Wednesday, June 19, 2024

A Most Dangerous Assumption: Mining the Future to Spend More Today

What the cheerleaders are actually claiming is the process of adding zeroes to "money" is limitless, but there are limits on the utility of devaluing currency, too.

How prosperous would the world be if we hadn't collectively borrowed and spent $315 trillion----333% of global GDP? We all know the answer--not very prosperous at all, for production, consumption and profits would all be mere fractions of their current totals if we could not borrow money and could only spend cash on hand. Global Debt Hit $315 Trillion In Q1 2024.

All this money that's been spent/invested has effectively been mined / extracted from future resources, labor and capital. The basic idea is that the interest that must be paid on this debt will be paid out of earnings generated by the productive use of resources, labor and capital in the future. Once the debt matures and the principle must be returned to the lender / bond purchaser, this principle must also be mined / extracted from assets available in the future.

Mining / extraction is the appropriate analogy because nothing is unlimited in the real world. Imagination--yes, it's unlimited. Denial and delusion: yes, both are limitless. But tangible resources that can be recovered at costs the economy can bear, productive labor and capital are not limitless. If we mine the future too intensively, there won't be enough left in the future to spend/invest at the level we enjoy today.

The fundamental assumption behind mining the future is that the pool of resources, labor and capital will continue expanding forever, effortlessly funding the interest and principle due on today's borrowing and leaving more than enough to consume and invest in the future.

But what happens when the resources, labor and capital available to mine in the future shrink? If the productive economy contracts, there will be fewer resources and less labor and capital available to split between servicing the ballooning debt and the consumption / investment needed to support the future economy.

Two mind tricks enable our faith in the sustainability of ever-expanding debt to fund our spending / investing today. One is the inaccurate assumption that Moore's Law--the constantly accelerating advancement of technological / digital mojo and efficiencies--apply to the entire real world: just as computing power has risen 10-fold every few years, so too will all other technologies.

This leads to the comforting but false belief that there will never be any resource constraints because technology will leap every boundary: we'll simply dig deeper and more efficiently to extract the minerals and energy we need to fund debt, consumption and investment.

This conveniently ignores the chemical and physical limits of the real world. A rocket powerful enough to lift a payload into orbit and on to the Moon is not 100 times smaller now than it was in 1969, or even 10 times smaller: it is roughly the same size due to the chemical / energy density limits of the liquid fuels needed to power the rocket.

Engineering advances do not cancel out the fact that digging / drilling deeper in remote, hostile environments costs more in energy, labor and capital than the easy-to-extract resources we've already consumed. Setting aside the mind trick of "money," it takes more energy and physical materials to extract resources far from paved roads and deep-draft harbors, in remote, difficult terrain and far deeper than easy-to-extract minerals and energy we've already taken and consumed.

As the productive labor force shrinks, there are fewer workers and wages to support debt service. If the resources, labor and capital we're mining are contracting, that will not only constrict additional borrowing in the future, it will also leave insufficient reserves to fund both debt and consumption.

The second mind trick is adding a zero to all "money" via currency devaluation / inflation. Here's how devaluation magically reduces the burden of debt: say household income is $10,000 per year and the home mortgage is $100,000. Add a zero (over a few decades, of course, so nobody notices the trick) to the income, which is now $100,000 a year for performing the exact same hours of labor as in the past. Now the mortgage has shrunk from 10 times income to 1-to-1. That makes servicing the debt much less of a burden on the household, and on the economy,

If the interest earned over the decades exceeded the rate of inflation / devaluation, the owners of the debt made up for the stupendous decline in the purchasing power of their principle when it is finally paid in full. The mind trick of reducing the burden of debt service by adding a zero to "money" ceases to work if the interest paid to lenders falls under the rate of inflation/devaluation, as lenders catch on and refuse to originate loans that destroy capital, albeit slowly enough few notice in the short-term.

