Don't Bet On The Fed

The era of quasi-religious belief in "Don't fight the Fed" is drawing to a close; the Fed has been revealed as significantly less omnipotent and powerful than previously imagined.

Many observers expect the Federal Reserve to bail out the stock market next Tuesday with an announcement of QE3, another round of "monetary easing" to reinstall the trade in risk assets. If they do, it will fail. The basic reason it will fail is that the Fed's credibility has fallen below a critical threshold. Put another way, the quasi-religious trust in the Fed's infallibility and power to single-handedly reverse global markets has been eroded by reality: QE2 was a monumental failure.

Here's a couple of things to understand about the Fed before you "buy the bounce when they announce QE3."

1. Though nominally independent, the Fed is a political construct. The idea that public opinion and political support have no influence on the Fed is wrong; the Fed's failure to revive the economy while squandering trillions of dollars propping up banks and Wall Street bonuses was not lost on the political class. Though nobody's talking about it, the Fed's abject failure to revive the real economy has greatly diminished its political range of maneuver.

Rumor has it that the word has already gone out to the Fed not to intervene with additional trillions to prop up Europe.

2. The consensus view is the Fed has either engineered the stock market drop to give it a free hand with QE3, or it will be "forced to do something" to combat the implosion of its pet fix to the broken economy, the "wealth effect" of rising stocks.

What these views miss is the Fed is now in a no-win endgame where its best move is to minimize the damage to what's left of its own reputation and credibility. The worst move here would be to double-down on QE3, because if it failed to goose global markets in a sustained fashion, then the Fed's remaining credibility and "magic" would vanish in a puff of smoke.

Chairman Ben Bernanke telegraphed this in his recent testimony to Congress, in which he basically stated that the Fed had done all it could and there was little more it could do other than wave a dead chicken and chant a few old incantations. Though he dutifully repeated the standard reassurances, i.e. "There is always more monetary easing we can do," he was careful to lower expectations that such easing would accomplish anything.

His testimony was that of someone setting up CYA in a major way. (CYA = cover your behind from recrimination when things head south.)

3. The Fed's power rests not in the fabled printing press but in the invisible coin of trust. Now that its fallibility has been exposed, its power, i.e. the magical faith in the guaranteed efficacy of its actions, has been destroyed.

This cloak of invincibility is what generated its power, and now that its grand policy of rescuing the economy via monetary easing and "the wealth effect" have collapsed into smoking ruins, that cloak has been shredded.

The folks running the Fed are not stupid, though they may be profoundly misguided. If they announce a vast QE2-type "easing," they would be taking on a potentially fatal risk, as the entire blame for the coming debacle would fall squarely on the Fed. They know a QE2-type easing will fail, because they have undeniable evidence that QE2 failed.

In other words: since they know QE3 cannot revive the economy or the market, then why on earth would they bet the farm pursuing a policy that's doomed to fail? That would be a form of institutional suicide.

While doing nothing would expose them to political heat from politicos desperate to revive the economy by any means, the Fed is not about to step in front of the train just to satisfy inept congresspeople.

What is the least-risky course of action for the Fed? Announce some wimpy half-measures to dodge the accusation of doing nothing, but also avoid any grand QE3 measures which would shift the blame for the coming meltdown on the Fed.

The Fed is backed into a corner of the board where all the endgame choices are unsavory. The Fed squandered all its pawns, rooks and bishops in 2008, 2009 and 2010. Its political capital has been expended pursuing policies that failed to fix the financial causes of the 2008 meltdown and also failed to revive the Main Street economy. As of yesterday, the "wealth effect" created by a rising stock market has been gutted.

The Fed is on the defensive. When you're playing defense, trying to protect your King and Queen with a single Knight, the Grand Strategy is no longer an option.

4. The limits of monetary policy are now clear for all to see. Even if the Fed announced a $1 trillion buyback of Treasury bonds, the market would go through the motions of a dead-cat bounce, but the faith in the efficacy of that policy has been lost. Neither the political class nor the market believe such a policy will accomplish anything.

In other words, QE3 is dead on arrival. If the Fed announces a massive "surprise" campaign of easing, it will be accepting the entire responsibility for the revival of the U.S. economy and the stock markets. Since we all know any such Grand Gesture will fail, then the Fed would be committing institutional suicide.

5. The Fed's easing does not push money into the economy. Thus is will necessarily fail.

6. The "risk trade" is on the order of $30 trillion. Printing $500 billion and shoveling it into the risk trade over six months is not going to offset the losses from this week, never mind the potential losses over the next six months.

