Part 20: Kylie's Painful Injury

Now that QE3 has solved all the world's financial problems, we can turn to this week's chapter of my serialized comic novel "Four Bidding For Love." (Those who find absurdist humor and adult situations offensive, please read no further.)

     The trepidation of a second date is quite unlike the trepidation of the first, and in its own way, even more harrowing. For while both parties know within the first few moments of their first meeting if there is any spark between them, the second is fraught with a much greater uncertainty.
     In the first date, once each realizes the tinder is damp, both can resign themselves to weathering the last hour of their acquaintance in polite fashion. But if the sparks flew off well-struck stones, then the anxiety of the second date is rapidly raised. Each will want to know if their first meeting lit the kindling of romance, or if the waiting tinder failed to light; for sometimes even the brightest spark fades to ash once the hopeful couple parts.
     Thus it was a special torture for Kylie to stand in front of her small closet, clicking through the hangers; it was bad enough trying to decide what to wear, but the excruciating pain in her right shoulder refused to diminish. The two pain-killers she'd gulped down had chiseled little from the insistent hurt, and she feared that the distraction would render her pale and drawn right when she wanted to be bright and funny. For she'd thought of little else all day but Robin and her fear that their attraction was not as mutual as she hoped.
     For his part, Robin was plagued by this same demon of doubt plus its distant but terrible cousin, guilt; for though he and Kylie had made absolutely no suggestion of even the slightest commitment to one another, it felt like a breach of trust to have set a second date with her and then return home to ravish his sexy, willing neighbor.
     In the aftermath, Alexia had discreetly confided that after having a fibroid removed some years ago, she'd been told getting pregnant was now problematic, so the lack of birth control was not a concern. Though each made the proper noises about their sofa love-fest being a spontaneous combustion which would not be repeated, their attraction was visibly mutual. For though each knew long months of romantic drought made the first rain the sweetest, each also wondered if they'd overlooked the obvious, e.g. their very available neighbor.
     And so Kylie and Robin met in a damp cloud of hesitancy—of second-date doubt, and for him, of guilt; and for her, a very distracting physical hurt.
     It had started after her first serve. Facing Mrs. Quigley, a strong, tanned woman of 30 whom she'd played several times recently, Kylie had put her all into her first serve. Perhaps it was her effort to overcome the gusty wind, or a desire to exact a measure of revenge on the well-toned Mrs. Quigley by finally beating her—but not too badly, lest she alienate her—Kylie hadn't warmed up before loosing her full strength on the serve.
     Something had immediately burned in her shoulder, but rather than stop, she'd played harder, trying to work the stitch out. It had been the wrong strategy, for by the end of their matches her shoulder fairly glowed with pain—and she'd lost anyway to her more experienced opponent.
     Having lost, she was loathe to mention her aching shoulder, as Mrs. Quigley seemed well-placed in local society and might become a valuable contact in the future. But Mrs. Quigley had noticed Kylie's stiffness after the match, and in response to her question Kylie had confessed that her shoulder was now burning fiercely.
     "I know exactly what you need," Mrs. Quigley had said with the confidence of the trust-funded wealthy. "A good careful massage, and I know just who can give you one. His name is Jordan Simon, and he only makes house calls."
     Kylie's alarm at this rather intimate business model was evident, and Mrs. Quigley chuckled. "Don't worry, he's beautifully, sweetly gay." Leaning forward, she added confidentially, "He once admitted that he found the female body somewhat repulsive, which may be why he's so wonderful with women."
