Wednesday, October 31, 2012

The Financial Super-Storm of 2013

The destructive whirlwind that hits New York in 2013 will be a financial Frankenstorm.


Four years of glorious central-planning "extend and pretend" have enriched the political and financial Aristocracies, and imbued them with a bubble-era hubris that they have indeed gotten away with murder: the $6 trillion the Federal government borrowed over the past four years, the Fed's $2 trillion in fresh cash, the Fed's $16 trillion bailout of the banking sector and various perception management manipulations have righted the storm-tossed ship. All those with power in 2008 remain in power and all those with outsized wealth in 2008 still hold their outsized wealth.
The global tsunami of borrowed and printed money lifted the water-logged dinghies of the debt-serfs enough to give them hope of better times; meanwhile, their adjusted income has declined 8%: they are poorer while the neofeudal Aristocracy is much wealthier: same as it ever was, right?

Except the financial tides and winds have shifted, and the linearity of central planning is about to be disrupted by nonlinear, positive-feedback storms. Let's list a few of the major storms brewing:

1. Destabilization of the euro. I have covered the fundamentals many times here:


2. The U.S. dollar will rise significantly, crushing overseas corporate profits that have lofted the U.S. stock market ever higher. I have covered the many positive feedbacks that will continue pushing the dollar higher. Dollar goes up, stocks go down.


3. The "China Story" runs off the rails. We are feeling the first stiff breezes from China's tidal paradox: as it starts pushing its neighbors around, resuming its Imperial ambitions, it undermines the source of its wealth, its export machine.

China has placed an informal boycott on Japanese goods as a result of the Senkaku Island conflict, which by the way cannot be resolved in the current paradigm. China, Japan and the Senkaku Islands: The Roots of Conflict Go Back to 1274 (September 25, 2012)

China's newfound wealth was always more fragile than true believers in the "China Story" could fathom. China had what it took to go from rural backwater to global industrial power, but it lacks the necessary foundation to move beyond that stage. Once the Eurozone and U.S. economies gather downward momentum, the export machine's inefficiencies and malinvestments will catch up with it.

And once that happens, the real estate bubble's inefficiencies and malinvestments will catch up with it.


There are structural dynamics in play that supercede any national policy.
Neofeudalism, neocolonalism, financialization, centralization and consumerism have all reached the stagnation-decline phase on the S-curve.

When these financial storms arise and feed each other, Wall Street and New York will experience losses that will exceed the hurricane Sandy damage by an order of magnitude, for the Wall Street Status Quo will crumble under its own dead weight. 



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Michael S. ($25), for yet another magnificently generous contribution to this site--I am greatly honored by your steadfast support and readership.


Read more...

Tuesday, October 30, 2012

The Fiscal Cliff and Peak Government

Six critical dynamics will trigger the devolution of Peak Government. 

With the fiscal cliff looming, it's time to check in on the Peak Government thesis.


Chris and Adam at peakprosperity.com asked me to revisit my Peak Government thesis, which describes how the expansive Central State has come to dominate both private society (i.e., the community) and the marketplace, to the detriment of the nation’s social and economic stability.

Let's start by examining the six critical dynamics that lead to the inevitable devolution of Peak Government.

Massive Borrowing

In a misguided attempt to maintain an unsustainable Status Quo, the Federal government is borrowing unprecedented amounts of money that then must be serviced.  And the Federal Reserve is expanding its balance sheet by trillions of dollars (“printing money”) and intervening in stock, bond, and other markets for the purposes of managing perception (“the recovery is here!”)
These government funds are not just paying the government’s bills – they are being used to guarantee loans and mortgages that subsequently enter default, transferring what was private debt to the public and subsidizing politically powerful special interests.

Guarantees and subsidies both incentivize what is known as moral hazard: the separation of risk from consequence.  This can be summarized very simply.  People who are not exposed to risk act completely differently than those who are exposed to risk.  When risk has been transferred to the taxpayers by guarantees, give-aways, and subsidies, then speculation and mal-investment are incentivized.  If the bet pays off, I get to keep the gain, but if it loses, then I personally lose nothing, as the loss is transferred to the taxpayers.

Institutionalized Mal-Investment

The net result of these policies – borrowing immense sums to prop up an unsustainable Status Quo and institutionalizing moral hazard – leads to misallocation of scarce capital on a grand scale.  In effect, the money borrowed by the federal government and electronically printed by the Federal Reserve is mal-invested, because those receiving the funding are personally not at risk and face no consequence if the money is squandered on speculation or unproductive programs. Once moral hazard has been institutionalized, it becomes a positive feedback loop.  Since everyone in the system faces little personal consequence from mal-investment, the institution loses the ability to police itself.

