Tuesday, August 31, 2010

The Bullish and Bearish Cases for Stocks

The financial news and general stock market sentiment are negative; in a contrarian fashion, that sets the stage for an "unexpected" rally.

The stock market is at an interesting juncture right now as an epic battle between Bulls and Bears has left the market volatile and range-bound since the "flash crash" in early May.

In essence, the Bearish fundamental-analysis case rests on the plentiful evidence that the U.S. economy is tanking: as the economy grinds down, corporate profits will suffer and thus so will stock valuations.

Indeed, a number market observers have been suggesting that the market is setting up for a serious crash.

The Bullish case rests on much less abundant evidence that even as the economy slows, it won't slide into the widely feared "double-dip" recession.

Technical analysts avoid debates about GDP, revenues and profit margins by looking only at charts. To technical analysts, all the important information is reflected in price and indicators. From this point of view, all the millions of investor opinions, convictions and data points are compressed into the market action as traders buy and sell stocks and options.

This makes a certain kind of sense, because the inputs of the U.S. economy and market are so numerous and complex that it is difficult to crunch them all into a coherent "story" about what the future holds. Everything from the yen-dollar currency trade to the price of crude oil to the percentage of S&P 500 corporations' profits that come from overseas sales bears on the economy and the market.

Just as the market crunches all this data and human emotion into price action, charts compress the market action into a visual display of price and indicators.

Given the great economic uncertainty, it is unsurprising that the charts can be interpreted as Bullish or Bearish.

So I've marked up two charts, one displaying the Bearish case and one showing the Bullish case.

As many technical analysts have noted in the past few months, the Bearish case rests on a technical formation called "head and shoulders." I've indicated the left and right shoulders and the "head"—the market top in late April-early May. Technically, a head and shoulders is a topping pattern, meaning that it typically marks a major market top. In theory, now that price has formed the completing right shoulder, the market should fall significantly from here. This is basic technical evidence to support the Bearish "crash" scenario.

But there is other Bearish evidence as well. The blue 50-day moving average line crossed below the red 200-day moving average (MA), a Bearish signal known as "the death cross" because it shows that market momentum is declining.

Even more telling, price has fallen below the critical 200-day MA level. Repeated attempts to regain that level have failed after a few days, a sign of weakness.

The market has also fallen under the shorter-term trendlines of the 50-day and 20-day moving averages—more evidence of a market in decline.

The range-bound trading since early May is thus seen as a period of what is known as distribution--another word for widespread selling by big players.

Key indicators are also signaling a weakened market. The moving average convergence-divergence (MACD) indicator has slipped below the neutral line, marking a bearish trend, and the stochastic has fallen from overbought to oversold, reflecting weakening demand for stocks.

The Bullish case rests on a standard technical pattern which few commentators seem have discerned: a "reverse head and shoulders" in which the low point becomes the head and higher levels form the left and right shoulders.

While this reverse head and shoulders isn't very symmetrical, technical analysts refer to this type of action as a "complex" head and shoulders in which choppy price action is resolved into a general pattern with these key characteristics: the "head" is lower than the left shoulder (previous low) and the right shoulder is higher than both the "head" and the left shoulder.

In other words, the "head" marks a definitive bottom, and the right shoulder is evidence of a new uptrend.

The classic definition of an uptrend is simple: higher highs and higher lows. Both are present in the chart. While Bears see a flat trading range, Bulls see a trading range with an upward bias.

Bulls concede that the moving average convergence-divergence (MACD) line is below the neutral level, but they note it is flattening, which could be setting up a very bullish cross.

Even more telling for the Bulls is the positive divergence in MACD: even as price has traded up and down in a wide range, MACD is working its way higher. This is strong evidence of a market that is slowly working its way into a Bullish stance.

While the stochastic has fallen into oversold levels, the lines have begun to rise and there is some modest positive divergence.

Many observers use sentiment indicators to help identify trends. Right now, sentiment is generally bearish. Contrarians view that as Bullish.

I have been exploring the case for a Bullish turn for the past six weeks, largely based on sentiment and the contrarian notion that when "everyone" expects a market crash, that significantly lessens the probability that the crash will arrive as expected.

Will the Stock Market Crash Before the Mid-Term Elections? (July 19, 2010)

Disconnect Between the Real Economy and Stocks May Widen (August 2, 2010)

A Note on Sentiment (The Bullish Case for Stocks Part 1) (August 16, 2010)

The Great Disconnect (The Bullish Case for Stocks Part 2) (August 17, 2010)

The market isn't rational; its "job" is to thwart any and all consensus predictions, and take along the fewest possible participants.

Disclosure: I am long the market via DIA and BAC calls.

I will be tending to family matters for the next few weeks and will be unable to read or respond to email--please accept my apologies in advance. Please post comments to the Daily Java forum.

If you would like to post a comment where others can read it, please go toDailyJava.net, (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 Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook and Kindle formats.A 20% discount is available from the publisher.

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

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Monday, August 30, 2010

What If We Ditched Quantitative Easing and Just Printed (and Distributed) Cash?

Actually doing what everyone fears as horribly inflationary--printing and dropping cash into households--might not be as terrible an idea as many assume.

Just as a thought experiment: what if the Federal Reserve and the U.S. Treasury ditched the failed policy of Quantitative Easing (QE) and instead printed cash and "helicopter dropped" it into households' accounts?

Many people think QE is a "helicopter drop" of cash; it is not. It is simply a way of expanding credit and encouraging more borrowing.

What if the Federal Reserve and U.S. Treasury stopped trying to stimulate the economy by encouraging more borrowing with "quantitative easing" and instead "dropped money from helicopters" into households' accounts?

The core of quantitative easing is this: by expanding bank credit and lowering interest rates, a central bank (in the U.S., the Federal Reserve) stimulates more borrowing and thus more spending by businesses and households.

The problem with this policy is that none of the funds goes directly into consumers' accounts. If consumers are tapped out or wary of taking on more debt, then bank credit can be expanded to the moon and households will not borrow more money.

So while the Fed, Treasury and the FDIC have shoveled about $4 trillion dollars into the nation's banking sector in various bailouts and guarantees, these actions have not actually distributed any cash to consumers or businesses. The Fed's operations in the recent crisis have been loans to banks and other financial institutions and purchases of financial assets, not helicopter drops of cash into households' accounts.

The problem with quantitative easing is fairly obvious to all: it hasn't really stimulated the economy, which despite the trillions of dollars spent on bank bailouts, is still tanking.

Put another way: the popular conception of Fed policy as a "helicopter drop" of money is misleading; a real helicopter drop would put money directly into households' bank accounts, rather than expand bank credit.

Some policies do put money in consumers' pockets. A trillion-dollar tax cut, for example, leaves more cash in the accounts of taxpayers—the basic idea behind the Bush tax cuts.

The limits of tax cuts as a way of stimulating the economy are also obvious; as I reported in Why Growth May Still Leave 95% of Americans Behind, rising income disparity means that tax cuts benefit the top 5% and make relatively little difference to the bottom 95%.

Proponents of a real helicopter drop of money directly into households' checking accountsargue that a broad-based distribution of freshly issued cash would directly stimulate spending and thus employment. This is why they recommend replacing the macroeconomic role of bank credit with distributions of cash.

What if the Fed and Treasury distributed $1.3 trillion directly to households rather than disburse it to prop up bank lending? At least some households would use the funds to pay down debt, meaning the money would flow to the banking sector anyway, but with one critical difference: household debt would actually decline, leaving household balance sheets in better shape and owing less interest every month.

With quantitative easing, the idea is to increase the debt load on households; with a helicopter drop of fresh cash, the idea would be to reduce the debt load that is crushing many households. Banks would benefit, too, as more consumer debt would be paid off in full compared to the current policy of promoting heavier debt loads. The negative consequences of pushing more debt on households is also obvious: more loans become uncollectible and go into default, creating more loan losses for banks.

If the cash transfers were broadly distributed, the subsequent spending would be more representative of sustainable demand than other means of stimulus, such as costly and ineffective "job creation" programs.