Add all this up and the inescapable conclusion is that the Fed will duck for cover.Maybe the market rallies for a few days, back up to the 200-day moving average in a classic oversold retrace, but the technical weakness outlined in Remind Us Again Why Anyone Should Own Stocks For the Next Two Years (August 3, 2011) cannot be resolved by QE3 for the reasons noted above.

Here is a simple chart of the S&P 500, the SPX. The SPX sits on 1,200, a line in the sand going back to the days in 2008 just before the waterfall collapse in global markets. Note how the SPX bounced off 1,200 back then; perhaps history will echo as the Fed's soothing half-measures will spark a relief rally of sorts.

But then gravity takes hold and reality sets in.

As noted earlier this week: since the U.S. dollar and the SPX have been on a see-saw for years, it's interesting to compare the DXY's recent decline with its action back in the summer of 2008, just before the global financial Ponzi scheme imploded.

The Fed bet the farm last August on QE2, and it lost. It no longer has the political capital or market credibility to make that sized bet again. It is on the defensive, and in survival mode. Big bets and grand gestures have no place in this endgame.

You might be interested in my new book An Unconventional Guide to Investing in Troubled Times, now available in Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.

NOTE OF THANKS: Thank you to everyone who wrote positive, encouraging emails recently--I have read and savored every one. Due to the press of events and workload, I am unable to respond at this time. To those I owe books to: please be patient, I hope to have worked through my backlog by next week.

Thank you to everyone who emailed me in the past week; while I read every email, at this point correspondence is like the incoming tide and my little sandcastle of time and energy has been completely swept away. Thank you for your understanding that I am just one standard-issue individual with extremely limited time to spend on the site.


Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

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, Mike K. ($50), for your astoundingly generous contribution to this site -- I am greatly honored by your support and readership.

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You Want to Create Jobs? Here's How Part II

The U.S. economy is bloated and inefficient; if we want to nurture enterprise and employment, we need to strip away what no longer works or is counter-productive.

The bottom line is that there is a fantasy view of America as a dynamic, innovative, efficient economy, and the stark reality that it is actually grossly inefficient, bloated, wasteful and not innovative in any meaningful structural way.Rather, the U.S. economy and culture have become calcified and rigid, fixated on counter-productive rationales and "projects" which yield no real return but which feed self-protective fiefdoms that stripmine the nation to feed their insatiable appetite for revenue and political power.

If we want to foster enterprise and employment, we have to face the reality that the U.S. economy is horribly inefficient and loaded with deadweight costs. Many seek external reasons for America's sagging economy, and issues of globalization, "free" trade and tariffs are certainly real. But we should keep in mind that imports and exports combined are roughly $3.2 trillion, or about 22% of the GDP.

We should also keep in mind that roughly half of "imports" are actually "related party trade" which the U.S. Census Bureau defines thusly: "Related-party trade includes trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies."

In other words, half of the imports come from U.S. subsidiaries: they are not the result of "foreigners" but of U.S corporations shipping in goods within their global corporate structures to reap immense profits in America.

Globalization is all about reaping vast profits, which is why U.S. corporate profits are near all-time highs: almost 14% of the entire GDP.

So while we need to understand how trade and trade policies have impacted employment, we should start by recognizing the gross inefficiencies and high cost structure of the domestic U.S. economy. No amount of fiddling with trade and tariffs can overcome the domestic bloat and counter-productive "projects" of fiefdoms and cartels.

In You Want to Create Jobs? Here's How (August 2, 2011), I listed three essential steps to repair the domestic economy:

1. Write off the trillions of dollars in impaired and bad debt

2. Cut healthcare/sickcare in half to align it with the costs of our developed-world competitors

3. Make starting small business and expanding small business easier by centralizing and speeding up permitting, regulation and oversight functions of overlapping government fiefdoms

Here are more essential steps which must be taken to lower the cost structure and eliminate counter-productive systemic bloat. Covering each topic would take an entire volume, but in shorthand:

1. Rationalize the tax structure to incentivize productivity and labor and disincentivize speculation and arbitraging of global wage and environmental imbalances.

2. Reduce unproductive waste of energy, and lower the cost structure of energy production in the U.S.

3. Eliminate the "war on drugs" and the drug-prison gulag, and transform drug abuse from a law-enforcement issue to a medical-care issue.

4. Reorient the Federal government's vast expenditures on basic research to creating enterprises and jobs.

5. Revolutionize education from the "factory" model to the "workshop" community model.

6. Reorient "free" trade away from ideological excesses of purity and from policies which benefit corporate profits at the expense of employment opportunities.