Even worse, concentrations of private wealth readily influence public institutions via lobbying and political contributions, exacerbating moral hazard and mal-investment of the publicly borrowed money.

Erosion of Trust in Government

Mal-investment inevitably yields poor results, and just as inevitably, the government seeks to mask the dismal results of moral-hazard riddled policies and agencies.  This “perception management” is driven by political expediency, as public outrage at failed policies and unproductive spending would eventually lead to a political price being paid by the leadership.  So failed policies are declared great successes, negative data is massaged into positive data, and unflattering frauds involving public funds are buried or transformed into pseudo-realities.

This institutionalization of mal-investing borrowed funds and the politically expedient falsification of fact to manage perceptions have a destabilizing consequence: The public loses faith in public institutions.

Diminishing Returns on Public Debt

Massive borrowing also has a consequence.  Interest on the immense sums being borrowed squeezes out other government spending.

This triggers two self-reinforcing feedbacks.  Public spending that is not rewarding moral hazard is cut, as those in charge protect their perquisites, and taxes on what’s left of the productive economy increase, reducing the private investment that is the bedrock of capitalist growth and innovation.

This institutionalized mal-investment leads to diminishing return.  Where each dollar of additional public debt generated nearly a dollar of additional GDP in the early 1960s, now borrowing a dollar generates negative growth, as the cost of servicing the debt exceeds the meager yield.  Thus the Federal government borrowed and spent a staggering $6 trillion in a mere four years (2008-2011), while the GDP has yet to return to 2007 levels when measured in real (inflation-adjusted) dollars.

All these forces reinforce each other in a death spiral.  As trillions more are borrowed, interest payments crowd out spending, causing the Central State to borrow even more, which generates even more interest costs, and so on.  As moral hazard infects the entire government and its numerous private contractors and beneficiaries, there are few constraints on rising public debt and mal-investment of public funds.  As trust in institutions that increasingly depend on perception management rather than real solutions declines, public faith in government deteriorates further.

The Hidden Tax of Inflation and the Institutionalization of Falsification

The government has one trick to create the illusion that it is “keeping its promises.”  It prints money to meet its obligations, depreciating the nation’s currency by expanding the money supply.  Creating money out of thin air does not create wealth, productive assets, or prosperity.  What it does is lower the purchasing power of money, which we call inflation.

Inflation robs every holder of the currency and is effectively a form of government-sanctioned theft, or if you prefer, a hidden tax on productivity, as productive people and enterprises are taxed to support crony-capitalist, unproductive mal-investments and the rising interest on public debt. In effect, inflation is a way of transferring wealth from the productive to the unproductive, which then leaves the productive with less capital to invest in innovation. This starves the economy of capital while robbing purchasing power of every citizen, establishing a positive feedback loop of lower income, lower capital formation, and lower productivity.

Since the government has obligated itself to adjust Social Security payments to inflation, the culture of understating inflation (i.e., falsifying data) has been institutionalized, for the Central State has the impossible dual mandate of increasing inflation so that it can meet its obligations with cheaper money while keeping the inflation-indexed cost-of-living adjustments low, lest program costs balloon out of control.

A “modest” rate of 3% inflation will, in a decade’s time, reduce the purchasing power of stagnating paychecks by a third, while setting the “official” rate of inflation at 2% or less will inexorably reduce the purchasing power of Social Security payments.

If the rate of inflation was to rise at a rate similar to that of the late 1970s, i.e., 10% to 12% per year, while the “official” rate was held to half the real rate, all those whose incomes did not rise by 10% a year would be impoverished as the purchasing power of their incomes evaporated. Meanwhile, even as its policies impoverish most of its citizens, the Central State would assure everyone that it was meeting all of its obligations as promised. This is how trust in government is not just eroded but ultimately destroyed.

Self-Reinforcing Feedback Loops of Self-Interest

Government at all levels responds to shrinking tax revenues from a declining economy and budgets squeezed by higher interest payments by seeking additional revenues by whatever means are at hand. Tax rates are raised, junk fees are imposed, fees for minor infractions are jacked up, and deductions and exclusions are eliminated.

The public that does not work for the government (that would be five-sixths of the workforce) increasingly resents what it perceives as predatory extortion in an economy where everyone’s disposable income is falling. 

