oftwominds-Charles Hugh Smith

Two Commentaries

December 20, 2008

I continue to be delighted by the in-depth commentaries submitted by readers of this site. Here are two which comprehensively address the choices I addressed in "Triage." Such critiques help clarify my own thinking and point out what ideas I did a poor job of communicating.

Reader comments illuminated the weakness of my coverage this week of certain key ideas. Let me try again on these:

1. The U.S. no longer creates enough surplus to fund its expenses/lifestyle. We as a nation have "made up the difference" between the surplus we generate as a nation (as priced in gold) and what we spend by unsustainable borrowing, leverage and speculation.

Think of national surplus income as a well. Ours has run dry for the past 8 years, so we borrowed water from others' wells (i.e. from their surplus), dumped the water in our well and then pulled up buckets of water proclaiming, "See? We still have plenty of water."

This trickery masked the reality that our well has run dry. Borrowing (whether via printing and selling bonds or creating money via leverage), leverage and speculative churning is not surplus--it's essentially stealing from future generations to pay our entitlements and other spending today. I find that unconscionable. There is no way to pay more wages (nationally), more entitlements or more of anything when we have no surplus. We need to produce a surplus before we can spend it.

2. Risk cannot be made to vanish--it can only be offset at great expense or hidden. Our entire system is based on the false idea that risk can be mitigated to near-zero. This is an illusion which has cost us dearly. Risk is now becoming visible in parts of our economy which felt "safe" (i.e. auto manufacturers, government employees, finance industry, etc.) Any solution which doesn't recognize real risk is doomed to fail as it is based on illusion not reality.

3. Regarding Has Capitalism Failed? December 19, 2008): I was trying to say that "real" capitalism will require the destruction of most stakeholder's capital in healthcare, autos, banking, etc., and since those stakeholders can buy political influence then they will "buy" government bailouts which are de facto nationalization to save their capital at taxpayer's expense. That isn't capitalism, yet for ideological reasons the reality of de facto nationalization is being cloaked with an illusion of "private enterprise" to hide the fact that what's being saved is private stakeholders' wealth and income.

The only thing "private" is the capital and incomes being "saved" by the taxpayer bailouts. The actual enterprise is essentially nationalized in everything but name.

OK, here are the two reader commentaries.

James D.

The triage article was great ( First Step: Triage December 16, 2008). Unfortunately, like you said, the chances of these things happening on a national scale are zero. I am emailing you about two topics: first, how to prepare, and second, what to do about energy.
On the first topic, we need to think through how to position ourselves to survive, thrive, and grow. To do this, we have to observe the Great Depression, Japan, and Argentina. In the short term, I see us completing this rally with perhaps a blow off to 1000 on the S&P after an auto bail out. Then we will retest 750 during 4th qtr. earnings. Following that, we will get a major rally. Up to now, the Fed has pumped a lot of money into banking, but it hasn't gotten out into the economy. That WILL change.

Obama is going to go on a trillion dollar spending spree. Banks will borrow from the Fed using the discount window at 0.5%, and buy long term government debt to provide the funding. Long term treasuries are going to continue to rally for quite some time. Since the government will be spending money, the money will end up in the markets. So I expect to see a big Obama rally in Feb./March. I won't be going long, but I will probably play it with gold. I might go long a few select shares, maybe oil services and maybe solar. Don't know yet. How long this keeps us afloat, it is too early to tell. But eventually it will fail. This final failure is the big one. You have to be ready for it, but you may have a year or two, so there is some time.

What smart people need to do is move to small rural towns where everyone knows everyone. Also, there are additional benefits. For example, I can put grass fed, chemcial free, free-range beef, butchered and wrapped, into my freezer at $2.15 per pound. I can get fresh free range eggs for cheaper than the store, and tons of farmer's market vegetables. I can also grow/raise my own (haven't done enough of that) by being in a rural community. Also, folks around here still look down on entitlements and tend to want to solve their problems instead of asking for a handout. Of course crime is very low and you can carry your gun without anyone even noticing.

The next thing people need to do is develop a black market skill that creates economic surplus. I told my fresh-out-of-college brother-in-law the following: Throw out the paper money for a moment and look at reality. In a few years either a lot of entitlement people and retirees will have to live in single wide trailers and eat rice and beans, or we have to become slaves. By slaves, I mean we will have to pay insanely high taxes and fees, endure rationing of medical care, and live under wage and price controls governing what we can charge. The retirees outnumber us, so get ready. Imagine if you can repair air conditioners. I assure you wage and price controls go out the window on a 100F day, and you will get paid in cash. This is coming, don't doubt it.

