A Contrarian Take on the Dollar's Demise

Can 97% of the punters be right when they're all on one side of the same trade? Everyone agrees: the answer is "yes."

As I type this Thursday morning, the risk trade is merrily bubbling away: global equities are melting higher, along with gold/silver, oil, seaweed futures, 'roo bellies and everything else except the U.S. dollar, which is universally declared doomed.

Something about the complete correlation of all these markets and asset classes bothers me, as does the absolute consensus that the U.S. dollar has only one possible future: down.

Doesn't anyone else sense a disturbance in The Force when 'roo belly futures, coffee, quatloos, gold, Indonesian lumber, German bank stocks, bat guano, etc. all rise in lockstep together? I mean, come on, folks--this is all one trade.

There is only one object of scorn on the other side of this global trade: the universally hated and loathed U.S. dollar.

No wonder. Courtesy of the excellent Jesse's Cafe Americain, here is a long-term chart of the dollar. Yes, it is ugly, and yes, it looks to be on a downward path--except for that flag/wedge which has recently taken shape.

Put another way: there are no Bears left in any trade except for dollar Bears. Bears have been eradicated elsewhere. As a result, there is one guaranteed-to-win strategy:buy the dips on every risk trade.

My contrarian sensibility tingles when literally 97% of the punditry, advisors, and gurus are all confident about the same thing: that the dollar is doomed and gold/silver/equities/'roo bellies/uranium/bat guano, etc. are all "can't lose" propositions.

Yes, yes, oh yes I know that all fiat currencies go to zero, that all currencies are in a race to the bottom and that the dollar has already lost 96% of its pre-Federal Reserve purchasing power, so all we're really talking about is the last 4%--but still, it is striking that 97% of all the active punters, pundits and traders are dollar Bears.

Every once in awhile I skim the views of the various big-name financial pundits and gurus, and I have yet to find any who are making a contrarian bet here. They are all in lockstep, so much so they might as well be wearing cheesy bangled uniforms ("and this medal was for calling the Great Bull Market in 1982") and marching down Wall Street in formation.

Isn't it great when the future is this easy to predict? Who knew it would be this easy to mint billions in profits--and everyone can win by piling in on the same side of the trade. Just bet against the dollar and bet on permanent, raging inflation in tangibles and equities, it really doesn't matter: everything is going to the moon as the dollar inevitably plummets toward zero.

Garsh, I love it when there are no confusing feedbacks to worry about, or any pushback. All the pundits agree: buy gold, timber, emerging markets, private islands, gravel, bat guano--it doesn't matter, it's all going to skyrocket because there is one thing we all know for sure: the U.S. dollar is doomed and going to zero.

No feedback, no pushback, no unintended consequences--forget all that stuff, it's needless because this is so obvious.

Why am I reminded of the initial dot-bomb slide, when all the pundits and brokerage houses were recommending dot-coms at $40 per share, down from $80 and still "buys"? It was all so "can't lose." There was only one wee problem: everybody was on the same side of the boat.

You have to wonder what Jesse Livermore would be doing now that literally the entire investment world is on the same side of one global trade.

I don't usually consider myself easily shocked, but I have to confess the uniformity of conviction right now is breathtaking. Do all these players and pundits really believe the market will reward the 97% of the punters who have piled in on the same side of a trade?

This uniformity of conviction, this belief in an absolute ("real estate never goes down," "the dollar is doomed," etc.) marks the apex of investing bubbles and manias.

Hey, maybe everyone can pile into the same side of the same trade and keep logging fat gains; if so, then we can all become millionaires with incredible ease.

Maybe the dollar will track everyone's expectation to a T. Maybe there are no feedbacks, no pushback, no unexpected bumps in the One Big Trade. Maybe history has truly ended and the inevitable is now visible to all.

Maybe everybody can be right at the same time.

I find it peculiar that when people talk about the dollar's inevitable demise and the inevitability of hyper-inflation, they speak of the dollar not as a political construct governed by political decisions and political will, but as a Force of Nature, somewhat akin to a boulder rolling downhill. To question the dollar's demise is like expecting a giant thundering boulder to suddenly stop in mid-air as it tumbles down a mountainside: impossible.

Maybe it is all this easy and predictable, but my contrarian sense rebels at the current uniformity of conviction and the certainty that the future will track one easily predicted vector.