Unfortunately, there is a great divide between those who work (or worked) for the government and those who work in the private sector.  Those in government service understandably view the promises made to them in good times, eras that we now understand were brief speculative bubbles, as sacrosanct. 

The promises were based on the abnormally high returns earned by pension funds in the brief windows of speculative frenzy, and even supposedly conservative pension funds based their projections on annual yields of 6% to 8%.  As the Federal Reserve has attempted to reignite borrowing by lowering interest rates to near-zero, low-risk yields have fallen to 3%, less than half the expected returns.

As a result, there is a massive and sustained shortfall of public-employee pension funding, a shortfall that must be paid out of general tax revenues at a time when those revenues are declining as employment and business activity stagnate. 

The net result in many communities is that schools and other local services are falling apart as budgets are slashed to meet skyrocketing pension obligations.  From the point of view of parents, the pension promises that government employees hold as sacrosanct were unrealistic, and what should be sacrosanct (but is not) is the education of their children.

Those of us in the private workforce with spouses, relatives, and friends in government service understand the frustration of those who work for government, but should the self-interest of the few dominate the public budget and chart the course for the many?

The key difference is that the government holds the power of coercion and the citizens do not. Thus those in government who seek to serve the interests of their unions, colleagues, departments, and agencies can impose fees and taxes on all citizens to fund their own perquisites and power.

From the point of view of those inside government, sharply rising parking tickets, higher property taxes, and so on are small prices to pay for essential services. But as citizens observe government services degrading even as fees and taxes increase, they see little value being added, even as self-service and moral hazard remain in institutionalized abundance.

Two destructive feedback loops are generated by this divide: Governments, desperate for more revenues, ignore public resentment and loss of trust, which only deepens the disconnect between those in government and the public.  And the private citizenry sees a lack of accountability, soaring public debt, accounting trickery, political dysfunction, and mal-investment of public funds as the hallmarks of their government.

In Part II: Understanding the Economic Impact of Peak Government, we explore how these self-reinforcing feedbacks lead to the devolution and eventual collapse of government institutions. In particular, we analyze what the likely economic fallout will be, as there is simply not enough purchasing power to distribute between those in power and the needs of the general populace.
Click here to read Part II of this report (free executive summary; paid enrollment required for full access).

This essay was originally published on peakprosperity.com, where I am a contributing writer. 



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Gene M. ($50), for yet another supremely generous contribution to this site--I am greatly honored by your steadfast support and readership.


Read more...

Sunday, October 28, 2012

Why Energy May Be Abundant But Not Cheap

It doesn’t matter how abundant liquid fossil fuels might be; it’s their cost that impacts the economy. 

Many people think “peak oil” is about the world is “running out of oil."

Actually, “peak oil” is about the world running out of cheap, easy-to-get oil. That means fossil fuels might be abundant (supply exceeds demand) for a time but still remain expensive.

The abundance or scarcity of energy is only one factor in its price. As the cost of extraction, transport, refining, and taxes rise, so does the “cost basis” or the total cost of production from the field to the pump. Anyone selling oil below its cost basis will lose money and go out of business.

We are trained to expect that anything that is abundant will be cheap, but energy is a special case: it can be abundant but costly, because it’s become costly to produce.

EROEI (energy returned on energy invested) helps illuminate this point. In the good old days, one barrel of oil invested might yield 100 barrels of oil extracted and refined for delivery. Now it takes one barrel of oil to extract and refine 5 barrels of oil, or perhaps as little as 3 barrels of unconventional or deep sea oil.

In the old days, oil would shoot out of the ground once a hole was drilled down to the deposit. All the easy-to-find, easy-to-get oil has been consumed; now even Saudi Arabia must pump millions of gallons of water into its wells to push the oil up out of the ground. Recent discoveries of oil are in costly locales deep offshore or in extreme conditions. It takes billions of dollars to erect the platforms and wells to reach the oil, so the cost basis of this new oil is high.

It doesn’t matter how abundant liquid fossil fuels might be; it’s their cost that impacts the economy. High energy costs mean households must spend more of their income on energy, leaving less for savings and consumption. High energy costs act as a hidden “tax” on the economy, raising the price of everything that uses energy.

As household incomes drop and vehicles become more efficient, demand for gasoline declines. Normally, we would expect lower demand to lead to lower prices. But since the production costs of oil have risen, there is a “floor” for the price of gasoline. As EROEI drops, the price floor rises, regardless of demand.

This decrease in real incomes and ratcheting-higher energy costs could lead to a situation where energy is abundant but few can afford to buy much of it.

