Friday, December 31, 2010

My Predictions for 2011

Despite the surfeit of predictions currently clogging the Web, I offer my own modest list of predictions for 2011.

I've tried to resist, but the temptation is simply too great: I'm caving in and unleashing a list of 2011 predictions.

Sitting back while other commentators issue their lists of predictions is like being in front of the salty nuts and chips at a party, watching everyone else grab handfuls of the tempting treats. I've held off so far but my resolve has finally broken down.

Despite the ridicule that is sure to be heaped on my head for being wrong, wrong, wrong about everything I expect to happen, at least I share that ignominy with 99.99% of humanity.

Life and history are not predictable, hence the temptation to go ahead and fling a guess or two at the dartboard.

So here goes nothing:

1. North Korea will demand a "workers' paradise" Disneyland be constructed over its uranium enrichment plant. The North Korean Elites are tired of skulking off to the Tokyo Disneyland under faked passports, and so after a hair-raising display of bellicosity and raving threats of a "holy war" against South Korea and the U.S., the North will demand a specially themed "workers' paradise" Disneyland be constructed over their primary deep-underground uranium enrichment plant.

The U.S. will greenlight the project over South Korea's objections, but the deal will fall through at the last minute when North Korea also demands a Universal Studios theme park be built on the Chinese-NK border as a hard-money tourist attraction.

The North, threatening nuclear war, will contact FedEx to inquire about the shipment of fissile materials via two-day express.

2. The Bernanke Put will turn out to be more than a figure of speech. When the U.S. stock market "unexpectedly" craters in the first quarter, despite the Federal Reserve's QE2 POMO buying of Treasuries and the positive news about retail sales, employment and Pres. Obama's pickup games on the D.C. basketball courts, the Fed will reveal that it raked in billions of dollars in profits from a massive bet against the SPX (S&P 500), NDX (Nasdaq 100) and DJIA (Dow Jones 30) via index puts.

After the revelation, the markets will rebound on rumors that the Fed exited the Bernanke Puts and has secretly loaded up on calls. A contract for a new luxurious Fed resort on Jekyll island will be announced via mimeographed newsletter distributed on a "need to know only" basis.

3. The convergence of Hollywood, politics and finance will gather momentum.President Obama will start subbing for the L.A. Lakers, getting the nod from Jack Nicholson and Magic Johnson, while the First Lady will start attending tractor pulls and motocross races.

Ben Bernanke will be a guest on "Jeopardy!", while Tim Geitner will do a turn on "Dancing with the Stars." Everyone's favorite member of the Financial Power Elite, Warren Buffett, will guest-star on "CSI: Omaha" as the avuncular billionaire who has misplaced a few billion dollars invested in Goldman Sachs stock at the bottom of the market in early 2009.

Lloyd Blankfein, the CEO of Goldman Sachs who famously declared that he and the firm were "doing God's work," will join Brangelina on a goodwill tour of East Africa, offering U.S. Treasury bonds to village chiefs in exchange for any diamonds they might have laying around gathering dust. He will be welcomed as a very amusing fellow, though lacking Brangelina's star power and charisma.

4. The SNAP food stamp program will be expanded to include cable TV access to a new U.S. government-sponsored channel, "Bread and Circuses." The new channel will be carried by all cable and satellite carriers, and will feature 24 hours of America's favorite "reality" shows (or their knockoffs and copycats if the original show is unavailable). The lineup will include the full menu of instant-celebrity entertainment: "survivor" copycats, "American Idol" and "Dancing with the Stars" clones, and a revolving schedule of demeaning, obnoxious TV-judge shows featuring citizens confessing to lying, cheating, stealing, wife-beating, child abuse, bungled burglaries, serial addictions, going to church solely to "pick up the ladies," coloring in their kid's coloring books and other assorted crimes and indiscretions.

5. A new "ultimate challenge" gameshow will offer not just instant celebrity but also the chance of dismemberment and death. As the public tires of formulaic singing and dancing contests and foolish races through pig-slop and hokey contraptions, one brave production company will move to a nation without liability laws and launch "the ultimate challenge" gameshow, which will include everyone's favorite contests plus new ones that will bring digital games that mimic combat to real life.

Contestants will gather in a replica of Rome's famed Coliseum, and engage in a series of contests that include dancing, singing, tug-of-war, trash-talking, endzone touchdown dancing, Tongan-Rules rugby, chariot racing, blindfolded combat with exotic ancient weaponry (such as the gimlet tor, a combination throwing net and mace), helmetless motocross, hang-gliding combat, and lastly, a weeklong stint with a U.S. Army Ranger team deep in Afghanistan. Contestants who fail to return will be given spectacular burials, and their exploits will be documented and posted on YouTube, with a voiceover by a Hollywood star.

Though critics will deride the show as "barbaric," it will be an instant hit.

6. QE3 will include issuing U.S. Treasury bonds directly to households. The sole stipulation will be that any proceeds from the sale of the bonds must be invested in the U.S. stock market.

7. Markets in precious metals, oil, commodities, stocks and bonds will rise and fall in an unpredictable fashion. Every analyst, pundit and commentator will be right about the movements, but at the wrong time. Most players will lose money while convincing themselves they made a killing. Bat guano and 'roo innards will emerge as the "hot commodities" of the year, as both will go parabolic.

Everyone betting on the oil futures contango will be wiped out.

8. Contact will be made with an alien civilization in the Alpha Centauri system. The U.N. security Council will issue a proclamation in support of galactic peace, with Russia and China abstaining rather than support the U.S. initiative. President Obama will request a loan of 100 trillion quatloos from the aliens as a "gesture of friendship to Earth," which his financial advisors estimate will fund the status quo to the 2012 elections.

Republicans will issue a stern warning to the aliens that "illegal immigration" to the U.S. was, well, illegal (at least in states which don't depend on said illegals to mow their lawns, staff their slaughterhouses and tend the Elites' offspring and elderly parents), while the Democrats will offer the aliens instant citizenship and Medicaid as long as they have "anchor babies" "within the U.S. or its airspace."

NASA's budget shortfall will preclude the intepretation of the aliens' message, but it will be believed by some cryptographers to be a combination of laughter and fear.

The crush of long workdays and events has caused me to fall behind my email once again, so please allow me to thank everyone who sent their holiday greetings and best wishes to me: thank you for your kind thoughts.

New recipes on What's for Dinner at Your House?--Elsewhere Cafe Muffins, and Louisa's Vegetarian Baked Beans

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Thursday, December 30, 2010

If We Close Our Eyes, The Monster Will Go Away

Refusing to face the need for radical change and adaptation only makes the eventual adjustment more traumatic and less likely to succeed.

As an initial reaction to unwelcome crises, denial serves a psychological purpose.Closing our eyes and hoping the Monster will go away is the first stage of eventual acceptance and engagement with unwelcome reality.

Clinging to denial sets up pathology, anger and collapse. If we continue to keep our eyes closed, and demand the Monster go away because we don't want to deal with change and challenge, then we either detach ourselves from reality altogether (a pathological psychosis perfectly depicted in the classic film Sunset Boulevard) or we rage in fear and dread at the challenge/Monster, as if it is somehow unfair that change has occurred without our express permission.

