Trends for 2009: Solutions Abound--On the Micro-Scale


The Denial/hope-somebody-rescues-us crowd seeks "solutions" from the Federal government. But the financial construct which supported a runaway consumer economy is broken, as is the borrow-and-spend model of Federal "solutions." (See "China no longer buying Treasuries.") Solutions abound, but they are on the micro-scale: individual, family, neighborhood, community and Web networks.

Here is the future of Federal government borrow-and-spend "solutions:"

1. The government borrows trillions of dollars over the next year or two, sating the entire world's appetite for Treasuries. Everyone who is willing to buy essentially zero-interest bonds on a gamble the dollar will strengthen against gold, oil and all other currencies already owns a couple trillion dollars' worth of U.S. bonds and has no appetite or cash for more.

2. As the export-our-way-to-wealth model (Japan, China, Germany, et al.) breaks down (because nobody's buying anything anymore from anywhere--nobody needs more machine tools, steel, autos, etc.) then the exporters' surplus which they once plowed into dollars and Treasuries vanishes.

As a corollary, the oil exporters' great wealth also dries up as the "head-fake" in oil prices causes their revenues to plummet just as their sovereign wealth funds take huge losses and their vast welfare expenses continue rising--along with their rampant inflation.

Simply put: nobody has surpluses to dump into U.S. Treasuries. They're using the money they have to stave off social disorder in their own countries.

3. U.S. buyers of Treasuries--panicked souls seeking safety--realize they're losing ground owning zero-interest bonds. Once the dust settles, money managers realize that just maintaining the value of their funds isn't going to cut it. Recall that pension funds are all based on making 8% per year forever. Losing money is not preferable, of course, but now that the markets have already lost 40%-50% then the losses have already been taken. Now the managers have to start recouping their losses or they'll lose their jobs.

It's really that simple. In times of panicky 40% declines, T-Bills are just fine. But after the dust settles, nobody's going to stay employed in the money-managing business who sits on zero-interest T-Bills. Get out there and make us some money, boys and girls; and T-Bills--which have shot to the moon in a spike that looks just like tech stocks in 1999 and oil in 2008--are no longer money-makers.

Simply put: the domestic market for Treasuries is also set to drop.

The blogosphere is alive with the news that the German central bank was unable to sell their latest batch of low-interest bonds; so guess what happens next? The interest rate has to rise to a point which entices jittery investors.

I know this sounds insane in a "low interest rates will last forever" climate, but I predict interest rates in the U.S. will climb to the 9%-12% range much faster than the "experts" imagine is possible. Yes, even with asset deflation and rising savings rates, two factors which are supposed to keep interest rates low forever.

I believe volatility in all markets is here to stay, and volatility is not a friend of bonds. The face value of bonds can fluctuate as wildly as the value of stocks, and so the notion that bonds are "safe investments" for widows and orphans is misplaced. It is assumed by many that low/no inflation means bonds will rise in value, and perhaps this is the case in normal times. But this is not a normal time, nor is the U.S. government borrowing $1.2 trillion a year indefinitely normal.

OK, let's take out our calculators. How about we tax the super-wealthy top 1% of wealth-holders in the U.S. another $500 billion a year. (After all, they own some 2/3 of all productive wealth, so they can afford to pay a bit more.) That's almost half of all corporate profits, and a pretty good chunk of change.

(Note: I believe it is fair and just that the AMT--alternative minimum tax--should be abolished for everyone below $1 million a year in gross income, for all sources. Above that, then every citizen of the U.S. should pay a hefty minimum tax regardless of tax loopholes and the source of the income. If you're raking in $1 million+, you can afford to pay some tax. Currently, it's "cheaper" to hire shrewd tax attorneys than it is to actually pay taxes-- at least at that level of income.)

OK, so we're pulling in $500 billion more--wow. Now the deficit is only $700 billion a year--roughly equal to the rightly loathed TARP program.

OK, then let's just abolish the U.S. Military--the entire thing, the Armed Forces and the civilian Pentagon, the multitude of bases, the 10 aircraft carriers, all of it. That saves $500 billion a year.

Hmm, we still have a deficit of $200 billion a year-- and we also have a couple more million unemployed citizens.

Does this little exercise bring home just how insane $1.2 trillion deficits are? There isn't enough money in the entire world to fund this scale--and recall that every other government in the world will also be running huge deficits as they borrow and spend to stave off social disorder and political turmoil.

4. As interest rates triple for Treasuries, the interest we pay on past and new debt also triples from $260 billion a year to $780 billion a year-- outstripping the largest programs including the Pentagon, Social Security and Medicare.

The need to service all this debt will stripmine the entire Federal budget. It will be so stupendous that we as a nation will be borrowing $750 billion a year just to pay the interest on past debts--thereby increasing next year's debtload.

The end-game to borrow-and-spend madness is insolvency and repudiation of debt. There is no other destination.

So here is a short, semi-random list of solutions which don't depend on Federal borrowing and largesse:

1. Every small business owner who vacates a tiny $3,000/month storefront and hastens the bankruptcy of the commercial landlord who "needs $3K" from the space to pay an inflated mortgage is part of the solution. When the building is sold later for a modest sum, spaces can be rented for what a struggling business might actually afford, i.e. $300/month.

Please note:

Nobody needs to start or operate a small business. You cannot coerce anyone to take the risks of entrepreneurship, hire workers, rent space and pay taxes. Every entrepreneur can opt out at any time when the risk-return ratio turns negative. High rents, high taxes and lower revenues have turned the ratio extremely negative.

2. Every parent/guardian who teaches a child (by their own example) to unplug electronics which are not in use and all those energy-hogging inverters/rechargers is part of the solution.

Q.: What percentage of household electricity in the U.S. is lost to appliances that are turned off?

Saturday Quiz: Energy Lost on Electronics Standby (May 24, 2008)

According to The U.S. Department of Energy, there are 2,776 electrical generation plants in the U.S. That means 140 power plants do nothing but generate the electricity wasted by DVD players, TVs, answering machines, stereo systems, xBoxes and computers plugged into wall sockets while not in use. One easy solution: put as many of these devices as is practical on power strips which can be turned off with one switch.

Although I'm a bit rushed right now and can't look up the statistic, I think 140 power plants burn over a million tons of coal a year. That's a lot of coal to keep your TV and computer speakers on standby.

3. Everyone who focuses not on losing weight but on becoming fit and feeling better via refusing to consume junk food and garbage fast food is part of the solution. Changing the goal from weight loss to well-being is a solution for the individual and for our society as a whole.

4. Everyone who consciously chooses to prepare a home-cooked meal rather than buy a toxic-waste fast food meal is part of the solution--and a revolutionary to boot: "A healthy homecooked family meal and a home garden are revolutionary acts."

Please don't email me that "real food" is unaffordable; beans and rice and vegetables from the Asian or Hispanic or Halal markets are much cheaper than fast food. Please click on the "What's for Dinner?" tab at the top of the page for an analysis which proves this. When it comes to fast food, what we have can be boiled down to one word: excuses.

5. Everyone who forms or helps sustain a community garden is part of the solution: "Food is wealth, health is wealth, energy is wealth; all else is illusion." (For more aphorisms, please scroll down this page.)

6. Everyone who starts bicycling, insulates their water heater, or installs solar panels, etc. is part of the solution. The cheapest energy "source" is conservation. Installing solar panels isn't just a metric of which energy source costs "less"--as measured by what? What if the energy is priced in gold, or oil, or air quality?

There are dozens of other solutions which we control and which don't require unsustainable Federal borrowing and largesse.

Here are several thought-provoking readers' comments:

Adam C.


I just thought I'd write in to correct a fallacy in the argument contributed by Harun I. today.

"The problem with maintaining inflation at 3% is that it compounds until the curve approaches vertical. This exponential growth will eventually outpace real productivity and therefore, at some point, fake prosperity has to be created through expansion of fiduciary media (credit). What this implies is that what is happening today could have been and probably was predicted well before 1913. But once again politics trumped reason.

The effects being experienced today had to materialize. Mathematically there is and can be no other outcome. Ceteris paribus, as real productive activity decreased, credit (fiduciary media) had to be expanded at exponentially increasing rates until exhaustion. Exhaustion occurs at the point where the curve approaches vertical where infinite credit or money has to be injected infinitely. This is impossible and is why all efforts thus far have failed."

This is actually not true. If we accept, for a moment, Milton Friedman's work as correct:

MV = PQ.

M = money supply
V = velocity of money (a placeholder)
P = price
Q = quantity of goods produced


A correlary is given as

%change in M + %change in V = %change in P + %change in Q

or, in plain terms

%change money supply + %change in velocity = inflation + productivity increase So, in a situation where V is constant or increasing, it is in fact not true that we need to inject an infinite supply of money into the system to obtain a constant 3% rate of inflation. The number is actually very finite, and is roughly 5% (2% productivity + 3% inflation). The degree to which inflation outpaces productivity is in fact entirely irrelevant to the discussion.