The relative abundance of fracked natural gas and low-energy density fossil fuels like tar sands and shale has led to a media frenzy that confuses abundance with low cost. This article (via correspondent Steve K.) illustrates the tone and breezy selection of data to back up the "no worries, Mate" forecast of abundant cheap liquid fuels: An economy awash in oil. (MacLeans)

Not so fast, reports Rex Weyler of the Deep Green Blog. Here is Rex's response to the above article.
Fair point about the volume of unconventional – deepwater, shale gas & oil, tar sands, etc. – hydrocarbons. These reserves may even produce peakies and/or sustain the plateau longer than some observers believe. However, biophysical restraints remain real; peak oil remains real; peak net energy appears imminent, and the impact on economies is already being felt globally. Points to consider: 
The dregs: In spite of huge shale & tar reserve discoveries, peak discoveries remain well behind us, in the 1960s. My father, a petroleum geologist his entire life (and still, in Houston, Kazakstan...), knew about shale and tar deposits when I was a teenager in the 1960s. He called them "the dregs." These deposits are not really news within the oil industry. And they are the dregs because of high cost, low EROI and rapid depletion. 
EROI: The volume of these low-net-energy reserves could extend peak oil production for decades, but at fast-declining net energy returned to society. We high-graded Earth’s hydrocarbons, just as we high-graded the forests, fish, copper, tin, water, and so forth. We’ve taken the best, highest EROI hydrocarbons, the 100:1 free-flowing wells of the 1930s and 40s. We’re now into the 3:1 and 2:1 tar sands. 
For example: damming rivers in Northern BC, to send electricity to the fracking fields, to send shale gas to Alberta, to cook the boreal substrate, and mix the black sludge with gas condensate shipped in from California and by pipeline from Kitimat to Fort McMurray, to mix with the bitumen, to pipe to Vancouver Harbour, to ship to China, to burn in a power plant, to supply electricity to their manufacturing empire.
By the time any of this energy gets used to actually make something useful to someone in society, and by the time that user puts that usefulness to work to feed, clothe, house, or heal anyone, there is no net-energy left. 
Our food in North America is already negative net energy by1:10 at best, up to 1:17 or worse for much of the crap we eat. This matters. EROI at well-head, EROI at the consumer pump, and EROI at the point of society’s actual service all matter.
Well-head EROI, counting all public subsidies, is now in the 5:1 to 1:1 range for all these “non-conventional” (meaning the dregs) hydrocarbon deposits. Money can be made. Some energy can be delivered to Society, but this is already way below the well-head EROI that could likely run the current complexity of the human society, much less “grow” economies. 
The degrading reserves take us down along the EROI curve, in which Net Energy returned to society falls off a cliff around 6:1, and is in freefall by 3:1. Net-energy alone kills the idea of much economic growth from a booming hydrocarbon bonanza (other than some great stock plays along the way). Furthermore, depletion renders the idea ever more unlikely: 
Depletion: Depletion rates on these gas fields have arrived quickly and appear drastic by historic industry standards. The fracking fields peak early and decline swiftly. In the Bakken shale field – one of the great North American saviour fields – the average well has produced ~ 85k barrels in its first year and then declined at about 40% per year. The newer average wells peak earlier and decline faster, so the overall trend is down. 
The depletion moves the production process along a function that approaches zero net energy... Down we go along the EROI curve... 5:1 .. 4:1 .. 3 .. 2 ... and then really complex society breaks down. An Amish farmer gets 10:1.
The Bakken break-even oil price is $85, so there is no profit in any of this right now, but of course there will be if global depletion exceeds demand from crashing economies. 
Depletion – both in volume and quality – and depletion for all industrial materials and energy stores, EROI, and economic stagnation all work as feedback loops. No one knows the bifurcation points in this complex system. We try to predict those, but miss by a longshot sometimes. Complex societies crash in this manner, declining returns on investments in complexity, from Babylon to London and Washington. See J. Tainter, H. Odum, N. Georgescu-Roegen, Hall, Cleveland, et al.
Here are some depletion data on The Oil Drum: Is Shale Oil Production from Bakken Headed for a Run with “The Red Queen”?. 
See A Review of the Past and Current State of EROI Data (PDF) by Hall, Cleveland, et al. (source: www.mdpi.com)
There is a lot of EROI data here: Obstacles Facing US Wind Energy. (The Oil Drum) 
Below is the EROI curve, only the “We are here” point at 10:1 is the modern average, and from a few years ago. The new conventional stuff is coming in lower and and the enhanced recovery, shale and tar fields are already over the falls at 6 or 5:1 for the better stuff (best dregs), and 3:1 to 1:1 for the dregs of the dregs, the deeper shale and tar sands.
 
