Monday, August 31, 2009

Japan's Bloodless Coup: Devolution of the Export/Central Planning Model

The ousting of the ruling party in Japan's election spells not just change in politics but the devolution of its entire model of national wealth-building: the export/central planning model.

The news out of Japan will be reverberating for years to come. Here are three cogent summaries:

Rise of a New Era in Japan (

Japan's ruling party suffers major election defeat

The Democratic Party of Japan (DPJ) has vowed to shift the government's focus to boosting domestic demand, rather than the Liberal Democratic Party's (LDP) traditional emphasis on supporting businesses and industry. The DPJ has promised to pay cash allowances of more than $3,000 per child to families, abolish highway tolls, make public high school tuition-free and provide more social programs -- all while postponing a hike in the country's 5% consumption tax even as Japan is struggling to keep its nascent economic recovery on track.
Analyst Christopher Wood of CLSA Asia-Pacific and author of the Greed & Fearnewsletter, courtesy of correspondent Craig M.:

The reason why this election [in Japan] is significant is because the DPJ is running on a manifesto which appears to be the complete opposite of the established LDP policy in place since the end of the Second World War. This is because the DPJ manifesto, which is in fact quite impressively detailed, is all about promoting domestic demand; whereas the LDP has been all about subordinating the interest of the consumer to Japan’s export driven economy where there was tight nexus of interest between the so-called “iron triangle” of big business, the bureaucracy and the long ruling political party.

"One of the most dramatic for GREED & fear is the [DPJ] proposal to introduce a minimum wage of ¥1,000/hour whereas many people are earning ¥800/hour or less. Another interesting policy proposal is a plan to pay a benefit of ¥26,000 per child per month up to the age of 15; a move obviously designed to improve Japan’s depressed birth rate. A third proposal is to ban manufacturing companies from employing temporary labour in factories.

"It is also the case that political funding in Japan is also provided by the government in proportion to the election results. For such reasons, there is even the risk that the LDP, in an incredible disappearing act, literally implodes as an organization on a four year view given its only raison d'ĂȘtre is to exercise power. correspondent Craig M. added this interpretive note:

The impact on the USD as Japan moves away from an export-driven economy to a domestic-driven economy will be significant. A DJP government would most likely stop accumulating US Treasuries and would likely start selling them to fund domestic programs. This is likely USD negative and gold positive.

There will be consequences, and none larger than the devolution of the export/central planning model which Japan pioneered and which many nations have copied.

The export/central planning model is simple: the national means of production are focused on manufacturing goods for export via a public/private partnership in which corporations, banks and central government planners essentially allocate capital and incentives to suppress domestic consumption in favor of export growth. The goal of course is to generate large trade surpluses.

"Free market capitalism" is left to the domestic economy, while a ruthless partnership of crony capitalism and merchantilist government policy conquers global markets and exploits other nations' free-trade policies.

The Japanese perfected this model and reaped the rewards--stupendous growth and trade surpluses/profits, until the export/central planning machine over-reached in the late 1980s and created gigantic bubbles in Japanese real estate and stocks.

Once these bubbles burst, the intrinsic limitations of the export/central planning model became visible. Without true domestic demand unfettered by central planning disincentives and the dead-weight of crony capitalism, export profits remained in the hands of global corporations while the central planners squandered trillions of yen attempting to create domestic demand via building bridges to nowhere.

Like all central planners (i.e. the Federal Reserve and the Treasury), the Japanese ministries believed that a few policy tweaks and some face-saving "adjustments" to mountains of bad debt would do the trick.

Alas, two decades of devolution and falling personal incomes have proven them wrong.

Transparency has no place in central planning. The major banks were crippled with massive bad debts, yet the planners moved glacially to force write-offs and renunciation of impaired debt. Even now, no one really knows how much uncollectable debt remains on the books in Japan, Inc.

One reason is cultural. Declaring a bank insolvent is a major loss of face for everyone involved. Thus the preferred solution was to keep "zombie banks" alive as a face-saving measure.

The tricks used were plentiful and clever. Say a commercial real estate loan went south and the borrower stopped paying. Hmm, that looks bad; why not loan the firm more money, as long as they agreed to use part of it to make some token payments which would allow the bank to keep the loan off the "in default" ledger?

Never mind the additional loans only made matters worse; face was saved and time was bought.

After 20 years of malaise, the citizenry's patience finally ran out. Things are dire for the Japanese economy and nation: the birth rates have fallen dramatically, social security costs on the exploding elderly population are climbing, and an entire generation of younger workers has been relegated to dead-end part-time jobs at 7-11. Like other global manufacturers, to remain competitive Japan's firms moved production to China and other parts of Asia; automation in Japanese factories eliminated many of the remaining domestic jobs.

These structural changes would have occurred even if Japan had moved away from the export model, but the reliance on exports and a sclerotic, crony-capitalist/central ministry oligarchy made the problems much worse.

All nations which have relied on the same export model are suffering the same consequences. China has dodged the recession by spending 30% of its GDP in a gargantuan stimulus program; nonetheless the same structural flaws in the crony capitalist/ central planning model are eroding China's prosperity, too. That devolution is currently being masked by the stimulus but the cracks will start showing by mid-2010 if not sooner.

Export-dependent Germany has also papered over its structural and demographic ills with domestic stimulus, and just as in China the modest "recovery" in global demand as governments spent $5 trillion in borrowed stimulus have boosted the hopes of the exporter/ central planning Plutocracy that exports will climb back to their previous heights and a staggering welfare state will somehow wean itself from enormous deficits.

2010 will see the further devolution of the export/central planning model, in Germany and every other export-dependent economy. Japan, the first exporter to suffer the inevitable consequences of a dependence on exports and trade surpluses, has finally begun the painful process of rebalancing the economy to demographic and financial realities.

There are no easy options. Japan's demographics are unfavorable, and increasing births over the next few years won't resolve that. The same can be said of all developed nations and China as well.

The new party claims it wants to stop relying on deficit spending funded by selling bonds--Japan's national debt is already 185% of GDP, almost three times' the U.S. rate--but it also refuses to raise taxes. It plans on reducing the deficit by cutting bureaucracy and worthless public-works projects. Unfortunately, both of those sacrifical lambs have large constituencies who have what I term asymmetrical stakes in the game: overwhelming incentives to fight to the last breath to retain government spending as is, regardless of the destruction that will wreak on the nation as a whole.

It's fun to govern in expansion--there's more of everything to give away. But governing in devolution and contraction is a lot more difficult and considerably less fun. Let's wish the DPJ well.

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Saturday, August 29, 2009

Readers Respond on Higher (Cost) Education

Readers respond to my recent entry on higher (cost) education.

I received a variety of thoughtful responses to Is Higher Education Worth a Lifetime of Debt? I've been promising (or is it threatening?) to update Readers Journal and What's for Dinner at Your House? but every spare kilocalorie of my flagging energy has been devoted to completing Survival+ which is still grinding forward like a glacier. This compilation is the best I can do at the moment.

Clearly, education is a complex topic. Here are the reader commentaries, more or less in order received. There is much good thinking here--some provocative if not outright subversive/inflammatory:

Rich H.

I paid for my 4 year BS college myself. Tuition and expenses were reasonable and affordable back in 1979-1983. I paid for college myself. No loans were needed. My degree was in Biology. I soon learned that there are no good jobs in biology. Some of my classmates got jobs as lab technicians. Low paying dead end jobs. So I got a job as a computer programmer. Computers and electronics were my hobby.

That lasted for many years until many of the computer jobs were outsourced to India. I love Indian food but the thought of getting paid a few dollars a day was not appetizing. I worked as a consultant and I could pretty much set what my hourly rate was for the job being done. Then I found my clients saying things like: "Submit your lowest offer". These were people I had done work for in the past and had a proven track record of solving their problems quickly. But now they could get cheap offshore programmers. I was competing with people that lived in huts with dirt floors. At that point I said forget it. I quit.

Now I'm restoring antique cars and selling custom designed/made electronics. And guess what? Everything I've done to make a living had nothing to do with what I learned in college. So, did I need the college degree? In short the answer is no.

But I did get something from college. I learned things I should have learned in high school. Things like math and writing. The school system I went to as a kid was pathetic. Looking back I can now see this clearly.

The bottom line is that if I had a good elementary and high school education I would have not needed college.

Cheryl A.

It is not unusual for students graduating medical school to have a combined debt from undergraduate and graduate school of $200,000 to $300,000. While some of these newly graduated physicians can "work" it off by joining the military, public health service, or finding a position that includes repayment of school debt, many will be paying several thousand dollars a month toward their loans for 20 years. I do not think it is a stretch to speculate that this may affect the specialty they choose, as well as other decisions.

You couldn't have been more timely if you tried: Law school students incurring significant debt (NY Times)

Louis R. also submitted this NY Times article--thank you, Louis.

Murph Freeacre & Murph

Your last post on higher education prompts me to step into some comments. I guess an old fogy like me had seen a distinct change in this area of society and one which I suspect is having long term questionable effects.

