Monday, December 15, 2008

Risk, False Productivity and the Ecology of Starvation

Much of the resources of the U.S. economy are expended on limiting risk--a costly enterprise. Yet this costly effort depends on a highly productive economy for funding. Unfortunately, real productivity in the U.S. has been largely replaced by a False Productivity based on borrowing money. By depreciating our currency and borrowing from future productivity (deficits must be paid by future generations' productivity), we have built a top-heavy castle doomed to collapse.

As long-time readers know, I try to address "long-wave" causal mechanisms which operate beneath the surface noise of financial and fiscal "news". The next few days will be devoted to ideas which receive little or no exposure in the MSM (mainstream media).

Let's begin with an appropriate analogy: a hunter-gatherer tribe. The lifestyle of gathering and hunting is what we as an organism have been selected to do well. Of the 7 million year history of our particular mammalian lineage, fully modern humans (homo sapiens sapiens-- the Mark 1.0 model) have been around for about 50,000 years. For all but the past few thousands years, all genetic and cultural modifications over the past 7 million years were selected to improve our hunting and gathering skillsets. Agriculture and urban settlements arose so recently that their impact on our genes has been slight.

That's why the analogy is appropriate.

Productivity is rather easy to measure in hunter-gatherer groups: the tribe either gathered enough food in its wanderings to survive or prosper, or it starved. Surpluses were needed to feed the children and perhaps supplement the diets of the few who made it over 60 years of age (evidence suggests about 5% of the populace were elders--a higher percentage than later agricultural communities).

Some surplus could be stored or transported, but the basic survival mechanism of humanity was to live within the means of the local ecology by moving about, thus avoiding overtaxing any one locale's "carrying capacity" for a group of large omninvores.

Though we do stockpile essentials, how small the stockpiles are might surprise most Americans. The oil markets hang on the weekly stockpile numbers released Wednesdays, moving on a few million barrels added or subtracted.

The total oil in commercial storage amounts to 17 days of U.S. consumption. (320 million barrels divided by 19 million barrels a day.) An increase of 2 million barrels may move the market, but in reality it amounts to about one hour's daytime consumption.

Even the nation's Strategic Reserve amounts to little more than a month's supply of oil. So in a very real sense, we are still a species with limited supplies of essentials. If we overtax our environment, we can starve now just as we starved then.

What most of us live on is the surplus generated by a relatively few members of the tribe. If we were to cast the entire 300 million citizens of the U.S. as a hunter-gatherer tribe, we would find that perhaps as few as 10-20% of the people are actually gathering and hunting up the "surplus" which the rest of us then consume.

In a strict accounting, "surplus" is truly only food, energy and goods which can be traded at a profit to other tribes. Every other activity is living off the excess food, energy and goods created by the few productive members.

If we were to characterize the U.S. as a tribe, 80% of the members are consuming surplus; they do no hunting or gathering or making of tradable goods. Some 80% of us do non-surplus generating things like write blogs, hold meetings, facilitate this or that, field complaints, mediate conflicts, care for children and the elderly, carry the chiefs around, plan our next raid on neighboring tribe's resources, etc.

This is fine as long as the productive members are astoundingly productive. A strong currency helps. When a dollar bought 300 yen, then if a U.S. worker made a dollar, that buck could buy quite a bit of Japanese-made goods. Now that the USD buys only 92 yen, then the dollar buys less than a third of what it once bought. As wages have doubled, the U.S. worker is given the illusion of higher income; but when measured by purchasing power, his/her wage has dropped in value.

What we as a nation have done recently is eat the seeds and kill off the game which is necessary to regenerate surplus in the future. We have consumed our future surplus. This is essentially why the Coming Depression will not end in 2009 or 2012--we as a nation have consumed our future surplus via stupendous deficits and the stupendous interest payments which must be paid out of future surpluses.

By leveraging massive amounts of debt and borrowing from our future, we created an illusion of productivity. Now that illusion has been revealed; borrowed money is not surplus.

Much of our spending is frivolous--the fruit of a deep denial that risk is still present. The sense of entitlement which is overpowering and ubiquitous among Americans who are not first-generation immigrants boils down to this: we are entitled to a low-risk society which guarantees pensions and healthcare for all retired citizens, and many other benefits for all citizens.

How many trees are being cut down to print stories of people who put money into a scheme which was visibly too good to be true and are now whining about the injustice of investing in the inherently risky stock market and actually losing money?

We as a people embrace the mythology of risk but adamantly reject its reality outside of narrow niches like Silicon Valley startups. Our propaganda machine spews endless praise for entrepreneurs like Steve Jobs, yet the fact that thousands of would-be Steves bet everything on a company or idea or technology and lose everything receives little mention. We like to read about the gamblers who embrace risk and win, not those thousands who take a risk and lose. Most small businesses fail within five years, and Silicon Valley is littered with the ghostly bones of once-prosperous companies.

But then Silicon Valley's credo is risk is part of the game, and losing carries no stigma; it is even viewed as having "earned your stripes" as an entrepreneur.
Auto industry executives, investors and UAW workers are stunned to realize
that their business actually retains some measure of risk. Correspondent Michael Goodfellow sent in this link to the marginal revolution blog, which ran this photo of the UAW-Ford contract: all 2,200 pages of it:

This is a document whose loudest subtext is: "I was negotiated in an era of no risk." When there is no risk, then you can argue over minutae, and be concise to the Nth degree; in a known high-risk environment, trust is, well, a matter of trust. Agreements are recognized as boilerplate to keep the attorneys at bay long enough to see if the enterprise succeeds. Nobody has enough surplus capital or labor to prepare 2,200 pages of legalese, never mind pore over each page and negotiate every niggling detail.