Most importantly, the status quo monetary policy distorts economic activity towards debt-based financial assets and debt-financed durable goods such as the "cash for clunkers" program to boost auto sales.

According to the status quo, adding more debt to households is the cure to our economic malaise. But for most households, high debt is the disease, not the cure,and adding more debt to "stimulate spending" is like trying to put out a fire with gasoline.

Some might argue that a direct deposit of freshly issued cash into households would be inflationary. But other economists argue that if inflation is a monetary issue, and a helicopter drop of cash is fundamentally fiscal, then the worry over sparking inflation is misplaced.

What seems clear is that expanding bank credit through quantitative easing policies of funneling trillions of dollars into banks isn't working. Putting the same money thrown into banks ($4 trillion) into households' accounts would certainly put the money where it could either be spent or used to pay down debt--both of which are direct "cures" to over-indebtedness and a no-growth economy.

The sums of money squandered on bailing out banks are difficult to grasp. So I'll make it easy: if the Treasury printed up $1.3 trillion in cash, that would be enough to give $10,000 to all 130 million households in the U.S.

Even $10,000 to each household would enable a lot of debt to be paid off. Those without any debt could save/invest/spend it. That would certainly do more for the economy than throwing another $1.3 trillion to "extend and pretend" the banks' insolvency.

Would such a distribution set up a political expectation for another $10,000 next election cycle? Very likely. Would that be positive? No. But all policy is a series of trade-offs, and a helicopter drop could be "sold" as one-time only.

Would it trigger massive inflation? Doubtful. The national debt is about $13 trillion, so adding 10% to it with a "helicopter drop" is not going to change the long-term debt problem much. The GDP is around $13-$14 trillion as well, so it would amount to a one-time 10% boost in GDP. Total personal income is around $8.4 trillion, so a $1.3 trillion helicopter drop of cash would be about a 15% boost to personal income.

Would it really do much to lower indebtedness of the American consumer? No. Total debt in the U.S. is about $52 trillion--governmental, corporate and private. Mortgage debt is around $10 trillion, and consumer debt is around $2.4 trillon. (These are approximate; a web search will confirm the round numbers.)

While $1.3 trillion won't do much to change the outlook for inflation or future debt crises, it sure would give a lot of households one last chance to set things on a more positive course. $10,000 could wipe out a high-debt credit card without wiping out the creditworthiness of the household, or it could finance a move to a locale with more employment. It could replace a vehicle on its last legs with a better used car.

Would some people squander a one-time "last chance to set a new course" helicopter drop? Of course some people will. But that's not the point. The point is that the nation has received zero value from trillions in quantitative easing, and so if even 10% of the 130 million households do something useful with their $10,000 in cash then that would be one heck of a lot more than we've gotten from the trillions thrown down the rathole of a venal, corrupted, insolvent banking sector.

Throwing money at banks hasn't done anything but reward financial Power Elites via privatizing their gains and transferring their losses to the taxpayers. Throwing money at households won't solve the nation's problems either, but it would give households a one-time chance to do something useful with a chunk of cash. If 90% of the households blew it, then it would still end up somewhere in the economy, which is more than can be said of the trillions thrown away on QE.

In the long run, it wouldn't make much difference to the nation's fiscal situation, but to households on the edge, it might make a very significant difference.

I will be tending to family matters for the next few weeks and will be unable to read or respond to email--please accept my apologies in advance. Please post comments to the Daily Java forum.

If you would like to post a comment where others can read it, please go toDailyJava.net, (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 Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook 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 to the four readers who bought their new Kindles through this site: your purchase provided a generous contribution at no cost to you. I am greatly honored by your support and readership.


Saturday, August 28, 2010

Notes from the Proprietor

Assuming this blog offers readers some value, I will try to continue offering whatever that value is.

No one could be more astonished by this blog's relative success than its writer/proprietor (me).

The writer who is new to blogging may feel a temptation to check his/her site's traffic to see if anyone is reading, and it is a thrill to find the blog had 23 visitors that day.

It's actually pretty darn amazing that even 23 people find your work in a World Wide Web of hundreds of millions of users and tens of millions of websites and blogs.

For a writer/journalist, there is no thrill quite like a printed byline in a widely distributed publication. There is your name for all to see. Wow. You are now a "real writer" in the sense that you are published and perhaps even paid.

I had my first byline back in 1988, in a major newspaper. I have since had hundreds of bylined articles published in newspapers and magazines, and I have authored eight books: one novel published by a respected literary publisher and seven self-published.

I have found that the thrill of seeing my name has been largely replaced with a keen concern (bordering on gnawing worry) that whatever I have written will stand up to high journalistic (or polemic, depending on the entry) standards.

I write a lot: close to 300 blog entries a year, often over 1,000 words each, roughly 100 feature stories for AOL Daily Finance a year, somewhere in the neighborhood of 6,000 emails a year, and thousands of words on whatever book(s) I am writing (and there are always two: one novel and a non-fiction title). I recently deleted 8,800 emails from my "sent file" that covered about 18 months.

Many of the emails were substantive.

I believe other bloggers with audiences much larger than mine (for example, Mish) answer all their voluminous mail, and I have no idea how many emails this might be annually.

Success is of course relative, but any success brings with it a host of new challenges. In many ways, being hungry and unknown is the ideal place to be, for any success is immensely rewarding. But once the enterprise (whatever it might be) becomes moderately successful, then it is in grave danger of slipping from being fun to being a great burden.

I am sure many of you know the feeling well.

While I maintain a modest curiosity about my web traffic, I don't really follow it closely or attempt to analyze it. There are several reasons for this.

The chief one is that I am not really writing this to "build an audience," just as I don't really care about search optimization. I just write what interests me and let go of it. I hope it interests readers, but I can't control that.

The second reason is that my readership is basically impossible to quantify. I can measure the page views of this site, of course, which are around 500,000 to 600,000 per month and 15,000 to 20,000 per day. I reckon this is roughly equivalent to a small newspaper or journal.

But then there is my mirror site charleshughsmith.blogspot.com and the RSS feed from that site, and all the aggregator sites which have permission to republish my work: Oilprice.com, Business Insider, Seeking Alpha, Before Its News, Benzinga, etc., and lastly, my features on AOL Daily Finance. I have no idea how many people read my work on those sites.

Perhaps it is just my contrarian nature, but the more that the received wisdom on the Web solidifies around obsessively tracking the response-rate to each bit of content one posts so that you can post more on that topic, the more I focus on the quality and variety of what I write, and thus the less I care about tracking what may or may not interest others.

I am usually wrong about that anyway. Some entry I tossed off in a flurry of enthusiasm for some idea will get picked up by Zero Hedge, Jesse's Cafe Americain and other blogs I hold in high esteem, while some entry I labored over as "really important" generates little feedback and no visible widespread interest.

For example, Japan and the U.S.: Ad Hoc War, Ad Hoc "Recovery" (June 14, 2010) in which I suggest that both Japan and the U.S. have responded to global financial and political crises in an ad hoc fashion; in effect, there is no "master plan" and thus no understanding of the crises at all. No wonder the status quo is falling apart. (The idea that a secretive group that's "really in charge" actually knows what they're doing remains no more than an appealing fantasy.)

The point is simply this: what I reckon is important may nor may not be what you or other readers think is important. Rather than guess what might be of interest to any one audience, I will keep doing what I have been doing, which is writing about topics which interest me, and attempt to do so in a modestly entertaining fashion.

Back in June, I attempted to define why this blog continues: So What's the Point? (June 1, 2010)

Since then, some other thoughts on purpose, value and intent have occurred to me.

There is a long tradition in the U.S. of what I call the Good Governance Movement. The core of this faith is that good governance--sunshine laws, sunset laws, open democracy, regulations enforced by agencies protected from corruption and self-interest, etc.--can fix whatever ills afflict our society and economy.

This movement combines citizen activism with healthy dollops of expertise; that is, we need to raise the political will to restrain naturally corrupting forces, and we will turn to academic and other experts to craft those restraints.

I applaud this movement and its many successes.

But I have concluded that our crises have moved beyond the reach of mere good governance, and that in a nutshell is what this blog is about.

