Do We Want Solutions, Or Just What's Easy?

We are so brainwashed by centralized models of state authority that few can even imagine a system where the solution is not one centralized monstrosity ruled by a political/financial Aristocracy but a competing profusion of opt-in, transparent solutions.

Many readers ask me for solutions to the current arrangement's many ills. Seeking solutions is a healthy and positive direction, for highlighting what's broken is not only much easier than proposing solutions, it's a dead-end. Pointing out what's broken is only the first step in crafting solutions.

But I've noticed that what most people want is not a real solution--they simply want what's easy, which means leaving the Status Quo in place but magically making it cheaper and more convenient for them. If the solution requires inconvenience, getting less, accepting more responsibility and making major trade-offs--then it can't be a solution because politicos have overpromised for so many decades that people expect everything to get cheaper (for them, not the system) and easier (for them, not the system).

For example, I proposed a simple solution to the unsustainably costly U.S. healthcare system: The "Impossible" Healthcare Solution: Go Back to Cash(July 29, 2009).

This solution would definitely lower costs and impose discipline on patients and providers alike--and for that reason, it is seen as "impossible," because the last thing patients and cartels/state agencies want is discipline that forces hard choices and rigorous changes in behavior, diet, fitness habits, etc.

Broadly speaking, the first step in any healthcare solution is to radically reduce preventable diseases that result from lifestyle choices by making patients responsible for the consequences and costs of their lifestyle choices.

The next step is to make the real costs of treatment and coverage transparent, so people--patients and citizens-- can see the real costs and make decisions based on the limits of cost, effectiveness, etc.

Both of these steps are absolute anathema in the current system.

I have addressed the systemic ills of U.S. healthcare (a.k.a. sickcare because it profits from sickness rather than from health), for many years, most recently inObamaCare: The Neutron Bomb That Will Decimate Employment (February 22, 2013). Over the years, I have presented a number of options to the present unsustainable, fraud-ridden, costs-twice-as-much-per-person-as-other-nations system that ObamaCare leaves intact:

Healthcare: A Large-Scale Solution (January 4, 2011)

A Sustainable National Healthcare System: Prevention Only (August 20, 2012)

How to Cut America's Healthcare Spending by 50% (August 21, 2012)

Nobody likes any of the practical solutions because everyone wants unlimited care and unlimited choice. Expectations in a system where the government can just borrow another $1+ trillion to pay the bills are unrealistically high, and the feedback from reality, i.e. price, has been eliminated in the current cartel/state-fiefdom system.

Everyone talks about "reform," but real reform is impossible in a bought-and-paid-for "democracy" like ours: Why Reform Won't Work (February 7, 2013).

Even more profoundly, the Central State and ObamaCare are the wrong unit size to provide healthcare that is transparently priced, accountable to the consumer, adaptable and decentralized.

What If ObamaCare, Too Big To Fail Banks and the State Are All the Wrong Sized Unit?(February 25, 2013)

We are so brainwashed by centralized models of state authority that few can even imagine a system where the solution is not one centralized monstrosity ruled by a political/financial Aristocracy but a competing profusion of opt-in, transparent solutions.

Rather than a single top-down system, we need dozens of transparent opt-in choices.

Centralized, top-down systems are quickly stripped of innovation and cost control as the political and financial Aristocracy soon capture the regulatory and governance machinery for their own benefit.

As I noted in The Pareto Economy (February 18, 2013), 80% of the benefits could be reaped for 20% of the money squandered on our corrupt, fraudulent, ossified centralized systems.

We suffer not just from a systemic failure of imagination, but from a child-like desire for what's easy and convenient. This is a theme I have explored many times:

Questioning "Progress" and the Poverty of our Imagination (June 11, 2010)

Oversupply of Old Failed Ideas, Undersupply of New Pragmatic Ideas (July 16, 2010)

Our Dust Bowl Economy (November 20, 2012) 

When the present path cannot possibly lead to success, regardless of the labor and treasure poured into the effort, then risking the unknown by trying something different is the only way forward.

