The Cost of Owning a Home Is Soaring

The soaring costs of home ownership are changing the metrics of unaffordability in important ways.

We all know that buying a house is now unaffordable, but owning a house is increasingly unaffordable, too. Gordon Long and I have laid out the sobering explosion of the costs of homeownership, a rise that shows no signs of slowing, much less reversing.

It would be nice to attribute it all to one source or one villain, but alas, it isn't that easy. Costs are rising across the board for many reasons, none of which are reversible by enacting a policy tweak or two.

For context, let's start with inflation since 2020 and the cost of buying a house. Truflation pegs the aggregate inflation (a.k.a. loss of the purchasing power of the US dollar in our domestic economy) at 26% since January 2020. All else being equal, we would expect the cost of housing to have risen by about 25%.

But according to the Case-Shiller national housing index, which tracks the purchase prices paid for each house over time, housing costs rose an eye-watering 45% since January 2020, as the index soared from 220 to 320.

Traditionally, the primary cost of home ownership everyone tracks is the mortgage payment, the famous monthly nut of principal and interest, which of course goes up with the purchase price and the interest rate of the mortgage.

As we all know, both the purchase price and the interest rate have gone up significantly, pushing the mortgage payment as a percentage of median household income up to levels that exceed the previous peak in Housing Bubble #1 circa 2006-08.



If inflationary pressures remain elevated and the bond market isn't buying the "inflation is fading" story, then mortgage rates might not drop even if the Federal Reserve cuts the Fed Funds Rate.



But the mortgage payment isn't the only cost of owning a home. All the other costs that were relatively affordable in decades past are now skyrocketing. Gordon listed the six basic categories of home ownership expenses: mortgage, property taxes, insurance, utilities, maintenance and repair and home-related services.



Anecdotally, we're hearing accounts of basic home insurance jumping from $3,000 to $13,000 annually in high-risk regions. We're also hearing of insurers abandoning high-risk areas and entire states, leaving homeowners with few options for insurance. In response, some homeowners are "self-insuring," i.e. they have dropped insurance coverage.

The problem with this option is that should the worst-case scenario come to pass, as a general rule the federal disaster relief agencies will pony up a maximum of $40,000 to the uninsured--far from enough to rebuild or repair a severely damaged house.



Insurers are not in the charity business. Once their losses run into the billions of dollars, they jack up rates to restore profitability. Recall that insurance is a global enterprise, and so the cost of our insurance is partly based on the cost of the reinsurance the big carriers purchase globally. If reinsurance rates rise, everyone's rates rise accordingly.



Unsurprisingly, homeowners are responding by raising the deductibles in their policy to lower the annual cost. This is a hybrid of "self-insurance," as homeowners with high deductibles have to have the cash in hand to fund the cost of repairs up to the deductible ceiling.



If you think the rise in the price of groceries is eye-popping, check out property tax increases, which are pushing 30% nationally. Since local governments depend on property taxes for a significant percentage of their revenues, we can expect these taxes to remain "sticky" even if housing valuations decline.



The costs of maintenance and repair are soaring as well as the costs of construction materials and labor have increased, along with the other costs of doing business. Just as the cost of a sandwich or burger seems to be about $15 everywhere, the cost of any home project other than fixing a leaky faucet seems to be $10,000 or more now: tree pruning: $10K, roof repair, $10K, and so on.

The soaring costs of home ownership are changing the metrics of unaffordability in important ways. It's not just the initial purchase price that defines what's affordable and what isn't; so too do the costs of owning the house after our name is on the property tax rolls.



The Slow Death of the Single Family Home (30:57 min).

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My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF)

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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

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

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

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

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

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

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


Become a $3/month patron of my work via patreon.com.

Subscribe to my Substack for free

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Unaffordable Housing and Homeless Encampments: How Did It Get This Bad?

To reverse the damage wrought by financialization, we must reverse financialization.

The post-election hope that festering problems can now be solved doesn't seem to extend to unaffordable housing and homeless encampments, two blights on the socio-economic landscape. Perhaps this reflects a sense that these blights aren't readily fixable, or an unsure grasp of the causes of these blights.

