Monday, April 05, 2010

The U.S. Status Quo: Unsustainable, Doomed and Danced Out

by Charles Hugh Smith


Socks which don't even last one day and 20% increases in Government fees are symptomatic of why the U.S. status quo is doomed.

Journalism avoids personal observation in favor of opinions from media-approved "experts," but sometimes experiential evidence offers more telling clues to the future than "expert/professional" models or projections.

The story of an Empire's inevitable decline might start with a single pair of socks.

The story begins and ends at Wal-Mart (last discussed here in The Wal-Mart Model of Self-Destruction: Lowest Prices, Always January 24, 2010). Our friends' Christmas gift was alas not to our needs or taste, so we returned the gift to Wal-Mart and received an in-store credit. Since my work socks were developing holes after years of service, we reckoned we could use the credit on new socks and a collander to replace the rusted piece of Chinese-manufactured junk we'd received as a gift from another friend.

The selection of standard white work socks was not large but there was a choice between a brand made in Central America and one which was made in the USA (assuming the labeling was accurate), so I bought the package made in the USA.

I went home, opened the package, pulled on a pair and went out to do the afternoon's light duties and a leisurely 1 kilometer walk to cap the day.

When I returned home and took off the socks, one had a large hole on the heel. The "made in USA" socks had not even lasted a full day.

As for the stainless steel collander (made in India), it too failed to perform its simple function; due to poor design, water did not flow through its tiny holes but sloshed around the lower steel band of the collander.

Both items will be returned and I am now hoping to use the Wal-Mart credit for corn flakes or equivalent simple food item which hopefully will not be defective/ useless.

I think I know what happened with the "made in USA" socks, and it's what I call the Tyranny of Price. Wal-Mart famously demands annual price reductions from its suppliers, regardless of any other conditions such as quality. The working presumption is that though you will lose money on each item sold to Wal-Wart, you will make it up on volume (that's a small-business joke; if you're losing money on each sale, then high volumes will simply bankrupt you faster.)

So Wal-Mart probably squeezed this supplier for additional price cuts, and the only way to retain the Wal-Mart account and not go bankrupt was to lower the quality of the thread and manufacture of the sock to the point that the heel wore out in approximately two hours of use.

Wal-Mart obviously didn't care and didn't check the quality of either item we purchased.

The real losers are U.S. consumers who have been conned into believing that "Low prices, always" is "cheaper" when in fact low quality is always costlier. The cost-per useage of my previous socks (purchased at Costco, locale of manufacture unknown) was on the order of fractions of one cent; the per use cost of the Wal-Mart sock was almost a dollar.

Since the collander could not perform its assigned task, it provided no use-value for even a single use. It was entirely worthless except as a piece of perforated metal.

Wal-Mart, and by extension, America, has a functional obsolescence problem.Selling defective, zero-quality goods, even those "made in USA," means that vast amounts of money spent by consumers is being squandered. Money wasted on socks which fall apart in one wearing means money was wasted on their manufacture, shipping, inventorying, sale and return, and the hapless consumer has either wasted their money or their time when forced to return the useless product to Wal-Mart for a credit.

Now there may be quality goods being offered for sale in Wal-Mart; I make no claim to a rigorous analysis, and would guess that there must be good-quality goods somewhere in the store. But it is certainly strking that the two products chosen more or less at random were both complete wastes of money and time.

Added together with millions of similarly defective/low-quality/useless goods, this is malinvestment on a vast scale.

Add in the granite countertops in millions of falling-apart McMansions, empty malls, vacant highrises, hundreds of needless "profit center" MRI machines, etc. and we have a nation which has misinvested trillions of dollars which are now lost to productive investment elsewhere.

No economy can recover from this scale of malinvestment. Borrowing trillions more to squander on Empire, real estate and "consumer spending" will not bring back the previously squandered trillions.

One other bit of personal experience: our dear city just jacked up the refuse collection fees it charges its residents another 20%, on top of the 20% increase it levied last year. 40% in about one year isn't "inflationary," at least statistically, though it certainly transfers hundreds of dollars a year from thousands of households into the coffers of city bureaucracies and union workers and their pension funds.

The second 20% increase was necessitated, it seems, because stripmined residents had responded to last year's 20% increase by reducing the size of their trash containers (fees are based on the volume of each container) and recycling more of their waste.

The ironies of this increase in recycling abound. The city claims its most cherished goal is to reduce the stream of landfill garbage, but when citizens did so then their reward is a 40% increase in their garbage collection fees.

You might think that a major reduction in trash by volume might require fewer workers or fewer hours to collect, but apparently no staffing cuts can be made anywhere in the city payroll.

Since residents have already moved to smaller bins, their options to evade the next 20% increase and the ones after that are limited to moving away or joining a tax rebellion which throws the current city management out the door.

Though we live in a state (California) which limits property tax increases to 1% per year, politicos and their various Masters and protected fiefdoms have evaded this limitation via "tyranny of the majority" measures passed by local residents who are always delighted to have someone else pay for further amenities and improvements.

Since residents who bought their homes decades ago--and there are many--pay very modest property taxes based on super-low valuations (also limited by Prop 13), a "tiny" tax increase based on a percentage of their low valuation adds little to their tax bills. And so they (and non-property owning residents) have been happy to pass every tax and every bond, though their enthusiasm for ever-more generous funding for the local politicos and their builder/developer allies seems to be waning slightly.