America Is Just Going Through the Motions

What If We're Beyond Mere Policy Tweaks? (February 6, 2012)

Spoiled Teenager Syndrome (January 3, 2013)

A good first step would be to admit to ourselves that we don't really want solutions; what we want is magic: financial magic that makes healthcare free and affordable, medical magic that fixes all our lifestyle ills without forcing any rigorous adult routines and limits on us, political magic that transforms our system from its current corrupt crony-capitalist paradise into a functioning, transparent democracy and economic magic that makes all the unpayable debt vanish so we can borrow another $50 trillion, or $100 trillion, with no restraints on our spending or cronyist corruption.

I have no idea what it will take to jolt us from our preference for magic over realistic, difficult (i.e. adult) solutions, but I suspect a crisis that threatens to completely unravel the Status Quo will be part of the process.


Admin. note: I will be off-line for the remainder of the month, other than a few moments here and there to post new content. Thank you for your readership and understanding. 

---

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)

Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible. And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career. 

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 

---

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Robert B. ($10), for your splendidly generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Read more...

Asset Ownership and Our System of Deepening Debt-Serfdom

Debt-serfs who make the difficult and risky transition to small-scale business owners find they have simply moved to another class of serfdom.

The core dynamic of debt-serfdom is that debt-serfs must borrow money to buy essentials while the wealthy borrow to invest in productive assets.

This is not merely a random result of free-market capitalism; it is the structure of cartel-capitalism in which highly profitable goods and services must be paid for with highly profitable debt.

This need to borrow to pay for essentials is already evident in student loans, vehicles and housing.

The cost of these essentials is so high that few debt-serfs can borrow enough to pay for these essentials and then have enough borrowing power left to buy productive assets.

Those few who do attempt to buy productive assets face regulatory hurdles and costs that limit their ability to own or launch small-scale profitable enterprises.

The net result is a system in which the vast majority of productive assets are owned by the few who then have the means to exploit the many.

This core dynamic of cartel capitalism is not new, as longtime correspondent Bart D. recently observed. This was the core dynamic at the root of Ireland's catastrophic potato famine of the 1840s: wealthy English owned the productive assets (land) and limited the opportunities for enterprises that boosted Irish self-sufficiency and competed with the assets owned by English financiers and landed gentry.

Here is Bart's commentary:

I recently picked up a copy of a novel dealing with the topic of the Irish Potato famine of 1845-6 from a second hand book store run by charity. Author is Liam O’Flaherty and it was written in 1937. It was re-released in 2002. My edition was printed in the 1970’s, so it’s had a following over the years.

Famine

I recommend this book HIGHLY as an insight into how families, communities, governments and economics will/are functioning in impoverished situations now and in the future. I know this because I was astonished (not using that word lightly here) at the similarity in the description of life and government/business portrayed in O’Flaherty’s book in 1845 and that which I have observed closely over many years in remote Australian Aboriginal communities from 1994 to 2012.

Especially fascinating to learn that the English Government provided ‘relief’ loans to Ireland at market interest with a condition that they could not be used to do anything productive. Basically they set up a scheme to pay a small proportion of each community to build roads, but not a cent could be spent on developing alternate Irish-owned industries or businesses for fear it would upset the rich English industrialists.

The English imported cheap American corn meal which everyone was forced to buy with the English Gov. financed wages (closing the loop of giving with one hand, taking with the other and adding in a profit to boot) after the Irish had to export all their own grain and livestock to England to pay the land rents.

The model of resource ownership described in the novel--English landlords owned all the Irish peasant farmer land and set rent at a level that ensured the farmers remained a hairs breadth ahead of destitution even under the best of circumstances--will be, I think, what our own future will look like. Unfortunately.

It’s very well written and engaging for the reader, but hard to read because of its infuriating and tragic subject material. No happy endings here.

