The Devolution of the Consumer Economy

The U.S. transformed into consumer economy that is exquisitely sensitive to debt and the costs of servicing credit. In other words: the bill is finally due, Baby.

One of the foundations of modern economics is the belief that insatiable demand for more goods and services is a permanent feature of humanity. This is also the basis of that other foundation of modern economics, the extension of credit so consumers can buy more now than their savings would otherwise allow.

It was a match made in Heaven--insatiable demand and nearly unlimited credit.Want a shiny new car, but have saved no cash? Not a problem. It will only take a modest monthly payment for 5 years (or longer) to indulge your impulse to have a shiny new vehicle to reflect your individual glory and unique personality (never mind the vehicle is mass-produced; it was "customized" just for you).

The "invention" of mass-marketed credit was one of the great innovations of capitalism. In the Depression, my grandfather paid $1 a week toward my Mom's first bicycle. The town's shopkeeper extended the credit, took the risk of non-payment and earned the interest.

Credit in modest amounts has positive features; with cash in short supply, the storekeeper probably had to extend credit just to book enough orders to keep the doors open.

On the consumer side, if servicing credit costs $1 out of a weekly paycheck of $25, then it's a modest tradeoff with substantial benefits.

In the late 1960s, a new innovation appeared: credit cards, a magical rectangle of thin plastic which enabled consumers to buy virtually anything they desired right on the spot. "Impulse buy" became a reality for anyone who qualified for the magic card.

There is of course a "marginal return" aspect to consumption. The first piece of chocolate cake is heavenly, the second is rewarding, and the third, hmm, no so amazing. Each succeeding piece carries a higher cost and a lower reward/return.

Thus is consumer ennui born. After a steady diet of continuous buying and consumption, the consumer finds less and less satisfaction from the ownership; soon, only the act of acquisition/purchase creates the "high" of satiation and excitement.

Alas, this hit of self-renewal and self-expression via consumption is also prone to habituation. The satisfaction of buying something new only lasts a brief time, a period that becomes shorter as the purchases pile up. Like the rat on the wheel in the cage, it becomes increasingly difficult to buy enough to keep the high going.

There are also some practical limitations, such as where to put all the crap you've bought. Luckily, ever-resourceful capitalism has the answer: self-storage units, which act as "cheap" extensions to store your valuables.

Maintenance costs are another bedeviling practicality. The fun boat must be moored or stored, the third car/truck's insurance must be paid, the vacation home's water lines froze, and the languishing spec house's property taxes--mysteriously higher every bill--must be paid lest the investment to date be lost entirely.

So there are two problems with the consumerist paradise that is the foundation of the U.S. economy. One is that people slowly awaken to the realization they don't really need additional goods and services, as their attention becomes focused on preserving their access to those they suddenly value, such as shelter, food and electricity.

In moving (out of a foreclosed house or on to another job, etc.) they suddenly feel the great freedom of no longer being enslaved to all their stuff; they realize it owned them, not the other way round.

In having to come face to face with their mountains of "cute blouses," old electronic toys, busted Ikea furniture, bicycles nobody rides, etc., then they slowly realize the return gained from buying all that stuff was increasingly marginal.

They might also awaken to the reality that partly why they have no capital or assets is that they squandered much of their income on instant gratification and marginal-return toys of various sizes and shapes, and costly "experiences" such as fine dining and cruises.

It is perhaps no coincidence that the wasting disease tuberculosis was once known as consumption. A single-minded focus on consumption is wasting to assets, income and the soul, and it eventually hollows out the economy built on its reedy, rot-riddled pillars.

Eventually, the costs of servicing the ever-rising debt and maintaining all the stuff exceeds the income of the consumers. I think we're approaching that point as housing declines in value and the costs of credit are rising, despite the Fed's claim that it can hold interest rates near zero forever ("Away, tides, I am Ben Bernanke and I speak for the mighty Fed!")

So what happens when demand stagnates and credit is denied or renounced? For one thing, all the stuff which people can no longer afford will be dumped, as correspondent E.P. recently noted in an email:

Debt/credit is such a distorter of the reality of value and economy. It is so hard to find realistic sellers. I just offered $15k on an older boat to which the seller laughingly responded 'you know the asking price is $50k?'. I nicely mentioned asking prices mean nothing these days and there simply aren't enough uberrich to buy all the luxury assets floating around. Its been sitting there for nearly a year...along with several homes we've made appropriate bids on that often eventually sell for less, or are still sitting there, empty. Simply amazing.

