Peak Walmart?

Walmart's growth model may be peaking due to structural declines in miles driven, income of its customer base and rising competition from dollar stores.

Structural declines in miles driven, middle and working-class income and rising competition from dollar stores may be leading to Peak Walmart. Walmart's model of superstores built on the edge of town with an inventory/distribution system based on high turnover may have reached the point of diminishing returns.

There are various signs of this, for example: Wal-Mart Nails The "Consumer Recovery" Coffin Shut (Zero Hedge)

Correspondent Mark G. ties together the long-term dynamics in this insightful analysis:

The proliferation of Walgreens & CVS standalone pharmacies, plus new construction standalone Dollar General and Family Dollar stores is reaching something of a critical mass. The only real difference between the first pair and the second pair of chains is Walgreens & CVS have a prescription drug department. Otherwise all four are nearly identical in format and product lines, including complete small grocery departments of dry goods and dairy products. These product lines are so low margin they haven't interested the Brown Truck Store (UPS) so far.

I've observed a rising number of young mothers pushing strollers in the neighborhoods where these standalone dollar format stores are appearing--in other words, car-less consumers.

I also note that all four chains prefer to build new stores in or on the edge of downscale neighborhoods. They do this rather than occupy the rapidly rising number of empty units at strip centers. And in point of fact Walgreens actually vacated a long-time unit at a local shopping center. CVS had built a standalone store on the corner across the street. Walgreens did the same a few miles down the road and also directly across from a Walmart Supercenter. The older Walgreen unit was then closed.

As Orlov and I learned in the USSR, you collapse with the infrastructure you have. Since consumers are having more trouble now getting to the stores, the stores are physically moving back to the consumers. Here we have stores proliferating that can be patronized and staffed by people without dedicated autos who instead walk or bike.

Car-less lower income consumers (and workers) look like major trouble for Walmart. A couple weeks ago in Fort Myers (FL) I noticed another of Walmart's "neighborhood" grocery store size format stores located in a strip center. The thought occurred to me that Walmart is doing poorly in an increasingly diverse array of activities. What's the point of moving into strip centers if Walgreens and CVS are moving out to be closer to their customers?

This theme also suggests a different angle for interpreting Walmart's tentative moves into Internet ordering and home delivery. Under this theory Walmart is principally worried about the proliferation of walking/biking distance neighborhood dollar stores.

Taken as a complete group these stores constitute a "Second Walmart" emerging to directly compete with the first Walmart at the bottom rung of the income ladder.
This makes more sense than imagining Walmart trying to compete with Amazon's wide inventory of high margin and low total national turnover items. That product array demands a compact warehouse distribution network to minimize inventory costs. Walmart's warehouse distribution network is instead optimized to throughput high turnover items.

The neighborhood dollar store story is ominous news for Walmart. The "Dollar Store" story suggests the bottom 25% of Walmart's demographic are losing their cars by force of economic circumstances. This is not something Walmart can do much about, if anything. As a result, Walmart is having its middle-class cream skimmed by Target while its base is being drained by car loss and the "Neighborhood Dollar Stores".

The question is not whether Walmart can survive another downturn but whether it can survive highly skewed recoveries like we're having.

Walmart's rise paralleled the rise of the one car per person household.The fundamental proposition of the Supercenter is you have to drive to get there. Therefore Walmart's decline will undoubtedly parallel the End of Driving.