There are two strains of what I consider perniciously appealing but ill-informed views on policy and "solutions." One holds that humans are inherently greedy, duplicitous, self-serving and thus easily corruptable, prone to self-delusion, violent, etc. etc. etc., and thus "there is nothing new under the sun" and so we should throw up our hands and accept the status quo as inevitable, with the caveat that whatever we might attempt to replace it with will be just as bad/good/indifferent.

This is an appealing ideology because 1) humans are obviously all those things and 2) it justifies being passive and not bothering to understand how today's problems might in fact be "something new under the sun" or perhaps worse than the usual status quo of corruption, self-service, embezzlement, etc.

An adjunct notion is that all we really need to do is return to some Camelot in the distant past in which good governance, common sense, propriety and fiscal restraint reigned supreme.

Upon examination, this reveals two apparently contradictory truths: humans were just as self-serving, greedy, etc. back then, and there are times in history when resurgent ethics and good governance are the dominant collective goals. The cycles of history show that we do not live in a steady-state; things can get better, or they can get worse. Doing nothing usually guarantees the latter.

The second perniciously appealing but ill-informed ideology is ideology itself. The human mind is inherently lazy, and so we seek simplistic generalities to guide our thoughts and actions because figuring out each unique situation is time-consuming and tiresome.

This is why it's so tempting to blame the Democrats or Republicans for all the nation's ills, and why choosing a professional sports team to cheer is satisfying, even if the player roster is a revolving door and the games are mostly wastes of time and money.

If we combine these two appealing but ill-informed notions, we get the present: a lot of sound and fury expended over ideologically fueled "governance" "fixes" which accomplish essentially nothing of value.

They do, however, provide plentiful fodder for the media machinery to grind into the sausage of carefully packaged "news" and "commentary," most of which is neither newsworthy nor enlightening.

The reason I wrote Survival+ was to explore two interwined alternative views: 1) that cultural and spiritual forces--those which are internal or internalized via the politics of experience--were just as important as financial/political externalities.

These are not "fixable" with more regulation or policy tweaks.

2) That larger intellectual forces offer more explanatory and predictive value than the superficial "brands" of ideology currently available. I would count natural selection and systems analysis among these ideas, and this is why I devote so much of Survival+ to an exploration of feedback loops and similar ideas, and to the forces of natural selection which work within groups, nations and economies alike.

These ideas have not been fully explored, and that is the direction I wish to take going forward.

My other focus will be on solutions. Many readers ask for practical solutions, and I have attempted to provide some--but there is much more to say about solutions. (Type "solutions" into the custom search window in the lefthand sidebar to see what I've written on this topic in the past.)

It is remarkably easy to agree on what's wrong, and remarkably difficult to agree on what is a solution. That's why we must each choose our own solutions; no one "solution" or ideology can offer up a list or a refuge for everyone.

That's the hard part: undertanding the problems we face, coming up with alternatives and then choosing which ones work best for us in our current circumstances.

As I wrote in Survival+: if the "solution" is to stockpile six months' of supplies and gear, then what happens in month seven?

If the solution is is throw up our hands because it's all a mess and will always be a mess, is that really a solution, or is it an excuse for passivity and thus complicity in the status quo? Is there really nothing that we can to improve our chances for a better future?

You may picture me as a slob in shorts, mumbling gibberish while I type out my daily rants and ramblings, covered in Cheetos dust. You would be wrong; I don't like Cheetos.

Actually, my online life is only a limited part of my life; the success of the blog (however you choose to define "success") has now pushed my life into overload. I find 12 work-hours a day is not enough, and that I fall ever farther behind on one project or another. That erodes the joys of work, and depresses the spirit.

I find 2010 two-thirds over and I have only a few thousand words written on the books I dearly want to complete this year.

I would also like to settle on some way to reward the 25-30 long-suffering subscribers to this blog, who get nothing from their monthly contribution other than the exceedingly modest satisfaction of supporting my ramblings.

While I admire those few bloggers who have fashioned a decent living from their online efforts to educate and enlighten, I have trouble thinking of this blog as a business. This is not to say that I don't think it a serious enterprise--on the contrary, I approach my writing here with the utmost seriousness, professionalism and intent to provide value (or amusement) and positive problem-solving.

In this way, oftwominds.com is what others call a social business, meaning it is a gift to the community rather than an enterprise focused on reaping a profit. Yes, I host Adsense adverts, and am delighted to earn a small commission from amazon.com sales made through this site; these help offset the expenses of the site. But if revenue were my focus, I would need to establish paid premium content and/or a subscription forum membership.

I am unwilling to do so for two reasons:

1. I am a "pure" writer, meaning that's all I really like doing. I manage the technical stuff and all the rest as a necessity, because it is in my "chippy" (carpentry) genes to want to learn how to do the thing myself rather than leave it as some sort of magic that I am dependent on others to perform. (That's why I don't use Wordpress or other complex software that I don't really understand.)

2. I like the freedom to write whatever interests me, be it stock charts, cultural analyses, a recipe or some silliness to relieve the seriousness of our collective situation. Since the content here is free, there are no implied obligations. You are free to enjoy it, disagree with it, stop reading, etc. You are also free to voluntarily support the site with a book purchase, an amazon.com purchase, or a direct donation via PayPal or the mail (pleaserequest P.O. Box address.)

In other words, the site depends on the kindness and generosity of its readers and contributors. That is how it has evolved; one day a reader suggested I add a PayPal "tip jar" button, so I did. A year or so later, another reader suggested I add a voluntary subscription button, so I did.

Readers have spontaneously gifted me with wonderful, valuable objects. Just recently Paul L. sent me a beautiful, rugged DeWitt garden spade; Robert N. sent me a 1888 silver U.S. dollar, while J.F.B. sent me a number of mint Canadian $5 coins. Scott C. sent me U.S. Navy service medallions from Korea, and Bart D. mailed me a handsome Australian $20 bill. I have also received rolls of old nickels, and numerous excellent books. Thank you, readers, for sharing your hard-earned wealth.

I am overwhelmed by this voluntary sharing and generosity, and that has fueled my goal to reply to every email I receive.

But I have concluded something has to give, and after much guilt-soaked deliberation (for it has always been my policy to respond to every email), I have realized that I have only a few limited choices: either respond to all email and give up writing books, limit the blog to a day or two of new content per week, or write the blog and books and limit my email responses to a rigid timeframe.

That means my goal will shift from answering all email to answering as many emails as I can in a restricted period of time.

Various bloggers handle this differently. Some never respond, even those with much smaller audiences, while others with vast readerships always respond. Some use auto-responders. It just depends on the person, their priorities and the time and energy they have available.

I value my email correspondence greatly, as correspondents are my network and my source of information and knowledge. This is why I have poured so much time and energy into maintaining my correspondence.

But I am just one individual. Even if wanted the headache of hiring a part-time staffer to help me, they couldn't write the blog or the articles for Daily Finance or my books or respond to my email from the many correspondents I have around the world. So they would just be another expense and timesink.

Some readers have asked if I am a real person; it looks like I am a real person, but apparently my output has introduced a sliver of doubt. I wish this was the work of a small organization rather than of one individual; I wouldn't be overwhelmed and constantly triaging an impossible workload. But I am.

So please don't take it personally if you don't receive a response to every email; I will read every email, and value it, even as I am unwilling to use an auto-respond to acknowledge it. Alternatively, I could stop writing, but what value would this absence offer to readers? There are no good answers to any triage, and even a simple blog requires hard choices. Success, especially the unexpected kind, has its own burdens, so it has to be managed like everything else (including failure) --as best we can.

I will be tending to family matters for the next few weeks and will be unable to read or respond to email--please accept my apologies in advance.

If you would like to post a comment where others can read it, please go toDailyJava.net, (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 Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook 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, Christi N. ($35) for your wonderfully generous contribution to this site-- I am greatly honored by your support and readership.


Friday, August 27, 2010

Did The Roman Empire Have Corporations?

Unlike our Corporate/State Empire, the Roman Empire did not have privately held, transnational corporations running the bread and circuses.