But I do have one tip: forget rare earth metals. The commodity that's about to take off is bat guano. I understand there's a leveraged ETF that's about to be released, and a bat guano futures market is about to open in Freedonia with 24/7 online trading. You can't miss, because everyone agrees.

Though it seems to have been forgotten, that's when things crash. When Bears have been eradicated, then the trade has become so lopsided that when it rolls over, it does so suddenly. When everyone agrees, then things become highly unstable. It's ironic, isn't it; on the surface, when everyone shares the same convictions and is on the same side of the same trade, things look rock-solid. Yet that very unanimity guarantees instability.


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Phase Shift: The Next Leg Down in House Prices

Housing has supposedly "hit bottom." Perhaps it will drop abruptly in a phase shift to much lower valuations.

Way back in August 2006, near the top of the housing bubble, I suggested a two-part scenario for the housing bust: it would take eight more years to play out, and the declines would occur in sharp downlegs following a phase-shift model.

Phase Transitions, Symmetry and Post-Bubble Declines (August 2, 2006)

Here is the chart I presented at that time as a possible time model:

A few months later, literally at the top of the housing bubble in early 2007, I suggested that a mere 4% of homeowners defaulting could trigger a collapse of the entire U.S. housing market.

That is pretty much exactly what happened, for when the 4% who couldn't pay their subprime mortgages folded, they took down an exquisitely corrupt and vulnerable banking sector and the FIRE (finance, insurance, real estate) economy which had come to depend on it.

Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

As I noted in Phase Shifts, Stick/Slip and the Demise of Our "Socialist" Housing Policy(February 26, 2010), the "recovery" in housing visible in the chart below was entirely the result of a 99% "socialist" Central State intervention/prop job: the Federal Reserve bought $1.1 trillion of dodgy mortgages to mask the bad debt and keep interest rates low, and the Federal government flooded the housing market with fee money via subsidies and absurdly cheap, central State-guaranteed FHA loans.

Now that this massive Central State intervention has ended, housing sales and values are succumbing to gravity. home sales and prices fall:

The National Association of Realtors said Monday that sales of previously occupied homes fell last month to a seasonally adjusted annual rate of 4.88 million. That's down 9.6 percent from 5.4 million in January. The pace is far below the 6 million homes a year that economists say represents a healthy market.

Nearly 40 percent of the sales last month were either foreclosures or short sales, when the seller accepts less than they owe on the mortgage.

One-third of all sales were purchased in cash - twice the rate from a year ago. In troubled housing markets such as Las Vegas and Miami, cash deals represent about half of sales.

The median sales price fell 5.2 percent to $156,100, the lowest level since April 2002.

Sales of new homes tumbled 16.9% in February from the prior month to a seasonally adjusted annual rate of 250,000, the lowest level since the series began in 1963.

The median price for a new home sold in February fell 13.9% from the prior month to $202,100, the lowest since December 2003.

Here we see the first phase shift decline and the "recovery," which is now rolling over.

I submit that the forces acting on price are mutually reinforcing to the point that price will drop rapidly in a second phase shift, with the target noted on the chart: a return to the price levels of 2000.

Once we get into the 2012-14 timeframe, then I expect a third phase shift will drop prices back to 1987 levels. As many observers have noted, bubbles don't retrace to historical averages--they over-correct to extremely low values.

What forces are working to push housing prices to new lows?

1. As I reported on Daily Finance, new mortgage broker compensation rules are about to wipe out independent, small mortgage originators and brokers. Mortgages will probably become harder to come by and more expensive as the "too big to fail" banks will consolidate their grasp on the mortgage market.

2. Interest rates will rise. Most financial analysts are supremely confident that the Fed can keep interest rates near-zero forever. I suspect their confidence is misplaced. As I discussed yesterday, the Fed has backed itself into a corner, where if it pursues QE3 then it will fire up inflation that will destroy profit margins and household purchasing power. If it ceases to buy U.S. Treasury debt, then interest rates will shoot up.

As interest rates rise, the amount of money home buyers can borrow drops. House prices follow this dynamic.

3. Income for the bottom 90% is stagnant. All the bogus "housing is now affordable again" charts floating around all base their rosy conclusions on median income, neatly avoiding the reality that the top 10% has garnered the majority of income gains. Factor out the top 10% and you find real incomes have actually declined for the lower 90%.

The same effect is true of the "wealth effect" powered by the speculative risk trade bubbles in stocks and commodities. These portfolio increases have only enriched the top 10% who own the vast majority of the financial wealth.

