Wednesday, June 30, 2010

Innovation: Financial, Technical and Institutional

We've had too much financial "innovation" and not enough institutional innovation.

The key context in any discussion of innovation is the returns generated. If they are marginal, then the innovation is of limited value.

In the realm of financial "innovation," the returns were phenomenal for a handful of Wall Street players selling mortgage-backed securities and for a much larger group of unscrupulous mortgage brokers who "gamed the system" and foisted high-risk or fraudulent mortgages onto secondary markets as if they were truly qualified and low-risk.

For the nation at large, the returns on the past decade's financial "innovations" of exponentially increasing leverage and debt, fraud, mispricing of risk and collusion have been catastrophic.

On the scientific front, many innovations in pharmaceuticals have been marginal, once side-effects and often-poor results are factored in.

On the institutional level, there has been little to no innovation, only more status-quo regulation which has generated dubious returns in terms of transparency or improvements and quite possibly negative returns when the costs of compliance are factored in.

So the key to truly productive innovation is that the return is substantial and scalable and the risks are properly assessed and priced.

In many cases, the innovation's returns/benefits are oversold and over-promised, while the inherent risks are misrepresented, glossed over and discounted.

Thus we have "safe" medications which are suddenly discovered to have serious side-effects, and "safe" 13,000-foot deep oil wells which blow out one mile beneath the surface of the sea.

Risk can be mis-assessed and also mispriced. The risks of Fannie Mae imploding were actually quite high, but the risk was mis-assessed and mispriced. Investors who believed the status-quo assessment of risk were wiped out.

This context plays an important function in technical innovations, not just in financial or institutional innovations.

A photovoltaic panel will not blow up, but a solar heat collector which heats water (or other substance) to high temperatures could well blow a valve. A geothermal exchange system will not blow up, but a geothermal well might trigger earthquakes and could release steam. These risks--the escape of steam and the triggering of small earthquakes--can be assessed, mitigated and balanced against the benefits, but the Gulf oil blowout is stark evidence that risk management and mitigation of inherently risky systems does not render them without risk.

Inherently low-risk systems do not need elaborate counter-measures and redundancies.

The First Big Question of this century is how do we replace the cheap, high-density energy of petroleum and natural gas. If oil were really as abundant as many seem to think, why does it require dropping a mile-long pipe in deep water and then drilling a 13,000-foot deep well to extract it?

Given the horrendous expense and the inherent risks, that doesn't seem like a good investment if cheaper/easier-to-get oil was as abundant as some seem to believe.

The solar radiation which bathes the planet every day is substantial. Some of this is captured by plants in photosynthesis, some is captured in heat, and a tiny sliver is captured via electronics or heat collectors and turned into electricity.

The rap against alternative energy is that it is fundamentally low-density. In other words, it doesn't come pre-packaged like petroleum in a transportable, high-energy density form. Wind, solar, tidal energy, etc. are diffuse and must be collected and condensed into higher-density energy which can be stored or distributed.

If we consider the basic physics--the abundance of solar energy and the need for high-density storage and transport--then we can conclude that innovative storage technolgies will offer high returns. Many observers believe hydrogen is the obvious choice for storing solar energy (to be used in fuel cells)--whether it is solar energy converted into algae, hot water or directly into electricity.

Others note that compressed hydrogen has potentially explosive risk factors, and in terms of vehicle transport then batteries might offer a lower risk source of concentrated power. Large-scale storage of energy would also benefit from scalable innovations.

If the energy source is essentially free and the collection process essentially low-risk, then the calculus of risk and return is quite different from an inherently dangerous energy collection/storage technology.

The Second Big Question of this century is how can we do more with the energy we do collect/extract. Take a vehicle which gets 10 miles per gallon of gasoline. Now to drive that vehicle 400 miles, we need to extract oil and then refine it into 40 gallons of gasoline.

Alternatively, we extract 40 miles per gallon from the vehicle and then we find/refine 10 gallons of gasoline. The result--400 miles--is the same in each case.

Once oil becomes scarce and/or very costly, then the truly high-return innovation would be to make a vehicle which gets 200 miles per gallon of gasoline or other liquid fuels. Then only two gallons of fuel would be needed to drive 400 miles.

The model of development of energy since the start of the Industrial Revolution has been to go find more cheap sources as energy demand rose. That model is running into a variety of limits, physical and political. Therefore extracting more work from the energy we do have is the preferable model.

The "market" is not always a productive arbiter of such value. The 5% of total U.S.-generated electricity squandered daily on zombie and stand-by electronics will never be addressed by the "market" because the consumer will never demand such a modest change nor will manufacturers gain any competitive advantage from the modest extra cost of manufacture.

Only the State can impose such common-sense practices on a market which cannot recognize or register a 5% loss of the nation's electricity because the market is individuals who will not respond to 5% of their electricity being wasted.

