Now Hiring: The Ministry of Failure

Those expecting some centralized, political-administrative "solution" will be disappointed, as the political-administrative "solution" is actually the problem.

The Ministry of Failure is hiring, as their decades-long expansion is accelerating. You probably don't know about the Ministry, but you see its handiwork everywhere. The principle behind the Ministry's existence and its raison d'etre is simple: failure is more profitable than efficiency.

The greater the inefficiency and the higher the failure rate, the fatter the budgets and profits. Consider the permit process: the longer it takes, the more revisions and hoops the applicant must go through and the higher the late fees and penalties for non-compliance, the fatter the budget of the agency and the fatter the compensation of the administrative staff. Inefficiency is more profitable than efficiency.

Consider the immense profitability of planned and quasi-planned obsolescence. The Ministry of Failure doesn't take any chances; it requires manufacturers to use the cheapest, lowest-quality electronic components so the failure of the controller board is essentially guaranteed. And since the cost of the replacement board and the labor to install it is so outrageous, the consumer is forced to buy a new product. Failure is more profitable than durability.

The Ministry is also tasked with eliminating competition while masking this behind a phony facade of faux competition. Consider insulin, a pharmaceutical product that is essential to diabetics. Here is a snippet from the Yale School of Medicine website:

Insulin is seven to 10 times more expensive in the U.S. compared with other countries around the world. The same vial of insulin that cost $21 in the U.S. in 1996 now costs upward of $250. But it takes only an estimated $2 to $4 to produce a vial of insulin.

The Ministry of Failure has spent decades perfecting various cover stories for quasi-monopolies and cartels to justify their blatant profiteering. The Ministry tirelessly works to eliminate competition, grease the revolving doors of regulatory capture and add more compliance thorns to the regulatory thicket that keeps oh-so-unprofitable competition safely suppressed.

So insulin costs 10X in the U.S.? Fantastic! Thanks to the efforts of the Ministry of Failure, this abject failure is incredibly profitable.

The Ministry understands that any efficiency or reduction in administrative friction steps on somebody's toes by disrupting the profitability of failure and administrative churn. All those toes crushed by efficiency and reducing administrative dead weight belong to powerful interests, and so everything continues to be done the way it's been done because any increase in efficiency / durability and any reduction in administrative bloat hurts somebody with political clout.

One of the greatest successes of the Ministry of Failure has been the rise to dominance of administrative bloat. Consider the example of the healthcare sector, which has experienced an explosive rise in the number of administrators and in the salaries of these administrators (see charts below).

This doesn't reflect the staggering increase in administrative burdens placed on doctors and nurses. The Ministry of Failure has worked tirelessly to exhaust frontline workers everywhere with needless, pointless admin duties.





All of this bloat and inefficiency has been papered over with an equally explosive rise in borrowed money. All the gross inefficiencies, skims, scams and administrative bloat have pushed costs higher, and so the Ministry has worked with the political class and the Federal Reserve to flood the economy with "free money" borrowed into existence by the Fed and the federal government.

Since efficiency and reducing administrative bloat are impossible because somebody's toes will be stepped on, the only "solution" is to slosh more money into the failed system. If insulin costs 10X what it costs in other developed nations, no problem, let's just borrow another trillion dollars (oh heck, make it $10 trillion) so the costs of failure disappear into the background.



One of the outstanding successes of the Ministry of Failure in the past two decades has been the expansion of student loan debt from near-zero to $1.77 trillion. These trillions paid for the expansion of administrative bloat in higher education, and nice salaries and benefits for the administrators. Everybody wins, right?



That all this failure is a net loss to our society and economy is masked by the borrowed trillions. Need more money to pay for failure? Just borrow more. So total debt, public, private and corporate, skyrockets from $20 trillion to $95 trillion, so what? The Fed can always create as much as we need to afford the profitability of failure.

But this "solution" is illusion: the costs of failure have simply been transferred to the citizenry, society and the economy, all of which are now staggering under a crushing weight of debt, money borrowed to keep failure profitable.

Those expecting some centralized, political-administrative "solution" will be disappointed as the political-administrative "solution" is actually the problem.

The default path is to take a job in the Ministry of Failure and borrow boatloads of money to paper over the costs of systemic failure in our own lives.