     "I don't understand," Kylie had said with a sincere frown, and Mrs. Quigley had beamed at her apparent prudishness. "In overcoming his repulsion, you see, he's more careful."
     Kylie nodded dubiously, and Mrs. Quigley continued. "I had the same problem once, so I know pain-killers don't really work. You need a massage to set it right, and I'll arrange for Simon to come by your place this evening."
     "I'm on a tight budget, and can't really afford any splurges," Kylie protested, and Mrs. Quigley waved off her fiscal concern with a breezy gesture. "It will be my little gift to you. I'll pay for a full body massage, because that really helps soothe you after the treatment."
     Kylie's doubts were all too visible, but Mrs. Quigley would not accept no. "Don't worry, Kylie, he's entirely reliable. Everyone I know is terribly dubious at first, and then afterward they're raving about how wonderful he is. You'll see."
     Fearful of losing her tenuous relationship with this well-connected woman, Kylie turned over her phone number and address, and then went home to take two analgesics, hoping the discomfort in her shoulder would fade and she could cancel the massage in good conscience.
     Now, as she rubbed the aching tendons, she was resigned to trying the massage, for she feared she couldn't sleep if the pain stayed this overbright.
     Her other problem was choosing an outfit. This was always a tricky decision; an informal college-girl facade sent an important message—this second date isn't that important to me—but a slightly sexier presentation sent the equally important message that I just tossed this on and gosh, look how sexy I am.
     Complicating matters, she sensed that neighbor Alexia had more of a draw on Robin than he'd admitted. His throwaway confession of Alexia's sexiness did not persuade Kylie that he was as unmoved as he'd stated. Tossing caution aside, she chose a direct frontal offense: a black pushup bra, augmented by a tight black top with cute fringework on the sleeves and a short matching skirt much like the one she'd seen Alexia wear rather briefly¬ —just before she went to work on the sofa with her client—finished off with open-toed half-heels.
     It had been some time since Kylie had experienced unremitting pain— menstrual cramps were the closest analog—and she debated whether to reveal her injury to Robin or try to mask it. Starting a relationship with artifice is getting off on the wrong foot, she admonished herself; so just tell him. Besides, if he sees me grimacing, he'll think I have some weird facial-tic syndrome.
     Robin was also worrying about his attire, but in a young male-like fashion; which is to say that on the way to the cafe he glanced down at his pinstriped Oxford shirt to make sure none of his burrito lunch had left a visible stain. He always wore a tie during sales calls, but he'd pulled it off in the parking lot; Kylie might think him overly formal, and he already hoped that Kylie would grant him a third date.
     The freshening wind was threatening to bend the rolled movie posters he was delivering, and he could well imagine the ruckus that would ensue should any of the overvalued collectibles be damaged in the transfer. He'd also wondered how he was supposed to test the Acme toaster; what if the cafe didn't have an electrical outlet?
     The aftershocks of yesterday's intoxicating sofa session with Alexia continued to roil his thinking; it would be difficult to return to their friendship as if nothing had happened, when in fact something rather glorious had happened.
     It was poor timing, to say the least, to bed Alexia with cool dispatch and then discard her post-haste for a younger woman. Thank goodness Alexia will be gone for two weeks of housesitting in Sonoma, he mused; if something does develop with Kylie, it won't seem quite so crass.
     There was a certain irony, he thought, in the cause of it all; none of this would have happened if Alexia hadn't won the online auction for this stupid toaster.