The longer we close our eyes and hope the Monster will magically go away when we finally open them, the more likely our eventual collapse.

As a nation, two years after the demise of the status quo, we are still closing our eyes hoping the Monster goes away. Frequent contributor U. Doran recently sent meHiding a Depression: How the Government Does It by Daniel Amerman, a blow-by-blow description of how Federal and state spending has expanded to replace the private-sector GDP which has vanished.

The article notes how this massive replacement of the private sector by Federal (borrowed) spending has gone largely unremarked.

In other words: if we close our eyes and borrow 10% of the nation's GDP ($1.4 trillion) every year (or perhaps more accurately, $2 trillion a year) from now on, then when we finally open our eyes the Monster of change and challenge will have magically vanished and everything will be as it was before the Monster's terrible appearance.

Yes, this is childlike. We have turned to the Central State as our Mommy and Daddy who will save us from the Monster.

Unfortunately, our own desires and derangements are feeding the Monster that is threatening us with change--a dynamic illustrated by the classic sci-fi film Forbidden Planet.

The more we cling to our deranged dependence on systemic fraud, exponential expansion of credit, corporate cartels/political Plutocracy, Central State largesse, corporate-media propaganda and a financial system that breathes misrepresentation of risk, the stronger the Monster becomes.

A close friend has been consulting for a long-successful private enterprise. Like many if not most businesses which started small and grew into a successful niche, the company's very success is the wellspring of its limitations: the owners cling to haphazard, anachronistic ways of doing business cobbled together in the distant past rather than risk change (and losing control over anything, even if serving customers demands new systems and some delegation).

As a result, the limitations of the inefficient, failing parts of the company will doom the entire enterprise as soon as a competitor enters their niche. And since the entry of a competitor in a profitable niche is inevitable, then the willful blindness of the company's founders/managers to the need for adaptation is dooming the company to a desperate make-or-break convulsion at a later point, when competition will force a rapid adaptation which may be too frantic to be successful.

This is an excellent analogy for the U.S. economy and society. We fear adaptation, even as we sense it is necessary and inevitable. We want to cling to the past for as long as we can, even as this dooms us to a convulsive, forced adaptation in the future that is likely to fail for the very reason that it has been put off until the last frantic minute.

The Titanic offers us a timeless analogy for denial and a frantic, too-late acceptance of grim reality. Had the doomed ship's leadership actively accepted the challenge to save as many lives as possible, then lifeboats would not have been sent off half-full. The sea was calm; boats could have been safely loaded beyond their designed capacity, and crude life-rafts might have been lashed together. As poor a solution as a lashed-together assemblage of buoyant materials would have been welcomed as a better alternative than certain death.

But instead, the "plan" was to maintain a veneer of normalcy: the band played on, even as the bow sank lower into the unforgiving icy water.

Fed chairman Bernanke, Treasury Secretary Geitner, President Obama and Congress are all ordering the band to play spritely tunes of rising holiday spending, endless borrowing, and the carefully crafted propaganda of Fed manipulation, statistical legerdemain and happy-talk about how the Monster will be gone when we open our eyes.

Since we are feeding the Monster with our very denial and derangements, then that is impossible. The longer we keep our eyes closed, hoping we can avoid any meaningful change, any meaningful adaptation and any meaningful sacrifice, the more fearsome and powerful the Monster becomes.

If we insist--childlike, petulant, resentful of reality--on keeping our eyes closed in 2011, then we are dooming ourselves to facing a much fiercer and more powerful Monster in 2012. We can't escape the confrontation, and the longer we put it off, hiding under our bed, wishing it all away, the more likely our panicky collapse when reality forces our eyes open.

The crush of long workdays and events has caused me to fall behind my email once again, so please allow me to thank everyone who sent their holiday greetings and best wishes to me: thank you for your kind thoughts.

New recipes on What's for Dinner at Your House?--Elsewhere Cafe Muffins, and Louisa's Vegetarian Baked Beans

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Wednesday, December 29, 2010

Japan's Perpetual Motion Debt Machine

Perpetual motion is impossible, but Japan has managed the illusion of perpetual debt for 20 years.

Perpetual motion--a machine which produces more than it consumes indefinitely, without any visible energy source--is impossible. So too is an economy which consumes more than it produces and fills the gap with debt. Yet Japan has maintained the illusion of a perpetual motion debt machine for 20 years.

Back in 2001 I wrote an article describing Japan's Runaway Debt Train: 40% of its annual budget was borrowed, and much of its tax revenues were gobbled up by interest payments on its mind-boggling public debt.

Nine years later, nothing has changed: welcome to perpetual motion. Japan's government approved a record 92.4 trillion yen ($1.1 trillion) budget for the 2011 fiscal year, of which 44 trillion is borrowed, 7 trillion is lifted from various trust funds and a mere 41 trillion is tax revenues.

So roughly half (48%) of Japan's Central State spending is borrowed.

Japan has borrowed almost half its government expenditures for a decade or so. Even at super-low bond yields of around 1%, it now costs 21 trillion yen to service that ever-growing mountain of debt. So 23% of the government's budget is spent on servicing debt. Roughly half of all tax revenues (51%) are devoted to paying interest on public debt.

The more Japan borrows, the more revenue must be devoted to paying interest.

Japan's total bond issuance in fiscal 2011, including roll-over of existing bonds and the additional 44.3 trillion, is 169 trillion yen--184% of the entire annual budget.

Despite a decade of vast "pump-priming," prices are still declining in Japan: the core consumer price index, which doesn’t include volatile fresh-food prices, was 0.5% lower in November than in the year-earlier period. Compared to October, the core CPI lost 0.1%. (Apparently the Japanese government has adopted the useful legerdemaine of "core" and "non-core" consumer price indices.)

Has Japan really invented a perpetual motion debt machine, in which consumption can exceed revenues by 50% forever? For an answer, we must look at culture and demographics. Japan is a very traditional society in key ways, and the citizenry have historically been prodigious savers. They have accepted low rates of return and other restrictions on their investment options as part of their social contract.

As a result, most of the gargantuan public debt in Japan is owed to its own citizens, life insurance companies, pension funds, etc. Its high savings rate and conservative culture has enabled a self-funding perpetual motion debt machine.

But the nation's demographic tides have turned against the self-funding. Given Japan's low birth rate and longevity, the generation which is now retiring is outsized compared to the younger generation which is supposed to fund the retirees' retirement. As globalization has eroded the old social contract of lifetime employment and high salaries, many of the younger generation earn a mere slice of their parents' wages.

Predictably, Japan's savings rate has plummeted as retirees start withdrawing their savings, and many younger workers find their incomes too low to save anything.

Japan may well try the Federal Reserve's approach of printing credit to buy government bonds--a perpetual motion debt machine if there ever was one--but Japan's debt may well have reached a critical mass that is simply too large to monetize without triggering serious consequences.

In the U.S., we are borrowing "only" 41% of our Federal expenditures, roughly $1.4 trillion a year. The U.S. annual borrowing is equal to roughly 58% of its tax revenues of $2.4 trillion. The Federal deficit is about 10% of the nation's entire GDP of $14.5 trillion.