If we take this a step further, and assume that "real productive activity decreased", constant inflation is even easier to maintain. If we produce less, than we don't have to inject any money at all into the system to create inflation.

Todays problems stem from the fact that for a variety of reasons, "V" has plummeted. It has nothing to do with real productivity. The government is feverishly trying to increase M through deficit spending to counteract this, which will certainly cause painful inflation down the road if/when V picks up. However, to say that this policy is "ceteris paribus" unsustainable is entirely false. It is only unsustainable if we assume a long-term drop in Velocity, which is quite clearly not a ceteris paribus situation.

The real issue with the US economy, monetarism aside, is that the "Y" we produce is not necessarily _useful_ in an objective sense. Legal advice is considered a productive good. Advertising is considered a productive good. Because we primarily sell services to one another, the "Velocity" of our economy is very high. $50,000 for a day in a hospital, as you like to point out, is a great way to create $50,000 of GDP. But we haven't really created anything at the end of the day. A second issue is that the prices of these goods -- let's call them "white collar goods" -- have been increasing at a much higher rate than 3% per year. Inflation in this country is actually quite high, as you have also pointed out many times, if we include items which are excluded from the basket such as health care and legal counsel. I worry about the day when our our considerable supply of money becomes more interested in buying turnips than paying consultation fees. That will be the day when our current economic situation finally hits home for most Americans.

Maggie R.

I'd like to reply to Noah C., who wrote:
"With fossil fuel depletion and 78 million Americans becoming retired and useless to the functioning of society in less than 10 years. I don't know what the results will be."

"Useless to the functioning of society" is a pretty harsh caricature of senior folks. Let's put aside the idea of retirement being "useless" which I do not agree with and go straight to the fact that many seniors work or want to work. But, first, they have to overcome age discrimination. I, for example, would like to work in my field, but for over five years have had no success being hired by mostly millenials or gen-Xer bosses. So I work as a free-lance consultant, part time usually, with no benefits.

As a result of spending most of my adult life raising children and working as a part-time professional I will receive a very minimal social security payout. In addition many "boomers" would like to continue working, but are laid off when they reach a certain age. Many seniors would like to work but find that the jobs open to them are minimum wage, part-time jobs at Target or Home Depot that require standing on their feet for 4-5 hour shifts. Still,many take those jobs which literally cause them physical pain.

Younger people do not understand that as one ages one's body does not always cooperate with one's desires. In addition, one's energy level and, consequently, one's motivation can lessen dramatically. Seniors, no matter how they would like to be more "useful to the functioning of society," literally cannot be, in so many ways. But, on the other hand, many seniors contribute much volunteer work of value that would otherwise never be done. Also, the presence of senior members in a society adds the irreplaceable long-view wisdom of social history.

Noah C's resentful attitude is also revealed in his statement "And we are going to have to support on our backs 78 million retired baby boomers. 43 million disabled people, 70 million children. And we have 20 million illegal immigrants. " . I don't understand why he feels that all these people will be "on his back." Disabled people have jobs. Parents support children. Illegal immigrants work hard. But the larger issue is his resentment. Has he never heard of the social contract? We are not islands unto ourselves. We all live and work together.

I've already written that I am in favor of social security and Medicare reforms. These are inevitable. In the future there will be more seniors living in poverty than those swinging a club on the golf course or sailing away on their dreamed- and worked- for vacation. Those lucky seniors with private investments that keep them out of poverty will be taxed heavily. If Noah (as a representative of his generation) is still resentful about that prospect, then there will be no hope for a civil society.

A.C.

From your Jan 07 entry: "It's relatively carefree to work for low pay 10-20 hours a week and scrounge up some tossed-out food from dumpsters."

Yes, this works in today's still affluent society. However, I disagree that they would be of any use in an actual depression:

"work for low pay 10-20 hours a week": Most corporations spend for an employee much more than the salary -- rule of thumb is total expenses for an employee including salary are 3-4x salary, and most items beyond salary do not scale down with fewer hours. Such expenses include office space, IT support and equipment, software licenses, HR support, taxes, insurance against claims by employee for work related issues, distributed costs of job searches to find the person, and so on...

Also, most unproductive time is at the beginning/end of a work interval, so shorter work intervals result in more unproductive time. Also, being out of the office means lacking the ability to provide input and to find out what happened when an item must be solved immediately... A half-time worker is only in the best case half as productive as a full-time worker, but the costs are always greater than half.

The professionals you mention are working part-time can do so only because of a tight labor market -- companies may not be able to fill their positions for months if they go, so they eat the costs. In a depression the employer has all the power, a nd guess what, work week goes to 60 hours, not to 20, for the few lucky enough to have a job. For who does not like it, there is another hungry candidate waiting at the door. This is backed with personal experience -- that's how the landscape looked in Eastern Europe in the 1990's.

"scrounge up some tossed-out food from dumpsters": After a state visit to France, Ceausescu (Romania's dictator) found out that they had this power plant in Paris that burns garbage and produces electricity. What a wonderful idea, he said, and ordered one built for Bucharest too, which was done. Unfortunately, the garbage in Bucharest did not burn, because guess what, people were so poor that they would reuse everything to an extent someone grown up in the rich West did not imagine. The miserable junk thrown in the garbage was stuff that not even pigs or dogs would eat, and that could not be reconditioned or reused in any way. People would share garbage, i.e. if the neighbor has a dog/pig, you save bones/potato peels, give it to them regularly, maybe they give something else in return. Pet food? Who can pay for that? Again, the above is not gleamed from some theoretical equation, but from my childhood in communist Romania, where nobody counted on dumpster-diving for a significant part of the diet.

That's how a real depression looks like. It looks and it smells like the brasilian favelas and the slums of Lagos, like fear and despair, and like all the nasty things people do to each other in such hellholes in order to make it until the next day. At no point living there without the chance of getting out feels like a spiritual experience and an opportunity for enlightenment, no more than diarrhea or a toothache do. I truly hope the US will never know such times, but if it does, don't count on dumpster diving and part-time work! Social networks and being able to provide what others need are the key to making it.

Thank you, readers, for these stimulating comments.

New Operation SERF installment. Please note: " This "Strategic Action Thriller" is fiction, and contains graphic combat scenes.
Operation SERF, Part 6:
“Dad,” said Daniel after he walked into the log home from outside. “The French are uploading the video they shot by satellite link.”
“And?” asked Josiah as he sat on his couch looking at the fire in the woodstove.
“Do you want them doing that,” questioned Daniel, “after what happened? What they have us on video doing.”

Amazing offer for Amazon Kindle owners: get a complete novel by CHS for the grand total of $1.58 each: Of Two Minds Kama Sutra Cadillac
Or Weblogs & New Media: Marketing in Crisis for $4 (digital download).


Thank you, Thomas Y. ($20) for your very generous donation to this site. I am greatly honored by your support and readership.

Thank you, Don P. ($20) for your ongoing encouragement and contributions to this site. I am greatly honored by your support and readership.

Read more...

Trends for 2009: "Same Old, Same Old:" Borrow and Spend, Until We Can't


The Federal government and financial system of the U.S. will continue applying the same old "borrow and spend" tricks to reinflate the debt bubble/bogus "prosperity" economy until such time as interest rates rise enough to stifle borrowing. The end-game of that worldview is now in sight.

As noted in Leverage Points for Positive Change (October 17, 2008), noodling around the edges of problems never solves them. We are currently engaged in a multi-year noodling effort known as "borrow and spend, then borrow and spend some more. Repeat until debt bubble reinflates or nobody lends us any more money."

The absurdity of attempting to force people to borrow beyond their means is self-evident to all but those who are yanking furiously on the levers of government policy.

In my little book Weblogs & New Media: Marketing in Crisis I list three sources of leverage in any system:

1. Add an information feedback loop

2. Change a goal

3. Change a worldview

People saving instead of borrowing more is certainly a new "informational" feedback loop in the system, as well as a new goal. The worldview that the U.S. economy can magically return to the glories of debt-fueled "prosperity" circa 2006 has yet to be replaced with a more realistic worldview.

Such a view would recognize the impossibility of borrowing trillions of dollars to support spending, the impossibility of reinflating the debt/asset bubble with legerdemain and a "zero interest rate" policy, and the impossibility of re-energizing a global system based on stupendous leverage and astounding velocity of transactions and money.

Frequent contributor Harun I. addresses the end-game we face:

"The responses to your post were thoughtful. I agree with some of the main points but remain unconvinced of the solutions.
Our problems began in 1913 when the Fed and therefore de facto centralized planning was established. And every generation that ignored the fact that counterfeiting money and lending it at interest is a scheme that has catastrophically failed in all previous attempts deserves what eventually befalls them -- results equal intentions.

The problem with maintaining inflation at 3% is that it compounds until the curve approaches vertical. This exponential growth will eventually outpace real productivity and therefore, at some point, fake prosperity has to be created through expansion of fiduciary media (credit). What this implies is that what is happening today could have been and probably was predicted well before 1913. But once again politics trumped reason.