As this chart of total debt in the US (public and private) shows, devaluing the currency soon outpaces the expansion of the real-world economy that's being mined to fund our spending today. Over time, the expansion of "money" accelerates inflation/devaluation into a self-reinforcing feedback that pushes interest rates above the point at which the economy can support both debt service and consumption and investment: something has to give, and that something isn't debt service--it's consumption and investment.

Welcome to the world of stagflation, a world in which mining the future is no longer sustainable as the pool of future earnings and resources available to mine is shrinking, even as our voracious appetite for borrowing more now to fund more spending today expands.

Many people reckon there's a third trick that's completely painless: a debt jubilee that wipes out all debts and re-sets the system so we can start mining future earnings and resources again with gleeful abandon. But this isn't how reality actually functions. Every debt is somebody else's income-producing asset, and in a world of $315 trillion in debt, that's a lot of assets that will be written down to zero by the debt jubilee and a lot of income that will drop to zero.

That money goes to money Heaven, never to return. In the happy story, lenders and bond buyers pile right back in and start funding trillions in new debt to start the cycle anew--no harm, no foul, right? Not quite.

We seem to be forgetting that the $315 trillion in assets and trillions in interest income went to money Heaven. Where is all the cash going to come from to fund new issuance of debt? And who would be dimwitted enough to loan money at low rates of interest, knowing that when things get iffy--which they inevitably will-- another debt jubilee will wipe out all of one's debt-based assets overnight?

The short answer is no one. Interest will be set high enough to offset the risk of a future debt jubilee sending all the money that was loaned out to money Heaven.

The net effect is borrowers will have to mine even more from the future to afford the higher interest. As resources become costlier to extract and the demographics already set in stone reduce the workforce that supports all future debt service, consumption and investment, all the mind tricks no longer work.



The future will need all the available resources, labor and capital for its own use, leaving little to none for us to mine today to fund our profligate consumption and gambling (sorry, "investing"). Cash will be King, and borrowing from the future to spend freely today will no longer be possible.

Impossible! Shout the cheerleaders of mining the future: the real world will always expand in endless growth. Sorry, but there are no guarantees that the limits of chemistry and physics can be jumped. What the cheerleaders are actually claiming is the process of adding zeroes to "money" is limitless, but there are limits on the utility of devaluing currency, too.

Podcasts: Crisis, Sacrifice and the New Economy, with Emerson Fersch (1 hour)

Financial Nihilism, Inflation & The Collapsing American Dream
.



My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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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Monday, June 17, 2024

The Glue Binding Democracy and a Free Economy Has Melted

And that's how democracy and a free economy die.

An astute reader asked me to clarify the difference between individual sacrifice and shared sacrifice in the context of the Common Good, which as he rightly noted, dictatorships use as the justification for oppressive enforcement of a regime that benefits the few at the expense of the many.

In a democracy with a free economy, the Common Good is the responsibility of the citizenry, not a dictatorship. In the current zeitgeist, the Invisible Hand of free markets is understood as a magical force that automatically generates the Common Good out of the churn of everyone aiming to get rich or die trying.

In other words, the Common Good is somebody else's responsibility: there's no need for shared sacrifices, the economy and society take care of themselves as we all get rich or die trying.

This isn't how a society actually works. Somebody has to mind the store of social capital that enables us to focus our energy on individual sacrifices made on our own behalf.

The single-minded pursuit of greed does not magically organize the economy or society to serve everyone's interests equally. As Adam Smith explained, capitalism and the social order both require a moral foundation, which in a free society takes the form of civic virtue: it is the responsibility of every citizen who is able to contribute to the social capital that serves us all to do so not in response to an oppressive state but of their own free will.

The Founding Fathers understood this and feared the decay of civic virtue as a threat to democracy. This was one reason why many of those active in the early decades of the American Experiment favored restricting voting to the class of citizenry who had the biggest stake in maintaining the nation's stock of social capital: the landed / commercial elites.

Commentators such as Christopher Lasch have described the steady erosion of civic virtue and the nation's stock of social capital since the 1970s. Lasch and fellow critics across the ideological spectrum understood that civic virtue is the glue that binds democracy and a free economy: once civic virtue and the responsibility to contribute to the nation's social capital are gone, both democracy and the free economy enter terminal decline.