Do you foresee stockpiles of cars/boats/planes in the coming years? A colleague mentioned if we remain patient and wait long enough these things will be available at no charge, simply to be able to afford the maintenance and operation costs....

Presciently said, E.P., thank you. I would add houses to the list.

Everyone who is currently confident in high-inflation-hyperinflation is recommending buying tangible assets. Perhaps that should be narrowed somewhat to tangible assets with a positive return on investment. It seems very likely that the U.S. will be awash in surplus boats, yachts, cars, trucks, houses, exercise machines, etc., as the "owners" (if you bought on credit, and it's now worth less than you owe, then what do you own?) will no longer be able to pay the slip fees, registration fees, insurance premiums, mortgages, property taxes, storage unit fees, etc.

No, conventional economics, demand is not insatiable or permanent, and neither is credit expansion.

The endgame of consumerism is one of the many topics explored in my book Survival+: Structuring Prosperity for Yourself and the Nation.

Readers forum: DailyJava.net.


Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Isabelle G. ($120), for your supremely generous contribution to this site (from Hong Kong)-- I am greatly honored by your ongoing support and readership.

Thank you, Timothy S. ($10/mo), for your spendidly generous subscription to this site -- I am greatly honored by your continuing encouragement and readership.

Read more...

Obama Will Lose in 2012

Predicting that Obama will be a one-term president is easy: Americans vote their pocketbooks.

There is nothing remotely ideological or personal in my prediction that President Obama will lose the 2012 election. Both parties are equally out of touch with reality in my view, and both suppport the same things: a global Empire, an increasingly intrusive Savior State, a shadow banking system which is no longer under the control of State institutions (rather, the banks control the institutions), and various crony-capitalist cartels which fund political campaigns and partner with the Central State's bloated, unaccountable fiefdoms. The only visible difference between the two parties is slight variations in the relative growth rates of the most-favored cartels and fiefdoms.

President Obama seems like a nice guy. Many people said the same thing about George W. Bush. While a likeable personality is a plus in a media-obsessed society, American elections boil down to this: Americans vote their pocketbook, and their pocketbooks will be a lot lighter by November 2012.

President Obama has several key flaws which have doomed his presidency.

1. His leadership style is one of consensus and compromise. This works OK in a caretaker setting in which there are no crises and no demands for bold changes of course. Unfortunately, this era is defined by structural crises, and a leadership based on gaining consensus and compromise is basically a rudderless one in this environment.

2. He does not understand economics or finance, nor is he secure about making decisions on financial topics. As a result he deferred to the "experts," who just happened to be Wall Street cronies and insiders who easily swayed the President with their hobgoblin stories of financial meltdown and ruin if we didn't "save the banking sector from losses."

3. His grasp of history is poor. The same can be said of most presidents, but Obama failed to grasp the historic opportunity to set a new sustainable course for the nation's banking and financial sectors, and thus for its economy. He opted instead to save and protect the corrupt and embezzlement-based banking sector from losses, and he continues to do so with "extend and pretend" policies.

In a similar fashion, he has allowed the National Security State and the Global Empire to expand without any limitations.

4. He has no visible core beliefs beyond a vague sense that the Federal government and its extension, the American Empire, are forces for good. His policies can be boiled down to: support and expand the Savior State and its many fiefdoms, support and expand the Global Empire and National Security State, and allow the banking system and its Power Elites to set the agenda and control the oversight agencies and institutions.

His signature accomplishment, the "Obama-care reform" of the nation's sickcare system, simply extends the power of existing cartels and fiefdoms and delivers an ever-larger slice of the national income to their coffers. In its basic parameters, the "reform" could easily have been supported and passed by socially liberal Republican presidents such as Richard Nixon. There is nothing remotely progressive or radical about "pooling" insurance cartels and wet-paper-bag bureaucratic tests of "the most effective treatments."

These are simply technocratic layers added to a bloated, corrupt, venal and destructive system that already costs twice as much as those of our advanced-economy competitors.

In addition to these flaws, he has made fatal policy errors which doom the economy to implosion by November 2012. All of his administration's policies can be distilled down to these three points:

1. The banking sector is the most important foundation of the economy. The Central State and its proxy, the Federal Reserve, pumped some $14 trillion (by some measures, $23 trillion) in cash, credit, guarantees and backstops into the banking sector and its cloaked twin, the Shadow banking System.

Meanwhile, little to nothing was done for the cash-strapped consumer or citizenry. Why?