One branch of my family (Scots-Irish, County Down) immigrated to the U.S. in the late 1840s, undoubtedly as a result of the potato famine. This history of exploitation and financial tyranny is not entirely abstract to me, and neither is the current American variation of the debt-serf model.

Those of us with experience in starting and operating small enterprises know that dozens of restrictive regulations and administrative costs limit debt-serfs' attempts to invest in small-scale productive ventures. We also know that the Federal Reserve's free funds for financiers enables hedge funds to invest $500 million in the latest software fad, while small-scale entrepreneurs have no equivalent conduit to near-zero cost funding.

Globalized cartels eliminate local pricing power by importing cheap goods from somewhere else. In less globalized circumstances, local producers retain some pricing power (and thus some profitability) because they can produce goods without the cost of shipping from overseas.

But the power of cartels buying millions of units at a time and the low cost of container shipping means cartels can eliminate the pricing power of local small-scale producers virtually everywhere.

Even low-income regions in developing nations cannot compete with global cartels in manufactured goods and agricultural/meat produce.

This is not a random result of free enterprise; it is the direct result of central banks' free funds for financiers that lowers the costs of borrowing and thus production for cartels.

Debt-serfs may legally start home businesses in some locales, but as soon as they become successful enough to compete with vested interests, their fixed costs are increased by regulatory and administrative rules. The resulting erosion of profitability and the lack of access to cheap credit limit their ability to expand without taking on burdensome levels of costly debt or selling their souls to vulture capitalists.

At that point, debt-serfs who make the difficult and risky transition to small-scale business owners find they have simply moved to another class of serfdom, one in which the serfs own an enterprise but cannot expand their capital. As a result, small enterprise ends up being just another version of serfdom, i.e. barely getting by or borrowing more just to survive.

Consider the evidence of the erosion of American small business: Economic Death Spiral: More American Businesses Dying Than Starting.

The net result is a system in which the vast majority of productive assets are owned by the few who then have the means to exploit the many.


Admin. note: I will be off-line for the remainder of the month, other than a few moments here and there to post new content. Thank you for your readership and understanding. 

---

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)

Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 

---

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Tech 100 ($5), for your much-appreciated generous contribution to this site-- I am greatly honored by your support and readership.

Read more...

How Do You Unmanipulate a Manipulated Economy?

Breaking the stranglehold of vested interests is the essential step to rebuilding an economy that isn't totally dependent on manipulated money and statistics.

The word manipulated has the sour taste of officially sanctioned distortion in service of an Elite's interests. At a minimum, manipulation smacks of intent to defraud. If there is no intent to defraud or mislead, then what's the purpose of manipulating statistics, media coverage and official narratives?

As a result, the unsavory reality of our massively manipulated economy is masked by insipid words such as stimulus, easing and investing in our future--as if borrowing and squandering trillions of dollars to further enrich the few at the expense of the many is anything but blatant grift, fraud and embezzlement of taxpayer funds.

Regardless of what slippery words are deployed to mask the manipulation, it doesn't change the reality that the U.S. economy remains a manipulated mess that is dependent on monetary and statistical manipulation. If you doubt the economy is dependent on monetary and statistical manipulation, then ask yourself what will happen to the economy should the Federal Reserve's zero-interest rate policy (ZIRP) be rescinded, and interest rates return to historic norms.

Ask yourself what happens if the Federal government actually declared the increase in public debt as the true measure of fiscal deficits rather than the ginned-up deficit number--a number that is much less than the actual deficit reflected in the annual increase in public debt.

Ask yourself what the gross domestic product (GDP) would be if hedonic adjustments and other flim-flam were eliminated from the calculation.

Ask yourself what the unemployment number would be if the federal government only counted living-wage jobs (i.e. full-time jobs, those with multiple part-time jobs that equal a full-time job, the self-employed who net a living wage, etc.) and counted every resident of working age who is not disabled as employable.

