Monday, June 30, 2014

The Next Global Meltdown Is Baked In: Connecting the Dots Between Oil, Debt, Interest Rates and Risk

The bottom line is the Fed can only keep the machine duct-taped together by suppressing the market's pricing of risk.

One of the Grand Narratives of our era is the substitution of debt for income: as earned income and disposable income have stagnated for 40 years, the gap between the rising cost of living and stagnant household income has been filled by borrowed money.


Money has been borrowed to replace income everywhere: consumers have borrowed money to buy things they otherwise couldn't afford, students have borrowed over $1 trillion to attend college, governments have borrowed money to fund wars and social spending, corporations have borrowed money to buy back their own shares, pushing stock prices higher.

There's one little problem with debt: interest must be paid on debt. Let's focus for a second on the difference between cash income and borrowing money. Cash doesn't cost money to maintain; debt does. In a functioning economy (as opposed to the dysfunctional mess we have now), cash would earn income from interest paid by borrowers.

If cash income is saved, the cash can buy stuff without debt or interest payments. That is a powerful advantage over debt.

How powerful is the advantage of cash over debt? It's literally life-changing. Take a look at your credit card statements, which now include an estimate of interest you will pay and how long it will take to pay off the balance at a given monthly payment.

Those making minimal payments will end up paying 100% or more of the balance due in interest.
The phenomenally high accrued costs of interest is true of mortgages, student loans, auto loans, corporate debt and government debt: eventually, current spending is crimped as more and more net income is devoted to paying interest.

There are two words for what happens when real income declines and interest payments rise: impoverishment and insolvency. This dynamic is scale-invariant, meaning it works the same for individuals, households, enterprises and governments.

Let's connect the rising cost of oil to debt. As we all know, oil matters because it's the foundation of our economy, and the cost of oil is built into virtually every sector in some way. For example, look at how the the cost of food rises and declines in lockstep with the cost of oil:


Despite the substitution of cheaper natural gas for oil, we use a lot of oil.




While the recent increase of 3+ million barrels a day in domestic production is welcome on many fronts (more jobs, more money kept at home, reduced dependence on foreign suppliers, etc.), the U.S. still needs to import crude oil.

U.S. Imports by Country of Origin (U.S. Energy Information Administration)

The rising cost of oil acts as an economy-wide tax. Everything that uses oil in its production or transport rises in price without offering consumers any more value than it did at much lower prices.

Look at the impact on food prices as oil rose from $20/barrel in 2002 to $140/barrel in 2008. While government statisticians adjust the consumer price index (CPI) based on hedonics (as the quality of things goes up, the price is adjusted accordingly) and substitution (people buy chicken instead of steak, etc.), the reality is, as one heckler put it, "We don't eat iPads:" that is, all the stuff that is hedonically adjusted (tech goodies, etc.) is non-essential.

The Status Quo has compensated for the relentless rise in the systemic oil "tax" by making debt cheaper to service. The Federal Reserve's zero-interest rate policy (ZIRP) has two purposes:

1. Channel immense sums of free money to the too big to fail banks by relieving them of the onerous requirement of paying interest on deposits while giving them unlimited access to nearly-free money they can lend out at huge spreads. (This is crony-capitalism writ large. The winners were picked by the Fed and the rest of us are the losers. Yea for the godlike Fed, our modern-day Mammon.)

2. To keep consumption alive as income declined and the oil tax eroded household disposable income, the Fed made borrowing cheaper.

Unfortunately for the godlike deities residing in the Fed, zero-interest rates trigger malinvestments, which are inherently risky. When unqualified borrowers borrow a ton of money--for example, a student with no assets or income, or a poor credit risk household assumes an FHA mortgage, or a corporation sells junk-rated bonds-- the risk of default is intrinsically higher than debt taken on by qualified borrowers.

This poses a systemic problem for the Fed: The Fed needs to enable more borrowing by the uncreditworthy to keep consumption growing and bank profits flowing, yet the inevitable result of such credit expansion is a massive expansion of systemic risk.

The more debt that is taken on by marginal borrowers--where marginal is defined as unable to weather any shock or decline to their financial position or income--the more risk piles up in the system.