In your essay you unquestionably treat higher education as a means to a job, you know, much like a vo-tech except with more expensive books, longer apprentice time and a more esoteric subject matter. I went back to the university system in the 90's with the belief that the degree would set me up for a job until I retired and I finally finished up my degrees, including one in education. When I started looking at the schools systems with a microscope, I backed away from it all, never used the degrees for a job meanwhile accumulating a debt so large there was no way it could be paid back. When I went to the university in the late 50's and early 60's I could pay for it all with part time jobs. No way now-days.

The purpose of this letter is to take issue with you over this higher education concept.

First off, I think we really need to define what we mean by "education" and what it means to be "educated". Is it really just a means of getting a higher paying job? What relationship does this concept have with the concept of education in the classical Greek era, or in the age of enlightenment or even in the early American higher degree attainment? I am going to assert that higher education(and to a great extent secondary education) is simply a vo-tech by definition with different course structural demands.

An excellent examination of educational systems can be found by reading Joel Spring, "Education and the Rise of the Corporate State" and a multitude of other books by this man. One book in particular "Educating the Worker Citizen, the Social Economic and Political Foundations of Education" which may be a tad hard to find these days.

In his analysis he examines the educational system from the 1600's to the 20th century in England and the U.S. He shows the dramatic shift in what we call education prior to the involvement of corporations to the present time of heavy corporate involvement since the industrial revolution. It is a drastic change of concept.

What we have gotten far away from in our educations system is generalized knowledge about our world and its interrelationships to one of high specialization with no knowledge of relationships. One of the really big problems with this shift is the degree of bureaucratic manipulation and control this entails and makes possible. We thusly turn out people with advanced degrees that have no ability to see what impacts their specialty has on other parts of the social, economic and environmental systems. They are also being conditioned into fitting within a huge bureaucratic system in corporations to cause no ripples by asking question about the validity of their work and applications of their specialty job training.

Anyway, I think a more thorough examination of what is actually happening with education would be in order.

Eugene P.

A few thoughts on your most recent essay re: higher education.

Somewhere along the line, between the founding of the first US college (Harvard, 1636) and the present, the populace became convinced (mostly via liberal propaganda, probably during LBJ's Great Society) that attending college, and receiving a degree, and walking down the aisle to Pomp and Circumstance was the best, safest, and indeed, the ONLY way to gain upward social mobility. If your dad worked on the assembly line in a factory, and you didn't want his life, one of manual labor and little promotion, your choice was clear: go to college, and then you can become the manager of that factory! (I say this with a mild jest, of course).

The government encouraged this behavior by offering low-cost loans (a moral hazard in it of itself, and a price inflator, since anyone with half a brain knows that cheap credit leads to higher prices), federal education grants (a redistribution of wealth from taxpayers to taxpayees), and its own taxpayer-funded propaganda mouthpiece, the Department of Education. (Now that sounds positively Orwellian, doesn't it?)

From a college's point of view, you have slowly gained a captive consumer. You have a product (a university degree) that the consumer is convinced he ABSOLUTELY needs, and will go into hundreds of thousands of dollars of debt just to acquire. Cheap and abundant student credit (again, partially subsidized by tax dollars via the GSE Sallie Mae) ensures that you can charge *whatever* you want (with little to no room for negotiating - have you ever tried calling a Registrar's office for a tuition discount?), and since most students don't understand the concept of credit, or compound interest, you simply convince them that all the debt can be paid with but a wave of the hand, once the students have graduated with their prestigious piece of paper, and land their dream job without so much as lifting a finger.

The colleges continue to rake in the money. Private institutions escape being taxed by the government, by calling the profits of their education casino "endowments" or "trusts." Public institutions make their money on tuition to out-of-state students, and on the other fees that have 100% profit margin, and little discussion: book fees, students association fees, housing/meal fees, and the like. Have you ever looked at the salaries for the administrators of some of these "public" institutions? When I was attending the University of Illinois (Urbana-Champaign) in the late '90s, the Chancellor of the University was making something like $500K a year. That's more than the President makes, for crying out loud. How can she possibly justify her salary?

Since the demand (artificially created as it is) is so much greater than the supply, the big dogs (the Ivies, the Stanfords, the U of C system) can continue to charge more and more, while admitting fewer and fewer students every year (as a percentage of the total that apply), so that they can improve their "admission ratio" numbers, and be considered even more "elite." They contribute to the caste mentality. On the other side of the spectrum, "diploma mills" like the University of Phoenix and Robert Morris churn out degrees as quickly as you can pay for them, diluting the "brand value" of an undergraduate degree from a more "legitimate" university, thus setting the table for grade and degree escalation. Nowadays, an undergraduate degree is not enough to distinguish you. You need Master's degrees (which of course entail you having to go back for more school, and paying colleges more tuition). Perhaps sometime in the near future (if the education bubble has not already popped), one will need a PhD in food-service management and administration before McDonald's will even consider hiring you for one of their burger-making associate positions.

Don't get me wrong, colleges have large liabilities, too. Much like General Motors, and any other corporation/government that promised unsustainable benefits packages, colleges have tenured professors. Tenure is the holy grail. I've met non-tenured professors who do the work of two or three men, patiently biding their time until the get tenure, and get into "the system." I've met tenured professors who couldn't give a rat's a** about teaching, or education, or students; they make even more money by authoring the multi-hundred dollar textbooks that are required reading for the one class they have to teach a semester. Then there are the TAs, who get paid barely enough to make ends meet, and do all of the heaviest lifting: the grading, the office hours, all the other sh*t jobs that a tenured professor wouldn't touch with a ten-foot pole. Once you get tenure, you keep it forever. That's even better than unionized workers, who constantly fight (and sometimes lose to) management that decides it must renege on its previous commitments. The joke is that unless you turn out to be Jeffery Dahmer, you get to keep your tenure.

Of course, there is an equal amount of blame to be shouldered by the students, and the parents of the students. Most students don't know anything about finances, or debt, or even what they actually want to study. They know more about their favorite TV shows, the texting functions of their cell phone, the hours of operation of the local mall. College, for them, merely represents an opportunity to get away from home, party, get laid, etc. They don't want to have to actually work, or think, so they pick majors like Leisure Studies, or Communications, or Diversity and Social Change, majors that colleges are all too willing to offer and charge for, "since the customer is always right!" It matters not that these majors will make these students essentially unemployable if and once they graduate. Parents don't think much either; they simply react, capable of only shuddering at the thought of the tuition bill in the mail. They've bought into the college propaganda as well.

College is a business, like any other. They exist to make money first. I claim that if you, as a student, happen to earn an education while attending college, than you were either smart, or lucky, or some combination of both.

I will say that those attending college, and those colleges providing programs, for such avenues of study like medicine, engineering, and science should be mostly immune from my commentary.

For the people that can afford to attend college, and not worry about where they'll be employed, or how they'll pay off the debt (e.g., the classic trust-fund baby), college is probably a good time. They can take whatever classes they want, meet some interesting people, and live in a sheltered bubble that doesn't resemble the real world. Once they leave, their money can continue to insulate them from the real world. Might be unfair, but life is unfair.

For the rest, they need to take a long, hard, critical look at the value proposition of college, ignore the self-serving "advice" of college counselors and admissions officers and the biased MSM, and decide for themselves if its worth it.

Chuck D.

I live in a big state university town. Among other events, it is famous as the home team of a highly ranked player who died of cocaine overdose, and a post-game riot bonfire which cooked a major East Coast fiber optic trunk a couple of years ago. The U crossed a threshold in MY mind when they ripped up a perfectly serviceable concrete sidewalk in front of their new performing arts center to replace it with slate slabs embedded in concrete. Slate is smooth and slippery when wet, uneven and hard to scrape the ice from when cold, and it was just so unnecessary. But with all that money coming in, it had to go somewhere, right?

I have a son at the U, who disgustedly reports on the many ways in which his peers waste their years.

Here are a few reasons why a college degree is so expensive:

1. when a student pays for room & board, they also pay for the accumulated damage and dirt that students bring to the dormitory.

2. downtown businesses thrive on students who buy discretionary food and (especially) drink. (How do I know it's discretionary? Most of them are overweight!) The "Animal House" ethos of collegiate partying is alive.

3. if a product is expensive, but people buy it anyway, then it HAS to be good, right? Higher tuition is a mark of quality that's just simple enough for the typical collegiate consumer.

4. every government program that tries to make college more "affordable" just makes it more expensive, because the customers will always spend up to a threshold of affordability. The reckless granting of HELOCs is one such source of cash.

5. just as spending money while on vacation is easier because "we'll only be here once", students probably have an attitude of "party now, pay later".

6. even in recession, I expect our state school to be popular, since there can be just as many students shifting down into the school as there are shifting down into community colleges.

Edward D.