I prepared the following spreadsheet to highlight the size and growth rate of "the second Walmart":

Company	Ticker	Price	Employees	Stores	Annual Revenues (Billions)	Quarterly Growth
Target	TGT	63.24	361000	1856	$73.48	2.00%
Walmart	WMT	74.65	2200000	10800	$473	2.30%

"The Second Walmart"

Company	Ticker	Price	Employees	Stores	Annual Revenues (Billions)	Quarterly Growth
Walgreen	WAG	54.85	171000	8117	$71.35	3.20%
CVS Caremark	CVS	57.78	203000	7458	$123.63	1.70%
Rite Aid	RAD	4.89	50730	4615	$25.26	0.80%
Dollar Tree	DLTR	57.44	15380	4700	$7.69	8.80%
Dollar General	DG	57	90500	10866	$16.80	11.30%
Family Dollar	FDO	72.57	33000	7600	$10.25	9.00%
Big Lots	BIG	37.19	13100	1514	$5.42	0.60%
			576710	44870	$260.40

Look at the revenue growth rates of the three non-pharmacy "dollar stores" in particular. (Big Lots is an older chain, and the ones I know of are all located in strip centers.) This is what is handicapping them. The three boldfaced "Dollar" stores are all opening standalone stores in residential neighborhoods. The first three drug store/variety store chains are also fairly included since Walmart also has pharmacies in most of its stores now. 

For Walmart, peak driving means very serious trouble ahead. The "dollar stores" have four times as many outlets, and they're opening more at a far faster rates.

Thank you, Mark, for an insightful analysis of primary trends in miles driven, income, demographics and retail. Peak Walmart may also presage Peak Mall Shopping and Peak Retail in general. The poaching of competitors' customers appears to be replacing real growth, and perhaps the impending demise of JC Penny is simply the first of many such victims of the retail shark pool.

Here are two charts of the structural declines in miles driven and household income:

Vehicle Miles Driven: Population-Adjusted Fractionally Off Its Post-Crisis Low (Doug Short)

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The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)

Kindle edition: $9.95 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Kindle: $9.95       print: $24

Thank you, David O. (postage stamps), for your exceedingly generous contribution to this site-- I am greatly honored by your support and readership.

Read more...

Camping, Waffles, Snow and Glaciers

A few photos of our recent camping trip in the American West.

I managed to escape the digital vortex and my day-to-day responsibilities and duties long enough to take a 10-day camping trip through Idaho, Montana and Wyoming. Here are a few photos of the trip:

Our campsite in the Sawtooth National Recreation Area in Idaho:




The view from our lakeside campsite on Flathead Lake in Montana:



Waffles, camping style:



None better anywhere in the world:



On the Hidden Lakes Trail in Glacier National Park, Montana:



Mountain goats on the Hidden Lakes Trail:



At the top of the Grinnell Glacier Trail, an 1800 foot, 5.7 mile climb: Upper Grinnell Lake and a scene of otherworldly beauty.



The Grand Canyon of the Yellowstone:



It snowed the day we camped in Yellowstone National Park: brrr.



A typical hot springs in Yellowstone:



Logistics:

miles driven: 3,072
Gasoline consumption: 73.5 gallons
miles per gallon (1998 Honda Civic with 90,000 miles): 41.8 MPG, despite a full load of camping equipment and climbing numerous mountain ranges
meals eaten in restaurants: 4 : local cafe breakfast in Choteau, MT, lunch in the fabulous Old Faithful Inn, Yellowstone, and two fast-food meals when driving late into the day.
snowstorm: 1 (Yellowstone)
torrential rainstorm: 1 (Tahoe/Donner Pass)
Phone calls answered: 0 (no AT&T cell coverage in Glacier, Yellowstone or Sawtooth)
emails read: 0
emails answered: 0
Pounds lost due to hiking: 2
sanity recovered: significant 

---

The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)

Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.
Kindle: $9.95       print: $24

Thank you, Adeena D. ($25), for your superbly generous contribution to this site-- I am greatly honored by your support and readership.

Read more...

The Big-Picture Economy, Part 5: The State, Taxes and the Shredding Social Contract

The social contract is fraying as those paying most of the income taxes are being squeezed from above and below.

The government--known as the state in political science circles--is fundamentally a social contract between the governed and the governing Elites. The governed agree to cede control and power to the state, and pay taxes for its maintenance and programs, in exchange for security and services that can best be rendered (or can only be rendered) by the state.