The analogy is a forest where the deadwood is never allowed to burn: The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009). The net result of rising systemic risk is a massive conflagration that burns off off the accumulated risk and bad debt.

Such a fire sweeping through the mountains of risky debt piled up in the American financial system would bring down the entire Status Quo. So what's a godlike Federal Reserve to do when it can no longer lower interest rates?

Answer: it suppresses visible risk by manipulating the stock market to reflect complacency.
"Old" VIX Plunges To Record Low (Zero Hedge)



Does a record low measure of risk reflect the systemic risk of default and a decline in consumption, or is it merely a reflection of the herd's boundless faith in the godlike powers of the Fed to suppress risk even as Fed policies pile risk ever higher?


The bottom line is the Fed can only keep the machine duct-taped together by suppressing the market's pricing of risk. Suppressing the market's ability to price risk is throwing common-sense fiscal caution to the winds; when risk arises from its drugged slumber despite the Fed's best efforts to eliminate it, we will all reap what the Fed has sown.




Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.


So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.


It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20


"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube) 




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Charlie W. ($300), for your beyond outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Daniel E. ($3.59), for yet another generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Read more...

Sunday, June 29, 2014

The Systemic Sources of Geopolitical Turmoil: Instability, Fragmentation, Resource Wars

The proximate trigger of instability is less important than we think.

It's tempting to think that the resolution of various geopolitical crises would restore global stability: tempting, but wrong. Global turmoil may appear to have specific causes--Ukraine, Iraq, Syria,etc.--but the deeper reality is the instability is systemic.

The proximate trigger of instability is less important than we think. The often-cited analogy is a sand pile formed by a steady trickle of sand from a storage bin. The sand slowly accumulates into a seemingly stable pile. But the structure of the pile becomes increasingly unstable as the sides steepen and the height grows, and at some unpredictable point the pile suddenly collapses in cascades of sand.

Do we focus on the last grain of sand that triggered the collapse of apparent stability, or do we focus on the real cause, the rise in systemic instability?

Gordon Long and I discussed these systemic causes of global conflict in Geopolitical Turmoil: Instability, Fragmentation, Resource Wars:


We discuss five systemic sources of global instability:

1. Failed Governments/States, where failed means an inability to provide the citizenry with basic levels of security, civil liberties and basic necessities of life.

Failed states are characterized by:

  • Weak Institutions & Corruption
  • Failed Governance/Political Gridlock
  • Failure of Central Planning Model
  • Failure of Neo-Liberal Model of Capitalism

  • 2. Fragmentation of nation-states
     assembled in the 20th century by the Great Powers.


    3. Divided geopolitical loyalties of traditional states located on geopolitical fault lines.

    4. Resource wars:

  • Transport of energy
  • Fewer resources (food, water, energy)
  • Shortages/rising prices of resources

  • 5. Insolvency of Nations/governments due to unpayable debts.


    Thinking that putting out geopolitical fires is the solution to global instability is equivalent to thinking that the solution to forest fires is to douse every small fire before it spreads. What results is an entire forest piled high with so much deadwood that the next fire will necessarily explode into a raging, uncontrollable conflagration.




    Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
    go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


    And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
    You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

    Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

    So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

    It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

    I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

    Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

    "I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
    Laura Y.

    Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube) 




    NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.


    Thank you, Arooj S. ($200), for your beyond outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Helen S. ($75), for your outstandingly generous contribution to this site -- I am greatly honored by your support and readership.

    Read more...

    Saturday, June 28, 2014

    The Stunted Tree Analogy: Nurturing, Neglect and Entrepreneurial Success

    Nurturing or neglect: the outcome is strikingly different.

    Two magnolia trees provide a visual analogy for the difference between nurturing and neglect. Some years ago, the city cut squares out of the concrete sidewalk near our home and planted magnolia trees about 10 meters (33 feet) apart.


    The soil conditions are unlikely to vary much in that distance, and the city used the same materials in planting the trees and provided the same watering schedule after planting.