The next thing is building up a stock of precious metals. The government is going to print. It is already printing, and once the Obama plan is launched, prices of commodities will go back up. Gold will rise once more. I like having junk silver on hand, and gold over in BullionVault.

In summary for Item 1, we need to predict what will happen based on history. History tells us the Newer Deal is coming. This means a dead cat bounce, maybe up to two years, ending in a further drop, maybe S&P at 400. Unfortunately it also means World War III. But think about the implications of the Newer Deal and prepare for it. In fact, if you play it right, you can profit from it. Just don't swallow the B.S. and keep your eyes open.

A quick aside on medical, I pay cash and don't have insurance. I ALWAYS get a 25% discount, and sometimes up to 35%. Doctors love cash paying customers. This has included surgery and hospital bills. In the five years I have been without insurance, I believe I have saved over $30K to $50K in premiums on a family plan ($900/mo). It adds up quickly.

On the second topic we have energy. First, ditch wind power and ethanol. Wind power is a loser because it would require a huge investment in a new grid. Even with a new grid, the transmission losses from say North Dakota to Chicago would be enormous. But forget about that, we aren't going to get a new grid, so wind won't fly (pun intended). On ethanol, it is a net energy negative, so the depression will quickly disabuse us of that idea. The ethanol subsidies will get chopped or inflated away. So now the truth about energy. First, the main crisis we are facing are the looming Global Warming regulations. I don't believe in man-made global warming.

If you look at Hansen's predictions, he had three curves, with the "A" curve being the worst case, and the "C" curve being the best case. Our temperature rise has been below the "C" curve. This is a major red flag for me. But whatever you believe, companies are unwilling to invest big due to future restrictions. In fact we have plenty of coal to keep us going. We also have coal-to-liquids technology that will produce diesel and jet fuel. In fact, this technology is currently being used in Kansas to produce fertilizer and has been used overseas for decades for diesel and jet fuel. We also have had incredible success with 3-D seismic and horizontal drilling. These two technologies have given us the chance to greatly extend our oil reserves including going into "dead" fields and producing again. And then we have the massive oil fields sitting in Alaska. Put it all together and there is no need for a crisis.

In reality, the biggest crisis we have is political. Two very important sources for oil are Venezuela and Mexico. Venezuela is busy destroying their oil industry under Chavez. In Mexico, they have three elephant fields in the Gulf, however Pemex doesn't have the ability to develop them, and U.S. companies are not allowed in. Even with these problems, coal and technology in oil drilling will keep us going for twenty years more.

The future will be in thin film solar. 20 years from now you will buy solar cell film from Walmart for $20. Thin film solar is the solution because we can use the existing grid. It will be ubiquitous. It will be on the roof of you car and on the roof of your house. Your house will back feed the grid during the day after topping off your batteries. And that grid might be generating hydrogen from salt water which will be used in fuel cells. I think we will also need a lot more nuclear for base load, and some coal to liquids for air travel. So what can we do and where to invest?

1. We need nuclear, so that means we have to get Yucca mountain up and running. Before people freak out about nuclear waste, let me ask you a question. Would you rather hold radioactive material with a 1 week half life or 1 million year half life? Yep, the one week half life material is used to xray pipe welds, and will fry you. Nuke waste you could probably eat. That's an exaggeration, but it is safe. Something that takes millions of years to decay is not putting out a lot of radiation. Putting it a mile under the ground in Yucca is completely safe. We need to end the silliness and get more nuclear plants up and running.

2. On global warming, we need the truth. The Hansen predictions have turned out to be 100% dead wrong. If you monitor climateaudit.com, you will see that global warming is full of fraud. Maybe man-made global warming is true, maybe it is not. The objective answer at this point is that we don't know. I think we can wait twenty years for the development of solar. By that time we will be running out of oil anyway.

3. For investing, thin film solar is the way to go. Who to invest in? I don't know, but stay current on the developments.

4. Battery technology is also something to invest in. Learn about that.

5. Hydrogen fuel cells which run on hydrogen generated from the sea will probably play a part. Transporting the hydrogen will be a challenge unless we use existing natural gas pipelines. Maybe wind power can play a role on the coasts as part of hydrogen plants. I still don't think wind power will be a big player sans subsidies.

6. We need ANWR and other domestic oil deposits. We have to face reality. Alternative energy is at least 20 years away. That is the hard truth. We are going to need oil until we develop alternative energy, and that means ANWR.