1% on a house valued at $90,000 on the tax assessment rolls is "only" $90 a year to do something worthy (rebuild the public pool, fund library improvements, etc.). But their young neighbor who paid $600,000 for a similar house next door faces a $600 increase--not trivial.

In this way, our property taxes have leaped from around $9,700 annually to $11,000 in just two years. Friends who bought near the top of the bubble pay an astronomical $15,000 to $18,000 annually. Their neighbors pay a third or less.

If increases of this magnitude are occurring in Prop 13-protected California, I shudder to think what increases lie ahead for those without any limitations on property tax increases.

If I have to read Paul Krugman or another Keynesian palaver on once more about how Californians pay such low taxes, I might suffer a serious loss of good humor.

Even as the Empire is beset by monstrous malinvestments in the homeland, $300/gallon gasoline at the end of the Imperial supply chain in Afghanistan, marginal returns on the trillions awarded to banks and "shovel-ready" pork projects, we also pay the hidden costs of the Tyranny of Price and the Tyranny of the Majority.

I know this might seem unbelievable, but I just did the research and can report that the bottom 60% of U.S. households (by income) pay about 1% of the Federal income taxeseffective tax rates (CBO). The top 10% pay roughly 2/3 and the top 20% pay 83%. While the top 1% has seen their effective tax rate decline, the 19% beneath them who pay the vast majority of taxes have not enjoyed any such reduction in burden. (Disclosure: my 2008 gross income was $30,713.)

It's awfully easy to shout "tax the rich!" but households making $100,000 on the Left and Right coasts don't feel wealthy, not when their property tax bill is $15,000. Yes, they could be renting, but rents are outrageous here, too.

So while the lower-income 60% get ripped off by low-quality "tyranny of price" goods and local government stripmining via speeding tickets and garbage collection fees, the top 20% are getting stripmined by myriad "tyranny of the majority" tax increases approved by recipients of State largesse who cannot face any possible reduction in their swag.

This culture-wide denial is partly fueled by what I term permanent adolescence inSurvival+: the inability to make the realistic assessments and tradeoffs required by adulthood.

Frequent contributor Harun I. recently made these observations about this deep societal immaturity/denial:

I had an interesting encounter with an middle school educator last weekend. She is nearing retirement and is worried about the talk of altering their benefits. I presented the argument that, while there may be a contract, there is no reasonable way of fulfilling it. By her body language I could tell she had no interest in the math, logic, or reality. She hopes that there will be an offer to buy them out before the worst hits.

Right then I understood that, in the same vein of "We are all Keynesians now", we are all interested persons now. While you and many bloggers write perfervidly about what must be done, there is no stomach for it amongst the masses. The greater than 60% of the population who are homeowners have no interest whatsoever in seeing their home values plummet. Workers, renters and homeowners care not to see their 401K's destroyed, their pensions bankrupted, etc. because they have no savings, no plan B, and face poverty if what must happen happens.

Was Chuck Prince being arrogant or merely stating reality on a much broader scale than was at first realized when he uttered these infamous words: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”?

For 90% or more of Americans and much of the developed western world the music has stopped but there is the mass delusion that, if we keep dancing, the fact that there is no music will not matter. However, refusing to submit to the rules of the game does not make you the winner.

There will be no concerted cry of havoc and unleashing of the dogs of deflation because, just as Wall Street, Main Street will see its interests destroyed. This administration and congress will be allowed to do whatever it wishes, and the public, like the deer in my earlier analogy, may grumble but will go about grazing with the hopes that they will not become a victim of the Great De-leveraging. In the post-industrial, exponential debt growth dependent economy, the fate of Main Street is shackled to that of Wall Street.

I am greatly saddened by this general attitude. I have served with and know that there are kids serving today that, without a nano-second of hesitation, would expose themselves in a firefight, risking everything they have, to aid a fallen comrade. Is this great nation still great with such pervasive moral cowardice?

Thank you, Harun, for these unvarnished assessments. I am reminded of the Beatles' song I, Me, Mine. Perhaps that will be the anthem of the next decade as everyone scrambles to protect their swag and perquisites at the expense of some other less politically adept group of citizens, until the entire system freezes up and the dancers suddenly notice the music stopped playing a long time ago.

Two new Readers Journal Essays:

The Inevitable Currency Collapse

Tilting at the Dragons' Memes (MS Word file)

from oilprice.com

The True Causes Underlying the Moscow Metro Bombings

Recommended by Michael Goodfellow:

The Collapse of Complex Business Models

Recommended by U. Doran:

Peak Oil and the Tipping Point for a Complex World (56 page PDF)


Poems by Jim S.

Millions, billions, trillions
Are really just
Omillions, Obillions, Otrillions

Vast-visioned America
Progressive to the end
Envisions all the way to Ozillions
Wheelbarrows-full for the minions

Moodys', Fitches, Standard and Poor
Triple AAA to BBB- evermore
Triple OAAA to OBBB
It's all inevitable, you see


Pakman ObamaGub-mint
Consumes Absolutely
ALL

Massive maw
Empty brain and stomach
IT comes, better run



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