Carrying Capacity, Demographics and Easter Island's Die-Off

Recent posts elicited thoughtful replies on resource and demographic overreach.


Readers responded to Booms, Manias, Windfalls and Die-Offs and Why the Present Depression Will Be Deeper than the Great Crash of 1929 with comments on resource and demographic overreach.

Simply put, every environment has a sustainable carrying capacity. In the past hudnred years or so, humanity has boosted food production by devoting vast quantities of non-renewable inputs like oil and phosphorus (chemical fertizilers) to agriculture. Once those inputs are depleted then production will revert to pre-fossil fuel/chemical fertilizer levels.

Yes, even the minerals used in chemical fertilizers are in the depletion phase:Phosphorus Famine: The Threat to Our Food Supply (Scientific American)

As population has risen then the pressure on carrying capacity increases.Add in staggering energy consumption of depleting fossil fuels and you get a scenario with startling parallels to the die-off of the human population on Easter Island.

Various policy decisions such as suburban sprawl and a growing dependence on consumption have also raised the demands on irreplaceable productive assets such as arable land. How much "air" is left in a global economy careening down a path of resource/windfall exploitation is an open question; one oft-overlooked reality is that all the "alternative energy" sources in the entire world provide perhaps 3% of the global energy consumption.

Double that, triple that, scale it up tenfold (a very costly project) and it would still supply less than a third of current global energy consumption, never mind future demand, which is set to skyrocket as another billion (or two) people reach for a middle-class level of energy consumption.

I follow up these readers' comments with a short list of suggested "further reading" on these topics.

Galen W.:

Another good one. But, you left out one large, important pressure facing the world today which was not present in 1929 - population.

Kevin M.:

In support of what you wrote, I'd like to offer a perspective on what I've seen living in the Atlanta area since the early 1990s.

Atlanta has been one the fastest growing metropolitan regions in the US for the past 20 years. The population of the metro area has grown from about 3 million in 1990 to over 5.3 million today.

However, within all of that growth--the explosion in the number of subdivisions, condos, apartment complexes, shopping centers, office buildings, warehouses, schools, public buildings and recreation centers--there has been no corresponding development of manufacturing facilities in the region. The biggest manufacturing stories of the past few years have been the closing of the area's only two auto assembly plants.

In addition, many thousands of acres of farmland have been annexed for additional suburban and exurban development.

Tremendous growth has occured here, not only without producing anything tangible (other than real estate of course), but with an erosion of both manufacturing and agriculture.

Atlanta is an extreme example but it's hard to imagine this trend continuing successfully on a national level for too much longer.

Bob Z.

I caught your blog today on why the depression will be worse than the 1930s. I think one other factor that is seldom mentioned or even recognized is that the 77 million baby boom from 1946-1964 was followed by a 44 million baby bust from 1965-1995.

Aging boomers will consume less of practically everything except health care - less houses, less furniture, less clothing, less imported stuff from China. The Gen X/Gen Y baby busters are far too few in number to pick up the slack from declining consumption among boomers. This alone spells disaster for a consumption-based economy.

Also, the Gen X/Gen Y baby busters will be called upon to pay some $50 trillion+ for aging boomers' Medicare, which is about $1.1 million in Medicare taxes per baby buster. My guess is that they simply refuse to pay up. So I'm almost willing to bet that the typical "Medicare" received by aging boomers who fall seriously ill will be a fatal overdose of morphine.

I'm afraid that US demographics indicate a very long and protracted period of depression and economic stagnation, perhaps lasting as long as 20-25 years.

Buzz M.:

Reading Michael Goodfellow's comments this morning turned a light on in my head. A couple days ago a young (35) friend of mine who has a small metal fabricating business came over to my shop to ask if I might give him some comments on a weld fixture he was building. On walking back across the street to his shop he says to me, " ...Yeah... last night my wife and the kids and I watched this cool show about how humans are effecting the ecology and environment of the planet. I mean...what do you think the guy that cut down the last tree on Easter Island was thinking?..."

Well that about bowled me over as I thought this kid was just another 'gearhead ' - oil burner like all the rest. I was very impressed. I reminded him that his two beautiful children would have to live in the world that we leave for them. Made my day to hear this realization coming from someone I would not have thought.

Anyway while I was reading Goodfellows comment this morning I thought of the Easter Island paradox, tragedy--call it what you will--and found Jared Diamond's take on it: Easter Island's End.

The story would make a nice childrens book.

As far as how I related it to Goodfellows comment was in the significance of the giant statues. Perhaps they knew that their time was limited by their life style and cultural practices but HOPED and PRAYED that someday something or someone whould happen along to SAVE them.

Jeff R. suggested this piece by Eliot Spitzer:

Green Shoots, Red Ink, Black Hole: Truly terrifying data about the real state of the U.S. economy.

Here is a popular metaphor of hubris/false confidence, circa 1912:

Hopefully you can borrow these titles from your local library:

The first chapter of The Future of Life is the best short piece written on China in the past decade. Academic studies loaded with statistics on China's GDP, etc. miss the point: China is facing environmental collapse, sooner rather than later. Quantitative financial data cannot possibly capture this as the environmental data points are lacking/massaged for political purposes. The economy is not some free-floating entity disengaged from the rivers running dry.

On Peak Oil:

Beyond Oil: The View from Hubbert's Peak

The Party's Over: Oil, War and the Fate of Industrial Societies

The End of Oil: On the Edge of a Perilous New World

Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

On chemical/toxins overload:

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

On the demographic time bomb about to explode:

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

On collapse of advanced civilization:

Collapse: How Societies Choose to Fail or Succeed (Jared Diamond)

The Collapse of Complex Societies

A realistic appraisal of alternative energy:

Sustainable Energy - Without the Hot Air

Our previous lists of hot reading and viewing can be found at Books and Films.


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Booms, Manias, Windfalls and Die-Offs

Perhaps financial booms and busts share characteristics with windfalls and the resulting die-offs.