Before you fire off a hot email defending the wonderfulness of "free" trade (there is no "free" trade, there are only trade policies with implicit incentives), please read Globalization and Unemployment The impact of globalization on income and employment by Nobel laureate Michael Spence.

Spence does not paint globalization with either a black or white brush--he notes that trade policies are chosen to benefit either employment and labor (as in Germany) or corporate profits, as in America.

Since corporations "own" the machinery of Federal governance, there is no mystery in the policy choice of the U.S. government. Spence's point is that we could choose a different policy and still maintain "free" trade: he argues that trade could benefit employment and labor, and reduce the widening income disparity in the U.S. (The top earners here reap eight times the salary of lower-paid workers, while the ratio is 4-to-1 in Germany. This is the result of national goals and policies, not some "invisible hand.")

As correspondent Arthur B. recently observed in an email, "Tariffs are legal within the WTO (World Trade Organization). The United States has chosen to have zero tariffs on most items from most countries, but we do have a 10% tariff on Pharmaceuticals. Our average tariff on goods imported from China is 2.5%, while China's average tariff on U.S. goods is 25%."

I can verify via our Chinese friends that many U.S. goods are much cheaper in the U.S. than in China due to high tariffs and other mechanisms that make imported goods costly.

Some friends from Denmark recently rented a Cadillac on their vacation here, and they told us this $60,000 car costs over $100,000 in Denmark due to tariffs and fees.

Both Denmark and China are members of the WTO, and both promote their version of "free" trade. "Free" trade is an ideological construct; it does not exist in the real world. Trade is an expression of policy, be it benign neglect, maximizing corporate profits or fostering local industry; there is nothing "free" about it.

Slapping 100% tariffs on everything from abroad is not going to solve America's deep structural problems. However, we would profit from understanding Spence's article and resetting our goals to align with those of our competitors such as Germany which have goals of maintaining employment.

Spence also noted the critical role of research and development (R&D) if it is reoriented to foster enterprise and employment. Correspondent John W. made the same point:

Yes, small business is where the jobs are created but there has to be a reason to create them. This is where the role of government comes in. Traditionally, of necessity, government funds basic research and creates markets by seeding them and putting the appropriate regulatory and legal frameworks in place. Almost every new industry with the possible exception of chemicals that started in Germany and maybe one or two others was brought into being by government. In short, businesses exploit markets. Businesses do not create them. This makes sense for doing basic research and creating markets are not profitable adventures with risks that are way too high for any business to assume willingly.

For example, I have personal experience with the support government provided to get the integrated circuit industry going. Back in the 1960's, ARPA was charged with funding promising new technologies. At that time, our leaders know it was easy to get funding for "defense" so they used ARPA as the vehicle for basic research and market creation for society as a whole not just for defense. Ironically, ARPA is now DARPA showing its change in focus to defense rather than society. Of course, we also believed in basic research then and funded universities according. All of that was in the era before industry and finance took over the universities and bastardized their output.

Thank you, John, for clarifying the role of R&D. Clearly, R&D could be realigned to focus specifically on creating employment opportunities. This would have to go hand in hand with a revolution in education, shifting it from the fiefdom-factory model to the "workshop" community model. I have written extensively about education, and without belaboring the obvious: the present "factory" model system is completely broken and connot be "reformed."

The only way to "educate" people to prepare them for real life and a changing era and economy is to do so on a community level, involving the entire community. Setting up a huge "factory" run by fiefdoms has failed and will always fail.

The "classroom" as traditionally designed has also failed.

I could easily write an entire book about this, but you get the basic idea: we have to scrap the entire system as broken and counter-productive, and set up an entirely new way of understanding education, socialization, learning, skills, and the need for full community engagement in education. Diddling around with the parameters-- gaming test scores, lowering class size from 31 to 27, etc--will accomplish nothing. We need a revolution, from the ground up, if we want to foster enterprise and employment in the era of "the end of work."

The "war on drugs" is a complete failure, and acts as a "useless tax" on productive citizens. Here is the fallacy of the "war on drugs" in a nutshell: the base assumption of the "war on drugs" is that the availability of drugs alone will increase their use to epidemic levels and ensnare otherwise healthy citizens in a downward spiral of addiction.

Clearly, the "war on drugs" has failed to limit availability; rather, by increasing the profitability of drugs, it has created a tidal wave of availability. But the real issue here is that the model of availability being the source problem is simply wrong.

Here's the reality: healthy people with positive goals, caring families and productive lives have little interest in getting drunk, wasted or addicted. Availability has little to do with "demand" for getting drunk, wasted or addicted. People who are in internal pain/distress, who feel useless and who lack goals and productive lives seek out drugs, and low availability does not hinder them; they either get what they seek legally (i.e. get drunk) or quasi-legally, i.e. OxyContin, a synthetic heroin which is legal, restricted yet widely available despite the "war on drugs," and which is laying waste to thousands of people via its addictive properties.