The Central State imposed common-sense conservation regulations on home appliances after the 1973 Oil Crisis and energy consumption actually declined as these modest measures took effect. Nobody "suffered" because their refrigerator required less electricity.

The broad outlines of high-return innovations in technology are clear; the innovations we need in institutions are less clear but no less needed.

To take but one example: is there truly no other way to educate people in the skillsets which will be valuable going forward (creativity, ability to learn on one's own, ability to work in teams, flexibility, etc.) other than a horrendously costly university? Is there truly no other way to run a university except to charge students $30,000 a year or a total of $120,000 for four years?

Or did this institutional cost arise because "free money" was available from student loans? If government-funded and pushed student loans were ended tomorrow (which would be my recommendation), then the hundreds of colleges and universities which have grown dependent on this model of finance and education would face a stark choice: either close down or come up with an innovative way to offer education for (say) $5,000 a year.

The same institutional shock and forced innovation will occur when (not if) Medicare and Medicaid implode and the endless supply of "free money" from the Federal government ends. A pharmaceutical company can offer medications at $10,000 a dose all it wants but there will be few buyers. Either that firm will go bankrupt from lack of sales or the price of the med will magically fall to what people can actually afford.

The fact that so many people automatically claim that such institutional innovation is "impossible" is proof of our shrunken imagination and limited conceptual understanding of innovation.

We understand technical innovations easily and expect them; but institutional innovations which offer just as high returns, if not higher, than new technologies, are verboten, impossible, beyond imagination.

Here is one example. How much money would it take to close a street to cars and trucks? Almost nothing--a few concrete barriers and signs. This "innovation" would be making travel by bicycle cheaper, easier, safer and in many cases faster than travel by car.

But we find this sort of innovation uninspiring and tepid; if there were a monorail being proposed, or flying bicycles, that would pique our enthusiasm and interest. But simply making a cheap, convenient form of transport more readily available and safer offers no zing. And of course, the inertia of the status quo is immense; though there are 99 other streets still open to them, drivers would undoubtedly protest the closure of a single street--not because it was truly essential but simply because it would be perceived as a "needless limit."

If we are truly after "faster, better, cheaper and lower energy consumption" then we have to look at sclerotic, bloated, inefficient institutions and social habits which haven't changed substantially since the 1950s.

Is there really no other way for an accredited university to educate people without the overhead and costs which make $30,000 a year the "minimum cost"? What if student loans were no longer enabled, and people had to save up and pay cash? Isn't it possible that new institutional forms would arise to meet the demand for education which isn't funded by loans?

What if low-risk, long-lasting collector and storage technologies got the same enormous tax breaks that deepwater oil drilling receives? What innovations might arise from that simple institutional rebalancing of perceptions and priorities?

Yes, we need innovations--not just consumer gizmos, but technologies which offer high returns and low risks on energy production and conservation. And just as importantly, we need to face up to the inherent risks of financial "innovations" and to the stupendous need and opportunity for institutional innovations.

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Tuesday, June 29, 2010

Believing Six Impossible Things (about trade, deficits and currencies) Before Breakfast

The consequences of Euroland austerity are far-reaching and not euphoria-friendly.

The global markets seem to be trying to believe six impossible things before breakfast. The line is taken from Alice in Wonderland:

"Alice laughed: "There's no use trying," she said; "one can't believe impossible things."

"I daresay you haven't had much practice," said the Queen. "When I was younger, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."

Alice in Wonderland

Longtime contributor Michael Goodfellow recommended this excellent analysis of global trade, the euro, China and the U.S.: Don’t misread the trade implications of the euro crisis for China (Michael Pettis)

In pondering the points raised in this article, I settled on Six Impossible Things the global markets are trying to believe before breakfast:

1. That the austerity and resultant reductions in southern European trade deficits will have no consequences in Europe. As Pettis demonstrates, every country in the world cannot run a trade surplus or deficit; the two balance out. Thus as the stupendous current-account (trade) deficits of Greece, Spain, et al. shrink under their forced austerity, then someone else's trade surplus must shrink.

That would be the trade surpluses which have been propping up the domestic economies of Germany, The Netherlands, Sweden, etc.

2. The austerity-forced decline of southern European trade deficits will have no appreciable consequences on China. This is the unintended consequence of pegging one's currency to the U.S. dollar. As the dollar rises against the euro, so too does the Chinese renminbi (yuan) which is pegged to the dollar.

As the euro drops relative the U.S. dollar, Chinese goods become more expensive in Europe, its largest trading partner.

3. Germany, China and other mercantilist, export-dependent economies will simply sell more to other nations running deficits to make up for the fall in southern Europe's imports. That wouldbe the U.S., the world's largest importer and the dumping ground for the past decade of the world's exports.

Take a look at this chart and notice that a significant percentage of the U.S. trade deficit is due to importing petroleum. Minus out the oil imports, and we see that the U.S. imports have fallen considerably.

