When We Lose Small Businesses...

When we lose small businesses, we lose More than tax revenues.

Small businesses receive plenty of lip service but very little appreciation--until they're gone. By then it's too late to do anything but mutter, "you don't know what you've got until it's gone."

Small businesses aren't just sources of tax revenues, they're sources of a wide range of jobs that can't be replaced by Corporate America or the government. Just as importantly, small business owners and entrepreneurs are advocates for the neighborhoods, districts and cities they depend on for customers and suppliers.

The livelihoods of the owners and their employees depend on maintaining the viability of their neighborhood / district / city, which includes public safety and services such as transportation and trash collection, and a minimum density of other private-sector services and amenities which provide residents a safe, appealing atmosphere worth visiting.

59.9 million Americans work at small businesses across the nation. An estimated 47% of Americans shop at small businesses at least twice a week, generating about 45% of the nation's economic activity. According to the most recent available numbers from the U.S. Census, approximately 47% of U.S. employees work for small businesses, compared to 54.5% in 1988.

Small business entrepreneurs are risking everything they have to open and operate a business. They have far more skin in the game than city functionaries tasked with enforcing regulations and collecting business-related fees or their employees, who have the freedom to quit and seek employment elsewhere.

Residents tend to feel powerless to stop the decay of their neighborhood safety, services and amenities. They tried contacting their elected officials or municipal functionaries and were given a meaningless feel-good reply which everyone involved knows is empty.

Small business owners are more willing to apply meaningful pressure because they know the decay follows a sobering slide in which incremental declines pile up and eventually trigger a phase change in which the character of the neighborhood / district / city goes over a cliff no one discerned: petty crime increases, paving the way for more serious crimes to proliferate; customers thin out and then become scarce, and the zeitgeist goes from friendly to wary to unpredictable or even dangerous.

The core characteristic of of neofeudal economy and society is that it's two-tier: there are two tiers of "criminal justice," one of wrist-slaps and vast white-collar crimes ignored for elites and the wealthy, and another far more brutal and Kafkaesque for the rest of us.

In terms of commerce, Big Tech is free to establish monopolies and Finance escapes all the supposed regulatory safeguards, while small business is throttled with endlessly multiplying petty regulations that have little or nothing to do with public safety or employee labor rights. Corporate America has the immense wealth and power to gut any regulations it finds onerous, but small business struggles to pay the soaring costs of compliance and the tripling of junk fees such as business license renewals.

City-provided services degrade but the costs for the privilege of doing business triple.

The majority of small businesses are sole proprietors. (see chart below) Many of these are online or at-home enterprises that are invisible to residents walking down the sidewalk. The 5.4 million small businesses with less than 20 employees are visibly consequential to the viability of bricks-and-mortar neighborhood commerce.

Demographics play a large role in the viability of small businesses. About 40% of all small businesses are owned by Boomers nearing retirement or already past the age of typical retirement. It won't take much in the way of losses or stress to nudge these owners into selling or closing the business.

But if conditions are decaying, who's going to buy a struggling business? The grim reality is "no one." Owners are already working long hours and enduring high levels of stress. This self-exploitation can only go so far before the owners' health and/or finances break down in burnout or losses.

Municipal bureaucracies tend to see small business tax donkeys as something they can count on much like a gushing spring. Should one tax donkey collapse and close a business, another tax donkey will magically appear to pick up the self-exploitation harness and start a new business in the same space.

Local-economy boosters love to cite the flood of new business applications as proof the spring is still gushing, but many of these new enterprises are sole proprietorships with no storefront presence and no employees. Many new businesses that thrived in the post-pandemic boom will soon encounter the headwinds of recession for the first time, and many will find their enterprises blown onto the unforgiving rocks of financial losses.

The phase-change shift in the character and zeitgeist of neighborhoods, districts and cities is difficult to reverse. Once people no longer feel safe, they won't come back. Once the empty storefronts and homeless encampments dominate the landscape, they won't come back. Once services deteriorate and trash accumulates, they won't come back.

Municipal bureaucracies are largely staffed by people who have never experienced what a real recession (such as 1981-2) can do to commerce, tax revenues and small businesses struggling to survive. They're confident that history demonstrates any downturn will be brief and the tax donkeys will appear as usual to fill the empty storefronts, lofts and offices.

But this time will be different. No new tax donkeys will appear to gamble their fortunes and lives on starting a stupidly expensive-to-operate business, pay prevailing wages and benefits and all the taxes, licenses and junk fees municipalities have piled on small business.

When we lose small businesses, we lose more than tax revenues. We lose the engines of employment and the commercial foundation of neighborhoods and districts. When these foundations crumble, those residents who see the slide down the slippery slope of decay sell their homes and get out while the getting's good. Those who remain will regret their inaction.