The only real solution available is to develop solutions for yourself and your household: pursue Self-Reliance and learn how to accredit yourself, a process I describe in my book Get a Job and Build a Real Career. Solutions and workarounds abound, but they're not centralized or administrative in nature.

---

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

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A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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The Psychology of Inflation: What Makes You Say, "No Way Am I Paying That"?

Value varies. Invest in what's valuable.

It's a well-recognized human bias to feel losses more acutely than gains. Perhaps something similar occurs with inflation. As essentials soar in cost--i.e. non-discretionary expenses such as shelter, food at home, utilities, childcare, healthcare insurance, etc.--our only response is sighing resignation: yes, it's a ripoff but there's little we can do about it without making major changes in our lives.

Discretionary purchases are a different matter. The pleasures gained by the purchase are significant enough to be worth the financial cost. But at some point--a point that varies with each individual--the cost is so high that the pain of that expense outweighs the pleasure of the purchase.

This may explain why the public mood is sour despite the rosy statistics of economic expansion. The experiential gains of abstract economic stability do not outweigh the acute pain caused by soaring costs for pleasures that were far more affordable just a few short years ago.

Put another way: economically speaking, what is unseen statistically may have more impact that what is seen. So GDP is rising, blah-blah-blah, but can you believe I just paid $56 for a nothing-special breakfast for two people?

You see and hear these experiential leverage points all the time now: if you take a moment to observe the shoppers in the meat aisle, you see many lookie-loos: people go to the "sale" cooler for steaks, look at the price, shake their heads and walk to the discount bin to paw through what little is left.

Or you hear another shopper mutter, "I'm not paying that!" after glancing at the price.

Even well-off retirees are appalled when a fast-food meal that a few years ago would have been covered by a $20 bill now requires a $20 and a $10.

Millions of households have canceled cable TV service due to the soaring costs and marginal quality of the offerings. "Basic cable" that provided low-cost access to local channels has vanished, replaced by a "basic premium (of course) service" that costs four times more.

As long as the credit card had plenty of spending power, people didn't seem to feel any pain as costs soared. $400 per day for a nothing-special room in a nothing-special resort, no problem. $100 to change the oil in the car, no problem. And so on.

But once the funds available for discretionary spending dry up, sensitivity to financial pain increases.

But just as consequential as availability of discretionary funding is the internal measure of value. The well-off retiree can easily afford the fast-food meal, but the pain exceeds the pleasure because the meal simply isn't worth the price.

The perception of value varies significantly. Time, place and individuals all vary. What seems costly in one circumstance may offer high value to someone else. But if we plot all these unseen data points, we sense a change in the tide: a great many discretionary purchases are no longer worth the cost.

Conservative pundit David Brooks recently illustrated these nuances by expressing his discontent with a $78 tab for a meal at an airport restaurant. His online post suggested that his $78 bill for a hamburger meal was an example of why Americans were discontented with the economy.

It was soon revealed that the burger meal was $18 and the balance was comprised of three whiskeys at $20 each. Mr. Brooks apparently felt the price of the three whiskeys exceeded the value of the three whiskeys, but one wonders why he ordered whiskeys two and three if he was so disenchanted with the price of the first one.

This introduces two other psychological factors in inflation: sudden price increases catch our attention, and so they are more likely to trigger an experiential leverage point. The same can be said of serial increases in the cost of services that were previously stable: when the cable TV or utility bill rises inexorably month after month, we notice this and begin considering actions to reduce or eliminate this expense.

The other factor is we like to whine, as if low prices are an entitlement and we've somehow been robbed of something we're entitled to. But value is conditional and contingent. In some cases, we simply can no longer afford the service or product. In other cases, the value has diminished as the cost has risen, or the cost has risen to the point it far exceeds the value.

Having lived on the margins most of my life, frugality was not an option, it was a pressing necessity. It is now a habit and a free-standing value independent of how much money I earn or have. So paying $100 to have the oil in my Civic changed is off the table. We change the oil ourselves, just as we've done for decades.

Acute sensitivity to value and price has its rewards. When we do splurge, we do it not out of habit but to reap the gains of some purchase that is well worth the monetary price.

Unlike jetsetters like Mr. Brooks, I can count the number of meals I've bought in airports on one hand, and several of those were voucher meals due to delayed flights. Earlier this year, I had a highly enjoyable airport restaurant meal that was worth a great deal more than the price. It was late, and there was only one restaurant still open. It was crowded, and I felt fortunate to get a table. I'd just left my wife in the post-surgery recovery ward of the hospital, grateful she was OK, and I was drained by a very long day of uncertainties.