These traditionally include law enforcement, a judicial system, national defense, and since the early 20th century, education and social income-security programs.

I have long held that America is a The Three-and-a-Half Class Society (October 22, 2012): the "entrenched incumbents" on top (the "half class"), the high-earners who pay most of the taxes (the first class), the working poor who pay Social Security payroll taxes (the second class), and State dependents who pay no payroll or income taxes (the third class).

This class structure has political ramifications. In effect, those paying most of the tax are in a pressure cooker: the lid is sealed by the "entrenched incumbents" on top, and the fire beneath is the state's insatiable need for more tax revenues to support the entrenched incumbents and its growing army of dependents.
Let's start our analysis of the three-and-a-half-class society by noting that the top 25% pay most of the Federal income tax, and within that "middle class" the top 10% pay the lion's share of all taxes.

The top 25% of taxpayers--34 million workers out of a workforce of 160 million and 140 million wage earners--pay almost 90% of all Federal income taxes. The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%, and the top 1% paid 38.8%.


The second class is made up of the working poor: 38 Million Workers Made Less Than $10,000 in 2010-- Equal to California's Population (The Atlantic magazine)

2011 real median household income was 8.1 percent lower than in 2007.

After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.


My conclusion: by heavily taxing earned income, the system extracts the highest taxes from the most productive citizens, leaving the less-productive with essentially no income taxes and the super-wealthy with the huge tax break offered to capital gains and other unearned income.
As I noted in Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010):

In essence, this is a vote-buying scheme by the Status Quo: the top 1% control the policies of the State in alliance with the State's own Elites, and together they buy the complicity of the bottom 60% to passively accept their dominance.

In other words, the bottom 60% pay relatively modest taxes or are recipients of State transfer payments and the top 1% who own the political process limit their taxes by favoring unearned income (what they collect from sales of securities, stock options, rents, etc.) and various tax breaks purchased with political contributions.

It's a partnership of "Tyranny of the Majority" and "entrenched incumbent Elites."If the political Status Quo alienates the majority by making them pay more taxes, they risk losing power in the next election. If they alienate the top .5% who fund their multi-million-dollar campaigns, then they will also lose power. So they heap the tax burden on what remains of the middle class.

This creates an unstable economy, political order and social contract. Those paying most of the taxes understandably see their taxes supporting leeches above (the financier and political-apparatchik classes) and below (guys with wallets bulging with black-market cash using food stamps at Wal-Mart, the not-disabled gaming the system to extract lifetime disability payments, etc.)

Bernanke's Neofeudal Rentier Economy (May 7, 2013)
America's Four Socioeconomic Classes (January 30, 2013)
Bifurcation Nation (June 24, 2013)
The Overworked and the Idle (July 15, 2013)
The Trick to Suppressing Revolution: Keeping Debt/Tax Serfdom Bearable (May 16, 2013)

All this has led me to ask Is America's Social Contract Broken? (July 17, 2013)

The Social Contract is broken not by wealth inequality per se but by the illegitimate process of wealth acquisition, i.e. the state has tipped the scales in favor of the few behind closed doors and routinely ignores or bypasses the intent of the law.

By this definition, the Social Contract in America has been completely shredded.One sector after another is dominated by cartel-state partnerships that are forged and enforced in obscure legislation written by lobbyists. Once the laws have been riddled with loopholes and the regulators have been corrupted, "no one is above the law" has lost all meaning.

Those who violate the intent of the law while managing to conjure an apparent compliance with the letter of the law are shysters, scammers and thieves who exploit the intricate loopholes of the system. In this way, the judicial system becomes part of the illegitimate process of wealth accumulation.

This is the norm in banana republics, whose ledgers are loaded with thousands of codes and regulations that are routinely ignored by those in power. In the Banana Republic of America, financial crimes go uninvestigated, unindicted and unpunished: banks and their management are essentially immune to prosecution because the crimes are complex (tsk, tsk, it's really too much trouble to investigate) and they're "too big to prosecute."