Tax donkeys don't appear by magic. There has to be an infrastructure in place that allows a real opportunity to scrape out a living despite the high costs and formidable challenges. If the infrastructure and character of a place decay, so does the opportunity, and small businesses melt into air when it's longer worth the struggle.








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Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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What If the Whole Shebang Unravels?

Nobody seems to be wondering what happens should the real world no longer respond to the Perpetual Motion Finance Machine.

Scrape away the hand-wringing about interest rates and we find a bedrock of complacency. Nobody seems to doubt that the status quo can grind on for another 30 years doing the same stuff it's done for the past 30 years.

Japan's Perpetual Motion Finance Machine can apparently run for another 300 years without a hitch. Here's how the Perpetual Motion Finance Machine works: the government spends huge sums it doesn't have by selling bonds to the central bank, which creates the money to buy the bonds out of thin air. Perpetual Motion--perfect!

Japan's immense success with its Perpetual Motion Finance Machine offers other governments a rock-solid template for permanent funding of all the goodies everyone wants and needs. It's perpetual motion, nothing can stop it.

This then drives another surefire financial gimmick, the Yen Carry Trade: borrow in yen at near-zero rates and then use the free money to buy US Treasuries yielding 3% or 4%. Free money! This is also assumed to be so ironclad it's good to go for another 30 years, heck, make it 300 years.

the assumption here is nothing can bring down a system that can create as much money as it needs to solve any spot of bother and we have the past 30 years of history to prove it.

Nobody seems to think there are any constraints on the Perpetual Motion Finance Machine or the alternatives being proposed: crypto, gold-backed currencies, and so on. That these alternatives might fail to solve the underlying problem--there's no way to keep the Waste Is Growth-Landfill Economy running with solely financial means--that's impossible. Finance fixes everything.

Until finance in all its flavors is the problem, not the solution. Few seem to ponder the possibility that the whole freaking shebang of debt and leverage might give way and tumble over the cliff regardless of what reforms (gold-backed currencies, etc.) and other financial modifications are instituted.

In other words, few seem willing to entertain the possibility that the system is now beyond the point that a return to stability is possible. In systems terms, the whole shebang (the global financial system and the global economy it enables) has veered so far out of equilibrium that incremental policy tweaks can no longer restore equilibrium.

The dominant dynamic will be wild swings within a widening gyre of instability until the whole shebang unravels. Then there's the real world, which--and I know this is shocking--can actually trump financial gimmicks.

Imagine the scene on the Titanic when the engineer explains to the captain the ship is doomed because too many watertight compartments have been compromised by the collision with the iceberg, and the captain reassures him: "No worries, we have a printing press on board and we'll print as much money as we need to repair the ship." Uh, right.

Yesterday I went to the local outlet of a major national grocery chain to pick up a couple of sale items. I walked around the cavernous store but didn't spot any hand-baskets, so I asked a clerk, "Did you get rid of the hand-baskets?" She replied, "No, we just don't have any."

I submit this as the perfect summary of how the whole shebang unravels. No, we didn't dispense with X, we just don't have any.

In other words, we'd be going to Heck in a hand-basket except we're out of hand-baskets.

This is not an isolated incident. Here are a few more.

1. Tried to reach an office in the healthcare system. Left four polite messages last week, no response. Called the doctor's office, the staffer said that office is understaffed. Gee, lucky nobody actually needs any prompt response.

2. Submitted a form via their "secure online system" regarding my IRA at a major US bank. No response for several weeks, so I called the number provided and was eventually connected (after many minutes of jarring music) to a support person who wanted to help but did not know what form I was referring to. In other words, every avenue of communication is a dead-end.

3. Another call to Corporate America connected to a support staffer whose English was so poor I couldn't make out what she was saying, but beyond that, she clearly had not been trained to do the basic functions of her job. So what to do? You know, of course: hang up, spin the roulette wheel and hope for a more competent staffer.

OK, I get it: I'm cursed. The rest of you are getting excellent service from every company, from the DMV, and so on, and there are stacks of hand-baskets waiting to increase your shopping pleasure.

Yes, these are all inconsequential developed-world annoyances. The point isn't that they're life-changing, the point is that these systems used to function reliably and now they don't. This can be written off with various excuses, but what if it's evidence that the real-world systems we rely on are all sliding toward the cliff edge of systemic dysfunction or breakdown?

One more anecdote. The guy ahead of me in the grocery store line ponied up $255 for a couple bags of groceries and another $22 for some Coors beer. He didn't look like his household was bringing in $250,000 a year, and yet he didn't seem troubled by dropping almost $300 for a couple bags of groceries and a few beers. He was clearly price insensitive, i.e. we don't need no stinking discounts, we pay full pop for whatever we want.