    The city stopped watering the trees within a few months, and it fell to the residents to care for the trees. The vast majority of residents are renters rather than homeowners. (This is in very high-cost urban Northern California, where homeownership is unaffordable to the majority of residents.)

    No direct benefit accrued to those residents who cared for the trees; they received no money or public recognition. As a result, we can assume they did so for generalized reasons such as civic pride, preference for shade trees rather then hot concrete, or perhaps a sense of obligation or duty to living things that need help in their early stages of life.

    A few trees received sustained care in the form of watering and occasional compost. One tree received very little care or water; the people living a few feet away had no interest in the tree or in exerting themselves on its behalf. This is that tree:



    This is one of the trees that received modest watering/care over the years:



    The outcome is strikingly different, isn't it? The neglected tree is stunted and struggling, and will remain so for its entire life. The tree that received modest, sustained nurturing is thriving.


    The analogy is apt not just for all of life, but for society and the economy. A child who grows up in a household of caring adults focused on learning and preparing the child for life is nurtured; the child who grows up in a household without any sustained adult interest and no focus on learning is neglected.

    Consider the difference between the child who grows up in a household with musical instruments and adults who make music for fun and expression, a household that is filled with things to read, a house rich in homemade art and and materials to make art, a household where the adults are constantly adding to their own knowledge, a household of home-cooked meals shared by everyone in the house, a household with a few inexpensive tools that adults use to repair and construct things, and a household lacking in all these nurturing conditions.

    These nurturing conditions are a form of capital that is more important than money capital. None of these conditions require much money; used books and magazines are inexpensive, as are used guitars, hand tools and leftover art supplies. Homemade art and music are free, and homemade food is much cheaper than fast food or packaged food.

    The water given to the trees was nearly free, and the compost made from household waste was also nearly free. In a similar (and scale-invariant) way, nurturing people is also a matter of sustained care, not money. A household that is poor in financial income and wealth can be wealthy in the human and social capital that results from nurturing.

    This analogy is scale-invariant, meaning that it applies equally to individual, households, communities, states, enterprises and nations. We in America lavish media attention on entrepreneurs who have "made it big," but where is the sustained effort to nurture the entrepreneurial skills and values in our young people? How much of of what passes for entrepreneurial training is hype, empty rah-rah and programs designed for public relations rather than actually fostering the eight essential skills of entrepreneurial success?

    A society that rewards entrepreneurial success but neglects to nurture the skills and values needed to achieve entrepreneurial success is a stunted, struggling society with a stunted, struggling economy. Throwing money around is not the same as providing nurturing.

    I discuss human and social capital and the eight essential skills of professionalism and entrepreneurism in my book Get a Job, Build a Real Career and Defy a Bewildering Economy. In a very real way, what I am talking about is nurturing the human and social capital that is increasingly vital to individuals and the economy.

    You can read a sample of the book here.





    Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
    go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


    And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

    You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

    Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.


    So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.


    It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

    I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

    Test drive the first section and see for yourself.     Kindle, $9.95     print, $20


    "I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
    Laura Y.

    Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube) 





    NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
    Thank you, Scott W. ($5/month), for your splendidly generous subscription to this site -- I am greatly honored by your support and readership.Thank you, Mark H. ($10), for your most generous contribution to this site -- I am greatly honored by your support and readership.

    Read more...

    Friday, June 27, 2014

    What's Behind the Rise in U.S. Industrial Production?

    The domestic energy boom is behind the expansion of Industrial Production.

    In contrast to other measures of economic activity that are stagnant or declining, U.S. industrial production has been rising: Industrial Production and Capacity Utilization (Federal Reserve data)


    Is this evidence that manufacturing is on-shoring, i.e. returning from overseas? While there is anecdotal evidence for on-shoring, it appears that energy production (classified as part of mining in government statistics) is the big driver of rising industrial production.

    Longtime correspondent B.C. submitted these two charts breaking down industrial production into mining, manufacturing and total production. While manufacturing has recently returned to pre-recession levels of late 2007, energy production (included in mining) has soared as the energy industry has put fracking and new wells into production. B.C. Commented: "The remarkable untold story: Ex mining and oil and gas extraction, US Industrial Production has been in contraction for most of the period since Peak Oil in 2005-08."