The rot has seeped from the financial-political Aristocracy to the lower reaches of the social order. The fury of those still working and paying substantial taxes is grounded in a simple, obvious truth: America is now dominated by scammers, cheaters, grifters and those gaming the system, large and small, to increase their share of the swag.

Formidable armies of scammers and their enablers (attorneys and doctors) are pillaging workers compensation and Social Security Disability (the lifetime kind, your claim and condition are never monitored after your claim is approved), not to mention Medicare fraud and those gaming the wide array of welfare programs.

The honest taxpayer is a chump, a mark who foolishly ponies up the swag that's looted by the smart operators. Everyone knows that the vast majority of wealth accumulation in America flows not from transparent effort on a level playing field, but from persuading the State (the Federal government and the Federal Reserve) to enforce cartels and grant monopolistic favors.

When scammers large and small live better than those creating value in the real economy, the Social Contract has frayed beyond repair. When the illegitimate process of wealth acquisition--a rigged playing field, a bought-off referee, and an Elite that's above the law by every practical measure--dominates the economy and the political structure, the Social Contract has been shredded, regardless of how much welfare largesse is distributed to buy the complicity of state dependents.

Once the chumps and marks realize there is no way they can ever escape their role of exploited tax donkeys and debt-serfs, the scammers, cheats and grifters large and small will be at risk of losing their perquisites. The fantasy in America is that legitimate wealth creation is still possible despite the visible dominance of a corrupt, self-serving, parasitic, predatory financial-political Aristocracy. Once that fantasy dies, so will the marks' support of the Aristocracy.

As Voltaire observed, "No snowflake in an avalanche ever feels responsible": every phony disability claim and every political favor purchased is "fair and legal," of course. This is precisely how social orders collapse: no one is responsible for anything but maximizing their personal share of the state swag.

For those who prefer charts, let's look at the state's rising share of the national income. Here is GDP:



State and local government spending:



Add in Federal spending and you get about $6 trillion, or about 40% of GDP:



Here is Federal debt "owed to the public," i.e. external debt that accrues interest and must be rolled over in Treasury auctions:



And last but not least, total credit market debt, public and private. This does not include an estimated $200 trillion in unfunded liabilities, i.e. future obligations that will have to be paid with either taxes or more borrowing.



As the state borrows trillions of dollars to support its Aristocracy and dependents, its debt skyrockets. The political Aristocracy expects the tax donkeys will carry a heavier burden without revolting, and the 60% "tyranny of the majority" who pay little but collect enough to get by will be wary of risking their benefits by resisting the existing political-financial kleptocracy.

In terms of democracy, the tax donkeys are trapped; they can't match the tens of millions in political contributions of the top .5%, and the 60% below them will support the status quo out of fear that the alternative could be even worse.

Politically, the system is unbreakable. Financially, it is unsustainable.


My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. 

---

The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)

Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.


Kindle: $9.95       print: $24

Thank you, Josh S. ($50), for your splendidly generous contribution to this site-- I am greatly honored by your support and readership.

Read more...

The Big-Picture Economy, Part 4: Income Disparity and Education

"More education" of the current sort is not a panacea to wealth inequality, as the widening gaps in education, employment and income are all reflections of a much larger set of forces at work. The solution is The Nearly Free University.

Rising income disparity in the U.S. troubles many of us, for a number of reasons. If more of the national income is flowing to the top 1/2 of 1% and less to those earning income from their labor, the foundations of both a vibrant economy and stable democracy are undermined.

Many observers identify education as one solution for rising income disparity, as those with higher education (college) have more skills and knowledge and tend to earn more.

There are a number of causal factors driving income/wealth disparity, including capture of the processes of governance by super-wealthy financial and corporate Elites, globalization, a "winner takes all" cultural mindset, heightened competition coupled with a surplus of labor, and financialization, to name just the top few.