Clearly, American politicos and recipients of Federal largesse are hoping that its debt will also be a perpetual motion machine. But Americans don't save much of their income; while the Chinese sock away roughly a third of their income, Americans save a meager 5-6%, and that number is dropping as the urge to consume overwhelms the culture's brief interlude of fiscal prudence.

Spendthrift consumption-obsessed America cannot self-fund its gargantuan government debt, so it must rely on external sources and the Fed's monetization.Despite the pretense of "concern" coming from the politicos in Washington D.C., America's "leadership" (barf) clearly believes that the U.S. government can operate a perpetual motion debt machine like the Japanese have done for an entire generation.

But just as perpetual motion is impossible, so too are perpetual motion debt machines which consume more than they produce via the "magic" of borrowing.

The end-game is not yet in sight, but the rumblings can be heard and the lightning flashes are now visible over the horizon.

The crush of 14-hour workdays and events has caused me to fall behind my email once again, so please allow me to thank everyone who sent their holiday greetings and best wishes to me: thank you for your kind thoughts.

New recipes on What's for Dinner at Your House?--Elsewhere Cafe Muffins, and Louisa's Vegetarian Baked Beans

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.

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Tuesday, December 28, 2010

One Investment Strategy for Q1 2011: Cash, Baby, All the Way

In response to readers' requests, I disclose my own amateur's Investment Strategy for Q1 2011: cash is king, and the U.S. dollar looks good simply because almost everyone expects it to collapse.

Despite my oft-avowed amateur-market-observer status, readers often ask me for advice or opinions on where to put their capital. This is not advice (please read the HUGE GIANT BIG FAT DISCLAIMER below), it is a disclosure of my own personal opinion, what we might call "one investment strategy of many possible investment strategies" for the first quarter of 2011: cash, baby, cash all the way.

Why am I in cash? Because I don't trust the parallel rallies, and I am extremely skeptical of the various "stories" which are driving the rallies. Why am I skeptical? Because everybody and their sister has bought into the stories, and a one-sided trade is rarely the winning one.

Yes, it's my contrarian nature: when everyone is a believer in a "story" that is too good to be true, then I become skeptical. This often gets me in trouble. When everyone was buying GM at $50, I was shorting it. When everyone was buying Fannie Mae at $60, I was shorting it (via puts). Both GM and FNM were obviously, painfully insolvent, but it took practically forever for reality to intrude on the fantasy/narrative that each firm was a "solid blue chip" investment with numerous analyst recommendations. In the meantime, I lost money treading water for quarter after quarter.

So even though the market is clearly top-heavy, the short-side trade may yet be ground down by the Fed's prop-job and the Wall Street/Central State partnership's desperate desire to use a rising stock market as a propaganda proxy for the "recovery."

(Hey, just borrow and squander roughly 13% of GDP, year after year after year (roughly 45% of the entire Federal budget), and you might stimulate a modest "recovery," too.)

So let's examine each of the "stories" driving the rallies.

1. The global recovery is solid, and Central State stimulus and quantitative easing will keep growth rising and interest rates low. This narrative drives capital into "risk assets," i.e. stock markets, commodities, FX carry trades, Chinese real estate, junk bonds, etc.

I'm not really sure where to even begin in throwing cold water on this "global recovery story." So 9 million jobs have vanished in the U.S., and a few hundred thousand jobs added in the past year is supposed to be "growth"? We're borrowing $2 trillion a year and blowing it on propping up the status quo, and this is all the job growth we get? That's beyond pathetic.

Mish has done stellar work dismantling the jobs propaganda, and here is my own modest analysis: What the rising stock market doesn't say about jobs.

Does anyone actually believe the Euroland debt crisis is "resolved"? To believe the "global recovery" story, you have to believe the Eurozone debt crisis is all fine now, fixed, done, history.

By all means, go ahead and risk your capital believing this story; I'll pass.

2. The rapid growth of China and India means commodity prices will spiral higher basically forever, so buy gold, silver, copper, cement, iron ore, tar sands, etc., it's only going higher--and soon.

The basic premise here is sound, but the story really boils down to this: China can expand its money supply by 55% every few months forever, without consequences. If you believe that, you need to actually get some on-the-ground intelligence from China. My contacts on the ground are reporting the official 5% inflation rate is an absurd joke--prices of some food items are doubling or even tripling.

And so a funny thing happens on the way to the projections of skyrocketing commodity prices: inflation eats everyone alive below the top 5% in China and India. When people can't afford to eat the way they have become accustomed to due to skyrocketing prices, then they get rather testy and irritated at the Powers That Be, and massive civil unrest is the inevitable outcome.

The Chinese authorities have aimed a toy popgun at the tsunami of inflation (their pipsqueak .25% rate increase) and I suppose the water receding has caused them to chortle in great self-satisfaction. But then the water receding is just the tsunami's warning signal, and the little popgun will soon be revealed as utterly inadequate to stem the inflation which is ravaging the common people's budgets in both India and China. You can't double your money supply and prop up a housing bubble (flats that cost 40 times gross income, is that sustainable? Believe it if you want, I'll pass, thank you) without unexpected and uncontrollable consequences.

Don't read the headlines and the propaganda, talk to real workers in these economies.

So what happens when money supply is throttled, the building boom goes bust, and development-dependent local government revenues collapse? Demand falls, and the commodity bubble pops. A huge amount of the "demand" for commodities was Chinese stockpiling, not true organic demand. Once they stop building empty malls and cities, demand doesn't decline--it craters.

3. Central Bank printing will drive inflation globally, which will drive up all tangible assets. Again, this is a sound idea but I get nervous when everyone is all-in on one side of a trade, and there are very few who haven't bought into this story.

But the market rarely rewards the 90% on one side of a lopsided trade. Usually it hands the 90% a big fat unexpected loss.

Look, $12 trillion has vanished in wealth in the U.S. alone. So the Fed (put on a funny hat, wave a dead chicken at the rising tide and shout, "recede, tides, for we speak for the mighty Federal Reserve!") prints $2 trillion and that's supposed to unleash a mighty wave of reflation?

What I see is the dollar arbitrage that is the foundation of U.S. wealth has, in combination with unprecedented money/credit expansion in China, led to rampant inflation in China and India--what others call "exporting inflation." I don't think that is really accurate, however, because the Chinese Central Bank doubling its money supply and injecting trillions of RMB (yuan) into malinvestments such as millions of luxury flats and excess capacity in everything is a key driver of the coming implosion of credit (and thus of investment) in China.

Meanwhile, the BRIC nations and other developing-world economies are supposedly "decoupled" from flailing developed-world economies, a "story" which has sent their stock markets soaring. Plopping down a Starbucks or three on the tony coasts of South America is proof that the growth there has nothing to do with credit bubbles elsewhere--it's all organic and sustainable.

Go ahead and believe that story--I'll pass. What I see is trillions of dollars in hot money seeking a quick-buck return, and capital sloshing into every watering hole in the world which promises a risky but potentially quick return.

Yes, costs of essentials (the FEW resources of food, energy and water) are rising in the U.S. due to the global frenzy caused by massive credit expansion and the trusty gaming of the U.S. dollar, and local taxes are skyrocketing as insolvent local governments desperately try to meet impossible demands to fund unaffordable pensions and benefits to public workers.