Not only that, but U.S. policy pursues the goal of expanding exports to reduce the trade deficit. Desperate exporters might find the global market for their goods has shrunk, which means their domestic economies are vulnerable to a slowdown in exports. Note how U.S. imports have fallen in the Great Recession:

4. Tariffs will set everything right. Many voices are calling for stiff tariffs against all Chinese-made goods in the U.S.--conveniently overlooking, it seems, that most of the stuff labeled "made in China" comes from factories owned by U.S., European, Japanese or Taiwanese firms.

But never mind that; the real; issue is that the World Trade organization rules prohibit essentially arbitrary tariffs. Wanting to reduce one's trade deficit is not considered a valid reason to impose 28% tariffs.

5. the Eurozone will be able to borrow hundreds of billions of euros on the bond market without any consequences to global interest rates or risk premiums.Despite all the propaganda released every time some sucker buys Greek or Spanish bonds ("You see? The risk is gone, investors are snapping these up at low yields, Everything's fixed now"), it seems some bond auctions have almost failed, and the value of Greek bonds continues to decline.

So what happens to bond yields when the demand for cash exceeds the supply of suckers willing to buy bonds with low yields? Yields go up--not just for Greek and Spanish debt but globally as the competition mounts for cash.

6. China will continue to buy U.S. Treasuries, enabling low interest rates in the U.S. forever and ever. Not only have the Chinese central bankers made it clear they think $900 billion or so in T-bills is more than enough, as Pettis explains, their only hope of halting the slide of the euro against the dollar (and hence against the Chinese renminbi) is to start buying euros in quantity to put a floor under the euro.

Even China doesn't have large enough current account surpluses to fund the gargantuan debts being floated by the U.S. and the eurozone.

Bonus Impossibility: The U.S. dollar will implode and the euro will stabilize at 120 to the dollar. With austerity requiring not just laying off tens of thousands of government employees, selling off government assets and a mass reduction in lifestyle along with stiff tax increases, but a wholesale realignment of euro-style State Capitalism, what are the odds that southern European populations will take all these losses in stride?

What are the odds that the Germans will watch their exports plummet with equanimity and that they will gladly pay even higher taxes to bail out the Club Med economies even as their domestic economy falters along with exports?

Who will be the first to jump the euro ship--the Germans or the Greeks? There are powerful arguments for both to bail out. Once it comes down to self-preservation, it is difficult to see any nation sacrificing itself on the altar of the euro.

Yes, all currencies may well fall against gold, silver and oil, but within the basket of currencies, those betting on euro strength really are trying to believe the impossible not just before breakfast but even before the coffee has finished brewing.

Pettis concludes his article thusly:

But make no mistake – if southern European trade deficits decline, someone somewhere must bear the brunt of the corresponding adjustment. The only question is who?

The consequences will ripple out not just through current accounts but through foreign exchange rates, bond yields, and domestic economies and politics.

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Monday, June 28, 2010

Once More Up, Then the Big Down

The ingredients for a classic head and shoulders topping pattern in the stock market are all present. That suggests one more rise and then a massive grinding move down to 2009 lows.

Officially, of course, everything's peachy with the economy. Europe is fixed, China is booming, consumer confidence is rising, and we are encouraged to resume our borrow and spend ways as the economy will not "double-dip" into recession. The economy will not slide into another recession, we are reassured constantly, even though roughly 80% of Americans don't think we ever left the recessionary quicksand.

Please see "Two Scoop Special": Double-Dip Recession Guaranteed (May 21, 2010) for more.

Courtesy of Imperial Economics, here is a chart of the growth rate of the Economic Cycle Research Institute's (ECRI) Leading Indicators (WLI). (Please visit Imperial Economics to view a the full version of this chart.)

Needless to say, this chart does not inspire the confidence that the Mainstream Media and Central Governments are so desperately attempting to inflate. The WLI appears to be moments away (figuratively speaking) from slicing into recession territory.

I have made a few notes to indicate the past few bubbles and recessions. The spike down of the Global Financial meltdown was truly significant, as was the stimulus-juiced spike of "recovery." (Recovery if you are a bank, recession if you are a debt-serf.)

The mere whiff of recession cratered the stock market. If we glance at a long-term weekly chart of the S&P 500, we can easily see the euphoric spike of the initial "V-shaped recovery" which was followed by a slower but steady rise to a classic top in April as the SPX kissed the 200-day moving average.

MACD is now threatening to drop below the neutral line for the first time since July 2009, and the stochastic is oversold. The decline in MACD is bearish, and the stochastic could stay oversold for an extended time.

I have a funny feeling the market "should" crash but instead it will do the opposite and rise once more before "The Big Down Move" The Powers That Be fear and loathe kicks in. Here is the moment when the stage falls silent and I ask you to re-read the HUGE GIANT BIG FAT DISCLAIMER below which states that these are the freely-offered (i.e. you get what you pay for) random observations of an amateur and they are not intended as investment advice.