Statistically, the connection between getting a college degree and higher incomes is weakening as those with college degrees are now in surplus. In effect, a 4-year college degree is becoming the entry-level minimum, replacing the high school diploma. Further up the food chain, Masters degrees are also in surplus, pushing many ambitious youth into PhD programs, in the hope that a PhD will guarantee a high-paying job.

Alas, there is a growing surplus of people with PhDs, at least in some fields. Some claim the unemployment rate for PhDs is very low, but these surveys do not measure under-employment, i.e. did the PhD take a position where a Masters Degree was all that was required? The Ph.D Bust: America's Awful Market for Young Scientists—in 7 Charts.

Granting more advanced degrees does not magically create positions for those holding freshly issued diplomas. Instead, it seems degree inflation is at work: what once required a high school diploma now requires a bachelor's degree, what once required a bachelor's degree now requires a Master's degree, and so on.

As higher education costs soar, the gap between wealthy and poor families widens. As Jerry Z. Muller observed in his recent Foreign Affairs article Capitalism and Inequality: What the Right and the Left Get Wrong:

Indeed, one of the most robust findings of contemporary social scientific inquiry is that as the gap between high-income and low-income families has increased, the educational and employment achievement gaps between the children of these families has increased even more.

"More education" of the current sort is not a panacea to wealth inequality, as the widening gaps in education, employment and income are all reflections of a much larger set of forces at work that includes financialization (favoring those with financial capital) and the built-in advantages of higher-income households' human and social capital.

Social scientist Edward Banfield summarized these advantages thusly: "All education favors the middle- and upper-class child, because to be middle- or upper-class is to have the qualities that makes one particularly educable."

Soaring higher education costs are further widening the achievement gap as non-wealthy students are forced to become debt-serfs to pay for college. A system that forces poor households to shoulder student loans for decades in return for marginal-return degrees is not just immoral, it is recklessly predatory. Yet this is the system higher education supports:



The "solution" for those within higher education is for the Federal government to borrow or print trillions of dollars to fund their bloated cartel in the manner to which it has become accustomed: multiple layers of highly paid management, monstrously costly edifices glorifying the institution, etc.
This chart shows the insane trajectory of Federal student debt:



Our Huge, Stinking Mountain of Debt: Student Loans (September 11, 2013)

If there is any operative difference between the higher education cartel and the military-industrial cartel, it is wafer-thin.

The real solution is nearly free instruction and accreditation of the individual, not the institution: a solution I flesh out in my new book The Nearly Free University and The Emerging Economy.

One of the key points of the book is that higher education must teach students how to acquire human and social capital, and the values that are essential to success in the emerging economy. The current system assumes students will acquire the necessary values by some sort of magic. This explains much of the failure of the current system to prepare students to prosper in the emerging economy.

Though it is un-PC to make this observation, it is painfully obvious that values, parenting and family have a great deal to do with wealth inequality and poverty. In a less politically charged (and centralized) environment, common sense would suggest that the values that lead to rising income/wealth should be part of what is considered essential education.

The conventional matrix of poverty--poor education, near-zero family wealth and low social status--does not impede those immigrants to America who have strong families and a specific set of cultural values centered around learning, thrift and investing the resulting savings in productive assets.

We can conclude that a nearly free system of higher education that focused on "learning how to learn" and the other values-based skills needed to build human and social capital and accredited each student directly (as opposed to accrediting institutions) would offer precisely the sort of higher education that would make opportunities to learn and thus to earn universally available.

Such a system would not necessarily close the income gap, but it would certainly close the opportunity gap.

Any system that depends on debt-serfdom for its existence deserves to expire as quickly as possible.

Peak Prosperity's Adam Taggart and I discuss these issues in this podcast:




My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. 