The effects being experienced today had to materialize. Mathematically there is and can be no other outcome. Ceteris paribus, as real productive activity decreased, credit (fiduciary media) had to be expanded at exponentially increasing rates until exhaustion. Exhaustion occurs at the point where the curve approaches vertical where infinite credit or money has to be injected infinitely. This is impossible and is why all efforts thus far have failed.

Mish is absolutely correct when he observes that credit is being destroyed faster than it can be created.

Those demanding that you tender solutions do not understand that: 1) The 53 trillion dollar gorilla in the room cannot be satisfied. What is so egregious is that the Boomer generation saw or should have seen it coming. Instead of tackling a very difficult problem they chose distraction by bread and circuses.

That the most technologically advanced country in history could conceive that sending worthless pieces of paper to China so that they could buy worthless Treasuries so that we could continue to purchase "things" that required real human effort and natural resources is either collective insanity, rank stupidity, desperation, or just plain old greed.

And now that we have engaged in this type of activity for decades and the comeuppance is upon us we demand solutions to avoid the inevitable consequences of ineptitude and apathy.

Means testing will cost billions we do not have, will be implemented ineffectively, and, on scale, will prove ineffective at deflecting the 53 trillion dollar asteroid the size of Rhode Island hurtling at us at a few hundred-thousand miles per second.

The situation is untenable. That an insolvent government (starting from a 53 trillion dollar deficit) and facing global peak resource utilization, will somehow effectively manage to administer to a huge retired population whom have no savings, assets that they will only be able to sell at a loss and pensions denominated in a worthless currency, as a line of thought, is at best, imprudent. I take no pleasure in stating, and do so without any hyperbole, that you are about to forget about Katrina.

2) This Grand Cycle top is unlike any other faced by mankind. We are at peak everything; peak oil; peak food; peak water; peak industrialism; peak credit; but not peak population. There is and will be no excess capacity for growth. The very mechanisms that have allowed homo sapiens to reach such high levels of population density are at or near exhaustion.

And there is no Plan B. Those depending on technology to the rescue do not understand that by the time the Trident Submarine was put into production its design was 20 years old -- and obsolete. This type of government performance is not encouraging. Very long term there will be no return to what has become to be known by the Boomer and current generation as status quo.

What will have to happen is a return to using precious resources not for consumerism with all of its built in waste (planned obsolescence, disposable everything) but for producing absolute necessities.

This may all sound grim but if you remove the adjective, it simply is.

I have not read Mr. Kunstler's book but the title cuts to the heart of the matter -- we have entered a long emergency."

Eric A., who recently penned the nuanced essay Life and Cash-flow Accounting , added these thoughts on what constitutes wealth in a new paradigm:

"There’s a far more likely possibility than any government-ordained financial triage: it’s that you and your extended family will move back to one house, grow their own food, and hustle whatever they can on the side. …Just like every other time in the history of mankind except the peculiar decades of 1947-2007.

The government can ration all they want. They can demand doctors give care all they want. They can give away all the money they want. But that won’t actually make things happen. Today’s case in point is Zimbabwe, but history is littered with examples. In the mid-80s the Zimbabwe dollar was par with the USD. Today $100Billion buys 3 eggs(actually $100 Trillion—it’s been revalued once already). The National Statistian officially stopped calculating inflation because goods are no longer for sale. How do you calculate a basket when nothing is available at any price?

This sounds far-fetched to us Americans, but with $99,000 Billion in unfunded liabilities, now rising at $8,000 Billion—or $23,000 a person--per year, why would we expect the money the government gives us will be of any use? In reality, the government is incapable of giving us anything we didn’t already make.

The only thing they can do is re-distribute from people who produce things to people who don’t. And when they do, I foresee a steady rise among those who receive and a steady decline among those who produce culminating in long-term shortages and general poverty—just as seen in Zimbabwe’s identical experiment. (For more, see Zimbabwe’s letter of approval for the Fed’s recent actions)

But note that neither unlimited sums of money nor the reality of a violent dictatorship can cause goods to appear, in Zimbabwe or anywhere else.. Only hard work and free cooperation can. This will happen the minute government stops actively preventing it, although you are free to do so now if you choose.

I did this with hyperinflation as an example, but the same would occur in a Depression: in the last Depression, government funded work programs, raised wages, demanded compliance to dozens of schemes, and deficit spent. It made no difference then either: there were shortages and general poverty.

This is because money is not wealth but a way to measure cooperation. Introducing money in the “rationing” argument is a misleading calculation. Is it better to have $20/mo owning your house and making your own food with 5 or 10 others to fall back on, or get a check for $2000/mo when you live alone, rent, and buy everything? In this case you might have a better life and better peace of mind being dismally “poor” than being “rich”. Doubly so when the government has more than shown that they are incapable of helping, of keeping their word, or of having your interests in mind.

I fully expect them to give away lots of money, demand cooperation by means both just and unjust, re-distribute goods with reckless abandon, often to themselves, waste goods, bark lots of orders, and I expect it to do no good whatsoever. Even financial triage and rationing of services is a sideshow.. With hard work and cooperation, there would be no need for rationing at all. As in the example of Zimbabwe, this happens automatically in a sound monetary system.

If for lack of alternatives each family or group becomes self-supporting with their family homes and dooryard gardens, what need would there be to re-distribute goods to others who are equally self-sufficient? And if we stop the massive re-distribution, what would we need the re-distributors for? The government has become nearly 50% of the economy. Returning their share to ourselves would be an enormous boost, perhaps enough to offset poverty.

Maybe we should stop looking to get everything from somebody else, cut out the re-distributors, and divide their share among ourselves. Ya think?"

Noah C.'s comments in Trends for 2009: Generational Optimism (January 5, 2009) about his generational peers seeking government jobs drew numerous responses, and here are Noah's thoughts on the issues raised.

"I was merely describing what we are doing, what I am seeing. I know many people my age who grew up very poor but still are working and have worked to become things like electricians, plumbers, brick layers, truck drivers, and nurses. I do not know many people from the upper class who work in business or are lawyers because the field of writing doesn't lead me to those people. It leads me to liberals who read a lot. I was describing, not proscribing, what my generation is doing with their time who are graduating with bacholors and masters degrees who grew up in the middle class.

What will be the result is unpredictable.

With fossil fuel depletion and 78 million Americans becoming retired and useless to the functioning of society in less than 10 years. I don't know what the results will be. But I don't know anybody talking about giving up.

We have to look back at the baby boomers when they were young. How the older generation was telling them that women and blacks didn't deserve equal rights. But you told them they did deserve them. And remained optimistic that what you were doing was right.

And from your place in youth you did not know what the results would be: yes a large amount of equality has been achieved. But you didn't know that your beliefs in comfort would lead to global warming and the depletion of fossil fuels for my generation.

My generation has much greater obstacles than previous ones. We have already had a terrorist attack, to fight in two wars, wages have decreased, we are finishing college, tech school, and high school to enter into an economic depression with college loans to pay off. We have hurricanes caused by global warming that lead to week long power outages in Ohio. We have a housing crisis that is a blessing to us, because at least if houses go down enough we can actually get one. Our colleges have become absurdly expensive. Light crude is depleting at 9.1 percent a year. We are going to have at least 10 more years of struggle with OPEC countries to keep our cars running. And we are going to have to support on our backs 78 million retired baby boomers. 43 million disabled people, 70 million children. And we have 20 million illegal immigrants.

These problems outweigh yours.

I don't know if my generation can fix these problems. And I'm not even sure if they want to. As Norman Cantor said about Rome, they let it fall, because it became a burden to sustain.

But these problems, added together create a such a large problem that it will take a war-like effort to combat it. And war-like efforts can only be fought by governments, not the private sector."

Last, former small business owner A.P. submitted this account of why he sold his business and retired to a smaller investment-based income. I know many of you who haven't been entrepreneurs may not "get" this, but to me and every other small business entrepreneur it rings true. ( Trends for 2009: "Voluntary Poverty" January 7, 2009)

"Last year I elected to move into 'voluntary poverty'. Well, not really by most people's standards. But in a sense by mine. I used to lead a much wealthier life.

For years I had operated a profitable business. My income varied over the years from $0 (nothing) when I started it, to over a $1M (one million) during a couple of years. In 2000, I knew I should have sold my business at the top of the cycle, but too many things were happening personally to get out. When presented the opportunity in late 2007, I took it.

As the business I was in had a certain cyclicality to it (in 2002 I lost money) but was overall quite profitable most years from the fifth year on, had I just 'hung in there' I would still most likely be making over $200k/yr and maybe as much as $350k/yr for the next few down years. As I already mentioned, I sold out instead.