My longtime friend G.F.B. recently asked, "Did the Roman Empire have corporations?" Based on my admittedly incomplete reading of Gibbons and a survey of Pompeii I am currently reading, I believe the answer is "no."

Yes, the Republic and later, the Empire, had ruling Elites and politically influential families who controlled immense wealth, but G.F.B.'s point was not about influence or wealth alone: Did the Empire flourish without accountability and personal responsibility?

In other words, were the Elites which controlled the Empire never held personally accountable? If so, then they may well have functioned as the equivalent of today's corporations.

But history--and what a long history the Roman Empire carved--suggests individuals who failed paid a price.

In today's Corporate Empire, the Elite individuals running the corporations can despoil, bribe, embezzle, cheat and collude and they completely evade accountability. Sure, the corporation pays a fine (or sets up a $20 billion fund with shareholders' funds), but the people in charge who oversaw the skimming, bribery, collusion, profiteering, embezzlement, mismanagement of funds, violation of the public trust, etc. are never really accountable; instead, they are awarded golden parachutes worth millions of dollars for their service to the goal of enriching the Elites and owners of the corporation.

The much-touted Sarbanes-Oxley financial regulations do require that individuals vouch for the accuracy of the corporate accounting, but how many CEOs and CFOs are serving time for violating the Sarbanes-Oxley Act?

After the U.S. financial and mortgage sectors have been pillaged for years, how many individuals are under indictment for any finance-related crime, large or small? I think the evidence is overwhelming that Sarbanes-Oxley and the rest of the regulatory system which claims to invoke accountability is in fact a facsimile, a facade of righteousness maintained for P.R. purposes. Behind the screen, it's all about scooping swag and then evading any accountability for that pillaging, collusion and corruption.

This is yet more evidence that the U.S. is a de facto Corporate/State Empire which benefits the Power Elites who have partnered private gain with global reach.

Please read Shadow Elite: Selling Out Uncle Sam: The Collision of State & Private Power for more on how this works in the Security State complex.

The same dynamics and mechanisms are everywhere in the Empire: agricultural policy and products, weapons sales, healthcare (a.k.a. sickcare), etc.

Many smart citizens are wondering which way the U.S. will go: will it slip toward fascism or toward revolution? I think the answer is neither: we already live in Corporate Fascism.

As noted yesterday, Benito Mussolini said that "Fascism should more properly be called corporatism because it is the merger of state and corporate power."

Weclome to America 2010, where Power Elite individuals are safely protected from accountability and responsibility for their actions behind the veil of the political partnership of the corporate and State Elites.

At least for significant lengths of time, the Roman Empire did not ignore/encourage individuals' failures and frauds, and it could be argued quite persuasively that this high level of personal accountability was a key reason for the Empire's longevity. Indeed, the decline of accountability parallels the decline of the Empire's wealth and influence.

It could be argued that the Empire fell apart for precisely this reason: once accountability was lost, then the collective good of the Empire was also lost as a meaningful collective goal. The constituent parts fell into private fiefdoms which collected onerous taxes for their own aggrandizement.

As the Empire declined, Rome was reduced to sending out thousands of edicts to its self-serving fiefdoms; with accountability and consequence lost, the edicts were ignored. The falcon could no longer hear the falconer, and the center could not hold. The Empire collapsed in a heap, and the irony is the self-serving Elites fell with it.

If we follow that line of thought, we have to conclude the American Corporate/State Empire has lost the requisite level of accountability to survive the demands of the real world. Accountability is the incentive for responsible actions, and being able to hide behind corporations and/or State bureaucracies to evade any responsibility for one's decisions incentivizes the precise ethical, social and financial erosion which brings Empires down.

If you would like to post a comment where others can read it, please go toDailyJava.net, (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.

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Thursday, August 26, 2010

Shock Troops of Corporate Empire: Hip-Hop, Fast-Food and Social Media

The shock troops of Corporate Empire actively undermine traditional culture, health and engagement with the real world, clearing the way for colonization and passive consumption.

The defenders of hip-hop, fast food and social media are legion. Critics of these Corporate Empire shock troops are labeled (and thus dismissed) as fusty social "conservatives," anti-technology Luddites and "liberal" busy-bodies getting in the way of "consumer's right to choose" their own music, food and hobbies.

The irony is the most passionate defenders of hip-hop, fast food and social media are unaware that they are actually defending the storm troopers of Corporate Empire.

Yes, there are hip-hop atists with positive messages, and fast-food giants attempting to improve the range of their offerings, and examples of social media enabling political resistance.

But all these arguments, justifications and polemics boil down to the equivalent of all the arguments, justifications and polemics in favor of corporate fascism, colonialism and Empire: the trains run on time, we're spreading "civilization" to the "primitives," capitalism and technology will free the oppressed classes, etc.

The spirited defense is not coincidence, for hip-hop, fast food and social media are the shock troops of Corporate Empire. While marketed by defenders as either essentially harmless "youth-oriented" avenues of self-expression or the progressive vanguard of individual choice, they are the active agents of Corporate Empire "soft power," undermining traditonal cultures, human health and engagement with the real world --the subtle, largely invisible realm of unconscious assumptions and propaganda I term the politics of experience.

Once traditional sources of stability and health have been undermined, dismantled and replaced with a mono-culture of marketing that glorifies self-absorption, conspicuous consumption and personal worth measured by broadcasted "likes" and other visible measures of popularity, then the Corporate Empire can quickly infiltrate and occupy the cultural and financial high ground.

Lest you think this absurd or extreme, consider the fact that 92 million Chinese now have type 2 diabetes, and that number could rise to a staggering 500 million within a single generation. I document these statistics in China's Headwinds.

What caused this explosion of a once-rare "lifestyle" disease? Fast food and the other "convenience" foods hyped by the Corporate Empire, and an inactive lifestyle of absorption in social media and online addictions (gaming, etc.). Ironically, auto and truck traffic in Beijing has now slowed to the same pace of 20 years ago when 95% of the residents rode simple one-speed bicycles-- only 30+% of the passengers are now obese.

As always, I start every critique (the basic Survival+ starting point) by asking: cui bono--to whose benefit?

Have hip-hop (the glorification of a toxic stew of conspicuous consumption, degradation of women, exploitation, drugs and violence), fast food (the grease-slicked pathway to an early death) and social media (choose your online addiction now!) actually benefitted the populations which have wholeheartedly embraced them--for instance, America?

The answer is rather obvious, isn't it? Who benefits is those profiting from the dominance of these elements of Corporate Empire. Those "consuming" the "products" are debilitated, brainwashed, distracted, and often addicted.

Correspondent Craig M. submitted this telling bit of research: Junk Food-Addicted Rats Chose to Starve Themselves Rather Than Eat Healthy Food.

And don't rats and humans share about 98% of the same genetic code? Hmm....

Rabid social networkers check Facebook and Twitter from bed, at dinner and during sex.

An addicted, distracted, passive populace of "consumers" bombarded with incessant marketing that subtly undermines well-being and security (are you popular enough, rich enough, etc.) is the ideal setup for the Corporate/State Empire that exemplifies corporate fascism.

As Benito Mussolini observed, "Fascism should more properly be called corporatism because it is the merger of state and corporate power."

Defenders of hip-hop can spout "positive" lyrics and claim that the "brand" is only a reflection of "what's real," but this is misleading: the global "brand" of hip-hop is a totally artificial construct, the precise opposite of "what's real." What's "real" is the "branding" of a destructive ideology that is immensely profitable to its purveyors; everything else is calculated artifice.

As for "positive" lyrics and artists--sure, they exist, just like "healthy" fast food exists and "positive social change" has a voice in social media; but the global "brand" of hip-hop (the kind that is sold in videogames and on billboards in gritty urban neighborhoods) remains an easily marketable and "packaged" construct of degradation of women (the "Madonna and whore" syndrome, only with the Madonna half left out), conspicuous consumption (bling), exploitation (of women, drugs, etc.) ugliness (the depicted "ghetto" is always blighted, even though most buyers of the music are suburban white kids), rejection of learning and community, and a pervasive atmosphere of violence, gunplay and early death.