The one and only solution is to end the "war on drugs" and face the reality that drugs are a medical/healthcare issue, not an availability/law enforcement issue.Trying to restrict availability via law enforcement has been a perverse disaster, creating drug cartels and a costly prison-gulag complex that acts as a hidden tax on the society and economy.

Make all drugs (other than "ice") legal, controlled and cheap, and you will wipe out the drug cartels overnight, and free resources squandered on the gulag/prosecution/law enforcement fiefdoms. The reason people get addicted is not because it's available--it's always available. They get addicted because they're in some sort of internal pain and they're troubled.

I come from a family with severe alcoholism, so please spare me the stories about perfectly healthy, untroubled people who puff a spliff and soon end up in the gutter with smack tracks on their arms. Of all the hundreds of people I have met and known in 57 years, I have never met one psychological healthy (that is, with basic self-esteem, positive attitude, emotional well-being/"intelligence", positive goals, caring family and friends and tools of self-management) who found drug abuse appealing.

What we are in denial about is not drugs, but the sickness of our society and culture which fosters drug abuse. The only way we can face up to this is to understand drug abuse as a healthcare/mental-health issue, not as an issue "solvable" by law-enforcement, the courts and the drug-gulag.

Disagree if you want, but please do not rely on prepackaged ideology for "answers." What no one can possibly deny is that 40 years of attempting to restrict availability has failed, completely, utterly, totally. Even if you truly think that is the "answer," the policy has failed. The "demand" is not "insatiable" from healthy people, it's from people who are troubled and prone to addiction as an "answer." Reducing "supply" has simply driven people to "legal" OxyContin. If that's your idea of "success," then what precisely would constitute failure?

Lastly, we have to face the reality that as local government resources are thinned by declining tax revenues, law enforcement resources available for the "war on drugs" will dwindle. Laws will not be enforced uniformly, and so a state of lawlessness will be "normalized." Is that a solution any rational person would choose over junking the entire "war on drugs" model and reframing it as what it really is, a healthcare/social issue?

The U.S. squanders a monumental amount of energy. yet despite this obvious reality, all the hubbub is about getting "more energy." The easiest way to generate "more energy" is to radically improve efficiency and cut waste. This mindset runs counter to the standard American ideology of "no limits, only more," which is a strong headwind to a rational understanding of energy consumption.

Here is a very useful presentation about energy consumption and generation: The Game Plan. While the author invokes climate change, this is not the core of his presentation; the issue he discusses in fascinating detail is personal consumption patterns and global production of energy.

The first is the impersonal story told in very big numbers about climate change, global energy consumption, and fossil fuels.

The second is the personal story about how every decision you make in your life impacts everyone you share the planet with, and just how big the scale of the energy challenge is.

I highly recommend reading the entire presentation.

As for taxes: the current complex tangle acts as a hidden tax with virtually no yield or benefit. Choose whatever tax scheme you want, but it should fit on one piece of paper. Anything 1,000 pages long is not a "solution," it's the problem.

People are aware of the unfairness of the current tax system, and the goal should be to restore fairness and faith in the fairness of the tax structure. Vast disparities in tax rates and enforcement breed contempt for taxation in general, and are rapidly delegitimizing fundamental institutions. People want accountability on how their taxes are spent but also on how they're imposed on the economy.

Those who own the machinery of governance will buy exemptions and loopholes; until the nation imposes some limits on concentrations of wealth and the political power it buys, then that won't change.

My new book An Unconventional Guide to Investing in Troubled Times (Kindle ebook format) is all about relocalizing enterprise and ways we can invest in that process. You can read the first chapter and other stuff here.

ABOUT THAT "SUSPENDED SERVICE" NOTICE: The site was transferred to a dedicated server yesterday, and there was a brief interruption of service as a result. Thank you to everyone who emailed to notify me of the outage. I maintain a mirror site on Blogspot, which you can always book mark charleshughsmith.blogspot.com or access via my RSS feed. (Note: the Internet is not "free" by any stretch of the imagination. A dedicated server cost thousands of dollars a year.)

NOTE OF THANKS: Thank you to everyone who wrote positive, encouraging emails recently--I have read and savored every one. Due to the press of events and workload, I am unable to respond at this time. To those I owe books to: please be patient, I hope to have worked through my backlog by next week.

Thank you to everyone who emailed me in the past week; while I read every email, at this point correspondence is like the incoming tide and my little sandcastle of time and energy has been completely swept away. Thank you for your understanding that I am just one standard-issue individual with extremely limited time to spend on the site.


Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

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

Thank you, C. William S. ($50), for your extraordinarily generous contribution to this site -- I am greatly honored by your support and readership.

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Remind Us Again Why Anyone Should Own Stocks For the Next Two Years

Here's the case for dumping stocks and not touching them for at least two years.

The case for "buying and holding" stocks boils down to four words: don't fight the Fed. Forget moral hazard and all the fancy stuff; the reason to load the truck with stocks is that the Fed is invincible, and its mighty machinery of manipulation can drive stocks higher no matter what else is happening.

Put another way: when the Fed succeeds in driving the dollar to near-zero, the value of stocks will be near-infinite.

The case to dump stocks now and not even look at the market for two years is based not on worship of the Federal Reserve's infinite wisdom and power but on the charts. The abject, pathetic, remarkably complete failure of QE2 has driven a stake through the heart of the Fed's political power and its reputation for wisdom; it has been revealed as a clueless cabal, basing policy on textbook models of what "should happen when we do this." Alas, real life doesn't follow moldy old PhD theses, and it doesn't worship the Fed or listen to the cargo-cult incantations of the Keynesians.

Financialization anf globalization have run their course, along with cheap abundant energy. As the giant 17-year bubble in stocks deflates, those entrusting their money with Wall Street face stupendous risk and potentially massive losses. (Shameless pitch alert.) My new book An Unconventional Guide to Investing in Troubled Times is all about withdrawing your trust from Wall Street and investing your capital in alternatives such as localized, productive assets which do not depend on financialization or globalization for their value or income streams. (It's currently #5 in the Kindle Store's investing category, and #9 in Amazon's Investing Bestsellers category, so there's some interest in the topic.) You can read the first chapter and other stuff here.

Let's let the charts speak for themselves, shall we?

Here is the S&P 500 from 1965 to 2011: note the giant double top, and the gigantic bubble which began inflating circa 1994 as financialization and globalization began their long domination of the economy.

Only massive government intervention reinflated the bubble in 2009-11, and now gravity is reasserting itself. The trendline projects to the next low around 600, while the bubble-retrace projects to around 450.

Since volume is the weapon of the Bull, let's check in on volume: oops, it's been dropping since 2009. Looks like those in the know have been selling into strength bigtime.

Courtesy of the always insightful Doug Short, here is Doug's overlay of the current market and two previous stock market bubbles, the Dow 1929 and the Nikkei 1989.Note that the market was rolling over last August, but the Fed launched QE2 and added a year to the "recovery." Can they extend it another year? based on their dwindling political capital, the answer is "unlikely."

Interestingly, the low hit by previous bubbles corresponds rather closely with cycle-seer Martin Armstrong's turn date of July, 2013. (He also pegs August 2014 and September 2015 as turn dates as well.)

This overlay of the 2002 decline and the current market also offers food for thought. As in, "this sucker's going down."

Again courtesy of Doug Short, the Q Ratio, which is at highs not seen since the last market top.

Since the U.S. dollar and the SPX have been on a see-saw for years, it's interesting to compare the DXY's recent decline with its action back in the summer of 2008, just before the global financial Ponzi scheme imploded.

And to state the Bullish case, here's the Fed's pet parrot:

Looks like they'll need to teach it another line.

NOTE OF THANKS: Thank you to everyone who wrote positive, encouraging emails in response to the weekend entry--I have read and savored every one. Due to the press of events and workload, I am unable to respond at this time. To those I owe books to: please be patient, I hope to have worked through my backlog by next week.

Many of you expected a reduced schedule of posts. Rather than post three times a week, I will be going into hiatus for 5 to 10 days at a stretch, then going back to a daily schedule. Times are getting interesting and there is still much to discuss.

Readers forum: DailyJava.net.



My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

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, David K. ($50), for yet another splendidly generous contribution to this site -- I am greatly honored by your ongoing support and readership.

Thank you, Brian F. ($10/mo), for your phenomenally generous subscription to this site -- I am greatly honored by your support and readership.

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You Want to Create Jobs? Here's How

Keynesian "stimulus" has failed to do anything but prop up the Status Quo. If we want to create jobs, we need to clean the house of impaired debt and lower the cost structure of the entire economy.

Politicos across the spectrum and cargo-cult Keynesians are constantly bleating about "creating jobs." You really want to create jobs instead of just helplessly wringing your soft little hands? Here's how:

1. The only engine for jobs is small business, so quit pandering to global corporations and start pandering to the people who might actually hire someone in America. The back-of-the-envelope number bandied about is that small business creates about 60% of the new jobs in the U.S. I suspect that's a number from a decade or two ago; in the real world of the present, it's more like 90%.