Now I pay no Social Security taxes as I have 'no income' to be taxed. I am living off dividends and interest. And while my portfolio took quite a hit with the market downturn, I am still able to 'make it' on what I have invested as most of those stocks I own were invested in dividend paying instruments of either higher quality, or in the energy sector (which I, like you, guarantee will come back in the next few years). When all is said and done, in the next 5 years I expect my losses to eventually total out to less than 10% of my portfolio, a hit I can easily handle. Even now with what cash I have I am in the markets buying select stocks. But I digress...

I have no idea what my income will be this year, but it will end up at less than the $200k I used to be able to make fairly handily. However, even if it is only $150k, at a 15% tax rate (v. the higher income tax rate plus Social Security and Medicare withholdings) I will still make roughly the same or more. In addition, I get to stay home, watch the markets, hang with the kids, read, and basically indulge myself in whatever I want.

Now I did not quit because I hated my job, or solely to be a 'slacker', I quit because I saw a system that every year seemed to have it 'in for me' more and more. One year the state legislature debated a bill that would have effectively put me out of business in NO time. It missed making it out of the Senate by one vote. In other years I had high workmen's comp claims that were clearly fraudulent.

The last year I had three employees try to 'blackmail' me around the idea of their having to work in an 'unsafe work environment' -- clealy a falsehood. Only with the state, it was MY burden to prove it, not theirs. I ended up paying them off to go away, as to fight it would have meant dollars from my pocket while the state would supply them with all they needed for representation -- also with my dollars!

Every year it seemed to weigh more and more on me -- "Why take the risks?" "Why chance losing it all for a few more dollars?" "Why put up with all the stress?"

So I sold out.

I have vowed not to work for at least two years, though it may be longer with the economy the way it is. As working for someone else is not my idea of fun, there will eventually be another business in my future. But it will be much smaller, with much smaller risks involved, much less capital needed, much less stress, and the ability to simply shut down and walk away if I so choose.

It is simply no longer worth all the effort to be responsible for scores to hundreds of employees when government, with one rule or regulation, can put you out of business and destroy millions in 'wealth' and goodwill. My common mantra over the years was I could always deal with the competition -- it was my government I had to look out for!

So Charles, I am already a living example of much of what you cover in some of your columns -- a guy who ran a small business and quit because of my government more than anything else.

I have a friend just like me (only a lot wealthier). He is living the same stress-free life, though he took much of his wealth and tied it up in real estate. I am trying to convince him to sell out all his apartments, as in the future, he will only get taxed higher and higher on those while being unable to raise the rents at the same rate. He believes his 5% return will stay constatnt. I tell him inflation will kill him over time if added taxes do not. I watched this happen to another friend for years in another city -- where every year he raised rents only to find higher property taxes ate up the added income. He never got ahead."

Thank you, readers, for your thought-provoking comments. We may not know the precise run of the future, but we do know this: it will not re-set to 2006 and the low-volatility bliss of bogus debt-based "prosperity."

Amazing offer for Amazon Kindle owners: get a complete novel by CHS for the grand total of $1.58 each: Of Two Minds Kama Sutra Cadillac
Or Weblogs & New Media: Marketing in Crisis for $4 (digital download).


Thank you, Kenneth W. ($50) for your exceptionally generous donation to this site. I am greatly honored by your support and readership.

Thank you, Gene M. ($25) for your much-appreciated contributions both financial and intellectual to this site. I am greatly honored by your support and readership.

Read more...

Trends for 2009: "Voluntary Poverty"

Voluntarily working less for a lower income--what I term "voluntary poverty"--will grow in popularity for a variety of reasons both cultural and financial.

An unspoken tenet of the American Dream (version 2.0, in beta) is that maximizing personal income is an essential ingredient of "success." Many are now re-thinking that notion for a wide variety of reasons. (This value was pithily summarized by rapper 50 Cent as "Get rich or die trying.")

I want to be very clear that by "poverty" I am not referring to the sort of poverty experienced by many on this planet, i.e. going hungry, shelterless, etc. I am explicitly referring to the concept of voluntarily opting out of the maximum income one might earn in this impaired economy.

Let's go through the reasons why some are choosing lower incomes than they might otherwise earn:

1. Noble service. This is not new, of course, but in times of need many idealistic citizens accept work which pays modestly in order to serve their faith or ideals. We recently met a very intelligent, hard-working young man who just completed his seminary training after having spent five years in church-related work in Vietnam. Let's just say he didn't get rich.

2. Exiting the high-cost small-business rat-race. I have frequently addressed the stupendously high taxes and junk fees paid by legitimate small businesses in the U.S., and many have concluded that's it's easier to just make $12,000 directly rather than working ridiculous hours and paying all the rent, junk fees, payroll taxes, cost of paperwork and compliance, etc. to gross $100,000 and then actually net . . . $12,000.(See Trends for 2009: The Rise of Informal Work (December 30, 2008) .

For example, here is correspondent Dave E., writing in response to Trends for 2009: The Death-Spiral of Local Government and Small Business (December 29, 2008) :

You're so right: government will simply tighten the screws, incognizant of the fact that they're destroying the livelihoods of their own taxpayers in the process.
I ran a small consulting business for decades, and from home. And despite my relatively low overhead, I still struggled to pay 1/3 of my gross income in income taxes, not to mention all the other sales taxes, property taxes and government fees. So for the time being, I'm basically unemployed while I figure out how to make money while reducing those burdens. What I've decided so far is that it doesn't make sense for me to earn more than the maximum that can avoid income taxes, which is around $10,000 per year. Fortunately, I can live on that.

The system has become so burdensome that it's literally suppressing participation. I remember talking to a small business owner from the Netherlands about fifteen years ago. And he said that the burdens and taxes were so high, and the social benefits so lavish, that for most people it made more sense to go on the dole. It seems we're headed down the same path. "

I would add that the "costs" of trying to keep a small business afloat aren't just financial--the toll on one's psyche, family, health and sense of self are stupendous.

3. Exiting soulless work. One of Karl Marx's key tenets about Capitalism as he experienced it was the alienation of workers from the fruits of their labor. I personally know many people who hold well-paying but super-demanding corporate cubicle-Hell jobs in which the actual product or service is a million miles away and all that's present is a demanding boss and piles (or digital files) of essentially meaningless paperwork. Many are planning their exit once their kids are done with college and they no longer need to maximize their income.

Though it's not popular to say this, these workers are extremely alienated from their work and the "fruits of their labor." Their work is fundamentally soulless and everyone knows it; people stay because the money is so much better than more meaningful work performed in service of actual customers or patrons.

At some point people are ready to let go of the extra income and do something better with their lives. Many will cling on to age 63 and then bail onto Social Security; others are simply hanging on to get vested in whatever pension plan they have.

Others will get laid off and find they like not working at their former jobs. Once their families adjust to the lower income, they seek lower-paying, less stressful work.

4. Job-sharing /family care. Several physicians I know have chosen to work three days a week, effectively halving their salary, in order to spend time with their children or have leisure time as they get older. Yes, I understand many physicians have to maximize their incomes to pay down their horrendous student loans, but at some point in middle age drastically cutting hours, responsibilities and income is a possibility for many frugal professionals such as doctors, nurses, attorneys, etc.

One side benefit of this halving of hours is that it essentially "shares" one job between two families, enabling more people to live off one position.

5. Anti-materialism can be fun. If low-cost shelter is available or shared, "dumpster-diving" and "freegan" lifestyles are remarkably low-cost for at least for the healthy among us. It's relatively carefree to work for low pay 10-20 hours a week and scrounge up some tossed-out food from dumpsters, leaving you time to form a band, do some craftwork, etc.

In other words, The American Dream Version 3.1 might reject maximizing income as a waste of one's life. Beyond a certain point of comfort, a sofa dumped on the street is (once de-fleaed and cleaned up) nearly as comfortable as some poorly made bourgeois sofa which cost thousands. Ditto thrown out food (mostly perfectly good), "beater" cars, etc.

In a "rich" irony, I find that the Forbes Ad Network is displaying a "win a $2 million dream home" advert today on the site. All I can say is: you gotta love it... the irony, I mean....

Here are some recent insightful reader comments; I am pleased several Gen-xers have checked in:

Kevin M.

As a baby boomer myself, I won't be one of the critics (of my views in Trends for 2009: Generational Optimism (January 5, 2009). Your article/analysis today is some of your best work. It offers hope in the fog ahead. But I'd like to offer that at least some of the pessimism of our generation is probably related in no small part to the fact that we see current circumstances as intractable.
The WW2 generation knew life before the "contract", the millennials can see clearly that the contracts future is unlikely; as boomers, we've grown up in and with the contract, and are somehow controlled by it emotionally and intellectually. We were even educated in it, giving it it equal weight in the scheme of life with basics such as food, water and air. Most of the analysis of the current state of affairs by boomers is status quo centered because that's what we know.

For most, it's all we know, and any assumption of it's demise is considered unduly pessimistic, unpatriotic or utterly unthinkable. Despite our generational (superficial) emphasis on free thinking and free living, we are at the core anything but. We may instead be the most programmed, propagandized generation in the country's history. Our views and behaviors in regard to consumption, lifestyles, education, healthcare and any number of facets, have become disturbingly regimented. We've seen less individualism--rugged or otherwise--in the past 10-20 years than we've witnessed in the previous 30-40. Our generation has become sanitized and robotized, if that's a word.