The hamburger meal and draft beer cost $35. That was a splurge for me but memorably valuable in that time and circumstance. I was grateful to have something to eat, grateful to the overworked servers and for everything good that had happened that day. I remembered my own job serving the public, and how much a decent tip meant. 50 years later, I still recall the rare decent tips. I handed the server a $20 tip, it wasn't much, but it expressed "thank you."

Value varies. Invest in what's valuable.

---

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

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When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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When Shelter Becomes a Speculative Asset, Society Unravels

Does anyone really believe that the renunciation of massive, sustained stimulus of speculation in housing would leave housing valuations unchanged because valuations are solely the result of "shortages"?

Let's begin by stipulating that speculation (i.e. gambling) is part of human nature. The role of regulations and policy is to limit the damage that gambling inevitably inflicts when "sure things" cliff-dive into losses.

In other words, where the speculative frenzy and money flows matters. When the South Sea Bubble expanded circa 1713-1720, this flood tide of speculative capital did not distort the cost of shelter and bread in England; it was limited to a purely financial marketplace of shares in the company. When the bubble imploded in 1720, the losses fell mostly on wealthy investors like Isaac Newton.

The same can be said of the speculative mania of the dot-com era: the bubble and collapse were limited to the tech sector and those participating in the sector and the speculative frenzy. The cost of rent and bread did not double due to the speculative bubble's inflation or bursting.

In contrast, when speculation floods into shelter / housing, it fatally distorts the cost of housing non-speculators must pay. I say fatally because shelter, along with food, energy and water (the FEW resources), are essential to life. These are not discretionary things we can decide not to have. When the price of essentials soars due to speculation that only rewards the speculators at the expense of non-speculators, the fuse of social disorder is lit.

Anyone who believes policies that encourage the wealthy to hoard housing to the point that the bottom 80% (or the bottom 95% in some areas) cannot afford to buy a home are just peachy is overdosing Delusionol. The social consequences are severe and uncontainable once the worm turns.

Exhibit #1 in Shelter Becoming a Speculative Asset is a modest house in the San Francisco Bay Area that sold for $135,000 in mid-1996. By modest I mean small, old, and on a small lot in a neighborhood of other small lots and homes. (A screenshot of the Zillow history is below.)

Today the home's value is estimated to be about ten times higher: $1.35 million. Let's do some basic math to understand just how distorted this market has become.

The median household income in 1996 was about $39,000. For a house costing $135,000, this represents 3.5 ratio of income to housing, well within the traditional ratio of 4 to 1 (4 X income = cost of the home).

Median household income has almost doubled to $75,000, roughly in line with inflation according to the Bureau of Labor Statistics. According to the BLS, the house that cost $135,000 in July 1996 would now cost $264,000 when adjusted for inflation, and the $39,000 median income would be $76,000.

Let's say the house appreciated above the rate of inflation to $300,000 today. That's still within the 4 to 1 ratio of income to house cost (4 X $75,000 = $300,000.) So even though the house rose 2.2X in cost, it would still be affordable to a median household.

At a value of $1.35 million, a household would need to make $337,500 annually--an income that is in the top 5% of households--to buy the house today. In other words, an income that is 4.5 times the median household income is the minimum needed to buy this modest house.

The house is now worth 4.5 times what it would have been worth if it had appreciated well above inflation.





The conventional argument holds that this four-fold increase in housing costs is due solely to a shortage of housing. Let's consider some data before concluding this is the only dynamic in play.

Chart #1: Case Shiller housing index: this chart shows two massive housing bubbles in the past 20 years.



Chart #2: Federal Reserve's purchases of mortgage backed securities (MBS) to goose the housing market. The "housing shortage" argument claims the unprecedented Fed purchases of trillions of dollars of MBS is not correlated to the housing bubble, but this claim makes no sense: dropping mortgage rates to unprecedented lows while soaking up trillions of dollars in securitized mortgages was like injecting speculative crack cocaine into the housing market. Gosh, how did we survive without the Fed buying $2.5 trillion in mortgages?



Chart #3: the current housing bubble compared to the 2000-2006 housing bubble: today's bubble is even more extreme than housing bubble #1.