Next: The Oh-So-Critical Second Date 


To read the previous chapters, visit the "Four Bidding For Love" home page. 

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A note of thanks to those who buy the book: As an independent writer, book sales are a substantial part of my income. I receive no funding from a university, trust fund, hedge fund, think-tank or government agency. I self-publish my books as a financial necessity, as the small royalties (5% to 7.5% of the retail price) paid by publishers cannot support me during the long months it takes to write a book. Your purchase makes it possible for me to continue sharing ideas on the blog and in my books. Thank you.

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Housing, Diminishing Returns and Opportunity Cost

It's not about "saving" housing, it's about saving the banks.

The Fed's policies of keeping interest rates at zero and buying mortgage-backed securities are intended, we're assured, to bolster the housing market by making it cheaper for buyers to borrow money. With mortgage rates under 4% and a trillion (soon to be two) dollars of dodgy mortgages transferred from the banks' tottering balance sheets to the Fed's wonderfully opaque balance sheet, then this appears plausible. But of course it's all a PR ruse, like everything else the Fed says.

If the Fed wanted to "save" housing and not the banks, why not buy mortgages directly from homeowners? Instead of buying underwater mortgages from the banks, why not just buy the entire $10 trillion of residential mortgages outstanding and charge the homeowners the same rate the Fed charges banks, i.e. zero?

The Fed's goal is not to relieve debt-serfdom, it's to enforce it. The entire purpose of the Fed's policies is to ensure homeowners keep paying interest to banks for the rest of the lives, and to encourage those who are not yet debt-serfs to join the serfdom with a "cheap" mortgage.

How did that work out so far? Hmm, 31% of all homeowners are under water, owing more than their house is worth:

The Treasury has also been part of the debt-serfdom enforcement, as it bailed out fannie Mae and Freddie Mac, not the borrowers who pay interest on Fannie and Freddie-backed loans. FHA has stepped in to fill the gap left by the implosion of Fannie and Freddie, and so government subsidies of the mortgage market are running at full steam.

As Lance Roberts brilliantly shows, dumping trillions into housing/mortgages has yielded diminishing returns. Q2 GDP - Nothing Good Happening Here:

I just want to dispel the whole current myth about the importance of a housing recovery relative to the economy. At one point in our history, housing was a very important component of economic growth, currently at a mere 2.6% of GDP, that is no longer the case. So, while we spend billions upon billions of taxpayer dollars trying to bailout homeowners, forgiving bankers of their criminal misdeeds, and not dealing with defunct government agencies all in the name of saving the economy - in reality it has very little effect.

Saving the banks by dumping trillions into housing is classic marginal return. Since the mechanism is broken--housing as the "wealth effect" generator and the source of billions in profits for banks--every $1 trillion in subsidies, give-aways, guarantees and mortgage purchases by the Fed yield fewer benefits to the real economy.

For example, how are those 3% down payment, low-interest FHA mortgages working out? All praise to the new subprime – 1 out of 6 FHA insured loans is now delinquent. Yup, defaults are rising and the taxpayers will be bailing out the banks once again to the tune of tens of billions of dollars.

This raises the question of the opportunity cost of squandering trillions on mortgages and banks: what else could the nation have done with those trillions?Something with a higher return, perhaps, such as upgrading the nation's electrical grid? Something that actually generated sustainable growth because it was a high-yield investment and not a bail-out of fraud, friction and malinvestment?

Once again the question arises: rather than loan $16 trillion to banks at 0%, why doesn't the Fed just buy all residential mortgages for $10 trillion and charge 0.25% interest on the lot? That would cut out the banks, and that is the point here: the Fed's policies are not aimed at "helping housing," they're aimed at protecting the banks' income streams, assets and political power. Since the banks own $10 trillion in mortgages, housing is a key concern of the Fed's "save and enrich the banks" campaign.

Here's the Fed's policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god! 

---

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Christi N. ($50), for your stupendously generous contribution to this site-- I am greatly honored by your support and readership.

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The Next Eurozone Crisis

Europe is currently basking in the temporary calm of official reassurances and half-measures. The calm won't last long.

Two of the more interesting dynamics at work in our world are geometric growth and stick-slip events. Geometric growth (or progression) is also known as exponential growth, where the initial phase accelerates into a steep rise--the famous "hockey stick." Exponential growth is unsustainable and either levels off or crashes.

Here is an example of exponential growth that has not yet crashed: bank assets:

Stick-slip events are of interest because the pressures that lead to sudden, unpredictable rupture are hidden from view. All appears well until the catastrophic break in the Status Quo. Earthquakes are one example: pressure along a fault zone builds to a point that stability becomes instability, and the tectonic plates suddenly slip into a new equilibrium.

Perhaps human crises progress along an exponential curve. I prepared this graphic to depict the progression of human crisis from denial and phony reforms to half-measures and official reassurances to the final phase of uncontrollable crisis and a crash to some new state of equilibrium:

The eurozone is currently in Phase II, basking in the temporary calm of official reassurances and half-measures. Notice that the crisis level, the pressures building beneath the surface, are significantly higher than the initial crisis phase.