Personally, I would be having a cardiac arrest if all I got for $277 was a couple bags of groceries and a few beers. But again, I guess I'm cursed with frugality and nobody else even cares how much things cost now. A $60,000 pickup truck? No problem, give me two!

Nobody seems to be wondering what happens should the real world no longer respond to the Perpetual Motion Finance Machine. Meanwhile, I'm cursed with the gut feeling that the printing press on board the Titanic isn't going to keep the whole shebang glued together as long as everyone else seems to think, and that substituting new financial gimmicks won't restore the system, either.

The lifestyle you ordered is out of stock and we have no idea when the back-order will be filled. But no worries, we've got 30 years of history to prove that all we need to do to enjoy 30 more years of Waste Is Growth is play around with various versions of "money," debt, speculative bubbles and phantom capital.

But really, everything's FINE (Fragile, Insecure, Nonsensical, Expensive) and it's all rock-solid for another 30 years. But hey, why be so darned cautious, make that 300 years, we've got Perpetual Motion.




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The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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America's Social Contract Is Broken

The Social Contract is broken not just by wealth inequality per se but by the illegitimate process of wealth acquisition

I do not claim any expertise in social contract theory, but in broad brush we can delineate two implicit contracts: one between the citizenry and the state (government) and another between citizens.

We can distinguish between the two by considering a rural county fair. Most of the labor to stage the fair is volunteered by the citizenry for the good of their community and fellow citizens; they are not coerced to do so by the government, nor does the government levy taxes to pay its employees or contractors to stage the fair.

The social contract between citizens implicitly binds people to obeying traffic laws as a public good all benefit from, not because a police officer is on every street corner enforcing the letter of the law.

The social contract between the citizens and the state binds the government to maintaining civil liberties, equal enforcement of the rule of law, defending the nation, and in the 20th century, providing social welfare for the disadvantaged, disabled and low-income elderly.

Critiques of "trickle down economics" focus on income inequality as a key metric of the Social Contract: rising income inequality is de facto evidence that the Social Contract is broken.

I think this misses the key distinction in the Social Contract between citizens and the state, which is the legitimacy of the process of wealth creation and the fairness of the playing field and the referees, i.e. that no one is above the law.

Few people begrudge legitimately earned wealth, for example, the top athlete, the pop star, the tech innovator, the canny entrepreneur, the best-selling author, etc. The source of these individual's wealth is transparent, and any citizen can decline to support this wealth creation by not paying money to see the athlete, not buying the author's books, not shopping at the entrepreneur's stores, etc.

The Social Contract is broken not just 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 even as the state claims to be following the narrower letter of the law.

By this definition, the Social Contract in America has been completely smashed. 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, all the while parading their compliance as evidence the system is fair and just. In this way, the judicial system becomes part of the illegitimate process of wealth accumulation.

In America, political and financial Elites are above the intent of the law. Is bribery of politicos illegal? Supposedly it is, but in practice it is entirely and openly legal.

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 legitimate jobs and paying their 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.

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 Central State (the Federal government and the Federal Reserve) to enforce cartels and grant monopolistic favors such as tax shelters designed for a handful of firms and unlimited credit to private banks.

When scammers large and small live better than those creating value in the real economy, the Social Contract has ceased to exist. 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 shattered, 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 exploited banana-republic status as neofeudal 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, venal, self-absorbed, parasitic, predatory 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 claim, every game of the system, every political favor purchased is "fair and legal," of course. This is precisely how empires collapse.

In broad brush, we can trace the transition from feudalism to capitalism to the present financialized, globalized cartel-state neofeudalism and next, to a synthesis built on the opposite of neofeudalism, which is decentralization, transparency, accountability, legitimacy and the adaptive churn of competing ideas and proposals.










New Podcast: Its a Waterfall - Risk, Collateral & Productivity (48 min)

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

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My recent books:

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


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Extremes Get More Extreme, But Everything's Fine

Extremes keep getting more extreme, but for those at the top of the heap, it's all fine. For everyone else slipping down the ladder, all that FINE adds up to Fragile, Insecure, Nonsensical, Expensive.

Readers occasionally point out I've been predicting that unsustainable extremes will eventually unravel for 10+ years, yet everything's still fine. Yes, everything's still fine, maybe even peachy, but perhaps we should describe "fine" in light of the policy extremes that keep getting more extreme to keep all that fineness duct-taped together.

How about this for FINE:

Fragile

Insecure

Nonsensical

Expensive

To assess just how extreme things have become beneath the placid surface of peachiness, let's look at federal debt, the Fed balance sheet and Household Net Worth in relation to inflation and GDP, two standard measures of growth.