As noted here many times before, Global Corporate America is a profit machine with no loyalty to the nation or its workforce. It only has one prime directive: deploy capital and labor wherever it reaps the most profit and the quickest return. That's it. Everything else is political propaganda and PR.

This is not a judgment, it is a statement of fact. As capital is allowed to flow freely, then it seeks the highest return and the lowest labor costs. Once global supply chains are in place, then that place is rarely America.

Why? Because the U.S. economy has a high cost structure for small business that's getting higher while yielding diminishing returns. Rents are high, thanks to the real estate bubble, taxes for small business are high, healthcare costs are double that of our developed-world competitors--the list goes on. America is not an efficient place to do business; you pay high costs and taxes (if you're a small business or self-employed), and don't get much in return.

It's a great place to be a global corporation or billionaire, because they can buy special favors that exempt them from the same burdens imposed on small business.

The U.S. economy is hobbled by two systemic burdens: sickcare and the insolvent "too big to fail" banking system. Both act as enormous taxes on the productive citizenry.

You want to create jobs? Then stop diddling around with cargo-cult Keynesian "stimulus" which just props up the least efficient and most parasitic elements of the economy: the banking sector, Wall Street, cartels and fiefdoms. Keynesian stimulus is simply another facet of the Wall Street/bank/corporatocracy Status Quo: we've already squandered trillions in "stimulus" government spending, and very little has trickled down to the businesses which might actually hire someone in the U.S. It is a failed policy precisely because it is entirely Status Quo.

If we really want to create jobs, we need deep structural reforms. Rearranging the deck chairs on the Titanic--i.e. trimming the payroll tax 2%--is meaningless. Here's the to-do list for those who are serious about creating jobs:

1. Write off $3 trillion in underwater mortgages, $1 trillion in impaired student loan and consumer debt, and $1 trillion in doomed commercial real estate loans. Here's the core fact: those debts will never be paid back; they're already lost. Keeping them in a zombie state cripple the borrowers and the economy. The 10 million mortgages which are deeply underwater are not coming back; they're gone, let's accept it and set the stage for real growth. This writedown will have several salutary consequences:

A. It will wipe out the 6 "too big to fail" banks which are acting as a dead weight on the economy and on its political governance. It's too bad the Keynesians are too busy painting radio dials on rocks and chanting tired incantations to realize that the only step that will make a difference in jobs is destroying the "too big to fail" banks, and thus destroying their grip on the nation's throat.

Replace them with 50 smaller banks which are precluded from buying each other--or 250 banks. Re-enact Glass-Steagal to separate depository and investment banks--recall the bill was less than 10 pages long. Once the TBTF banks are gone, there won't be enough concentrated wealth and capital to so easily subvert the political system.

B. By wiping out doomed home mortgages, you free up workers who were immobilized and unable to move to where jobs are being created. Labor mobility is absolutely critical, so those with the right skills can move to where the skills are needed; underwater mortgages trap potential employees in dead-ends.

C. Wiping out the debt via auctioning off 10 million homes would drop prices and lower the cost structure of housing across the board. The critical destructive event of the past decade was making housing a speculative playground. That jacked up costs and left underwater owners and lenders fighting to keep prices propped up. That is a hopeless exercise, another "hidden tax" on the economy.

Writing off debt that will never be collected cleans the slate and lowers the cost structure. Once housing returns to its historical levels of valuation, a lower salary will still be enough to buy a house.

In other words, propping up housing to "save" the banks has helped render America uncompetitive on the global marketplace. Historically, a house should cost no more than two years of the median salary in the area.

2. Reduce healthcare/sickcare costs by a third, from 17% of the nation's gross domestic product (GDP) to 11%--then reduce it again to the level of Australian and Japan healthcare costs, around 8% of GDP. Sickcare is truly pernicious, as it acts as an 8% "useless tax" on the economy: if our developed-economy competitors can provide healthcare to all their citizens for literally half of what we spend per capita, then we are instantly uncompetitive just as a result of sickcare.

As I have endlessly explained here, "healthcare" in the U.S. is nothing but an enormously profitable assembly of cartels. It is truly sickcare, because in a profit-based system, health is profitless and therefore the enemy of profit: it's illness that's profitable, so the sicker the populace, the better.

That's why 50% of our healthcare costs are expended on 5% of the people. They're where the money is to be made. Diabesity is immensely profitable; low-BMI healthy people are uselessly profitless. Illness is highly profitable, health is unprofitable.

