Saturday, February 27, 2010

Weekend Poetry and Reading

Reader poetry, a new Readers Journal essay on Iraqi oil and a semi-random list of interesting books make for worthy weekend reading.

There's nothing quite like a timely haiku, and frequent haiku contributor Jed H. neatly summarizes the big picture in only three lines: (The structure of haiku is 5-7-5 syllables)

Spend, Borrow, hike TAX
GO, Federal PONZI scheme
The "END GAME" is here!

Thank you, Jed H., for keeping the site in provocative haiku. Readers, feel free to try your hand at your own haiku; it's a fun challenge.

Next up: the wonderful Boomers Storm by D.M. Lambert
(Copyright 2010 by DM Lambert).

Boomers listen and do absorb,
you are the problem, you did gorge,
the debt you made, is now a rage,
to the piper, it must be paid.

You did worship, the god of mammon,
and like a fish, we're all now salmon,
following, a god of lies,
in histories grave, we soon will lie.

Don't you see, the horizons cloud,
moving faster, towards the crowd,
children crying, going hungry,
millions suffer, tents and sundry.

You said that we, could have it all,
debt to the sky, ahead of the fall,
But thats ok, they said to us,
you are fine, just us, do trust.

Now we're not Congress, no we're not,
debts to the moon, we go to pot,
they say to all, it'll be ok,
clouds do gather, not here today.

A hurricane gathers, around the land,
generation zero, does try to stand,
what it means, they just don't know,
they filled your minds, all full of glow.

You went to class, and they did too,
a criminal act, they said to you,
that debts can grow, unto the sky,
a trick they pulled, upon your minds.

Cycles of history, they do flow,
unto minds, of men, you know,
they deceive and they do fool,
we're in the mud, and left with gruel.

The good times of credit, do not last,
after the good, does come the fast,
its different this time, they did proclaim,
we knew better, but went insane.

We the boomers, created the fall,
boomers must change, one and all,
we must find, a life without sin,
of he who dies, with the most toys wins.


Courtesy of our colleagues at www.oilprice.com, here is an insightful report on the energy/exploration situation in Iraq:

Tide Turns As Kurds Push For Oil Law Amid South’s Sudden Bright Future
(Fawzia Sheikh, February 27, 2010)

While the Iraqi government has made overtures to its Kurdish counterpart in the north to end an oil standoff, much remains in doubt without an actual law keeping the industry in check - rules which this time the Kurds are pressing for rather than Baghdad.

And a brief weekly analysis of the oil market:

Crude Oil Hits Ceiling in Week as Hedge Funds Attack Euro

Crude oil broke through the $80 a barrel ceiling repeatedly during the week but kept falling back as hedge funds placed big bets on the Euro’s decline.


Here is a list of potentially interesting/useful titles I've run across recently.Check them out at your local library if you don't want to own a copy.

Deschooling Society (Ivan Illich)

War Is a Force that Gives Us Meaning (Chris Hedges)

Empire of Illusion: The End of Literacy and the Triumph of Spectacle (Chris Hedges)

Pedagogy of the Oppressed (Paulo Freire)

Radical Homemakers: Reclaiming Domesticity from a Consumer Culture

Cook Food: A Manualfesto for Easy, Healthy, Local Eating

Dirt: The Erosion of Civilizations

False Dawn: The Delusions of Global Capitalism

Get Ready!: Preparing for the Coming Catastrophe

Peak Everything: Waking Up to the Century of Declines

How To Bury Your Goods: The Complete Manual of Long Term Underground Storage

Life Without Lawyers: Liberating Americans from Too Much Law

Plows, Plagues, and Petroleum: How Humans Took Control of Climate

The Starfish and the Spider: The Unstoppable Power of Leaderless Organizations

Who Was Jesus? Fingerprints of The Christ

Fab: The Coming Revolution on Your Desktop--from Personal Computers to Personal Fabrication

China: Fragile Superpower

China: The Balance Sheet: What the World Needs to Know Now About the Emerging Superpower

China's Trapped Transition: The Limits of Developmental Autocracy

The Blind Watchmaker

Conspiracy World: A Truthteller's Compendium of Eye-Opening Revelations and Forbidden Knowledge

Democracy: The God that Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order

Special autographed book offer: Fellow author (Reinventing Collapse: The Soviet Example and American Prospects) and blogger (Club Orlov) Dmitry Orlov has just published a limited-edition collection of his most acclaimed essays titled Hold Your Applause! A donation of $21 or more will get you a signed copy of this very limited-run book, and help support Club Orlov. Please check it out and support an independent, informed voice.


If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other oftwominds.com readers and contributors are discussing/sharing.

DailyJava.net is now open for aggregating our collective intelligence.


Order Survival+: Structuring Prosperity for Yourself and the Nation and/orSurvival+ The Primer from your local bookseller or from amazon.com or inebook and Kindle formats. A 20% discount is available from the publisher.