So yes, real estate favored by this top 10%--Manhattan, Westwood, San Francisco, etc.-- will hold its own as those benefiting from fat Federal contracts, Wall Street's renewed license to practice piracy, the bubble in lighter-than-air Web 2.0 stocks, etc. try to outbid each other, but for most housing, the support created by demand has just melted like dirty ice on a hot Spring day.

4. There are too many houses and not many buyers. The demographics are this: Baby Boomers are trying to sell to cash out or move, and the impoverished generations behind them cannot afford bubble-era prices. Just because prices have retreated to 2002 levels doesn't mean they're cheap--2002 was already a bubble, as you can see in the chart.

5. The Federal-supported "recovery" is in trouble, politically and financially. As long as the nation obeys the whip of the Fed and allows it to print $1 trillion to buy Treasury debt every year, then the travesty of a mockery of a sham can continue. But as I noted yesterday, this policy is destroying the dollar and the purchasing power of households. That game cannot run for long without political pushback. Saving the "too big to fail" banks and the Financial Plutocracy might be Item #1 on the Fed's list, but it ranks decidedly lower on voters' agendas.

6. Every investor who bought with cash because "this is the bottom" will 1) be underwater and anxious to sell and 2) be out of cash, having bet their capital playing "catch the falling knife" with real estate valuations. Sorry, cash buyers: the knife is still falling.


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I've Got a Funny Feeling About the Stock Market

The dollar has reached a point of double-bind for the Fed: push it down further or allow it to rise, it won't matter: either way, stocks will fall off a cliff.

I've got a funny feeling that all the ramp-and-camp, extend-and-pretend POMO games propping up stocks are about to stop working. That would of course trigger a long, deep slide in equities, because as we all know, it's the Federal Reserve's games which have goosed the market to its current lofty heights. The market's confidence in the Bernanke Put--that is, the belief that the Fed will never let stocks decline-- remains supremely undimmed.

A lot of very good technical analysts see sentiment reaching lows which usually mark market bottoms. I am not so sure about this interpretation, for the investors intelligence readings are still complacently bullish.

Other very good technical analysts haven't yet seen a break in the long-term uptrend, so they too have reservations about any real decline.

Various Wall Street analysts are predicting a "mild correction" of 7% to 10%, after which it's off to the races once again--a pause that refreshes the permanent Bull.

I've got a funny feeling that it's lose-lose time for the Fed's games. here's the basic game plan: inject tens of billions of free money into the "risk trade," i.e. equities and commodities, ramp the futures markets when volume and liquidity are low, and crush the U.S. dollar.

It's practically a perfect inverse correlation: when the dollar tanks, stocks move higher, and when stocks hit bottom then the dollar peaks. Think see-saw: when one tops out, the other hits bottom, and vice versa.

Interestingly, there is a rough correlation with the 40-week (9 month) cycle that many chartists watch. If that holds in the chart of the dollar, then the dollar should rise to a near-term peak in about 8 to 12 weeks. That further suggests stocks will crater.

Notice that the dollar has been driven down to an important inflection point. If the Fed forces it below the 75 level, then that opens the way to 72 and a careening collapse below the line-in-the-sand at 71.

There's an inherent limit to the "drive the dollar down to boost equities" game: inflation, which is already on track to hit 8.3% in 2011 (via Zero hedge).

For there's another see-saw dynamic: the lower you push the dollar, the more all the imports the U.S. depends on cost, generating a loss of purchasing power that is often called inflation.

Here is a simple real-world definition: you pay more for the same (or smaller) goods and (degrading) services than you did in the recent past, though your wages have been stagnant for decades.

Though the Ministry of Propaganda is running full-tilt pumping out statistics that "prove" inflation is near-zero, the recent "you can't eat iPads" heckling of a Fed official reflect the growing disbelief in these official pronouncements.

So here's the lose-lose double-bind: if the Fed continues destroying the dollar, then they will feed the rising-input-costs monster which devours corporate profits like a 10-year old devours Oreos. In a climate where consumers' incomes haven't risen for decades in real terms, passing on higher prices is a non-starter.

So profits will take a hit, and since the market has priced in ever-higher profits, the market will plummet when profits "unexpectedly" decline.