Chart #4: housing per capita (per person) has reached a new high: if there's such a severe shortage of housing, how can the housing per capita be at an all-time high? Population rose 4 million in the past 4 years while 5 million housing units were added--plus a pig-in-a-python of housing in the pipeline.



Chart #5: household net worth is $50 trillion above trend, the direct result of massive monetary and fiscal stimulus. Tens of trillions of dollars were borrowed into existence and pumped into so-called risk assets--assets such as housing that the wealthy buy for speculative appreciation.



Chart #6: total debt--private and public--soared from $20 trillion in 1996 to $95 trillion now. Is it merely coincidental that this is $55 trillion above the trendline of inflation, which would have placed total debt at $40 trillion today?



Chart #7: net worth of the top 1% households, which soared from 23% of all net worth to 32%: this 9% gain in the percentage of all household net worth represents a gain of $14 trillion above and beyond the $28.7 trillion in gains registered by the 23% they owned in 1990.

1990 total net worth: $21 trillion, 23% = $4.8 trillion; 2023 total net worth: $146 trillion, 23% = $33.5 trillion; $33.5 trillion - $4.8 trillion = $28.7 trillion.



This unprecedented bubble in housing valuations is due not to shortages but to decades of massive financial stimulus that incentivized speculative capital to flood into housing as a low-risk way to skim stupendous gains for creating zero gains in productivity. If you doubt this, then run this scenario and tell us what happens:

The Fed dumps its entire portfolio of mortgage backed securities and stipulates it will never buy any again. It also renounces all the other stimulus gimmicks that incentivized expansions of debt and speculation.

Does anyone really believe that the renunciation of massive, sustained stimulus of speculation in housing would leave housing valuations unchanged because valuations are solely the result of "shortages"? If so, there's a little shack under the Brooklyn Bridge I'll let you have for a couple of million. I'm sure the Airbnb rent will mint you millions.

---

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

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The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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A Time Capsule from the 1930s: What's Different Now

If we compare health and endurance, well-being, security, general attitudes, family and community ties and values, we would conclude that it is we who are impoverished.

We're taking care of my 92-year old mother-in-law here at home. She has the usual aches and pains and infirmities of advanced age but her mind and memory are still sharp. Her memories of her childhood are like a time capsule from the 1930s.

My mom-in-law has always lived in the same general community here in Hawaii. She's never lived more than about 10 miles from the house where she was born (long since torn down) in 1931. Listening to her memories (and asking for more details) is to be transported back to the 1930s, an era of widespread poverty unrelated to the Great Depression. Many people were poor before the Depression. They were working hard but their incomes were low.

Prior to the tourist boom initiated by statehood and affordable airfare, Hawaii's economy was classically colonial: large plantations owned by a handful of wealthy families and/or corporations (known as The Big Five) employed thousands of laborers to raise and harvest sugar cane and pineapple. Pearl Harbor, Hickam air base and Schofield Barracks were large military bases on Oahu. Travel between islands was expensive (ferries) and each island was largely self-sufficient.

Even taking a bus for the 12-mile ride to the island's sole city was a rare luxury, an excursion that occurred a few times a year.

Plantation workers were not yet unionized in the 1930s, and wages were around $20 a month for backbreaking field labor--work performed by both men and women. Typical of first and second-generation immigrant communities of the time, families were generally large. Six or seven children was common and nine or ten children per family was not uncommon. Many families lived in modest plantation-provided camps of two bedroom houses.

Gardens were not a hobby, they were an essential source of food to feed a table of hungry kids and adults. Candy, snacks, sodas, etc. were treats rserved for special occasions and holidays. Kids usually went barefoot because shoes were outside the household's limited budget.

Staples were bought at the company store (or one of the few privately owned groceries) on credit and paid off when the plantation paid wages.

Credit issued by banks was unknown. Neighborhoods (kumiai) might pool a few dollars from each family every year and offer the sum to the highest secret bidder or by lottery. Those households that scraped up enough to open a small business often worked 12 hours a day, 7 days a week (or equivalent: 14 hours 6 days a week).

Neighbors helped with births and deaths.

Since no one could even dream of owning a car, transport was limited. Children and adults walked or biked miles to school or work. Many sole proprietors made a living delivering vegetables, meat and fish around the neighborhoods. (This distribution system is still present in rural France where my brother and sister-in-law lived for many years). Each vendor would arrive on a set day / time and housewives could gather to buy from the proprietor's jitney or truck. Children could eye the few candies longingly, and if they were lucky, a few pennies would be given to them to buy a candy.