So yes, our friends are correct about the great volume of tar, shale, deep, heavy hydrocarbons, but increasing production of world liquid hydrocarbons much beyond the current 85mb/d is not likely, and increasing net productionis even less likely. As you may know, net production per capita peaked in 1979. Actual net production is peaking now. This is the figure that counts: Actual current Net Production Delivered to Society. 
Growing this figure is technically possible, and may happen with some massive production bonanzas, i.e. we may see actual production push above 90mb/day, or higher, and may even see net production increase, but a major glut of hydrocarbons? No. Not remotely. 
When settlers first came to North America, they found copper nuggets the size of horses exposed in river beds. China just bought the best known, last, huge, moderate-to-low-grade, strip-minable, high-cost copper field in the world, in Afghanistan, for $billions over the western bids. There will be others, but rest assured: They will be lower grade, higher cost, and the competition will be more intense. When was the last time you bought a “copper” fitting at the hardware store. They’re crap. The alloys are crap. Because the ore quality is in decline and the costs of extraction are rising. Same with oil, trees, tin, coal.... 
Make no mistake: The war for the dwindling materials and energy flow is well underway.
Thank you, Rex, for this commentary on EROI and the quality and cost of hydrocarbon resources. Complex systems like economies are nonlinear, and so history does not necessarily track linear extrapolations of present trends. With that caveat in mind, the preponderance of evidence supports the notion that fossil fuel energy may remain abundant in the sense that supply meets or exceeds demand in a global recession, but the price of liquid fuels may remain high enough to create a drag on growth, employment, tax revenues and all the other economic metrics impacted by high energy costs.



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Karl L. ($50), for yet another superbly generous contribution to this site--I am greatly honored by your ongoing support and readership.


Read more...

Saturday, October 27, 2012

Part 24: A Very Surprising Surprise

Here is this week's chapter of my serialized comic novel "Four Bidding For Love."(Those who find absurdist humor and adult situations offensive, please read no further.) 

PREVIOUSLY: Part 23: The Mysterious Masseur.