Left unmanipulated, the statistics would no longer be rosy, and both the economy and our perception of the economy would tank.

The irony of relying on manipulation to prop up an economy designed to serve vested interests is the manipulation becomes permanent, as every participant in the manipulated system optimizes their behavior to exploit the manipulation. Once the manipulation is withdrawn, the economy falls to pieces because participants have optimized their actions to extract the maximum benefit from the manipulation.

To attempt to invest productively makes no financial sense whatsoever. Those who win big in manipulated-money economies are those who leverage bets in what's incentivized by manipulation: debt and speculation.

Instead of seeking constructive investments that generate increased productivity in the economy, players optimize their investments to influence the manipulators in charge (politicos, regulators, central bankers, etc.) or speculate with the excess funds flooding the system as a result of monetary manipulation.

An economy optimized for indebtedness and speculation is akin to a spoiled kid who is rewarded for sitting around playing video games and eating chocolate cake and potato chips. The sugar-high of the chocolate-cake diet feeds the psychological addiction of playing counter-productive, meaningless games all day, and the kid's expanding waistline and deteriorating fitness go unnoticed.

Withdrawing the manipulation that rewards debt and speculation is akin to demanding the spoiled kid start running laps and doing push-ups on a diet of broccoli and carrot sticks. The spoiled kid's tantrums will be epic and unending, as he pulls every trick in the book to escape the discipline of reality and seeks a return to the easy life of squandering his health playing games and eating junk food.

That the game-playing and junk food diet are ultimately destructive are lost on the spoiled kid. In the exact same fashion, the U.S. economy will throw a screaming tantrum the second the monetary and statistical manipulation is unwound, and those sectors that have benefited the most from the manipulation will scream the loudest and longest.

Like the spoiled kid who threatens to hold his breath until he expires (anything to escape the discipline of a functioning market), the sectors that have grown fat on the manipulated money will claim they're having a fatal spell, and that their demise will take down the entire economy.

The only way to save the spoiled kid from the destructive lack of discipline is to call his bluff: go ahead and hold your breath until you expire. Everybody knows it was a bluff, and the kid will grumpily re-enter reality once his bluff has been called.

There is no way to painlessly unmanipulate an economy that has grown dependent on manipulation. Addiction can only be broken by going cold turkey: ending all the manipulation and forcing the economy to adjust to the discipline of reality and an unfettered market for money, credit and risk.

The U.S. can survive the demise of its bloated, unproductive banking sector, the Federal Reserve that enforces the sector's power, and the eradication of its numerous classes of parasites and leeches. Every parasitic vested interest will claim it is essential to the well-being of the nation; the truth is entirely the opposite--each is terribly and intrinsically destructive to the fabric of the nation.

Each parasitic vested interest will sob and moan and threaten to hold its breath, whimpering that the discipline of reality and the unfettered market will kill it. If the discipline of reality and the unfettered market will kill the vested interest, then it is in the best interests of the nation to hurry its demise, as breaking the stranglehold of vested interests is the essential step to rebuilding an economy that isn't dysfunctionally dependent on manipulated money and statistics.


Admin. note: I will be off-line for the remainder of the month, other than a few moments here and there to post new content. Thank you for your readership and understanding. 

---

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)

Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible. And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 

---

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, James L. ($5/month), for your wondrously generous subscription to this site-- I am greatly honored by your support and readership.

Read more...

Who Benefits When Bubbles Burst?

Blowing speculative bubbles cannot possibly lead to organic growth because speculative bubbles fatally undermine the real economy.

An astute reader recently posed an insightful question: we all know who benefits from asset bubbles in stocks, bonds and real estate--owners of assets, banks, the government (all those luscious capital gains and rising property taxes), pension funds, brokers and so on. But who benefits from the inevitable collapse of these asset bubbles?