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


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Friday, February 26, 2010

Phase Shifts, Stick/Slip and the Demise of Our "Socialist" Housing Policy

Any of several critical factors could trigger the next phase shift decline in housing prices. (To see the charts in full, please click on the title above)

One of the central ironies of the current "housing recovery" is that it is 100% "socialist," that is, funded entirely by the Federal Reserve and the Federal Government. The Fed has purchased quite literally 99% of all the mortgage-backed securities issued in the past year--$1.2 trillion. Without the Fed purchases, there would be no mortgage securities market. It's as simple as that.

The government owns well over half the nation's $10 trillion in mortgages via its defacto ownership of Fannie Mae and Freddie Mac, and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA.

Anyone claiming to be a supporter of free-market capitalism must demand an immediate end to this 100% "socialist" support of the U.S. housing and mortgage markets.

The reason why realtors, bankers, builders and politicos are nervously whispering "we're all socialists now" is simple: were the Fed and Federal government to withdraw their subsidies, guarantees and outright purchases of mortgages, the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value.

If hypocrisy was fatal, virtually every realtor, banker, mortgage lender, Fed and Treasury official and craven politico would instantly expire. Housing is the ultimate "too big to fail"--yet it is failing nonetheless.

To understand why, let's revisit one of my first explorations of how phase shifts offer a guide to the housing bubble's decline (from 3.5 years ago): Phase Transitions, Symmetry and Post-Bubble Declines (August 2, 2006)

Clearly, we have experienced only the first leg of the decline; thanks to unprecedented "socialist" backstopping, guarantees, subsidies and outright ownership of mortgages, buyers in 2009 were persuaded "the bottom is in" and millions of souls rushed in to buy a home "at the bottom."

Unfortunately for the bottom fishers, there are a daunting number of triggers for the next leg down.

1. Due to growing political pressure now that "the recession is over" and Fed/Federal debt is skyrocketing into the trillions of dollars annually, the Fed might be constrained from buying another $1.2 trillion in mortgages in 2010, 2011, and beyond.

The result of any weakening in this "socialist" policy to prop up housing no matter how many trillions are needed will be nearly instantaneous: the mortgage market will either disappear or interest rates will leap and lending standards will tighten dramatically, effectively ending the subsidized sales which promoted the fantasy that "housing is in recovery."

2. A new wave of mortgage re-sets swamps the socialist support of the market.

3. The pressure building from underwater mortgages, foreclosures and job/income losses will "slip," unleashing a sudden decline in house valuations.

One of the concepts I cover in Survival+ is the stick-slip hypothesis. An earthquake is an example of this phenomenon: the pressure on two adjacent plates of the Earth's crust rises without apparent consequence until the plates suddenly "slip," triggering a devastating earthquake.

Look how suddenly housing prices fell once the pressure reached a threshold and the market "slipped" in a phase transition:

Another phenomenon observed in Nature is the Pareto Principle: that 20% of a group can generate outsized influence on the other 80%. Often referred to as the 80/20 rule, this can be distilled down to the 4/64 rule. This led me to explore the idea that 4% of the homeowners with mortgages (50 million mortgages so 4% is 2 million homeowners) defaulting could trigger a collapse in the housing market:

Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

We now know the answer: yes, they can. The consequences continue unfolding, as I forecast in that entry from three years ago:

This is a staggering conclusion, for it suggests just how a "mere" 4% delinquency/foreclosure rate could trigger a "modest" 15% decline in housing values, which would put the nation's mortgage holders (if taken in aggregate) under water: the nation's household debt would exceed the value of the mortgaged residential real estate.

Now that over 2 million homes have already been foreclosed and another 5 million are in default/distressed, we are rapidly approaching the critical 20% threshold: when 20% of all mortgages outstanding in 2007 are distressed/in default (10 million), then the odds of another "earthquake"/slip in housing prices increase dramatically.

If we consider just the number of mortgages which are underwater--the mortgage exceeds the value of the property--that number is already estimated at 24%: well above the Pareto threshold for triggering outsized effects on the entire group of mortgage holders.

Another wave of mortgage re-sets lies just ahead.

It doesn't take much forecasting acumen to anticipate another wave of defaults and thus foreclosures. If we add the "shadow inventory" of homes being held off the market by sellers and lenders, then the market might already be close to the "10 million mortgages in default" tipping point/phase shift.

It is important to note that so-called "conventional" 30-year fixed mortgages are also at risk. Here is my analysis from 2007: The Mortgage Mess: The Soft Underbelly Beyond Subprime (April 10, 2007) . Note that "safe" "prime" mortgages are a distinct minority of the market, and recent reports have documented that the default rate for prime loans is leaping up to match the default rates for riskier "toxic" loans.

Prices are determined by supply and demand. The current illusion of "recovery" has been fueled by two massive manipulations of the market: the supply has been artificially limited by the withholding of distressed homes in the "shadow inventory," and the demand has been artificially juiced by stupendous "socialist" government pumping via subsidies, guarantees, backstops and purchases/ownership of "private" markets.