But other than the bogus Fed-induced stock rally, U.S. assets are rolling over or deflating: housing is Example 1, and bonds are Example 2 as rates are rising (rates = the rising tide, the Fed = silly guys in funny hats waving dead chickens at the rising water).

That everyone believes gold and silver have no downside makes me skeptical. If you are a buy-and-forget investor in precious metals, fine, but the market likes to destroy some wealth when the trade gets lopsided. The time to buy anything, gold and silver included, is after everyone who believed there was no possible downside has their head handed to them on a platter.

Maybe that will never ever happen to gold and silver, and if so I will miss out on the next stupendous precious metals rally in Q1 2011.

Ditto the "don't fight the Fed" stock market rally scheduled for Q1 2011. It will soar to the stars without me.

Ditto the Q1 rally in oil, farmland, pork bellies, coffee, sugar, quatloos, 'roo innards, sand, bat quano, swampland in coastal China, Chinese IPOs and all the other tangibles slated to head to the moon in Q1.

Some very smart people note that very few Americans own any silver or gold. True. But then 80% of Americans have no capital to speak of, as many have negative equity and little to no cash or other assets. Of the top 20%, many have the vast majority of their capital in their homes or 401K Corporate America retirement plans, which often have limited choices for investing.

Most Americans don't own any gold or silver to speak of because they have no cash assets to speak of, either (a closet full of spiffy Nike footwear doesn't count).

Lastly, I don't trust rallies that correlate to every other rally. Gold, the S&P 500, emerging-market stocks, oil, copper, sugar, 'roo innards and bat quano are all rallying in parallel: in effect, there is only one trade here: for everything and against the U.S. dollar.

But weirdly, given the near-universal predictions of its collapse to near-zero, the dollar keeps rising.

This doesn't seem all that mystifying to me, because one key feature of a reserve currency is the potentially stupendous demand for it when debt has to be repaid in cash. Printing up a couple trillion just isn't the big deal everyone seems to think it is. They seem to forget that there is $52 trillion in assets in the U.S. and roughly $160 trillion in the global economy. A couple trillion dollars is chump change.

That's how you get a supply imbalance--demand for dollars can actually exceed supply, and then the price of the commodity in question (USD) rises.

The fact that virtually nobody sees this as likely makes it very likely to me. But then that's my contrarian nature, which should be heavily discounted. I don't trust rallies which are correlated to practically every other asset class, and I don't trust "stories" that everyone has already bought into. I think the global markets in all asset classes are unsettled, murky, and heavily gamed/ manipulated.

I see being in cash as a viable investment strategy, and being in the hated and loathed U.S. dollar as where I want to be, precisely because it is so widely viewed as doomed.

This is not advice, it is merely a disclosure of an amateur's opinions. Cash may yet be king, and his reign may last a lot longer than many think possible. When one asset class in a highly correlated group rolls over, then maybe the entire group rolls over with it. Maybe not, but the possibility of losing 25% in being wrong makes me cautious.

I don't know what will happen, but I can sleep being in cash in Q1 2011. If I miss all the spectacular rallies that everyone sees as sure things, so be it. I prefer to let things settle out before making any bets or predictions.

For another perspective on 2011, I recommend Jesse's A Handwave Forecast for 2011.

The crush of work and events has caused me to fall behind my email once again, so please allow me to thank everyone who sent their holiday greetings and best wishes to me: thank you for your kind thoughts.

New recipes on What's for Dinner at Your House?--Elsewhere Cafe Muffins, and Louisa's Vegetarian Baked Beans

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.

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HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

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Monday, December 27, 2010

America's Job-Creation Machinery Is Hollowed Out

Hollowing out small business and lower value-added enterprises has hollowed out America's job-creation machinery.

The conventional wisdom is that boosting consumer borrowing and spending (same old, same old) will magically create millions of new jobs. As usual, the conventional wisdom is dead-wrong: America's job-creation machinery is hollowed out.

Questioning the quasi-religion of "free trade" always brings down the wrath of true believers, but I don't see rigid ideologies as shedding much light on the complex interlocking crises we find ourselves tangled in.

I have long held that a mono-maniacal obsession with "low prices" is one factor which has hollowed out the U.S. economy: The Wal-Mart Model of Self-Destruction: Lowest Prices, Always (January 24, 2010)

In sum: the corporate globalization model of maximizing profits, efficiencies and long supply chains saves "consumers" $300 a year on goods that have declined in quality as well as price, while hollowing out the industries that once offered "citizens" $30,000 a year jobs.

The "free market" ideology holds that there is an either-or choice: either you pursue the corporate globalization model ("free trade") which supposedly benefits all while maximizing corporate political power and profits, or you choose by default "bad" "trade restrictions," which supposedly hurt everybody by making domestic "consumers" subsidize horribly inefficient domestic manufacturers.

Meanwhile, in the real world, both Germany and Japan have pursued a middle path for decades. As correspondent Dr. David D. has often noted, despite its well-publicized financial/fiscal woes, Japan remains a remarkably stable, wealthy society in which the domestic economy is 89% of GDP--yes, exports/imports are a mere 11% of Japan's GDP.

Japan has restricted "free trade" for decades, and has pursued a "low unemployment" policy that has little to do with restricting imports and everything to do with policies which enable hiring marginal workers. The "social contract" between citizens/consumers and the government is different than in the U.S. Is it "better" or "worse"? That sort of judgment cannot be made, as the criteria are cultural and social.

The same can be said of Germany, where workers shift to part-time when business is slow, as opposed to the American model in which workers are fired and more work is piled on the survivors--again, to maximize those all-important corporate profits.

In other words, the "free trade" ideologists claim it's all dollars and cents, but "soft" cultural values play a critical role in the "social contract" which controls the role of trade and imports in an economy.

America is in thrall to a specific cultural and financial ideology which claims that all good things flow from corporate profits, and the maximization of those profits is the foundation of a "growing economy" (if debt is rising faster than GDP, is it still "growth"?) and more jobs.

Too bad there is no evidence to support this narrow faith. Rather, maximizing profits requires that the Federal government and the private sector both borrow trillions to prop up fading "consumer spending" because corporate profits don't require jobs, they only require consumption. If it's funded by debt rather than producing wealth, no problem.

The unholy alliance of global corporate interests and the Central State has pursued a specific strategy which emphasizes borrowing and consumption over production and savings, and the massive expansion of debt in all sectors of the economy is the consequence of this policy.

Corporate interests can play both sides of the "free trade" game. When it suyits their purposes to move production overseas, then they are hearty proponents of "free trade," But if their profits are being pinched by other global interests, then suddenly a defense of "free trade" requires restricting imports.

The net result is that the high end of the value-adding chain remains in the U.S. but the bulk of the chain is now global. Free trade apologists claim that the "solution" for the U.S. is to compete globally for the high-end value-adding chain: the design, marketing, research and development, etc.

There is certainly some truth to the idea that global products demand global competition, but this idealized view of the economy overlooks the inconvenient fact that the vast majority of mere mortals do not have the brainpower or drive to become research scientists, top-level designers, etc. So by shipping everything below the top level of R&D, design and marketing overseas, then you've also shipped most of the employment in the lower value-added chain.