Perhaps more significantly is the fact that while the economic game is changing, the status quo still dominates, and therefore we're still within it's grip and unable to make extreme moves beyond it. This is especially true for anyone with children who are school age or younger (the current level of government control or influence over child rearing is unprecedented in our history). Yes, the current system is dysfunctional and in a state of deterioration, however evidence of a successor system in not yet clear so we desperately cling to the past in the search for salvation for the future.

So while it may be entirely logical and reasonable to project that the future will see a return to small family farms, the present remains dominated by corporate agribusiness. We continue to live within a construct of unsustainable high costs in housing, health care, taxes and various other mandated costs which constrain our options to move forward. That's the reality of the moment.

There may be hope for a rise in boomer optimism once the changes resulting from the current deterioration become more obvious and relevant. Keep plugging with your articles. The future will become clearer over time, but we need people like you to identify it to the skeptical masses who have been brainwashed to believe that the status quo is the only way.

Lone Cowboy

From your Jan 06th column:
" I was born in 1980 so I'm one of the people you're talking about. It is accurate to say my generation is full of optimism. .... Everyone I know that graduated from college last December wants to work for the government,"

And what exactly is entitlement but working (actually perhaps we should say "employed", working a government job is an oxymoron) for the government. Who do they think pays for all these government jobs?

And, they never seem to remember, those paychecks of theirs (taxes) are collected at the point of a gun. Just try not paying your taxes.

The LAST thing this country needs is yet still more government workers. Maybe, just maybe, they should get a real job and try getting along with all the government workers, rules and taxes. Then maybe, just maybe, they wouldn't be so "full of optimism".

They are full of something all right, but it isn't optimism.

I'd have more, but I have to go fill out government paperwork for the next hour or so to continue to do the same job I always have. The paperwork, will of course, never be looked at, for any reason, but by god if it's missing, the huge fines would put me out of business.

Brad G.

I have one response to your thought-provoking reader Noah C's comments: For goodness sakes, I'd be optimistic too if I was looking for a government job that provided great pay, benefits, and pension. Did you notice that NONE of his friends want to work in the private sector. Who the heck is going to pay for all these govt jobs,benefits, pensions? Boy, you talk about someone that doesn't have a clue... just like most of the "millennial optimists".
Lis M.

I read your and Maggie's comments with interest. I agree with much that was said in both. However, I do wonder why the vast military expenditures of our country are seemingly "off the table" when it is time to talk about fiscal responsibility. Nowhere is there more waste and corruption than in our military spending. No other national expenditure brings more misery and destruction to the rest of the world. It seems to me that we need to address the wider world of spending in order to build a more equitable society. The reason that SS has persisted and the genius of its formula is that it is an entitlement for all. When it assumes the character of a welfare program for a designated group, it will perish. The very entitlement that Americans feel for their SS is the only thing keeping the wolf from the door for the poor.
David S.

As an amateur historian, I believe that the Greatest Generation (WWII) is responsible for a lot of our current mess! Their parents were adults during the Great Depression, and seemed much more skeptical about FDR and his socialist solutions to Hard Times. However, the GG ate up FDR’s nonsense with a spoon. They were the ones who were first fully indoctrinated. It took until about 1965-1970 for the decline to fully set in, but I believe it began when the WWII generation embraced socialism.
Michael Goodfellow

The thing about Social Security and Medicare is that old people vote. To really means-test those programs requires not just cutting them from Bill Gates (there aren't enough rich people to matter to the overall numbers), but cutting them from upper-middle class, and then (if health care inflation isn't tamed) middle-middle class. And you wouldn't just be cutting future retirees -- once the budget gets bad enough, you are going to have to cut current retirees and people just about to retire.
Politically, those programs have always been a mix of welfare and forced retirement. It's the retirement part of it that maintains political support. If people really get into a situation where they are paying thousands a year into a program they know they will never get any benefit from, I would expect political support to disappear.

Though what I really expect is that the government will be under pressure to cut anything else but SS and Medicare. Certainly defense, and R&D (NASA, etc.) and sell off national land, and cut support to the states, spending on highways, etc., all before they start denying operations to Mom. And of course, they will demonize the drug industry and overpaid doctors and inefficient hospitals, etc. I would also expect to see free care in Emergency rooms dropped before they really cut benefits (homeless people don't vote.)

That's if they don't tell themselves they are saving money by nationalizing the entire system, which would throw it all into chaos. Who knows what will result then.

P.S. What would you have said at 18 if told your parents would be remembered as "the greatest generation" and the boomers would eventually be seen as an annoying, self-indulgent swarm of locusts who left nothing behind for their kids?

Bill Murath

Your post the other day about the outlook of the younger generation was timely. At 48 soon to 52 weeks from 50 on Thursday I want to think at the fore front like the 80's-90's folks. A basic tenet of Zen / Tao is that the old grow hard and hold fast to their ideas and thus snap in the wind. I want to let loose of my own long held beliefs and become one of the new revolution in thinking to keep advancing society. The old thinking is dead and it will lead most for a long miserable ride til the end of existence this time around.
I read Zen and the Art Motorcycle Maintenance 15 years ago on the Northshore. It was deeply moving back then. I was on a walk this afternoon with J. and how I mentioned to her that I felt like the main character. Driving himself nuts at the apex of middle age. I think the whole issue is that at this point in human existence we are not supposed to move so fast or so far ahead. We can't handle all the input and sort it out to really function.

It blows my mind how many people are taking effexor and clonidine for depression and anxiety. I am not part of that crowd though I self med with beer and smokes. Sure my choices are old school by they are simple by-products of our existence and somewhat more social than the others. Even taken to the extremes the homeless drunks do share a common bond of alcohol. Even smokers chat with other smokers during smoke breaks. But do you here the lost folks saying " hey, it's time for me to pop a Clonidine wanna chat?" Hell, even heroin addicts have more of a social bond than do the lost.

Chuck L.

love your blog, read it every day and I think you are way ahead of most people in understanding the types of changes that are coming. In regards to today's post, one of your reader comments makes me think that this younger generation may not understand the depth of changes coming their way and I had to write you. It was this one:
"In Ohio where we are supposed to be a lost people. Everyone I know that graduated from college last December wants to work for the government, my friend wants to be a school teacher, one woman I know wants to work for intelligence, and another wants to work helping criminals reenter society."

It's simply not possible in any type of a modern economy for everyone to work for government or for charity organizations-these things are neccesary and good, but totally dependent upon wealth generation/private sector activities to pay for it. Please try to gently let your younger readers understand this, or they may enter the workforce with some really dangerous illusions and naivete.

Jude Z.

You recent installments about generations, optimism, realism, and sacrifice concentrate on Boomers and Millennials, and the reader responses are a truly sad affair. Boomer comments are primarily apologia or condemnation of whipper-snappers, and the representative Millennial explains that he and his friends are optimistic because they want government jobs and to "party hard". As a Gen Xer, I am stuck between the unrealistic entitlement Boomers and what they "deserve", and hard-partying government parasites? Oh, that's lovely.
Gene M.

Reading this thread, I noted that few mention the fact that SS might well be self-sustaining if Congress had in fact let it alone instead of using it for the general fund (and avoiding the need to halt spending and/or raise taxes. In fact there was a law passed a couple of decades ago that was meant to halt this practice, but of course Congress got around it by writing IOU's to SS. {Insert here a snide, well-deserved remark of your choice about Congress}
Ah but Bernanke, who has become something of an expert on bailouts, should easily be able to bail out SS. After all the FED's balance sheet is unlimited, they tell us.

Steve C.

Just read your responses to Maggies email. All of it was well reasoned.
I do, however, have one other thought to add. Means-testing, rationing, et al, will be useless simply because at some point within the next decade, we won't, as a nation, be able to afford any form of social welfare. Recession/depression, a decrease in tax revenues (with a congruent decrease in the number of workers paying into the system), and an increase in the numbers of people drawing (or wanting to draw) welfare benefits from the government, will necessarily mean that something's gotta give.

Either the "boomers" will have to fall on their swords, or the Gen-X'ers may very well decide to run the boomers through with their own.

Thank you, readers, for your thought-provoking comments.


New Operation SERF installment. Please note: " This "Strategic Action Thriller" is fiction, and contains graphic combat scenes.

Operation SERF, Part 6:

“Dad,” said Daniel after he walked into the log home from outside. “The French are uploading the video they shot by satellite link.”
“And?” asked Josiah as he sat on his couch looking at the fire in the woodstove.

“Do you want them doing that,” questioned Daniel, “after what happened? What they have us on video doing.”

Amazing offer for Amazon Kindle owners: get a complete novel by CHS for the grand total of $1.58 each: Of Two Minds Kama Sutra Cadillac

Thank you, Mark K. ($75) for your outrageously donation to this site. I am greatly honored by your support and readership.