Time and again the real economy has shown unmistakable signs of serious illness, yet the market rallies--often in most peculiar ways such as "ramp and camp Mondays" in which the market shoots up and stays elevated all day with essentially no volatility. Another favorite move is a down day that is erased with a sharply manic rally which begins liftoff at 3:45 pm sharp. Hmm.

So given the tenuous causal connection between the real economy and the market, we should be on the lookout for yet another rally which flies in the face of reality.

Here is a daily chart of the SPX which reflects the dual forces at work. The MACD reflects a major decline in the market, but on a short term basis, it is signalling a Bullish divergence (rising as the market fell). This is setting up a classic head-and-shoulders topping pattern:

There are two key reasons to suspect the market will rise to the 1,150-1,175 range. One is that the right shoulder can be expected to reach the previous line of resistance shown--the left shoulder around 1,150.

The other is the possibility that there will be time-symmetry in the head-and-shoulders pattern. Note that it took about 3 months for the market to top from the right shoulder. Symmetry suggests that the right shoulder will form around 3 months out from the top in late April. That would target early July as the high point of this final rally which will complete the head-and-shoulders topping pattern and set up a long, grinding decline to the 2009 lows around 667.

For those of a fundamenal analysis bent, please read U.S. Profit-Margin Outlook `Extremely Bad' and glance at the accompanying chart, which shows U.S. corporate profits reached an all-time high in Q1 2010, blowing past the highs of the dot-com era and the credit/housing bubble peak in 2006-2007.

Exactly what drivers are there for future gains in corporate profits? I can't think of any, short of Martians landing and going on a shopping spree with gold they manufacture in their spacecraft. On the negative side, we have:

1. The rising dollar is a huge headwind to sales in the Eurozone and elsewhere.

2. The low-hanging fruit of pushing the workforce to produce more output for the same salary/wages have all been picked.

3. The inventory build-out is done for everything but the iPhone 4 and iPad.

4. So-called "fiscal austerity" (when did living within one's means become some sort of brutual "austerity"? Talk abour propaganda!) in the eurozone and U.S. states will remove tens of billions of dollars from corporate sales.

5. Global overcapacity is alive and well. There is overcapacity in everything manufactured except the iPhone 4, and that will be in glut by 2011 as well.

6. Uncle Sam is not distributing trillions of dollars quite as freely. There seems to be some glimmer of awareness that there could be consequences of squandering trillions of borrowed dollars on essentially worthless projects such as occupying Iraq, inflating the housing market by socializing the entire mortgage market, propping up Fannie Mae, Freddie Mac and FHA, etc.

7. Housing is rolling over now that the socialized mortgage market has been tentatively allowed to go off life-support (it is wheezing and turning blue in the face, not signs of vibrant health).

8. There is no pricing power anywhere once stimulus-goosed demand declines to organic demand (flat to down).

For those who want to exit long positions, there may yet be a golden opportunity to do so. It's even possible that the Powers That Be squeeze the market so tightly that we see a double top around 1,200, just to frustrate the Bears one last glorious time.

As they say, keep an eye on the referee as the Bull and Bear duke it out. Here is my long-term look from May 26: Stocks Due for a Bounce, But Long Term...

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Saturday, June 26, 2010

Sleep, Dreaming, and National Suicide (guest essay)

Longtime contributor Eric Andrews suggests we are experiencing not just a financial Depression but a psychological/spiritual Depression as well.

I am very pleased to offer this provocative and insightful essay by correspondent/essayist Eric Andrews. You may not agree with every idea presented here, but the diagnosis cannot easily be dismissed. Those of you familiar with the work of psychiatrist R.D. Laing may hear echoes of his ideas here.

Those of you who have read Survival+ will gain a new perspective on opting out,protected fiefdoms, when belief in the system fades, profound political disunity,plantation-like structures, derealization, radical self-reliance, asymmetric stakes in the game, induced amnesia and other ideas I have presented here over the years.

This is the sort of essay you will never find in any Mainstream Media outlet, even so-called "progressive" ones.

Sleep, Dreaming, and National Suicide by Eric Andrews

“At what point shall we expect the approach of danger? …All the armies of Europe, Asia and Africa combined, with all the treasure of the earth (our own excepted) in their military chest; with a Bonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.” --Abraham Lincoln

The news lately is a blizzard of destruction: wars, recession, the financial crisis, deficits, drugs abuse, and border wars, random violence, declining education, energy crisis and the Deepwater Horizon, national policy, corporate malfeasance, collapsing communities, bankrupt cities, states, and nations, the list goes on and on. How did we get here? What’s causing all this bad news?

To me it’s simple:

All these effects are symptoms of Depression.

Not Economic Depression, like the 1930s stock crash, but National Depression, the psychological state.

Let’s take them one at a time: what do people do when they’re Depressed? Shop? Overeat? Make themselves physically ill? Get doctors to medicate? Abuse drugs to self-medicate? Are they unable to care for themselves, others, and even their children? Are their tempers short, and prone to irrationally lashing out, even at the wrong people, both at strangers and with their own people?