Which sounds like what? Iraq, of course, and it is also no coincidence that videogames are being deployed to train the next generation of warriors defending the Empire. Desensitizing people to violence is a key step in brainwashing them and preparing them to do the Empire's bidding without resistance.

A variety of Web pundits are hyping the notion that social media will be the great enabler of everything wonderful in the world, as people use the new "public utilities" to share knowledge and accomplish positive social changes.

But like all those "positive" lyrics and "healthy" convenience foods, the "positive" aspects of social media are mostly rationalizations and simulacra designed to deflect criticism and leave the global profit machinery untouched.

Are the people interrupting sex to check their Facebook and Twitter accounts really working for "social justice" on a global scale? The mere suggestion is absurd; the goal is to monitor and enhance one's broadcasted "self": social me-me-me-me-me-media.

I address the underlying reason for this in Survival+: the global marketing complex's goal is to undermine our sense of internal security by objectifying the measures of self-worth. Not wearing the latest fashion? You're low value, Baby; I can't be seen with you any more. Fortunately, there is a 'solution" to your inadequacy: buy the latest stuff, immediately. Not enough "friends" and "likes"? You're a loser; better spend even more time on social networking to build up a respectable metric so you don't have to be ashamed of yourself.

And so on. This is all consciously designed into marketing everywhere.

While I am constantly being "sold" on the wonderfulness of social media, what I see in the real world is destructive addiction and distraction: teens laying around a disheveled house glued to their screens while the dirty dishes pile up in the sink (Mom will do them when she drags herself in from serving Corporate America), trash blowing around the yard and sidewalk out front (Not my job!), "convenience" food containers in the overflowing trash (if I can't microwave "dinner" in a minute, I'm wasting valuable time), earbuds blasting music, but nobody in the house knows how to play any instrument, or makes music for fun--I will stop there because you can fill in your own similar observations.

There is something painful about watching youth around the world mimic the "brand" of hip-hop--down to the backward baseball cap and American branded clothing--ka-ching go the sales registers--and U.S. teens snapping up pre-torn jeans for $80 a pair--an ironic mockery of the kind of hard physical work that they eschew as only worthy of poor immigrants, and various self-destructive addictions (to online pornography, gaming, social media, etc.) being sold and defended as the "progressive" result of the technologically unstoppable forces of Corporate Empire.

Is this laying waste to the shock troops a touch hypocritical? After all, don't I display a photo of myself and keep track of my page ranking? Don't I have a Twitter account and Adsense adverts? I would say the issue boils down to what's being offered that readers/listeners/consumers can opt out of. Anyone can get an ad-blocker, and this web page is passive. It takes work to read it. Visitors can stop visiting. It's not like an advert in the shopping cart. As for the photo--some people are curious about what owners of blogs looks like (I certainly am), and this seems harmless enough. If you want to judge my potential biases from education and experience, I provide enough basic information that you can make such an assessment. I have a Twitter account so I can experience some social media directly rather than count on other observers for my information. In small doses--a few minutes a day--it is like any other media: potentially distracting, occasionally useful.

Being a careful, skeptical "consumer" is a positive trait, and one I try to encourage. Each of our minds is a territory ripe for invasion, occupation and exploitation; thinking for yourself and maintaining a skeptical vigilance against the ubiquitous forces of Corporate Empire is the only real defense any of us has against addiction, distraction, confusion, insecurity and a deep spiritual and intellectual poverty.

If you would like to post a comment where others can read it, please go toDailyJava.net, (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.

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

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Wednesday, August 25, 2010

Colonizing the Plantation of the Mind

The plantation economy's most valuable colony is the one in our minds.

All plantation economies rely on exploiting colonies not just for materials and labor, but as controlled markets for the home economy's products.

Thus Great Britain imposed restrictions on cotton weaving in India, forcing its colonial citizens to buy cloth produced by the home country's factories.

As I explain in the Survival+ / Survival+ The Primer chapter entitled The Crisis of Neoliberal (Predatory) Global Capitalism, global capitalism has reached the limit of the colonial/plantation model in terms of exploiting new colonies around the globe and subjugating their materials and markets to the purposes of home country domination and profit.

From this point of view, China and India are the last major "colonies" to be exploited, as they provide products and information-technology (IT) services at low cost, keeping modest slices for themselves while enabling the home countries' corporations to reap premium profits on the quasi-colonial output.

Thus Foxconn, which manufactures Apple devices, pays its workers roughly $200-$300 per month and earns a few percentage points profit--a few dollars at best on each Apple device. Meanwhile, Apple routinely skims gross profits of 40% or more on all its products.

This is the modern model of a plantation/colonial economy; much of the productive assets in China are owned by overseas Chinese (Taiwan) or other overseas corporations (Japan, Korea, U.S., E.U., etc.). This is the classic overseas planation model in which cheap labor and materials are exploited and waste products are dumped in the colonies.

As the limits of colonialization became increasingly visible, Global Predatory Capitalism had no market left to exploit but its home populace.

It did this in two ways:

1. It purchased the Central State's partnership in privatizing the profits from rampant speculation and financial leverage--i.e. the "financial innovations" which have strip-mined the middle class of their assets--while spreading the risks and losses from this speculative fraud onto the taxpayers, i.e. the public.

2. It deployed increasingly invasive marketing to colonize the minds of the home country citizenry, effectively brainwashing them into "consumers" who bought into the fantasy of ever-rising real estate and the dubious notion that debt could expand forever as long as the Central State kept credit cheap.

One of the key concepts in the Survival+ critique is the politics of experience. This is an elusive concept because what we take for granted is invisible to us, and we have to go back in time, so to speak, to rediscover a history in which the experience of daily life was quite different from the present.

Today, we accept it as "normal" that marketing worms into every once-private area of our lives. Not that long ago, adverts and marketing were limited to print media (newspapers and magazines)--fundamentally passive media.

With the advent of radio, adverts could push national brands via broadcast. Yet even this new medium was nowhere near as dominated by marketing as the present. Adverts came on every half-hour between radio programs.

Now we expect (and get) multiple adverts every six minutes on commercial TV.

The landline telephone was the standard medium for interpersonal communication. The only adverts related to the "Ma Bell" (AT&T) regulated phone network were in the phone book, and these were highly valued by marketers as one of the few propaganda/marketing vectors which reached into the privacy of every home.

Contrast that relatively protected home with today's shrinking zone of privacy.Now email has adverts, and text-based adverts on cellphones are the "New Frontier" of invasive marketing.

The key concept in all marketing now is supremely pernicious: any advert or campaign which reaches deep into the last refuges of privacy is considered highly valuable.

A passive print advert has lost its ability to influence; the "gold standard" is a campaign which violates the last remaining refuges of privacy--communications with friends via the Web and the telephone.

Where the only public adverts were once billboards, now there are adverts on the shopping carts in the supermarket--another violation of what could be considered temporary private space--and on the floor of the supermarket. Even the rubber dividers used to separate one's own purchases from the next customers now display an advert.

The colonialization of the plantation of the mind is now complete. It is not coincidental that those citizens who watch the most TV are also the biggest buyers of junk food and its accompanying junk worldview based on consumption, faux novelty ("get the new chicken-bacon-cheese-double-burger today!") and a passive disengagement from the real world: for example, cooking real food, raising real food, sharing the preparation of real food with others as an activity, teaching your kids some useful skills at home ("that's the school's job"), etc.

Passive absorption of marketing-dominated media is the primary activity on the plantation of the mind, and that of course is the goal of the colonial overlords: distraction, passivity, confusion, "divide and conquer," and the old stand-by, financial desperation.

The Plantation economy has conquered a substantial percentage of the minds of home-country "consumers." (They were once citizens, but the MSM has brainwashed them into the chattel known as "consumers.") Now that this internal mono-culture of marketing dominates the populace, exploitation as per the plantation/colonial model can proceed along a slightly modernized pathway.

As in any plantation/colonial economy, the real profits are skimmed by the predatory global corporations and the Central State which enables their domination. Very little flows down to the bottom 95%.

As in any plantation/colonial economy, restive elements will be suppressed, marginalized, undermined or co-opted.