---

The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)

Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Kindle: $9.95       print: $24

Thank you, Stephen K. ($50), for your superlatively generous contribution to this site-- I am greatly honored by your support and readership.

Read more...

The Big-Picture Economy, Part 3: Scarcity, Risk and Debt

When skimming and speculation are more profitable than actually increasing the production of goods and services, the discipline and incentives of a market economy are distorted to the point of no return.

In the natural order of a market economy, income and credit are scarce. Income must be earned, and is thus limited by the hours of the day, capital, competition, ingenuity and luck. Credit is scarce because the pool of savings (capital) available to be loaned out at interest is limited, as is the income available to service debt.

This intrinsic scarcity of income and credit generates capitalism's inherent discipline: capital must be saved by sacrificing consumption, scarce capital must be placed at risk to earn a return, and capital that is lent to borrowers (i.e. credit) must earn a return commensurate to the risks of default and alternative uses of the money.

The natural order has been completely upended in our state/crony-capitalist economy. The Federal Reserve's Zero Interest Rate Policy (ZIRP) and easy credit has destroyed capitalism's inherent discipline and incentivized the destructive forces of speculation, leverage and debt.

We need to distinguish between income earned from generating goods and services and unearned income skimmed from government giveaways and central-bank enabled carry trades. Consider the investment banks that, thanks to the Fed's manipulation, can borrow billions of dollars at near-zero interest and then use the money to buy non-U.S. bonds paying 3.5%. This is a carry trade, as the cost of carrying the debt is much smaller than the yield on the foreign bonds.

In an unmanipulated market economy, the cost of borrowing money would generally be 1.5% above inflation for very low-risk situations. That suggests the interest rate if the Fed ceased its intervention would be around 3.5% to 4%.
How many currently profitable carry trades would vanish if investment banks had to pay 4% to borrow money in the U.S.? How much risk would speculators have to take on to skim higher-yield trades?

The Fed's ZIRP is a blatant gifting of billions of dollars in low-risk carry trades to large banks, speculators and financiers. The Fed might as well write a check and send it to the bankers--ZIRP and easy credit are the equivalent of a free-money check.

On the lower end of the economic spectrum, low rates and abundant government-backed credit enable marginal borrowers to load up on debt that they would not qualify to borrow in unmanipulated markets. This incentivization of marginal borrowers increases risks of defaults and systemic crashes, which tend to be triggered by marginal-debt defaults.

In effect, The Fed's ZIRP and easy credit have leveraged up systemic risk and moral hazard. Moral hazard describes the difference between those who risk losing money in a speculation and those with no risk of loss. Those with very limited risk--for example, Too Big to Fail (TBTF) banks backstopped by the Fed or FHA home buyers putting down 3% cash on a home--will act quite differently from those who risk losing their all their capital if the bet goes bad.

Put another way: if all your losses at the casino are covered by the Fed, while any winnings are yours to keep, you will gamble big and gamble often. After all, why not? The losses are shifted to someone else while you get to keep any gains.

Abundant, easy credit incentivizes systemic speculation, leverage and risk. If you're issuing mortgages guaranteed by the U.S. government, there is no need to be too risk-averse: originate a mortgage for anyone with a pulse and skim the fat origination fee. If the borrower defaults, who cares? You skimmed your fee, and all losses are shifted to the taxpayers.

When skimming and speculation are more profitable than actually increasing the production of goods and services, the discipline and incentives of a market economy are distorted to the point of no return. That is the U.S. economy in a nutshell.

The only way to restore natural market discipline is to let the cost of credit rise to a market-discovered price, force all speculators to absorb the losses resulting from their bad bets, and let the risk of losses discipline lenders to adjust loan portfolios and interest rates to reflect the risks of rising rates and defaults.

Scarcity of credit is the source of sound risk assessment and the discipline of aligning interest rates to risk and inflation. Manipulating rates to near-zero and opening the credit floodgates has incentivized everything sound economic policy avoids: moral hazard, speculation, leverage and reliance on marginal credit expansion for profits and "growth."