Longtime correspondent Michael Goodfellow mades these astute comments about booms and busts from a perspective I would characterize as sociobiological:

I was thinking about financial booms and busts the other day. I think we both believe that crashes are just the price of bubbles. Which is why I'm suspicious of any statement that the 1929 stock market crash "caused" the depression. The crash was just the end of the bubble, and the depression was the prolonged unwinding of excess debt and poor investments. Prolonged by government attempts to reflate the bubble, among other things.

So the real problem here isn't unwinding debt and so on. We know that happens eventually. Systemic effects (dominoes crashing into one another) are important, but overrated in my opinion. The real problem is manias and bubbles. Why do we do this to ourselves?

Two points:

1. No living thing (there's a general argument for you!) can ignore windfalls. If for whatever reason, the grass is greener this year, if you are a rabbit, you eat more of it. And have more kids, which survive in greater numbers. If you were some "sustainable" cautious rabbit that only had 2 kids and only ate what it usually ate, you'd lose out to the greedy ones. Nature selects for optimists that grow more or less as fast as they can.

2. We are social animals and there's a huge cost to being an outsider. Living alone is deadly -- you have no one to help you if you get into trouble, no one to look out for you, no one to hunt or gather with, and no one to share food with if you don't do well today. One mistake and, like solitary animals, you may be finished.

Similarly, we worry about our status in the group. Being unpopular means getting beat up a lot, getting no help, having to give up your food/mates to the stronger members. Also very bad news from an evolutionary standpoint.

So as social animals, we crave status (or at least acceptance) by the group. This is why group-think has such a power over us, from fads and manias to adulation of heros and kings, to religious movements, wars, and revolutions. We think of ourselves as rational beings, but it's just a gloss over those social instincts.

As long as we are human, we will have these crazy bubbles from time to time. Because as animals, we don't ask why times are good, we just try to take advantage of it. And because as primates, if everyone else is buying houses, we will too.

Regulators are just as caught up in this as the general population. They don't want to do the unpopular thing, and they don't want to kill off a boom. No one does, except cynical "doom and gloom"-ers. Wishing it were otherwise is just futile.

Instead we should be asking, "when the inevitable booms and crashes happen, how do we avoid systemic risk?" I don't think we're asking that question as we deal with this crisis. All the debate I read is about more regulation, as if there weren't enough already.

Thank you, Michael. Excellent points. Now that all the happy little consumer-rabbits have eaten all the once-lush green grass of consumer/home-equity-line-of-credit down to bare earth, we might ponder what happens next in Nature when the grass fails to grow back.

Most of the rabbits die off, leaving only the hardiest, most adaptable of their numbers.

If we extend this cruel aftermath of "windfall exploitation" from green grass and rabbits to HELOCs (home equity lines of credit) and other forms of once-abundant credit now shriveled or consumed, we get to a consumer-borrowing/spending "die-off" in which spending that was based on housing/credit bubble "windfalls" vanishes.

The consequences are rather obvious:

1. Businesses which depended on this spending die off.

2. Tax revenues based on this spending die off.

3. Lenders dependent on this borrowing die off.

4. Households which depended on credit to remain solvent die off.

5. Asset classes like residential housing which depended on abundant "windfalls" of credit to fuel valuation increases also stage the equivalent of a die-off.

6. Exporters who depended on this credit expansion to sell their goods in the U.S. will also suffer a die-off.

Hmm, now we're talking about a significant chunk of the global economy, aren't we?

Extending the "windfall exploitation/green grass" analogy a bit further, we can anticipate that the consumers who require little to no new green grass (credit) will be the survivors. Everyone dependent on abundant cheap credit for their survival, from consumers to governments to enterprises to entire nations, will suffer financial starvation.

That's the inevitable consequence of "windfall exploitation."

"Quantitative easing" is supposed to sow millions of new little green shoots, but the dirt (the collateral needed to justify and support new credit) has dried out. All QE does is burden the government with collossal new borrowing; all the seeds sprouting will wither because the consumer rabbits have eaten through or lost their collateral and so there is simply nothing left on which to "grow" more credit.

Once all the grass and seeds have been consumed, starvation is the result. There is no collateral left in the U.S. except the "full faith and trust of the U.S. Treasury" and that is now (rightly) drawing mocking guffaws from university students in China.

Some see "green shoots" but the ground (collateral) is rock-hard; expect not lush new fields but numerous expired rabbits.


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Why the Present Depression Will Be Deeper than the Great Crash of 1929

Galbraith's conclusions about the causes of the Great Depression point to why the current Depression will be deeper. 


Continuing our analysis of The Great Crash of 1929 by John Kenneth Galbraith:by understanding the causes of the Great Depression as elucidated by Galbraith, we can observe the differences between the present and 1929. These reveal why today's Depression will be even deeper than the 1929-1941 one and why today's policy "fixes" as pursued by that great student of Depression, Ben Bernanke, are fighting the last war--a Keynesian stimulus strategy doomed to catastrophic failure.

I hesitate to call this topic "important" because such announcements instantly cut my readership in half. Thus I am inclined to call this topic "edgy," "explosive" and "contrarian," all of which sound more interesting than "important" (yawn).

Galbraith begins his exploration of causes by noting that "economics does not allow final answers on these matters. But, as usual, something can be said."

First, he demolishes the notion that abundant credit caused a speculative orgy.

The long-accepted explanation that credit was easy and so people were impelled to borrow money to buy common stocks on margin is obviously nonsense. (page 169) On numerous occasions before and since credit has been easy, and there has been no speculation whatever. Furthermore, much of the 1928 and 1929 speculation occured on money borrowed at interest rates which would have been considered especially astringent.

Far more important that rate of interest and supply of the credit is the mood. Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich. (emphasis added, CHS)

Next, Galbraith looks to the wellspring of credit which has been virtually nonexistent in our current speculative boom: savings. (Or at least domestic i.e. U.S. savings.)

Savings must also be plentiful. If savings are growing rapidly, people will place a lower marginal value on their accumulation; they will be willing to risk some of it against the prospect of a greatly enhanced return.