I have covered this many times, and I don't have time to repeat it all. Please enter "sickcare" into the Google custom search bar in the upper left sidebar, and you can find all the source material you want.

If you read the history of healthcare, it seems more an historical accident than some well-thought-out plan that employers were saddled with providing healthcare insurance for their employees. This was workable when healthcare was 1% or less of a workers compensation, but now that it's 50%, and millions of people work part-time or are contract workers, it no longer works on a systemic level. There is nothing written in stone about this system, and in a "freelance nation" it no longer makes sense.

I have often written about healthcare, and what it all boils down to is this: either the system shrinks in a chaotic collapse, or we deal with reality and shrink it via a complete redesign. It's going to implode if the current course is maintained, and then we'll have nothing but shambles. Is that really preferable to grasping the nettle and redesigning the system from the ground up? Isn't America supposed to embrace innovation? Or is that just PR for selling a new electronic toy?

Scrape away the propaganda spewed by cartels and their think-tank toadies, and the bottom line is that there are only two large-scale healthcare systems which are efficient in the U.S.: the Veterans Administration and cash. To understand why this is so, we need to realize the staggeringly negative consequences of not having a nationally mandated "best practices" for care that is also strictly cost-conscious.

Without a coherent, rational, cost-conscious set of national "best practices" guidelines, doctors and their employers are open to claims of wrongful care, inadequate care, etc. This lack of national standards creates wasteful "defensive medicine" on a vast scale. This site has many readers within the medical profession, and I could relate many horror stories of the perverse incentives created by the current sickcare system.

I am not an expert on the VA, but it seems to have a national set of "best practices" which are applied at all VA facilities around the nation. There are limits on care--there has to be. That is simply reality. I knew an older internal medicine doctor in my 20s and 30s, and he often had very ill patients with multiple conditions and diseases. At this stage of illness and life, there is very little anyone can do to restore the health of a very ill person. "Heroic measures" undertaken to stave off lawsuits just throw away money and place additional burdens on the family and the patient.

Why is it so difficult for us to recognize these simple realities? One reason is the system rewards "heroic measures" (highly profitable) and lawsuits (potentially profitable, so "fishing expeditions" are encouraged) if they're not undertaken.

The VA is the only truly innovative healthcare provider in the nation. I don't have time here to explain why, so do your own research on national computer systems in healthcare. The VA is owned lock, stock and barrel by the Federal government, and while it has its problems like any vast bureaucracy, nobody is claiming that it is corrupt. We seem to have forgotten that corruption comes with concentrations of wealth and political power which forms partnerships of cartels and Central State fiefdoms. If there is no profit, then the motivation for corruption falters.

How corrupt is NASA or the VA? Are they really like the banking sector? The answer is no.

Here's the key feature of the VA system: doctors get to be doctors, not gate-keepers or profit-skimmers. Doctors don't own the labs that do the tests they order, and when somebody sues them, the doctors are backed up by a regiment of government lawyers. Doctors don't have to lay awake at night worrying about getting sued or making their malpractice payment.

The common-sense solution to cut healthcare costs in half is a dual system: a VA-like system with universal access but strict cost controls and no profit, and cash: buy whatever care you want, from whomever you want. Don't like the VA system? Fine, save your cash and buy whatever care you want, no restrictions. Don't want to work for the VA system? Fine--get your license to practice medicine and set up shop, cash only.

This would not be a painless transition; after all, the cartel-Medicare/Medicaid complex has been on a hiring spree ever since the cartels realized there was literally no limit to how much they could bill the government. (Recall that 40% of our sickcare costs are paper-shuffling, embezzlement and fraud. That's what's incentivized, so that's what blossoms.)

But the reality is that cutting sickcare in half would restore it from a "profit center" to actual healthcare in the hands of primary-care physicians.

The ultimate answer to improving healthcare is community-based healthcare. As long as isolated "consumers" have few incentives or local options for improving their own health with their peers and primary-care physicians and nurses, then improving health is fighting the headwinds of marketed illness via junk food and techno-entertainment inactivity.

If you don't like these solutions, then come up with your own, but they have to cut U.S. healthcare spending per capita in half. Nothing less will create a competitive economy.

Lest you think this alarmist, the Establishment journal Foreign Affairs reached the same conclusion: How Health Care Can Save or Sink America.

It's easy to predict what will happen is we do nothing; in a few years, Medicare will exist in name, but there won't be anyone left to provide care for IOUs. That's the ultimate irony: when the whole system implodes, the only thing left will be the VA and cash care: the two systems I am recommending as solutions.