Social capital, civic virtue and the Common Good are not easily defined or measured. They cannot be reduced to numbers like GDP. This confuses ideological purists, left and right, as social capital, civic virtue and the Common Good cannot be distilled down to simplistic ideological formulations.

This is why Lasch's work cannot be pinned down as "left" or "right": ideologues on both ends of the spectrum find references in his work they agree with. He was addressing issues larger than political or economic ideologies.

The glue of America's social order--civic virtue--has melted away, and few have even noticed. The concept of voluntary attention to the common good--an attention that requires shared sacrifice--has been jettisoned as unnecessary: all we need to do is focus on getting rich by any means available.

This has led to a complete breakdown of the moral foundations Adam Smith identified, and a breakdown of the nation's shared social capital. If our sole responsibility has shrunken down to getting rich by any means available, then quite naturally we bribe politicians, crush competition to establish cartels and monopolies, degrade the quality of our goods and services to increase profits and addict our customers to rake in steady profits.

Consider the difference between Old Money and private equity. Private equity slavishly worships at the altar of mobile capital and increasing shareholder value. Private equity assembles mobile capital from the ends of the Earth--Dubai, London, Hong Kong--and swoops in when it detects an asymmetry between the potential market value and the current valuation of an asset.

Unlike Old Money, which is anchored in a place embedded in a specific culture and social order, private equity has no sense of place or responsibility for contributing to a locale's social capital. Private equity swoops in, buys the asset, sells off pieces to the highest bidders, reorganizes what's left, slaps a quick coat of paint on it and then cashes out via a public offering of equity or debt or a private sale.

The damage done to the local economy, populace and its stock of social capital by this stripmining is of no concern to private equity: get in, maximize profits / gains and then get out, and start circling the planet for the next "opportunity to increase shareholder value." (Hence the term "vulture capital.")

Old Money, rooted in a place and its history, does care about the local economy, populace and its stock of social capital. Yes, Old Money makes money with its money; that is the nature of capital. But Old Money understands that stripmining assets with zero concern for the wreckage left behind does not support either democracy or a free economy that offers a somewhat level playing field to all participants.

This is why it's wise to relocate to a place where Old Money still resides and still maintains an active role in maintaining the social capital of their home base. Living in places dominated by the culture and values of private equity is voluntary servitude in a rotting ship without a compass or leadership.

Old Money keeps an eye on the stock of social capital, and voluntarily engages in using its wealth and influence to preserve or enhance it. Mobile capital flits around the globe, happy to fund a university building here and there to enhance their personal "brand." They don't actually care about any place; that's someone else's responsibility.

And that's how democracy and a free economy die. The glue of civic virtue, of doing the hard part of maintaining the stock of social capital and devoting some care to the common good in this place and in this time--those are somebody else's responsibility.

Me, I'm busy: my underlings located an asset just begging to be dismembered, offshored, stripmined, and we're going to make a killing. Then I'm off to my flat in London, then to my getaway in the South Pacific, and then to a quick meeting in Shanghai. I'm busy making a killing.

Yes, a killing. What died is democracy and a functional economy of equal opportunity. Once the glue melts away, things fall apart. Welcome to what's left of the 2020s and the 2030s.



Podcasts: Crisis, Sacrifice and the New Economy, with Emerson Fersch (1 hour)

Financial Nihilism, Inflation & The Collapsing American Dream
.



My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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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Saturday, June 15, 2024

Prepare for the Repricing of Risk Globally

There are no more "saves" available for the next market meltdown.

The past 24 years can be viewed as an era in which risk declined due to the dynamics of globalization and financialization.

The ascent of China as "workshop of the world" generated a deflationary wave of lower prices for products (due to lower labor costs and lower quality components) that blunted the inflationary impact of the global economies adding $150 trillion in debt since 2000. Global debt, public and private, now tops $315 trillion, 333% of global GDP.