Speculative excess is somewhat self-regulating--or should be unless manipulated by the very state which is pledged to protect the economy from such excesses. Galbraith notes:

Finally, a speculative outbreak has a greater or less immunizing effect. The ensuing collapse automatically destroys the very mood speculation requires.

Moving from the causes of speculative excess to that of Depression, Galbraith rejects a cyclical cause: "No inevitable rhythm required the collapse and stagnation of 1930-1940."

As for the business cycle--expansion of plant, credit and inventory once over-extended, requires a contraction to restore balance--Galbraith grants it viability, but he rejects it as the cause of the Depression:

In 1929 the labor force was not tired; it could have continued to produce indefinitely at the best 1929 rate. The capital plant of the country was not depleted. In the preceding years of prosperity, plant had been renewed and improved.

Finally, the high production of the twenties did not, as some have suggested, outrun the wants of the people. There is no evidence that their desire for automobiles, clothing, travel. recreation or even food was sated. A depression was not needed so that people's wants could catch up to their capacity to produce.

So then what did trigger the Great Depression? Galbraith sets aside the speculative collapse itself for a moment and digs for problems in the real economy. He begins by noting worker productivity rose by 43% between 1919 and 1929 even as wages, salaries and prices all remained comparatively stable. This enabled increasing profits, which due to the large income disparities of the era, flowed largely to the well-to-do.

What did the wealthy do with this new-found capital?

A large and increasing investment in capital goods was a principal device by which the profits were spent. (page 175) It follows that anything that interrupted the investment outlays--anything, indeed, which kept them from showing the neessary rate of increase--could cause trouble.

The effect, therefore of insufficient investment--investment that failed to keep pace with the steady increase in profits--could be falling total demand reflected in turn in falling orders and output.

As I understand this, the proximate cause was a vast income disparity which placed much of the prosperous era's profits in the hands of a small wealthy class, who then mal-invested the profits. If that isn't ringing some bells in your head, then please recall that income disparity, which fell from 1946-1970 or so, has been rising ever since. Bingo--profits flowed increasingly into the hands of a elite wealthy class who then squandered/mal-invested the vast profits, undermining the entire economy.

Galbraith then turns to the causal relations between the collapse of the speculative stock market and the ensuing Depression. Once again, Galbraith fingers income disparity: 5% of the populace garnered a full third of personal income.

This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be luxuries or by way of investment in new plants and new projects.

As the stock market crashed, those with the most to lose--the wealthy--found their cashflow and capital massively crimped. Since the entire economy was dependent on them spending and investing freely, the economy crashed, too.

You see where this leads in terms of the 1990s-2006 boom. The stupendous profits skimmed in the great dot-com boom flowed disproportionately into a few hands, who then mal-invested the gains (in a macro context) in a completely unproductive burst of overbuilt housing and commercial real estate. The ensuing bubble drew in all those who in Galbraith's words believed they deserved to be rich and as those hapless speculators crashed they took the entire middle class of homeowners with them.

Galbraith also fingers two other causes of the Great Depression: Faulty corporate structure and flawed banking structure. The parallels to the present are achingly obvious; here's Galbraith's terse description:

The fact was that American enterprise in the twenties had opened its hospitable arms to an exceptional number of promoters, grafters, swindlers, imposters and frauds. This, in in the long history of such activities, was a kind of flood tide of corporate larceny.

As gargantuan as the flood of corporate larceny was in the 20s, the present era certainly exceeds it by a large margin.

Here is Galbraith's trenchant comment about the banking practices of the 20s:

Since the early 30s, a generation of Americans has been told, sometimes with amusement, sometimes with indignation, often with outrage, of the banking practices of the late 20s. In fact, many of those practices were made ludicrous only by the depression. Loans which would have been pefectly good were made perfectly foolish by the collapse of the value of the collateral he had posted.

The same, I fear, cannot said of the present: millions of guaranteed-to-default mortgages made to impossibly unqualified borrowers were never good nor prudent. The same can also be said of millions of auto/truck loans, millions of credit cards, millions of home equity lines of credit, etc.

Even worse, of course, the banks of the present era achieved heights of leverage via off-balance sheet derivatives, the securitization of mortgages and other financial legerdemaine that even the greediest, most venal bankers of the 20s could not even imagine.

Lastly, Galbraith blames "the dubious state of the foreign balance," i.e. the imbalance of foreign trade and flow of funds. In 1929, the problem seems to be that the U.S. was a magnet for capital inflows even as it managed a trade surplus. That imbalance doomed the global economy. Now of course we face the opposite imbalance but the same result will follow: the U.S. continues to run a staggering, unprecendented trade imbalance even as it sucks up an unprecedented share of global capital/savings.

Galbraith concludes: "Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small. But business in 1929 was not sound; on the contrary it was exceedingly fragile. It was vulnerable to the kind of blow it received from Wall Street."

You mean like the evaporation of $12 trillion wealth we've just experienced in the U.S.?

But the present is far more fragile and vulnerable than the U.S. economy of 1929, for the following reasons. In 1955 Galbraith could not possibly have foreseen or anticipated these current conditions:

1. A Federal government which since the "Reagan Revolution" of 1981 (e.g. don't tax and spend, just borrow and spend) has borrowed during so-called good times on a scale once reserved for rare Keynesian stimulus to combat serious recession. Thus we find ourselves at unprecedented levels of debt (comparable in terms of GDP to the entire cost of World War II) and our current Depression has barely begun.

2. A corrupt-to-the-core corporate structure riddled with bogus accounting, reliance on financial trickery for profits and misdirected/worthless regulatory oversight.

3. A banking sector of such debauchery and fraud that the excesses of the 1920s are reduced to the pranks of slighty-naughty choirboys and girls.

4. A Federal system of entitlements (Medicare, Medicaid and Social Security) which has grown far faster than the underlying economy for decades and now threatens the very solvency of the government itself, so stupendous are the future obligations.

5. A global military hegemony which costs more than all the other militarys and intelligence operations of the entire world put together. The U.S. military consumes more oil than the nation of Sweden (9 million residents).