As I mentioned yesterday, I worked on a real plantation, and the paternal aspects were quite seductive. As long as you did the work expected of you, life was pretty good; housing was subsidized, and the company maintained the town.

The internal plantation is less well tended and less paternalistic; just buy the junk we're pushing, and what happens to you afterward is your problem.

Experience itself has become so derealized that we don't even recognize our minds have been colonized into neatly internalized plantations.

RE: Wal-Mart and the Plantation Economy: correspondent P.W.D. submitted this account of his experience as a seasonal employee of Wal-Mart:

I have just read your essay on Wal-Mart and the Plantation Economy and wanted to share what I learned working this summer at my local Wal-Mart in a seasonal job since I am retired and needed to supplement my income because of the Ben Bernanke economy.

You are right that just walking into a Wal-Mart not only transforms one into a zombie but also lowers one's IQ by at least 25 points. I had not realized how many uneducated people really make up this country's population as evidenced by the typical Wal-Mart shopper. The customers shuffle along playing with their cellphones, shuffling their feet along the floor like they are medicated and staring blankly into the dull aisles of cheap Chinese junk.

The working conditions are horrible and no employee is treated as a human being; they are just a number on a computer. Also, employees are hired and fired literally on a moment's notice so the turnover is never ending. This keeps them from filing unemployment claims thus saving the company more money.

Oh and one more item. If it were not for the EBD and WIC programs that supplement many of their customers food supplies, I think Wal-Mart would lose at least 30 percent of their business. So basically Wal-Mart is being subsidized by the federal government.

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Tuesday, August 24, 2010

Wal-Mart and the Plantation Economy

The tyranny of "low prices" is a characteristic of a plantation economy which strip-mines local economies and replaces employment-rich economic ecologies with a single integrated exploitative cartel of global predation.

I am probably one of the few Americans who has worked on an honest-to-goodness plantation: I picked "pine" on the Dole Pineapple plantation on the Hawaiian island of Lanai in 1970. (The plantation was subsequently closed and production moved to the Phillipines to take advantage of lower labor costs.) Thus my understanding of the plantation economy that I describe in Survival+ is not merely academic.

Wal-Mart is the quintessential plantation in the U.S. and global economies. Like a classic agricultural-commodity plantation, Wal-Mart enters a region and market with a diverse, employment-rich ecology of small businesses and networked supply chains of local and regional manufacturers and distributors, and it bulldozes the entire "forest" of businesses, suppliers and distributors with the irresistable blade of global supply chains and "lower prices, always."

The original sugar king, Claus Spreckels, pioneered the integrated global plantation economy of scale: he owned the plantations which grew the sugar cane, the ships used to export the cane and the refineries which processed it for distribution to global markets.

He also imported uncomplaining, cheap (i.e. desperately poor) labor to provide the heavy work required.

Wal-Mart doesn't have to own the suppliers or distributors or the ships--it's great size gives it supreme pricing power and the ability to offer suppliers a simple yet stark choice: either lower your price to our price-point or we pull your contract, and you implode. You may survive as a much smaller business, but probably not.

Like a plantation, Wal-Mart extracts wealth via mono-cultures and an integrated structure and supply chain. Wal-Mart's model calls for selected global suppliers-- the monocultures who make millions of specific items-- to provide massive quantities of goods at Wal-Mart prices, meaning that small suppliers get squeezed out by their inability to scale up to meet Wal-Mart's demands for product.

Profitable suppliers are squeezed to the break-even point (or below) by Wal-Mart's continuous demands for ever-lower costs. In effect, Wal-Mart expropriates the profits of all its suppliers and distributors in the entire chain.

A Wal-Mart store quickly bulldozes the complex economic ecology of local businesses. Small business is both the engine of job creation and a highly employment-rich ecology. Wal-Mart crushes this ecology and replaces it with a low-job, low-pay, highly efficient plantation economy in which the townpeople's only choice is to work for Wal-Mart or scrape out a living feeding the Wal-Mart workers, doing their laundry, etc.--exactly as on a classic plantation.

On a classic plantation, the wages are low and the "company store" offers easy credit, binding the workers to the corporation not just for wages but for credit and goods.

Those few who manage to save up enough capital to start small service businesses-- laundry, cafes, etc.--must do so in the shadow of the Company, which can always drive them out of business should they irritate their corporate overlords.

A once-diverse landscape is reduced to a monoculture wasteland dependent on subsidies, either implicit or explicit. Wal-Mart's low wages leave many of its workers' families on state aid or food stamps to survive, and so it prospers on the backs of taxpayers who subsidize its low wages.

A relative handful of local workers run the plantation, while the economy the plantation bulldozed offered more jobs and a wider range of jobs.

Here is an example from real life. We shop for groceries in Chinatown or "Mexican" markets (in quotes because we do not know the national origins of the workers or owners) because we find the produce to be fresher and cheaper than supermarket chain stores.

A typical full-service market in Chinatown (not the tourist Chinatown, the real one) is small by U.S. standards--perhaps 4,000 square feet compared to 40,000 square feet for an old supermarket and 120,000 square feet for a "superstore."

In this small space one finds a full meat, poultry and fish counter with three butchers on hand, a full panoply of vegetables and fruit (usually placed on the sidewalk every morning) and aisles of canned goods, beverages, dried fruits, etc.

Each small store has over a dozen employees.

If you stop to examine the boxes of fruit, vegetables and meat which are being carted in by hand, you will see a wide range of local produce from family farms and local suppliers.

Next door, the bakery has several salespeople at the counter and several bakers in the back. The deli next door to the bakery has four clerks and four or five cooks/staff preparing food in the small kitchen.

Thus this modest bit of square footage supports dozens of jobs, pays rent to several landlords (further distributing the revenues) and multiple owners/managers. In addition, dozens of small suppliers and farms receive a share of the revenues.

This is the ecology of classical capitalism, in which competition yields a rich variety of goods, services, prices-- and wages. Not everyone is capable of learning high-wage skills in a world of global wage arbitrage, and the wages in small-scale markets are modest. But this ecology offers plentiful opportunities for career changes and entrepreneurship--something the global plantation only offers within its corporate mono-culture.

The plantation-economy is one of concentrated financial and political power, global scale, exported jobs, integrated supply chains which exclude small local enterprises and a predatory monopoly which vacuums up all the profits of the entire supply chain for itself.

The alternative is not some fantasy of "old-time America"--this model still exists where citizens refuse to submit to the mono-tyranny of "low prices." Long-time readers know that my experiences with Wal-Mart are limited to attempting to buy something of utility with a store credit issued for a gift we could not use.

The Wal-Mart Model of Self-Destruction: Lowest Prices, Always (January 24, 2010)

When my wife attempted to return an item of unusably poor quality, the clerk just shrugged and said, "It's Wal-Mart." In other words, poor quality is to be expected along with "low" prices.

Mono-culture plantations like Wal-Mart are ugly and soul-draining. There is nothing charming or life-affirming in the cavernous stores or wide aisles. People are enervated by the deadening atmosphere; they shuffle forward in line like zombies, and the pall of mono-culture "low prices" offers zero opportunity for amusement or fun.

Street markets (indoor and outdoor) offer plentiful, free opportunities for amusement and diversion, and ones like Porte de Clignancourt in Paris and Chatuchak Market in Bangkokare famous precisely because they are fun and hugely diverse--and offer plenty of bargains to shoppers.

The communities which support local economic ecologies do so not because they dislike low prices, but because the mono-culture plantation of Wal-Mart doesn't offer everything they want, nor is it convenient or enjoyable.

The nation does not exist to benefit corporations--the corporations exist to benefit the nation and its citizenry--and not just with cartels and plantations. Isn't it odd how this statement--The nation does not exist to benefit corporations--the corporations exist to benefit the nation and its citizenry--sounds breathtakingly revolutionary in today's plantation politics of experience?

Thus not shopping at big-box plantation stores is as revolutionary an act as preparing your own food, growing your own garden and eating a household meal together.

If you would like to post a comment where others can read it, please go toDailyJava.net, (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 Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook and Kindle formats.A 20% discount is available from the publisher.