And when confronted with a problem, they cannot muster the concentration to investigate, discover, and then enact changes to solve them, like our energy policy, but muddle about in listless thoughts and pointless actions, eventually dropping it?

When faced with imminent, deadly danger, financial, as with the financial crisis; bodily, as with the Mexican Border Wars and ceding a swath of territory from Mexico to Phoenix to the Drug Cartels1; or with internal disintegration, as we see every day with law, contradictory taxation, sovereignty, what is the response of the Depressed? They don’t care. The Depressed have no sense of urgency to danger, no remaining sense of self-preservation.

Often, as we’ve read on various challenges, Peak Oil, our trade deficit that comes from the imports, our lack of common sense in law, I’m sure we’ve all asked ourselves:
Are we crazy? Are we trying to commit national suicide?

And I’m here to tell you in no uncertain terms the answer is “YES!”, that’s exactly what we’re doing, complete with the panoply of symptoms and not-so quiet cries for help.

In the Hugo-Winning story “The Sandman” by Neil Gaiman, the main character is Morpheus, King of the Dream world. As a primary element, he cannot die, anymore than “Death” “Desire” “Despair” or “Delirium” can, for they’re not people, but ideas. (Warning: spoiler alert)

In the story, however, Morpheus takes years of novel-time to painstakingly and irreversibly arrange his death, his dissolution, his ending. He carefully made sure no one saw it coming. In that way no one could stop him. And he succeeds.

The United States has the same problem. A nation cannot die. For what makes a nation? It’s not a bunch of buildings, a collection of bureaucrats, a geographic territory; it’s not even a standing army: America is first and foremost an IDEA. And an idea can’t BE killed, not even by suicide. As long as anyone can read the Declaration of Independence and recite our history, America lives.

And as Lincoln says above, America is unique in that we can’t die by the normal means that nations fail. We’re not going to be culturally absorbed. We’re not going to be conquered by a larger neighbor. Even China isn’t powerful enough to do so, even if they could somehow get 30 million Chinese here in boats.

Yet the symptoms are all there: Lethargy. Incoherence. Blame. Violent temper. Drug abuse. Fantasy. Escapism. Empty consumerism, empty sex, empty eating, empty action, empty rhetoric.

Depression is not some random disease, a chemical imbalance caused by losing the genetic lottery. Depression has several causes, clearly-defined, clearly-traceable, clearly-provable, clearly-curable. The main cause of depression is simple: it’s cognitive dissonance. That’s a fancy way of saying, you have two ideas that don’t mesh and are at war with each other. It’s a way of saying, you’ve swallowed a lie or a pack of lies, and they’re poisoning you from within.

Consciousness is something we know the least about, but I think we all recognize that ideas are real, and that they have energy and power. If half that power is fighting with the other half, you’ll find yourself in an exhausted condition. Worse, you won’t be able to know, to choose, or to act. For which side, which set of ideas should you act on? Who’s right and who’s wrong? You don’t know, which is why there’s a civil war.

Like any other civil war, the two sides are wrangling for who is going to get control, who is going to have their ideas acted on. An exhausting, tiring, excruciating civil war. It’s no less than a real civil war, same as in distant fields with a gun, or ceaseless fighting at home with one’s family. You may not want to fight, you may avoid it, but every action, every decision only brings up the problem again. You may not want to lash out at people, but you’re in agony: taking drugs, shopping, zoning out in TV, video games, anything to mitigate the pain.

We may not be able to measure an idea, put it on a table and photograph it, but we know that they’re real. The pain is certainly real. And the actions we take to manage the pain are very real, for they're part of our daily life.

This is the state we’re in as a country.


I can even tell you what the dissonance is:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

Compare that idea of ourselves to where we are today: referring to ourselves as “Consumers,” a nation where a “Right” is anything we can get somebody else to pay for, and “Free” is something we use to advertise Checking Accounts.

Which nation are we? The America of Jefferson and Madison? Or the America of Gordon Gekko and Edward Bernays, father of modern advertising and propaganda?

This is not idle discussion—which we choose will have real, calamitous, and permanent consequences. Whichever we choose is likely to kill us, or kill the other. This is the same cognitive dissonance that was tearing the nation apart under slavery, and could easily have the same outcome: more men died in that one conflict than all American wars combined. Nobody wants to start it off. Nobody wants to throw the first punch. In fact, we are one mind, one nation and the finest display of grace is that we don’t want anybody to get hurt. We’re not taking it out on the Jews, the Blacks, the Mexicans, the Rich. It’s all us, and we’re killing ourselves with ignoring it, with trying to keep it all going.

But ultimately only one path can be chosen.