Charles, your latest article about education certainly had me pounding my desk in agreement. However, I was surprised that you seemed to have missed one crucial aspect: the bourgeoisification of work. My specialty is in the IT field and I can attest that this problem is becoming rife in the industry.

So, I disagree a bit with your network admin scenario. Technology is a fast moving target and most state universities are two to three years behind the curve. Furthermore, they are dogmatic and tend to base curriculum around academic platforms that may not be widely used by real world businesses.

My #1 rule of software is that most solutions do not require overly complex computer science. Selecting the biggest building block possible and applying it to your particular business need tends to be the most efficient way to develop software. Universities do not teach this. They tend to teach, in great detail, how to reinvent the wheel and, in effect, duplicate the millions of man hours spent developing the platforms that exist today.

Certainly, we need elite OS kernel engineers, compiler designers, and advanced silicon wafer engineers – just not many of them. So, if this is the case, yet businesses are constantly complaining about their incoming IT graduates, what’s going on here?

Two things, really: 1) most state universities are geared towards the defense industry which, by nature, does not leverage commercial software and reinvents the wheel at any expense and 2) there has been the creation of a “weeder” methodology to create a walled garden to block out competition from self-trained computer/IT professionals.

As for factor 1, yes, computer science and electrical and computer engineering are infinitely deep, mature sciences. Out universities produce some of the brightest researchers on the planet that will create tomorrow’s technology at companies like Raytheon, Intel, and Microsoft. But, I’d like to focus on the more pragmatic computer professional. You know, the ones that businesses are, supposedly, starving for and cannot find enough of.

Well, it should be clear that there are divergent groups of professionals with divergent goals stuck in the same class with one another. Everyone thinks they need to be a computer scientist or an engineer. But to what end? What does it do for your customer? Yes, it’s all computer technology and programming. But creating an operating system, or an airplane’s control system, is a far cry from, say, the workflow automation that businesses need. So the traditional CS curriculum serves research and defense, but not the needs of typical SMBs. I think the reason this curious construct persists is factor 2:

Let’s examine factor 2. Traditionally, the computer industry had few official accredited degrees for those working in the field. Most pioneers in the IT field came to the industry from a tangential, perhaps related, field. These computer pioneers, especially personal computer pioneers, were “hackers”, which meant that they hacked, or tinkered, with technology in their spare time.

Everything was too new to learn from the university and all the business models were untested. So, how did these professionals learn their craft? They hacked – they picked up books, manuals, magazines, and trade journals, they programmed, stuck together different systems, and devoured every last bit of information they could get their hands on.

And this tradition was healthy all the way through the mid 90s. I was just a kid hacker when I got my first computer technician job at 16, yet my coworkers seemed to think that I was as knowledgeable as any other. The notion of giving respect for practicable knowledge and performance was also a hallmark of the IT industry.

But, some time later (and I’m not sure when), perhaps during the dot com bust, the bourgeoisification of IT work began. Job postings started ratcheting up the education requirements for even the most mundane computer technician jobs.

Then, as a response I suppose, came the onslaught of the cottage industry we know as IT certifications. I guess those that lacked the proper undergraduate degree thought they could demonstrate that they actually knew what they were doing by acquiring certification in each of their IT specialties.

This seemed to be a stable compromise for a period of time. But alas, it backfired. The certs obviously could be gamed and all kinds of kids came out of the woodwork with ridiculous numbers of them. A certification did not mean you had the intense passion of a hacker, or the experience, and once again corporate America ratcheted up their requirements.

And so the infection began. With the artificial requirement of said degrees in place, the ranks of IT departments slowly became filled with those that held them. The average business developer knows that they really possess no knowledge that is so unique that a determined individual couldn’t just grab a bunch of books, online classes, and tutorials, and become proficient within a couple of years. In fear of job security, perhaps from the phony cert-kiddies, the degreed fraternity was born.

So if you want to play the game, buy the degree and endure its misguided curriculum or forever be fought off by the bourgeoisies. It’s becoming true in the IT industry and I’m sure it’s becoming true elsewhere. What a cancer on America.

Keep up the thought provoking articles.

Paul K.

Charles ... there are two really separate issues in an analysis of higher education. One is costs and the other is value.

I agree with you on value. Higher ed is a good value for students who have a good feel, going in, on how to use a higher education to advance what they already sense they want to do. I would, however, avoid calling them elites ... they are no more elite than a great craftman who has interned with other great craftsmen or Labron James who is an elite athlete. The are just focused on what they do and that makes them better. People who succeed in higher education have one set of skills, not the essential set of skills. Value, as in any setting, is dependent upon both cost and outcome and outcome is in the eyes of the beholder. But we agree here that too many people think that a College or University education is all that it takes to be successful and that is far from true.

As for the costs of higher education rising, the reason is simple and not at all political or manipulative. Higher education, like hospitals, research centers and other creativity-based businesses, are highly labor intensive. In higher education, about 70-75% of all costs are labor (and Fringe benefits). Small annual increases in labor rates yield a sustained and significant increase in higher education costs over time.

Ernesto M.

The first thing I will say is that philosophically, I am opposed to ANY public education because I do not believe that there is anymore of a reason to create an entitlement in this area than in any other.

But from a practical standpoint, I have grudgingly come to consider it necessary with the following exceptions. The first is that there should be NO federal government spending at all because it is unconstitutional. The constitution specifically delegates the rights and responsibilities that are not specifically outlined in it to the states and this is not one of them. And no, I would not favor a change to the constitution to permit what exists today either.

The second is that I consider it undeniable that any assembly line system, which is the most likely system under any level of government and the only one possible when the federal government is involved, will always be of low quality. So the expenditures might as well be reduced to as little as practically possible. This is also consistent with the conclusion of your (last) article.

The primary purpose I see for the “educational” system today is twofold and yes, I know this opinion is a cynical one but it is accurate. First, we cannot have millions of indigents running unsupervised in the streets. So the taxpayer must provide a form of child daycare which just happens to be disguised as the public school system.

And second, because of the increasingly technological direction of the economy and the limited role which agriculture and manufacturing now fill plus the fact that most people now work for someone else, it is necessary to take steps to keep people occupied to reduce unemployment. This purpose is filled by both the public school system and to a lesser degree, a college “education” until these graduates are generally old and mature enough to generally have the capacity to fend after themselves (albeit as a defacto DEBT SLAVE in many instances due to the ridiculous cost).

Most people either do not see the logic in this position or reject it out of altruistic incurable based romanticism combined with envy filled populist demagoguery. From an economic standpoint at least at the university level, most people look to the impact on the individual along these lines.

They compare the lifetime economic advantage for college graduates versus those who do not have a university diploma. And since many or most people cannot afford to pay the cost on their own, that’s why they believe the taxpayer should cover the cost for them. It’s based upon the public presumption that, at a minimum, an opportunity to a middle class lifestyle is a universal entitlement. Many others apparently believe that a minimal middle class standard of living is an entitlement period. Either position is, of course, an absurd justification for public funding but I will overlook that minor detail for the moment.

I’ve never seen the empirical evidence for this position but even though I implacably reject it, for the moment I’ll assume for the sake of argument that it is correct. Nevertheless, I believe that the economic value of a diploma has been shrinking in absolute terms over time even though it is or may be increasing relatively versus those who do not have one.

First, this is due to the fact that the number of college graduates is increasing continually in both the United States and elsewhere and probably at a faster rate than the number of jobs which are supposed to provide the expected compensation. And since the labor market is becoming increasingly global, those from the developed economies are increasingly competing not just with each other but with those from the developing world. There is numerous information technology staff in my company from places like India and the Philippines (generally contractors) and this is true at many other organizations as well. (And yes, my interactions with them support that they are very well qualified and that Americans better get off their chairs and get serious about their marketable skills.)

The second reason is the increasing cost of a university degree. I graduated in 1989 with my masters but when I talk to younger people, I find=2 0it incredible how absurdly expensive a college “education” has become. And the reason why this has primarily happened is (once again), you guessed it, the government. Government subsidies of “education” have enabled institutions of all types to increase and maintain prices at levels that their “customers” could not possibly afford under competitive market conditions. This is an example of Bizarro world economics. There isn’t a single other “industry” that I am aware of (unless it is also distorted by the government such as housing and health care) where anyone can continually price the good or service in the market place above the customer’s ability to pay without going bankrupt. Eventually, this is going to prove unsustainable just like the housing bubble was and financial assistance is ultimately either going to be allocated politically (as it partially is now) or the number of enrolled students will have to decrease dramatically. Possibly a combination of both will occur.

Now that I have addressed some of the individual considerations let me turn to the societal ones.

One thing you will typically hear is what a competitive advantage an educated workforce is to an economy and yes, this is true. In fact, if you listen to the socialist apologizers of the democratic welfare state, you would think it is the most important or even the only competitive factor. This is false for several reasons and here are at least two of them.

The first is that there is widespread empirical evidence in other countries where people with university degrees are performing menial jobs like taxi drivers and restaurant servers even when they have law or graduate degrees. I’ve been to some of them myself.

