Monday, February 18, 2019

Which One Wins: Central Planning or Adaptive Networks?

Those who are betting on Central Planning do not understand the essential role of adaptation.
The global economy is in the midst of a grand experiment pitting centralization (Central Planning) against the evolutionary model of adaptive, self-organizing networks. Centralization is the dominant dynamic of the Status Quo everywhere: the economies of China, Japan, Europe and the U.S. are all dominated by Central Planning: central banks, central state agencies, and Deep State / private sector nodes of wealth and power that pull the systemic strings.
Central Planning--the concentration of power and wealth in the hands of the few--is presented as the "solution": in China, the "solution" is a Total Information Awareness Social Credit Score system of centralized control of the populace. In the U.S., Medicare for all-- the PR term for centralized cartel-state profiteering on a vast scale--is just one of many Central Planning "solutions" being touted by the "Progressives."
Geopolitically, American "Progressives" and neoconservatives alike are enamored of the centralized Imperial Project as the go-to "solution" to any and every challenge.
As I explain in my latest book (now out as an audiobook), Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic, there's one fatal flaw in Central Planning "solutions": they run completely counter to the principles of evolution which guide all systems, natural and human.
That which is rigid and inflexible cannot adapt to rapid change, and thus it fails to adapt and vanishes from the Earth. That is the essence of evolutionary dynamics.
Central Planning is a monoculture that incentivizes self-serving corruption and propaganda. Central Planning is by its very nature opaque, as transparency is its mortal enemy. Propaganda is necessary to mask the true nature of the self-serving elites who benefit from central Planning, as their primary task is to convince the commoner sheep being sheared that being sheared is the best of all possible worlds--and that dissenting sheep will be led off to slaughter.
The essence of Central Planning is coercion: skepticism and dissent are dangerous and thus must be suppressed; everyone must consent to the control of elites and agree with the rigid ideology that provides cover for Central Planning's blatant inequality, as the few insiders reap the benefits at the expense of the many--the classic definition of systemic corruption.
Central Planning works until it doesn't, and that moment of failure is at hand.Central Planning is in essence a vast machine of mal-investment of irreplaceable capital. Capital--financial, human and social--that's squandered on unproductive graft, embezzlement, bridges to nowhere, Imperial misadventures, ghost cities, student loans, grossly overpriced, ineffective medications, monuments to Central Planning, etc. cannot be replaced by creating currency out of thin air, or borrowing it into existence.
Eventually, the fantasy that we can replace capital that has been lost to mal-investment with freshly printed/borrowed capital dies: borrowing from our future eventually runs out of rope when the future arrives and can no longer sustain the fast-accumulating mountain of debt.
Central Planning strips out the all the core dynamics of adaptation as dangers:dissent, experimentation, decentralization of power and capital, and a diversity of competing narratives. These are all mortal threats to Central Planning, which is by its nature rigidly hierarchical.
Whether we acknowledge it or not, the world is placing its bets on which system will survive the coming era of destabilizing non-linear change:inflexible, opaque Central Planning or flexible, self-organizing networks of decentralized autonomy and capital.
Those who are betting on Central Planning do not understand the essential role of adaptation: what cannot adapt will die, and Central Planning is by its very nature incapable of true adaptation. Central Planning exists in a self-defining world in which shuffling the facades of PR passes for adaptation: nothing actually changes structurally, the rigid power hierarchy remains untouched.
Adaptation can't be faked. Organizations that cannot adapt quickly and efficiently implode. This is a scale-invariant dynamic: the organizational size doesn't matter. Size and scale do not provide magical protection. Households, corporations, governments and empires that fail to adapt will collapse.
There is a real solution: decentralize, diversify, open the economy and society to dissent, experimentation and self-organizing networks of peers. Rapid adaptation requires radical decentralization, autonomy, transparency, flexibility and experimentation.
Mark Jeftovic and I discuss these topics and more in our new podcast (YouTube, 43:27).
I address these topics in greater depth in my book Pathfinding our Destiny: Preventing the Final Fall of Our Democratic RepublicNow available as an audiobook. You can read the first section for free in PDF format..
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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Sunday, February 17, 2019