"Growth" that depends on manipulated interest rates and easy credit is a sand castle awaiting the rising tide; its destruction is assured.

My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. 

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The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)

Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Kindle: $9.95       print: $24

Thank you, Anthony S., for your longstanding financial support of this site-- I am greatly honored by your subscription and readership.

Read more...

The Big-Picture Economy, Part 2: Surplus, Spending and Debt

Borrowing money to fill the gap between what we want to spend and what we generate in surplus incentivizes fraud and speculation and creates a pernicious sense of entitlement.

If things are going so great, why does our government need to borrow $1 trillion a year and our central bank create another $1 trillion a year just to keep the bloated status quo afloat? That $2 trillion a year (about 13% of the nation's gross domestic product, roughly equivalent to the entire GDP of France) is really starting to add up.

Federal debt has skyrocketed (note that this is "debt held by the public" and excludes intergovernment debt, i.e. what the Treasury owes Social Security for squandering $4 trillion in Social Security payroll taxes):



Here is the Federal Reserve's balance sheet (bonds bought with freshly created money), which has shot up with quantitative easing money-creation:



The key concept here is surplus. Surplus is what's left after you pay all costs of producing goods and services. You can only spend what's left over, i.e. surplus.

If you own an oil well and it costs $100 to extract and ship a barrel of oil, if the barrel only fetches $90 on the open market, you lose $10 per barrel. Eventually your capital is consumed and you go broke.

If you sell your output for $120/barrel, you need to set aside $10 of the $20 surplus to pay for maintenance and capital investment in the well; you can't just blow every cent of surplus, as eventually the well parts wear out and your production falls to zero.

So you can really only spend $10 of the $20 surplus per barrel.

This holds true for any good or service, for every business and every nation: no nation can spend more than it generates in surplus. the only way we can spend more than we generate in surplus is to borrow money and use the surplus to pay the interest.

As I explain in Why Things Are Falling Apart and What We Can Do About It, going into debt to spend more than you generate in surplus provides a short-term illusion of prosperity, but there is an endgame to borrowing more to live beyond your means: as you borrow more, the interest payments go up, as does the risk of default as your debt eventually exceeds your assets.

We as a nation are borrowing trillions of dollars beyond what we generate in surplus. Many commentators suggest taxing corporations and the wealthy who own most of the shares. Let's say we taxed corporate profits at around 60% and raised $1 trillion that way. By raising the $1 trillion from higher taxes, we wouldn't have to borrow the $1 trillion every year.



Setting aside the fact that corporations and the super-wealthy own the processes of governance and would never allow a 60% flat tax on corporate profits (or on the total incomes of the super-wealthy), this solution overlooks the impact on stock valuations if 60% of corporate profits are diverted to the central state to distribute as it sees fit.



The stock market would crash, of course, as valuations are based on net profits and dividends. That would wipe out not just the wealth of the super-rich but also the wealth of pension funds and insurance companies that hold stocks. Put another way: there is no free lunch. We can redistribute surplus in various ways, but redistribution does not generate more surplus.

The point here is that we can only sustainably distribute the nation's surplus that is left after capital investment. Borrowing or creating vast sums of money to paper over the fact that we're spending more than we generate in surplus fosters an entirely illusory sense of wealth and prosperity. Eventually the interest owed on debt crowds out all other spending, and the debt-based system implodes.

Borrowing money to fill the gap between what we want to spend and what we generate in surplus incentivizes fraud and speculation and creates a pernicious sense of entitlement: we can have it all, everyone can have everything they want, and there is no need for sacrifice, thrift or hard choices.

In effect, we have been leveraging our surplus into a rapidly expanding mountain of debt. That is only sustainable until interest costs start crowding out spending on politically untouchable programs and constituencies.

My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. 

---

The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)

Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Kindle: $9.95       print: $24

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

Read more...