Want to know where this started? Look when the symptoms began. Sure, we had this with George F. Babbitt back in the 20s, but the real problems began with Reagan after Vietnam. We had a choice under Carter: would we face up to our limitations of failing oil and shrinking importance and become a smaller, humbler country, the spunky underdog of Mickey Mouse, a nation of “aw-shucks” stay-at-home farm-boys? That was the path of the 60s, back-to-the-land, hippie guitar-playing with your friends by the wood stove, of Carter in the sweater, solar panels on the White House. The American Reality: oil was declining. We’d have to work hard as ever, play nice and get nothing from it but to claim our own souls as men.

Or were we going to live the American Dream? The Big America. The leader of the Free world. The greatest might and right ever known, the John Wayne of nations, going to kick ass and take names Pilgrim, the world’s sole hyperpower. We could have it all: the new house, the new car, the fancy retirement, eat and flush 25% of the world’s resources, and what’s more, all for no money down, no work! Which would you choose? The reality, or the dream? Work? Or play? Eternal Sunshine? Or the Endless Hardship?

And we know how that went. American Reality was bounced out on its ear in favor of a glorious new “Morning in America.” A year later, Nancy Reagan started the War on Drugs, as Americans kept demanding medication in ever-spiraling quantities and ever-increasing strengths to stand the lies, the dissonance between what they knew and what they heard—always bad enough, but which then entered the transcendent levels that seem so quaint today. Consumerism turned from a modest enjoyment to an unreasoning juggernaut, the purpose of existence. Debt—personal, national, corporate--went from a modest load to numbers on a scale that now dwarfs the number of all stars in all the known galaxies.

But like any other depression, any other addiction, it didn’t cure the problem, it only hid it. The root disease remained down below, festering, eating us from within.

You want to know how easy it is to fix our problems? As the world's 3rd largest oil producer, we use 20M bbl/day in transportation fuels. Yet we only import 10M bbl/day altogether. Isn’t the solution to our oil imports and a therefore a major part of our trade deficit just to live twice as close to work? With 10M empty houses, can it really be that difficult? 1/5 of all electric power is consumed in vampire cubes and ready-on devices. Europe and Japan use 1/3 less energy than the US for an equal or higher standard of living. We've spent 30 years on a problem could be solved overnight.

You want to know why we won’t fix the problem of oil spills, of strip malls, of imminent energy crisis, of unsustainable finances? We don’t want to. We don’t WANT to keep going. We WANT it to end. We don’t WANT to be this kind of country. But we can’t stop it, we can’t die, because America is an idea, not a person. If we can’t stop it, we do what all addicts, what all the suicidally depressed do: we arrange our own destruction so it ends for us, without our having to choose. We use increasingly bad behavior to force the collapse so we can finally break free from the impasse, and make the radical, nation-shaking change we can’t face on our own.

That’s what we’re doing right now. At the bottom, with Millennial Apathy and dissipation, right to the top, with Katrina rescues and unwinnable Foreign wars. We’re committing suicide. We’re FORCING ourselves into a corner so we HAVE to change.

We hate this place. We Americans hate our empty houses, our empty jobs and our empty lives. We hate driving and not seeing our children. We hate not doing the things we dreamed of as children, making flying machines and pedaling free down tree-lined roads. We hate it with a burning passion but we don't know how to stop it, which is our fascination with Apocalypse, with catastrophe, with violence and disaster. We wish it would just blow up once and for all. Yet this place is us, our lives, our neighbors, our home towns: how can we hurt it? How can we condemn our own American Dream to death?

You have to understand, America is a very, very, very good country. It may not look like it right now, but you can still see it at every level. Who was there in hours when Katrina was hit, giving time, money, lives, everything for free? Who was there when the Boxing Day Tsunami came in, despite that 12% of our own people are on food stamps? We were. We fix things. We’re practical and we make it better, instantly, automatically, inventing a new world that’s never been. Even in our tangled suffering, we can’t help it. We’re a good people, a practical, hard-working people. That’s who we are.


If we’re suffering with half-truth, half-lies, at internal war, where did the lies come from? Where are these lies coming from today?

This part is important, so listen up. You know how we all tour the web, upset, angry, frustrated as hell with people telling us the Fannie Mae bailout was for our good, we were going to make money on it, that the oil spill was under control at 1,000bbl/day, that deficits don’t matter, that unemployment is at 9%, and that 12% of the nation on food stamps and the annihilation of New Orleans and Detroit don’t mean anything? Who tells us those lies?

Let’s not even pick on this administration, or the last one, for this sort of thing goes back to President Wilson. Let’s be broad, let’s be generous. Was it both parties? Yes. Was it corporate advertising? Yes. Was it Television, including every major news outlet by the 5 controlling companies, every book released by the 5 remaining publishers, every textbook you’ve ever read, every teacher and professor you’ve heard? Yes. Was it every false, propaganda-addled government statistic released since Kennedy, each unlisted mortality of war, every vanishing job, every dollar of inflation? Yes.