7. Support legislation that allows you to "spin your meter backwards" and get paid for it. That is probably the best way that you can support the development of solar as an individual.

Kyle L.

There are at least three things I find wrong with your assumptions:

1) City/State Salaries: I find you naturally assume that city employees are overpaid instead of assuming private sector employees are underpaid. Instead of destroying well paid positions I suggest you advocate improving the pay in the private sector. Start with increasing minimum wage, which I find deplorable down there in the US. There are other levers to increase private sector pay. I deal with this below.

2) You said: "For instance, the 100,000-page tax codes could be tossed out and a 5-page FAIR (consumption-based) tax system put in place." Consumption-based tax is regressive. The problem is the massive assets accumulated by 1% of the population and denied to the rest of us. Our society must find a way to extract that wealth so it can be put to use. Consumption based tax will never do this; the wealthy have no hope of spending it all. Furthermore, all these assets are loaned out with interest: increasing the concentration of wealth.

I do not advocate taxing assets, but I also believe that there should be no pay for no work. This means capital gains should be taxed at 100% of income tax rate, and inheritance taxes should be taxed even higher. Capital gains are already offset by losses; so risk is already accounted for. The children of the rich should not be granted free money: they should work for it like everyone else.

3) "Take responsibility for your own healthcare" I disagree, and the reason is because of a bigger picture:

We, are "too efficient", and we two options for our society: Work less or have more.

Working less will never fly: Some people derive great pleasure from working hard, and at same time, will enjoy belittling those that work less. I see this in what you say about city/state workers. There is not enough work for everyone: The hard workers, who have "taken work" from others, will blame those that can not get a job. Unless there is a new level of compassion in our society for those that actually take the freedom our efficiency has granted us, we will never go down this path.

Our only real option is to have more, and generate enough employment for all. We must do this while at the same time living within our limited natural environment. To me, it seems we must change our attitudes away from having more *things*(which consume natural resources) to having more *services* (which consume human resources). Here are some things our consumer culture should be directed toward consuming:

A) Heathcare (but not drugs) B) Food Services
C) Body Care services

Healthcare: Cuba's heath care system is better than the US. Sure, Cuba can't cure exotic cancers, but the US can't cure simple sicknesses in the poor's infants. Government run and government funded heath care systems work very well and make a stronger economy generally: Both by increasing employment, and reducing individuals' risk:reward ratios. Efficiency is had by reducing paperwork and removing profit from the system costs: which are significant. The corporate propaganda machine has you believing that drug and diagnosis costs are going up, but they are not:

1) Drug costs are high in the US because there is no body with significant purchasing power: Government healthcare can negotiate country-wide discounts on drugs, AND have the power of withdrawing patent protection if negotiations are not done in good faith. This is done in Canada, and is why are drug costs are lower.

2) Increase in drug effectiveness, especially over the last five years, is due to the REMOVAL of bad drugs from the system. The New England Journal of Medicine found that even though each individual medical trial may be properly run, and the conclusions correct, the body of trials was badly corrupted. The corporations were canceling trials that did not produce proper results. Only the trials showing a new drug in a positive light was released for publication. Now the NEJM demands all trials be pre-registered if they are to ever be published:

( content.nejm.org). You can see its effect as dangerous drugs are being taken off the market, and simple drugs like aspirin, are shown to be just as effective.

3) Diagnosis is overdone: If doctors were not incentivized to request more diagnostic tests, they would not. The clear majority of medical problems do not require expensive diagnostics to determine treatment.

4) A robust heathcare system that services the whole population, and not just the rich, will employ more people.

Food: First, I agree: "... completely ditch the standard American diet of junk food, prepared food and high-salt, high-fat, high-sugar 'food.'". But I disagree that making your own meals is not the solution. Food can employ more people by increasing regulation and promoting eating out.

1) We want to regulate restaurants to make nutritious food, which means more regulation toward organic and proven-safe additives.

2) Illegalize the flavour industry: The flavour industry is required to make mass-market food palatable. Most natural food can not handle the packaging and freezing process: illegalize the modified vegetable oils, and other unnatural construction materials, and hopefully this industry dies.

3) Demonize the mass market food, and promote food that requires a high amount of preparation: The food must be served to your table. The food must be cut for you (like in China and Japan). The food must be better than the swill you make at home. More work put into the food, the more people are employed.

Body Care: I do not have much to say. May people consider this a luxury, so should be easy to promote in the consumer culture. It also employs many people, and seems to consume little natural resources for the number it employs.

Thank you, James and Kyle, for taking the time to present a wide range of thoughtful ideas/solutions.


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