In the third and final phase, pressure skyrockets as the time available to reach a new equilibrium is compressed. If we boil away the distracting propaganda and complexity, the European crisis is not one of dodgy debt; it is two interlocking crises:

1. An inherently unstable currency that the Powers That Be in Europe are attempting to stabilize by brute-force money-printing and public-relations artifice.

2. The European model of generous social welfare is breaking down for demographic and financial reasons that are independent of the euro currency crisis. Two workers cannot support one beneficiary, and no state or aggregate of states can borrow enough to mask this reality for long.

Financialization and the build-out of China provided Europe the illusion that the worker-to-retiree/beneficiary ratio could fall to 2-to-1 and be maintaned indefinitely. Now that the fast-growth phase of China's build-out has ended, and the disastrous consequences of financializing everything under the sun are apparent, the illusion has run aground on fiscal reality.

Expectations that have been raised to unrealistic levels for decades are now in the process of being adjusted down to reality, and everyone who felt entitled to promises that cannot be kept is angry, frustrated, disillusioned and seeking a scapegoat for processes that are running entirely independent of the leadership of the moment.

How long will this false calm of official reassurances last? Nobody knows, but if crises track an exponential curve like so many natural dynamics, the next phase of the Eurozone crisis will quickly reach escape velocity and accelerate beyond the reach of politicos and PR.


My apologies to email correspondents: I am under the weather and unable to maintain my usual workload. 

---

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Edward D. ($100), for your outrageously generous contribution to this site-- I am greatly honored by your support and readership.

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The Inevitable Decline of Retail

Online shopping is rippling through the economy, affecting not just retail but energy consumption and the job market.

Correspondent Marc A. responded to my recent entry Is Anybody Else Tired of Buying and Owning Stuff? (September 7, 2012) with an informed commentary on how online shopping is affecting the retail sector. The Web and online shopping is rippling through the economy, affecting not just retail but energy consumption and the job market.

Is anyone else sick of the "buying experience"? No wonder online buying has become so ubiquitous--the experience of shopping to acquire stuff is a form of torture, at least to some of us. Getting there is a nightmare (unless I can bike to the store), parking is a hassle, clerks generally don't know much, and the selection is often limited or skewed to the high end. The "fun" is in leaving empty-handed. Is Anybody Else Tired of Buying and Owning Stuff? (September 7, 2012)

Here is Marc's commentary:

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"Yes, online shopping has much room for growth. Given three days the "Brown Truck Store" has an infinite breadth and depth of inventory. A good example are the $39.95 Asic Gel running shoes I'm ordering from an eBay vendor. "Free shipping". They have my size and are much cheaper than local shoe stores which are also often 'out' of my preferred size and style. I can wait four days.

And it's infinitely cheaper in terms of fuel and energy for one Brown Truck Store to deliver to 600 consumers a day than it is for these 600 consumers to sally forth in 600 vehicles to local stores that are more expensive and aren't nearly as well-stocked. Once delivery densities in neighborhoods grow large enough UPS and FedEx will add additional men to trot the packages up to doors while the truck rolls slowly down the street. They do this at Christmas time already. Soon it will be standard. But this is only an interim solution.

Once delivery density is high enough UPS & FedEx ground will do what Waste Management has already done. Waste Management compelled the use of standard green wheeled bins that can be picked up by a mechanical arm. And they fired the 50% of the labor force that was riding the back end of the truck and emptying garbage cans manually. UPS/FedEx/DHL/USPS will organize the compulsory installation of secure standard delivery bins at curbside. Then the vehicles will be fitted with chutes and computer-controlled equipment that will dispense packages into the bins. And once enough navigational aids are installed the drivers will be fired, too. We will end up with gas-electric robots rolling down the street making deliveries.