All else being equal, most economic-financial metrics will roughly track either inflation or Gross Domestic Product (GDP), the broad measure of the economy's activity / expansion /contraction.

In other words, one way to identify extremes is to look for metrics that are way out of line with GDP and inflation. Consider federal debt as an example. We can be forgiven for assuming federal borrowing would more or less track the expansion of GDP.

But as the chart below shows, if federal debt had tracked GDP since 1990, it would be around $16 trillion, half of its current bloat of $32 trillion. Hmm, $16 trillion here, $16 trillion there and pretty soon you're talking real money.

The GDP of Japan is around $4.3 trillion, the GDP of Germany is about $4 trillion, so that $16 trillion in "excess federal borrowing and spending" is the equivalent to four GDPs of the third and fourth largest economies in the world (just behind the US and China).

Does an "excess $16 trillion" of federal debt qualify as extreme? I think the fair conclusion is "yes."

Next up, the Federal Reserve Balance Sheet, which reflects the sum created out of thin air to buy US Treasury bonds and mortgage-backed securities as the means to inject gobs of US dollars into the financial system as liquidity for speculation.

Hmm, if the Fed balance sheet had tracked GDP, it would have risen from around $700 billion in the early 2000s to a meager $1.8 trillion, a far cry from its current level of $8.6 trillion. In round numbers, this is about $7 trillion in "excess Federal Reserve stimulus," not quite the combined GDPs of Japan and Germany but hey, $1 trillion at these levels is a mere rounding error, right?

Now let's look at the really, really fine part of the extremes, Household Net Worth: all the plump, juicy wealth created for the top 10% who own the vast majority of financial assets to enjoy.

If Household Net Worth had tracked GDP, it would total about $90 trillion, $50 trillion less than its current level of $140 trillion. You see what's really fine here: the federal government injects $16 trillion in excess stimulus, the Federal Reserve injects $7 trillion in excess stimulus for a total of $23 trillion, and the top 10% reap $50 trillion in excess wealth: yowza, that's a really fine investment!

Of course private and corporate debt has soared along with federal debt, but never mind the details. $50 trillion in excess wealth is roughly twice the size of America's GDP of $26 trillion. That's a lot of extremely fine wealth to play with.

But all this really fine wealth hasn't exactly been evenly distributed. It turns out the bottom 50% of households lost ground since 1990, as their share of the total household wealth fell from about 4.5% to 3% (see chart below).

The middle class (the 50% to 90% segment of households) also lost ground, as their share of wealth fell from above 36% to less than 29%. A 7% decline may not sound like much, but recall that each 1% is $1.4 trillion, so that 7% decline adds up to roughly $10 trillion in today's total wealth of $140 trillion.

Meanwhile, back at the Really Fine Ranch, the top 1% saw its share of the wealth soar by 40%, from 23% to 32%. It seems some have received more fineness than others.

Extremes keep getting more extreme, but for those at the top of the heap, it's all fine. For everyone else slipping down the ladder, all that FINE adds up to Fragile, Insecure, Nonsensical, Expensive.














New Podcast: Its a Waterfall - Risk, Collateral & Productivity (48 min)

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

Read the first chapter for free (PDF)

Read excerpts of all three chapters

Podcast with Richard Bonugli: Self Reliance in the 21st Century (43 min)


My recent books:

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


Become a $1/month patron of my work via patreon.com.

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Over the Falls: Credit, Collateral, Risk, Asset Valuations

Together, these factors generate a self-reinforcing cycle of debt saturation, declining collateral and credit contraction.

If we want to understand where the economy is going, credit and risk are good places to start. Credit/debt is how the system creates and distributes money: when a home buyer gets a mortgage to buy a house, that mortgage increases the money supply. When the mortgage is paid off, the money supply contracts.

The mortgage is secured by two things: the income of the buyer and the house, which is the collateral for the loan.

Risk is integral to credit. Should the income of the buyer or the value of the house decline sharply, the loan is at risk of default / loss. In the national/global economy, the cost of credit reflects trends and policies that raise or lower the risks which then influence the cost of credit: as risk rises, the cost of credit goes up.

As macro-risks rise, the cost of credit pushes mortgage rates higher, increasing the percentage of income the buyer must devote to service the mortgage. This leaves less income for additional debt or consumption.

Once their income is maxed out, the buyer reaches debt saturation: there is no more spare income to service additional debt. The workaround to debt saturation is to engineer lower interest rates, so the buyer can refinance debt at lower interest rates and reduce the monthly cost, freeing up more income for additional debt/consumption.

But when systemic risks rise, lowering interest rates is no longer possible. Rates rise to reflect the risk premium generated by uncertainty and the higher potential of defaults and losses.