Was it the total machine, every authority figure you’ve ever seen, convincing you that our life is forever better and better, that America is greater and greater, every day, from every office of power public and private, although this is has been measurably false since wages started falling in 1971? Yes. Is this the same empty propaganda they heard in Romania, Czechoslovakia, Serbia, East Germany under the Soviets? Yes. And it’s having the same effect on us: it’s driving us insane.

So. You’ve been lied to. You’re being lied to with every word you hear. You’ve consumed maybe 10,000 lies that are inside you, eating you up, warring, making your judgment faulty, your actions irrational, the results arbitrary, contrary to the expectations you’ve been told, the way we were told the world would work. You need to get them out, and to expel one per day will take 30 years hard labor. Only a catastrophe can make it go faster. The one we’re creating.

This is why we’re sick, and why we’re acting the way we do. The lies on TV are not a sideshow, they’re not a misfortune to be glossed over, they aren't harmless Spin: they are a condition that is fatal; they are specifically and measurably killing us, as people, as you, your neighbors, foreigners, the nation, and quite possibly, the world.

My question is: who is profiting by these lies? Sure, some lies are thoughtlessly repeated, but who is knowingly and serially lying, to the detriment and total destruction of us and our great nation? And why?

I think you’ll find a startlingly small layer of individuals profiting by the lies, made drunk as Gods on the wealth, power, and influence that gives them, unthinking and uncaring of the total collapse that faces us and them because of their acts. There is a slightly larger, but still-small group directly below them of insiders and hangers-on. They are the same kind of small layer that held the Soviet Union together and profited by it, instead of suffering with the overwhelming mass of people, and exist in the same way for the same reasons. This insignificant few are using those lies, that sickness, and the Depression and lethargy it creates in us to cling to power and prevent any significant change that might save us from destruction. They fight all realization, all discussion, any challenge to their interlocking interests with astoundingly and increasingly draconian measures. No input is welcome, no change is allowed. No action of yours is wanted or permitted.

Want to know why people are Depressed, why as a nation, we’re diseased, unhealthy, addicted, over-medicated, over-incarcerated, committing suicide? It’s right here. It’s well-proven that hardship does not cause depression. People endure the most appalling things: the Black Plague, the 1918 Flu, the 1908 earthquake, hurricanes, tornadoes, dustbowls, violence, privation, starvation--anything at all as if it were nothing at all—as long as they have the freedom to respond to it. As long as they can choose what to do to change things, solve things, create a better tomorrow. As long as they have Life, as long as they have Liberty, and as long as they are allowed the Pursuit of Happiness as they see fit.

What we have now is a backlog of the usual challenges and hardships, and you are not allowed to do anything about it. Only they, our leaders, that thin, insignificant layer of influence at the top, are allowed to choose. Want to take water to somebody thirsty after a Hurricane? Sorry Amigo, federal roadblock, M-16s waving, and our federal prisons are eager to receive you. Want to close a critical estuary in the Gulf to save a corner of fishing for your children and grandchildren? Sorry, not allowed. Here’s a form to fill out and in 6 months we might respond, long after all hope is destroyed.

Want to grow a garden in your front yard? Get a permit. Want to buy a chicken and to sell six eggs? Be arrested by the FDA for food violations and the IRS for tax evasion. Want to start a business? Pay 50% of your income up front before you make that first dollar and maybe we won't run you out of business with regulations.

Heck, want to paint your house blue and change the height of your porch railing? Sorry, not allowed.

What do the people say then? You and me, and the Millennials who have lived their entire life under this regime of “safety” and “orders” under threat of violent, hysterical consequences? Fine. I can’t stop it. They can’t stop it. You can’t stop it. But I guarantee you, on my life, it will stop.

The people have stopped supporting the system. The system, the powers of coercion and violence can rush from place to place making them, ordering them, forcing them, but they refuse to save it, refuse to help, refuse to perpetuate it. Let it rot. It’s too big and too violent to take down and there’s no point anyway. Let it fall in.

There’s the apocryphal example of Soviet rail workers sitting on the station, bags of cement all around. And it starts raining. “A pity, Comrades,” the workers said, “we didn’t get any orders to load the concrete onto those waiting boxcars.” Too bad. Let it rot. They’d learned that if they took initiative, Khrushchev would be as likely to have them arrested. And they didn’t care if the system succeeded or failed anyway. What did they get out of it?

For that matter, what do we get out of it? If I work those extra 20 hours a week, if I get out there and make a new business, a new invention, create free energy, solve world hunger, will I get anything out of it?

No. It will be punished as a challenge to the system, taxed to penury, and stolen by insider lobbyists and given to an insider monopoly. Same as the bailout, deregulation, S&L, Enron, and a dozen more I could name. So fine. Atlas has officially Shrugged. They’re so big and important, they can run it by themselves without me. Let them turn every screw, load every sack, and personally make every tiny decision if they think they’re so big and smart. I’ll just sit here and watch because I don't need them for anything. --But they sure need me. Who is Napoleon if nobody follows his orders? A lunatic. The power isn’t with him, it’s with us, just like the Declaration told you.