Let's focus on the primary cause that led to unaffordable housing and homeless encampments. There are many contributing factors, of course, such as the NIMBY (not in my back yard) restrictions on new housing, the soaring cost of construction permits, materials and labor, and so on, but all these factors are subservient to one: financialization, which enriched the wealthy and incentivized them to pursue housing not as shelter for their family but as a low-risk investment that generates income and capital appreciation.

As the wealth to be parked in assets exploded to unprecedented heights, those seeking housing as an investment outbid those seeking housing as shelter. As demand generated by financialized investment pushed housing valuations higher, the wealthy gained more capital to be sunk into housing, creating a virtuous cycle of increasing demand and higher valuations.

Those without substantial portfolios of stocks and housing could no longer afford a home as shelter.

Lest you think this is an exaggeration, consider An estimated 26% of Fort Worth's single family homes are owned by companies, city says. That is a non-trivial percentage of homes owned by corporations, and this doesn't include homes owned as rentals / short-term rentals (AirBNBs) by wealthy individuals, households, trusts, etc. So up to one-third of all single family homes being owned by investors of one type or another in desirable regions is not unreasonable.

Note that this is 26% of single-family homes, not rental apartments. For context, the U.S. has about 145 million housing units, 15 million of which are unoccupied (second homes, available for rent, rarely occupied, left empty, etc.) 82 million single-family homes of which 68 million are owner-occupied, and about 45 million rental households.

The flood of capital seeking housing created a wave of gentrification that wiped out remaining pockets of low-cost housing. Cheap housing was available in undesirable neighborhoods until financialization created trillions of dollars seeking assets that could be snapped up, renovated and sold or rented at a profit.

Once small landlords learned that studio apartments in the newly renovated flophouse were now renting for $2,000 a month, they naturally raised their rents to "market." Gentrification--driven by financialization--pushed rents higher, too.

With all the cheap rental housing gentrified, those on the margins ended up on the street. This includes addicts and those suffering from mental illness, but it also includes people who fell on hard times who were now priced out of any shelter other than an underpass or sidewalk.

Let's tell the story in charts. Here is the Case-Shiller housing index, which shows the 2007-8 housing bubble as a modest blip compared to the current financialization-driven Everything Bubble which has pushed housing valuations out of reach in desirable (i.e. places with plenty of jobs) regions.



Measured by per capita--how many housing units are there per person in the U.S.--there is no housing shortage, as the number of housing units per capita has never been higher.



Wealth and income equality in the U.S. tracks the global asymmetries shown here: the top 10% collect half the income and own 76% of the wealth / assets. (In the U.S., the top 10% own 90% of all stocks.)



Non-bank financial assets are a proxy for financialization, which rose by roughly $50 trillion since the 2009 financial crisis.



The wealth held by the top 0.01% soared by $7 trillion just since 2019, topping $20 trillion. If this elite's wealth had only risen with inflation. it would be around $4.3 trillion rather than $20 trillion. The increase far above inflation was generated by financialization.



All the monetary and fiscal stimulus, the super-low interest rates and massive appreciation of assets didn't do much for America's bottom 50% of households, who saw their share of the nation's financial wealth fall from 3% in 2010 to 2.6% as tens of trillions of wealth were added to the swollen portfolios of the top 10%--wealth that sought a safe haven in housing.

Financialization has widened the gap between the top 10% and the bottom 50% to the kind of extreme asymmetry that typically presages social upheaval.



To reverse the damage wrought by financialization, we must reverse financialization. Doing anything other than this will have little effect, for no matter how many new homes are built, the wealth of the top 10% will have increased such that they will easily outbid mere wage-earners for the new housing. Building more homes for the wealthy to snap up with their ballooning wealth won't address the root cause of unaffordable housing and homeless encampments: financialization.

Gordon Long and I discuss The Slow Death of the Single Family Home (30:57 min) in this new podcast.

To further the discussion of the opportunities and limits of state power, I'm making my 2018 book Pathfinding Our Destiny free (Kindle ebook) from November 7 to November 9. Yes, the book is now in the "free box" out on the sidewalk until Saturday, 11/9/24.

I was invited to discuss the upsides and downsides of central planning on two recent podcasts:

Charles Hugh Smith on the China Real Estate Bubble (29:28 min) Host Richard B. of the Financial Repression Authority

Charles Hugh Smith on The failure(s) of central planning across the globe (42:56 min) Host Rob S. of the Contrarian Capitalist (Substack)

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My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF)

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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

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

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

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

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

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

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


Become a $3/month patron of my work via patreon.com.