    The red line is the ratio of total production to mining/energy. Its decline reflects the dominance of mining/energy in the rise of industrial production as a whole.

    The second chart is percent change from a year ago. This shows the rate of manufacturing expansion has been declining since 2010 while mining/energy has been on a tear, spiking as high as 10% gains per year.



    Here is a chart of the U.S. oil/gas rig count:



    For context, here is a longer term look at the U.S. rig count. Note that the number of active rigs in the early 1980s was considerably higher than the present count.



    For context, here is total U.S. energy consumption. The takeaway here is the reliance on oil, gas and coal, i.e. the fossil fuels:




    One last bit of context: U.S. oil imports. While the increase of 3+ million barrels a day in domestic production is welcome on many fronts (more jobs, more money kept at home, reduced dependence on foreign suppliers, etc.), the U.S. still needs to import crude oil.


    U.S. Imports by Country of Origin (U.S. Energy Information Administration)




    Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
    go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


    And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

    You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

    Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.


    So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.


    It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

    I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

    Test drive the first section and see for yourself.     Kindle, $9.95     print, $20


    "I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
    Laura Y.

    Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & careers (25 minutes, YouTube) 




    NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
    Thank you, Stephen J. ($20), for yet another splendidly generous contribution to this site -- I am greatly honored by your ongoing support and readership.Thank you, Tim L. ($50), for your superbly generous contribution to this site -- I am greatly honored by your steadfast support and readership.

    Read more...

    Thursday, June 26, 2014

    The Coming Global Generational Adjustment

    All sorts of promises, explicit and implicit, were issued to win votes. All the promises are now empty, and we might as deal with this reality head-on.

    Here's what often happens when people start discussing Baby Boomers, Gen-X and Gen-Y online: rash generalizations are freely flung, everyone gets offended and nothing remotely productive results from the generational melee.

    These sorts of angry, accusatory generalizations reflect what I call the Generational Monster Id (GMI), the urge to list faults in generations other than our own.

    I think the source of generational angst and anger is the threat that the entitlements promised by the developed-world governments will not be delivered as promised.

    These entitlements range from healthcare to education to old-age pensions to "a good paying job now that I have a college degree."

    The bottom line is that the promises cannot and will not be kept. The promises were issued in an era of cheap, abundant fossil fuels and favorable demographics: the next generation was considerably larger and more productive (due to more education, longer working lives, etc.) than the previous generation it would support through old age with taxes.

    In that bygone era, there were as many as 16 workers for every retiree. Even 4 workers for every retiree is a sustainable level if energy remains cheap and full-time jobs remain plentiful.

    But the global reality is the Baby Boom generation is so large that it dwarfs the younger generations. Regardless of any other conditions, this reality negates all the promises issued to retirees: as the ratio of workers paying substantial taxes on their full-time earnings to retirees slips below two workers to one retiree, there is no way the workers can support the lavish costs of healthcare and old age pensions without becoming impoverished themselves.

    This is already a reality. As I have noted in this week's series, there are 118 million full-time jobs in the U.S. and 57 million people drawing benefits from Social Security, and a similar number drawing Medicare and Medicaid benefits. As Boomers retire en masse in the decade ahead and full-time employment stagnates or declines, the ratio will slip to 1.5-to-1 or even lower.

    Many low-birth-rate European nations are facing worker-retiree ratios of 1-to-1. This is simply not sustainable.

    The prospects of the younger generations are much poorer than those enjoyed by their elders.

    Adding to the unsustainability of the promises blithely issued to gain political approval, energy is no longer cheap.That means income that 30 years ago was available for taxes or discretionary consumer spending now goes to pay for energy. In effect, higher energy costs are a tax that does not support retirees or the government. The workers paying the energy tax are poorer, but the retiring generation is not wealthier as a result.

    The Status Quo has compensated for this higher cost basis by lowering interest rates. The basic idea is that if wage-earners and companies pay less interest, then that leaves more for them to spend on taxes and consumption.