     To say her face registered shock would be a fantastic understatement. Grabbing her pillow to her bare frontside, she scrambled to turn the light off.
     "What are you doing here?" she demanded, and Robin was at a loss to grasp her outrage.
     "I saw the lights off in your part of town, and came by to invite you to dinner."
     "Then why didn't you?"
     "Because you invited me to give you a full-body massage. And why should I refuse?"
     Flushing a hot deep crimson of embarrassment, Kylie realized she'd assumed her visitor was the previously scheduled Simon Jordan, or whatever his name was; and after their banter about massage, Robin had every right to assume she'd suddenly agreed to the very massage she'd mocked at the cafe. The apology fell heavily to her, and thankful that the streetlight outside cast only the barest hint of light on her bed, she whispered, "My tennis partner paid for her masseur to come over and work on my shoulder. She said he's gay, and absolutely trustworthy, so I thought you were him."
     "I'm trustworthy, too," Robin said in a hurt voice, and Kylie shushed him. "Don't forget about my nosy neighbor Vonda."
     "Yes, Vonda," he whispered with evident frustration. "So you liked the massage but are angry that it was me who gave it to you rather than some gay guy?"
     "No," she said in a small voice. "I mean, yes, I liked it, and no, I'm not angry. It's just that, well, I don't want you to think I always let someone give me a full-body massage on the second date."
     Bubbling with an inflamed desire for more than merely touching her shoulder, Robin sought to repress his aggrievance. "I understand the confusion, but let's be clear about one thing. When you show up at my door, it means you've decided to make love with me, okay?"
     Holding the pillow to her midriff, Kylie whispered, "Okay."
     "And just so you know," he continued in a firm whisper, "I’m safe. I can show you the test results."
     "I'm safe, too," she said quietly. "I've only had one serious boyfriend."
     "And I’ve only had one serious girlfriend." Hoping to lighten the mood, Robin added, “Technically speaking, I think this qualifies as our third date.”
     The streetlights cast an eerie storm-tossed light through the curtains of her window, and Kylie’s expression softened. “Let’s call it two-and-a-half.” Gazing up at him, she whispered, "Since we're on the subject—have you ever been more than just a neighbor to Alexia? I know it isn't my right to ask, but I'd like to know."
     Robin's silence communicated volumes, and Kylie murmured, "Her sofa took a beating, I bet."
     Robin's tone mixed surprise, guilt and confession. "How did you guess?"
     Ignoring the question, Kylie coolly asked, "Was it romance or just payment?"
     Relieved that she'd offered him an escape route, Robin said quietly, "Payment sounds so cold, but it's as good a word as any. I'd done her a favor, which she repaid very unexpectedly."
     Kylie's whisper was testy. "You didn't know that about her?"
     "Not at all," Robin murmured, and the three short words mixed innocence with an equal measure of defensiveness.
     A frosty silence fell on the youthful couple and Robin said, "I don't expect you to understand, but I haven't had a girlfriend in a long time."
     "How long?"
     "Almost two years."
     "Dates?"
     "A few, but nothing clicked. Until you."
     Kylie made no reply, and Robin whispered, "So are you going to hold one time with Alexia against me? Is that fair? I'm not grilling you about your previous boyfriends, or what you might have done after two years of being alone."
     "You're right," she sighed. "It isn't fair. I guess I'm just worried that I won't measure up to sexy Alexia."
     It was Robin's turn to sigh. "If only you knew how much willpower it took not to turn you over and kiss you just now."
     "It was sweet of you to resist," Kylie whispered. Lowering the pillow, she felt around for her clothing on the rumpled sheet, whispering, "Have you seen my panties?" Sensing their golden moment of intimacy might abruptly end, Robin cannily slipped her panties and bra to the floor behind him while appearing to help look for the misplaced underwear. "Maybe they're under here," he whispered, pulling the pillow aside, and after a show of additional searching he edged so close their noses nearly touched.
     It was a wondrous moment, gazing into the liquid reflection of her eyes, and he murmured, "If only you knew how much willpower it takes not to kiss you."
     After a longish pause, she whispered, "In recognition of your honesty and trustworthiness—" and with that, she leaned forward and planted a very warm, rich kiss on his fevered lips.
     Perhaps if it hadn't been such a wind-stricken, forbidding night outside, and if they hadn't just spent so many hours chatting happily at the cafe, and if Robin hadn't been quite so thorough in his massage, and if Kylie hadn't felt quite so guilty about her unjustified reproach, and if he hadn't reassured her so convincingly of his safety, and if the angels of extravagant new love had not been cajoling them so ardently, and if Kylie hadn't been as bare as the day she was born, and if their first kiss hadn't been quite so wondrous, and if the faint opera playing above hadn't provided such a romantic soundtrack, then perhaps the enamored couple might not have made love so readily that night. But all the conditions aligned to perfection, and the angels of love at first sight were very pleased indeed; for they hovered above the entwined couple the entire time, much delighted with their handiwork.

Next: Fire! 


To read the previous chapters, visit the "Four Bidding For Love" home page.

Buy the Kindle ebook for $4.95             Four Bidding For Love (print, $16.99) 



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Friday, October 26, 2012

About Raising Taxes as the "Solution" to the Fiscal Cliff....

Raising taxes is the "solution." Too bad incomes are declining. What will raising taxes do to household savings, spending and the economy? 

We all know cutting Federal spending is politically impossible, so that leaves raising taxes as the only "solution" to the "fiscal cliff."


Since most income tax revenues flow from household income, let's look at some charts of the workforce and household income:

As a percentage of the population, the workforce has contracted to levels of the late 1970s.


As a percentage of national income, labor's share is in a free-fall:


Hourly earnings have been trending down for years:


Income for every age group other than 65+ seniors has declined sharply:


The income of those in their peak earning years 45-54 have been slammed:


Household debt loads have soared far above wages:


Meanwhile, government expenditures are up, up and away:


Yes, I know: the solution is to "tax the rich." The Problem with "Tax The Rich": It Won't Work (May 28, 2010)

The parasitic Elites should certainly pay as much as the heavily taxed middle class (The Real-World Middle Class Tax Rate: 75% (July 5, 2012), but since the parasitic Elites have captured the machinery of governance, the chances of Congress actually raising taxes on the top 1/10th of 1% are nil.

There will be noises made, of course, for perception management and public relations, but when April 15th rolls around we will find tax revenues are stagnant: loopholes and tax breaks will have blossomed like mushrooms, magically enabling the parasitic Elites to escape any serious reduction in their income.