Subscribe to my Substack for free

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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, David S.L. ($7/month), for your magnificently generous subscription to this site -- I am greatly honored by your support and readership.		Thank you, Simple John ($70), for your superbly generous subscription to this site -- I am greatly honored by your support and readership.

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The Limits of Government

The limits of governmental power to solve the problems created by expanding governmental power are rising globally.

I composed this essay before the election, as the limits of government apply regardless of who takes the reins of leadership.

Elections are the opportunity to transfer the powers of government to a new set of leaders. As fascinating as this process may be, I'm more interested in the shadow cast by elections, the limits of government's powers. Elections focus our attention on the powers of government to change society, the economy, foreign policy and the cultural zeitgeist. The limits of government receive little attention, for obvious reasons: elections are the sizzle, and state power is the steak.

I know this sounds cynical, but much of what passes for government's power to transform society and the economy boils down to the power to print or borrow money on a truly immense scale. Yes, there are all kinds of legal powers: Congress can pass new statutes, the President can issue Executive Orders and the judiciary can change society with a new interpretation of the Constitution. But beyond changing the laws, the real power of government is to collect taxes, print money and borrow money.

Since paying taxes is painful, leaders prefer to print or borrow money, as the pain--the interest that must be paid in perpetuity--falls on future taxpayers, while the benefits of spending the new cash are felt immediately.

Printing and borrowing lots of money is the solution to all problems, until the Printing and borrowing become the problem. At that point, the government's power to solve problems by printing and borrowing lots of money vanishes, as the problems are now caused by printing and borrowing lots of money.

This is a limit of government's power that has been dodged for decades, but is now rumbling over the horizon. When the "solution" to every problem--throw money at it--becomes the problem, then what's the solution? Should the government stop printing and borrowing money in nearly limitless quantities, the pain felt by those no longer receiving the tax breaks, subsidies, entitlements, state contracts, paychecks, etc., quickly ramp up to somewhere between excruciating and unbearable.

Put another way, the government's power to maintain the purchasing power of its currency is not infinite. Printing and borrowing lots of money erodes the purchasing power of all that money if the real-world economy isn't generating equivalent increases in goods and services. We call this inflation, and history offers a variety of examples of this destruction of the purchasing power of money bringing down the state and nation.

If the government's ability to print and borrow vast sums to distribute is severely limited, what happens to its power? Its power is also severely limited, because changing regulations is not the same as passing around money. And without enough funding, all those legal requirements cannot be uniformly enforced.

So when the government orders everyone to wear their underwear on the outside of their clothing, where's the money to enforce this new statute going to come from?

Another limit emerges when the government's solution to every problem is to expand its reach and control. In my book Resistance, Revolution, Liberation, I describe this as the state's ontological imperative, a fancy way of saying that this innate drive to expand its powers is embedded in the very nature of the government, regardless of its form or ideology.

I addressed some of the problems created by this ceaseless expansion of state power in my essay Central Planning: China's Miracle--and Malaise.

Once again, the "solution"--expand the powers of the government--become the problem. And if the "solution" is to expand the powers of the government, then what happens when the solution is the devolution / reduction of state power? The idea of reducing the reach and power of the state doesn't compute to the leadership and functionaries, whose mindset is locked on increasing the powers of the government to solve every problem.

The centralization of state power and the expansion of state power is now the problem that government cannot possibly solve. Nobody in the governance structure ever thinks that shrinking government's reach, control, budget and power could possibly be the solution to the nation's most pressing challenges. Yet that reality is also rumbling over the horizon.

The limits of governmental power to solve the problems created by expanding governmental power are rising globally. Governments don't relinquish power voluntarily. If history is any guide, their power erodes as the forces they cannot control consume their power in an inverse power law: the more government tries to increase its power, the faster the entire system unravels.

Some readers insist that central planning / expansion of state power funded by debt works splendidly. Let's see how things play out globally over the next four years. 2029 may well be more interesting than anticipated.