Even if the U.S. were to pump out 10 million PhD-level researchers, there wouldn't be 10 million new jobs waiting for them. The ugly truth is the number of positions available for high-end researchers, designers, etc. is intrinsically small. Post-doctorate researchers from the top research universities in the world still have to fight to secure a job.

In other words, there are very few $50 to $100 an hour jobs in the value chain, and many $10 an hour jobs. While it may well be possible to tax the $100/hour workers enough to pay for food stamps and other welfare so 100 million people can sit at home watching TV, borrowing trillions of dollars to prop up the current status quo is simply a criminal theft from future taxpayers to fund our current consumption.

In While Washington pursues CEOs, they snub U.S., Robert Reich notes that much of the value chain in Apple products goes elsewhere. In the simplistic view, that's wonderful as long as Apple pumps out fat profits.

But the social contract is larger than corporate profits--though that is obscured by the "solution" America has chosen: borrow trillions from future taxpayers and global players to fund current consumption and a growing army of unemployed with few prospects.

America's job-creation machinery has been hollowed out by the "globalization-debt-consumption" model. There are no simple, ideological pure "solutions" to the complexities of globalization, fostering entrepreneurship and small business and the often-unexamined "social contract" between citizens and their Central State.

I am reprinting a post by author Chris Sullins which illustrates how the hollowing out has occurred over the past few decades. Real life does not lend itself to simplistic ideological straitjackets; the "solutions" cannot be purely financial or ideologically driven. Any "solution" has to balance the needs of the citizenry against corporate interests and a cultural and governmental obsession with propping up consumption.

Here is Chris's entry:

The Lesser Evil is Still Evil:

There was a sequence of events that I observed over the last 25 years culminating in the destruction of one private business. This was a small corporation owned by an American family who had started off using local talent to make a quality product and took great pride in the “Made in USA” label.

Early to Mid 1980s: Company is born, grows, and does well. Moves from a mom and pop shop to hiring non-family members. A lot of hard work and growth during this time pays off. To help facilitate growth, investment, etc., company takes on partners with expertise in specialized areas.

Late 1980s: Company continues to do well, but growth plateaus. Original owner does not want to do a public offering of the business. Internal triangulation and disagreements on how to proceed leads to moves by newer partners to break-up/sell the business. Original owner/family takes out loan to buy their company back from the newer partners. This takes a significant amount of money out of reinvestment in the business and improving health/retirement plans for all workers (including the owners).

Early 1990s: Owners continue to use American parts and labor as other companies begin to outsource some production of parts to Mexico. The company survives the regional recession of the early 90s and the owners are able to make their payments to the bank for the buyout and are also able to do a large expansion.

Mid 1990s: Due to increased domestic competition due in large part to changes under NAFTA, owner begins to buy some of their parts from Mexico, but the majority of products are still made in the USA and assembled by American workers –local people who have lived in the area for generations. At this time, similar completed products begin arriving from China. Owner expands production facility again and contracts out labor for some parts and completed products to other American-owned businesses.

Under the traditional business model in a fair and uncorrupted market, this expansion should lower costs over the long-term while still providing a quality product to customers. The plan looks good to the bank, too.

Mid to Late 1990s: The cost of parts from Mexico begins to rise and the completed products are now no less in retail price than similar products from China. Despite production in a low-tax, low-wage state (as in not much above the minimum wage!), both the company and subcontractors have difficulty making any kind of profit against the rising tide of Chinese imports. By the late 1990s, they can’t figure out how the Chinese products can sell at a retail price which is still less than the combined wholesale prices of many of their parts. There are also times when the raw materials alone cost very close to the wholesale price of the Chinese goods.

Retail outlets sell both the Chinese and American goods and the difference in price is apparent on the shelf. Although the loan to former partners has been paid off, the owner begins to struggle financially at times to meet the loan for the expansion as sales drop. The owner has to get some short-term loans to cover operational costs.

At this point in time, he has no idea how GATT, WTO, and MFN are impacting his business and changing the playing field. In fact, the American company owner thinks tariffs are still on the books and enforceable, that his elected representatives will protect the local community, that the Constitution still means something outside of the town he lives in, and that multinational corporations haven’t been bribing…sorry, I digress…

Late 1990s to Early 2000s: Continued importation of Chinese goods which cost less than American raw materials pushes company owner to focus on a niche market by offering “Made in USA” products to consumers who have higher standards, i.e., quality over price. Catering to this high-end consumer seems to work for a while, but the company takes a major hit when one of their biggest wholesale customers (a retailer in that high-end niche market) declares bankruptcy. The timing is “unfortunate” since it happens right after the company had delivered one of its biggest orders ever to the retailer before the Christmas shopping season.

The bankrupt retail chain is a big player and has many creditors and suppliers. The company finds itself to be one of many small fish in a big ocean inhabited by larger fish, whales, and sharks. Nevertheless, the company demands their unpaid products be returned. The big retailer responds: Those goods have all been sold and there’s nothing to return to inventory.

A couple years later a federal judge from another district orders: All small companies to be awarded new stock cut by the big retailer. The stock “paid” to the company is literally worth pennies on the dollar against the products originally delivered, but never paid for, by the retail chain. Big retailer never changes the name on their storefronts, re-organizes on paper (board members play musical chairs), has a record year and is still in business to this day. (BTW, during the entire history I’m describing today the top value ever reached by this stock was 1/10th of the sum originally owed to the company for the products that the retailer ripped off…er, supposedly unable to pay for).

During this same time period, the bank which loaned the company money for the expansion demands larger monthly payments. Owner/family members sometimes defer their own pay, but the company is at least able to pay the bank and not go into a forced sale. Upon a review with the bank months later, the banks representative makes a comment to the effect of “I can’t believe you guys were able to make your payments” before raising the monthly payments even more. Negotiations for readjusting payments, rates, frank talk on how the company won’t be able to survive and local workers will be thrown into the unemployment line quickly go nowhere with the bank.

Owner has to go to another bank to get short-term loans to cover payroll for non-family workers as owner/family members go without compensation for health, retirement, etc. At least the workers understand the company is going through a rough time and do NOT demand raises or other increases in benefits. Many years of life in the community together, shared hardships and reciprocated loyalty still mean something at this point.

Mid 2000s: Owner can’t meet bank terms and is on the brink of losing personal/non-business property. They haven’t been able to put aside any money for retirement (I need to interject here that owner lived modestly and frugally as well). Open and honest discussions with workers about future of the company and tough changes ahead. Owner sells company, all contents, and product line and only retains ownership of the building.

New owner is able to get a better deal from another bank to buy the same company that the old owner couldn’t get a loan to maintain. New owner believes he can continue to focus on the well-heeled consumers in the niche market. New owner soon learns that Americans of all shoes would rather save a buck than buy “Made in USA” products. Production is curtailed and majority of workers are laid off. Repackaging of imported goods with very few finishing touches by American hands becomes the new norm just to survive.

The company’s base of buyers shrinks –they’ve either turned to suppliers representing the Chinese or have gone out of business themselves. Old customers aren’t happy about the change in leadership at the company and soon notice the lower quality of goods and services they receive. More customers begin dealing directly with importers/distributors rather than the company which appears more and more like an unnecessary middleman.