The next phase shift down will be triggered by market forces responding to the asymmetry between supply (high and rising) and demand (low and falling). It doesn't take any more houses coming on the market to trigger the next leg down; it will only take a decline in demand as the pool of bottom fishers is exhausted and potential buyers realize the "recovery" was purely government-orchestrated illusion.

Special autographed book offer: Fellow author (Reinventing Collapse: The Soviet Example and American Prospects) and blogger (Club Orlov) Dmitry Orlov has just published a limited-edition collection of his most acclaimed essays titled Hold Your Applause! A donation of $21 or more will get you a signed copy of this very limited-run book, and help support Club Orlov. Please check it out and support an independent, informed voice.


If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other oftwominds.com readers and contributors are discussing/sharing.

DailyJava.net is now open for aggregating our collective intelligence.


Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook and Kindle formats.A 20% discount is available from the publisher.

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

Thank you, Helen St.C. ($5/month), for your exceedingly generous subscription to this site. I am greatly honored by your support and readership. Thank you, Thomas S. ($20), for this much-appreciated generous contribution to this site. I am greatly honored by your support and readership.

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Thursday, February 25, 2010

It's Time to End the Student Loan Rip-Off

Student loans are a classic simulacrum of "helping the citizenry:" the real purpose is to support bloated bureaucracies and create highly profitable debt instruments.

The time has come to end the student loan charade/scam/rip-off. Cloaked in the language of "helping the citizenry get a higher education," the entire student loan system is instead a classic simulacrum: behind the propaganda, it is nothing but a highly profitable funding mechanism for bloated, bureaucratic "higher education" fiefdoms and yet another debt instrument which profits Wall Street and banks while indenturing the citizenry in a perverse form of lifelong servitude.

I am not saying this to be contrary; it's simply stating what is "obvious."

Here is the key to understanding the fundamental fraud at the heart of the entire U.S. financial system and one of its offshoots, the student loan industry: lowering interest rates and providing limitless credit does not make a good or service "affordable," it only raises the price.

Lest you think I am making this up, please consider the cost of housing in the past 35 years. Mortgage rates slowly fell from 10% to 5% while the "ease of borrowing" (FHA 3% down, option ARMs, etc. etc. etc.) went through the roof. Lower rates and easy lending standards were supposed to make housing "more affordable"--instead, the exact opposite occurred--housing doubled while wages stagnated.

Here are the statistics for income, drawn directly from Census Bureau data and adjusted for inflation, which I prepared for Why We Keep Getting Poorer: High-Cost Housing (February 4, 2010).

Bottom 20%
1975: $12,664
2001: $14,021
increase: $1,357
percentage increase from 1975: 10.7%

Middle 20% a.k.a. "the middle class"
1975: $39,807
2001: $51,538
increase: $11,731
percentage increase from 1975: 29.4%

Top 20%
1975: $91,848
2001: $159,644
increase: $67,796
percentage increase from 1975: 73.8%

Top 5% a.k.a. "the wealthy"
1975: $134,735
2001: $280,312
increase: $145,577
percentage increase from 1975: 108%

Now let's look at housing. Our statistics are once again drawn directly from U.S. Census Bureau data: median house prices 1975-2009.

The average house price in 1975 was $39,500. Using the Bureau of Labor Statisticsinflation calculator, we find that comes to $158,000 in 2008 dollars.

The average (mean) house price in December 2008 was $301,200--almost twice the 1975 cost. To be exact, 90.7% higher.

Thus we can see that only the top 5% of households actually gained enough income to match the rise in housing costs. Even the "upper middle class" in the top 20% of households only gained 74%, substantially less than the 90% rise in housing.

The lower 3/5 of the households were completely blown out of the water by housing's 90% rise; obviously, their ability to afford a house was essentially destroyed by this asymmetric rise in the cost of housing.

I submit that the exact same mechanism is at work in the "affordable education" student loans scam: the cost of education has far outpaced wage increases, for the precise reason that cheap easy money was now available to feed the system.

Just using my own education at a state university as an example: my tuition and student fees in 1975 (the year I graduated from the University of Hawaii at Manoa) were $235. (Books were of course extra.) Since I was self-supporting and was working as many hours as possible in a six-day week, I recall the exact numbers: $89.25 for tuition, $27 in student fees per semester.

In 2010 dollars, the 1975 tuition and fees is about $950 per year. Meanwhile, the 2010 tuition and fees for UH-Manoa now $4,000--four times higher than the 1975 costs.

Why have higher education costs skyrocketed? Since my brother-in-law has worked on the teaching side of things at UHM for the past 37 years, and since I visit the campus often and follow Hawaii politics and budgets a bit, these reasons pop out as "obvious" (and thus highly unpopular within the status quo)--and I suspect they hold true at every institution of higher learning, public and private:

1. Since "cheap" essentially limitless student loans are available, then there is no incentive to rein in costs; the students will borrow more.

2. While teaching staff is being squeezed, administration costs have ballooned-- from outrageous salaries for top administrators in the hundreds of thousands of dollars, and from an increase in administrative headcount which has far outpaced any rise in the number of students.