Absent the deflationary impact of globalization, this vast increase in money sloshing around would have sparked inflation. Absent the vast expansion of money via financialization, the expansion of production and consumption enabled by globalization could not have occurred.

At the same time, central banks coordinated policies to steadily reduce interest rates, reaching effectively zero or negative rates (when adjusted for inflation) in 2009 and beyond. This reduction of rates far below historic norms enabled creditors to borrow more even as their debt service costs fell.

Financialization vastly increased leverage and the commodification of credit/debt, enabling emerging-market nations and enterprises and consumers globally to increase their borrowing/spending.

Globalization generated incentives for nations and their central banks to "play nice" and cooperate with other governments and banks to spur profitable (and happily deflationary) trade. These coordinated efforts enabled the global economy to avoid the potentially fatal disruptions of the Global Financial Crisis (GFC) in 2008-09.

Despite localized droughts and extreme weather, global food production increased by expanding land in production and intensifying agricultural methods.

All of these risk-reducing trends are reversing or reaching diminishing returns.

Extreme weather events are increasing, leading to massive losses by insurers, a trend described in As Insurers Around the U.S. Bleed Cash From Climate Shocks, Homeowners Lose (New York Times)(seechart below):

"In 2023, insurers lost money on homeowners coverage in 18 states, more than a third of the country, according to a New York Times analysis of newly available financial data. That's up from 12 states five years ago, and eight states in 2013. The result is that insurance companies are raising premiums by as much as 50 percent or more, cutting back on coverage or leaving entire states altogether. Nationally, over the last decade, insurers paid out more in claims than they received in premiums, according to the ratings firm Moody's, and those losses are increasing.

The growing tumult is affecting people whose homes have never been damaged and who have dutifully paid their premiums, year after year. Cancellation notices have left them scrambling to find coverage to protect what is often their single biggest investment. As a last resort, many are ending up in high-risk insurance pools created by states that are backed by the public and offer less coverage than standard policies. By and large, state regulators lack strategies to restore stability to the market."


Much of the rising cost is a result of global insurance losses, which boost the reinsurance rates insurers must pay to cover the risks of extreme events generating extreme losses that push insurers into bankruptcy. Hawaii insurance chief doesn't see carrier exit as costs rise:

Reinsurance is something insurance companies buy to cover extraordinary losses, and it is part of a policy's price. This reinsurance cost, which is tied to the global insurance industry, has increased 20% to 50% annually during the past several years, according to Ito.

"The cost to insure homes or condos is going up because of this tremendous surge in the reinsurance costs," he said.

Ito said there were 23 climate-related disasters in the United States in 2023 that caused at least $1 billion in losses, and that in five of the past six years, the reinsurance industry incurred losses of over $100 billion worldwide.

"Reinsurance is worldwide," he said. "Events that happen in Europe, or in Asia, or in Kansas, or in Florida, all impact the cost of reinsurance that insurers pay regardless of where they write business."




The rising costs of insurance reflect a critical dynamic of risk: in a tightly bound, interconnected global system of finance and trade, risks arising anywhere in the system increase costs and risks throughout the system.

This is the downside of increasing our dependence on tightly bound global systems to lower prices: disruptions and risk now spread rapidly to every node and participant in the global system: events far away trigger the cancellation of your insurance policy or an astounding increase in its cost.

What were beneficial in the low-risk growth phase--increasing dependence on global capital and trade flows to lower prices and boost borrowing--are now sources of rising risk--risk that cannot be fully hedged even as the cost of hedges such as insurance rise sharply.

Let's consider the other dynamics turning a low-risk era into an unstable, high-risk era.

Our starting point in an examination of risk is the nature of the global system we are dependent on / embedded in. The dominant economic model in this system is "the market," an idealized construct in which buyers and sellers "discover the price" of everything from currencies, risk, goods, services, labor and capital, and any scarcities are filled by new production (as people rush to reap higher profits by expanding production) or substitution (beef too expensive? Replace it with chicken).