But if the Fed insists on pushing the dollar below 75 in the hopes of pumping up equities, they risk triggering a meltdown of the dollar globally and forcefeeding the rising-input-costs monster until a positive feedback loop kicks in and inflation sinks its teeth into the economy. As noted above, that will destroy corporate profits and thus the stock market's lofty valuations.

I also have a funny feeling about this chart. The NASDAQ, heavily dependent on a few superstars like AAPL and riddled with gaps all the way up from its lows in August, could be topping out not for a few weeks but for years.

The always excellent and provocative Imperial Economics blog of B.C. has published some eye-opening charts which overlay the current bullish utopia with those from previous eras. The sobering conclusion is that if history echoes, then the market is about to roll over in a massive decline that will last a year or two.

As I noted in Sorry, Fed and People's Bank of China: You Can't Have It Both Ways (March 15, 2011), you can't pump up money supply and credit to goose "risk trades" in stocks and commodities without inflating asset bubbles and triggering runaway input-costs, i.e. inflation that destroys profit margins and impoverishes stagnant-wage households.

But if the Fed takes its hands off the game controller and allows the dollar to rise, then equities crash anyway.

In other words, the dollar is at a point where either path leads to stocks crashing.Go ahead and destroy the dollar, and the rising-input-costs monster will gut stocks and impoverish households. Back off and let the dollar rise, and the risk trades (equities and commodities) will plummet.

Take your pick: the result is the same.

Disclosure: I opened a long position in UUP, the U.S. dollar ETF yesterday, and added to my QID short against the NASDAQ 100.


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Is the Recovery "Self-Sustaining"? Here's a Test

Here's a simple test of whether the economic recovery is self-sustaining or not: cut Federal spending back to 2007 levels (a $1 trillion reduction) and cancel all Fed intervention such as quantitative easing.

Federal Reserve Chairman Ben Bernanke has suggested the economic recovery is almost "self-sustaining," meaning it is no longer totally dependent on Federal stimulus and unprecedented Fed intervention for its "growth."

The key idea here is simple: all the extraordinary stimulus spending, all the bailouts and all Fed programs--buying up $1 trillion in questionable mortgages, $600 billion in quantititative easing purchases of Treasury bonds, and so on--was all necessary to "get the economy through this rough patch." At some magical point we are now approaching (or so we are reassured), the private (non-government) economy will start growing organically, meaning that non-State economic activity will generate a virtuous cycle of economic growth that fuels future growth.

The alternative vision is a bit more bleak. In this view, all the Federal Government and Fed spending and intervention have accomplished is encourage the culture of "extend and pretend" and "free money," and raised the vulnerability of the Status Quo to exceptionally dangerous heights.

In other words, from this height, there can be no "soft landing" when the asset bubbles and stupendous Federal borrowing both collapse.

Here's a simple test of whether the economic recovery is self-sustaining or not:cut Federal spending back to 2007 levels (a $1 trillion reduction) and cancel all Fed intervention such as quantitative easing. If the economy is self-sustaining, it will move forward without Federal spending and Fed intervention.

If "self-sustaining" is a fiction, an illusion, a mere figment of propaganda deployed to enable the Status Quo to feast off the remaining productive elements of the U.S. economy, then the economy will absolutely crater.

Let's compare Federal spending in 2004, 2007 and 2010. Remarkably, the Federal government spends $1 trillion more a year now than it did a mere three years ago and $1.5 trillion more than it did a brief six years ago. Here are the numbers from the Office of Management and Budget website::

revenues

2004 $1.88 trillion
2007 $2.56 trillion
2010 $2.16 trillion

spending

2004 $2.29 trillion
2007 $2.72 trillion
2010 $3.72 trillion

deficit

2004 –$412 billion
2007 –$160 billion
2010 –$1.3 trillion

In three years, Federal spending jumped almost exactly $1 trillion, or 36.7%.

Here are the deficits of the past three years, and the estimated shortfalls for fiscal years 2011 and 2012:

2008: $458 billion
2009: $1.4 trillion
2010: $1.3 trillion
2011: $1.5 trillion (est.)
2012: $1.6 trillion (est.)

(CBO estimate for 2011)

total: $6.258 trillion in five years.

And this isn't even the real total being added to the national debt, as “supplemental appropriations” for war costs and other large expenditures are “off budget” and not included in the “official” Federal deficit. The same is also true of funds appropriated to bail out mortgage giants Freddie Mac and Fannie Mae and other financial institutions.