Now some of these people may have received an inferior “education”, but the primary reason they cannot find a job in the local market consistent with their actual or supposed qualifications is the government’s inability to protect or outright hostility to private property right’s which leads to capital flight and inadequate business investment. A second reason may be that there is a huge excess supply of college graduates due to the government artificially increasing the supply. Or maybe it is both.

But in any event, this creates an economy with few to no jobs available for these people no matter what their qualifications are on paper. And this isn’t just true in the developing world but in Europe also. This is the direction we are heading toward in the United States if the socialist idiots ever get to conduct their ivory tower social experiments in the real world.

The second consideration from a societal standpoint is that a substantial number of jobs today do not in actuality require a university or advanced degree of any kind. Many people falsely believe that they do but that is only because they may look at the job requirements which a hiring organization claims they need or want. It’s true that there are some (primarily technical) jobs that did not exist before that are better filled by a college graduate, but the vast majority are generalist professional and managerial jobs that do not. The reason we know this is because many or most of these jobs were filled by employees without a college degree in the past when the pool of college graduates would not accommodate it. Most of these jobs require leadership skills more than formal training and while a university experience can help develop them, it is hardly necessary.

I remember at the beginning of the Clinton administration when there was wishful thinking to essentially make a university degree a public entitlement. Bush in my opinion was also in favor of that philosophically and now under the Obama administration, we may actually get it. My comment to that is it would be economically more cost effective to just grant everyone a diploma by decree rather than waste the economic resources that would be necessary to make that happen.

Any substantial increase in the college population would lead to even larger increases in costs while simultaneously diluting both the value of a diploma and the quality of the graduate pool. Today, with the government distortions created by financial aid, there are many students that have no business being in a post-secondary school and many academic institutions that have no business granting diplomas.

And at the same time, these distortions that concurrently increase the supply of college graduates and cheapen the value of a diploma also turn many of the students who excel academically that actually deserve to be in school into defacto debt slaves due to the absolutely ridiculous cost of obtaining a degree. Today, it isn’t uncommon for students to graduate from college with student debt resembling a mortgage. Is this fair?

To summarize this topic, the optimal solution to this problem is to get the federal government out of “education” altogether and let the states run the primary and secondary schools and the state university systems (at least for the moment) with “only” their own money. At the university level, a removal of the (primarily) federal government induced distortions would finally force many of these institutions to compete on a market footing and bring their costs in line with their customer’s ability to pay. If this happened, then those who provided comparable value for what they charged (whether in an economic sense or otherwise) would survive while those that do not would go out of business as they deserve to, just as in any other industry where an organization does not provide sufficient value for what they charge.

Thank you, readers. Please pardon my poor editing--my editing neurons have been fried by the process of trying to edit my own work...

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

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Friday, August 28, 2009

"Business as Usual": Legitimizing the Illegitimate

A key goal of the status quo is to label illegitimate looting and fraud as "business as usual."

NOTE: My apologies to all email correspondents: I have been overwhelmed this week and thus while I have read every email I have been unable to respond to all. Your patience is greatly appreciated.

One of the key goals of the status quo's propaganda is to convince the target audience that fraud, deception, obfuscation and looting have always been "business as usual" and thus protests are specious. The key technique employed to accomplish this goal is to derealize U.S. history, depriving the target audience (the U.S. citizenry) of any context that does not support the soothing contention that "everybody has always cheated, there's nothing new under the sun, politicians have always been crooks," etc.

Any history which suggests that the present era of fraud, debauchery of credit, State over-reach and Plutocratic excess is unprecedented or parallels moments in U.S. history which were immediately followed by financial collapse, strife and war is dismissed or expunged from the mass media.

This derealization of history has several moving parts:

1. Emphasize the present unceasingly and ignore the past as irrelevant. The "news cycle" shortens into soundbites and video snippets, eliminating any moment of relative calm for analysis or context. This could be termed induced amnesia.

2. A frenzy of images and emotional content that confuse and numb the audience via sensory and verbal overload.

3. Delegitimize skeptical inquiry and demands for transparency by dismissing our era's ubiquitous fraud and over-reach as merely typical behavior that has always been present in U.S. history.

This approach is effective because there is a kernel of truth in every admonishment that greed in inherent in human nature. But this appeal to greed as normal (if not "good") masks the reality that previous eras of American history were characterized by robust negative feedbacks which acted to limit financial fraud, deception and embezzlement.

4. Decontextualize scale. If the rentier-financial Elite pillaged $10 million in a previous period of unlimited financial looting and debauchery of credit (to grab a number from the air), then claim today's looting of hundreds of billions of dollars--adjusted for inflation, a sum a 100-fold larger than the past sum--is "no different than the past, it's just business as usual."

The goal is to mask the truth that today's over-reach and embezzlement is very different as it is two orders of magnitude greater and has reached its larcenous claws past the usual "den of thieves" on Wall Street into the heart of middle class wealth, housing/real estate and retirement savings.

This technique also effectively masks the very different scale of the U.S. military and its global reach. Prior to World War II, the U.S. military quickly shrank back to its prewar modest scale after the cessation of hostilities. The U.S. Navy was significant enough to defend sealanes for commerce and enforce the Monroe Doctrine (domination of Central America and the Caribbean) but other navies were larger. The Great White Fleet (14 ships) of 1908 which sailed around the world in a display of American seapower depended on friendly ports of call to refuel; now the U.S. maintains global fleets homeported in its own bases around the world.

Once again, the fact that the U.S. possessed a Navy and Army in 1908 can be used to mask the scale of the present military: "what's the big deal, we've always had a Navy," which sounds exactly like "What's the big deal, banks have always been greedy," etc.--all language designed to distract us from the realization that today's financial fraud and embezzlement and today's American Empire are unprecedented in their scale and reach.

5. Decontextualize history. By downplaying comparisons with legitimately prosperous eras in U.S. history, propaganda masks key differences between the past and present. Thus when banks were tightly regulated after the fraud and debauchery of the 1920s (and subsequent crash of 1929), financial profits were a modest slice of total U.S. corporate profits. In the past decade of deregulated "financial innovation," financial sector profits have ballooned up to completely dominate private-sector earnings, now constituting some 40% of all corporate profits.

In the same manner, the fact that inequality has leaped since the early 1970s has been derealized to protect those reaping the benefits from any comparisons with the past which might call into question their justifications.

6. Confuse the taxonomy of profit and wealth generation. This can also be termed "purposefully confusing apples with oranges." Thus the neutral word "profit" is used to describe the legitmate profits earned by innovative enterprises such as Apple which earns money by providing goods and services that provide greater value than competitive devices, and illegitimate profits reaped by deceptive, fraudulent mortgage-mill lenders who sold "toxic" mortgages to borrowers who were clearly unqualified--at least by standards that were universally considered sound prior to the rise of "financial innovations" in the past decade.

Despite the visible difference in type and category of these "earnings," the mainstream financial media (a key arm of the propaganda/marketing machine) compares the numbers as if they deserve the same categorization in the taxonomy of profit and wealth generation. Yet one is clearly illegitimate as it cannot function without deception, fraud, embezzlment, distortion, misrepresentation, excessive risk-taking, malfeasance and collusion. And indeed, once questions were raised and standards modestly tightened, these firms vanished overnight.

The other key goal of Plutocratic and State propaganda is to legitimize the illegitimate. Consider, for example, complex derivatives. Although these financial instruments are presented as "risk management tools" akin to futures contracts and options (which have been in place for hundreds of years), they are mere simulacra of these time-tested risk-management tools.

Where a futures contract or option has simple, transparent features--the contract gives the owner the right to buy shares of stocks or a specified commodities--a complex derivative is designed to be obscure and opaque, offering a facsimile of risk management that actually masks inordinate hidden risk.

Such instruments might include currency swaps and credit default swaps which only those originating the derivative truly understand. This purposeful complexity provided a rationalization for the derivatives to remain unpriced, unlike options and futures contracts which are "marked to market" every trading day on transparent exchanges. Masking their true value, complex derivatives are marked not to market but to fantasy: whatever the holder claims the value to be.

Since no one outside the underwriter can assess the value, the underwriter enters a "game the system" collusion with a ratings firm which then issues a AAA "safe investment" rating on the risky derivative.

And since there is no market to set the value, such instruments can be claimed as assets even as they approach zero valuation.

By any measure, such instruments are not legitimate risk-management tools; they are purposefully fraudulent from inception and by design, and immensely profitable to the underwriting firm. Thus it is no surprise that some $600 trillion in notational value derivatives have been written and are floating around the global financial system, carrying illusory valuations and endemic risk.

The net result is immense profits for the insiders perpetrating the fraud and the eventual undermining of legitimate credit and risk-assessment and management systems.