Thank you, Richard D. ($20) for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.

Read more...

Trends for 2009: Discussion Begins on Means Testing and Rationing of Entitlements

As the impossibility of funding Baby Boomers' pensions and Medicare becomes ever more evident, a tentative, terrified-of-alienating-voters discussion begins on the most obvious ways to limit unaffordable entitlements: means testing Social Security and rationing Medicare/Medicaid.

Reader Maggie R. took me to task yesterday for being long on anti-Boomer diatribe and short on solutions. I would have to agree with her critique, so today's entry is on potential solutions. Maggie wrote:

"I read with interest your essay this morning on Trends for 2009 Generational Optimism. But I was sorry to read that what began as an essay about the millennial generation degenerate into a diatribe against the "boomer" generation.
To implore a whole generation to fall on their swords is really cavalier, to put it mildly. I would ask you to imagine a generation of elderly people without incomes or health care, many of them without family to live with. I wonder if this millennial generation would be able to tolerate a society full of indigent old people?

Rather than come up with some catchy phrase like "fall on their swords" why not use your considerable intellect to propose some pragmatic steps that individuals and society can take to ameliorate the coming situation?"

Well said, Maggie, thank you. Maggie then offered solutions which many well-informed observers view as inevitable: means testing, rationing and a national healthcare plan of some sort.

"I agree with you that Social Security and Medicare are unsustainable as is and need policy changes that will recreate them as entitlements for the poor. And universal health insurance may allow us to do that. . If SS is means tested, there will be no need for anyone to "fall on their swords." The financial impossibility of SS is due to its being owed to everyone, even those who could live quite easily without it. The upper and upper middle class will need to give up their SS benefits and new tax laws will likely accomplish that. But they won't like it having paid into the system all her life.The economy will need to become quite dire for people to swallow this necessity.
Medicare is another issue. There is no question that health care provision will have to "rationed" for everyone. In fact, those of us who have managed to purchase individual health insurance with high deductibles already ration our care. I have a $2700 deductible and you can be sure that I do not go to the doctor for minor issues. "

It was not my intention to sound cavalier, so let me re-phrase my intent in saying Baby Boomers will have to "fall on their swords." What I meant was this: politically and culturally, we are in the deathgrip of an entitlement mindset in which the vast majority of the populace is focused on "what I was promised," "what I deserve," "what I paid into," etc. etc. etc. and not at all on what the nation can actually afford and what sacrifices might have to be made to restore fiscal prudence (and survivability).

That transformation from entitlement to sacrifice is "falling on your swords." That change will have to occur within millions of Boomers, and then as a result of that inner understanding, in the body politic of the nation.

I would say we're not even close to that transformation. But discussions--tentative, fearful, murmured, whispered--of limiting unaffordable entitlements are beginning, and will become ever more common as the U.S. economy continues its downward spiral.

Astute reader Jason submitted a link to this upcoming book The Narcissism Epidemic: Living in the Age of Entitlement with this comment: "Not out yet, but you have to love that title." Agreed, and thank you, Jason, for bringing this to our attention.

Maggie R. also observed that the Boomer generation is not solely responsible for the present financial meltdown and culture of entitlement:

"I, too, have been frustrated by the short sightedness of my generation in regard to economic issues, but I believe that much of the blame can be laid at the feet of our whole culture that prefers to pay millions to football players and 30K/year to teachers. This is merely an example (I'm not an embittered teacher). These skewed values cannot be blamed on the boomer generation; they were inherited. One could blame the WWII generation for raising its children with these values. It's true that one doesn't need to accept such values. But the numbers of people with an independent mindset are few in a culture permeated by mass media culture. One would have to fault the human species for that.

I'd also like to point out that our generation protested Vietnam, supported civil rights for African Americans, and promoted equal rights for women. There is much to admire, although I feel pessimistic that these achievements will be lauded by younger generations when they are faced with looming poverty as a result of an economic firestorm."

While I would agree no one generation bears sole responsibility, it is the Boomers who are about to retire and thus it is they who must step up to the plate and make the fiscal sacrifices necessary for the survival of the nation. The generation who got drafted to fight World War II didn't get a choice about what sort of sacrifices they would be called upon to make, and it can be said that those Boomers who got drafted (or volunteered) to fight the Vietnam War have already made enough sacrifices.

Fair enough, so let's place Veterans' entitlements at the head of the "entitlements triage" line. Medical care provided by the Veterans Administration is actually very cost-effective compared to the bloated, 50%-is-waste Medicare program, so that can be left more or less as-is.

As for retirement benefits, maybe some prioritization is in order: those who served in combat and those who served active duty for more than 20 years are at the head of the line, followed by everyone else. Do Veterans' widows receiving the benefits of their spouses "deserve" that entitlement if they have adequate income from other sources? Since my Mom fits in that category, it would be easy for me to say "yes," but I think the coming triage really requires us to get back to basics: the Vets get the benefits they earned with their service and when they pass away the benefits do, too.

It would be nice if we could pay every entitlement forever, but reality is about to impose limits on how much the nation can borrow to pay entitlement benefits to 75+ million people.

Is "means testing" fair? I would say: absolutely. Look, if someone is collecting a $4,000/month pension from a government/private retirement pension, then would sacrificing their $1,000/month Social Security put them on the street in a cardboard box? No.

Do they "deserve" Social Security" because "I paid into it"? Well, actually, yes and no. The truth is that virtually all Social Security recipients pull out the actual money they put into the program, and interest earned on those contributions, in a few years. Everything after that is welfare, paid by other taxpayers--i.e. the generational Ponzi scheme.

Most people refuse to accept this incontrovertable fact: after a couple years, every dollar of Social Security you get is flat-out welfare: an unearned benefit paid by someone else.

So far, we've been borrowing money from future generations to pay this welfare to retirees, but our ability to borrow trillions of dollars from foreign exporters is about to be radically restricted (by rising interest rates and the destruction of their surpluses), and as the worker-retiree ratio slips toward 2-to-1 then the generational Ponzi scheme that worked when the ratio was 10-to-1 or even 5-to-1 is about to collapse.

(Bernie Madoff has provided us with an example of how Ponzi schemes eventually collapse, and retirement "entitlements" are the world's biggest Ponzi schemes.)

So let's envision a means-testing triage for Social Security. Let's say we aim for a non-taxable cap of $2,000/month. If a retiree pulls in $1,200/month from whatever sources, then their Social Security benefit above $800/month is taxed. If they receive $2,000/month or more, then their Social Security benefits are taxed at extremely progressive rates--essentially 99% by $3,000/month in all income (even Muni bonds--no loopholes).

It's called triage, folks. Why should people drawing $8,000/month in other government pensions receive Social Security? What number is "too much"? Well, once you finally admit the nation is effectively bankrupt, then you set that number pretty low because that's all the actual money we'll have to spend anyway.

Once you agree to live within the nation's means, i.e. what's collected in cash via taxes, then all sorts of entitlements melt away--there's simply no money for them.

As for Medicare care being rationed: while I understand that's one way to go, I'm not sure that's the fairest or most practical way to go. I would start with these limitations:

1. There is no entitlement or right to care: all Medicare/Medicaid benefits are privileges, not rights, which have to be adjusted to the fiscal realities of the nation's income and expenses.

2. Those who can afford private care/private insurance which duplicates Medicare are excluded via means testing. Transferring your wealth to your offspring a year before you retire won't cut it: all wealth transferred within the past 20 years is counted. (see item 1. There are no "rights" except what's in the Bill of Rights. Medical care is not in the Bill of Rights.)

3. Every doctor's visit under Medicare regardless of the patient's income costs a $50 co-pay. This will create a market for $20 visits at the Wal-Mart walk-in clinic, and the government won't get billed $700 for a $20 visit.

4. What gets covered by Medicare is severely restricted. The triage is based on age and the cost of the procedure. The amount to be paid by each procedure is based on airfare to New Delhi, Shanghai, or Bangkok, Singapore, etc. plus the cost of the procedure wherever it is the cheapest. (Thus a hip replacement which costs $43,000 in the U.S. would be reimbursed at the rate of $5,000. See Doing the numbers on medical tourism (S.F. Chronicle, 1/4/09)

The net result of this would be clinics popping up in Mexico with First-World trained staff providing the care at those prices at a profit. No, you won't be able to sue; you'll have to do the research on the clinics and doctors there, and take your chances. Or you can save up cash or buy your own insurance to pay the $43,000 here in the U.S.

It's peculiar that we don't have a "right" to drive or a "right" to auto insurance; if you get three DUIs and wreck your car, your "right" to the privilege of driving and auto insurance are revoked or severely restricted. The lesson here: if the "right" to medical care is likewise revoked, then maybe people will start taking responsibility for their health. It certainly works in other areas of life like driving.