No one looks at labels to see where products are made or even asks about quality anymore –the bottom line is cost. The new owner sells to yet another person. This transaction still includes leasing the facility from the original business owner.

Mid to Late 2000s: The third and soon to be last owner quickly shrinks to a mom and pop operation. The company becomes a part-time operation in only a small portion of the original facility. The company’s products are no longer offered in retail catalogs. The last owner stops making payments on the building and the original owner has to get a short-term loan to cover the building (a debt leftover from the last expansion). A year later production stops altogether and the company closes. The building goes into disrepair and is put on the real estate market, but it’s already past the bubble and there are no buyers.

In the meantime, the original owner and last owner end up in court over the breached agreement on the building. Rather than cutting some stock for a company which no longer has any sales or apparent residual worth (nor was ever publicly offered), the last owner has to pay some real cash to the original owner. A settlement is reached for far less than what was owed.

Late 2010: Everyone involved with ownership of the company at some point in its history has debt. They’re all working for someone else now. But, at least they’re working. Unofficial unemployment is 20% in their area.

It’s easy to blame China for what happened, but it was only possible with the willing connivance of people who sit in D.C."

Thank you, Chris. If I had to summarize the point being made here, I would say that small business

has been hollowed out by specific policies which just so happen to favor corporate profits and thus corporate political power above all other considerations in the social contract.

The Central State has papered over this hollowing out of small business by borrowing and spending trillions of dollars to prop up consumption. That "solution" has consequences which few are willing to face--yet.

The crush of work and events has caused me to fall behind my email once again, so please allow me to thank everyone who sent their holiday greetings and best wishes to me: thank you for your kind thoughts.

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Friday, December 24, 2010

A World Without Money (A Sunday School Lesson)

Important truths about personal integrity and money can be found in a recent Sunday School lesson.

Correspondent Joe H. recently described a fascinating simulation he held in his Sunday School class about the value of one's word (integrity) and money (trustworthy exchange). Joe's lesson was designed to teach truths which have largely been forgotten in contemporary America, where lying, cheating, gaming, embezzlement, fraud, misrepresentation, half-truths and propaganda are the foundation of Financial/Corporate America's soaring profits, the Federal government's robust defense of the financial status quo and many Americans' individual responses to this systemic fraud: committing their own frauds, gaming the system and misrepresenting the truth to further some scheme.

If you read Joe's account carefully, there are fundamental points being made about the nature of money and the value of integrity, a "commodity" which has been devalued to near-zero in contemporary America.

Here is Joe's account:

I was recently pressed into service teaching Sunday school to 13 9th graders, about half boys and half girls (pretty unusual for a Sunday School class). I am having a blast.

One recent Sunday, the Second Commandment was the scheduled lesson, and the pre-prepared materials were pretty skinny so I called an audible (football term) and made up my own lesson plan.

My goal was to teach the Second Commandment: "Do not use the Lord's name in vain," in a way that connected with my ninth grade students at a visceral level.

Modern Americans lack the context that makes the message of the Second Commandment accessible.

The standard bearers of 'cool' are professional athletes and rap stars. Trash-talk and debasement comes as easily as breathing to many of them. Their currency is domination and debasement. Respect for 'name' is alien to the standard bearers of modern 'cool'.

Name is slightly more respected in the economic sphere. The gates that grant access to economic life are not named Joe, or Chuck or Fred. They are named Visa and Mastercard, and American Express.

Most Americans think the Second Commandment is 'quaint'. If they even think about it, it is with a condescending superiority, something like: "Boy, did those old Hebrews get it mixed up. Imagine rating the name of the God/Goddess/All-That-Is (presuming one/they exist) ahead of 'Don't murder'....Just no figuring...."

As a card-carrying Christian of an unspecified denomination, it is my belief that proper understanding of God's plan will prepare us for life. My job, as a Sunday school teacher, is to teach proper understanding of God's plan and to make it highly accessible so it can come into play when they need it.

The goal of the simulation was not to prepare them for Joe H.'s fantasy of what the future might be like, but to make God's roadmaps accessible to them so they will be prepared regardless of the future they will live in. I know that all that "God" stuff makes some readers a little bit itchy. I will be pleased if they find any utility in the simulation or the discussion of it.

One part of the lesson was hands-on. I planned to create a small-village economy with 5-to-7 farmers producing 'corn', 2 weavers producing coats and 3 fisherman catching fish and transporting goods. Every family needs 60 kernels of corn a month to survive and 4 coats (I will probably use socks as a proxy for coats) a year. Fish is a luxury. The mayor is picked on the basis of how cool a party you can throw and the goods you give away (Potlatch culture).

Number of fish caught per month is based on the throw of a die. Weaver families can produce 3 coats per month. Farmers will be 'gifted' a harvest on an annual basis.

Breakdown was 7 'Farmers', 2 'Weavers' and 3 'Fishers'. Fishers also transported. The 13th person kept track of months and helped count out 'coats' to weavers, etc.

Each Farmer had 24 months worth of corn (one cup of popcorn) and had to feed both his family and use some for trade. A month's worth of popcorn was 60 kernels. So some of the more generous Farmers might start feeling pinched toward the end of the year and find themselves importing.

The kids must figure out how to make it work without money or paper records.(Emphasis added: CHS)

At some point in the simulation, I would have a couple of the kids start cheating. Inadequate food will kill off a weaver family and half the village will perish due to hypothermia.

My belief is that complexity obscures what can be clear and simple. A man's word/bond can be an ample substitute for money *if his name is associated with integrity*. (Emphasis added: CHS) To besmirch a man's reputation for integrity is to guarentee chaos, ruin and devastation.

It is my hope that after a few simulations, the cheaters will be quickly identified, shunned and extincted.

It is also my hope that "Do not use the Lord's name in vain" will have three dimensionality to the 9th graders after this lesson. They may also have a heck of a headstart on the kind of economy we may be heading toward.

* * *

The simulation went well. Kids are masters at suspending disbelief when the task at hand looks like a game.

Each month took 10 minutes to execute with the first month taking longer as they worked things out.

One month I forced zero fish caught due to a flood. The flood also destroyed the food the fishermen had saved up ahead.

Some of the kids "got it" much quicker than others. Not surprisingly, the girls caught on quicker than the guys. I think it is a cooperative vs. competitive thing.

Time went VERY quickly and I had to end the simulation because we ran out of time. So I forced a cheating event.

I asked who wanted to be a bad-guy. One of the fishermen volunteered. I had him sell defective fish (we were using lima beans as proxies for fish) so he was trying to pass off splits of beans as complete fish. The next month I killed off all families that obtained fish from the bad guy, telling the it was tainted from the flood,,,,he had dried it out and sold it as good. By a stroke of luck the two weaver families were wiped out.

Only one person had four socks to become 'the mayor of the dead' as she phrased it. And of course she was to die the next winter.

One guy kept trading with the bad-guy even though he had effectively exterminated the village. He did not get it. I guess shunning is not a natural act.

One place I did not effectively execute was to draw heavy, double lines back to how the importance of names is important to GOD. I hope I left them with the message that 'name' was your job, your bank account, your pantry and insurance policy all rolled into one ball.