This construct creates a happy illusion: the system operates as a closed system in which all the moving parts are visible and measurable. This creates the illusion that the system is inherently self-correcting and therefore stable, as buyers, sellers, producers and consumers all pursuing their own self-interests will maintain what's known as dynamic equilibrium: prices may spike or collapse for a short time, but the system will quickly adapt and equilibrium will be restored.

The real world is not a closed system in which all the moving parts are visible and measurable. The real world is an open system operating not solely by the pursuit of self-interest but by natural selection unguided by any goal or destination.

We presume "Progress" has an inherently upward trajectory: everything inevitably gets better as technology advances. In other words, we view the dynamics of history and Nature as teleological: they are on a path heading toward a goal.

This is a misunderstanding of Nature. Natural selection has no goal. If external changes disrupt an ecosystem, some species may be wiped out. From their point of view, this was not inevitable progress toward a goal.

The tightly interconnected global system is akin to an ecosystem. It is an unpredictable, unstable open system, not a predictable, stable market. External events can lead to scarcities for which there are no substitutes or increases in production, and irreplaceable links can be broken, collapsing the system beyond repair.

When the Vandals wrested the North African wheat production away from Roman control, the Roman Empire lost the primary food source feeding the half-million residents of Rome, many of whom were granted a free bread stipend--hence the term "bread and circuses."

Since there was no substitute for this lost wheat, and the residents grew little or no food themselves, the result was the collapse of the entire structure. (There were other factors, of course, such as the unaffordable cost of maintaining a paid mercenary military, pandemics, etc.--what we now call a polycrisis.)

The point here is risk is often hidden in systems that are stable for long periods of time. It isn't non-existent; it is simply out of sight. This conditions us to believe that the system is self-correcting, and so we become complacent.

A recent example of this is the way the Federal Reserve and other central banks have "saved" the stock market every time it stumbled for the past 15 years, since the Global Financial Crisis of 2008-09. We're now conditioned to "buy the dip" because every time the market dips, the banks leap into action and markets soar to new highs. This is like clockwork, and so only fools doubt that the next dip will also be "saved" and markets will once again soar to new heights.

In the context of global risk, "buying the dip" appears to be low risk. But this conditioning / complacency overlooks the fact that China "saved the global financial system" by rapidly expanding its own debt load, what we call "leveraging up" debt, much like a homeowner with a modest mortgage and plenty of home equity can borrow against that equity, leveraging the collateral into much higher debt loads.

China is now mired in the same slow-growth, over-indebted, property-bubble, rising inflation, decaying global trade environment as every other nation which precludes it "saving the world" again.

Now that the deflationary impulse of rising global trade has reversed, there's nothing to counter the inflationary pressures generated by the decay of globalization and financialization: interest rates cannot be pushed back down to zero, as that will only boost inflationary forces. Since collateral has already been "levered up," there's no more pool of collateral to support a new credit bubble.

Should central banks attempt to "save the market" by dropping interest rates to zero, that won't boost borrowing and spending because the system is already over-levered: staggeringly large sums of debt are already unsupported by collateral, for example, commercial real estate in the U.S.: buildings that sold for $200 million a few years ago are now entering foreclosure and being auctioned off for $10 million or less. The underlying value of the property--the collateral supporting the loan--has collapsed.

In other words, there are no more "saves" available for the next market meltdown.

Another systemic source of risk was described by Benoit Mandelbrot in his book The (Mis)Behavior of Markets. (The book's original 2004 subtitle was "a fractal view of risk, ruin, and reward." The current edition's subtitle is "A Fractal View of Financial Turbulence." I prefer the original subtitle, which is more to the point: risk and ruin.)

In the conventional view of risk / portfolio management, "100-year floods" occur, well, every 100 years or so. This risk of such a devastating disaster occurring in any one year is thus low.

But as Mandelbrot explained, these catastrophic floods don't occur every 100 years--they occur every 5 years or so, as the mathematical models used to ascribe risk are deeply flawed. Nature is fractal, and thus prone to sudden instability.