The main reason people want cars for shopping is to carry large quantities of 'stuff'. Once this task is replaced by home delivery it will become possible to massively expand public transportation. And this is more easily done than is supposed. Consider the airport style auto rental shuttle vans that carry people to and from the rental car lots. This size of van can run routes in residential neighborhoods to and from stops on the main arteries. Larger buses (which may well be electric trolleys with overhead catenaries) will run on these routes. I've just described the suburbs of the average Russian and Eastern European metropolis.

Similarly, it's unnecessary for one soccer mommy to make 14 trips a week to a grocery in her minivan or SUV. Two or three soccer mommies can make one trip a week and save huge amounts of fuel. These huge available economies and telecommuting (for those who still have office jobs) are why I don't believe in "Collapse" discontinuities even if "Peak Oil" is accurate and occurring now.

Local Shopping

I personally never got used to shopping. I hate it. But a close friend designs merchandising displays and graphics for shopping mall kiosks, "carts" and inline stores. I occasionally lend a hand fabricating and installing merchandising devices that aren't available "off-the-shelf". (Actually off the Loaded In Asia container). This has forced me to spend a great deal of time in and around malls in the last few years.

What I have observed makes me think that we're in for a long transition. Or a steady downward decline depending on your perspective and hopes.

1. The shopping malls will mainly survive at some level. Look at Simon's Malls stock price if you don't believe me. Most cities no longer have real "downtowns". And even the ones that do were generally reinvented as corporate office centers. These malls will primarily survive as women's clothing and accessories centers. Women love to physically shop for clothing, shoes, jewelry, accessories and cosmetics. Caveat: increasing numbers of them just browse and subsequently order online at a discount and have UPS/FedEx deliver. It's not just Best Buy that has become a free Amazon walk-in showroom.

Other mall staples such as movie theaters, food courts, restaurants and "Something Unique For This Christmas Season" carts will survive along with this. Margins are tightening up even more. Caution! You must be a big box retailer, a corporate chain rag store or an immigrant with solid connections back in the home country (or to people buying in China) to buy product at a low enough price in container size loads. The native American owned small independent retail store is an extinct business model. You cannot buy from domestic USA wholesalers, resell and live.

Think about the stores that have already disappeared from most malls.

--- Bookstores.

--- Independent electronics retailers. That local space is broadly down to Sears, Best Buy and Walmart. Only Sears is present inside the malls.

--- Music and video stores have terminal diagnoses.

--- Small housewares. Only anchor big box retailers still handle these inside the malls. Sears, Macy's, etc.

--- Childrens clothing.

2. It's all the strip centers around the malls and located near residential neighborhoods that are in big trouble. Here we can start talking about 25% - 50% vacancy rates. Anyone holding their breath waiting for consumer retail to lead a recovery can breathe now. We are in for decades of stagnant and declining local retail/commercial real estate prices along with vanished jobs. This sector is even more overbuilt than residential housing.

--- We have already lost the store front video rental stores and travel agencies. The store front insurance agencies are following close behind. All three were killed by the Internet. Mortgage companies? Surely one jests!! (Falstaffian laughter) Branch banks are also starting to close in rising numbers. Borders, B.Daltons and Waldenbooks are in advanced decomposition. Books A Million will follow them soon enough.

--- Office Depot, Office Max and Staples are clearly on the way out. Q. What do they sell that Walmart/Sams/Amazon/eBay doesn't? A. Nothing. That front corner of copy & printing services is not enough to sustain them.

--- Target is a tough call. Despite the current high share price (due to 2% cash dividend at current price) I see Target disappearing along with its lower middle class base. Target does not sell groceries. Go to any Walmart Supercenter and watch. At least 75% of the customers at any moment are in the grocery or pharmacy areas. Even the people in the non-food merchandise area have lots of food items in their baskets.

--- Furniture. This business generally moved to a local showroom/regional hub n spoke delivery system over a decade ago. Ikea has been the major semi-exception. Although what Ikea has really done is extend the Sam's Club format to furniture.