To further the discussion of the opportunities and limits of state power, I'm making my 2018 book Pathfinding Our Destiny free (Kindle ebook) from November 7 to November 9. Yes, the book is now in the "free box" out on the sidewalk until Saturday, 11/9/24.

I was invited to discuss the upsides and downsides of central planning on two recent podcasts:

Charles Hugh Smith on the China Real Estate Bubble (29:28 min) Host Richard B. of the Financial Repression Authority

Charles Hugh Smith on The failure(s) of central planning across the globe (42:56 min) Host Rob S. of the Contrarian Capitalist (Substack)

---

My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF)

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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

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

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

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

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

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

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


Become a $3/month patron of my work via patreon.com.

Subscribe to my Substack for free

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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, William B. ($70), for your magnificently generous subscription to this site -- I am greatly honored by your support and readership.		Thank you, USA MC ($70), for your superbly generous subscription to this site -- I am greatly honored by your support and readership.

Thank you, Joseph E. ($7/month), for your marvelously generous subscription to this site -- I am greatly honored by your support and readership.

Thank you, Joyce A. ($70), for your splendidly generous subscription to this site -- I am greatly honored by your support and readership.

Read more...

Central Planning: China's Miracle--and Malaise

The illusion created by the initial success of central planning is that it can continue indefinitely, when the reality is it's unavoidably self-liquidating as the distortions unravel the entire economy.

China offers a real-time case study of the upsides and downsides of central planning, broadly defined as the central state establishing the goals, financing, incentives and regulatory structure for various sectors of the nation's economy.

In the U.S., examples include the transformation of the American economy to wartime production in World War II, and the razing of inner city neighborhoods to build freeways in the 1960s. A swath wasn't just bulldozed in one or two cities; it happened everywhere because the federal government established the funding and incentives.

Turning to China: those of us who were fortunate enough to visit China just before the "China miracle" took off recall the decrepit state of China's housing stock, much of which was unchanged from the 19th century except for electrical wires strung haphazardly through dimly lit common areas.

Starting in the 1990s, China's central government began selling land leases to households, retaining ownership but granting lessor ownership rights to those living in the homes, in effect transferring ownership from the state to households. The idea wasn't to create an asset that households could sell, and so after-market sales were non-existent. The idea was to shift the cost of housing from the state to the private sector, freeing up state funding for industrialization and infrastructure.

As China's economy shifted from rural agriculture to urban industrialization, the need for urban housing became a priority. As tens of millions of people left rural villages for factory jobs in cities, a new centrally planned model emerged that from the perspective of the central government was a win-win-win:

1. Local governments were given the right to sell land to housing developers, and the revenue from these sales eventually made up between a third and half of local governments' budgets. In effect, a third or more of the costs of local government were shifted from Beijing to the private sector.

2. Construction of housing--much of it in high-rises--created millions of jobs, so roughly 10% of the workforce was employed in construction. This employment boosted the nation's economy, a key goal of central planners in Beijing.

3. As China's economy boomed, central planners prioritized bank lending for housing, enabling households to deploy their accumulated savings to buy a home (or later, an investment flat), a culturally favored "safe" asset to invest in.

Note that housing was funded by private capital in this model: developers pre-sold homes to households, who used their savings as the down payment and borrowed the rest from banks (often closely tied to the government). The buyers paid for the home in full, so developers had all the money upfront, and the temptation to use these funds to buy more land leases for future development and pre-sell more to-be-built-later homes was Irresistible.

Since the sale of existing units would compete with new construction, there was no resale housing market as in the West. The value of existing units was set by new housing being sold/built in the area. So if a household bought a unit for $100,000, and the new development next door was selling for $150,000, then the existing homeowners reckoned their home was now worth $150,000 as well.

This artificial valuation generated a wealth effect--our homes are rising in value--that was entirely illusory, an illusion that has burst as the actual resale value of homes was never tested in an open, transparent marketplace.

As a result, this artificial wealth effect has flipped into a reverse wealth effect: households are awakening to the grim reality that their real estate-based wealth has evaporated, and given the extreme oversupply of housing and the declining population, it's never coming back.

With few other investment opportunities available, households poured their savings into investment homes, usually leaving them empty, as homes that had been rented to tenants were considered of lower value.