If asset bubbles end badly for virtually every participant, then why does the system go to extremes to inflate them? This is an excellent question, as it goes right to the heart of our dysfunctional Status Quo.

Broadly speaking, there are three possible answers:

1. The system has no choice left but to blow serial bubbles.

2. Bubbles are domestic opportunities for Shock Doctrine-type crises that enable further consolidation of power.

3. Those in charge of the Status Quo believe the fantasy that the next bubble will usher in the long-awaited return to organic growth, i.e. expansion that isn't dependent on central bank stimulus, enormous fiscal deficit spending, ginned-up statistics, etc.

Let's consider each possible answer more closely.

1. The system has no choice left but to blow serial bubbles. The financial/fiscal Powers That Be have reluctantly accepted that the era of organic expansion driven by rising public/private debt is over for structural reasons, but they have no alternative to maintaining the current power arrangement (i.e. vested interests operate the system to their own benefit) other than serial bubbles.

In other words, it's not that the vested interests benefit so much from the collapse of the bubble-du-jour; blowing speculative bubbles is the only tool left for maintaining the illusion that the current arrangement is permanent and sustainable.

In this scenario, the Status Quo has no Plan B should the next speculative bubble fail to inflate.

2. Bubbles are domestic opportunities for Shock Doctrine-type crises that enable further consolidation of power. Naomi Klein's landmark study of how manufactured crises are used to justify further consolidation of power in the hands of the few, The Shock Doctrine: The Rise of Disaster Capitalism, provides a blueprint for how the easily predictable crises of financial bubbles popping can be used to extend the power of central and private banks and various government agencies.

In this scenario, the state (government) and the vested interests that control the state are largely immune to the losses generated by the deflation of speculative bubbles, thanks to the state's ability to borrow essentially unlimited sums of money to cover the losses incurred by private speculators.

Profits are privatized, losses are socialized. Banks and other financier speculators reap outsized gains during the bubble's inflation, and the state covers their losses when the bubble pops.

The central banks are able to extend their already vast powers with ease during the financial crisis of a bubble popping, and this expansion of financial power is symptomatic of the general dominance of financialization over the economy's productive assets.

The problem with this scenario is there are limits on the system's ability to inflate speculative bubbles. Eventually the economy is so hollowed out by debt and speculative excess that bubbles can no longer be inflated. The end result is power has been fully consolidated in the hands of a few, who are then responsible for fixing the post-bubble economy they created to further their own power and wealth.

Post-bubble economies cannot be fixed if the current power structure remains intact, so the Powers That Be face an impossible task.

3. Those in charge of the Status Quo believe the fantasy that the next bubble will usher in the long-awaited return to organic growth. As absurd as this may seem, I don't think we should discount the naivete, real-world inexperience and credulity of those in power--not just in the state, but in think-tanks, academia and central banks.

Keep in mind that these organizations ruthlessly select out dissenters and those with real-world experience. Those who question the Status Quo arrangement in academia, think-tanks, state agencies, central banks, etc., are weeded out: passed over for advancement, sent to Siberia, marginalized or fired. Those left in charge have little real-world experience outside the cloistered halls of power, and little willingness to risk their own rise to power by questioning the Keynesian Cargo Cult's serial bubble-blowing as the magic that will spark organic growth.

This quasi-religious faith cannot be questioned, for the simple reason there is no Plan B. There is no official policy alternative to the Keynesian Cargo Cult's serial bubble-blowing, because any alternative would necessarily disrupt the existing power structure.

It doesn't really matter which answer we choose; blowing speculative bubbles cannot possibly lead to organic growth because speculative bubbles fatally undermine the real economy.


Admin. note: I will be off-line for the remainder of the month, other than a few moments here and there to post new content. Thank you for your readership and understanding. 

---

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 

---

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Gary B. ($5/month), for your most excellently generous subscription to this site-- I am greatly honored by your support and readership.

Read more...