Expanding credit is the lifeblood not just of consumption but of asset valuations. Home prices rise when the pool of buyers with sufficient income and creditworthiness to buy a house is larger than the inventory of available homes. When interest rates plummeted in the pandemic stimulus phase, house prices soared as buyers panic-bid for properties.

(The same mechanism supports stocks, as corporations borrow money and use it to buy back their own shares, boosting per-share valuations.)

Declining interest rates and rising asset valuations create a virtuous cycle in which higher asset prices provide more collateral to support bigger loans, loans which are easier to service as interest rates drop.

This self-reinforcing feedback of higher asset prices / increased collateral enabling more debt is clearly visible in the charts below of the Case-Shiller national Home price Index, which soared 43% in the two years from 2020 to mid-2022, and the Households Net Worth which increased by a staggering $44 trillion in the two years following the pandemic stimulus.

The risk profile of credit has changed both nationally and globally, and cost of credit cannot fall back to near-zero. I addressed this in Why Interest Rates Are Not Going Back to Zero.

At the same time, productivity and wages have stagnated, leaving less income to service additional debt. As I explained in Here's How We'll Have Labor Shortages and High Unemployment at the Same Time, workers with skills that are scarce and in demand will command higher wages, while those with skills that are not in demand will not be able to find work or maintain high earned incomes.

As risk and the cost of credit rise, the valuations of assets dependent on expanding credit decline. Not only do owners of assets such as houses feel less wealthy--the reverse wealth effect--the collateral available to secure additional credit drops.

Together, these factors generate a self-reinforcing cycle of debt saturation, declining collateral and credit contraction: risk rises, credit costs rise, incomes and collateral decline and all the consumption and asset valuations that are dependent on credit expansion go over the falls.

Gordon Long and I discuss these dynamics in our latest video Its a Waterfall - Risk, Collateral & Productivity. (48 min, numerous charts)








New Podcast: Turmoil Ahead As We Enter The New Era Of 'Scarcity' (53 min)

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A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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The Housing Bubble: Owners Trapped by Low-Rate Mortgages, Buyers Thwarted by High-Rate Mortgages

Who's left to buy overvalued houses? Too few to prop up bubble valuations

If as many posit the Federal Reserve has an unstated mandate to generate a "wealth effect" by propping up housing, they've managed to create a no-win situation. As longtime correspondent K.M. recently documented, roughly half of the 50+ million home mortgages in the US were refinanced in 2020 and 2021 to lock in historically low interest rates of less than 4%, with many around 3%.

Closed-end originations (excluding reverse mortgages) increased in 2020 by 65.2 percent, from 8.3 million in 2019 to 13.6 million in 2020.

Almost 25% of homeowners refinanced in 2021.

About half (51%) of homeowners have a rate under 4%.

As K.M. observed:

"That doesn't include the millions who bought houses 2020 - 2021 at rates below 4%, who similarly are unlikely to sell unless rates drop well below 5%. Those who got rates below 3% or thereabouts, may be permanently off the market.

Think about it - why would I sell and surrender a 2.75%, 3.00% or 3.25% 30-year mortgage, only to move into another house with a loan at 5.5% - 6.5%? I'm locked into my house and loan for years if not decades.

And then there are reverse mortgages, which essentially lock the elderly in their houses for life. That's been a housing stock reduction force for years now and may explain the increase in the number of houses in obvious disrepair.

I think you can see where I'm going with this. The artificially low rates of 2020 - 2021 have at least semi-permanently (and permanently in millions of cases) removed many millions of housing units from the market."

We all know what happened to housing valuations as mortgage rates plummeted and post-pandemic panic-buying swept through the market: valuations skyrocketed, pushing housing affordability to near-record lows. (See chart below of the Case-Shiller Index which shot up from below 100 to 174 in the 2020-2022 bubble mania.)

This was not "market forces"--this was outright intervention by the Federal Reserve and federal housing agencies. As the chart below of mortgage-backed securities (MBS) held by Federal Reserve banks shows, the Fed went from owning zero MBS prior to the bursting of the first housing bubble in 2007-08 to owning roughly 20% ($2.6 trillion) of the entire US mortgage market for conventional single-family homes: ($13 trillion).

Federal agencies such as the Federal Housing Administration (FHA) and Veterans Administration (VA) offer low-down payment mortgages and other incentives. The mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, quasi-governmental agencies. The entire state-central-bank financial machinery has worked together to inflate a housing bubble that makes those who bought long ago feel wealthy while making housing unaffordable to younger buyers who don't have the luxury of getting help from wealthy parents.

So the Fed has succeeded in inflating a housing bubble that makes the already-wealthy feel even wealthier, but only by throwing the younger generations of potential homeowners under the bus. As I have argued here, (Why Interest Rates Are Not Going Back to Zero), the risk profile of the global economy and financial system has changed, and this risk is repricing the cost of capital (interest rates) and all financial assets.