Nassim Taleb explored the nature of unpredictable/improbable risk in his book The Black Swan: The Impact of the Highly Improbable.

The decades of relative stability between 2000 and 2020 conditioned us to complacently believe the global system was now so robust and our stabilizing institutions (central banks) so powerful that risk was if not banished, manageable and could be readily hedged.

This is not realistic, and so we're ill-prepared for shocks to the system that fatally destabilize trade and capital flows we assume are permanently dynamically stable, i.e. any spot of bother will be corrected by one institution or another.

Another systemic source of risk is the thinning of systemic buffers is not visible. In other words, the rising risk of instability is invisible to us as long as the system appears to be functioning normally. So we're surprised when fisheries collapse, ground water dries up, financial systems implode, and so on, because everything appeared to be more or less the same.

We can view the human body as a metaphor for the way a system attempts to maintain homeostasis / equilibrium, but the effort required overtaxes the systems tasked with correcting / rebalancing the entire system. The individual feels "normal" and has no awareness of rising risk until they experience a cardiac arrest or their metabolic disorder strikes them down.

Risk is slowly being repriced globally, as costs rise and trade and capital dependencies undercut stability. What we currently view as predictable closed systems will be revealed as unpredictable and potentially destabilized open systems that cannot be restored to previous forms of stability.

How do we operate in a world in which risk cannot be fully hedged, and apparently small events can collapse critical systems on which we're dependent? The first step is to set aside conditioning that leads to complacency and false assumptions of safety / stability. The second step is to mitigate risk before it rises up like a tsunami: reduce debt, exposure to financial risks, reduce our dependency on global, tightly bound interconnected systems, move to places with a diversity of essentials, and invest in our own self-reliance. I wrote my book Self-Reliance in the 21st Century as a general guide to this de-risking process.



This is a sample essay from my Weekly Musings Reports sent exclusively to subscribers, patrons and Substack subscribers. Thank you very much for supporting my work.



Podcasts: Crisis, Sacrifice and the New Economy, with Emerson Fersch (1 hour)

Financial Nihilism, Inflation & The Collapsing American Dream
.



My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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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Friday, June 14, 2024

The Crises and Sacrifices Yet to Come

The timing of finally embracing risk and sacrifice as the only option left is exquisitely sensitive: finally caving in a moment too late leads to the system collapsing beyond recovery.

The sense that we're approaching a tipping point into a crisis with no easy resolution is pervasive, a sense that beneath the veneer of normalcy (the Federal Reserve will lower interest rates and that will fix everything), we sense the precariousness of this brittle normalcy.

While many are uneasily scanning the horizon for geopolitical crises, others see the crisis emerging here at home, possibly a political crisis or a financial crisis that ensnares us all.

Few look at the decay of our social order as the source of crisis. Few seem to notice that corruption has become so normalized that we don't even recognize the ubiquity and depth of our corruption; we tell ourselves that this isn't corruption, it's just healthy self-interest, the "invisible hand" of the market magically organizing our economy to optimize efficiency and productivity. This provides cover for our worship of self-interest, a polite phrase for limitless greed.

While the media glorifies illusions of salvation and grandeur (AI!), few look at what's been lost in the decay of our social order, a list that starts with sacrifice for the common good and civic virtue.

The American Dream has a peculiarly truncated vision of sacrifice: we make individual sacrifices to advance our personal goals, but sacrifices for the common good are not part of the Dream: sacrifices for the sake of our fellow citizens are at best unnecessary and at worst a waste of money, something only chumps fall for.

The Smart Money spends a fortune evading taxes, as part of the prevailing ethos: Get rich by whatever means are necessary and let the Devil take the hindmost.

What few seem to have noticed is specific classes of the citizenry have already been sacrificed to clear the path for limitless greed and corruption to reap the spoils. These classes include the majority of the citizenry, the bottom 90%, though the burdens of the systemic cannibalization / predation have fallen most heavily on the bottom 50%, whose share of the nation's financial wealth is effectively signal noise: 2.6%.