I think the next move will be to robotic factories making furniture to order from standard components such as Medium Density Fiberboard, standard steel and aluminum mill shapes, glass, fabrics and other synthetic coverings. "Furniture" consumes a lot of air in transit and incurs inventory holding costs. Even disassembled furniture incurs high inventory costs due to the diversity of product designs. It's best to ship this stuff around as bulk commodity raw materials that are palletized, carried on flat bed trailers and handled by forklifts (which will begin to lose their human operators). We already know that stepper motors and computers are eliminating the profit formerly available from long distance labor arbitrage.

--- Car dealerships. A casual drive down any major retail thoroughfare will show the large and growing number of vacant car lots and abandoned showroom and service buildings.

--- Cell phone, smart phone and tablet dealers and 4G network subscriptions. Considering that Walmart handles all the major providers and hardware, this field is clearly overpopulated. Many more vacant storefronts are enroute.

--- Local appliance dealers have been in mortal danger ever since Home Depot and Lowes started selling major appliances. btw, Home Depot and Lowes both use Sears' appliance service network to do their appliance warranty and repair work. This is another reason for SHLD's seemingly magical powers of share price levitation.

--- Non-mall local retail is swiftly resolving to Walmart, Home Depot, Lowes, major grocery chains and Ace/True Value Hardware stores."

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Thank you, Marc, for sharing your experience and observations. Jim Quinn of The Burning Platform blog has issued an eye-opening analysis of "big-box" retail overbuilding that concludes big-box retail is overbuilt as well: Are You Seeing What I'm Seeing?

The most troubling aspect of the shift to online shopping and networked distribution directly to consumers is the destruction of jobs. I have often addressed the consequences of technology and globalization, a topic I call "the end of work." For example, Labor Day 2012: The Future of Work (September 3, 2012)

The optimistic view is that technology will create more jobs than it destroys. I see little evidence of this in the real world. Many high-tech industries that are viewed as magical engines of growth--for example, biotechnology--are limited in scope and employment. The reality is there are few "blockbuster" drugs or applications that scale up to make a lot of money. If you issue 100,000 PhDs a year in bioscience, it doesn't follow that they will all find jobs waiting for them.

Retail has long been a source of both low-skill entry-level jobs and well-paid careers. Yes, people love to browse and stroll down the mall or shopping district, and this social/novelty function will continue. But can retailers make money off of people browsing? If retail contracts, what does this do to skyhigh commercial property valuations?

The same can be asked of cubicle-farm office parks. As telecommuting and contract labor expand, the need for energy-wasting office parks and long commutes will also decline.

Technology cannot be stopped, and neither can the drive to cut costs by cutting what can be cut, labor. We can legislate certain aspects of how technology is used, and fiddle with tax incentives and trade restrictions, but we cannot make people drive somewhere to go shopping or stop the 3-D printing/fabrication revolution.

What all this calls into question is the entire financialization (debt-based)-consumerist model of "growth" and employment. Decades ago, young men were employed to pump gasoline at gas stations; these jobs all went away as self-service fueling became the norm. At least one state (Oregon, I believe) mandates that all gasoline is pumped by an employee of the station. This rule has created hundreds of jobs that are not necessary in terms of market-demand but that are certainly welcome.

Choices like this will have to be made on multiple levels.

It doesn't help labor that the U.S. sickcare system costs twice as much as our developed-economy competitors pay, and this acts as a 9% of GDP ($1.4 trillion) tax on labor. It also doesn't help that parasitic banks and cartels effectively tax our economy with their skimming.

It's all related: technology that eliminates labor, high costs resulting from cartels, fraud and crony capitalism and the follow-on consequences of those technologies.


Exclusive offer to oftwominds.com readers: 20% discount off MacroStory.commemberships. Tony at MacroStory.com, a full service community for traders and investors, is offering oftwominds.com readers a 20% discount on any membership. Just enter coupon code OfTwoMinds.

Please note that I receive no commission or compensation from this offer, which is presented as a service to readers. 

---

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Creig F. ($10/month), for your splendidly generous contribution to this site-- I am greatly honored by your support and readership.

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If You Want to Help the Poor and the Middle Class, Encourage Deflation

If we step out of the conventional brainwashing about how bad deflation is, we discover it's actually good and it's inflation that's bad.