6. An industrial, transportation and energy infrastructure that, rather than being rebuilt during the past 26 years of debt-based "prosperity," has crumbled in a long decline. Rather than invest in electrical power grids and energy-efficient transport systems, the U.S. squandered the trillions of borrowed dollars on toys, gewgaws, electronics made elsewhere, malls and commercial towers with only transient value and millions of bloated, inefficient poorly constructed homes no one needed or could afford: "assets" which were not productive at all, "assets" which are now capital traps on a scale heretofore unimaginable

7. A paucity of U.S. savings (and thus of domestic capital) with only one historical parallel: the depths of the Great Depression when unemployment was 25%.

8. A huge reliance on financial leverage, debt, borrowing and trickery for corporate profits; the U.S. exports soybeans, increasingly worthless dollars and "financial innovations" which are now exploding in economies from Ireland to India with the destructive force of superweapons. In exchange for this dubious paper, we have accepted actual tangible goods from the rest of the world.

They are now slowly waking up to the fact they've been conned on a scale few can grasp.

9. Globalization has reworked the global supply chain in an astonishingly brief period of time. As a result, the arbitrage of currencies (foreign exchange a.k.a. forex), wages, governance (less is more profitable) and environmental regulations (zero is the most profitable) have all placed advanced post-industrial economies like the U.S. at great structural disadvantages.

10. The U.S. claims to be competitive but much of this competitiveness is highly selective and thus illusory. Everything in the U.S.--labor, goods, buildings and taxes--is high-cost, overregulated (except for finance, banking and governance) and vulnerable to unpredictable lawsuits and officially sanctioned looting. Other than recent immigrants, non-U.S. employers find the workforce is often surly, unappreciative, narcissistic, entitlement-obsessed, unhealthy, poorly educated, unmotivated and more inclined to get-rich-quick schemes than actual enterprise or productivity.

The middle management labors under impossible demands to enrich stockholders next quarter and heavy turnover insures few stay in any job long enough to learn it effectively. Team cooperation is a doublespeak fraud imposed by "facilitators," creating a phony work environment where employees and managers alike pretend to care. This bogus environment breeds a looting, game-the-system mentality in which everyone is grabbing for all they can before retirement, restructuring, reassignment, resignation or getting fired.

A "quarterly profits are God" mentality reduces the workforce (even the good workers) to units of input which are pared back or hired without regard to morale or loyalty. This managerial and cultural pathology makes a mockery of worker loyalty and breeds the very qualities of distrust and "I got mine" attitude which undermines both productivity and workplace happiness.

11. Last but certainly not least, the U.S. economy is highly depedent on cheap, abundant fossil fuels--the very fuels which are in the global depletion phase, happy stories about unlimited natural gas and tar sands to the contrary.

For all these reasons, we can anticipate the Depression currently unfolding will be deeper, longer and more destructive than the Great Depression.

Let's recount the chain of events which partly parallel the Great Depression and partly diverge in meaningfully more destructive ways from that previous era:

1. The postwar income convergence (i.e the rise of the great middle class, the reduction of poverty and the relative reduction of the Plutocracy's share of national income) reverses in the early 1970s as the "true prosperity" of the postwar era ends and is replaced by income flowing increasingly to the top as stagflation, globalization and the decline of dollar gut the purchasing power of the middle class.

2. The rising productivity of the 50s and 60s slips to the flatline through the 70s and early 80s, only picking up again as computer software and hardware revolutionize the back office, sales, manufacturing, just-in-time shipping/production, etc.

3. Concurrent with this gradual return to productivity is the rise of finance as the key profit-center of corporate America. As income skews ever more heavily to the top 1%/5%, then capital (productive assets) become ever more heavily concentrated in the hands of the financial Plutocracy. The top 1% now owns some 2/3 of the nation's entire productive wealth.

4. As profits rise (from rising productivity) then the profits flow not to wages (which remain flat to down 1975-2009 for all but the top 10% professional class) but to those who own the capital.

5. As the middle class experiences a decline in their income and purchasing power (for reasons cited above: declining dollar, rising income disparity, and wages falling due to global wage arbitrage) then they turn more and more to borrowing and ever greater debt to fund what they have been brainwashed by the media to believe is "the American dream" of imported luxury goods, bloated homes, vacuous cruises, etc.

The only other mechanism available to the middle class to increase household income is for Mom/Aunt/Grandmom to enter the workforce, which she does in the tens of millions, with sociological consequences which are still unfolding.

6. This advert/media-driven desire to borrow to fund the "good life" is hugely profitable to the money-center banks, which expand rapidly into mortgage securization, derivatives and consumer credit to the point that they come to dominate corporate profits.

7. The financial Plutocracy, observing that actually producing goods is not very profitable unless you can fix prices as per ADM (Archer Daniels Midlands) or gain government subsidies and tax giveaways (oil lease depreciation, etc.) sinks its capital into the FIRE economy (finance, insurance and real estate), eschewing real-world investments as comparatively unprofitable.

Though rarely noted, this is a longstanding trait of capitalism stretching back to 1400-era Venice. When trade became less profitable than mainland farmimg, the Venetian Elite stopped funding trading and bought farms on the mainland. As a side effect, Venice ceased to be a military and trading power. But the Elite remained immensely wealthy.

8. As the tech bubble expands, middle-class investors see the Plutocracy (those with enough capital to qualify as angel investors and vulture, oops, I mean venture capital) reaping huge gains, and they enter the dot-com stock bubble buildup with a vengeance.

9. In a happy accident, the Soviet Empire collapses just as productivity begins its computer-fueled rise in the U.S. In a so-called Unipolar World in which U.S. military, political and financial influence is unrivaled, non-U.S. investors seek the relative safety and high returns (based on appreciation of the dollar) of U.S. financial instruments.

10. The dot-com bubble implodes in a speculative meltdown (dot-bomb), and retail investors (a.k.a. the middle class 401K investors) are devastated. The ephemeral wealth they once possessed, however briefly, fuels their speculative desire to get into the next get-rich-quick game, which just so happens to be "something everyone understands:" real estate and housing.