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Monday, August 23, 2010

The Ratchet Effect: Fiefdom Bloat and Resistance to Declining Incomes

The Ratchet Effect can be found in economies, societies and households facing declines in income and results (diminishing returns).

The Ratchet Effect is one key reason why meaningful reform of the status quo is impossible. In flush times, budgets expand as easily as waistlines, ratcheting up to consume ever-higher revenues. But once revenues start declining, the administrative/consumerist status quo is fiercely resistant to any reduction.

Like a body which has grown fat from excessive consumption, the status quo will resist any reduction in staffing or spending, sacrificing muscle to keep its layers of fat untouched.

Correspondent Kevin K. submitted this example of the ratchet Effect in higher education:Top ranks swelled at University of California at Davis:

UC Davis' administration fattened up in a way few other campuses nationwide could match from 1993 to 2007, with the third-highest increase in ratio of administrators to students among 198 universities.

UCD went from 3.2 full-time administrators per 100 students to 13.5. That 321.9 percent increase also was the highest in the 10-campus University of California system.

The figures are included in Administrative Bloat at American Universities: The Real Reason for High Costs in Higher Education.

Here is a telling tidbit from that report:

Arizona State University, for example, increased the number of administrators per 100 students by 94 percent during this period while actually reducing the number of employees engaged in instruction, research and service by 2 percent. Nearly half of all full-time employees at Arizona State University are administrators.

These same "ratcheting" trends are present in my alma mater, the University of Hawaii: administrative staff has continued expanding even as teaching positions have been slashed year after year: the "fat" defends itself with political victories in what I callinternecine war between protected fiefdoms in Survival+, cutting the muscle of the university (the teaching staff) to do so.

Meanwhile, as the maintenance department's budget has bloated up, the campus is slowly falling apart; the cause, we are told, is lack of funding, yet salaries, pensions and benefits have been rising for years. Could incompetence, inefficiency and plain old laziness have anything to do with the abysmal maintenance? That question is quickly snuffed out before it can ever be answered.

Security staffing has also risen, even as "crime" remains muted on campus and the security staff does little beyond writing parking tickets.

Even as the state's premier campus falls into disrepair, the system's top administration is doggedly constructing a massive new and totally unnecessary campus less than 40 miles from its main campus in Manoa, a political move to reward the powerful construction unions and justify its own rising headcount.

Salaries of top administrators have skyrocketed, supposedly to "match comparable private-sector salaries." Uh, right; how many private-sector assistant vice-presidents do you know who make $150K a year plus massive bennies? How many qualified candidates who would gladly take the job for $100K are among the nation's 8.5 million unemployed/10 million under-employed?

We all know how this works in an organization: when revenues are rising, everybody suddenly needs an assistant. In no time at all, meetings are being called to discuss the strategic planning process for calling meetings, and pretty soon there are more admirals and generals than during World War II when the Armed Forces were 10 times current force levels.

Mission creep sets in, and suddenly the corporation "should" be in everybody else's business, and it starts buying enterprises which add no value or enters markets it knows nothing about. The military soon needs to fight 2.5 wars globally, because you never know when the Bad Guys might decide to coordinate their attacks on us, and the National Security State realizes it botched its inter-agency coordination, so it contracts out huge new fiefdoms to enhance the coordination which it didn't have with fewer agencies and contractors....

It's called diminishing marginal returns. Throwing ever-larger sums of money at the (self-created) "problem" produces ever-less meaningful output.

On the household level, people accustomed to a certain level of consumption and "lifestyle" are pulling money out of their 401Ks to fill the gap between their income and expenses. Stories like this pop up with sobering regularity: Fidelity sees record number raid their 401(k)s.

What's also eye-opening is that 45 percent of participants who took a hardship withdrawal a year ago took another one this year.

A key concern is that these withdrawals are just that, they are not loans. As a result there can be a significant impact on someone's overall retirement savings. If the worker is younger than 59½, they'll pay a 10 percent penalty for early withdrawal in addition to taxes.

The good news in the report was that the average 401(k) account balance as of the end of the second quarter was $61,800; up 15 percent from the same time last year, but down from the end of the first quarter of 2010.

$62,000 isn't exactly a King's ransom in today's economy, but it sure is worth resisting the urge to withdraw it all to pay for things which are no longer affordable out of income.

Yes, some families are withdrawing 401K funds to pay for emergency medical care, and that is a tragic necessity. But is paying for education really a hardship? If the family can't afford $30,000 a year for college, then perhaps Junior should live at home and attend the state school or even community college.

The key data point here is that people are returning to the 401K well year after year. That suggests the possibility that the gap between income and expense is regarded as a hardship or crisis that won't go away until income rises to meet expenses, rather than the more painful solution of slashing expenses to meet income.

Anecdotally, I am hearing stories of husbands broaching a serious downsizing in housing and expenses, and being told "no way" by their spouses.

So the household's "muscle"--its capital, cash and retirement nesteggs--are all sacrificed to keep the "fat" of a bloated mortgage and consumer lifestyle intact.

Add The Ratchet Effect as another reason Why Nothing Changes and why reforming the status quo is effectively impossible. When the ability to tap cash or borrow runs out, then resistance to reduced expenses caves in all at once as the organization, state or household's basic insolvency can no longer be denied.

If you would like to post a comment where others can read it, please go toDailyJava.net, (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 Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook and Kindle formats.A 20% discount is available from the publisher.

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Saturday, August 21, 2010

Why Is Income Disparity Widening?

That income disparity is increasing is not in doubt, but the causes--and thus the solutions--are not easily parsed.

The statistics are unequivocal: The Gap Between the Top 5% and the Bottom 95% Is Widening in America. Is this the result of "natural" forces, or of government favoritism?

In a nutshell, the potential causes of the widening gap can be divided into two camps: "natural forces" of capitalism and Central State intervention.

Causal factors in the first camp include:

-- The differences in education, motivation and skills in people; the hardest working, most ambitious and most highly skilled people will naturally end up making more money than those with less skills and drive.

-- The differences in humans' propensity to save/invest or consume/gamble. The Pareto Principle suggests that 80% of the property and wealth ends up in 20% of the populace's hands, regardless of the initial state (in other words, even if income is evenly distributed to start with).

-- The globalization of trade and manufacture has introduced an extremely competitive wage arbitrage in which American workers are often competing with workers not just in different states but in different countries.

In general, this camp is discounted by "progressives" to whom innate differences between people are verboten for ideological reasons; the "liberal" ideology often confuses equal rights and opportunities with equal ability and drive.

The "progressive" agenda is thus set on equalizing not just rights and opportunities but skillsets, education, etc.--everything which is perceived to be a sociological wellspring of unequal skills and motivation, and thus of future income. Government intervention is thus essential to keep the society from diverging into financial nobility and serfs.

The "conservative" ideology discounts these sociological factors--education opportunities, marital state of the family, living conditions, etc., on the grounds that immigrants to the U.S. often arrive with little money, skills or education, yet many prosper quickly despite these (for U.S.-born citizens) supposedly insurmountable handicaps.

The "conservative" ideology is more accepting of what is often (mistakenly) called the Darwinian characteristics of capitalism; those with less motivation and fewer valuable skills must either try harder or be left in the wake of the economy.

(Darwin's work described the forces of natural selection between and within species, not between individuals in a community. Thus the struggle between "species-like systems" such as U.S.-style capitalism and Soviet-style Communism could be rightly viewed as Darwinian, as the competition, mutation/adaptation and selection process was systemic rather than individual.)

The "conservative" ideology objects to the government's role in attempting to correct sociological inequalities by redistributing income on the grounds that those who work the hardest are being penalized while those who make less effort are in effect rewarded.

I reside in neither camp, though I am sympathetic to various arguments on both sides.

I have observed that no sociological incentive can motivate a human being; they must find their own path to motivation. Giving people endless free stuff merely makes them dependent and atrophies their self-reliance and ability to work with others. Whatever is given as "free" is rarely valued, education being the most obvious example.