    But lowering interest rates and making credit freely available--the basic strategies of central banks around the globe--have triggered structurally destructive consequences. These policies inflated credit bubbles that jacked up the value of assets such as houses, rendering them unaffordable to younger people, and they distorted the mechanics of the real economy, widening wealth and income disparity and creating systemic mal-investments that have led to a destabilizing dependence on zero-interest rates and credit/asset bubbles.

    One way to understand this is: you can't fool Mother Nature. You can print enough money and issue enough credit to create the illusion of solvency and sound collateral, but these claims come crashing down once you try to sell the overpriced assets en masse.

    The unlimited printing of money and issuance of credit also has global unintended consequences, as these monetary manipulations destabilize the bond and currency markets.

    I addressed these basic themes in detail in this week's series:

    The Happy Story of Boomers Retiring on Their Generational Wealth Is Wrong
    The Fed's Hobson's Choice: End QE and Zero-Interest Rates or Destabilize the Dollar and the Treasury Market
    The Generational Short Part 2: Who Will Boomers Sell Their Stocks To?
    The Next 20 Years Will Not Be Like the Last 20 Years--Here's Why

    There are four Grand Narratives at work: demographics, resource extraction, geopolitical conflict and the changing nature of the economy and paid work. The last two are heavily influenced by the first two; some studies suggest that large cohorts of unmarried, under-employed males are precursors to war, as political leaders channel that restless and potentially disruptive force against external enemies.

    Economies based on endless resource extraction founder when the resources are found to be less than endless.

    The Grand Narrative of the U.S. economy is a global petro-dollar empire that has substituted financialization for authentic, sustainable economic expansion. In shorthand, those people with access to the Federal Reserve's "free money" credit have taken advantage of the asset bubbles financialization inflates. They have a chance to do very well for themselves, if they have the presence of mind to exit the asset bubbles in stocks, bonds and real estate before they deflate.

    Those people who do not have access to cheap credit and rentier assets become poorer. That is the harsh reality of neofeudal, neocolonial financialization: Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)

    Large cohorts generate their own self-referential feedback loops. A large cohort of home buyers drives up real estate as demand exceeds supply, and those who get in early are handsomely rewarded. Those seeking similar returns provide the fuel for further advances. This is the basic story of housing from 1974 to 2006 and the stock market from 1981-2014, as the Baby Boom cohort bought houses and saved for retirement via stock and bond mutual funds.

    As the Boomer cohort sells its homes, bonds and stocks, supply will exceed demand and prices will decline, especially if household capital and access to credit are also declining. This selling cycle will also be self-reinforcing.

    Central banks have masked this generational selling by becoming buyers of last resort. The Fed has purchased trillions of dollars of Treasury bonds and home mortgages, to push interest rates to zero and prop up a generationally unsustainable housing bubble. But central bank buying of assets to prop up valuations also generates unanticipated blowback: To quote songwriter Jackson Browne: Don't think it won't happen just because it hasn't happened yet.

    Mainstream financial pundits were crowing that household assets recently topped $80 trillion in the U.S. Inflate bubbles in real estate, bonds and stocks, and it's not surprising that nominal net worth goes through the roof.

    As a back-of-the-envelope calculation, I reckon $40 trillion or half of this sum is phantom, meaning that it will vanish into thin air when these enormous asset bubbles deflate.

    These bubbles are all based on one-off conditions that cannot be repeated: the global boom fueled by a now-maturing China, the central banks pushing interest rates to zero and "solving" a credit crisis of phantom collateral by issuing an unprecedented flood of new credit and buying trillions of dollars of assets at bubble valuations, and a surge of new fossil fuels from Africa and North America.

    The reality is that promises made two generations ago were made in circumstances that were not as sustainable as those making the promises believed. Extending linear projections in a non-linear world inevitably generates wrong conclusions. Promises made in one set of rosy circumstances are no longer valid in an entirely different and much less rosy set of circumstances. The citizenry will have to adjust to these systemic realities, and demanding we wuz promised is guaranteed to lead directly to failure.

    All sorts of promises, explicit and implicit, were issued to win votes. All the promises are now empty, and we might as deal with this reality head-on--if we can muster up the almost-lost ability to deal with reality rather than rely on fantasy/wishful thinking.






    Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
    go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


    And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
    You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

    Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

    So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

    It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

    I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

    Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

    "I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
    Laura Y.

    Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube) 




    NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
    Thank you, Brian S. ($50), for your splendidly generous contribution to this site -- I am greatly honored by your support and readership.Thank you, Mark F. ($50), for your superbly generous contribution to this site -- I am greatly honored by your support and readership.

    Read more...

    Wednesday, June 25, 2014

    The Happy Story of Boomers Retiring on Their Generational Wealth Is Wrong

     This happy story is wrong on multiple counts.

    The conventional view of the Baby Boomers' retirement is a happy story: since we're living longer and remaining productive longer, Boomers will not be as much of a burden on Gen-X and Gen-Y as doom-and-gloomers assume.

    Not only are Boomers staying productive longer, they will draw upon their vast generational wealth as they age, limiting the financial burden on younger generations.

    This happy story is nicely summarized in this lengthy piece The Fear Factor: Long-held predictions of economic chaos as baby boomers grow old are based on formulas that are just plain wrong.

    In this view, the only thing needed to prop up Social Security for the rest of the 21st century is a higher tax on high-income earners, in effect moving the limit on earned income exposed to Social Security taxes from about $114,000 to $217,000.

    This happy story is wrong on multiple counts. Let's start with the most egregious errors:

    1. It ignores the End of Work and the decline of full-time jobs

    2. It ignores the Elephants in the Room, Medicare and Medicaid

    3. It ignores the inconvenient reality that there is nobody to buy the Boomers' overpriced stocks, bonds and homes when they start to unload them

    Put another way: the happy story ignores the changing nature of work and jobs, the unsustainable cost trajectory of Sickcare (a.k.a. healthcare) and the inability of Gen-X and Gen-Y to buy Boomer assets at bubble valuations. Take these factors into minimal consideration and the claim that 76 million people (out of 316 million) can retire with no negative repercussions falls completely apart.

    1. The end of work and changing nature of jobs: I have covered this for many years, most recently in a program with Gordon Long: The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube).

    Insert end of work in the custom search box on this site and you'll get 10 pages of articles published here on that topic. For example:

    Global Reality: Surplus of Labor, Scarcity of Paid Work (May 7, 2012)

    The reality is sobering: 57 million people draw Social Security benefits, tens of millions more draw Medicaid, Section 8 housing credits, etc., and full-time jobs number 118 million:

    The Good And The Not- So-Good News About US Jobs In One Chart (Zero Hedge)



    That's a ratio of roughly two workers for every retiree and considerably less than that for workers to the total number of government dependents. As the Baby Boom retires en masse, if full-time jobs don't rise as dramatically as the number of retirees, the system fails.

    The happy story repeats the usual falsehood that Social Security has a Trust Fund it can draw down. This is a falsehood because the Trust Fund is fiction: when Social Security runs a deficit, the Treasury funds it by selling Treasury bonds, the same way it funds any other deficit spending. If the Treasury can't sell bonds, the phantom nature of the Trust Fund will be revealed.

    2. Everyone who looks at numbers rather than fictional claims knows the intractable problem is Medicare and Medicaid. In Sickcare, there are no real limits on cost, and so every attempt to impose cost discipline fails or triggers blowback.



    Here is Medicare's twin for under-age-65 care for low-income households, Medicaid:



    As I have observed for years, Obamacare and Medicare/Medicaid do not tackle the underlying problems of Sickcare costs in America. If you haven't read these analyses, please have a look:

    Why "Healthcare Reform" Is Not Reform, Part I (December 28, 2009)

    Why "Healthcare Reform" Is Not Reform, Part II (December 29, 2009)

    That Which is Unsustainable Will Go Away: Medicare (May 16, 2012)

    Obamacare is a Catastrophe That Cannot Be Fixed (December 6, 2013)

    3. As I explained in The Generational Short Part 2: Who Will Boomers Sell Their Stocks To?, the Boomers' vast generational wealth will shrivel once they start selling assets en masse. The reality is neither Gen-X nor Gen-Y have the savings, income or desire to buy bubble-level assets from their elders.