Gross debt increased by $1 trillion fiscal year 2008, $1.9 trillion in 2009 and $1.7 trillion in 2010--considerably higher than the “official” deficit numbers. Debt held by the Public—which includes Treasury bonds owned by the central banks of China, Japan and other countries--jumped up 80% from $5 trillion in 2007 to $9 trillion in 2010.

Meanwhile, the U.S. economy has been treading water. In adjusted-for-inflation dollars,the U.S. Gross Domestic Product (GDP) in 2010 was almost precisely the same as it was in 2007: $13.363 trillion in 2007 and $13.382 trillion in 2010.

So the Federal government will have spent over $6 trillion--almost 41% of the nation's annual GDP--just to keep GDP stagnant. That $1 trillion a year in extra spending is 7% of the GDP, which implies that if the Federal budget returned to the carefree, free-money days of 2007, the GDP would contract by 7%.

And that's not even counting the trillions of dollars injected into the financial system by the Federal Reserve's opaque machinations and money-printing schemes.

So what is America getting for this extra $1+ trillion in Federal spending a year? Just more of the same old Status Quo that did such an outstanding job circa 2008-2010. I have rooted around a conflicting mess of reports on Federal spending, and found precious little of that $1 trillion actually flows to those suffering from the recession.

Consider the direct costs of the Great Recession: extended unemployment costs, and food stamps (now called SNAP, Supplemental Nutrition Assistance Program).

In 2007, SNAP cost around $30 billion. In 2010, costs rose to $68 billion as the number of people receiving SNAP benefits rose by 15.6 million people, or 57% to 43.2 million in October 2010. So costs rose $38 billion in those three years.

The estimated cost of continuing unemployment extensions is estimated at $65 billion. According to this New York Times graphic, total unemployment program costs in 2010 were $158 billion. So together, these two recession-related programs cost about $100 billion more a year.

Let's factor in inflation from 2007 to 2010: according to the Bureau of Labor Statistics (BLS), that accounts for 5% of any change. So $50 billion of that $1 trillion a year can be attributed to inflation.

The $787 billion stimulus package passed by Congress in 2009, the American Recovery and Reinvestment Act of 2009, is being spent over several years: $154 billion in 2009, $353 billion in 2010, $232 billion in 2011 and the remainder over 2012 and beyond.

Roughly speaking, that averages to about $250 billion for each of the recession-impacted years, but it doesn't affect the 2012 Federal spending plan much.

So where is the $1 trillion a year being spent? Around $350 billion a year can be attributed to recession-caused spending: extended unemployment, SNAP and the stimulus package.

That still leaves $650 billion unaccounted for in 2011, and more in the 2012 budget, which is not influenced by the little remaining stimulus spending. So in effect, the sum in 2012 is more on the order of $850 billion, as the stimulus funding drops to around $50 billion.

Next, let's look at the four big Federal programs:

Medicaid:
2007: $276 billion
2010: $293 billion (+17 billion)

Medicare:
2007: $395 billion
2010: $462 billion (+67 billion)

Social Security:
2007: $586 billion
2010: $724 billion (+138 billion)

Defense:
2007: $699 billion
2010: $738 billion (+39 billion)

(other sources list other totals, depending on what is included in "Defense." I leave the Department of Energy and Veterans Affairs as separate departments, but if you prefer to include them, you'll find the total budget appropriations for both of those departments increased by only a few billion.)

So these entitlement and Defense programs account for about $260 billion of the additional $1 trillion in spending. Add in the $100 billion in direct costs of recession and you get at most $360 billion. Add in inflation and you get to $410 billion.

So only $600 billion more each and every year is spent to prop up a voracious Status Quo. From various sources, here are the estimates for the Federal budget in fiscal 2011:

revenues (taxes): $2.3 trillion

(if the economy doesn't implode and the creek don't rise)

spending: $3.8 trillion

deficit--borrowed: $1.5 trillion

That $1.5 trillion is roughly 11% of GDP. The Fed has printed over $2 trillion to prop up the mortgage and Treasury markets, seeking to "extend and pretend" the valuations of defaulted assets held on the books, to suppress interest rates and last but certainly not least, to inject hundreds of billions of dollars in free money to goose the risk trade, i.e. stocks and commodities.

The Fed sees a "self-sustaining" economy as one which "only" needs $1 trillion in extra Federal spending and another $1 trillion in Federal Reserve goosing every year just to maintain the same GDP we had in 2007.