K.M. summed it up thusly:

"The whole problem with housing in the past several decades has been the manipulation of the market by government players - The Fed, HUD, FNMA/FHLMC, and the other alphabet-soup agencies that rule the housing market. It has far less to do with natural demand and supply than is commonly believed. I'm saying this as one who worked in the mortgage business for many years."

Unless the Fed is going to buy up the entire $13 trillion mortgage market, market forces will keep mortgages rates in the historical range of 5% to 7%.

Meanwhile, those with 3% mortgages are trapped in their current homes which are effectively off the market, and would-be young homeowners face the unaffordable combination of bubble-valuations and high mortgages rates. As I concluded in my previous commentary on the housing bubble (This Housing Bubble Is Different: It's Much More Precarious), Distortions eventually have consequences. Concentrate wealth and income in the top 5% and corporations, and give the already-wealthy abundant low-cost credit to concentrate ownership of assets, and you get a distorted economy in which the older and wealthier have outpriced the young.

Who's left to buy overvalued houses? Too few to prop up bubble valuations. This Fed-engineered generational wealth-opportunity inequality will generate more than a phantom "wealth effect"--it will also generate second-order effects of social fragmentation and the erosion of the social contract that the Fed is powerless to repair.








New Podcast: Turmoil Ahead As We Enter The New Era Of 'Scarcity' (53 min)

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

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The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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This Housing Bubble Is Different: It's Much More Precarious

And what happens next? Bubble symmetry: valuations fall at the same rate as they rose, declining back to the starting point over a roughly equivalent time duration.

All speculative bubbles share certain traits: the abandonment of caution, the euphoria of seemingly endless gains, the eventual re-connect with reality (i.e. the bubble pops) and bubble symmetry as the waterfall decline mirrors the euphoric ascent.

At the same time, the specific origin and nature of each bubble is unique to its era and circumstance. The housing bubble that popped with such devastating consequences in 2007-08 was the result of the vast expansion of subprime mortgage lending which began as a progressive goal of expanding home ownership to the lower-middle class by lowering credit standards.

This ideal quickly morphed into the explosive growth of entire industries exploiting this new pool of subprime borrowers via outright fraud: no-document loans (a.k.a. liar loans), negative interest mortgages, interest-only mortgages, etc., all fueled by the packaging of guaranteed-to-default mortgages in mortgage-backed securities fraudulently veneered with a low-risk rating issued by captured ratings agencies.

The rock that starts the landslide doesn't have to be all that large. The entire subprime mortgage sector was a relatively modest percentage of the mortgage market and a tiny slice of the global financial system, but it is the nature of bubbles to be a pyramid house of cards in which the entire bubble is based on debt expanding on the supposedly solid foundation of rapidly rising collateral: the McMansion that sold for $300,000 a few months ago has doubled in value and now supports a $500,000 mortgage.

The delighted speculator takes the "free money" $200,000 and buys another McMansion, and so on, pyramiding the first house into a mini-empire of homes, all gaining value as the bubble expands. This virtuous feedback expands housing valuations, collateral and debt that is deployed to buy more homes.

Then the feedback loop reverses. Once the bubble pops, valuations decline, collateral diminishes and eventually all the mortgages are underwater, i.e. unsupported by collateral. At the same time, income generated by the assets declines, making it difficult for the owner to service the debt, which perversely, remains the same as valuations plummet.

This time around, the source of the bubble isn't subprime buyers, it's wealthy investors and corporations using "excess savings" and easy credit to snap up homes and rental apartments as "safe" places to park their excess capital. Excess savings is in quotes because the "excess" money isn't savings per se, it's unearned gains generated by buying assets long ago at low rates of interest. As valuations soared, the wealthy owners of capital have been "burdened" with the task of where to park all these massive gains.

Macro-economists reference this "excess savings" as a problem without exploring the reality it's only the top 5% which have this "problem": as many have documented, the vast majority of the gains generated by the economy/assets have accrued to the top 5% who bought assets early in the cycle and used their skills, connections and capital to skim most of the income gains as well as most of the capital appreciation.

Globalization and financialization concentrated the economy's gains in corporations, which also gained the "problem" of what to do with all this "excess savings." One popular choice is use the money to buy back shares, an "investment" that boosts earnings per share by reducing the number of shares outstanding and that accrues to shareholders and those managers who have outstanding stock options based on the value of shares.

Both the wealth 5% and corporations also had access to low-cost credit. Ample incomes, substantial assets--these are highly attractive to lenders, and so the best rates are available to the already-wealthy who can then tap this credit to buy assets which yield higher returns.