The generational divide is equally stark: Boomers hold 51% of household wealth, while Millennials hold a mere 9%.



The divide between wage earners and owners of capital is staggering, yet of little interest to the financial media: Labor's share of gross domestic income (GDI) has declined for decades, resulting in the transfer of $149 trillion from wage earners to owners of capital:



The sacrifices yet to come will fall on everyone, but they will fall most heavily on capital as capital has scooped up the vast majority of the financial gains for the past 45 years. The owners of capital are already whining, as if the addition of $50 trillion to their wealth in the past four years is their birthright, the legitimate rewards of their brilliant creation of stupendous gains in productivity rather than the illegitimate gains of a centrally planned bubble that enriched the few at the expense of the many.



We are reluctant to face the consequences of our corruption and our vastly unequal economy. The dynamics of our ability to rationalize away the coming crisis are crystalized in this graphic composed by Dave Pollard in his post Why We Cannot Prevent Collapse:



In summary, we are fixated on the short-term, enamored by our own power, intoxicated by normalization and conditioned to being "saved", confident that our salvation will be delivered via a painless central bank "save" should anything threaten to overturn our apple cart.

Financial podcaster Emerson Fersch asks a cogent question: what catalyst will finally tip the system into disorderly incoherence? My answer is the core of our recent podcast, Crisis, Sacrifice and the New Economy.

I don't have a crisp answer that fits in a Tweet or a Tik-Tok video because any prediction is nothing more than a guess due to the nature of the global economic system: an open, (i.e. emergent) tightly bound system that has veered far from equilibrium and is prone to sudden drops into chaotic disorder in which there are no guarantees that the previous stability / equilibrium can be restored.

We know a few things that offer some minimal guidance. We know that in complex, highly interconnected /tightly bound systems, small perturbances can generate large effects.

We also know that should events occur faster than the system's stabilizing feedbacks can respond, the system is highly prone to collapse.

We also know that humans don't change anything that requires exposure to open-ended risk and sacrifice until there is no other choice.

Lastly, we know that the timing of finally embracing risk and sacrifice as the only option left is exquisitely sensitive: finally caving in a moment too late leads to the system collapsing beyond recovery. When this moment arrives, who will be ready and who will resist, rationalize and prevaricate until it's too late?

When we're finally ready to bargain--OK, we'll sacrifice a bit--it's too late to stop the whirlwind.


Podcasts: Crisis, Sacrifice and the New Economy, with Emerson Fersch (1 hour)

Financial Nihilism, Inflation & The Collapsing American Dream
.



My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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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Tuesday, June 11, 2024

How Many Millennials Will Be Rich Enough to Buy the Boomers' Millions of Unaffordable Bungalows?

Absent demand from tens of millions of wealthy, high-income buyers, asset valuations will fall as Boomers sell off assets to fund their retirement.

There's a peculiarly flawed logic behind the widely held view that the Baby Boomers will seamlessly transfer tens of trillions of dollars of their wealth to the Gen-X and Millennial generations as they exit stage left. This is flawed for a very basic reason: the extremely overvalued assets that will be transferred--real estate and stocks--only reached such extreme overvaluation because there is a surplus of buyers who are sufficiently wealthy (and willing) to pay bubble-inflated prices.

Since the ownership of both real estate and stocks is concentrated in the hands of the wealthiest 10% who tend to be older, how many Gen-Xers and Millennials have the means to buy million-dollar bungalows and overpriced portfolios? If buyers are scarce due to entrenched wealth-income inequality, then once Boomers start selling their vast holdings of stocks and millions of overpriced homes, prices will plummet if sellers outnumber qualified and willing buyers.

In other words, the bloated valuations Millennials hope to inherit will only remain at the currently overvalued levels if millions of qualified buyers emerge to snap up every Boomer bungalow at today's bubble prices. If there are fewer buyers than sellers, prices will decline accordingly.