I suggest an addict analogy is more accurate: a high-cost, bloated, corrupt and inefficient cartel-State Empire of high-cost, bloated, corrupt and inefficient fiefdoms is like a heroin-addled junkie. The "high" of GDP "growth" keeps requiring ever-larger hits of smack; any slackening in this accelerating consumption of Marching Powder will send the addict careening into the agony of withdrawal.

So what we really have is a Status Quo that now needs $2 trillion or more in "free money" injected into its fiefdoms and Elites just to keep from crashing. It would laughable if it wasn't so tragic: here is Ben Bernanke, shoving the needle of QE2 into the twitching half-dead addict and declaring that the zombied-out junkie is on the threshold of "self-sustaining" something or other.

The only cure for addiction is cold turkey. By all means let's keep the methadone and nicotine patch of food stamps flowing, but the Status Quo--the fiefdoms and Financial Elites--will have to go cold turkey.

What does that mean? It's simple: you get the same bloated budget you enjoyed in 2007: $2.7 trillion is still a lot of money. But it is $1.1 trillion less than the $3.8 trillion 2011 Federal budget. Even at $2.7 trillion, we'd be running a staggeringly large deficit of $400 billion.

"Self-sustaining growth" ranks right up there with "we had to destroy the village to save it" as a classic of propaganda gone sour.

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Sickcare Will Bankrupt the Nation--And Soon

The costs of the U.S. "healthcare" system, a.k.a. sickcare, are rising at a rate that is three to five times faster than the growth of the GDP--when it's growing at all. That guarantees sickcare will bankrupt the nation within a few years.

Forget the Pentagon and welfare: what will soon bankrupt the nation is our out-of-control malignant sickcare system, a.k.a. "healthcare." The runaway costs of "healthcare" are undermining the nation's economy on multiple levels.

The people actually providing the care know the system is broken. It's not "fixable" via minor policy tweaks or limiting payments to one slice of providers; the problem is systemic.

The country is in a tizzy over public employee bargaining rights and compensation costs, but few ask this question: What is the biggest cause of public employees compensation soaring to unsustainability? Answer: The costs of providing healthcare, which are rising 6% every year across a flatlined economy, and up to 11% per year for public employees.

Here is a chart drawn from Public Pension and Healthcare Costs and Financial Common Sense (February 28, 2011) which depicts how fast-rising pensions and healthcare costs are completely disconnected from the underlying economy.

Public employee healthcare costs in some California cities have been rising an average of 11% per year in the decade since 2000.

Here is what happens to $1 in healthcare costs which increase 11% per year:

1 (2001)
1.11
1.23
1.37
1.52
1.69
1.87
2.08 (2008)
2.3
2.56
2.84
3.15 (2012)
3.5
3.88
4.31
4.78 (2016)

By 2012, these costs have more than tripled and by 2016 they will have jumped five-fold. Once again: does anyone seriously believe these trends are sustainable in an economy which isn't even growing at all once we subtract Central State borrowing and spending?

For context on Central State borrowing (Federal deficits): Here are the deficits of the past three years, and the estimated shortfalls for fiscal years 2011 and 2012:

2008: $458 billion
2009: $1.4 trillion
2010: $1.3 trillion
2011: $1.5 trillion (est.)
2012: $1.6 trillion (est.)

(CBO estimate for 2011)

total: $6.258 trillion in five years.

While healthcare costs are rising around the developed world due to the demographics of aging and more treatment options, the U.S. sickcare system costs twice as much as our competitors' systems.

Medical Care Prices Are Rising Faster Than Overall Inflation (BusinessWeek)

The U.S. spent an estimated $2.4 trillion on health care in 2008, about 16.5% of gross domestic product and a 6% increase from a year earlier. Medical care prices are rising faster than overall inflation, and the burden on consumers continues to grow.

The source of the problem is the "fee for service" foundation of the system. There are no real limits on spending, despite various "reforms" which attempt to limit the runaway costs. Correspondent Quentin VT submitted this article from The New York Times on CEOs of publicly funded hospitals drawing millions of dollars a year in compensation: Immune to Cuts: Lofty Salaries at Hospitals.

I have covered these issues in depth for years:

Healthcare "Reform": the State and Plutocracy Stripmine the Middle Class (Again)(November 9, 2009)

The Simulacra of Change, the Propaganda of Hope (January 20, 2010)

Is Fee-for-Service What Ails America's Health Care System? (January 18, 2010)

Can Health Care Reform Possibly Control Costs? (April 10, 2011)

Sickcare is fundamentally a system of interlinked politically powerful cartels.