Real estate is a favored place to park "excess capital" globally for three reasons:

1. As a general rule, it's a stable, lucrative source of income via rents, either long-term or short-term vacation rentals (Airbnb).

2. Real estate typically has a lower risk profile than assets such as stocks.

3. In eras of expanding credit, leverage and population, real estate typically increases in value as supply is inherently limited by geography and other factors.

The short-term rental craze is an under-appreciated driver of the frenzy to buy homes and flats globally. The top 5% read accounts of owners banking huge incomes from short-term rentals in desirable locales and in response they deployed some of their excess capital/credit to chasing the short-term rental market by buying properties sight unseen.

In hot real estate markets, wealthy buyers snapped up properties to hold for capital appreciation. Since tenants are potential sources of problems, these absentee owners prefer not to bother renting out the flat or house; they purposefully leave it empty since they don't even need a rental income to cover the expenses.

The net result of these pressures to park excess capital in real estate? Hundreds of thousands of empty homes and flats. By siphoning these properties off the market, the wealthy parking excess capital have created artificial scarcities in long-term rentals and "homes for sale," jacking up rents and pushing valuations to the moon.

Corporations have bought up tens of thousands of houses and built or bought tens of thousands of rental apartments to lock in the low-risk returns of collecting rent and capital appreciation.

Note the virtuous feedback for the wealthy: the more properties they own and keep off the market, the greater the upward pressure on rents and valuations, and the greater their income and appreciation.

In the first chart below (courtesy of CH @Econimica), note that the population and number of employees 18-64 years of age in the American West remained essentially flat while the number of housing units increased by 1.3 million. And yet there's supposedly a sudden shortage of housing for rent/sale? Any scarcity isn't the result of population growth, it's the result of rentier-investors buying units as investments and holding them off the long-term rental / ownership markets.

There's also a demographic component: the number of young people who can afford to buy a flat or home from the absentee-rentier wealthy / corporate owners has diminished as interest rates have risen and housing prices have soared. In effect, this concentration of ownership in the hands of rentier wealthy and corporations has stripmined the market of conventional household buyers.

In effect, liquidity has been withdrawn from the real estate market. The wealthy can sell to other wealthy households, but since that's 5% of the populace at best, the market is thin / illiquid. Once selling commences, there are few buyers to support valuations. Illiquid markets are prone to crashes or waterfall declines, a dynamic visible in the chart below of the current housing bubble bust decline.

Though few seem to mention it, housing demand is elastic. People move back home, move in with their adult children, take boarders / roommates, etc. There is no law that says an increasing population guarantees a populace of people who can afford $2,500 rent for a tiny flat or $750,000 for a crumbling bungalow.

In a recession, rents drop. Housing demand slackens and vacancies increase, pressuring rents lower. Once rents drop, valuations follow, as valuations eventually reconnect with the fundamentals of income generated by the asset.

Once prices of houses and flats start dropping, owners can no longer count on appreciation. Suddenly, a low-risk asset acquires a different risk profile: it's losing value, not gaining value.

To lock in gains, the wealthy rentier class and corporations have to sell. Nice, but to whom? Having outpriced households and stripmined the younger generations with sky-high rents, the wealthy and the corporations will discover there aren't enough buyers to support current valuations. Once absentee owners try to sell en masse, the market crashes.

Distortions eventually have consequences. Concentrate wealth and income in the top 5% and corporations, and give the already-wealthy abundant low-cost credit to concentrate ownership of assets, and you get a distorted economy in which the few have outpriced the many and skimmed most of the income.

Who's left to buy overvalued assets? Too few to prop up nosebleed valuations.

And what happens next? Bubble symmetry: valuations fall at the same rate as they rose, declining back to the starting point over a roughly equivalent time duration. (see chart below).







Thank you, all who responded so generously to my rattling of the begging bowl this past weekend. I am honored and humbled by your support and encouragement.


New Podcast: Turmoil Ahead As We Enter The New Era Of 'Scarcity' (53 min)

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

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Podcast with Richard Bonugli: Self Reliance in the 21st Century (43 min)


My recent books:

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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De-Dollarization and Trade: Be Careful What You Wish For

Be careful what you wish for, because currencies are not abstractions we ponder, they are commodities that serve real-world functions that place demands on the currency as a mechanism of trade, trust, value and risk.

The current telling of the story of de-dollarization--the replacement of the US dollar as the global economy's primary reserve currency with a new BRIC (Brazil, Russia, India, China) funded reserve currency--depicts the loss of the reserve currency as a catastrophe that will crush America.

As delightful as this prospect may be to various audiences, once we shift from considering a reserve currency as an abstraction to a mechanism of trade and finance, then another outcome takes shape: supporting a reserve currency is a burden, and lifting that burden from the US will benefit the US and hurt mercantilist exporting nations.