11. Having exhausted the dot-com play, Elite capital is seeking a new high-profit home. The miracles of derivatives (CDOs, credit default swaps, etc.) and securitized debt (mortgage tranches, etc.) open up vast bew opportunities for leverage, off-balance sheet shenanigans and outright fraud/debauchery of credit. As chip wafer plants disappear from Silicon Valley (too dirty, too costly, etc.) then they're replaced with paper: mortgage-backed securities.

12. Sniffing gold in them thar exurban hills, the under-capitalized and over-indebted U.S. working class and middle class reach for the chalice of easy-money gold: leveraged real estate.

13. With the Federal financial regulatory agencies in a Republican/Democrat-enforced somnambulance, the coast is clear for brigands, shysters, fraudsters, con artists, liars, cheats, and assorted riff-raff in the realtor, mortgage and appraisal businesses, who all feed the ravenous maw of the money-center banks' apparently limitless appetite for real estate assets to securitize and leverage in exotic and highly profitable ways.

14. For a wonderful five years circa 2001-2006, the game is afoot and no-down-payment Jill and $100 million bonus Jack are immensely enriched. Meanwhile, the underlying real economy is becoming ever more imbalanced and ever more fragile as real production and real productivity plummet as everyone rushes to the speculative riches of exurban McMansions and malls.

15. This last best speculative leveraged bubble pops, gutting a Wall Street which had grown utterly dependent on leverage, debt, gamed/fraudulent accounting and bubbles for its rising profits.

16. Doubly devastated by the implosion of housing and their stock investments (mostly in retirement funds), the middle class faces the terrible consequences of its 26-year stupor of ever-rising debt and leverage. Alas, the Emperor's clothes are revealed as remarkably transparent.

17. Just as in the Great Depression, to its great surprise, the Elite has also suffered catastrophic losses and declines in capital and income.

18. Having borrowed and squandered trillions of dollars since 1981 on unaffordable entitlements, military misadventures and assorted worthless bridges-to-nowhere pork spending, the Federal government (The Fed and the Treasury) finds that its ability to borrow its way out its current debt hole somewhat annoyingly limited. The rest of the world has finally caught on to the con, and Chinese university students are openly mocking Treasury Secretary Geithner's Orwellian claim of "we support a strong dollar." The miracle is that he was not pelted with tomatoes and tarred and feathered for making such absurd statements.

19. With the global media concentrated in a scant few corporate hands (less than 10), this pulling away of the curtain is deleted/excised from media coverage in a ruthless campaign of pure "green shoots" propaganda.

20. As the wheels fall off the U.S. economy and the bubbles cannot be re-inflated, fruitless attempts at holding back the tide with incantations (stop, tide, I am Obama/Geithner/Bernanke!) and loopy sand castles (the bottom is in, buy now! Green shoots are sprouting everywhere except in the real economy!) abound. Unresponsive to propaganda, the real world grinds down into a global Depression without visible end.

Is this "edgy" enough to be worthy? I hope so. 


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Learning from the Great Crash of 1929

Amidst an ocean of often-specious and superficial analysis of the Great Depression, it is wise to return to a key 1955 source book for insight. 


If you only read one book this year, make it The Great Crash of 1929 by John Kenneth Galbraith. First published in 1955 (and very modestly updated in the 90s), it is a short (194 pages) and very entertainingly written book with profound implications for the future. (Hopefully your local library has a copy.)

History may not repeat, but it sure as heck rhymes most sweetly. The reason of course is that human nature, with its permanent propensity for greed and euphoric manias, does not change.

Here are few key passages which apply quite directly to the present Depression in the making and the "green shoots" stock rally which defies reason and fact alike:

It was not hard to persuade people that the market was sound; as always in such times they asked only that the disturbing voices of doubt be muted and that there be tolerably frequent expressions of confidence. (page 70)

It seems Timmy, Ben and a robustly rabid host of SIFPs (standard-issue financial pundits) have been making rather more than frequent expressions of confidence for months.

In 1929 treason had not yet become a casual term of reproach. As a result, pessimism was not openly equated with efforts to destroy the American way of life. Yet it had such connatations. Almost without exception, those who expressed concern said subsequently that they did so with fear and trepidation.

The official optimists were many and articulate. Bernard Baruch pointed out that no Bears had houses on Fifth Avenue. Numerous college professors also exuded scientific confidence. The bankers were also a source of encouragement to those who wished to believe in the permanence of the boom.

Financial fraud was not just rampant but systemic--then as now:

In amny ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery.

At any given time there is an inventory of undiscovered embezzlement in--or more pricisely not in--the country's businesses and banks. This inventory--it should perhaps be called the bezzle-- amounts at any one time to millions of dollars.

In good times people are relaxed, trusting and moneyis plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.

In depression this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.

Galbraith lists various governmental regulatory agencies which were founded to curb future speculative excesses and bezzles, but concludes thusly: (remember this was written in 1955)

Yet, in some respects, the chances for recurrence of a speculative orgy remains good. No one can doubt that the American people remain susceptible to the speculative mood--to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share. A rising market can still bring the reality of riches. This is turn can draw more and more people to participate.

The government preventatives and controls are ready. In the hands of a determined government their efficacy cannot be doubted. There are, however, a hundred reasons why a government will determine not to use them. In our democracy an election is in the offing even on the day after an election. The avoidance of depression and the prevention of unemployment have become for the politician the most critical of all questions of public policy. Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune time. Booms, it must be noted, are not stopped until after they have started.

And after they have started the action will always look, as it did to the frightened men in the Federal Reserve Board in February 1929 (8 months before the crash--CHS), like a decision in favor if immediate death as against ultimate death. As we have seen, the immediate death not only has the disadvantage of being immediate but of identifying the executioner.

Here then is the explanation of Ben Bernanke and Tim Geithner's endless incantations and expressions of confidence: Lest they be identified as the executioners of the bubble boom, they are opting for a delayed but certain death of the American economy and stock market.