Insiders who refuse to speak on the record for fear of antagonizing the powers that be, exorbitant price increases, confidential agreements and a tug-of-war between warring tribes. Is this the Mafia we're talking about?

From the point of view of investigative journalism, it could also describe America's health care industry. Setting aside the politically attractive mantra of "improving access to healthcare," from this point of view the industry is a highly profitable and politically powerful group of companies which operate in cartel-like fashion: that is, they use their clout to limit competition and establish highly profitable pricing.

These observers use the word "cartel" not in the sense of a formal organization like OPEC (the Organization of the Petroleum Exporting Countries) or the criminal activities of drug cartels, but in the informal sense of a small group of companies which dominate specific markets and thus wield significant political and pricing power within those markets.

Why should we care? Experts say that it is a sign of the medical industry's enormous political power that the health reform bill overlooked some of the biggest cost drivers in American medicine.

And if costs don't go down, then the affordability and sustainability of the U.S. healthcare system become questionable over the long-term. The U.S. already spends twice as much as other developed countries on healthcare as a percentage of GDP.

When asked to identify the source of America's runaway health care costs -- U.S. spending on health care has more than doubled as a share of GDP in the past 30 years -- healthcare industries and trade groups excel at pointing to the next guy as the source. Doctors, hospitals, insurers, HMOs, pharmaceutical companies, malpractice lawsuits and the courts which award huge settlements, Federal regulatory agencies, Medicare--scapegoats abound, and so do rationalizations.

If no one industry is responsible, then perhaps we need to look at the entire system of self-serving industries which profit from guaranteed payments to private-sector corporations which involve special political dispensations such as exemptions from anti-trust laws, and a tolerance for ways of limiting competition and insuring highly profitable contracts.

If the healthcare reform bill doesn't really address the cost drivers and the incentives built into the current system, then it's difficult to see how costs can decline.

This system is based on regional networks of providers negotiating with insurers to exclude competitors and set exorbitant prices that are passed on as insurance premiums. While insurers complain about rising costs, they are exempt from antitrust laws and thus they have the power to consolidate smaller insurers within a region and then pass on price increases to consumers and businesses alike.

A recent report by Massachusetts Attorney General Martha Coakley uncovered multiple forms of anti-competitive behavior among providers, including huge price disparities that had no visible relation to any free-market factors. The report concluded that this and other forms of collusive behavior were "pervasive."

Once upon a time in U.S. healthcare, it was the norm to post prices for procedures and care; this is no longer the norm.

Some local providers who post their prices openly, such as Keith Smith, an anesthesiologist with the Oklahoma Surgery Center, find that preferred provider organizations (PPOs) and insurance companies aren't interested in contracting with his group, even though their prices are 70% less than those charged by local not-for-profit hospitals. To Smith, that is strong evidence that medical cartels are making deals with insurers to monopolize services in their region.

To cite another example of the distortions which end up costing the nation twice as much for health care (as a percentage of GDP) as competing developed countries such as Australia and Japan: Pittsburgh has almost as many MRI machines as the nation of Canada.

According to local media reports, Western Pennsylvania has about 140 MRI machines, while the 32 million residents of Canada share 151 MRI machines. And the machines are getting a lot of use: the number of CT and MRI scans (scans other than old-fashioned X rays) tripled from 85 to 234 per thousand insured people since 1999.

While proponents are quick to note that scans are cheaper than the alternative diagnostic procedures, one firm's research found that a doctor who owns his own machineis four times as likely to order a scan as a doctor who doesn't.

As if that wasn't enough to highlight the self-serving nature of "fee for service" cartels, MRI scanner manufacturer General Electric waged a two-year lobbying campaign to roll back cuts in Medicare reimbursements for scans. While the effort proved unsuccessful due to the intense political pressure to reduce soaring Medicare costs, some critics claim that providers simply made up the reduced reimbursements by increasing the number of tests administered.

The only solution that actually addresses the systemic problem is to get rid of the entire fee-for-service structure and break up the cartels. Healthcare must be reconnected to diet, nutrition, fitness, lifestyle and community, and to education and emotional well-being.

The odds of any of this happening are essentially zero, and so we can safely predict that sickcare will bankrupt the nation (with a helping hand from the Pentagon) within a few years.


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