Since I believe that foundational truths and relationships do not change with complexity, they only become masked or obscured; it makes me ponder the effect of training vast numbers of people to walk away from signed contracts, that is, mortgages and credit card debt. Will the village headman be known as "The Mayor of the Dead"?

The simulation could have been run faster than 10 minutes for every month. But running an economy without the benefit of money is an intensely social proposition. That comes very naturally to 9th graders and I wanted the experience to be theirs. I wanted them to own the successes and the failures. So I let them take a luxurious amount of time to transact thier trades. In hindsite, the efficiency of money separates us from a wealth of social interactions.

"Character equity is one of the few forms of wealth that is not diminished by inflation." -Joe H.

Thank you, Joe, for an important and insightful lesson. It is a fitting story for Christmas Eve. In Survival+, I identify ethical/spiritual decay as a primary feature of the interlocking crises that lay ahead for this nation--and the deafening silence in our culture and mainstream media on this subject makes me feel like a lone voice in a wilderness of corruption and an economy of fraud so ubiquitous that its residents no longer even notice their debasement.

This is why "maintaining personal integrity" is one of my key "survival techniques" in the decades ahead. That the loss of integrity in our culture goes unnoticed and unspoken makes me think of Lincoln's Second Inaugural Speech and his comment that "Men are not flattered by being shown that there has been a difference of purpose between the Almighty and them."

Yet, if God wills that it continue, until all the wealth piled by the bond-man's two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash, shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said "the judgments of the Lord, are true and righteous altogether."

With malice toward none; with charity for all; with firmness in the right, as God gives us to see the right, let us strive on to finish the work we are in; to bind up the nation's wounds; to care for him who shall have borne the battle, and for his widow, and his orphan -- to do all which may achieve and cherish a just, and a lasting peace, among ourselves, and with all nations.

The crush of work and events has caused me to fall behind my email once again, so please allow me to thank everyone who sent their holiday greetings and best wishes to me: thank you for your kind thoughts.

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Thursday, December 23, 2010

The Last Christmas in America

The end of cheap oil, the end of work and the end of affluence: welcome to The Last Christmas in America (TLCIA).

As unemployment rose toward 10%, the January 1975 cover of Rampartsmagazine blared: The End of Affluence: The Last Christmas in America. (TLCIA)

The government responded quickly to unemployment, high inflation and rising budget deficits: it started manipulating data to mask the politically inconvenient realities of rising inflation, unemployment and deficits by playing switcheroo with Social Security Trust Funds, inflation data, etc.--games it continues to play to cloak reality from the media-numbed public.

The Bear market, and thus the "real" recession, lasted 16 years: from 1966 to 1982. Now statistics are echoing that last great recession: rising prices for essentials, systemically high unemployment and stagnant wages.

We all know the 16-year recession/malaise had a "happy ending": huge new oil fields were discovered in Alaska, the North Sea, West Africa and elsewhere, ushering in a renewed era of cheap, abundant petroleum. President Reagan "saved" Social Security for a generation by raising contributions paid by employer and employees, and he heralded a "lower taxes, higher permanent deficits" ideology that is now accepted as the norm: deficits don't matter, even when they reach the trillions, because our good friends the Gulf Oil Exporters and Asian exporters will buy all our debt forever and ever, keeping interest low forever and ever.

(And if they drop the ball, then the Federal Reserve will print money and buy the Treasury bonds. Sweet! We don't need any external buyers, just the Federal Reserve.)

Then the U.S. created and launched two revolutionary technologies which both created new wealth around the globe: the personal computer (microprocessor and cheap RAM) and the Internet (TCP/IP, Ethernet, and the commercialization of Tim Berners-Lee's World Wide Web with free browsers) spawning the generation-long boom of the 1980s and 90s.

But when the wheels fell off that boom in 2000, the U.S. did not create a new engine of wealth: it opted instead for a devilishly insidious simulacrum of wealth: debt which rose at an exponential rate throughout the economy.

Borrowed money and phony financial legerdemain (mortgage-backed securities, derivatives based on the MBS, etc. etc.) from 2000-2007 created what I have termed a "bogus prosperity": no actual new wealth was created, only a brief and doomed bubble of debt-based housing valuations was inflated which followed the classic model set down by the Tulip Craze in Holland hundreds of years ago: insane boom, crushing bust.

We have to revisit the early 1970s for a reality check. In post-industrial America circa 1970, a huge surplus of food was grown by a mere 2% of the workforce. The cornucopia of manufactured goods was produced by about 20% of the workforce (hence the phrase "post-industrial"), and other than essential government services like the Armed Forces, police and the courts, the rest of society's work was either service-oriented paper-pushing relating to affluence (insurance), do-good selfless work (Peace Corps, churches) or leisure-related: entertainment, films, travel, amusement parks, stereos, clubs, etc.

This was not all fantasy. A friend of mine supported an entire house of hippies in late-60s Pittsburgh on his union steelworker job, and had plenty of money left to save for his trip to San Francisco. (As I recall, the rent for the big old house was less than $200 per month.) Hippies were the first ardent dumpster-divers/scavengers, driven not by poverty but by the idea that since that our society generated so much waste and surplus, why bother working?

As noted here many times before, the purchasing power of American wage-earners reached a plateau around 1973 and has been declining ever since.

One key point which is usually overlooked when comparing "The Last Christmas in America" circa 1974 and TLCIA circa 2010: the wealth distribution in the U.S. was much flatter then. CEOs of financial institutions did not earn $10 million each; there were no hedge funds with chiefs pulling down $600 million each (yes, that was the average "compensation" for the top ten fund managers at the hedgies' glorious peak), and even minimum wage ($1.60/hour in the late 60s, I know because my wage stub recorded it) bought far more goods (purchasing power) then than minimum wage does now.

Not only was gasoline cheap, but housing was far and away cheaper than it is today. Just about any G.I./Vet could buy a house with his/her V.A. benefits (3% down), and anyone else could scrimp and save for a few years and then buy a house for 2 or 3 times their annual wage at an interest rate around 6%.

Even in the the most expensive city in the U.S. in terms of cost-of-living, Honolulu, I was able to rent an old studio apartment in 1973 for $120/month--$525 in today's dollars. My tuition and student fees at the University of Hawaii per semester in 1971-75 was $117--$514 in today's dollars. Can you find an apartment in a high-cost city for $500 and go to a four-year state university for $500/semester (not including books of course)? No. Was the state or Federal government running stupendous deficits to provide this education? No.

Meanwhile, in TLCIA circa 2010, obscene "compensation packages" are defended as "free enterprise." Well, what did we have in 1973? Unfree enterprise? Amidst all the ideologically convenient defenses of heavily skewed "compensation," we have to admit that the dream of affluence combined with leisure was based on the presumption of society's wealth being distributed somewhat evenly, not by a Communist central state but by the "free enterprise" system and modest common-sense government regulation (limited work hours, overtime, minimum wage, etc.) which protected employees from the excessive exploitation of the late 19th century and early 20th century Monopoly Capitalists.

That dream seemed at hand in 1970. Now, after "the limits to growth" were mocked by those expecting ever larger oil fields to provide endless abundant cheap oil, we find that Peak Oil was merely put off a generation; there have been no new discoveries of super-massive oil fields since the early 1970s, and the supposedly abundant alternative petroleum sources like shale oil are horrendously costly to exploit, for they require vast quantities of energy (mostly natural gas at the moment) to be consumed to extract the oil.