Legitimizing the illegitimate necessarily ends up delegitimizing the authentic foundation that the illegitimacy preyed upon. Claiming financial fraud is legitimate delegitimizes capitalism, the U.S. financial system and the U.S. as a nation. It's as if a serial adulterer announced that now that his wife is having an affair then his own adultery is thus legitimized. But this justification fools no one; the adulterer has delegitimized his own fraudulent, debauched marriage and himself.

That is precisely the situation of the U.S. financial sector and Empire, which has employed legimate military forces in illegimate "pre-emptory" wars and other uses of force which are purposefully kept as State secrets lest the American citizenry question their legitimacy and necessity.

This process of legitimizing the illegimite and thus delegitimizing what was once trustworthy and authentic can be seen in all the mechanisms and structures described in this analysis, financial, intellectual and political. It is a pattern which is repeated again and again in the substitution of simulacrum for authentic systems and the masking of this substitution with delusions, deceptions and misrepresentations actively promoted and disseminated by a sophisticated mass media marketing/propaganda machine.

Here are examples of "business as usual" which were not "business as usual" a relatively short time ago:

-- Advertising medications directly to consumers was banned until only a few years ago. Pharmaceutical firms could advertise only to doctors in professional journals.

-- Investment banks were not allowed to perform commercial banking until 1999.

-- Banks' profits flowed from conventional lending and constituted a relatively modest percentage of overall corporate earnings until the last decade when they became the dominant profit-center, reaping fully 40% of U.S. corporate profits.

-- The Armed Forces and other government agencies did not engage in pre-emptive wars, coups and foreign entanglements that George Washington warned against until relatively recently in U.S. history (post World War II).

All of these fundamental changes have been legitimized and sold as "business as usual" via propaganda and induced amnesia.

This is a new section from Survival+: Structuring Prosperity for Yourself and the Nation. I am working desperately to complete the revised ebook by September.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

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Thursday, August 27, 2009

Denial and Risk

Denial and risk are linked: as perceptions of risk fall to near-zero, denial reaches new heights.

NOTE: My apologies to all email correspondents: I have been overwhelmed this week and thus while I have read every email I have been unable to respond to all. Your patience is greatly appreciated.

You may have forgotten all about the LIBOR rate. This London-based interbank lending rate was in the news daily during 2008's global financial meltdown, for it was widely taken as an accurate measure of risk appetite and perception. As fears of a global meltdown rose, the LIBOR rate skyrocketed.

Less than a year later (the rate topped October 10, 2008, at 4.81875%), Libor Rate Falls to Record Low (

The rate is now 0.22813%, the lowest on record since the British Bankers' Association launched the LIBOR back in 1986.

In other words, the risks of a global financial disruption are now perceived as near-zero. The reason is rather obvious: governments around the world effectively "backstopped" all losses with their own money--either drawn from reserves, borrowed or printed.

This is significant for a number of reasons. Some lenders use the LIBOR rate in their formula for adjusting ARMs--adjustable rate mortgages. A low LIBOR rate and low interest rates translate into dropping rates for ARM holders. That's good news for borrowers facing re-sets.

But is the super-low LIBOR rate a reflection of global financial risk dropping to zero, or is it a misplaced confidence in government's ability to manage all systemic risk by guaranteeing that "no large banking institution will lose money risked anywhere in any market because we will transfer all that risk to the government and its taxpayers"?

These are two quite different propositions.

In the first case, the market is betting that the global financial markets are entirely, systemically healed--in fact, the risk of anything untoward happening are the lowest since 1986.

In the second case, the markets "know" the risk is still high, but they get to play like there is no risk because governments will "backstop" their bets--they literally cannot lose because the government will step in and buy the soured loans and bets or enable bogus "mark to fantasy" accounting which effectively masks the bad bets.

Denial of risk is not the same as low risk.

The fundamental denial is that government (be it the U.S., U.K., P.R.C. (Chinese) or any other government) can borrow or print essentially unlimited funds to backstop private bets and fund government deficits with no consequences.

There will be consequences--cause and effect have not been repealed by Bernanke and Geithner.

Denial will not resolve the imbalances.

Correspondent Bruce C. submitted this report on the CBO (Congressional Budget Office) estimates for future Federal deficits. the CBO estimates are riddled with absurd assumptions which boil down to either 1) propaganda or 2) institutional denial or perhaps some of both.

CBO 2009 Budget Update. See Table 1. The CBO projects an avg. annual growth of federal outlays through '14 of just 1.4%, with revenues growing at 9-10%!! So much for the CBO's reputation for political independence.

Also, cumulative deficits will grow by $6T from '09 to '14 ($7.1T by '19), but debt held by the public/GDP will only reach 61-67%!!

Still, even with what appears to be rather rosy projections by the CBO, projected avg. nominal GDP growth after the net effects of deficit spending from '09 to '14 will be -3.2%/yr.

More importantly, nominal GDP growth net of deficit spending over the next decade is projected by the CBO to be -1.25%/yr., with net growth from '14 to '19 of less than 1%/yr. Budget Review August 2009
The federal budget deficit for the first 10 months of fiscal year 2009 reached $1.3 trillion, CBO estimates, close to $880 billion greater than the deficit recorded through July 2008. Outlays rose by almost $530 billion (or 21 percent) and revenues fell by more than $350 billion (or 17 percent) compared with the amounts recorded during the same period last year.

That net surpluses from social insurance receipts are already disappearing, and the Postal Service budget is being squeezed, the off-budget offsets are likely to be much smaller or even deficits, implying that federal deficits will be larger than the CBO currently expects.

This forecast is a Japan-like scenario but with an avg. ~1% GDP and PCE price changes, rather than the persistent deflation of ~1%+ in Japan since '98.

Bernanke and the apologists for Fed and gov't intervention to date claim that they saved the world from another Great Depression; yet (1) they previously claimed that the potential for a Great Depression was nil; and (2) once the risk of the Great Depression II had emerged, actions taken by Bernanke and the boys over the course of 3-4 months vanquished the potential forever hereafter.

But what they don't tell us is that the most probable scenario was not Great Depression II but was always a Japan-like demographics-induced, debt-deflationary slow-motion depression or what might euphemistically be referred to as "sustainable no-growth with no inflation" or "manageable or predictable no-growth with price stability".

In other than a Bizarro-like world, the implications of the data in the latest CBO forecast should have caused the stock market to crash owing to the obvious inference that the private sector of the US economy presents little or no growth potential for corporate revenue and earnings, shareholder equity, P/Es, book value, employment, wages, or investment for 5-10 yrs.


Thank you, Bruce. Surreal, indeed. GDP is set to shrink yet tax revenues are expected to leap. Hmm.

The obvious hope on the part of The Powers That Be is that pretending everything will be OK will eventually lead to everything actually being OK. This is substituting fantasy for reality and denial for realistic assessment of systemic risk.

Denial seems to be the American public's preferred state. In all the rantings and ravings and self-righteousness boiling away in the so-called "healthcare debate," I have yet to see even one serious MSM pundit or politico voice the obvious: Medicare is unsustainable, and so why are we even talking about any new program or spending? The health care elephant in the room: Medicare (Daily Finance)

Even quintupling the Medicare tax from 2.9% to 15% would only give us a brief respite before costs overtook this stupendous new revenue stream. Here is a chart of Medicare expenses:

OK, so this is a slight exaggeration, but when a spending program grows at triple the rate of the underlying economy and demographic trends are set to double the number of recipients even as this same population exits their peak earning/taxpaying years, then you will get a close-to-exponential rise in costs.

If you don't dig through the dross yourself, then you will never happen upon this reality. It is safely stashed behind bogus estimates and flimflam, lest the apple cart of complacent denial be upset.

Risk has not fallen to zero--it remains high, and the efforts to mask it are perversely ramping it ever higher. Denial is a wonderful survival strategy until suddenly it isn't. When the entire government intervention/borrowing/printing mechanism implodes, the public will be shocked anew because they'd been promised and assured that "everything's been fixed, so party like it's 1999 or 2005."

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Michael H. ($20), for your most generous donation to this site. I am greatly honored by your support and readership. Thank you, Don E. ($15), for your ongoing satupendous generosity to this site. I am greatly honored by your support and readership.


Wednesday, August 26, 2009

Is Higher Education Worth a Lifetime of Debt?

Our latest Sacred Cow to gore: Higher education.

Just this week I've demolished the housing "recovery" (was it in a 12-step program?) The Pareto Principle and the Next Wave Down in Real Estate (August 24, 2009), torched the fantasy that Medicare is sustainable The health care elephant in the room: Medicare (Daily Finance) and also deep-fried network/cable TV Television, Symbolic Capital and Empire (August 25, 2009) now... good golly, is nothing sacred? Short answer: not here. The next sacred cow dragged up to be gored: Higher Education.