Credit Exhaustion Is Global

Europe is awash in credit exhaustion, and so is China.
The signs are everywhere: credit exhaustion is global, and that means the global growth story is over: revenues and profits are all sliding as lending dries up and defaults pile up.
What is credit exhaustion? Qualified buyers don't want to borrow more, leaving only the unqualified or speculators seeking to save a marginal bet gone bad with one more loan (which will soon be in default).
Lenders are faced with a lose-lose choice: either stop lending to unqualified borrowers and speculators, and lose the loan-origination fees, or issue the loans and take the immense losses when the punters and gamblers default.
Europe is awash in credit exhaustion, and so is China. China's situation is unique, as credit expansion has been propping up the entire economy, from household wealth to corporate speculation to the export sector.
As this article explains, The China Story That Is Far Bigger Than Apple, China's trade balance--trade surpluses for decades--is close to slipping into trade deficits.
At the same time, China's once-mighty pool of savings has diminished as consumption has risen. As a result, China now needs foreign investment more than it did in the previous era.
Chinese businesses have borrowed around $2 trillion in US dollar-denominated debt, requiring the acquisition of dollars to service the debt.
So far this sounds like a typical case of a fast-growth economy maturing into a trade-deficit, debt-dependent consumption economy.
What the article misses is the staggering rise in the cost of living in China over the past two decades. Some services are still affordable to the masses--subway fares are extremely cheap--and private healthcare is a mere fraction of healthcare costs in the U.S.
But other costs--housing, food, clothing, etc.--have shot up to the point that our on-the-ground correspondents report that many living expenses aren't much different than in the U.S.
Officially, inflation is low in China, but the reality is not so cheery. "Domestic sentiment is definitely very bad, perhaps even worse than during the 2008 global financial crisis," said Fred Hu. Chinese Professor Censored After Admitting Real GDP Growth Is Below 2%
Recall that wages for college graduates are around $1,100 per month (7600 RMB), with $1,500 per month (10,000 RMB) being an above-average salary.
While white-collar wages are $13,000 annually, apartments in first and even second tier cities are similar in cost to desirable U.S. cities. Rent for a small flat is $800 USD in Shanghai, more than half the average salary, and typically cost hundreds of thousands of dollars to buy.
As I've noted before, roughly 3/4 of all household wealth in China is tied up in real estate, where it is effectively dead-money, earning no yield and completely illiquid.
Reflecting a broad malaise, China's stock market has dropped by 25% in 2018 while its currency weakened against the USD (by official design, of course).
Echoing Tolstoy, every economy in a credit-fueled boom is happy in a similar way, but every economy in a credit-exhaustion decline is unhappy in its own way. The euro's internal contradictions and the EU's political "irreconcilable differences" are about to manifest in a unique way, and China's credit bubble bursting is about to deflate bubbles in shadow banking, housing, speculation and confidence in China's central planning model.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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Saturday, February 16, 2019