2. The "problem" is lack of credit and "confidence." If the State and Fed flood the banking system with credit and "restore confidence" by goosing the stock market, then people will start borrowing and spending again, and everything will be "fixed."

This presumes demand is strong, and all that's needed is credit for people to satisfy their thirst for more goods and services.

Meanwhile, back in reality, people realized they didn't need a third car, fourth TV, 17th "cute blouse," 23rd pair of shoes, etc., and now that their home is worth less than their mortgage (or their remaining equity is minimal), they can't really afford the luxury travel, boats, etc. they enjoyed when they thought their house would keep rising in value forever and tapping that rising equity was painless.

Demand is slack because everyone who could afford more crap already owns more crap than they need or even want. The percentage of the populace who would like more stuff cannot afford more stuff. Their household incomes and wages are declining, and their expenses for essentials are rising.

The Fed's largesse to banks (free money in unlimited quantities) doesn't reach them; all it does is boost assets held by the top 10%.

3. Boosting the assets of this top 10% (or 20% if you include those who have equity of some sort beyond the $2,500 in their IRA) will cause a "wealth effect" that will "trickle down" to the lower 80% as the top 20% buy more Coach handbags, enjoy fine dining at tony upscale restaurants, etc.

Unfortunately, this may help boost Coach's profit margins, but the vast majority of the "trickle-down" consists of low-paying retail clerks and busboys.

In other words, the "wealth effect" is bogus, a charade deployed to defend the pillaging of the economy via financialization and Fed intervention.

4. Pushing the dollar lower in a "beggar thy neighbor" currency war is the best way to boost the U.S. economy. Apparently no one in the President's team looked at financial history to identify the nations which grew rich and powerful by debasing their currency.

In a perverse blowback to this misguided policy, corporate profits earned overseas were certainly goosed, but so were import prices, one of the reasons (along with the Fed's easy-money quantitative easing) for rising costs to consumers.

If you set out to design a policy that impoverished 80% of the citizenry and channeled a larger share of the national income to the top 10%, then this is precisely the set of policies you would pursue.

Nothing important has been fixed; nothing important has even been addressed. The institutions of governance are captured and corraled by the monied Elites to the point that the government has lost control of its own institutions, which now rule as quasi-independent fiefdoms. The citizenry, bought off on the cheap by stale Bread (rapacious student loans, food stamps which offer the veneer of normalcy, extended unemployment benefits so no angry mobs form, etc.) and dazed and distracted by the Media Circus, keep quiet in their complicity, while the Power Elites revel in the freedoms offered by a caretaker Administration.

If President Obama had fought for fundamental structural reforms and lost, he would still have support. Yes, Congress holds the pursestrings, but let's not forget the President appoints his own staff and advisors, and wields great power via Executive Orders. He could have submitted a 5-page Financial Reform Bill and promised to veto anything else. If the Power Elites watered it down, then he could have vetoed it and gone directly to the public. But he did none of these things.

Courtesy of correspondent George B., here is a chart of public and private debt over the past decade, from the St. Louis Federal Reserve. Notice that all the Administration and Congress have done is boost Federal debt to replace the "missing" private debt (missing because incomes are declining, housing equity has crashed and the consumer overborrowed for a decade).

This is mindless Keynesian policy on auto-pilot. As I have reported before, the Federal Government is borrowing and spending some $6 trillion in a mere four years, almost doubling the nation's debt, and all that's been accomplished is the Power Elites' share of the national income has risen and GDP has flatlined.

The structural dislocations and imbalances remain firmly in place; a financial sector dependent on fraud has been "saved," and an economy sick with an addiction to rampant financialization has been given plenty of smack to keep it from going through a desperately needed withdrawal.

The Keynesians have no answer as to when the economy will "recover" without the Central State borrowing 11% of GDP every year to prop up its various cartels and fiefdoms. They have no answer because they have no understanding of the imbalances, the fraud, the financialization or of the feudal partnership of the State and crony-capitalist cartels.

Obama has lost his "progressive" base, because he's done nothing remotely progressive. He has lost the middle because his Administration has overseen their gradual impoverishment at the hands of Financial Power Elites. He has offered them phony facsimiles of reform slicked down with the tiresome "soaring rhetoric" of a con artist so besotted with his own story that he actually believes the BS himself.

He can count on the public-union vote and a few of the State fiefdoms he's enriched and enlarged at the expense of the common good, but as the addict (the economy) goes downhill, slowly destroyed by the ever-larger doses of smack administered by the Fed and the Central State, then the consent of the governed will be irrevocably lost--not just by President Obama, but by the entire Status Quo.