3. On the teaching side, endless meetings now suck up more time than teaching, curriculum development, etc.--the classic signs of bureaucratic bloat/inefficiency.

4. Non-teaching staff (grounds crew, security, etc.) routinely underperform; there are no incentives to work hard and no way to get fired.

5. Non-salary benefit costs--healthcare and pensions--have skyrocketed, as they have for all public employees.

Even though the employee might not see a wage increase for years, the total cost of their position (the "overhead" non-wage benefits and pension costs) has soared.

The incentives in the student loan scam are all perverse. Universities face little competitive "market pressure" to completely revamp their bloated, inefficient structures, and students just sigh and tack on another $20,000 to their stupendous student debt.

Meanwhile, Wall Street and the banking industry love student loans, especially after the Republican White House and Congress passed the "No Banker Left Behind" bankruptcy "reform" which leaves student loans as collectible until death (and beyond)--essentially a form of debt servitude for life.

So what's not to like from the Status Quo point of view? Lifelong debt serfdom is the entire raison d'etre of the American financial system and Savior State, and student loans are just one nasty little piece of the total debt-serfdom/servitude package.

I propose these solutions. Yes, I understand these can be contested on ethical grounds, and that like every other "solution" which starves the Protected Fiefdoms of the Savior State and the rentier-financial Power Elites, they are "impossible." Nonetheless, I propose them anyway:

1. Take the TARP funds which were supposedly "paid back" by the "too well-connected to fail" banks and pay off the entire $550 billion in outstanding student loans. Yes, I know this penalizes those who didn't take on loans, but the system is rotten to the core, ethically and morally, and it needs to be liquidated and shut down.

No penalties or collection fees would be paid; the parasites would get the principle due and nothing else.

2. The entire student loan system is shut down, with the exception of $1,000 a year for a maximum of four years. I can already hear the screams: "That's impossible! Who can afford to pay for college without loans?" Precisely.

Sorry, Protected Fiefdoms; your "protection" just vanished. If only 10% of the students can afford the tuition and fees, then the institutions will have to survive on the fees paid by 10% of the students. The other choice is to re-tool the entire institution, from the ground up, such that the costs align with what the citizenry can afford without lifelong debt servitude.

Some institutions will adapt to reality. Students will flock to affordable schools, and they and their families will start saving for education.

I know that many families do save for education, but the typical middle-class American efforts leave a lot of room for improvement. Let me sketch out the path to saving for education:

Times you eat fast food: 3 times a year, not 3 times a week.

Times you eat at "fancy sit-down" restaurants: twice a year.

Feature films at theatres: zero or once for your birthday.

Lavish vacations: none.

New vehicles: none.

New anything: none. Buy it used (usually it's barely used or new)

Can't afford the dorm? Live at home or find some family who has a spare room you can trade labor for: yardwork, babysitting, etc. I did this for a year when work was scarce in the 1973-74 recession.

Find the cheapest room in the entire city. My landlady in 1975 strung a few Christmas lights in the hallway to avoid the tremendous expense of 60-watt bulbs. The house had been untouched for decades but the wiring and plumbing still worked. Good enough.

Work at whatever menial job you can find; it isn't "career-building," it's for the cash. The harder and dirtier the work, the less competition you'll find.

I know that this is not a popular solution--lower the costs of education via brutal competition, institutions either adapt or perish, and eliminate debt from the picture entirely--but they are solutions.

What is ironic is that this "solution" worked in 1975, when interest rates were 10% and nobody borrowed a fortune to go to college. (I paid my own way with low-moderate-wage jobs and exited, degree in hand, with savings and zero debt--and I was not alone.)

If the "cheap easy borrowed money" vanished, then the costs would come down and people could get a degree without the lifelong servitude/debt serfdom of student loans.

Is it "impossible" to provide higher education for 1975 costs? Why don't we eliminate student loans and find out? I suspect innovation would blossom once the student debt-serfdom machine was smashed.

Special autographed book offer: Fellow author (Reinventing Collapse: The Soviet Example and American Prospects) and blogger (Club Orlov) Dmitry Orlov has just published a limited-edition collection of his most acclaimed essays titled Hold Your Applause! A donation of $21 or more will get you a signed copy of this very limited-run book, and help support Club Orlov. Please check it out and support an independent, informed voice.


If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other oftwominds.com readers and contributors are discussing/sharing.

DailyJava.net is now open for aggregating our collective intelligence.


Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook and Kindle formats.A 20% discount is available from the publisher.

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

Thank you, Mark F. ($200), for unbelievably generous contribution to this site. I am greatly honored by your support and readership. Thank you, Terry L. ($20), for this second outstandingly generous contribution to this site. I am greatly honored by your support and readership.

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Wednesday, February 24, 2010

"Shovel-Ready" = "Marginal Returns"

"Shovel-Ready" means "wish list" projects chosen at the top of a credit bubble. Such projects offer marginal returns.