Our Central Planners Are Breeding Failure

How can success breed failure?  It turns out there are a number of dynamics at work.

Success, we’re constantly told, breeds success. And success breeds stability. The way to avoid failure is to copy successful people and strategies. The way to continue succeeding is to do more of what has been successful.

This line of thinking is so intuitively compelling that we wonder what other basis for success can there be other than 'success'?

As counter-intuitive as it may sound, success rather reliably leads to failure and destabilization. Instead, it’s the close study of failure and the role of luck that leads to success.

In the macro-economic arena, I think it highly likely that the monetary and fiscal policies of the past six years that are conventionally viewed as successful will lead to spectacular political and financial failures in 2015 and 2016.

How can success breed failure?  It turns out there are a number of dynamics at work.

Survivorship Bias

Survivorship Bias is the natural tendency to look at the survivors for the keys to success rather than to examine those who didn’t survive, many of which disappear without a trace. If 100 restaurants are founded and five of the new eateries achieve rip-roaring success, business schools usually study the decisions and strategies of the five survivors, not the 95 failures which closed their doors and left no trail of decisions and strategies to study.

As David McRaney observes in his excellent account of survivorship bias, by focusing solely on survivors rather than those who failed, the causes of failure become invisible. And if the causes of failure are invisible, the critical factors that determine success also become invisible.

Even worse, we draw faulty conclusions from the decisions of the survivors, as we naturally assume their decisions led to success, when the success might have been the result of luck or a confluence of factors that cannot be reasonably duplicated.

We are often reassured by the financially successful that perseverance and the willingness to accept risk are the key factors in success.  But as McRaney explains, this is the equivalent of asking the one actor from a rural state who achieved Hollywood stardom for the key factors of his success, on the assumption that anyone else following the same path will reach stardom.

But magazines never track down the 100 other aspiring actors from the same region who went to Hollywood and persevered and took risks but who failed to become stars. Examining the few hundred miners who succeeded in finding enough gold in the Klondike in 1898 and returning with enough of their newfound wealth to make a difference in their life prospects while ignoring the experiences and decisions of the 100,000 who set off for the gold fields and the 30,000 who reached the Klondike but who returned home penniless (if they survived the harsh conditions) will yield a variety of false conclusions, for luck is never introduced as the deciding factor.

The narrative that success breeds success has no role for luck, which is by definition semi-random and therefore uncorrelated to the stratagems of the survivors. Here is McRaney’s summary of the role of luck:

In short, the advice business is a monopoly run by survivors. As the psychologist Daniel Kahneman writes in his book Thinking Fast and Slow, “A stupid decision that works out well becomes a brilliant decision in hindsight.” The things a great company like Microsoft or Google or Apple did right are like the (World War II) planes with bullet holes in the wings. The companies that burned all the way to the ground after taking massive damage fade from memory. Before you emulate the history of a famous company, Kahneman says, you should imagine going back in time when that company was just getting by and ask yourself if the outcome of its decisions were in any way predictable. If not, you are probably seeing patterns in hindsight where there was only chaos in the moment. He sums it up like so, “If you group successes together and look for what makes them similar, the only real answer will be luck.”

Drawing Over-Arching Conclusions from Single Examples

A similar form of bias appears when commentators attribute China’s great developmental success to its command economy, or Silicon Valley’s enduring role as a center of innovation to America’s military-industrial-academic-research complex and the U.S. culture’s broad acceptance of risk-taking.

Who can say with certainty that another model of development might have duplicated China’s growth record but avoided the endemic corruption, environmental destruction and widening wealth inequality that are the negative consequences of the command-economy model?  No one can say, as there are no other Chinas to refer to for comparison.

If duplicating Silicon Valley were just a matter of government support of research and close ties between corporations and universities, there would be dozens of Silicon Valley rivals, as billions of dollars have been expended globally to duplicate the Silicon Valley model. But Silicon Valley remains in a class of its own.  Clearly, Northern California’s engine of innovation cannot be distilled down to a simplistic model that can be duplicated by policies and investment.