Correspondent David C. summarized the Medicare-like trend in higher-education costs-- double the growth of inflation--and questioned the value of all those "must-have" degrees. David recommended this thought-provoking article: M.I.T. Calls Academia's Bluff (Gary North) and added these comments:

According to this web site, Financial, "A good rule of thumb is that tuition rates will increase at about twice the general inflation rate." I went to Dunwoody College of Technology, AKA private votech, for about $4,000 a year in the early 90s and now it costs about $16,000 a year! After all, in our culture, parents are expected to pay the full cost of college. As if one must get a higher education or they're screwed to a lifetime of crappy low-paying jobs. Then there's the snobbish view if you don't have a college education you're a moron. Academia pushes the "lifelong learning" dogma as if the only place you can properly learn is in school, they do this of course to increase their customers... I mean students.

I've always wondered why the cost to get a "higher" education goes up so much. Is it a conspiracy by the elites/rich to keep poor people ignorant? Or maybe to keep the middle class in debt servitude? Or maybe greedy teacher salaries? Or maybe too much bureaucracy? Or maybe schools that think they need state of the art facilities in order to provide a quality education.

Whatever the reason the increasing costs are going to make a "higher" education from academia impossible for more people. Maybe that's a blessing in disguise, for what is the real value of a college degree these days?

With the average student $20,000 in debt it seems to me a college education is overrated especially in the current depression, few students will find the good paying jobs they are entitled to... I mean want.

The link above is a provocative article on the future transformation of academia in the Internet age.

A while ago I came to the conclusion that most schools aren't really interested in giving a well-rounded education; they're more interested in money and prestige. I see the ads on TV for the Votechs that say: be a graphic designer, be a video game designer, be a photographer and travel, be a videographer and shoot music videos, etc. (see some of the glam jobs here:

Well, these ads are misleading, they imply that it's easy to get these jobs, just go to our school and spend lots of money and we'll give you a degree and then you'll have a glamorous job. I know that it's hard to get an art-related job because I tried. There are few art related jobs to begin with and even fewer that pay well. The reason the schools run these ads is because these are glamorous jobs that attract more students and more money.

Thank you, David. We might recall at this point that Andrew Jackson (among many others) studied law on his own and passed the bar exam. That may seem like an outlier from the distant past, but if MIT is offering much of its curriculum on line, then what's to keep a motivated student from studying a subject on their own and learning it well enough to practice it as a profession?

I want to make it clear I am not suggesting a university or vocational degree has no value. But we need to look at the issues David has raised. If it puts a family or a student in essentially a lifetime of debt, exactly what is the value of that education? Precisely why has education skyrocketed in cost?

My brother-in-law graduated from M.I.T., promptly earned a Masters from that institution and then went on to earn a J.D. degree from another prestigious university as well. Yes, these three degrees put you in a superstar class which practically guarantees you a high-paying corporate-America or government gig.

But not too many of us reach those heights. Most of us are mere mortals. And the truth is that there are not unlimited positions open for super-qualified technocrats. The winds of change blow all the time and PhDs in chemistry and other fields have found themselves very unemployed.

As a mere mortal, I earned a B.A. in 1975 in four years, and paid for it myself with no loans. (I did receive a $250 scholarship one year; don't laugh, that paid a full semester's tuition, fees and books.) As I paid for everything myself, I recall tuition was exactly $89.25 per semester (the University of Hawaii was a two-semester system), and student fees were $27 a semester.

Books were horrendously expensive (another needless rip-off), about $100 a semester. so the total cost of my 4-year university education (3.5 GPA, woo-hoo, even with my work scehdule to support myself) was about $1,800.

Adjusted for inflation (BLS calculator), that comes to around $8,000 in today's money--yes, for the entire four-year degree at a large, well-funded state university. (My one-room hovel was $120 a month and I got by with a used car and cheap food I made myself.)

Today, it's not unusual for students to exit college with debts exceeding $80,000 or even $100,000. That's ten times' what I paid in the 70s-era recession (the 1974-75 recession was brutal, and the 1981-82 one was even worse).

The dirty little secret of higher education is that most graduates are not qualified for any particular job, nor do they have life-skills for starting their own own self-employment/ independent living-by-whatever-means-are-necessary.

If you can't get a job, scrape by with experiential moxie or have the skillset to start self-employment, then precisely what is the value of a college education? Basically, it boils down to clearing the hurdles. That's good, but what about that crushing $120K debt?

I know this will raise all sorts of ideological hackles, but here's the European system (yes, there are variations, but this is it in a nutshell so please don't quibble): most people are not "college material." They are funneled into apprenticeships and vocational programs which teach them real live skills in baking, mechanics, medical technologies, etc. which enable them to step into a job they have learned from the bottom up.

The "elite" students who are academically ready for university are admitted and most of the expenses are paid by the government. In many nations such as Denmark, students are paid a stipend while attending the university. (Don't have an envy-triggered coronary.)

Once you're in and you do your coursework, then you can usually go to graduate school, even if the subject has no bearing on real-life jobs. The government also pays you to study abroad--nothing's too good for their young academic hotshots.

Compare that to the U.S. system in which votech and university students alike are saddled with debt-serf loans, many of which are not paid off until the "student" is in her/his 40s or even 50s.

Is this "worth it"? In certain technical fields such as stem-cell research and network security, it certainly pays off. But for the average B.A. or B.S., it provides very little training or qualification for a job market which is undergoing structural changes. Please read Endgame 3: The End of (Paying) Work (January 21, 2009) for context.

Clearly, the entire cost structure of higher education is totally out of control. Please read Lowering the Cost Structure of the U.S. Economy (August 29, 2008) for context.

Given these forces--the web, the end of (paying) work and the high-cost structure of higher education-- the viability, sustainability and even utility of an incredibly costly university/votech system is in question. Yet all we hear is endless propaganda that "education is the only hope for our nation." Perhaps, but what if every student is indebted for life? How many of us will be qualified to engineer higher-efficiency solar panels, etc.? How many video editors will be paid a living wage?

In sum: by all means go to college if you can afford it, for your own fulfillment; as for becoming qualified for paying employment at the cost of a lifetime of debt--think it over. A degree certainly won't hurt but it may no longer open doors to paying jobs as it once did.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Susan M. ($5/month), for your superbly generous subscription to this site. I am greatly honored by your support and readership. Thank you, Ken B. ($50), for your outrageously generous donation to this site. I am greatly honored by your support and readership.


Tuesday, August 25, 2009

Television, Symbolic Capital and Empire

In which we connect American TV, an obession with social capital and Empire.

I watch television occasionally, but my selection of programming opens me up to either mockery (from my wife) or charges of elitism. Now that we receive a number of PBS channels over the digital airwaves, I have found another channel of interest beyond the usual PBS fare such as Nova, American Experience, etc.: the NASA channel.

Yes, NASA has its own TV channel which for some unknown reason is carried by a PBS affiliate in our region. My wife tells me I am one of five people watching it, a slight exaggeration but nonetheless in the ballpark.

Yes, I am a junkie for balding, pot-bellied engineers describing lunar or Mars missions, footage of the space station, the shuttle landing, etc.

Well, not exactly a junkie. Once a week keeps the monkey on my back satisfied. It's not that I'm elitist; all those "cops and docs" shows are too high-brow for my taste, which runs to "Kung Fu Theater" and Hollywood "blockbuster" flicks.

We've been house and cat-sitting for friends this past week and as a result we have had the opportunity to scan Comcast's full offering of premium cable. The experience has been both insightful and dismaying.

Having traveled fairly often to Europe and Asia, I've been awake at weird hours due to jetlag and thus can report what most of you already know: TV is dumb the world over. The U.S. has no lock on lowest-common-denominator TV; in fact, many popular U.S. shows have been cribbed from overseas, especially Britain.

Based on my brief unscientific survey, it seems the primary obsessions of Americans are as follows:

1. Weight loss.

2. Media recognition or exposure, i.e., qualifying for "Dance Your Fat Ass Off" or equivalent.

3. Looking superficially like a "Hollywood star" or "model," i.e. buffed, perfect makeup, etc.

I know this sounds like I've been living in a remote cave, but the commercials alone are positively guaranteed to drive viewers into a state of mental instability (ADD, full-blown depression, etc.) or stupor. Yes, you can mute them or TIVO them into oblivion, but we must remind ourselves of the salient fact about TV adverts: if nobody watched them or acted on them, then the corporate advertisers would not be paying hundreds of thousands of dollars for TV ad campaigns. Hence we can deduct the adverts work most of the time.

If you haven't come across this classic book from the 1970s, I recommend it: Four Arguments for the Elimination of Television .

The advertisements are a parody of Empire in terminal decline. Handsome people fill the screen, and then one flashes a sad expression--uh-oh, a pharmaceutical ad for an anti-depressant. Literally 3/4 of the ad time is spent listing the side-effects, which might suggest to the nominally conscious viewer that this is powerful stuff and maybe not all that nifty for you: do not take this if you're pregnant, nursing, on blood thinners (well, there goes 9/10 the male population over 50), or if you've eaten a pepperoni pizza within the last 48 hours; do not use if driving machinery, playing video games or cooking with MSG or ibogaine, and do not mix with Zombiestria.