    This reality has been papered over for the past 5 years of super-low interest rates, which have enabled unqualified buyers to buy overpriced assets with modest income. Once the defaults start pouring in (and/or interest rates rise), the reality will become visible: you can't cash in your wealth if there are no buyers.

    There are numerous other fatal flaws with the happy story that 76 million Boomers can retire on full pensions and live off their home equity and stock portfolios. Here are a few of many:

    4. Pension funds based on annual returns of 7.5% will be unable to fund the promised pensions when annual returns decline to negative 5%. As John Hussman has explained, every asset bubble in effect siphons off all the future return: when the bubble finally pops, average annual returns are subpar or negative for years.

    5. The ultimate buyer of all Boomer assets is presumed to be the Federal Reserve.I explain why this isn't going to happen in The Fed's Hobson's Choice: End QE and Zero-Interest Rates or Destabilize the Dollar and the Treasury Market (June 24, 2014).

    6. It's presumed the Federal government can borrow as many trillions of dollars as it needs to fund retirement and social benefits as far as the eye can see. Please see the article linked above to understand why limits on the Fed's money printing and buying of governemnt bonds imposes limits on Federal borrowing.

    To quote Jackson Browne: Don't think it won't happen just because it hasn't happened yet.

    7. Boomers are staying productive longer and keeping their jobs longer. The reasons for this are many, but one consequence is a dearth of opportunities for Gen-Y job seekers. As full-time employment stagnates or even declines, it's a zero-sum game for the generations: every job a Boomer holds onto is one a Gen-Y applicant can't get.

    A 12-hour a week low-pay part-time job will not support a wage earner or fund a retiree.

    8. A Boomer who bought his home for $50,000 decades ago can live very well on $75,000 a year; it's a different story for Gen-Y. The Boomer has a low mortgage payment (presuming he didn't extract all the equity in the go-go years) and low property taxes in states with Prop-13-type limits. The Boomer who hits 65 has relatively modest medical expenses as Medicare does all the heavy lifting.

    Low housing and medical expenses leave Boomers with relatively ample discretionary income. The Gen-Y wage earner who takes the same $75,000 a year job is not so fortunate. The Gen-Y wage earner is offered the Boomer's $50,000 home for $550,000, and crushing property taxes to go with the gargantuan mortgage.

    The Gen-Y wage earner typically still has often-monumental student loan debt to pay off, and much higher healthcare expenses as companies offload rising Sickcare costs onto employees. Higher Social Security and Medicare taxes hit Gen-Y square in the financial solar plexus, while retiring Baby Boomers escape these taxes altogether unless they're still working.

    The point is an income that offers a Boomer a middle class lifestyle does not offer a corresponding discretionary income to Gen-Yers. The entire pyramid of well-funded retirement is based on a generational continuation of massive borrowing and discretionary spending.

    If that doesn't happen for structural reasons, the pyramid of well-funded retirement collapses under its own weight.




    Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
    go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


    And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
    You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

    Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

    So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

    It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

    I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.
    Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

    "I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
    Laura Y.

    Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube) 




    NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
    Thank you, Robert K. ($25), for your extremely generous contribution to this site -- I am greatly honored by your support and readership.Thank you, William C. ($20), for your much-appreciated generous contribution to this site -- I am greatly honored by your support and readership.

    Read more...

    Tuesday, June 24, 2014

    The Fed's Hobson's Choice: End QE and Zero-Interest Rates or Destabilize the Dollar and the Treasury Market

    Though the Fed is doing its best to mask its abject failure and lack of choices with public relations, the reality is it has no choice but to taper and eventually end its endless spew of credit and its unprecedented and destabilizing purchases of assets.

    Many smart observers assume the Federal Reserve (and other central banks) can print money and buy assets like bonds, mortgages and stocks unconstrained by any limit. Indeed, at first glance, it seems like a closed circle: print the money and use it to buy bonds, mortgages and equities, which are booked as assets.


    The more the Fed buys (or enables proxies and financiers to buy), the greater the assets value, as buying pushes prices higher.