Younger generations hoping to inherit million-dollar McMansions and stock portfolios overlook that many aging Boomers are planning to sell their stocks and homes to fund their retirement. Boomers who are wealthy on paper are wealthy due to their ownership of stocks and real estate; they need to liquidate these assets to afford to retire at their desired level of comfort.

Another overlooked factor is inheritances often require selling the house to split the money between heirs. Once again, the inheritance depends on buyers emerging like locusts to buy up every house being sold at absurdly overvalued prices. How many younger people will have the means or willingness to buy the millions of overpriced bungalows being dumped on the market?

Hopeful heirs also overlook that prices are set on the margin. Take a neighborhood of 100 homes. If every home that sells fetches fewer dollars, the sale of only 10 homes can cut the valuations of the other 90 houses in half in a few years.

People are living longer nowadays, and since few retirement / nursing homes are being built, many Boomers will have to stay in their own home as they grow old. Assisted living / nursing home fees run around $10,000 to $12,000 or more a month; private nursing care in residential homes typically runs between $6,000 to $9,000 a month. Few can afford these options unless they sell their house. It's far more affordable to continue living at home until the end of one's life.

That can either consume the inheritance or extend the transfer of assets to the point the heirs are in their 70s. For example, my Mom is 95 years old, bless her heart, and she sold her house 17 years ago to fund her retirement in an assisted living complex. Her house proceeds funded her retirement years; there will be little left (if any) for her heirs.

If we consider the vast concentration of wealth in the top 10% (typically the wealthiest Boomers), it's clear there aren't enough young people who can afford to buy assets at today's valuations to keep the prices at nosebleed levels. As this chart shows, the top 10% own 44% of all real estate in the US, while the bottom 50% of households own a meager 11%.



That's much more than their share of the nation's financial wealth, which is a rounding-error 2.6%:



Boomers own 42% of all real estate value, with Gen-Xers holding 30% and Millennials owning 14%. We can surmise that the majority of Gen-Xers who can afford to buy a home have already done so. Given their relatively modest numbers and age, counting on Gen-Xers to soak up millions of Boomer Bungalows for $1 million does not reflect generational / financial realities.



That leaves the buying of millions of Boomer Bungalows for $1 million each to Millennials, who have the numbers but not the wealth to do so. Boomers hold 51% of household wealth, while Millennials hold a mere 9%.



So the expectation that nosebleed valuations for houses and stocks will remain at a "permanently high plateau" is based on flawed reasoning that Millennials will be buying millions of homes being dumped by Boomers to fund their retirement at today's prices, and this buying by Millennials will maintain the high valuations of homes and stocks they will eventually inherit--possibly far later in their own lives than they anticipate.

This doesn't add up. The concentration of wealth in the top 10% and the Boomer generation means there cannot possibly be enough buyers in the ranks of those with few assets, high debt loads and modest incomes with sufficient wealth and income to buy Boomer assets at today's bubble prices.

Since the top tier of older, wealthier folks own 50% of all wealth, there is no way those with lesser means can afford to buy all those assets at today's bubblicious valuations. It simply doesn't compute.

Absent demand from tens of millions of wealthy, high-income buyers, asset valuations will fall as Boomers sell assets to fund their retirement. In many cases, the wealth younger people hope to inherit will be consumed by costly nursing home fees.

This is the price of enabling a concentration of wealth in the hands of the top 10% and the older generations who bought assets at pre-bubble prices and have enjoyed the appreciation created by stupendous bubbles.

But those valuations will only be reaped by the first sellers. Everyone selling as demand falters due to insufficient numbers of buyers who can afford to pay today's prices will find valuations will fall once selling overwhelms demand.

The expectation that tens of trillions of dollars in assets whose value is set on the margins will magically retain their bubble valuations as aging Boomers liquidate their assets en masse in an economy where only 20% of the populace can afford to buy a house at today's prices is not grounded in demographic or financial realities.


New podcast: Financial Nihilism, Inflation & The Collapsing American Dream.




My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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


Become a $3/month patron of my work via patreon.com.

Subscribe to my Substack for free





NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

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