Before you start writing me, please keep in mind the context: a bankrupt nation requires fiscal triage such that its expenses are aligned with its income. Now if you want to leave all the entitlement structures as is, then you have to raise the funds to pay for them via taxes. Go ahead and nail the corporations for $1 trillion a year (and see how many still generate a net income to tax), and raise income taxes to 65%--yes, 65%. That's what Danish and Swedish citizens pay, and they don't even have the world's mightiest and most expensive military to support--so maybe we better nudge that up to 75% for the U.S. tax rate.

If you think I'm joking, do the math on raising $66 trillion (or maybe it's $90 trillion, we're only guessing at how much Medicare will actually cost) via taxes. Right now the U.S. government collects about $2.5 trillion in taxes per year and borrows a $1 trillion more to squander/spend, mostly from non-U.S. exporting nations like Saudi Arabia, Japan and China--yes, the very nations which are also entering recession and seeing their trading surpluses vanish.

It would be nice if the coming triage were easy, and if it could be managed with a few minor nips and tucks. But that is fantasy. The reality is: we either trim spending by $60 trillion over the next 20 years or we raise taxes by $60 trillion to pay for the entitlements we "deserve." Or we cut $30 trillion and raise $30 trillion in taxes. One way or the other, the sacrifices will have to be made.

I personally think our nation's cost structure has become bloated to an insane degree and the first step is to "get back to basics" and cut costs rather than try to raise $60 trillion in new taxes. This isn't just philospohical; I just don't think raising $60 trillion in new taxes is practical, as the imploding economy won't support it. But that's a discussion for another day.

Here are some other thought-provoking reader comments on the subject:

Noah C.

I was born in 1980 so I'm one of the people you're talking about. It is accurate to say my generation is full of optimism.
In Ohio where we are supposed to be a lost people. Everyone I know that graduated from college last December wants to work for the government, my friend wants to be a school teacher, one woman I know wants to work for intelligence, and another wants to work helping criminals reenter society.

I went to New York City, one woman with her psychology degree is helping the mentally retarded, another I met was going to school to become a lawyer to help with border issues.

My one friend with a masters is working for the state library in New Mexico organizing their archives.

My dream is to graduate next December and join Americorps.

The strangest is that we party hard. We get drunk a lot and have promiscuous sex. We are not in terms of past generations the most moral people when it comes to what we do after work.

But most of the people I know personally have the dream of working for the government trying to make America a better place.

Barely anyone I know wants to work in the private sector anymore.

The private sector doesn't provide the money, benefits, or enriches our emotional lives like it does working for people.

Concerning ideology: We aren't ideological. We are very pragmatic like you said. We were raised in a very factual world, we consider facts, take them, and seek a solution. We were raised by schools and television more than our parents, and schools and television don't have political affiliations. But they do have facts and problem solving.

We are a generation that has no real love for a political party and wants to work for the government, I think this will have strange consequences no one will be able to predict. I'm very excited to see it and will participate in it as much as I can.

My father and mother were born in 1946, they went to work and came home. My mother took pain killers all day. My father drank at least twice a week, smoked weed, and watched a shitload of television.

Saint Augustine said you can define a nation by what they love: My parents and their baby boomer friends loved air-conditioning, indoor heating, indoor plumbing, cement driveways, basketball hoops in the driveway, sports, well maintained highways. All of them loved their unions and were proud to members of it.

Besides that I couldn't see anything else they loved. They loved the conviences of modern living and want them to be there forever. All of them grew up hearing stories from their grandparents about being cold in the winter and having to farm for food. Hell, my dad got to listen to old Sicilians talk about what it is what like to live there, which what a stone shack and a small field to farm. My mother grew up on a dirt road they used to put oil on in the summer. She would talk about her grandfather coming in the house smelling like cow manure from farming all day. But there was no running water, so he could only shower once a week. I think baby boomers had an idea that was life different before world war 2, and didn't want to go back to that state.

Clinton and Bush are about not going back to that way of life before World War 2. They were presidents of Maintenance not of Change.

Also I think maybe the thing abour generation was that in the late sixties when the civil rights movements were successful, it set america on such a course, that america really couldn't move again until blacks and women were really equal. And I think now, we are seeing that a large level of equality has been accomplished. and since that course has been accomplished, we can take a new direction with the new stage set even further. but we needed that equality to move further, so it was like your generation's job to make that happen, to make that equality happen and I think you did that.

Dave E.

I am quite optimistic about the future, and I'm a baby boomer.
The things I'm optimistic about are a retreat from materialism and consumption, toward community, sharing, and a renewed civility. In addition, I'm hopeful that we may once again work in harmony with nature and willingly protect the environment as much as we would our own personal health, as if they are distinct.

The only reason not to be optimistic, and this is a real concern, is that the existing power structure may destroy the planet in a futile effort to preserve the existing hierarchy, from which it derives so much benefit. This is a far graver concern to me than even peak oil. After all, humans existed just fine before the advent of oil, which was a mere 150 years ago. We can do so again. Of course, I recognize that the human population that exists today cannot be sustained without oil, but I'm hopeful that the population can diminish gracefully and through attrition, if people are given a chance to work things out for themselves. Again, the biggest threat to the human population comes from the existing power structure.

Pat M.

The poll indicates optimism about the future and willingness to embrace change. Is this naïve or realistic? When the Ipods and Blackberrys cease to work and travel is restricted and food costs escalate to absurd levels, what will be their reaction then? In my observation few of the younger generation have ever got their hands dirty to earn a living, what dirt they have gotten on themselves is mostly from extreme sports, and their feeling of entitlement equals or surpasses the baby boomers.

While I agree with the assessment of the mess the boomers have made, I notice that the poll did not address whatever extreme measures that must be embraced to correct the mistakes and greed that these younger people will have to address. After all, we are in an extreme situation and it is going to take some extreme measures to right this sinking ship we are on. I wonder at what howling will be manifested by the young’ns when a large amount of what they take for granted isn’t there anymore and their attention must turn to grubbing in the dirt to grow food.

It sure appears to me that this optimism expressed in the polls only has validity if we assume that a radical change in life style is not necessary for just pure survival. It also assumes that working within the system also has validity. Being a doomer, neither of these assumptions appear viable to me. But what the heck, I’m 68 and what do I know?

Thank you, readers, for your thoughtful comments.


I am way behind on my email--I appreciate your patience as I strive to catch up from a few days visiting family.

Thank you, Jim S. ($75) for your stupendous donation to this site. I am greatly honored by your support and readership.

Thank you, Ross R. ($20) for your most generous donation to this site. I am greatly honored by your support and readership.

Read more...

Trends for 2009: Generational Optimism

The Millennials (those born between 1980 and 1990) view the future not with doom-and-gloom dread but with optimism. While this could be written off as delusion or "mere youthful optimism," the younger generations' optimism may well be an accurate assessment that the patterns, ethics and lifestyles of the older generations have run aground; as a result, the U.S. economy's deadwood (self-indulgence, moral dysfunction, solipsism/narcissism, debt-based bogus "prosperity," etc.) can finally be tossed out, along with absurdly impossible National debts and pension/Medicare obligations.

In a recent "conversation with Richard Metzger," we discussed the Millennial generation's optimism as per this research: Millennials Anxious Now, Optimistic About Future: "Despite a failing economy, employment woes and countless other concerns, a key segment of Millennials, people born between 1980 and 1990, remain confident about what 2009 will have in store for them. According to an omnibus survey conducted by StrategyOne on behalf of Pepsi, four out of five Millennials are hopeful about the future as the New Year approaches, and nearly all surveyed (95%) agree that it is important for them to maintain a positive outlook on life.

Lisa Orrell, generation relations expert and author of Millennials Incorporated, says "Children of the '80s and '90s inherently feel a strong sense of optimism in the future and their ability to shape it. This age group feels refreshingly unencumbered by history or tradition, a feeling that they can accomplish anything they resolve to achieve."

According to the survey, Millennials spend more time enjoying life than worrying about it and this group is most optimistic about their overall well-being and relationships with friends and family. Other findings include:

74% find that supporting causes make them feel more optimistic
77% of Millennials report having a strong sense of optimism about their careers
95% of Millennials make positive associations when they think of the word "change," associating it with "progress" (78%), "hope" (77%) and "excitement" (72%)
67% of Millennials say that the election of Barack Obama is making them feel optimistic about the future of the country

Those feeling "excited" about the future include:

57% of Millennials
49% of Gen Xers
38% of Baby Boomers
27% of Post-War Americans"

How much of this youthful optimism is just, well, youthful optimism? Is the study too small to be judged accurate? Perhaps the sample is small, but the responses seem to reflect a real difference between generational views of the future. We all have been inculcated with American culture's basic optimism; yet where is this optimism in the older generations' responses?

Perhaps these numbers reflect a true generational divide: the older generations which counted on tapping younger generations to pay for their retirement pensions and Medicare are no longer optimistic because they are finally absorbing the reality that their $66 trillion (or is it $90 trillion? Nobody knows above about $60 trillion) in unfunded liabilities are essentially uncollectable/unaffordable/ain't gonna happen.