Have you seen any lists of "shovel-ready" projects being funded by the Federal stimulus package? You know, the $787 billion extravaganza which is supposedly reigniting the fading U.S. economy?

Perhaps there are some fundamentally worthy projects being funded in your area, but here in Northern California what little I've seen seem like projects dreamed up at the very peak of an unprecedented credit/asset bubble, when money flowed easily and "prosperity" (and rising tax revenues) seemed endless.

Wish lists drawn up at the peak of prosperity provide exceedingly marginal returns. Investments with reasonable returns have already been funded, but all that rising tax revenue and "free Federal money" must be spent, so how about we replace an efficient bus transfer from the BART subway station to Oakland Airport (a 5-7 minute ride) with a billion-dollar underground spur line?

The return on this stupendous investment is worse than marginal. It's precisely the kind of essentially worthless make-work project dreamed up by government agencies when "free money" is pouring in/available to be squandered.

Or how about funding an academic research project to study the choices made by young people in bars after they've been drinking?

I am not making this up. That was one local example of a "shovel-ready" project funded by Federal stimulus money.

Are wish lists drawn up at the top of credit/asset/tax revenue bubbles the best way to allocate scarce resources in a time when private GDP is contracting rapidly?

Clearly, the answer is no. The "shovel-ready" projects are a continuation of the malinvestments made during the housing boom--the equivalent of adding granite benches to the pool cabana BBQ area.

(Please go to Imperial Economics for some charts which show private GDP--what's left if you subtract massive Federal spending--is plummeting by 15+% annually.)

It's like we're Easter island residents just before the last slide to oblivion, and we're blowing our last wad of borrowed money on building a few more stone statues, in the hopes that the "magic" thus created will restore the prosperity we've squandered.

How about refurbishing the national rail lines? How about that "national smart grid" electrical infrastructure everybody agrees is absolutely necessary? How about insulating all government buildings and putting solar arrays on each one in areas with high annual sunlight? At least those projects would still be paying real benefits in energy savings and generation 10 years hence.

Making scattershot malinvestments via "wish list" projects dreamed up at the bubble top simply continues the malinvestments of the past decade: trillions squandered on malls nobody needs, office towers nobody needs, granite-counter McMansions nobody needs (19 million vacant dwellings in the U.S., 5 million foreclosures in the pipeline), foreign wars nobody needs, $300 million per plane weapons programs no nation can afford, prescription drug plans to reward the pharmaceutical cartel, etc. etc.-- gargantuan "investments" with increasingly marginal returns paid for with borrowed money: $1.6 trillion a year at last count, and that's just Federal borrowing; it doesn't include the trillions being squandered by the Federal Reserve to prop up the housing market.

Sadly, the only thing left in 10 years will be the debt we've collectively taken on to fund marginal "make work" projects of fleeting or zero value.

Special autographed book offer: Fellow author (Reinventing Collapse: The Soviet Example and American Prospects) and blogger (Club Orlov) Dmitry Orlov has just published a limited-edition collection of his most acclaimed essays titled Hold Your Applause! A donation of $21 or more will get you a signed copy of this very limited-run book, and help support Club Orlov. Please check it out and support an independent, informed voice.


If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other oftwominds.com readers and contributors are discussing/sharing.

DailyJava.net is now open for aggregating our collective intelligence.


Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook and Kindle formats.A 20% discount is available from the publisher.

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

Thank you, Michael M. ($45), for exceedingly generous contribution to this site. I am greatly honored by your support and readership. Thank you, Ludovic V. ($65), for yet another outrageously generous contribution to this site. I am greatly honored by your support and readership.

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Tuesday, February 23, 2010

Some Big Wild Guesses About the Future

Special note of thanks: A most sincere thank you to the dozens of readers who generously sent emails of support and encouragement (and many who also sent generous donations) in response to yesterday's rant. You have made me realize that this site is not just an experiment in self-expression but a conduit for a large, diverse community of very smart, experienced members of the Remnant. It is my duty to support and encourage all of you, just as you have encouraged me. I will be responding to each of you in the next few days.

I take a few wild guesses at which scenarios might play out in the next decade or so.

Accomplished correspondent N.G. recently submitted an irresistible question:

How likely do you think are the following scenarios for the US over the next 30 years?

1. "Successful" reform and continued political integration
1a. Quasi-democratic model
1b. Authoritarian model

2. "Unsuccessful" reform and de jure political disintegration

3. "Unsuccessful" reform and de facto political disintegration

4. Something else

I know the future is murky and forecasting is an impossible business and all that, but what do you think? Which item do you think has the highest likelihood? Which items have negligible likelihood?

My thoughts on this:

- 3 or 1b are most likely, and roughly equally probable (note that 1b political unification would probably happen under the foot of some now-peripheral but later-militarily-ascendent subset of the US empire, a la Carroll Quigley's Evolution of Civilizations model)

- None of the items have negligible likelihood.