As a result of this model, housing now comprises 70%+ of all household wealth, a percentage more than double that in the U.S. (30%):



But central planning's initial successes generate a blindness to its fatal flaws, a reality now playing out in China's housing sector. The model described above created "winners"--banks, developers and local governments--who have every incentive to continue building more developments, whether they fill a real need or not, and no incentives to recognize the diminishing returns and soaring risks generated by the model.

Without an unfettered, open resale market for homes, the actual value of existing housing is unknown. Since the model only wants buyers of new (and as yet unbuilt) homes, the resale of older homes is suppressed. As a result, there is no feedback as to whether more developments actually fill a need for housing, or if they are nothing more than stupendous mal-investments, black holes sucking in capital, resources and labor that could have been productively deployed elsewhere in the economy.

Two recent reports outline the malaise once the central planning "miracle" becomes a blind machine enriching entrenched interests, grinding on even as the vast asset bubble the "miracle" created is popping:

China's Paradox Under Xi: A Sea /xi:/ of Macro Imbalances - a Story Told Through the Lens of its Bust Property Bubble. Episode 1: The Chinese Housing Market

China's Paradox Under Xi - Episode 2

Since there were no feedback mechanisms allowed in the model, it continued expanding regardless of actual conditions. The net result is a massive debt bubble and an equally massive oversupply of housing: thought official statistics are not published (for the obvious reason that they reflect poorly on central planning), it's estimated that there are 94 million empty homes in China and an astounding 120 million paid-in-full homes that are unfinished or not yet started. That's an oversupply / overproduction of 214 million homes.

Whether the actual number is 160 million, 180 million or 220 million doesn't really matter at this point: the oversupply, losses and distortions are so vast that there are no pain-free policy tweaks that will fix what's broken or reverse the catastrophic losses.

Since the developers used the buyers' funds to buy more land leases, they no longer have the means to complete the 100+ million units promised / under construction. The central government is now on the hook to fund the completion of these millions of homes--many of which were investments, not intended for sheltering a family--and to clear up the enormous debts left by insolvent developers.

Who suffers the most is obvious: the hapless home buyers who are paying mortgages for half-finished homes that may never be completed. The net result is some of the homeowners are living in their half-completed high-rise homes, as shown in the video from BBC News, in which the filming was cut off by local police, as this tragic reality doesn't reflect well on central planners:

China's homeowners living in unfinished apartments BBC News (3:21 min)

Given the enormous over-supply and collapsing demand, what's known as a bidless market, the actual market value of older homes may well be near-zero in Tier 2 and 3 cities, as the costs of ownership exceed the return on the investment. Without paying renters or appreciation generated by scarcity, the value of an existing home is a negative number.

What lessons can we extract from the success and failure of this model?

1. When an economy has untapped productive capacity and is starved for credit, central planning can open the floodgates of credit and direct the productive capacity into specific sectors, creating rapid growth and "winners": in China's real estate boom, the "winners" were banks, developers and local governments, as well as the central government freed of the immense burdens of funding the construction of hundreds of millions of new homes.

2. The "winners" quickly become entrenched in the system, rewarding each other with kickbacks, insider trading, etc., and as their wealth grew, so did their political muscle, which they used to protect their sector from oversight or feedback from the real world.

3. China's central planners reckoned they'd discovered the financial equivalent of the perpetual motion machine, that housing would continue to provide 10% of the nation's jobs, fill the coffers of local government and enrich insiders indefinitely, all paid for with private capital saved up by households.

4. There were no effective safeguards in the system to protect homeowners from paying in full for a never-built or half-finished home. Central planning incentivizes insiders and entrenched interests to play fast and loose to maximize their private gains, without regard for the distortions and systemic risks their wheeling and dealing generates.

5. Since market mechanisms were eliminated or restricted, there are no structural mechanisms in either the private sector or the central government to fix the machine once it implodes. The immense losses piling up under the surface eventually must be paid by someone, and so central planners, faced with insiders' outsized influence, end up distributing the losses to the powerless, i.e. households, workers, children, retirees, etc.

This eventually generates social malaise, and the decay of the consent of the governed (a.k.a. Mandate of Heaven).