But I didn't reveal my brief exposure to the madness known as commercial broadcast TV (if he/she/it gets shot, falls, blows up and bleeds, it leads) to mock it. That is akin to shooting fish in a barrel, as we all know. I would be offended if someone criticized bad kung-fu movies for the same reason TV devotees would be offended by criticism of their favorite show: it's supposed to be bad.

No, I want to suggest TV is the penultimate expression of the American ambition for social capital. French sociologist Pierre Bourdieu offered up a way of understanding TV-America's obsessions with weight loss, media exposure/fame, etc.

For Bourdieu, financial capital is but one form of wealth/influence; others include social capital, cultural capital, and symbolic capital. In Bourdieu's analysis, each individual carves out a position in a multidimensional social space; he or she is not defined only by social class membership, but by every kind of capital he or she can express/possess.

Bourdieu viewed symbolic capital (e.g., prestige, honor, attention) as a crucial source of power: Distinction: A Social Critique of the Judgement of Taste .

Bourdieu noted that the lower social classes enjoy familiar food served in large quantities and consequently are typically heavier than upper class types who dine on exotic cuisine in small portions.

Thus it was a revelation to see the astonishing variety of cooking shows on TV--in stark contrast to America's apparently declining ability or willingness to prepare real food on a regular basis. The more people watch exotic cooking on TV, the less they actually cook.

What it does express, I think, is the desire and ambition to be slim and knowledgeable about diverse cuisines--in other words, to acquire symbolic capital.

The same ambition can be seen in the "theater of the absurd" TV shows which offer opportunities (often horridly sordid) for "average" people to appear on TV: to gain attention and media exposure, and thus create symbolic capital ("I was on TV, hence I am now important.")

We can thus speculate that as the prospects of acquiring financial capital dwindle with the housing bubble's demise and the economy's slow-motion collapse, Americans are even more desperate to acquire social/symbolic capital.

Of the many ironies this presents, none is more obvious than the gulf between the products marketed on TV and the aspirations of upper-class symbolic status. To wit: the way to get thin and learn about world cuisines is to stop buying packaged foods of the type which are hyped on TV (ditto vitamins, supplements, weight loss schemes,etc.) and actually devote oneself to learning how to cook a variety of healthy cuisines.

There must be some vicarious satisfaction in watching famous chefs whip up exotic cuisine (no boring prep required on TV--everything's always chopped and ready); the other irony is that the only way to prepare such real food in real time is to turn off the TV.

Other ironies abound as well.

Correspondent Ernesto M. (with whom I've been discussing Empire and democracy-- Are Empire and Democracy Compatible? August 21, 2009) described a bizarre TV show in which consumers beg for "permission" to spend like drunken sailors:

I was watching the Suzy Ormon show yesterday. She has this segment where people call in and "apply" to spend money on certain things. She evaluates their request based upon their financial circumstances and either "approves" or "denies" it. Yesterday, the "denies" were 5-for-5 and you should have seen the ridiculous things people were going to spend their money on. Yes, this is a TV show but I consider it a reasonable reflection of the way middle and upper middle-class America do and especially did live during the mania.

These people were not broke but were hardly that well off, yet were considering spending thousands or tens or thousands on "toys". $120,000 to build a log cabin as a second home, $2,000 for U2 concerts, $20,000 for a boat and so forth. I consider it irrefutable that millions of people (and tens of millions on a smaller scale) who are in financial difficulty now were spending money in similar ways before "bad luck" overtook them. And now, many are receiving public assistance which they have absolutely no business receiving. They made incompetent financial choices and deserve to reap the consequences of their incompetence.

This makes me wonder if Americans are seeking to spend wildly while they can, since they now grasp that "bad luck" is indeed coming their way.

There is little evidence of the global American Empire on network TV. But then there is little evidence that this is a democracy, either; judging by cable and prime-time network TV, we might as well be living in a debt-serf "plantation" colonial State which plucks residents at random to compete for the symbolic glories of media exposure.

We might also speculate that TV's larger role is to gain the populace's "permission" for wildly irresponsible spending on a national scale. If only 40% of eligible voters actually cast a ballot, and the two choices offered are merely different flavors of the same financial-rentier power Elite, then what exactly is democracy?

Ernesto M:

On the idea of whether "democracy" is consistent with empire or not, it would depend upon someone's definition of "democracy". It certainly is not consistent with the idea that the country will be run by and for the benefit of "the people" because that is simply an idealistic illusion of incurable romanticism for the gullible fool.

Me, I'm not interested in "democracy" but in individual liberty and the protection of individual private property rights. (I consider the political process to be completely dishonest and dishonorable; elections are simply advanced auctions of stolen merchandise as H.L Mencken stated.) Historically, "democracy" or representative government generally has been more conducive to than other political systems but I would mainly attribute that to the lack of political competition.

"Democracy" has reached the status of a religion where the mindless clones in the media and the public never or hardly ever question the general outcome of "the system". Or they have a hypocritical double standard where they distinguish between personal freedom and economic freedom. When it comes to personal freedom, few to no restrictions are permitted ( for the "liberal") or there is an effort to regulate many personal choices that the government has no business regulating in the first place (primarily the "conservative" position but also shared by some "liberals").

The hypocrisy of it comes from the fact that almost everyone believes that any economic decision made through the political process is legitimate (to pay for irresponsible lifestyle choices or bad decisions that did not work out) which of course is complete nonsense.

In other words, as long as we as a nation get "permission," any amount of visibly irresponsible borrow-and-spend-like-drunken-sailors is legitimate.

Why is the American Empire so invisible on TV? Maybe because it's invisible to Americans in general. Although some 27% of Americans now hold passports, that number jumped hugely in the last few years from 21% as a result of the new requirement that you now need a passport to visit Canada and Mexico.

Americans are Tuning Out the World.

As the world becomes accustomed to the American way of life, Americans are tuning out the rest of the world. US citizens have paid less and less attention to foreign affairs since the 1970s, writes journalist Alkman Granitsas. The number of university students studying foreign languages has declined, and fewer Americans travel overseas than their counterparts in other developed countries. News coverage of foreign affairs has also decreased.

I know it may seem far afield to see American TV as a peculiar mirror in which the reflection of the American Empire does not appear, but as Ernesto points out, the overseas reach of the U.S. is perhaps only understood from outside the U.S.:

Ernesto M:

I was in India last year in New Delhi. On the way to the hotel from the airport, we passed the American Embassy. I was really surprised at how large the complex was. The driver pointed it out to us and it was two city "blocks". And by "blocks', I am not referring to a typical one of city size but what must have been at least one mile square - each. There literally must be thousands of employees on that facility. The driver also pointed out the school just for the staff (probably just or mainly for foreigners since a lot of locals presumably work there too) on the complex which will further give you an idea of the size. (We also passed the British complex and the US property must have been at least twice as large, though the British one was also very large.)

I never gave it much thought before my trip, but the only reason why that could possibly be necessary would be to "run interference" for the "national" commercial interests. We both know it isn't because there are many American tourists or expatriates who lost their passports or have problems with the local government.

I had a similar experience in Bangkok, Thailand, a few years ago when I passed the enormous American Embassy off Sukhumvit Road. Sited in the business center of crowded Bangkok, the U.S. embassy is surrounded by security and spacious lawns--perhaps the largest such expanse of open greenery other than one large public park and various Thai governmental complexes.

I didn't see the Chinese or Russian embassies, but I doubt they have equivalent open space and location; those assets are both financial and symbolic capital.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

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Monday, August 24, 2009

The Pareto Principle and the Next Wave Down in Real Estate

In February 2007 I suggested a 4% mortgage delinquency rate could trigger a decline in the entire housing market. Since that proved prescient, we should revisit the analytic tool behind that call: the Pareto Principle.

There is a whiff of euphoria in the housing market, a heavily touted confidence that "the bottom is in." It's all roaring back--rising sales, multiple bids by anxious buyers, 3.5% down payments, low mortgage rates and the bonus of an $8,000 first-time home buyer credit (a gift from U.S. taxpayers). Housing Lifts Recovery Hopes (Wall Street Journal)

Foreclosure-related sales account for over 30% of all sales nationally, and over 70% in hard-hit markets such as Las Vegas, but like piranhas feasting on a school of weakened fish, nobody in the real estate business mentions the huge losses of capital and equity which created all these "bargains."

All we need for a complete bubble reflation is people avidly gaming the system... oh wait, we have that, too. A recent Time magazine cover story onLas Vegas contained this informative tidbit (courtesy of Michael Goodfellow):

(Realtor) Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that's about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they've been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it's willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.

Hmm, isn't this the same recipe of froth, low down payments, cheap, easy mortgage money and scamming which got us in trouble the last time? Only the lenders lose, but then now that Ginnie Mae and FHA have stepped up to replace the disgraced, bankrupt shells of Fannie Mae and Freddie Mac, then it really isn't the lenders taking the risks, it's the U.S. taxpayer (again).