The President is now a candidate hoping to scoop up a cool $1 billion to blow on another long, greasy media blitz, but I would be surprised if he rakes in much from the commoners and serfs straining to keep the wheels of their household finances turning. He will of course collect big bucks from various crony-cartels and contractors who have benefited from his bogus "reforms" and unstinting support of the banking sector, but his true-believer supporters will be thinned down to a few Elites, die-hard Democratic hacks and the delusional by mid-2012.

His opponents may fare little better unless they are willing to tackle the dominance of crony cartels, government fiefdoms and Financial Power Elites whose fat fingers remain firmly on the throat of the fast-expiring nation.


Readers forum: DailyJava.net.


Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Wayne L. ($20), for your exceedingly generous contribution to this site-- I am greatly honored by your support and readership.

Thank you, Carl G. ($5/mo), for your most excellently generous subscription to this site -- I am greatly honored by your longstanding encouragement and readership.

Read more...

The Grand Failure of Conventional Economics

The "fixes" of conventional economics such as Keynesian stimulus will all fail catastrophically within the next 10 years.

The next decade will see the complete failure of conventional economics. Why is this so?

If we take the very long view, we find that all of conventional economics developed in the era of ever-cheaper, ever-more abundant energy and the miraculous "low hanging fruit" productivity gains made possible by cheap energy and the tools of mass production and industrialization. Like a creature that was born in the morning and has only seen daylight, conventional economics has never experienced night and so it has no conception of darkness.

This is true of classical, neo-classical, Marxist, Socialist, Keynesian, Neoliberal, "Capitalism with Chinese characteristics," etc.

Not one of these ideological strands of conventional economics recognizes the limits on conventional "growth" as measured by GDP, increased production, etc.When the planet's population stood at 500 million, there were sufficient resources to enable a doubling to 1 billion. Then 1 billion tripled to 3 billion, which doubled to 6 billion. Now, the 600 million high-energy-consumption "middle class" of post-industrial economies is expanding four-fold to 2.4 billion.

There simply isn't enough oil on the planet, in any remotely plausible scenario, for 600 million of China's 1.3 billion people to live on an American scale of oil consumption, not to mention 600 million of India's 1.2 billion, and so on for every developing economy.

As population and energy use per capita have expanded, the curve of consumption approaches an exponential function. Frequent contributor Harun I. has often commented on the impossibility of this curve continuing in the physical world we inhabit.Exponential Growth and Depletion: Chart of the Century? (May 3, 2010)

Here are his recent comments on the impossibility of limitless growth as defined and measured by conventional economics:

Think about what pension funds expect, 8 percent per annum. Let's think about this in terms of inputs and output. For simplicity's sake let's round to 7%. This means that every ten years inputs have to double in order for outputs to double. On the finite sphere that we call earth this reaches its limit at a pace that accelerates. Imagine that today if we were to make two iPads per household. In ten years we would need to make four, then eight, then sixteen, etc. We already have gone from one car per household to two. Since four cars per household is unlikely all eyes are upon China (brace for disappointment).

This goes back to my discussion on thermodynamics. The net energy required for every chemical reaction is constant. In a finite realm, more of something cannot be made. If stranded at sea with few rations of food and water, you can consume it all in one day or portion it out. Regardless of what is decided there will come a point where nothing is left. This nullifies the notion that each successive generation can have a better quality of life. Within the finite sphere of earth, this is simply not possible.

Many smart people have placed their hopes on technological innovations such as nuclear power, fusion, biofuels, and so on. As I have noted here many times, under close examination, each of these promises of limitless cheap energy either violate the laws of thermodynamics or they have severe limits in scalability, cost, waste, etc., or they end up being dependent on cheap, abundant oil for their functioning in the real world.

Others look to innovations such as iPhone apps to provide "growth," conveniently forgetting that an iPhone app is just as dependent on electricity, security, a power-hungry Internet, etc., as a sewage system, highway network or any of the other infrastructures of modern life.

Nothing in conventional economics of any flavor suggests how to create "growth" when oil is scarce/rationed and it costs $300 per barrel. Having been conceived in daylight, conventional economics has never experienced darkness, and has no way to conceptualize a world without "limitless growth."