Tomorrow I devote to exploring Galbraith's reasons for why the stock market crash precipitated a Great Depression, and what is different about today's unfolding Depression.

Lagniappe quote of the day, courtesy of correspondent Phillip H.:

Genuine ignorance is...profitable because it is likely to be accompanied by humility, curiosity, and open-mindedness; whereas ability to repeat catch-phrases, cant terms, familiar propositions, gives the conceit of learning and coats the mind with varnish waterproof to new ideas. - John Dewey

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle 


Our previous list of hot reading (check them out at your local library if you don't want to own a copy) can be found at Books and Films. 


What's for dinner at your house? has been updated with a new recipe: Eggplant Parmesan . This a mouthwatering photo-illustrated PDF from longtime contributor Bill Murath.

Of Two Minds reader forum (hosted offsite, reader moderated) 

Thank you, Maryline P. ($2), for your much-appreciated generous contribution to this site. I am greatly honored by your support and readership.

What's Wrong with California

June 2, 2009 

California's pending bankruptcy has deep roots in tax policy, public employee costs, regulatory dysfunction and a declining real-world economy. 

Standard-Issue Financial Pundits (SIFPs) like Paul Krugman ( State of Paralysis) are claiming the state's problems all stem from miserly California voters refusing to pay higher taxes. Uh, Paul, do you pay $10,000 in property taxes for a property you bought in 1992? I do, and I don't think that's a low tax.

In case Paul hasn't visited the Golden State recently, allow me the honor of introducing a funny little concept called fact to his pro-tax rant. We pay 9.5% sales tax (9.75% if you voted for various transit projects like BART) which is among the highest in the nation.

If you make a decent wage (I don't, but many do) then the state income tax is about 10% as well. That rate is also among the highest in the nation.

What we have here is not just cognitive dissonance but pathological disassociation from reality: California is a very high-tax state, with among the highest rates in the nation in virtually every category of taxation.Voters rejected the bogus tax-and-borrow-more propositions for two reasons:

1. The propositions were deceptively written and presented in a ham-handed attempt to mask the fact they weren't tax increases. Voters rejected this incredibly crass attempt to deceive them. Lesson for state politicos: if you want a tax increase, ask for it in plain English.

2. Residents already pay high taxes, and the state has already garnered $40 billion per year in additional funding over this decade. We seem to have received little in the way of improvements for the extra $40 billion a year in state spending. Even in a state with 36 million residents, that is a stupendous sum. Therefore voters desire to send more of their money to a government which has shown little fiscal restraint and precious little oversight of current spending was low.

To understand California's impending bankruptcy, we have to consider these fundamental issues:

1. State, county and city employees are paid (wages and benefits) between 50% and 200% more than equivalent private-sector employees.

2. The California economy's real-world foundations--agriculture, entertainment, technology and tourism--are all in decline or pressured by state policies.

3. Overlapping state regulatory agencies are effectively strangling real-world businesses in favor of high-on-the-food-chain enterprises like attorneys and Web 2.0 firms--businesses which create few jobs and which ultimately depend on highly profitable real-world businesses for their own incomes.

4. The Prop 13 limits on raising property taxes has saved millions from losing their homes due to escalating property taxes even as it has unintentionally created vast injustices.

Let's tackle the last item first. Pundits both in-state and out-of-state are quick to identify not bloated public-employee pay and benefits but low property taxes as the culprit. My wife and I bought our residential property 17 years ago at a cost far below current values and we still pay $10,000 a year. Is that "too low"? If that's too low, then what do these pundits think average wage earners can afford? $20,000 a year? Do they really think $1,660 per month is "reasonable" for property taxes? How much do they pay?

The injustice in the system is obvious but difficult to rectify. To understand why, let's consider the other taxes: income and sales. A rough form of justice is implicit in both: everyone who buys something regardless of their income pays sales tax. Those who buy more are presumably wealthier, hence they pay more sales taxes than those of limited incomes. (Food is exempt from sales tax in California.)

Income tax is highly progressive in California, with moderate-income folks like myself paying modest sums (I paid $513 on adjusted gross income of $30,000) while high-income residents pay a stiff 9-10%. This too carries a readily comprehensible justice: higher income residents can more easily afford higher tax rates as they have more income above subsistance.

But a tax which is $1,200 for for one house and $12,000 for the identical house next door is explicitly unjust. The problem is that the elderly resident of the house paying $1,200 a year might be scraping by on a Social Security check, while the house across the street paying $1,300 a year in property taxes might be long-owned by wealthy pensioners pulling in $10,000 a month.

Meanwhile, the young family who foolishly bought in at the top of the housing bubble next door might be paying $15,000 a year in property taxes even as 65% of their income goes to pay their mortgage and property taxes. (I have friends who pay even more than this stupendous sum for their "fixer-upper" purchased in 2006.)

The only fair way to rectify this structural injustice is to consider the total income (not just taxable income, but all income) and total assets of the residents. Simply raising taxes on low-tax properties will only create new injustices as low-income retirees are forced from their homes by suddenly steep tax increases.

On the other hand, why should residents pulling down $10,000 a month pay 10% of the tax their neighbors pay? That too is unjust.

It seems obvious that some straight-forward adjusting based on income and assets could rectify the worst of the injustices of the current system.Yes, this would require a lot of paper-processing, but isn't justice worth some paper-pushing?

How about something along these lines: if you pay property tax of less than $3,600 a year and your gross income from all sources (including tax-free bonds) exceeds $100,000 a year then your tax jumps to $3,600 a year or 90% of the county's average property tax, whichever is lower.

Look, if you're enjoying an income of $100K or more, I think you can manage $300/month instead of $150/month in property taxes.

If you pay more than $10,000 per year in property tax, the property is worth less than $1 million and your household income from all sources is less than $100,000, then your tax drops to $10,000 per year.

Whatever parameters are set, a fairly limited set of adjustments like the above would rectify the worst injustices of the current system in short order. Yes, some would still pay much less than neighbors while others would pay far more, but some modest attempt at justice would still be worth the effort.