The conventional conclusion that the major central banks—the Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of China—succeeded in saving the global economy from depression in 2008-09 is another example of drawing over-arching conclusions about success from single examples.

Since each nation/region is unique, any claim that the policies of any one central bank can be applied to other nations/regions with equivalent success is a highly questionable assumption.  Since there is only one European Union, Japan, China and U.S.A., there are no opportunities to test the assumption that the central bank recipe used in 2008-09 can be applied with equal success in future financial crises in these very different economies.

Previous Policies Have Changed Conditions

One reason we cannot draw over-arching conclusions about the drastic monetary policies enacted in 2008-09 is that those policies have changed the financial-political landscape. As a result, what worked in 2008-09 may not succeed in the next financial crisis because those policies only worked in the specific set of conditions of that crisis. If the conditions have changed, then the strategies that were 'successful' in the previous set of conditions will not yield the same outcome.

For example, central banks lowered interest rates to near-zero in 2008-09 to spark borrowing and refinancing of existing debt. Now that rates are still near-zero, this policy and outcome cannot be duplicated.  Lessons drawn from successes that cannot be repeated are suspect.

Previously successful policies may fail in the next crisis due to diminishing returns: for example, policies that extend credit to marginal borrowers to bring demand forward (i.e. subprime auto loans) eventually reach all but the riskiest borrowers.  Extending those policies essentially guarantees rising defaults as people with no business borrowing money are given credit to maintain consumption.

As defaults soar, lenders record losses and sales decline, as consumption was already brought forward.

Due to diminishing returns, a policy that was successful at first fails when extended.

In effect, successful policies may be time-stamped; not only do they only work in specific circumstances, they only work for a limited length of time in those specific conditions. Beyond those conditions and timeline, the supposed factors of success no longer work.

Are the Outcomes of Monetary Policies Truly Predictable?

As noted above, any policy identified as the difference between success and failure must pass a basic test: When the policy is applied, is the outcome predictable?  For example, if central banks inject liquidity and buy assets (quantitative easing) in the next financial crisis, will those policies duplicate the results seen in 2008-14?

The current set of fiscal and monetary policies pursued by central banks and states are all based on lessons drawn from the Great Depression of the 1930s. The successful (if slow and uneven) “recovery” since the 2008-09 global financial meltdown is being touted as evidence that the key determinants of success drawn from the Great Depression are still valid: the Keynesian (or neo-Keynesian) policies of massive deficit spending by central states and extreme monetary easing policies by central banks.

Are the present-day conditions identical to those of the Great Depression? If not, then how can anyone conclude that the lessons drawn from that era will be valid in an entirely different set of conditions?

We need only consider Japan’s remarkably unsuccessful 25-year pursuit of these policies to wonder if the outcomes of these sacrosanct monetary and fiscal policies are truly predictable, or whether the key determinants of macro-economic success and failure have yet to be identified.

The Seeds of Failure Are Sown in the Initial Flush of Success

Even more troubling is the possibility that these monetary policies have sown the seeds of systemic failure in their pursuit of the extremes that yielded the initial flush of success.

That this initial success might be brief and transitory rather than enduring is rarely considered.  If this is the case—and the slowing global “recovery” suggests this is indeed so—then the success of these extreme policies is illusory, and the truly key determinants of success and failure remain elusive.

In Part 2: The 6 Reasons The Next Economic Rescue Will Fail, we examine why the current unstable "recovery" must topple despite the central planners' best efforts to sustain it. They simply don't have an accurate awareness of the true situation, nor have the right tools and skills to address it -- and so, in their ignorance and fear, are pulling levers that are inconsequential (at best) or will hasten the destabilization of the system.

Click here to access Part 2 of this report (free executive summary; enrollment required for full access)

This essay was first published on peakprosperity.com, where I am a contributing writer. 

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