Sometimes the Best Solution Is To Leave Things As They Are

We must distinguish between the oft-lauded creative destruction of what is obsolete and destruction in pursuit of fleeting fashion.
I recently received an insightful email from a reader who had come across my archives of free-lance articles and essays on home and urban design. I wrote dozens of articles for S.F. Bay Area newspapers from 1988 to 2006, and a handful are listed here.
The one the reader is responding to is Best Remodel Might Be None At All (2006). Here are the reader's comments:
"I thoroughly enjoyed the articles you penned for the SF Examiner that you've linked to on your website, these being written close to two decades ago.
Especially noteworthy was your response to the homeowner inquiring about a kitchen remodel where you recommended that the best course of action might be no course of action. This was an wonderful response and it caught my attention because it belies the common sales oriented suggestions generally offered by those writing about remodeling, and especially about kitchens. Usually you see writers busy extolling the gutting and replacement of a kitchen with wild zeal talking about how wonderful it will be to pour coffee or to butter toast once the kitchen area has been refurbished... and how in the sheer pleasure of a new kitchen you might even choose to drink two cups of coffee just for the fun of it!
In the old craftsman style house or bungalow it would mean new plumbing and upgrading the electrical wiring to go with new appliances and new cabinetry. In the era when that house was constructed the cabinets were typically built on site, matching the cabinetry to the design and work flow of the kitchen.
Kitchen cabinetry today is highly decorative with expensive hardware and finishes, but hardly as suitable as kitchen cabinets were once intended; that being to provide an unobtrusive and utilitarian storage and work area for the laborious processes involved in the preparation of food. Areas for preparing food were never intended to be decorative with expensive countertops and as a show-off space for the espresso machine, it was rather the equivalent of a laundry room or a home workshop, a place to do work on surfaces that were large and solid enough to take some abuse and that could be easily cleaned.
Instead of suggesting a complete remodel you appealed to the homeowners aesthetic appreciation for the unique design elements in maintaining the symmetry of the older house that would be destroyed with a new fashioned kitchen. That is the best advice I have ever read offered to someone that was apparently under the thralls of the renderings of the soulless antiseptic modern kitchen most of which are only suitable for microwave cookery or a place to unpack the delivery of fast food. Hopefully this individual took your advice to heart."
Thank you, Dear Reader, for the high compliment. It seems to me that this advice--appreciate what is, and leave it as it is rather than seek a frenzied make-over as a "solution"--can be applied to far more of life than remodeling.
As the reader so eloquently observes, mindless herd-like pursuit of the fashion of the day drives out practicality as well as destroying the integrity and aesthetics of the structure.
Ours is a commerce-and-credit society and economy. In an economy whose lifeblood is borrowing money to squander on consumerist pursuits of status, the tropism is always to rip out and demolish the old in favor of a faddish make-over.
We must distinguish between the oft-lauded creative destruction of what is obsolete and destruction in pursuit of fleeting fashion: how much of irreplaceable value has been demolished in favor of low-quality, brazenly superficial and instantly dated "new designs"?
The default "solution" in America now is to 1) borrow immense sums of money and 2) squander it heedlessly on self-serving cliches and false assumptions.Corporations, governments and entire populaces hurry after a chimera of "transformation" that transforms nothing of importance or value, but that generates vast revenues for lenders, profiteering shucksters and the government that depends on a frenzied pursuit of commerce-based status for its revenues and power.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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Thursday, February 14, 2019

What Happens When More QE Fails to Reverse the Recession?

The smart money is liquidating assets, paying off debt and moving capital into collateral that isn't impaired by debt or speculative valuations.
The Federal Reserve's sudden return to "accommodative" dovishness in response to the stock market's swoon telegraphs its intent to fire up QE once the recession kicks into gear. QE (quantitative easing) are monetary policies designed to ease borrowing and the issuance of credit, and to prop up assets such as stocks and real estate.
The basic idea is that the Fed creates currency out of thin air and uses the new money to buy Treasury bonds and other assets. This injects fresh money into the financial system and lowers the yield on Treasury bonds, as the Fed will buy bonds at near-zero yield or even less than zero in pursuit of its policy goals of goosing assets higher and increasing borrowing/spending.
This is pretty much the Fed's only lever, and it pulls this lever at any sign of weakness in stocks or the economy. That sets up an obvious question that few seem to ask: what happens when QE fails? What happens when the Fed launches QE and stocks fall as punters realize the rally is over? What happens when lowering interest rates doesn't spark more borrowing?
What happens is the smart money sells everything that isn't nailed down, a process that is arguably already well underway.
Why sell assets when QE has guaranteed gains in the past? Answer: exhaustion. There are limits to everything financial, and once those limits are reached, no amount of goosing will push the limits higher. Rather, further goosing only increases the fragility and vulnerability of the system.
Price-earnings ratios only go so high before reversing, rents only go so high before reversing, and so on. Once the trend has visibly stagnated, smart money sells out because the gains are minimal while the risk of reversal is rising by the day. Why wait for losses to pile up? Sell now and avoid the self-reinforcing decline as everyone starts selling.
The smart money is careful to mask the selling so as to avoid panicking the market. Smart money sells out slowly, in pieces small enough to avoid banging the bid lower. Alas, the Smart Money strategy is to count on greater fools to believe the shuck and jive of QE and the rest of the flim-flam: real estate never goes down, the economy will grow strongly through 2040, the next target for the S&P 500 is much higher, and so on.
Take a look at these charts of total liabilities/debt and federal income tax collected and ask yourself: are these trends sustainable in an economy growing by a few percent a year?
Federal income taxes collected have practically doubled from the recessionary nadir of 2009: does anyone really think they can double again in the next 9 years?
These geometrically rising trendlines are the acme of unsustainability. The limits have been reached and reversal looms. Ask yourself why multiple bids for real estate have vanished and why the Fed is so anxious to publicly trumpet its dovishness. If the limits were far from being reached, why the tone of desperation?
As I noted yesterday, every injection of stimulus weakens the response of the following dose. After a decade of never-ending stimulus, the positive effects of stimulus have been exhausted. Increasing the stimulus is toxic to an exhausted system pushing its intrinsic limits.
As I observed yesterday, the smart money is liquidating assets, paying off debt and moving capital into collateral that isn't impaired by debt or speculative valuations. The Smart Money has secured the good seats at the banquet of consequences, the seats reserved for those with no debt, unimpaired collateral and little dependence on central bank stimulus or central state statistical legerdemain.


Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.

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.
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Wednesday, February 13, 2019

What Caused the Recession of 2019-2021?

The banquet of consequences is now being served, but the good seats have all been taken.
As I discussed in We're Overdue for a Sell-Everything/No-Fed-Rescue Recession, recessions have a proximate cause and a structural cause. The proximate cause is often a spike in energy costs (1973, 1990) or a financial crisis triggered by excesses of speculation and debt (2000 and 2008) or inflation (1980).
Structural causes are imbalances that build up over time: imbalances in trade or currency flows, capital investment, debt, speculation, labor compensation, wealth-income inequality, energy supply and consumption, etc. These structural distortions and imbalances tend to interact in self-reinforcing dynamics that overlap with normal business / credit cycles.
The current recession has not yet been acknowledged, but this is standard operating procedure: recessions are only declared long after they actually start due to statistical reporting lags. Maybe the recession of 2019-21 will be declared at some point in the future to have begun in Q2 or Q3, but the actual date is not that meaningful; what matters is what caused the recession and how the structural imbalances are resolved.
So what caused the recession of 2019-21? Apparently nothing: oil costs are relatively low, U.S. banks are relatively well-capitalized, geopolitical issues are on the backburner and stocks, bonds and real estate are all well-bid (i.e. there is no liquidity crisis).
This lack of apparent trigger will mystify conventional economists who generally avoid the enormous structural imbalances in our economy because those imbalances are the only possible output of our Neofeudal Power Structure in which a New Nobility/Oligarchy dominates financial and political power and skims the vast majority of gains the economy generates.
The cause of the recession of 2019-21 is exhaustion: exhaustion of the pell-mell expansion of credit (i.e. credit exhaustion/saturation), exhaustion in the household and small business sectors as real-world price increases continue exceeding wage and revenue gains, exhaustion of margin expansion in stocks, and exhaustion of Corporate America's policy of masking inflation by reducing quality and quantity: at some point, the toilet paper roll is so visibly diminished (i.e. stealth inflation) that companies can no longer reduce the quantity: at that point, they must raise prices to remain profitable, and this explains the recent surge in the sticker price of consumer staples.
Conventional economics has no answer for exhaustion: the only "solution" in a Keynesian universe is to goose borrowing by lowering interest rates and sluicing limitless liquidity into the financial system.
But if everyone who is qualified to borrow more has no interest in borrowing more, lenders turn to unqualified borrowers who will soon default. This sets up a destruction of debt, collateral and wealth that also has no policy answer. The credit impulse doesn't expire, it simply fades away, along with "growth," rising stock markets, higher tax revenues, etc.
The second "solution" is to substitute government spending for private spending. But in case nobody noticed, please observe that state/local and federal borrowing and spending has been soaring at insanely unsustainable rates since 2008.
Exhaustion overtook the global economy in 2016, but central banks injected massive doses of financial adrenaline to shock the comatose patient. This "solution" continues to this day, as China's central bank reportedly injected an unprecedented $1.2 trillion into credit markets in January alone.
The problem with financial adrenaline is that every dose reduces the impact of the next dose. At some point, the patient fails to respond. The positive effects of the stimulus become toxic, and attempts to increase dosage will only push the patient into collapse.
That's where the global economy is today. The exhaustion that was taking hold in 2016 was stimulated away by unprecedented injections of monetary stimulus. The response to current massive injections is between tepid and zero. Adding debt to stimulate "growth" no longer works, and injecting the patient with higher doses of stimulus will only cause collapse.
The banquet of consequences is now being served, but the good seats have all been taken by those with no debt, unimpaired collateral and little dependence on central bank stimulus or central state legerdemain. All that's left are the bad seats with horrendous consequences for perverse, distorting policies that refused to deal directly with painfully obvious imbalances.


Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.

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, Spike T. ($150), for your outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.
 
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