We as a nation have expended the surplus of decades to reduce risk--often a noble enterprise. The risk of families going hungry: food stamps. The risk that elderly retirees will not get adequate medical care: Medicare. The risk that the elderly will be poverty-stricken: Social Security. The risk that industry will knowingly or unknowingly poison the Commons we all share/breathe/drink: the EPA. And so on.

Now we come to the ecology of starvation. In any ecosystem, any fast-reproducing creature can, once freed of predators and disease, eat its way through the entire available food supply. It then starves to death in great numbers, reducing the load on the ecological system to the point the "carrying capacity" of the environment rises from near-zero to a restored balance.
Every creature will exceed its environment's carrying capacity if given the opportunity, and we as a nation have long exceeded our financial resources. Rather than re-scale our promised benefits and government to our true surplus, we have borrowed money from our children and grandchildrens' future surpluses to fund our own risk-abatement/benefits. Now like rats proliferating on an island, our promises to ourselves far exceed the carrying capacity of our real economy; we must now tighten our belts for a generation or two, or starve as we consume the last morsels of future productivity.

In a financial sense, we are eating the seeds needed for the next generation and stripping the fiscal ecology of assets, reducing its future carrying capacity.

As noted here many times before, demographics and rich promises of future pensions and medical care guarantee the insolvency of every pension and healthcare plan in the U.S., regardless of its size or management. No economy can generate enough surplus from two workers so that a third can be paid a retirement pension and given medical care to the tune of hundreds of thousands of dollars each.

Rather than face the fact that the risk-mediation programs we have promised are unsustainable, we have borrowed from future generations to maintain an illusory surplus. We as a nation have stripped the environment which supported us and eaten the seeds and lifestock which were needed to generate surpluses for future generations. Now we face a desert of our own making, and we're fulminating about the re-emergence of risks we thought were banished for all time.

But the risks could only be mitigated by the husbanding and careful investment of real surpluses. Once the surpluses shrink or disappear, there is nothing left to mitigate risk.

Statistics make it abundantly clear that the purchasing power of the average American household has been in decline since the mid-1970s. Some of this can be attributed to globalization (i.e. capitalism outside the tribal borders making goods and materials cheaper than the tribe can), some to the rising costs of government and healthcare, and some to the depreciation of the dollar.

This decline was masked by the financial legerdemain of two great asset bubbles: the late 1990s dot-com era and the 2000-07 real estate bubble. Behind the apparent "wealth" created by IPOs and flipping houses lay the stark reality that such paper transactions created no new tradable products, services or real surplus. Even as an illusory surplus was fashioned out of thin air, the actual productive surplus of the nation declined via the dramatic loss of the dollar's purchasing power.

Even as people were reaping paper profits in the millions, the value of the dollars being created by government fiat and fractional lending was dropping. You can't fool the productivity/surplus gods for long. Every billion in illusory wealth was offset by the loss of purchasing power for the trillions of dollars in circulation.

Those unable to cream off millions in "new" wealth simply borrowed money to support the pensions, medical care and frivolous spending. The Federal government borrowed trillions, local governments borrowed tens of billions via municipal bonds and consumers and businesses borrowed hundreds of billions more via HELOCs, mortgage extractions, corporate bonds and credit cards.

All of this money was borrowed to fill the deep and growing gap between the surplus generated by productive labor/capital and the desire to alleviate risk with costly programs.

We can be sure the 2,200-page labor contract between Ford and the UAW was forged in an unspoken consensus that the U.S. auto industry was a well which would never run dry; it was timeless, forever, a creature capable of fending off predators and therefore impervious to risk.
It doesn't take much imagination to see that an industry which failed to make money even as it sold millions of vehicles cannot survive as vehicle sales fall in half. Global overcapacity is so stupendous that unprofitable/outdated factories will have to be shuttered. The auto industry will survive in some form, but one capable of profitably making 8 million vehicles a year in North America (total demand) when it once made 16 million vehicles a year will be a very different industry.
Global Auto Contraction Ahead (Wall Street Journal)

A financial system which enabled one money manager to destroy $50 billion in wealth without any regulator sniffing even the faintest foul odor is a system in which risk was simply masked, not ameliorated.

A system which covers the lack of actual surplus with trickery, debt and phony statistics is a system doomed to a rude awakening. The U.S. no longer generates enough real surplus to pay for its own pensions, healthcare, energy system, consumer fripperies, etc. The staggering debts accumulated in the past 8 years are proof of that.

So we face a choice in 2009: either re-scale and re-size our risk-offsetting obligations to our actual surplus, or shift capital and labor from non-productive work to work which generates surpluses in food, energy and tradable goods others want, or starve as the carrying capacity of our economy collapses.

Here is Part III of Chris Sullins' strategic action thriller, Operation SERF: Operation SERF, Part III
"This is an illegal assembly!" proclaimed the man wearing a slate gray uniform, black boots, olive drab web gear and carrying a submachine gun.
The uniformed man walked down the center aisle between the rows toward the altar area where a young man stood at the head of the assembled group. Two other men dressed in a similar manner with weapons stood back toward the entrance and behind the people. The faces of all three were cleanly shaved and straps from their gray helmets were snapped around their chins. When the uniformed man made it to the front he turned around to face the audience with his back toward the young man. He let his firearm dangle by its sling, took off his helmet and held it under his left arm.
Operation SERF, Part I
Operation SERF, Part II


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