Meanwhile, the younger generations are more optimistic because they sense that these unsustainable burdens will inevitably be lifted from their shoulders, freeing them to get on with the work of fixing all that's wrong with the U.S. economy, infrastructure and society.

Richard made these insightful comments on the study:

"What I make of the optimism is that is it FAR better to be an optimist than a pessimist.

In terms of your health, everything. Timothy Leary and Robert Anton Wilson have written extensively on this. Why perform the "loser script" when you can be following the "winner script"? What's the point in being gloomy all the time? You only get one life. You've got nowhere else to go, you're stuck here for a passage of time on Earth, make the best of it. Fake it until you make it!

Simple but sage advice.

Taken in generational terms, the Millennials haven't, at this point, aged enough to have either a) firm political opinions or b) any sort of real, muscular political power. Both are coming, but in due time. I've been saying this to anyone who'll listen to me for the past few days, that I have complete faith in the up and coming generation, especially if 75% of them see reason for optimism! This is good news indeed.

Here's the key statement:

"95% of Millennials make positive associations when they think of the word "change," associating it with "progress" (78%), "hope" (77%) and "excitement" (72%)"

... which translates to me as a fair degree (putting it mildly) of more OPEN MINDEDNESS in the young and a greater WILLINGNESS TO CHANGE AND IMPROVISE as events require them.

95% associating "change" with "progress" and not the backwards thinking reaction such a word inspires in, say, the hardcore GOP/Pat Buchanan types out there, well, this is good news to me. It means that the, the twenty-somethings of today, will not hesitate to throw out the BAD and try something new. It means the reactionary element of American politics is on the run.

I don't think this means that a new "New Left" manifests itself, far from it, I see this generation as being largely NON-ideological. It'll take the form of Pragmatism, in it's truest sense, the ultimate American philosophy. Or else there will be a cult of personality that will spearhead it. I don't think that an "ism" is necessarily what we'll be dealing with, but maybe. More of a "meme" methinks and anything "green" will be on the ascent, but again, I don't see any new "ism" on the horizon. except pockets of populism in some of the Red States.

And another thing, I simply do not see the young accepting the massive debts that we accrued before their birth or when they were young children for them and for their children to pay off. If memory serves, I didn't sign up for this either, did you?

Why should the productive capital of a generation be held up in debt when all it ever was was were digital "values" predicated on DEBT (i.e. fractional reserve lending --I borrow $1000 and so now the bank has $9000 to lend out) in the first place? The concept of money has become very, very fragile. Three percent of all "money" is in paper form, the rest is digital.

It doesn't GET any more arbitrary than THAT and yet this is what the world is basing its collective economic systems on... something that doesn't even stand up to common sense or "balancing your checkbook" math!

The idea of being 43 in an era of what I believe will be incredible REVOLUTIONARY change in, not just the young, but in all societies sick of what they've become, is to me, a blessing. I used to always think that I was born a few years too late for "the Sixties" and then punk (true, but I got post punk 1979-83 which was even better in hindsight) and then the dotcom era came along and I had quite a ride on that current.

But to be an adult, with the benefit of experience and age and all the (ahem) wisdom that confers (knowledge of history, old enough to have seen how little things change over time, seeing trends of all sorts come and go, old enough to know better and old enough to know that I will never, ever understand womankind) is, I think a good place to be in during a transition of sorts, for society.

I've always thought that the US needed a revolution. I think we're going to get one. I didn't think I'd see it during my lifetime, but now I'm sure of it will happen.

I can think of a number of positive things that are just around the corner, not the least of which is (as we discussed two weeks ago) is the fact that there should be a LESSENING of stress in terms of the tremendous "fees" and hidden taxes of life in America.

If housing costs and rents drop dramatically... If the leases on automobiles drop dramatically... If there is anything even close to universal healthcare in America (and this MUST BE, they have to do it with the kind of unemployment we face), well, these are three tremendous reasons for the common man to rejoice.

I mean, if universal healthcare, for the most part, just looked like these walk-in clinics that Wal-Mart and Target have opened, and $10 generics, I'll TAKE IT.

Imagining this doesn't sound all THAT BAD to me. If a LOT of people get pushed off the hamster wheel of modern living... I think a lot of them will LIKE IT.

It's the monetary system that has gotten society to where it's gotten (in terms of the modern world, world trade, wealth creation) but that same system to led to such bounty has been abrogated beyond all repair. When that system is understood (as is now starting to happen) by average people, the game is up. WHO would stand for it and WHO would agree to set themselves up again with the same stupid game with the same rules?

When 97% of the world's financial assets are held by 3% of the population or whatever that number is, the idea of private property and inherited wealth is idiocy for that 97% to put up with."

Thank you, Richard, for directing our attention to this research and for your commentary.
I would summarize the situation thusly. The "generation that won World War II" is now roughly 82 years of age or older (any younger, and you couldn't have served in World War II). There is a largely unspoken "social contract" to continue to provide the care which these citizens were promised for the remaining decade or so of their time on Earth; they saved Democracy, and this care is right and just.

But the 76 million-strong baby Boomer generation has no such "social contract" for the simple reason it is demographically impossible for 130 million workers to pay the pensions and horrendously costly Medicare benefits for 75 million retirees.

Yes, I know millions of Boomers will be working past 66 years of age, and so on; that is all just statistical noise in the long view. Two workers cannot pay for one retirees' benefits when a week in the hospital costs $120,000. (My friend's father recently exited the hospital after a modest procedure and that was the bill paid by Medicare--the equivalent of three year's pay or decades of Medicare taxes blown for one week without major surgery.)

Then there's the undeniable fact that the Boomers were front and center in the past two decades' orgy of debt, lies, obfuscations, greed and bogus "prosperity." Not just the Wall Street crowd, but the "flippers" who leveraged multiple homes on shaky credit, etc. Yes, the younger generation tapped the same vein of greed and malice, as did a few enterprising oldsters; but the Baby Boomers flocked unskeptically to worship the gold-veneered gods of rampant debt-fueled consumption and unproductive speculation.

So what "social capital" was built up by the Boomer's experiments in narcissitic consumption and political/financial self-destruction? Not a whole lot, and I say that as a Boomer (I just turned 55). Exactly what have the past two Boomer presidents and their political cronies accomplished to win the accolades and gratitude of the generations which follow? Borrow trillions and squander it on unproductive wars, speculative excesses and benefits which should have been paid for responsibly out of net National income via taxes.

I can already predict that some readers will chastize me for this moral-tinged outrage at the squandering of the nation's wealth and the Boomers' role (either active or curiously passive) in that destruction of wealth, trust and credibility, but to claim that this level of self-indulgence, destruction and willful myopia was "always the norm" is simply not true.

Two decades ago there was widespread outrage that Chrysler was extended $1.7 billion in Federal loan guarantees; now an $850 billion bailout of the most corrupt and venal elements of our economy drew muted cries, and a $14 billion bailout of the auto industry now seems picayune and modest in scale.

This is the Boomers in charge, and there is very, very little to be proud of in my view. It has been a parade of shame for well over a decade: a shamelessly neurotic and remarkably ineffectual trash-TV drama (the Clintons) was replaced by a simplistic charade of "strength" which masked raw stupidity, ignorance, greed and a willful looting of America's environmental, global and financial assets for private gain.

Guess how well the "privatization of Social Security" would have worked out. That was the ultimate ideological end-game of this administration and its minions on Wall Street--the privatization of immense profits and the socialization of risk.

I have long suggested the Baby Boomers should prepare to gracefully accept that the benefits we promised ourselves are simply unaffordable. Boomers, Prepare to Fall on Your Swords (June 2005):
"Now it falls to us to fix the finances of our foolishly bankrupted nation. Either we sacrifice our freebies (every recipient of these programs has extracted far more than they paid in, even including accrued interest) or we leave our children and their children burdened by an impossible debt. I say we go out with idealistic panache, and fall on our swords with grace and dignity."

For more on the demographic impossibility of the Boomers receiving the benefits of their parents' generation, please read A Generational War We All Lose (March 19, 2008). The loss of these retirement benefits is rather naturally a source of pessimism for Boomers, but perhaps the nation needs to start looking at its future through the lens of the challenges ahead rather than through the broken lens of what was irresponsibly promised in the past.

I am way behind on my email--I appreciate your patience as I strive to catch up from a few days visiting family.

New Operation SERF installment. Operation SERF, Part 6:
“Dad,” said Daniel after he walked into the log home from outside. “The French are uploading the video they shot by satellite link.”
“And?” asked Josiah as he sat on his couch looking at the fire in the woodstove.
“Do you want them doing that,” questioned Daniel, “after what happened? What they have us on video doing.”

Thank you, Peter F. ($20) for your much-appreciated donation to this site. I am greatly honored by your support and readership.

Thank you, T.L. ($8) for your book order and generous donation to this site. I am greatly honored by your support and readership.

Read more...