    After all, look what quantitative easing (i.e. buying assets like Treasury bonds and home mortgages) and zero-interest rates have done for the stock market: to the moon, baby!



    And to housing: thanks to the printing press and buying mortgages, the Fed inflated an echo-bubble to soften the inevitable crash of the previous bubble:




    On the surface, there are no intrinsic limits to QE and central bank money-printing:in other words, there appears to be nothing stopping the Fed from printing essentially limitless money and buying up the majority of Treasury bonds, mortgages and stocks.


    But we must be mindful that the economy is not linear. Pushing asset prices higher via unlimited credit at zero-interest rates has not trickled down to wages or consumer spending. That is, the wealth effect is missing in action despite a $20 trillion increase in household net worth. (Most of this increase flowed to the top 10%, and within that, most flowed to the top 1/10 of 1%.)

    Meanwhile, risky credit bets are soaring: subprime auto loans are now common, margin debt has skyrocketed and purchases of junk bonds have gone through the roof.

    The Fed's printing and asset purchases do not occur in a vacuum. Fed printing and asset purchases affect the reserve currency, the U.S. dollar, and the Treasury market, which the Fed now dominates via its purchases.

    Keeping interest rates near zero has removed any financial incentive to buying Treasury bonds other than flight to safety. As Stephanie Pomboy observed in her excellent Wine Country Conference 2014 presentation, (and I paraphrase here): "every day they continued QE, they chased away more and more of our foreign creditors."



    The Treasury must sell bonds to fund the Federal deficit, which is running about $500 billion a year. The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing.


    The more T-bills the Fed buys to keep interest rates at zero, the more it drives foreign and domestic buyers out of the Treasury market.

    This is also true of the U.S. dollar. This sets up the Fed's Hobson's Choice, which is the term for an illusory choice, i.e. a choice in which only one option is offered.

    If the Fed continues QE, it destabilizes the Treasury market that funds U.S. government deficits, and the hegemony of the U.S. dollar. If it ceases QE, interest rates will rise as non-central bank buyers will demand an actual return on their capital.

    Rising rates will crush the echo bubbles in housing and the stock market, which has been propped up by dividend-paying stocks and speculative issues purchased with Fed-supplied "free money."

    For the Deep State, there is no choice: dollar hegemony is paramount. Rising interest rates and the fate of financiers who have over-leveraged the Fed's free money are not even secondary.

    Who Gets Thrown Under the Bus in the Next Financial Crisis? (March 3, 2014)

    The Dollar and the Deep State (February 24, 2014)

    Is the Deep State Fracturing into Disunity? (March 14, 2014)

    The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong. The real economy is more fragile and dysfunctional than ever due to the distortions created by Fed policies, while the top 1/10th of 1% have feasted on the asset bubbles inflated by these same policies.

    Meanwhile, beneath the crony-capitalist celebration of new asset bubbles, the foundations of the nation's fiscal security--the Treasury market and the U.S. dollar--have been undermined and destabilized by these same Fed policies.

    Those who focus solely on the Fed assume the ruling Elite is monolithic: unified in worldview, strategy and goals. I believe this is overly linear and overly simplistic: there are competing elites, and nations fall when their elites experience profound disunity.

    Though the Fed is doing its best to mask its abject failure and lack of choices with public relations ("Pay no attention to what's behind the curtain!"), the reality is it has no choice to tapering and eventually ending its gargantuan spew of credit and its unprecedented and destabilizing purchases of assets.






    Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
    go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


    And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

    You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

    Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.


    So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.


    It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

    I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

    Test drive the first section and see for yourself.     Kindle, $9.95     print, $20


    "I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
    Laura Y.


    Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube) 





    NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
    Thank you, John H. ($5/month), for renewing your extremely generous subscription to this site -- I am greatly honored by your steadfast support and readership.Thank you, William C. ($5), for your most generous contribution to this site -- I am greatly honored by your support and readership.

    Read more...

    Terms of Service

    All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


    Our Privacy Policy:
    Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.


    Our Commission Policy:
    Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

      © Blogger templates Newspaper III by Ourblogtemplates.com 2008

    Back to TOP