Locally baked bread was delivered by boys. Milk was delivered by small local dairies.

Nostalgia is a powerful force, but I don't think we can dismiss the general happiness of my Mom-in-law's childhood as airbrushed impoverishment. The poverty seems obvious to us now, but at the time it was normal life. Everyone was in the same general socio-economic class. The plantation manager lived in a mansion with servants, but those with wealth were few and far between. In other words, wealth and income inequality was extreme but the class structure was flat: the 99% had very similar incomes and opportunities--both were limited.

Employment was stable, community ties and values were strong without anyone even noticing, and everyone had enough to eat (though not as much as they might have wanted, of course).

This secure plantation structure of work and community was still firmly in place in 1969-1970 when I lived on the pineapple plantation of Lanai (and picked pineapple with my high school classmates in the summer), and so I was fortunate to experience it first-hand. My Lanai classmates speak fondly and with a sense of loss when they recall their youth. Life was secure and protected, and with unionization of the workforce, the wages sufficient enough for frugal households to save enough to send their children to college off-island.

I can personally attest that fond memories of 1970s plantation life are not distorted by nostalgia. These memories are accurate recollections of a far more secure, safe and nourishing place and time.

Compared to today, the typical 1930s diet was locally grown / raised and therefore rich in micro-nutrients. Grains such as rice and flour came from afar, but other than canned fish and similar goods, food was local and fresh. Little if any was wasted.

People typically worked physically demanding jobs that burned a lot of calories.

There are many people 90+ years of age in our neighborhood. My Mom-in-law's brother--like many of the men in this age bracket, he was a World War II veteran of the famed 442nd unit--died last year at 96, despite smoking a half-pack of cigarettes daily until the end. A neighbor/friend just passed away at 99 (he was also a 442nd veteran). Our neighbor (cared for by her daughter and son-in-law, just like us) just turned 100. These people are generally healthy and active until the end of their lives.

If we look for causal factors in their advanced age and generally good health, we cannot ignore the high-quality, near-zero-processed foods diets of their youth and their strong foundations in community ties and values.

If we compare the financial and material wealth most enjoy today with the limited income and assets of the pre-war era, we would conclude they lived in extreme poverty and their lives must have been wretched as a consequence.

But if we compare health and endurance, well-being, security, general attitudes, family and community ties and values, we would conclude that it is we who are impoverished and it was their lives that were rich in these essentials of human life.

The world has changed since the 1930s, of course. Materially, our wealth and options of what to do with our lives are off the charts compared to the 1930s. But if we look at health, security, well-being, community ties, social cohesion and civic virtue, our era seems insecure, disordered and deranging.

The irony is that those who have grown weary of our divisive, rage-inducing socio-economic system yearn for all that's been lost in the rise to material wealth and opportunities to spend that wealth. Those who grasp the emptiness of spectacle and material wealth and who have the means to do so are seeking the few enclaves that still have a few shreds of community and social cohesion left.

These enclaves then get listed on "best small towns in America" or "best places in the world to retire" and the resulting influx of wealthy outsiders destroys the last remaining shreds of what everyone came for.

I recently harvested some of our homegrown green tomatoes, and my Mom-in-law gave me a handwritten recipe for Fried Green Tomatoes from her collection. The first ingredient was "two tablespoons of bacon drippings." Um, okay, if we were all working 10-hour days hauling 80-pound loads of sugar cane on our backs, no problem, but we're a household of three seniors, 69, 70 and 92. I think we'll substitute two teaspoons of olive oil for the bacon drippings...

---

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

Read the first chapter for free (PDF)

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Podcast with Richard Bonugli: Self Reliance in the 21st Century (43 min)


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The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


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Six Reasons Why Corporate Profits Will Fall 50%

Should stock valuations track this same decline in profits, it's entirely reasonable to expect the stock market to lose 2/3 of its valuation premium.

All Six of the reasons corporate profits will decline by half are common sense:

1. Reversion to the mean: profits that are double the historical average as a percentage of Gross Domestic Product (GDP) are highly likely not to be a sustainable New Normal. The far more likely track is a reversion to the historical average, which is about 50% below corporate profits' current 12% of GDP. Permanently elevated plateaus of stock valuations and corporate profits are both compelling chimera. (see chart below)

2. The Boost phase of Globalization has ended. The era of hyper-globalization is clearly visible on the charts of corporate profits and corporate profits as a percentage of GDP: right after China was accepted into the WTO in 2001, US corporate profits skyrocketed in both nominal dollars and as a percentage of the US economy (GDP).