Thank you, N.G., for summarizing the key puzzle of the next decade: Can the Status Quo (Neoliberal cartel capitalism/Empire/Savior State based on cheap credit and fossil fuels) be reformed into something which is politically, financially and environmentally stable/sustainable?

My answer: a big fat "no," for the reasons laid out in the Survival+ chapters "The Crisis of Neoliberal/Predatory Capitalism," "Over-Reach and Inequality" and "Insurmountable Barriers to Structural Reform."

I cannot possibly summarize the dozens of ideas fleshed out in these chapters, but here are a few points which are excerpted from the Survival+ analysis:

1. All civil societies/cultures develop Elites; this is the nature of social animals. Elites are self-organizing groups which share the same self-interests, that is, a higher-order clique; they are not conspiracies or formal organizations.

2. Under certain conditions, the structural obstacles/negative feedbacks which constrain Elite dominance weaken and the Elites (private and public/State), like any other human group, seek to exploit the resulting windfall.

3. This leads the Elites to over-reach which creates positive feedback: the more wealth and influence the Elites/State control, the easier it becomes to control even more. The net result is the Elites and the State's share of the national income rises to historic extremes.

4. Regardless of the exact nature of over-reach--expansionist warfare or financial leverage and looting are two popular choices--the interests of the Elites and the society as a whole diverge. As this divergence grows, the social contract between the Elites and those whose productivity powers the economy and society begins fraying.

5. Over-reach ontologically (inherently) leads to structural imbalances which then threaten to destabilize the productive middle class which supports the Elites. Due to the overwhelming power of the Elites/State partnership's fiefdoms, structural reform is impossible (see Chapter Twenty).

6. As the productive middle class's share of national income shrinks, a well-concealed,opaque parallel system of dominance with a structure of its own arises to exclusively serve the interests of the Plutocracy/State Elites (apparatchiks). The hidden mechanisms are many: backroom deals, unwritten "understandings," price-fixing and other forms of collusion; cash payments and other "gifts and donations;" political favoritism (special admission to elite public universities for the well-connected); and a cornucopia of financial benefits: access to initial public offerings, special tax laws written to reward a particular enterprise or cartel, and so on.

7. The State, which was intended as a bulwark against the natural dominance of concentrated private capital and Monarchy, has instead become the handmaiden of the rentier-financial Power Elites. The Elites and the State have thus become partners in the task of diverting ever-larger shares of the national income to their own coffers.

8. As a result, inequality--as measured by shares of the national income and wealth--widens, furthering the divergence of interests between the productive class and the Elites/States' unproductive fiefdoms and dependents.

9. The State/Elites seek to counter these growing imbalances by extracting more from the productive class via taxes and "theft by other means" and masking this rising inequality by manipulating the politics of experience via relentless mass media propaganda.

The goal is four-fold: nurture complacency and fatalism in the citizenry; divert their attention from the concealed parallel system that benefits the Plutocracy and State Elites exclusively; legitimize simulacrum democracy and delegitimize protest.

10. To keep the State dependents passive and unthreatening, the Elites/State placate this class with "bread and circuses," State-funded entitlements paid for by raising taxes on the dwindling productive class. Under the guise of entitlements, the State (and the Elites who control it) has in effect bought the passive complicity of its dependents in the Elites' growing dominance of national income and wealth.

11. Having over-promised entitlements to the unproductive and garnered the majority of national income and wealth for themselves, the Plutocracy/State Elites can only tax the productive class so much lest they kill the horse they ride so majestically. Their only alternative to loss of income and power is to debauch the currency by printing money and debauch credit by borrowing far in excess of what can possibly be paid back.

12. The debauchery of credit and currency and rising inequality/diverting of national income to the Elites continues in a process of devolution until a phase shift/tipping point is reached and the status quo collapses in insolvency.

This process is both post-Marxism (that is, occurring outside the framework of Marxist theory) and post-Neoliberal State Capitalism--in other words, these broad intellectual frameworks failed to predict or account for the coming devolution and collapse of the State/rentier- monopoly capital Power Elite partnership.

The grand experiment of the State controlling the private economy has failed.

Both the Marxist/Socialist/"Command Capitalist" model of government control and ownership and the Neoliberal State Capitalist model of the State controlling the economy via monetary and fiscal manipulations have failed, for in each model there is no negative feedback to State over-reach and expansion, or any negative feedback to limit extreme concentrations of power via State or cartel control/ownership of national assets and income.

As the State and the predatory cartel Elites (the Plutocracy) who control the State's machinery gorge on the national wealth (windfall exploitation), the State's interests radically diverge from those of the citizenry.

end of excerpt

Since the State and Rentier-Financial Power Elites' interests are united against the interests of the citizenry in both the authoritarian and quasi-Democratic models, then successful reform under either model is impossible.

The State retains unique monopolies on four sweeping powers:

1. "legitimate" violence
2. conscription
3. taxation
4. inflation

The first enables it to repress, suppress and oppress its citizenry via quasi-legal justifications ("emergency powers") via violence or the threat of violence.