Behind today's carefully contrived façade of normalcy, the only limitless resources are paper money and propaganda. Everything else is limited by real world constraints. An economy which consumes ever-greater quantities of real-world resources such as oil, and harvests renewable resources such as timber and fish at rates far in excess of their renew rates, will soon encounter shortages and higher prices as those with paper or electronic money bid for the remaining reserves.

The Keynesian experiment is being extended to its ultimate point of failure.Interestingly, China, Europe, Japan and the U.S. are all pursuing the same Keynesian credit-expansion Grand Strategy. It is the single tool available to States and Central Banks imprisoned by conventional economic theories, and they are hitting that single policy switch like cocaine-crazed lab rats clamoring for another hit.

Their lab cage is our world.

The Federal government is now borrowing in excess of $1.6 trillion every year to prop up the Status Quo, fully 11% of America’s GDP and 40% of all Federal expenditures. This stands in stark contrast to the traditional economic view that deficits in excess of 3% of GDP a year are inherently destablizing. Now we borrow roughly four times that much (once we include the off-budget “supplemental appropriations” that run into the hundreds of billions of dollars every year) and the political and financial class evince a complacent confidence that these extremes are sustainable indefinitely.

The globalization of financialization is another conventionally approved system that is unraveling. The world’s central banks and governments are waging an unprecedented “war” on global financial instability using the “battle plans” perfected in the wake of the Great Depression in the 1930s. Unfortunately, they’re fighting the last war, and today’s global financial system is fundamentally different from the one which imploded in the 1930s.

Theirs is not a failure of individuals, but of the whole of conventional economics.

These articles dismantle a key part of conventional economics, the benefits of "free trade":

Economists Are Hopelessly Naive About International Trade

The theory of "comparative advantage" and why it's wrong.

Behind all the elaborate theoretical facades, the foundations of the current system, globalization and cheap, abundant energy, are eroding, and as they devolve then so too will all the promises of "permanent growth" made by conventional economics, along with all the policies and theories that were hatched in the bright light of a long-ago morning.

Readers forum: DailyJava.net.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Larry K. ($20), for your extremely generous contribution to this site-- I am greatly honored by your support and readership.

Thank you, Murat B. ($5/mo), for your wondrously generous subscription to this site -- I am greatly honored by your encouragement and readership.

Read more...

Chart of the Week: Stocks Are Overvalued

A chart from dshort.com of the Q-Ratio suggests stocks are remarkably overvalued.

You won't hear anything about it from the mainstream financial media or the Federal Reserve, but this chart is screaming "stocks are extremely overvalued."Please visit dshort.com's excellent overview Market Valuation: The Message from the Q Ratio for additional charts of the Q Ratio, a measure of stock market valuation.

Although the mainstream financial media is touting low price-earnings ratios and permanently rising profits as the backdrop for a permanently bullish stock market, this chart reveals that stocks are more overvalued now than they were just prior to the Great Crash of 1929. Only the bubble of the dot-com era reached a higher extreme.

There is literally no reason to be bearish on stocks, at least in the mainstream media ("don't fight the Fed," etc. etc.), and there is always a chance that overvalued stocks can become even more overvalued (the "party like it's 1999" phenomenon).

What's remarkable about this chart is the consistency of the highs and lows going back 100 years: the tops and bottoms are within a few ticks of each other, except for the dot-com bubble and the current bubble, both of which were blown by vast expansions of credit, State backstopping/intervention and leverage.

It's also interesting to note that the Federal government and the Federal Reserve intervened so massively that the market wasn't allowed to fall to previous cyclical lows. That further suggests that when the market overcomes the forces of intervention, it might fall below previous lows in a counter-reaction.

But not to worry--that's "impossible."


Readers forum: DailyJava.net.


Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

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

Thank you, Alex H. ($5/mo), for your most-welcome generous subscription to this site -- I am greatly honored by your ongoing encouragement and readership.

Read more...

Gadhafi Seeks Seat on the Federal Reserve

Colonel Gadhafi is seeking to join the Federal Reserve, as his interests align so neatly with Fed policy.

A secret transcript has come to light that reveals a shocking turn of events: Colonel Gadhafi is actively seeking a seat on the Board of Governors of the Federal Reserve System. These stills explain why the Colonel sees himself as a perfect fit for the Board.

April Fools. Except for the part about the Fed destroying America from within.


Readers forum: DailyJava.net.


Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Dominic S. ($10), for your much-appreciated generous contribution to this site-- I am greatly honored by your support and readership.

Thank you, Peter P. ($15), for your most generous subscription to this site -- I am greatly honored by your support and readership.

Read more...