Even if we were able to squeeze some additional taxes out of the parasitic Elites, their income stream is dwarfed by the Federal spending that looms ahead: The Fiscal Cliff and Demographic Drag. The top 1/10th of 1% cannot pay the rapidly expanding Federal benefits of the 99.9%, even if we confiscated every dollar of their incomes.

How can tax revenues increase when household incomes are declining? Transfer more of the national income to taxes and that leaves less for savings, investment and consumption. The economy contracts, reducing the workforce and wages further.

If that isn't a death spiral, it is a close approximation of one. 



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Robert B. ($10), for yet another splendidly generous contribution to this site--I am greatly honored by your ongoing support and readership.


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Thursday, October 25, 2012

The Fiscal Cliff and Demographic Drag

Federal spending is heading for a fiscal cliff while millions of retirees are starting to draw  Federal benefits. 

We know two things about the future:


1. Borrowing 35% of Federal expenditures every year is unsustainable. (2012 Federal budget = $3.8 trillion, Federal deficit = $1.3 trillion, 34.2% of every Federal dollar spent is borrowed)

2. The Baby Boom generation of 75+ million may be working longer, but they are also retiring en masse, joining the ranks of Social Security and Medicare beneficiaries at the rate of 10,000 per day, a flood that will not ebb until the late 2020s. (The Baby Boom is generally defines as those born between 1946 and 1964, though many quibble with the 1964 date. The choice of parameter doesn't change anything about the consequences.)

The first Boomers qualified for early Social Security retirement (age 62) in 2008 and for Medicare (age 65) in 2011. The biggest cohort years (almost 4 million a year) will start reaching early retirement (62) in 2014 and Medicare (65) in 2017. The number of people entering these programs will rise every year from 2014 to 2020, and then remain constant at 4+ million a year until 2025.

Here are three views of the Baby Boom for context:


Frequent contributor B.C. calls this enormous transfer of people from wage earners to retirees drawing government benefits the demographic drag, as it will reduce consumer spending, wages and taxes while dramatically increasing Federal spending.

Here is a chart courtesy of B.C. that overlays year-over-year changes in private-sector wages+Federal expenditures, Treasury bond yields and the consumer price index (CPI). Note the downtrend in wages+Federal spending and Treasury yields, and the range-bound CPI.


Here is B.C.'s commentary:
The sum of the year-over-year change rates of wages and Federal spending is deeply into historical recessionary/depression territory. With the demographic drag and fiscal cliff constraints ahead, who knows how slow the rate will be hereafter, and for how long.
B.C. also submitted this year-over-year chart of Federal expenditures. Despite the unprecedented size of Federal deficits, both in dollars and as a percentage of peacetime budgets, the recent spurt of spending growth was lower than previous spikes.


To reduce the deficit--i.e. address the "fiscal cliff"--Federal spending will have to decline for many years. Such an extended period of declining Federal spending would be unprecedented.

This raises the obvious question: if Federal spending must decline, then where is the money going to come from to fund 65 million more retirees? Calling the Central Bank of Mars: Greetings, Martian friends. Please send us 10 trillion quatloos every year from now until 2029. We promise to pay you in 2030 (heh).


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, D.M.T. (gift), for yet another supremely generous contribution to this site--I am greatly honored by your steadfast support and readership.


Read more...

Wednesday, October 24, 2012

Generational Wealth and Upward Mobility

Advanced democracies have lost upward mobility. 

Both capitalism and democracy promise the opportunity for upward mobility. Capitalism offers upward mobility to anyone with a profitable idea or productive skillset and work ethic. Democracy implicitly promises a "level playing field" of meritocracy, where talent, drive and hard work open opportunities for advancement.


Crony capitalism offers wealth to the class that already possesses it. Feudalism bestows "rights" to wealth to a favored few. In a way, upward mobility is a real-world test of a nation's economic and social order: if upward mobility exits in name only, then that nation is neither capitalist nor democratic. Stripped of propaganda and misleading labels, it is a feudal society or a crony-capitalist economy masquerading as a capitalist democracy.

Japan is an interesting case study. Some readers of last week's series on Japan noted that Japan was still very wealthy and life was good there. Indeed, some commentators have made the case that Japan has purposefully indebted itself to mask the wealth generated by its export machine: The Myth That Japan is Broke. (via Mike H.)

Here is last week's series:
My focus was the consequences of economic stagnation, not measuring Japan's national wealth, and this raises the issue of upward mobility: Yes, Japan remains very wealthy, but the wealth is concentrated in a specific neofeudal class; Japan's economy has lost the upward mobility of its long 1950-1990 growth phase.