I live in a high-immigration state (California) and thus I have personally witnessed immigrants arrive with nothing, work two jobs, save every penny they can from their earnings, and buy houses, cars and businesses for cash a few years later. The only U.S.-born citizen I know who achieved the equivalent is my wife, who worked and saved enough in five years of ceaseless toil at low-wage jobs to buy her mom a house and pay off the entire mortgage. My wife completed this goal when she was 23 years old, and then she finished college. I am sure there are many such U.S.-born people, but I don't know any.

One of the dirty little secrets in America is that excuses are offered in endless millions here; my wife was raised in a single-parent family and her Mom worked at low-level jobs her entire life. Many Americans will devote more energy to creating excuses than they will to changing their life circumstances, and they often resent anyone from humble backgrounds who has accomplished a positive life change. (This is called "the crabpot syndrome" to those in the know.)

In our politically correct society, these observations are verboten, and quickly marginalized or dismissed.

I have also observed that many people I know make large sums of money yet they are continually "broke" and own little to no assets. Their consumption ratchets up with their income and their low propensity to save/invest never strengthens.

I suspect long-term cycles of innovation/stagnation, complexity/marginal returns and habituation to a "prosperity" that is no longer sustainable play roles in income disparity, as does globalization.

But if we ask cui bono of the status quo (The starting point of the Survival+ critique), I think we will find the Central State (Savior State) is heavily favoring unearned income over earned income and "gaming the system" financial speculation using other people's money over productive labor. The profits from gamed embezzlement/speculation is private, while the losses are backstopped by the government, i.e. profits are private, losses are public. That doesn't hold true for the 99% who are not financial Power Elites.

Thus I conclude that government/Elite-dominated policy heavily favors the Elites' conservation and accumulation of wealth, and that these factors are systemically (and thus policy) causal factors that we could change if we had the political will. "Fairness" and "hard work" have nothing to do with this set of policies; they are the result of concentrated wealth which buys political favoritism.

Consider the Russian oligarch's $300 million yacht. Did this gent earn his fortune by the sweat of his brow and by generating amazing innovations, or did he merely buy the State's crown-jewel assets for pennies on the dollar in a classic State/Elite sweetheart deal?

A number of readers offered cogent comments on the topic. First up, frequent contributor Michael Goodfellow:

1. Increased opportunity always produces increased inequality. That's simply because the ambitious people will take advantage of the new opportunities and some of them will profit. The more cautious people won't do anything new and won't profit. "If you don't bet, you can't win."

In practice, you have things like real estate booms or tech stock booms, and the people who participate in those (up until the final crash anyway) get very rich. The ordinary types who live paycheck to paycheck obviously don't and can't. But it's also true that those who get the extra education in useful fields are going to benefit from economic growth more than those with high school educations, or useless college degrees.

As the world economy gets larger and more interconnected, there are more and more opportunities, and more and more inequality. For example, Apple (and Steve Jobs) gets rich building iPhones in China. No ordinary worker gets any part of that. But 50 years ago, before globalization, no ordinary American company would have been able to do that either.

There's also this theory that we now have a "winner takes all" economy. This is modeled on the entertainment industry, where a single actor or musical group, not much better than the competition, becomes popular and crowds out all the rest. The winner gets very rich, due to mass media, and the nearly-as-good losers get nothing.

I think the entertainment industry is changing, with more, smaller successes, and the internet will do the same to other kinds of businesses. But you could argue that "winner take all" is what's behind Wal-Mart and the category killers like OfficeDepot. I would argue that it's about efficiency and moving more product with smaller numbers of employees, but you could certainly argue that it's really about name recognition (same as with entertainment), and well-known brands like Amazon and NetFlix just don't leave any room for smaller competitors.

In any case, I don't see this as having anything to do with tax policy or "greed of the elites." These new opportunities are opening because of technology and economic growth. The elites are the ones who take advantage of those opportunities. That's why a Bill Gates can drop out of college and become the richest man in the world. It's not because of quirks in the tax code or friends in high places.

2. There's a limit to how much you can tax the rich. They can restructure their income away from salary to capital gains, or as perks (cars, health care, company apartments, etc.)

Rich people (by definition) also don't have to keep working. These stock brokers and CEOs everyone despises have millions in the bank. If they decided to quit working altogether, they could afford to do that. I assume they work for the fun of it, and the status of having lots of money and toys. If taxes get high enough that they can't get significantly more money, they will stop working. Even if you enjoy your work overall, it doesn't mean you have to do it 80 hours a week.

You could argue that these people are parasites on the financial system, or on government handouts, but if there's anything useful that they do, you'll get less of it as you tax income more. With someone outside the top 1%, like a doctor, this is clearly going to happen. Why work all those hours if your 60th hour a week earns you half of what your first hour does?

3. Rich people already pay for most of the government. What exactly do you want from them?

You already have the top 1% paying 28% of all Federal taxes. The top 10% pay 55% of all taxes and the top 20% pay 69% of the taxes. Their share of taxes has gone steadily up, from 56% in 1979 to 69% in 2006. Meanwhile, the share of the bottom 20% has gone from 2.1% in 1979 to 0.8% in 2006. Share of the bill has dropped for every other quintile as well.

See Taxes paid by quintile, 2009 (CBO).

4. The tax code (and government handouts) are not the problem. I don't know how you'd quantify this, but looking at people like Buffet or Gates, I don't see that things would be any different even if the government left the economy alone.

The ones being bailed out in the latest crisis do include bankers, but they also include millions of people with recent mortgages who don't want to see their house prices drop further. Bailouts for the auto industry primarily benefited unions, not investors (some creditors were just ignored in the bankruptcy.) The health care legislation will temporarily benefit insurance companies by giving them new customers, but in the long run, they are going to be crushed out of existence by government demands to provide more care for less money. The Federal budget is being killed by entitlements, which benefit the poor far more than the rich. State and city budgets are being killed by union pensions and salaries, not giveaways to rich people.

I think increasing income inequality is a result of economic growth, which means it's not something you can get rid of, or would want to get rid of.

Americans are not just divided into rich and poor, they are divided into well-educated ambitious professionals and average Americans with no more education than they had in 1970. That average group is losing the advantage it once had over the rest of the world. Technology has made it easier to do business anywhere, education and infrastructure have improved in other parts of the world, and a billion willing workers have joined the world economy.

None of that is going to change soon, and none of that is due to corruption or crony capitalism or an "unfair" tax code. Telling people that they live in some insiders-only society where they can't win is just encouraging them to give up and get run over.

Aaron S.:

Your article about the "Two Americas" and the growing divide between the top 5% and the bottom 95% is very astute. One thing I have noticed, that you touch upon, is that it has become very easy to fall out of wealth but very difficult to climb into it.

With the outsourcing of productive jobs, the only people that are able to become "wealthy" are those very few who gamble and win. Instead of "working your way to the top," people get wealthy off of other people's investments in startups (which fail, but the CEOs get rich) or by investing in the right asset through sheer luck.

In the meantime, people who are wealthy can lose everything if their investments turn south, which can happen very quickly. Only the few elites at the very top are safe, and they are just sitting back collecting more assets.

Ernesto M:

Though the top 5% of income earners are much better off than those below them (generally), as you state, these are not really elite at all. Most of them by my reckoning are still solidly middle class. If an income of $216,000 is the cut-off, that is only the equivalent of a married couple who each make slightly over $100,000. I suspect that many of these people do not fit the profile of the typical millionaire (which is not even 'rich" anymore and was not then either) included in the 1996 book "The Millionaire Next Door".

A substantial number of them are probably over-indebted consumers who live in high cost cities such as NY, San Francisco and Washington DC because that is where many of the high or higher paying jobs exist. The business owners and secondly some professionals (such as doctors or lawyers) have greater latitude to earn high incomes in more locations.

Despite this, I do not see the tax code as the primary cause for the speculation problem. Its made it worse but the government created moral hazard is a far bigger problem and financial intermediation is also. Even with favorable tax treatment, if the Fed and Treasury did not bail out these losing positions, no amount of tax benefit could induce so many people to engage in the rampant and reckless speculation which permuates the modern financial system.

Thank you, readers, for your thought-provoking observations. There is no one "answer" or "solution" to income disparity, but we should not be hindered from seeking out disparities caused by policies designed to enrich financial and political Elites.

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