We have been brainwashed into believing that inflation is good and deflation is bad. The truth is that inflation is good for banks and bad for households, while deflation is bad for banks and good for households.

Since ours is a bank credit system enforced by the Central State, what’s bad for the banks is presumed to be bad for everyone.

This is simply not true. Inflation is “good” for borrowers, but only if their income rises while their debts remain fixed. For everyone with stagnant income--and that's 90% of the nation's households--inflation is just officially sanctioned theft.

The conventional view can be illustrated with this example. Let’s say a household earns $50,000 a year and they have a fixed-rate mortgage of $100,000. If they set aside 40% of their income to pay the mortgage, that’s $20,000 a year. This means they can pay off their mortgage in five years. (To keep things simple, let’s ignore interest.) Let’s say the household’s annual grocery bill is $5,000—10% of the annual income.

If inflation causes all prices and incomes to double, the household income rises to $100,000 and groceries cost $10,000--still 10% of the annual income. In this sense, inflation hasn’t changed anything: it still takes the same number of hours of work to buy the household’s groceries.

We can say that the purchasing power of an hour of labor hasn't changed; whether the hour is converted into $1 or $1 million, that money buys the same quantity of goods and services as it did before the inflation.

But inflation does something magical when incomes rise and debts remain fixed:now 40% of the household income is $40,000, and so the household can pay off the fixed-rate mortgage in only two-and-a-half years.

Why is inflation good for the banks? After all, the mortgage is paid with depreciated money that no longer buys what it used to. Inflation benefits the banks for the simple reason that it enables the household to make its debt payments and borrow more.

Remember that banks don’t just earn profits on interest, they make money on transaction fees: issuing loans and processing payments. The more loans they originate and manage, the more money they make. The more debt and leverage increase, the more money the banks make.

Banks don’t actually hold many of the loans they originate. They bundle the loans and sell them to investors, a process called securitization. The banks bundle the loans into a security such as a mortgage-backed security (MBS) that can be sold in pieces to investors around the world. (Near-worthless mortgages always have a ready buyer: the Federal Reserve.)

The bank made its money when it originated the loan. Future inflation hurts the investors who bought the loan, not the bank. The bank sold the loan and booked the profit. To make more money, it needs to originate more loans. And to do that, it needs consumers who feel richer because inflation has boosted their nominal (face value) income.

It’s all an illusion, of course; it still takes the same number of hours of labor to buy groceries. But this illusion of having a higher income encourages households to borrow more. This is how inflation greatly benefits banks.

But the mechanism falls apart if incomes don’t rise along with prices for goods and services. When incomes stay the same and prices of goods and services rise, the household is poorer-- their income buys less than it did before inflation.

The mechanism also falls apart if interest rates rise while income stays flat. In adjustable rate loans and credit cards, for example, the interest rate can adjust higher; the rate is not fixed.

This is the situation we find ourselves in: 90% of households are experiencing stagnant or declining income, even as inflation raises the cost of goods and services every year. Adjusted for (probably understated) official inflation, the median household income has fallen 8% in the past five years.

Income, Poverty and Health Insurance Coverage in the United States: 2011 According to the Census Bureau, "In 2011, real median household income was 8.1 percent lower than in 2007."

Major expenses like medical insurance and college tuition have been rising at 5% to 6% a year for decades, twice the official rate of inflation.

The Federal Reserve’s policies are explicitly intended to create 3% inflation, as this benefits the banks. But since wages and incomes are declining for 90% of households, the Fed’s policy is stealing purchasing power from households and enriching the banks. The Fed is a “reverse Robin Hood,” stealing from the poor to give to the rich. The Real Reverse Robin Hood: Ben Bernanke and his Merry Band of Thieves (August 31, 2012)

Since we’ve been brainwashed into uncritically believing deflation is bad, we haven’t thought it out for ourselves. Take computers as an example: we can buy more memory and computer power every year with less money. The cost of computers has deflated for decades. Calculated in 2012 dollars, I paid $5,350 for my first Macintosh computer in 1985. Last year I bought a Hewlett-Packard PC for $450, less than 10% of the cost of a computer in 1985, and the PC has 1,000 times the power and memory of a 1985-era computer.