As a bonus, it will also shift the burden of supporting a reserve currency to the BRIC participants, who will then have to do what the US has done for decades:

1. Export their new reserve currency in size by running vast, sustained trade deficits, for the only way a reserve currency can function is there is sufficient quantities of it floating around as a transparently traded, market-priced commodity to grease trade and finance.

2. Become the dumping ground for the world's surplus production of goods and services as the means to run the vast, sustained trade deficits that are the other side of exporting currency so others can use it in global trade.

Many commentators such as Mish Shedlock and Michael Pettis have explained these mechanisms of reserve currencies and pointed out that being relieved of the burden of supporting the primary reserve currency would be a great long-term benefit to the US. I have written about Triffin's Paradox for many years, the reality that no currency can serve both the domestic economy and the global economy (i.e. be a reserve currency) as issuing a reserve currency demands running trade deficits as a means of exporting trillions of units of the currency for use by others.

Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)

What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012)

In a similar fashion, proponents of a gold-backed currency view such a currency as an abstraction without considering the actual mechanics of backing a currency with a tangible commodity. The currency isn't actually "backed" by the commodity unless it can be converted into the commodity upon demand. A currency is only "backed by gold" if there is a conversion mechanism in which the holder of the currency can trade the currency for the equivalent quantity of gold.

This is the only mechanism that counts. Waving around the phrase "backed by gold" doesn't turn a fiat currency backed by nothing tangible into a currency backed by gold unless that currency can be converted into gold upon demand.

Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies (January 19, 2023)

You Want Truly "Sound Money"? A Thought Experiment (January 24, 2023)

So let's think this through a bit rather than expound on abstractions. Let's say the US loses its reserve status; nobody wants the USD any more and so nobody will trade goods and services for dollars. That means the US can only import as much as it exports, i.e. a trade balance.

According to the Bureau of Economic Analysis (BEA), the US exports about $3 trillion of goods and services and imports about $4 trillion. So once surplus imports can no longer be purchased with dollars, that surplus $1 trillion in sales to mercantilist economies like China vanishes.

Globalists love to weep and gnash their teeth over the fact that costs of goods made in the US will be higher than in sweatshops overseas. But globalists never consider quality, which has been declining since globalization took the world by the throat. Let's do the math: a poorly made imported item that only lasts a year before it must be replaced costs $25. This item costs $50 when manufactured in the US.

Oh, boo-hoo, right? Not so fast.

If the domestically produced item lasts 5 years, the total cost over 5 years is $50. The total cost of the shoddy imported item is 5 X $25 or $125. The domestic product is much, much cheaper once we expand the time frame to the entire lifetime of the product.

Stainless Steal (February 26, 2023)

Who's going to be crying real tears of anguish are all the mercantilist economies that have dumped their surplus production in the US for decades, as there is no alternative economy large enough to absorb the $1 trillion in (mostly shoddy) goods and services that the US will no longer buy.

The issuers of the new reserve currency will have to run massive, sustained trade deficits to export enough of their new currency to meet the demands of a reserve currency and they'll have to let the price of the new currency float freely on global markets, or it cannot be trusted to retain its value--a key attribute of a reserve currency.

If this new reserve currency is "backed by gold," then nations that pile up the new currency in trade must be able to demand gold in exchange for the currency, as France demanded (and received) gold in exchange for its surplus US dollars in 1971. If the currency can't be converted into gold, it's not a gold-backed currency. It's only backed by, well, nothing, just like all the other fiat currencies.

Actually, fiat currencies are backed by something: interest-paying bonds. The higher the interest and the lower the risk profile of the bonds, the greater demand for that currency above others with riskier profiles and lower rates of return on the bonds.

This leads to an irony: the US dollar will become much more valuable once it is no longer a reserve currency as it will no longer be exported in vast quantities. US dollars will be scarce and will thus increase in value.

Personally, I'm in favor of competition in currencies--the more the merrier. The more options available on a transparent global market where all currencies are floating freely on market supply and demand, the better for everyone.

But be careful what you wish for, because currencies are not abstractions we ponder, they are commodities that serve real-world functions that place demands on the currency as a mechanism of trade, trust, value and risk.



Thank you, all who responded so generously to my rattling of the begging bowl this past weekend. I am honored and humbled by your support and encouragement.


New Podcast: Turmoil Ahead As We Enter The New Era Of 'Scarcity' (53 min)

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

Read the first chapter for free (PDF)

Read excerpts of all three chapters

Podcast with Richard Bonugli: Self Reliance in the 21st Century (43 min)


My recent books:

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


Become a $1/month patron of my work via patreon.com.

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