I know all you who work for government and quasi-government agencies like water boards, transit systems and school boards will find this disagreeable, but the vast majority of public employees are paid twice as much (or more) as their private-sector counterparts when benefits are factored in. I know for a fact that clerks in school district offices are paid well over $40,000 a year, with benefits exceeding $20,000 per year, while private-sector clerks with the same skillsets are worth perhaps $22-24,000 in the real world, with minimal pension benefits.

Including rich benefits and pensions, many public-sector employees in California are paid twice or more the market-rate value of their labor.

Since labor costs make up 3/4 of all government budgets, it is obvious the only long-term solution to deficits in states already groaning beneath high taxes is to bring public employee wages and benefits in line with real-world market valuations for that labor.

To date, California's public employee unions are fiercely resisting all but the most feeble reductions in their members' pay and benefits. Given the outsized share of labor costs in all government, this recalcitrance guarantees the state will become insolvent/go bankrupt and literally be unable to meet its payroll.

It is instructive to recall that in 1932, the city of San Francisco reduced its municipal salaries by 25% and limited city jobs to one per household. Note to public-employee unions: that is a real-world start you might do well to accept before even harsher terms are offered.

Overlapping dysfunctional regulations are driving real-world businesses under. Like a prissy spoiled princess, California has turned up its nose at enterprises like making steel (smelly), surfboards (let China worry about fumes), agriculture (uses too much water which I need to keep my lawn green and pool filled), aerospace (there's never enough taxes on the military-industrial complex) and physical technology (that wafer plant is too toxic for our taste, no matter what controls you install).

Oh, and every permit application will cost you big-time. The actual permit--well, what makes you think we'll actually lower ourselves to grant you one? If we do, the fee will hit you like a sucker punch to the gut. Then we'll add inspection fees, business licenses and a swarm of other junk fees. But really, we're "pro-business" here--we love businesses dumb enough to stay here. Sadly, the ranks of sucker corporations seem to be thinning.

As a result, California now depends on top-of-the-food-chain enterprises like attorneys (sue it if has insurance, don't bother if it doesn't), tourism and the horrifically overhyped fraud known as Web 2.0 (a handful of young coders constructing a web business suposedly worth billions but the only source of revenues from now until the sun explodes is advertising). In case nobody noticed, adverts only work on people with jobs and income.

Tinseltown is tanking. The Web is dismantling the film and music industries faster than you can say "Ten bucks to see a freakin' movie?" Unemployment in the film and music industries is rampant and growing. The costs of doing business in california are simply too high to make money.

The illusion of corporate headquartering in California is like a Hollywood set facade. Behind the corporate facade, global giants like Intel are basing most of their employees overseas or in lower-tax states like New Mexico and Oregon. Yes, Silicon Valley is still the place to come for venture capital; and yes, entrepreneurs are still starting companies. But once they need to grow, they have to exit the state to prosper.

The state organs of propaganda will deny all this, but then why are tax receipts down over 40% year over year? Is that because so many new businesses are prospering and hiring people?

The pathetic truth is California got by on a mere $100 billion a year in spending not many years ago and now there is great gnashing of teeth and weeping that the state is ruined if spending doesn't stay at $143 billion a year. If this were true, then how did we get by on $95 billion a mere decade ago? The answer to cutting $42 billion is simple: all agencies must revert to their 2001 budgets.

The housing bubble provided California with one last glorious shot of fantasy. No need to tax and spend prudently--housing will keep going up and the property tax increases are stupendous. No need to make anything tangible any longer--just fill office towers with brokers, attorneys and mortgage sales staff. Property taxes and capital gains from housing will keep rising forever.

Yeah, right. Welcome to reality, California. Either fix your structural problems or prepare your bankruptcy filing. 


Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle 


Our previous list of hot reading (check them out at your local library if you don't want to own a copy) can be found at Books and Films. 


What's for dinner at your house? has been updated with a new recipe: Eggplant Parmesan . This a mouthwatering photo-illustrated PDF from longtime contributor Bill Murath.

Of Two Minds reader forum (hosted offsite, reader moderated) 

On Preparing for a Reasonably Easy Passing

June 1, 2009

Some thoughts on making death somewhat easier for both the deceased and the surviving heirs/executor. 

First, let me extend a very sincere thank you to all you who were kind enough to send your personal condolences regarding the passing of my father. It is much appreciated. He was quite a character, amusing and frustrating by turns. The value he passed on to us is entirely internal in nature, and thus cannot be taken from us.

Subtext note: this also means I remain a poor dumb writer.

As a result of the seven straight 14-hour days my stepmom, sister, wife and I put in mounting a public memorial service, a private graveside service, the working through of several hundred details and decisions regarding a knotty financial history, various meetings with funeral directors, CPAs, realtors, etc. and conversations with various cousins and other interested parties, I offer a random assortment of observations which might ease the various difficulties of passing for both the person who is preparing for his/her passing and his/her heirs/executor.

For the person who will die and leave something to somebody, i.e. all of us:

1. Do not stuff important financial documents unopened in obscure files unless you harbor an especially malignant hatred of your heirs/executor.

2. Prepare a will even if you prefer to believe death is for other people. If you have a complex and well-funded estate, by all means hire a competent attorney who specializes in estate and tax planning and perhaps trusts if you're really bucks-up. For mere mortals like myself who own but simple assets, then Quicken WillMaker Plus 2009 is perfectly adequate for preparing a will at home. The software costs about $40.

3. Pay your taxes on time. Or, failing this, leave funds to pay the taxes in an account which is accessible after your passing to the executor (or spouse if you file jointly, etc.)

4. If you really object to paying taxes, then please be consistent: sell all real estate and holdings in the U.S., close all accounts in U.S. institutions, earn no income in the U.S., hold no assets in the U.S. and then move to another nation with tax laws which align with your beliefs and values. Otherwise, just pay your taxes like the rest of us.