We are blessed to have many young (20s and 30s) Japanese friends, single and married. Though it is not a random selection, it is geographically and socially diverse. In reviewing each friend/couple's education, financial stability, homeownership and the wealth of their parents, I realized every young person (under 40) who owns a house or flat has parents who made the purchase of their education and home financially possible.

Everyone without wealthy parents--and "wealth" means enough income/savings to pay for an entire university education in cash, and then pay 50% or more of their child's home purchase in cash--does not own a home, even those with a college education.

In other words, wealth is being transferred within the class that already earned and accumulated the wealth. It is not being earned by young people. The untidy truth is that they aren't paid enough to buy a home and accumulate wealth for their children.

What nobody in Japan dares discuss is the fact that tens of millions of young "freeters" will never make enough to get married, much less own a home or save enough to educate their children, unless they receive a lump sum of wealth from their parents while they are young enough for it to matter. If their parents don't have enough wealth to matter, then the freeters are doomed to membership in Japan's expanding underclass.

So a nation can claim $3 trillion in offshore assets or whatever wealth metric you choose, but if that nation has lost upward mobility, then the wealth is increasingly concentrated in a neofeudal structure. How "wealthy" do we say a nation is that has lost upward mobility?
Once upward mobility is lost, "social recession" sets in and the social contract frays.

How different is the U.S.? Most people who don't have physicians in their nuclear family or close circle of friends think that an M.D. is the ticket to upward mobility. In many cases, this is an exaggeration. I just received an email from an M.D. who stated that adjusted for inflation, his highest earnings were 30 years ago, in 1981. Others write to tell me that the hundreds of thousands of dollars in student loans that those without wealthy parents must borrow to attend medical school take many years to pay off, even with salaries that most people consider generous.

This is an example drawn from what most assume is the top-level "surefire ladder to wealth." We could look at non-Elite graduates of Ivy League universities (i.e. the non-Elites accepted in the name of diversity) and see how they're doing in terms of wealth accumulation that can be passed down to their kids. Sure, they're "doing well" in most cases, making a comfortable living, but are they making enough to pay off their student loans, own a home that isn't 90% owned by the bank and accumulate enough savings to not only pay their children's education in cash but also help them buy their own home with at least 25% down in cash? If not, then they're not really accumulating wealth that can be transferred, they're simply consuming it.

Correspondent Chris Sullins added transferrable generational wealth to my short list of "what makes someone middle class": Priced Out of the Middle Class (June 28, 2012). How many American households can pay for their children's university education in cash and then fund their purchase of a home?

Here are the eight "threshold" characteristics of membership in the middle class:
1. Meaningful healthcare insurance
2. Significant equity (25%-50%) in a home or other real estate
3. Income/expenses that enable the household to save at least 6% of its income
4. Significant retirement funds: 401Ks, IRAs, income property, etc.
5. The ability to service all debt and expenses over the medium-term if one of the primary household wage-earners lose their job
6. Reliable vehicles for each wage-earner
7. Hard assets and cash that can be transferred to the next generation, i.e. generational wealth.
8. Ability to invest in offspring (education, extracurricular enrichment activity, etc.).

How many households meet these criteria? Not many. This is now a list for the upper-middle class, the top 10% who earn in excess of $150,000 a year. But even households with significant incomes and inheritances from their parents are losing items on this list.

What I am seeing, once again anecdotally, is the consumption of family wealth as America "eats its seed corn." Families with savings are "investing" them in $120,000 per child college educations that may not qualify the young person for a job that pays enough to duplicate their parents' purchasing power--or a job at all.

Having lost their corporate job, they're burning $12,000 to $15,000 annually buying their own health insurance.

Having drunk the debt-is-cheap Kool-Aid, they're heavily indebted, and much of their income goes to debt service and taxes.

Families that had significant cash wealth in 2000 are burning through that cash at an alarming rate. By the time the children are all educated and back living at home or in their own apartments, then Mom and Dad have to buy them vehicles, pay their dental bills, etc. because Junior doesn't earn enough to actually support himself.

The wealth that could have been transferred to the next generation has been consumed suporting a "middle class" lifestyle and providing the next generation with what was once the basis for advancement: a university education, healthcare insurance, a reliable vehicle, etc. Now that jobs are hard to find and compensation is low, the next generation still needs the accumulated wealth of the household to get by.

That is not upward mobility, it is downward mobility, on a vast and largely unnoticed scale.



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Robert B. ($100), for your outrageously generous contribution to this site--I am greatly honored by your support and readership.


Read more...

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