The second enable it to draw upon its own citizens to wage wars of Empire or conquest. This power was relinquished in the early 1970s in a de facto "Grand Compromise" with the middle class: the State will stop drafting your sons to fight wars of Empire/conquest if you stop challenging the State's Status Quo.

The third enables the State to strip-mine the productive classes, drawing funds to placate the unproductive classes with "bread and circuses" and to divert ever-larger shares of the national income and wealth to the State's Fiefdoms and their private Elite Masters (The Plutocracy).

The fourth enables the State to inflate away its own rising debts while wiping out much of the wealth of the productive classes (those with earned income as opposed to unearned rentier income).

If the State is unable to create inflation due to massive credit losses which dwarf even the State's ability to create money/credit, then the State's debts become unsustainable and the State collapses in insolvency.

Given that real reform is ontologically impossible without the destruction of the partnership between the State and the Power Elites of cartel/crony capitalism,that informs our analysis of the second part of N.G.'s question: de jure (legally enacted) or de facto political disintegration.

Many have speculated that the U.S. could break into smaller regional nations which possess some inherent geographical and/or cultural ties.

My answer begins with this question: which model, a large nation-state (existing U.S.A.) or smaller regional powers, best serves the interests of the predatory/cartel/crony capitalist Power Elites who will survive the insolvency/implosion of the Savior State? Which best serves the interests of the citizenry?

I address this in the final chapter of Survival+, "Structuring the New American State."

I conclude that despite their fears of Central State dominance of the states and citizenry, the Founding Fathers selected a Republic (central State government) for its unique features as a counterweight to invasion/foreign interference and to countering the very private-sector Elites which now dominate our government at all levels.

The Constitution is mute about great concentrations of capital and financial/political power; it neither enables them nor precludes them. That choice is up to the citizenry. The passive, cowed, confused citizenry of today has, in its passivity and complicity with the Savior State (which bought us off with entitlements), enabled concentrations of financial power to buy political control of the Central State's machinery.

An engaged citizenry could demand the Central State break up cartel/crony/predatory capitalism's concentrations of power.

Smaller regional powers would inherently be more vulnerable to crony/cartel Elites' power. The full financial weight of global capital would be focused on a smaller target.

It could be argued that smaller regional powers (the "alliance" of Washington, Idaho, and Oregon, the nation-state of Los Angeles, etc.) would be more within the control of their citizenry, and the ancient Greek model of nation-states lends some credence to this argument for the break-up of the U.S.A. into smaller states.

It comes down to which model best serves the interests of financial Elites and the citizenry. I doubt that the Wall Street/banker crowd will care much about the governance of any particular region; lobbying/buying the leaders of an alliance or a city-state is not much different that lobbying Congress now.

So the question boils down to what model best serves the interests of the citizenry. I conclude that the large, globally influential nation-state U.S.A. best serves the fundamental interests of the citizenry--if its government is both limited and accountable to an engaged citizenry.

Others may disagree, and that debate is an open one. In any event, while it is possible the U.S.A. breaks into regional alliances or city-states, either by legal actions such as elections or Supreme Court rulings (de jure) or de facto (the US remains a nation in name but in practice is a toothless alliance of regional states), I would posit that any such geographic/political re-ordering would only arise from a Great Crisis such as losing a global nuclear war, a revolution on the order of China's 1949 upheaval or the French Revolution or equivalent destruction of the machinery of the Status Quo.

So the scenario I consider most likely would be along the lines of "unsuccessful reform and de facto political and financial devolution, leading to a Great Crisis and Spiritual Awakening."

I know this last item isn't popular with the spiritual-less Status Quo punditry and Apocalyptic Doomer ideologists, but the U.S. has a long history of grass-roots spiritual movements called Great Awakenings.

The Great Awakening of the 1740s led to the American Revolution, and the Awakening of the 1840s was a precursor to the Civil War.

I know it is popular now in various revisionist histories to see both crises/struggles in purely financial terms ("It's all economics, man!") but any exploration of the politics of experience of the time would unearth a spiritual core which existed outside the purely economic.

Again, I realize this line of thought is completely alien to the sort of post-modern relativistic, "ironic" analysis which currently dominates academia and the popular culture. Nonetheless I would say that the Chinese Revolution of 1949 was in the "lived" terms of its participants (i.e. in their politics of experience) a spiritual revolution which created a fervor, drive, hope and renewal which was both internal and external. This revolutionary spirit cannot be distilled down to some economic model or analysis. Any such attempt would completely violate the lived politics of experience of the participants.

That this revolution was squandered by Mao and his cronies is another story.

My point is simply this: a critical causal factor in the current "Depression Leading to Insolvency" is the spiritual rot at the very heart of the status quo "marriage" of the Savior State/Empire and crony/predatory/cartel "capitalism".

Yes, spiritual rot: lying, cheating, embezzlement, fraud, manipulation, secrecy, shadow systems of governance, etc. etc. etc.

My own thinking on what sort of crisis might occur has been influenced by The Fourth Turning, which posits an 80-year cycle of crisis and transformation in American history. 1781 (American Revolution), 1861 (Civil War), 1941 (World War II) and next, 2021.