Would there be any point in preparing for the crisis, to be wealthy, well-positioned, well-stocked? No. If there were a dollar of wealth left anywhere, the government and inside powers will change the rules and steal it, devour it utterly and chase you for more. There is no point in physically preparing when there are no property rights remaining, no rule of law, as seen around us daily in eminent domain, ever-shifting bankruptcy laws, shaking down companies for $20B a pop, suspending bondholders without bothering with due process. This is how nations become poor. One simple way, one simple difference: rich nations have rule of law and property rights. Poor nations do not.

Do you see why we’re Depressed? When the reaction to the most mild challenges to power is irrational, hysterical violence, false imprisonments, frivolous lawsuits, IRS harassments, law changing at a whim, we know we can’t stop the system by pushing it, by any known challenge, or even involving ourselves with it. This was proven years ago, with the Indians, with the Rebels, with the Hippies, then the South Americans, the Arabs, the Asians. And the system that we turned on them has now turned on us. It’s gone categorically and demonstrably insane.

What is it to be insane? A danger to one’s self and others? Check. Divorced from reality? Check. Actively defending beliefs that are demonstrably false, even with violence? Check. Cannot be reasoned with by any argument, but whose beliefs and goals are an unalterable article of faith? Check.

The only answer when you have a violent, insane neighbor, who is protected by the world’s largest army of the world’s largest government, is to stay far, far away and let matters take their own path.

The only thing we can do is, slowly, methodically, over unending years, arrange our own irrevocable suicide to happen in its own time without being anybody's “fault”--not even our own.

Will we survive? Or will the crisis kill the idea of America forever? I don’t know. No suicide or addict does. If we could be certain we would survive, there would be no danger. All that will be up to us at that future time. All I can most assuredly tell you that we CAN survive it. We are a large country and even if stockpiling and creating wealth is useless, we can do many internal things to help ourselves at that time. We can transform ourselves into the people we once were and loved to be, or into some new people we have yet to imagine: all good, all healthy. But the first step is to know what is going on, what has happened to ourselves and each other.

The first step is to stop swallowing what is killing us and vomit up the poison that’s killing us all: the lies that are driving us crazy.

Morality is not a nicety, a pretty addition to life. Morality is what we DO: it IS life. And our decisions in life are fatal so you better pick well. It’s high time we started acting as if we mattered, because we do. The lives of you and everyone you know depends on it.

So what are you going to do about it?

“I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.” –Douglas MacArthur

Two for $24: Super-Limited Summer Reading Special Offer:

Buy signed copies of Chris Sullins' new Book 2 in the Operation SERF trilogy,Horsemen of the Red Hand and Survival+ The Primer for $24 (shipping included) and receive a free embroidered military-style patch that is based on the flag of a new group introduced in the story. More about the patch and a picture can be found on the Garden SERF blog.

For more about each book, please visit the Operation SERF Trilogy page and theSurvival+ page.

This is $5 off the retail price and less than the cost of ordering the unsigned books online. (It's also less that the cost of two tickets to a 100-minute long bloviated summer "blockbuster" movie and a small rancid popcorn.) You can buy the signed books (only 20 available--please email me to confirm your order) via mailed check or PayPal.

Chris Sullins' Strategic Action Thriller Operation SERF was first serialized here on If you missed the story, here is a summary:

A Strategic Action Thriller set in the United States of America in the year 2023. After many years of economic depression, a terrorist act fractures the country. The stage is set for another Civil War as three factions battle for control of the pieces. The story takes place in many areas across the country, but centers on one extended family caught between the struggles of the rival factions. The reader will glimpse into the minds of the leaders of the factions, as well as common Americans, and travel along with them. "Operation SERF" is Book One of the trilogy.

Chris just completed Book 2: Horsemen of the Red Hand:

Book Two of the Operation SERF trilogy continues the complex saga of the breakdown of America in the year 2023. As the Shroud family continues to struggle with the threat of attack on their rural home in Michigan, powerful political factions conspire from Chicago and Phoenix to divide up what remains of the shattered nation. More pieces move on the chessboard as the military decides to leave the sidelines and become involved in the action in order to secure the President and restore order. During the course of all these events, a nebulous man named Mond continues to manipulate the strategic situation nationwide and a deadly man-made virus begins to make itself known.

Substitution options: If you already have a copy of Survival+ The Primer, I will send you a signed copy of Weblogs & New Media: Marketing in Crisis or any one of my six novels.

If you would like to post a comment where others can read it, please go, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Order Survival+: Structuring Prosperity for Yourself and the Nationand/orSurvival+ The Primer from your local bookseller or from or inebook and Kindle formats. A 20% discount is available from the publisher.

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

Thank you, William K. ($40), for your stupendously generous contribution to the site-- I am greatly honored by your support and readership. Thank you, James M. ($10), for your much-appreciated generous contribution to the site -- I am greatly honored by your support and readership.


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