Globalization's boost phase that sent corporate profits into orbit has rounded the S-Curve and is now in the stagnation / decline phase. (see chart below)

The reasons why hyper-globalization rocketed corporate profits to unprecedented heights are both well-known and terribly inconvenient to the happy story that globalization will magically generate unprecedented profits forever.

The primary drivers were global labor and environmental arbitrage, a.k.a. exploit cheap labor in sweatshops and dump all the toxic waste of industrialization in developing nations with lax environmental standards and enforcement. As the chart below shows, wages in China are no longer low, and China has begun improving its environmental standards.

3. Quality and durability have been gutted and there's no more profit to pluck from buying lower-quality components and inputs, as the cheapest, lowest-quality components and inputs have already been standardized.

Hyper-globalization provided the ideal cover for the systemic collapse of quality and durability. This corporate institutionalization of planned obsolescence, abysmal quality and shrinkflation all boosted profits enormously, but there's nothing left at the bottom of the barrel; corporations have licked the profitable slop of planned obsolescence, abysmal quality and shrinkflation clean.

The super-efficient global supply chains are also breaking under the strain of geopolitical and national security priorities, and the difficulties of replacing existing supply chains, which depend on cheap energy and transport and a massive infrastructure to serve trade that non-industrialized developing nations cannot duplicate.

4. Hyper-financialization has also entered the decay-collapse phase. Hyper-financialization drove corporate profits in two ways:

A. As borrowing costs dropped to unprecedented lows, corporations could borrow vast sums at near-zero rates to scoop up other companies with positive cash flow, gut the quality and staff and scoop up the resulting cost reductions as profits.

B. Consumers could borrow vast sums at low rates to buy products that they would not have been able to afford at historically average interest rates. For example, with 1.9% (or even zero) financing, new autos and trucks became more affordable. With demand strong, corporations could keep prices high and reap the gains of stronger sales.

Now that zero-interest rate policy (ZIRP) has ended its disruptive reign, the tailwinds of zero rates have reversed into the headwinds of structurally higher rates.

5. The asymmetric distribution of the economy's output favoring corporations at the expense of labor is finally shifting. After 45 years of capital skimming $50 trillion from labor, rising rates of disability, unfavorable demographics, systemic healthcare inflation and social dynamics are pushing labor costs higher.

6. Debt saturation. Corporate profits soared from $800 billion annually to $3.5 trillion in 2022 on the tailwinds of public and private debt skyrocketing from $30 trillion in 2000 to $95 trillion today. With the era of zero cost of debt over, we've entered an era of debt saturation: households, government and enterprises can no longer afford to take on more debt without triggering unintended consequences or slashing discretionary spending to service the higher costs of new and existing debts.

Since growth depends on the ceaseless expansion of debt and the discretionary spending it enables, growth reverses along with discretionary spending. Corporations will find it impossible to keep prices at nosebleed levels as consumer demand plummets while costs remain sticky.

Rather than being the New Normal, corporations skimming 11% of GDP as profits was a one-time outlier resulting from the one-time boost of hyper-financialization, hyper-globalization and ZIRP. US GDP is around $26 trillion according to the Bureau of Economic Analysis (BEA). Corporate profits sagged a bit to $3.2 trillion in Q1 2023, roughly 12.3% of GDP.

Should profits decline to 5% of GDP ($1.3 trillion), this would be in the middle of the historic range. In a real recession, they could dip to 3% of GDP ($800 billion). At 5% of GDP ($1.3 trillion), corporations would still be making money but not at rates that would justify today's absurdly overvalued stock valuations.

The $2 trillion haircut equates to a 2/3 decline. Should stock valuations track this same decline in profits, it's entirely reasonable to expect the stock market to lose 2/3 of its valuation premium--a premium based not on anything remotely sustainable, but on a one-off of hyper-financialization, hyper-globalization and zero interest rates.

There's nothing wrong with a 5% of GDP run-rate for coporate profits. That's still a very healthy return. It's only a disaster in a highly distorted funhouse whose players have lost touch with reality.

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