The inherent weaknesses of central planning are on display in every economy. It's tempting to use central planning to kickstart a sector or industrialize / re-industrialize, but there are no mechanisms in central planning to recognize or respond to the fact that you can only funnel private capital into a blind machine of entrenched interests for so long before the machine consumes not only all the gains of central planning but the entire economy, as the distortions become so profound that there are no fixes other than the extreme pain of absorbing catastrophic losses.

The illusion created by the initial success of central planning is that it can continue indefinitely, when the reality is it's unavoidably self-liquidating as the distortions unravel the entire economy. As I explained in my weekend post for subscribers, TINS and the Global Economy's Cliff Dive: There Is No Substitute, once the central planning model reaches its inevitable point of failure, there is no substitute available, as the economy has been optimized to reward the "winners", effectively hollowing out other sectors of the economy.

I was invited to discuss the upsides and downsides of central planning on two recent podcasts: there is quite a lot of ground covered in each discussion, please give them a listen:

Charles Hugh Smith on the China Real Estate Bubble (29:28 min)
Host Richard B. of the Financial Repression Authority

Charles Hugh Smith on The failure(s) of central planning across the globe (42:56 min)
Host Rob S. of the Contrarian Capitalist (Substack)

---

My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF)

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

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

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

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

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

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

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

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


Become a $3/month patron of my work via patreon.com.

Subscribe to my Substack for free

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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.

Read more...

Friday, November 01, 2024

The Extremely Profitable Inner Workings of Digital Addiction

Turn the crank of social media / search (SM/S) and you get highly profitable Digital Addiction and social destabilization leading to disorder and breakdown.

The extremely profitable inner workings of digital addiction are complex, but the business model is simple: collect user data and sell it to advertisers. The more users you addict, oops I mean attract, and the more time they spend on your platform, the more money you make.

The raison d'etre of social media / search (SM/S) is to collect user data to sell to the highest bidder. To maximize profits, the SM/S platforms stimulate users to post more content and spend more time "engaging" (i.e. creating user data) on their platform.

There are three mechanisms to accomplish this goal:

1. Financial incentives. By offering users a tiny share of the third of the trillion dollars in revenue (of just the top three platforms), users are incentivized to post more content, and optimize that content o attract more views / engagement by other users.

The share earned by the few who attract an audience of millions is substantial, but the modest revenues shared with users posting content follows a power law distribution: a handful make millions, a few make $100,000 or more annually, a small circle make a middle class living ($60,000 annually), and the vast "long tail" earn a pittance at best.

Your song received hundreds of thousands of downloads? Thank you for the content and engagement. Here is your share of the revenues generated: $17. Your content attracted thousands of views, here's your share of advert revenue: $73.

The share is a pittance, but it's enough to drive a Darwinian frenzy that optimizes extremism and clickbait. This extremism can be measured, and as a result of the frenzied competition for attention, extremism is off the charts, with predictably destabilizing social consequences.

2. Self-worth incentives. Given the structure of everyday life, the vast majority of us have little influence or power in the status quo. (For many of us, our power lies not in the status quo but in opting out of the status quo.) Given the zeitgeist of our market-driven global economy, we observe others gaining visibility and income within the digital realm of social media. Since anyone with a phone or laptop / tablet can get online, this digital road to fame and fortune is open to all. This is in marked contrast with the real world, which is characterized by few pathways to fame and fortune, or even being noticed.

I'm worthy of attention is a powerful manifestation of selfhood: if I attract attention / engagement, I'm somebody. Without attention / engagement, I'm nobody.

This self-worth incentive is amplified by glorifying the few winners in the free-for-all competition for attention. No wonder it's called the Attention Economy: attention = user data = trillions in revenue.



3. Optimizing addiction. The mechanisms of addiction are fairly well understood, and these mechanisms function with profitable precision in endless scrolls of feeds and posts and algorithms that amplify clickbait and extremism, for these arouse base emotions that then increase "engagement," i.e. collecting more user data.

The net result is Digital Addiction and social destabilization. Turn the crank of social media / search (SM/S) and you get highly profitable Digital Addiction and social destabilization leading to disorder and breakdown.

Digital Addiction has many destructive consequences. Here is one with profound effects stretching across the entire landscape and far into the future: The Anxious Generation: How the Great Rewiring of Childhood Is Causing an Epidemic of Mental Illness (2024, Jonathon Haidt).

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