This is deflation in action: our money buys more goods and services every year. How is this bad? If deflation is good when it comes to computers, how does it suddenly become bad when applied to everything else?

Not only is deflation good for the household with fixed or declining income, it’s also good for the economy. How many people could afford a computer in 1985? Very few. How many can afford a computer now that they cost one-tenth as much? Almost everyone can afford one, even those households that are officially near the poverty line ($23,000 for a family of four in 2012).

If inflation had driven up the cost of computers while income stayed flat, even fewer people could afford computers, and manufacturers would have a much smaller market.

It’s important to remember that adjusted for inflation, the median income for the lower 90% of wage earners (138 million people) has been flat since 1970--forty years. Only the top 10% (14 million people) actually gained income, and only the top 5% gained significantly (+90%). The only way 90% of the populace can buy more goods and services is with deflation.

Let’s consider a household that earns $1,000 a month that enables them to buy 100 good and services. 

At 4% inflation, in five years the household will only be able to afford 80 goods and services, because inflation stole 20% of the value (purchasing power) of their income. Those producing and selling goods and services have lost 20% of their market.

At 4% deflation, in five years they can afford 120 goods and services--20% more. If you are producing a good or service, your market has expanded by 20%.

Let’s total the consequences of inflation and deflation. With 4% inflation, households are poorer, as they can buy fewer goods and services, and those producing goods and services see their market shrink by 20%. Inflation is a disaster for everyone but the banks.

With deflation, households’ purchasing power increases by 20% and the market for goods and services also increases by 20%. If productivity rises more than 20% over five years, companies can actually produce and sell 20% more goods and make more profit than they did five years before.

What the banks and their neofeudal enforcer the Federal Reserve want is for households to become poorer but more heavily indebted. They don’t want households to be able to afford more goods and services--they want households to have to borrow more money to buy more goods and services because issuing more loans is how banks make huge profits.

Politicians love bank profits as much as the banks because they collect tens of millions of dollars in contributions (in more honest terms, bribes) from the banks. Politicians don’t care if 90% of American households get poorer every year thanks to inflation created by the Federal Reserve: the 1/10th of 1% live in a completely separate world than the 99.9%.

The banks and their politician partners love inflation because it lines their pockets with tens of billions of dollars in profit. They have worked very hard to convince the 99.9% that inflation is good and deflation is bad, but it’s simply not true. Inflation is a slow, continual theft that robs the hard-working productive members of society and transfers the wealth to the banks and their crony lapdogs, the politicians and lobbyists.

Banks and the Federal Reserve hate deflation because people can buy more goods and services without borrowing money to do so.

If the Federal Reserve’s nightmare comes true and deflation occurs, something else happens that the banks fear and loathe: marginal borrowers default on all their debts. Rather than being easier to pay, the debts become more difficult to pay as money gains value. Marginal borrowers no longer get the “boost” of inflation, so they increasingly default on their loans.

How is it bad for hopelessly over-indebted, overleveraged households to default on all their debt and get a fresh start? Exactly why is that bad? What is the over-indebted household losing other than a lifetime of debt-serfdom, stress and poverty?

The banks have to absorb the losses, and since they are so highly leveraged, the losses drive the banks into insolvency. They are bankrupt and must close their doors.

Note that 99.9% of the people benefit when bad banks absorb losses and close their doors. Only the bank managers, owners and bond holders lose, and everyone else gains as an unproductive, poorly managed bank no longer burdens the economy with its malinvestments and risky bets.

The Federal Reserve’s policy of protecting the wealth and power of the banks while stealing from wage earners via inflation is a catastrophe for the nation and the 99.9% who are not financiers, politicians and lobbyists.

If you want to do something for the poor and middle class, encourage deflation.


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Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
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We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

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