Here are some speculative thoughts on the nature of the crisis "due" for 2021.

1. Insolvency of the Savior State: not just likely but guaranteed by 2021.

2. collapse of the dollar/creation of a "new dollar," systemic financial crisis. Likely.

3. Political upheaval/peaceful overthrow of the status quo Demopublicans and their crony/predatory Power Elite Masters: likely. I would place the emergence of a new Third Party as a rather high probability, for the simple reason that so few give this any credence whatsoever. Meanwhile, U.S. history is replete with examples of new political parties emerging, either under the name of the "old" party or with a new name.

4. Global nuclear war. Possible. China's leadership may decide that an external "enemy" must be blamed for its internal devolution/crisis. The U.S. is the prime target, and the "reward" would be both political hegemony of Asia and control of the globe's remaining key resources.

The highest likelihood for such a war is miscalculation of American resolve. As the U.S. Savior State implodes, other nations might mistakenly calculate the U.S. has lost its nerve or ability to protect its global interests/Empire. As an example from history, the leaders of the Japanese Empire reckoned that America would sue for peace after its Pacific Fleet was smashed at Pearl Harbor in a surprise attack.

That miscalculation cost Japan its Empire and a generation of its citizens. In one of history's great ironies, it vaulted the U.S. to global hegemony as the U.S. filled the vacuum left by old powers.

Given the staggering weaknesses of American culture (a whiny culture of entitlement), it is easy to anticipate another power concluding that this overblown, self-absorbed culture of overfed sickly weaklings will cave in to modest pressure/threats.

4. Environmental crisis/famine. The U.S. is still rich in expertise, soil, water, and at least in some circles, drive and determination. Most ancient cultures fell or collapsed due to famine brought on by drought, overpopulation or mismanagement of resources. While that is possible in the U.S., it seems more likely to be a process rather than a crisis.

Nonetheless, a famine/drought/energy "famine" would likely trigger an authoritarian response (rationing, price controls, etc.) by the Central State, which could then trigger a political crisis if the State botched the rationing or favored its Elites too visibly.

These are mere guesses; nobody knows the future. The likeliest path to me is this: the current financial devolution leads to a nadir in 2012-2014; a political change heralds an era of reformist hope which is dashed by 2016 as the status quo Elites strangle/co-opt all reforms which might diminish their perquisites/powers.

This launches the final slide to insolvency and a Grand Crisis/Transformation in 2020-2022.

If you'd like to share your own speculations about the future, please join theDailyJava.net forum. Just click on the image at the end of today's entry, then select the "Of Two Minds--Charles Hugh Smith" link. There are a number of threads in that category; select "big wild guesses," register and then contribute your thoughts/links/ideas.

Here are a few titles which may inform such speculations:

The Great Transformation

The Road to Serfdom

The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization

The Collapse of Complex Societies

Since Yesterday: The 1930's in America, September 3, 1929 to September 3, 1939

Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders

Collapse: How Societies Choose to Fail or Succeed

A History of Money and Banking in the United States: The Colonial Era to World War II

The End of Work

The Coming Anarchy: Shattering the Dreams of the Post Cold War

Civil War II: The Coming Breakup Of America

China: Fragile Superpower: How China's Internal Politics Could Derail Its Peaceful Rise

The River Runs Black: The Environmental Challenge To China's Future

Hungry Ghosts: Mao's Secret Famine

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

The Third Chimpanzee: The Evolution and Future of the Human Animal

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century

The Future of Life

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

The Solar Economy: Renewable Energy for a Sustainable Global Future

The Dollar Crisis: Causes, Consequences, Cures

Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It

End of the Line: The Rise and Coming Fall of the Global Corporation

The Tipping Point: How Little Things Can Make a Big Difference

Manufacturing Consent: The Political Economy of the Mass Media

The Paradox of Plenty: Oil Booms and Petro-States

The Lucifer Effect: Understanding How Good People Turn Evil

The Cultural Contradictions of Capitalism

Sociobiology: The New Synthesis

The Nature of Mass Poverty

The Sovereign Individual: Mastering the Transition to the Information Age

Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships

The Paradox of Plenty: Hunger in a Bountiful World

Tragedy & Hope: A History of the World in Our Time

How The World Really Works

The Great Wave: Price Revolutions and the Rhythm of History

When Giants Fall: An Economic Roadmap for the End of the American Era

Globalization and Its Discontents

Who Rules America? Challenges to Corporate and Class Dominance

The Long Descent: A User's Guide to the End of the Industrial Age

The Ecotechnic Future: Envisioning a Post-Peak World

Planet of Slums

Reinventing Collapse: The Soviet Example and American Prospects

The Great Wave: Price Revolutions and the Rhythm of History


For our complete list of recommended books and films (600+ titles), please go tobooks & films.


If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other oftwominds.com readers and contributors are discussing/sharing.

DailyJava.net is now open for aggregating our collective intelligence.


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