Now we face a future which might well be called the End of Work for up to a third of the current workforce. Since agriculture employs about 2% of the workforce, industrial/factory production about 11%, essential transportation and essential government each a bit more, we have to ask: in an economy in which 70% of GDP is consumer spending, how many jobs are actually essential? How much actual wealth is being created/produced in the U.S. and sold overseas? Is giving people with Medicare coverage 13 costly and often ineffective medications and endless MRI tests actually creating wealth, or it mostly squandering it?

We might also ask: how much of the consumer economy is superfluous if wage-earners shift values and decide saving is more important than consuming? How many malls, storefronts, internet retailers, restaurants, fast-food joints, etc. can a newly-frugal economy support? How many dog-walkers, derivative salespeople, nail shops, carpenters, financial planners, realtors, etc. does an economy need if the FIRE economy (finance, insurance and real estate) is shrinking?

Based on the tremendous size of the service economy, construction, finance and government, I have estimated that 30 million jobs out of the current 134 million-strong workforce are superfluous. Many government positions are essential: police, meat inspectors, rangers, tax collectors, meter maids, etc., but as Mish so thoroughly illustrated in his detailed analysis of the California state budget ($120 billion or so), dozens of agencies could be eliminated without any visible effect on the economy except to the wage-earners who lost their jobs.

If 20 million jobs disappear (9 million have already vanished since 2008), so do all the taxes those wage-earners paid; if 10 million homes go through foreclosure, the inflated property taxes the owners once paid will disappear, too. Once businesses close, it's not just wages which disappear: all the junk-fees governments levy disappear, too: the business taxes, the licensing fees, the permits, transaction fees, etc.

Does anyone think all these taxes and levies can fall and government employment will be funded by some other source? Yes, the Federal government can borrow money for a few more months or years at low interest rates; but soon, the surplus money which has piled up in exporters' accounts will be gone, and the endless borrowed trillions will actually start costing real money--money that will be diverted from government employment to pay the interest on all that wonderful debt everyone loved when they got a piece of it.

So how does a society deal with The End of Cheap Oil and the End of Work when it also means The End of Affluence, even for many of those with jobs? How does government deal with declining tax revenues and rising interest rates?

The death throes of the debt-based consumerist lifestyle are already visible beneath the glossy propaganda of "rising revenues this Christmas season." My friend Richard Metzger (founder of the amazing Dangerous Minds website) neatly summarized the reality of our "consumerist paradise":

When we first met in 2007, there were so many topics we could have started with, but the most pressing one seemed to be, to both of us: 'What is "it" (Depression II) going to actually look like?' Or what will it look like in a year, then two, then five? What will be the visible and social manifestations of the crisis? Let's start with that here, shall we?

What strikes me at the moment, is just how poor the retail environment is. Well poor for the merchants, great for the consumers. Would they have slashed prices this deep, this early, unless sales were off on an absolutely monumental scale? My wife and I were walking around the mall the other day and the prices now are lower than they'd normally be at the end of February, when they REALLY want to get rid of stuff.

Here in Los Angeles many of the chi-chi modern furniture stores and small clothing boutiques are closing or have closed already. Not to type out such a Grinchy prognosis, but here it comes anyway: I think it's obvious that as bad as this retail season has been --if 75% off isn't flat out DEFLATION, I don't know what is-- this will still be seen as the "last" great, old school American spend spend spend Christmas shopping orgy for some time to come.

Christmas 2010 will be the historical bookend of the consumer era.(Emphasis added: CHS) The last gasp. I don't see any possible chance of its return. This culture of spending, the conditions won't be there for it, nor the desire to consume like that again. I think it's simply being beaten out of us.

But, further to this point, with the tremendous implosion in the FIRE economy and the huge aggregate losses in the GDP from Wall Street, the banking sector and the real estate bubble (all essentially non-productive enterprises seen from hindsight, none likely to rebound for decades), when these losses get combined with a massive, massive slowdown in US consumer spending --which serves as a sort of gigantic furnace for much of world manufacturing and trade, of course-- we'll have an America where the GDP returns to the level of... what year?

You often read economists writing about real estate saying that housing prices might eventually return to pre-bubble levels by 2014, but what about the GDP? A lot of the Ponzi scheme profits of Wall Street and the hedge funds can now be seen to never have existed in the first place. There's been unprecedented wealth destruction in real estate. In practical terms for a reasonable guesstimate of the true United States Gross Domestic Product, might this mean a return to the GDP of, of say, pre-dotcom bubble America, taking the years 1994 to 1996 as an arbitrary yardstick?

Subtract the FIRE industries, throw in the consumer/debt shut down and how much THAT will subtract (I can't guess at that number) we are looking at one hell of a haircut for the GDP. It won't be anything like a 4% contraction-- already an epic nightmare-- it'll be an abrupt implosion of some high percentage of the GDP.

And when America's rapidly growing national debt is measured against a GDP that looks closer to 1996's tally than to 2006's, this is when the word DEFAULT will be on everybody's lips. It will begin to seem advantageous to repudiate the debt before there is no possibility of any sort of governmental spending beyond servicing it. What will that do to the currency, what will this do to world trade, etc.? So many more onion layers keep presenting themselves and it all looks doomed.

Excellent summary, Richard, thank you. The numbers being bandied about to quantify the wealth that's been lost/destroyed in the U.S. in the past two years are truly staggering: $12 trillion has vanished.

The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired debt.What the Fed dreads is the reality we all feel and see: fear of the future due to diminished wealth and shaky incomes. If your assets have been slashed, you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier.

People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more, and banks which cannot dare to lose more money loaning to people who will default have cut off credit to millions of previously rabid consumers of debt.

And let's not forget that much of what is purchased in this frenzy is needless, superfluous crap. My wife saves the most egregiously gift-buying-frenzy advertising circulars, and one from Bed, Bath & Beyond caught my eye.

There is no difference between this "1001 Best Gifts" from BB&B and a parody of consumerist excess. Hmm, how about an "executive standing valet" rack of wood and plastic for $99.99.

To make this poor-quality contraption, a forest somewhere in a Third-World kleptocracy was cut down and precious, irreplaceable oil was burned shipping the lumber to China and from that factory to the U.S. across 6,000 miles of Pacific Ocean.

We know this spindly piece of garbage will break in a matter of days, weeks or maybe if the owner is especially careful, months; then the legs will break loose of the base, the towel bar will pull out, etc. and the "we cut down a priceless rain forest to make this" piece of human handiwork will be put on the curb where a diesel-burning garbage truck will haul it to the landfill along with all the spoiled food Americans throw out.

The 16-bottle wine cellar/cooler from China (labeled Cuisinart for your consuming pleasure) for $199.99 might come in handy storing something once it's unplugged--but a cardboard box will probably do just as well.

I for one will not mourn the last Christmas in America. Good riddance to the flaunting of borrowed money and the heedless, desperate purchase of valueless "goods" as gifts for an insolvent nation awash in too much of everything but common sense, integrity, gratitude, accountability and healthy living.

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