It's the same old mispriced risk and misallocated capital which created and popped the housing bubble in the first place, with the lagniappe insanity of giving people $8,000 of taxpayer funds to prop up home sales to benefit builders, realtors and lenders. (Hats off to their lobbyists--Congress stood on its hind legs and barked on command. "How many years to the next election, Tuffy? Bark! Good dog--only one!")

It's not just new buyers and gamers buying--it's investors plunking down all cash for "bargains," in many cases outbidding each other just like the good old days. 'Cash is king' in market for foreclosed homes (

All-cash sales are most common where prices are low and bank-owned properties account for the lion's share of listings. In foreclosure-ridden Pittsburg, for instance, 42.7 percent of home sales in the first three weeks of July had no record of a purchase loan, according to county data analyzed by MDA DataQuick. The median price for those transactions was $105,000.

For the same period in San Pablo, 45.1 percent of sales appeared to be cash transactions; their median price was $110,000. In the Bay Area overall, 22.2 percent of sales in the July period looked like cash transactions; their median was $200,000, DataQuick said.

"Houses are less expensive than they've been in over a decade, and there is a Gold Rush mentality out there," said Andrew LePage, an analyst with San Diego's DataQuick. "If you want to be the one who gets the house, in some cases you just have to have cash."

Despite the cheerleading, the gaming and the "Gold Rush mentality" there are a few flies in the ointment. Topping the list: almost one in seven mortgages are distressed--in foreclosure or delinquent:

4.3% of mortgages in foreclosure (

The non-seasonally adjusted delinquency rate increased from 8.22 percent in the first quarter of 2009 to 8.86 percent this quarter.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the second quarter was 4.30 percent. The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

Moody's estimates that lenders will foreclose on 1.89 million homes in 2009, up from 1.43 million last year.

Then there's these factors:

Souring Prime Loans Compound Mortgage Woes (Wall Street Journal)

Improving Home Sales Belie Market Reality (Wall Street Journal)

Can Vanished Real Estate Wealth Come Back? (Wall Street Journal)

I have applied the Pareto Principle to the housing market over the years, and now that foreclosures have hit the critical 4% mark, it's time to revisit the 4/64 rule and the 80/20 rule. I was introduced to the Pareto Principle by longtime correspondents Harun I. and U.K.C. The Pareto distribution quite effectively predicted that the 4% "vital few" subprime defaults would have an outsized effect on the 64% "trivial many" households with mortgages.

Readers of this blog learned in May 2006 of the likelihood that 5 millions homes would soon be in foreclosure:

How Many Foreclosures Will Hit the Market? (May 1, 2006)
Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)
How 4% of Mortgages Have Brought Down the Entire Market (August 21, 2007)
Will Delinquencies Trigger a New American Revolution? (April 7, 2008)
Feedback Loop of Recession: Housing Bust, Debt and Layoffs (March 10, 2008)
Could 50% of All Homes End Up in Foreclosure? (June 3, 2008)
Why Housing Is Far from Bottoming: Depression, Demographics, Defaults and Dumps (October 8, 2008)

Bingo, foreclosures are on track to exceed 5 million shortly. (1.3 M in 2007, 2.3 M in 2008 and 1.8 M (est.) in 2009.)

Critics might well ask why the The Pareto distribution should apply to the mortgage/housing market. It is a fair question, because the Pareto Principle is not causal--it merely captures the distribution probabilities within groups.

That said, there are a number of fundamental causal drivers which suggest the 4% of homes in foreclosure will have a dramatic, long-term negative influence on the value of 64% of the housing market (the 4/64 rule).

Once the number of distressed mortgages rises from 13% to 20%, then we can anticipate the 80/20 rule will apply: those 20% will wield an outsized influence on the remaining 80% of mortgages. Recall there are about 50 million mortgaged homes in the U.S. and about 25 million owned free and clear. The value of all homes will be pressured as foreclosed and distressed housing is placed on a saturated market.

A key driver of future delinquency is negative equity. Owing more than the value of the home saps homeowners' willingness to "stay the course" and keep sacrificing to pay the mortgage. Regardless of your opinions on the morality of this trend, it is undeniable:

Almost one-third of home loans under water

More than 15.2 million U.S. mortgages, or 32.2% of all mortgaged properties, were in a negative-equity position on June 30, edging down from 32.5% at the end of March, according to the real-estate information company, which tracks data on about 90% of mortgage loans nationwide.

The aggregate property value for loans in a negative-equity position was $3.4 trillion, according to the report.

Negative equity can occur because of a decline in property value, an increase in mortgage debt or a combination of both. Negative equity is a strong driver of foreclosures,

Foreclosures Drag on U.S. Recovery (Dismal Scientist)

Foreclosures depress house prices through three channels: increased supply, discounting, and the neighborhood effect. In the first case, additional inventory comes on the market when homes are foreclosed, adding to supply just as the recession is curbing new household formation, keeping demand for housing weak. Second, banks typically discount the price of foreclosed properties to encourage quick sales. Foreclosed homes also are often damaged, reducing their value. None of the conventional price indices capture this effect.

Finally, foreclosed properties drive down prices for nearby homes, regardless of whether they, too, are distressed. Simply being located next to a foreclosed property renders a home less desirable. This is reflected in overall house prices: According to a recent Federal Housing Finance Agency survey,California house prices excluding foreclosed properties had fallen 36% from the market peak through the first quarter of 2009, not much different than the 41% decline in the FHFA price index that includes foreclosed properties.

Once the homes with negative equity surpassed 20% of the total market, a new dynamic set in. One recent report estimated 50% of U.S. homes would be "under water" by 2011. Given the Pareto distribution, this seems entirely reasonable and even conservative.

What about all those homes being snapped up with investor cash? The idea, of course, is that the "smart buyers" will rent the properties out to cover all the carrying costs and then profit as housing "recovers."

Please excuse my cynical snort. Being a landlord/landlady is not an easy business. Human being have all sorts of perverse reactions to higher rents, such as moving out and leaving you with big fat vacancies.

Humans under financial stress also display all sorts of quirky behaviors such as not paying the rent, or paying sporadically. And when you try to evict them, other quirks can kick in, like suing you for discrimination, claiming you failed to keep the property habitable, and so on. Some might take out their anger at your unreasonable greed by trashing the house. To make them go away usually requires a few thousand dollar cash "incentive."

So much for those "easy profits."

Most annoyingly, houses actually require constant upkeep and financial investment to be rentable. Houses are not bonds. They do not pay "dividends" with no work and no further expenses. Costly things are always going wrong. You can ignore them and be a slumlord, but then an amusing reaction called "karma" sets in and you end up getting the kind of tenants you deserve.

Fantasies of easy wealth via landlording die quick and hard. A funny thing happened on the way to a long, drawn-out New Depression--lots of people no longer have the financial ability to pay rent in any amount above zero. All those folks the new "investors" are counting on to rent their trashed, abandoned houses will be moving back home with parents, sleeping on sofas, renovating garages and outbuildings into semi-habitable spaces, moving into welfare SROs, moving back to their nation of origin, etc.

Just anecdotally, I know of one investor who bought a multi-unit building and promptly jacked the rents 20% to reap a tidier profit. Most of the tenants are leaving. Good luck with that "I'm gonna get rich as an absentee landlord" game. I anticipate a wave of desperate sellers in 2010 trying to dump their "can't lose rental investments" for any price as long as it's cash.

Yes, it is possible to earn a modest positive return on rental properties, if you maintain the property scrupulously, screen your tenants as if they were future in-laws, study your neighborhood rental markets carefully and respond to your tenants as valued customers rather than annoyances. Few landlords are willing or able to do the above and hence losses and vacancies are guaranteed.

And the mortgage re-sets just keep coming. We've all seen this chart so often that we've become numb to the dire consequences it implies:

Let's also consider the waveform of every financial bubble. With minor variations just to keep life interesting, all financial bubbles follow this basic progression:

There is always a false bottom/false dawn marked by euphoric buying by those who expect a resumption of a trend which is irrevocably broken. Now that foreclosed houses are drawing 30 cash bids above asking, I think we can safely announce that the post-false bottom peak is at hand.

There is generally a rough symmetry to bubbles. Thus since the housing bubble took about 11 years to reach its apex (roughly 1996-2006) then we can expect about an 11-year downcycle (2007-2017) give or take a few years. To expect a decade-long bubble to bottom in a mere 18 months is folly.

Few beyond historians know that half of all urban homes were in default/delinquency during the Great Depression of the 1930s. Various Federal schemes were put in place to suppress this national default: bans on foreclosures, renegotiating existing under-water loans, etc. None of them changed the fundamental reality or "fixed" the housing market. We would be wise to recall this history before placing too much faith in re-runs of the same policies.

Thank you, Cheryl A. and Alberto R., for your suggestions to revisit the housing market.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Lawrence C. ($10), for your most generous second donation to this site. I am greatly honored by your support and readership. Thank you, Brian L. ($15), for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.


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