5. If you're not going to give anything to your heir/heirs upon your death, tell them in advance of your passing. It will minimize the angst, fuss and muss often associated with being cut out of the will/passed over in favor of Fluffy the dog, The Clinton Library, etc.

6. Simplify your finances. While creating needless complexity via multiple bank accounts, brokerage accounts, ignored tax liens, lapsed or lost insurance policies, etc. might well offer you endless hours of amusement, rest assured your heirs/executor will probably not find untangling the thicket all that enjoyable, unless your estate is paying them $200 an hour to do the untangling.

7. Choose the lowest-cost, easiest-to-manage tax shelters. A trust may well offer significant tax savings if you own millions of dollars in real estate purchased long ago, but if you're not a Moneybags then simple shelters like the $500,000 primary residence shelter may well do the job. Research current estate/inheritance tax laws; the size of the estate exempted has risen in recent years. As always, do due diligence (check references, etc.) of any attorneys you may hire for advice/estate planning/trust preparation. Be forewarned that trusts are separate legal entities like corporations and thus they require their own tax return filings, filings which can easily cost $5-$10,000 for "simple" trusts. (That's a joke, heh; there are no simple trusts.)

8. If you have heirs (i.e. children, nephews/nieces, etc.), make sure you leave them some of your estate upon your death, especially if you have remarried. Legally, they are generally entitled to the assets you owned prior to your second or third marriage.

Interestingly, assets have a funny way of falling to zero at unexpected times. Thus the assets you left your second or third spouse for their use during their lifetimes have a peculiar knack for disappearing before they pass to your offspring.

Bereaved people often find solace and profound love with someone your children consider a gold-digging stranger. Leaving what you want them to have of your estate at your death simplifies things considerably.

9. Be wary of purchasing so-called high-yield, "safe" assets prior to your demise. That real estate investment TIC (tenancy in common) you thought was so nifty because it deferred your capital gains on investment property via a 1031 tax-deferred exchange turns out to be highly illiquid (i.e. it cannot be sold except at a stupendous discount). Even worse, such real estate TICs have a nasty tendency to stop paying the juicy promised monthly returns on short notice, like overnight, at which point they become essentially worthless.

Your $250,000 asset thus falls to $0 value. Even worse (yes, it gets worse), since you cannot sell the TIC it is difficult to record the loss for tax purposes.

If you are fortunate enough to have $250,000 to leave your heirs, you might be wise to avoid real estate TICs, Lehman Brothers bonds, General Motors stock and other "safe" investments which have an uncommon propensity for falling to near-zero at the most unwelcome moments. Although gold and oil leases may or may not return 7% annually, it is unlikely they will fall to zero overnight. Cash is generally welcomed by most heirs.

10. Be aware that two-legged sharks, opportunists and those eager to get a piece of the action will quickly mobilize their forces upon sniffing out your demise. If you have property to sell, choose your realtor/broker ahead of time and make sure your heirs/executor know of your choices in writing.

11. Write down your account PIN numbers, log-in names and passwords and tell your executor/heirs where the list is stored. (A physical written list, not one stored on a computer where it might get hacked.)

12. If you are a military veteran, please place your discharge documents with the above financial account information.

13. If you attend a place of worship and want to have your service there, write out the exact hymns, psalms, scripture passages, etc. that you want. If you do not know the current pastor/priest/minister, jot down a few notes about what you would like him/her to say on your behalf.

My father was very active in his church, not just in the congregation but in various committees and as a donor of time and money. Thus the pastor knew him well and could speak movingly of him. Not everyone has such felicitious circumstances, and having names mis-spoken, etc. during the eulogy is something to be avoided if at all possible.

My father specified the Navy Hymn ("Eternal Father, Strong to Save") in honor of his service to the nation in World War II. (His flat-bottomed LST almost broke up in a typhoon and the welder on the crew was lashed to the deck to keep from being washed overboard while he welded plates over the buckling deck. I imagine it was a moment where atheists rapidly became few and far between on the crew.)

14. If you want to be interred, by all means choose the funeral home, casket, etc. if you have the mobility and presence of mind to do so. Funeral societies offer low-cost alternatives to traditional funeral homes and are something to research/explore.

15. If you belong or belonged to organizations, leave the contact names and emails along with PIN numbers, etc. so your executor/heirs can quickly notify your colleagues/friends of your memorial service or graveside service.

16. If your family is multi-ethnic, be aware that various ethnicities and religions have different traditions and expectations. Thus some ethnicities expect to gather for graveside ceremonies while others consider those private.

17. If your Great American Novel/song/symphony is collecting dust in a closet, assign the global rights in all media to somebody in your will. You never know, your genius might be discovered after your passing.

18. If you want to leave your body to organ donors or for medical research, find out how the process actually works. Unbeknownst to the family, your body may be kept in cold storage for months before it can be interred/cremated; in some cases, it may be kept indefinitely. Do your research. It is a noble thing to donate one's body to science/donors but not all families want their loved one uninterred/uncremated for months.

19. Talking about your preparations for passing makes it easier for everyone to accept the passing when it does come. 


For those handling the arrangements:

1. Thank everyone. People didn't have to come or help; recognize their graciousness, generosity and in the case of funeral directors, CPAs, etc., their professionalism. Consider a donation to the church and pastor/priest/minister above and beyond the fees involved.

2. Buy thank-you cards. Send them as you can.

3. Make short-term and long-term lists to organize the tasks ahead. Prioritize.

4. Make home-cooked meals, eat well.

5. Humor is appropriate and welcome among the inner circle who knew the deceased well. Those not in the inner circle will be relieved to find you telling fond stories and jokes. The grief and loss are understood and will come of their own accord.

6. The American Way of Death is awkward. Ease everyone's awkwardness whenever possible. We all know death comes to us all, and if we are fortunate enough to live long enough, then it inevitably looms as release.

7. Try to sleep even if it's sporadic. Take naps.

8. Just get through it one hour, one day at a time. Though this is obvious, it remains somehow comforting to remind oneself of this truism.

Thank you, Kenneth R. ($25), for your very generous contribution to this site. I am greatly honored by your support and readership.