3. State and local government "one-stop" permits and oversight for new business.Those outside small business have no understanding of the roadblocks, the junk fees, and the madness-inducing pettiness of competing government bureaucracies, the vast majority of which take no risks and whose employees view small business as the enemy or as tax donkeys upon which they can heap abuse without any fear of retribution. The general mindset of government from the point of view of struggling small business can be summed up in one word: Extortion.

If you think this harsh, please go out and try starting a business from scratch and hire 10 people to work for you. Was the experience enjoyable, low-cost, risk-free and seamless?

The truth is that government workers trying to do a good job of regulation and oversight are just as frustrated as small business: the current system's tangle of self-serving fiefdoms makes it almost impossible for government workers to do their jobs well.

Regulation and oversight are like vitamins: if you don't have any, the economy suffers, but having too much is deadly, too.

I know one growing suburban community that has been trying to get a new train station on an existing rail line for over ten years. The number of agencies and monopolies which can inhibit or block every step of the process is somewhere between 10 and 13. If you think this tangle of competing jurisictions and bureaucratic bloat offers great value to the nation, I invite you to compare efficient nations with low unemployment and bloated banana republics with high unemployment and crony Capitalism.

The latter take 10 years to approve a new commuter train station.--or maybe 15 years, or never. This is the acme of a broken system.

Yes, the issues are complex. But does stretching the decision process out for 10 years add value? Couldn't a decision be reached in two months, if there was any incentive and pressure to do so? Yes or no, proceed or do something else: we have lost the ability to incentivize speed and efficiency in government, and this has crippled the economy being regulated.

If the nation is serious about encouraging new businesses, then government has to strip away the inefficiency and bloat which inhibit growth for essentially zero payoff. Permits are important, and oversight is important; but it is merely common-sense that these functions be centralized and speeded up to foster "best practices" without stultifying new businesses.

Government employees who want to do their jobs efficiently and productively would be delighted to work for a stripped down, centralized agency which was designed to approve or disapprove projects quickly, and regulate the economy like vitamins--enough for safety, but not too much, i.e. a self-serving fiefdom.

It's that simple: lower the cost structure of the economy, and remove the impediments to starting new businesses and hiring workers. For more on these topics:

Unemployment: The Gathering Storm (September 26, 2009)

Here's Why Small Business Isn't Hiring, and Won't be Hiring (July 11, 2011)

Seven Headwinds for the U.S. Economy (August 4, 2010)

NOTE OF THANKS: Thank you to everyone who wrote positive, encouraging emails in response to the weekend entry--I have read and savored every one. Due to the press of events and workload, I am unable to respond at this time. To those I owe books to: please be patient, I hope to have worked through my backlog by next week.

Many of you expected a reduced schedule of posts. Rather than post three times a week, I will be going into hiatus for 5 to 10 days at a stretch, then going back to a daily schedule. Times are getting interesting and there is still much to discuss.


Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

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, Ted L.C. ($50), for your outstandingly generous contribution to this site -- I am greatly honored by your support and readership.

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

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That Which Is Too Fearful To Speak: The Demise of the Consumer Economy

The consumer-debt-based economy is doomed; good riddance. It was nothing more than an elaborate cargo cult based on marketable anxiety.

The consumer-debt-based economy is toast, but everyone's too terrified by its demise to acknowledge this reality, never mind consider a new model. The entire creaking economy is based on a few ideas which no longer work:

1) Create "aggregate demand" (i.e. consumer demand, which then creates business demand) and the economy "grows," people are hired and get paid, and that's good.

2) When consumer demand slumps because people are over-indebted and can't afford to buy more of anything, then "stimulate" demand with massive Central State spending to replace the vanished private demand.

3) Demand is endless. You can never have enough stuff, food, vacations, education, healthcare and toys. Give people free money, or the ability to borrow nearly-free money, and they will spend, spend, spend. This creates "growth" which is always good.

A funny thing happened on the way to the infinite demand/consumption model--or actually, two things:

A. People borrowed all they could afford, and then borrowed more. Now they can't borrow any more, even if the interest rate is low. By some estimates, American consumers need to pay down $4 trillion in debt just to restore the income-to-debt ratios of the early 1980s, never mind the early 1960s.

B. Infinite demand met marginal return in a dark alley, and infinite demand is in the gutter, whoozy and bleeding profusely.

That horrendously costly master's degree has only a marginal return in the real world--or perhaps a negative return.

That expensive McMansion provided no better shelter than a much more modest home, and its investment return is atrociously negative.

That $120,000 5-day stay in the hospital paid by Medicare didn't fix the health problem; it made it worse, because the patient didn't need hospitalization or the procedure, and the previously moderately-ill patient caught a drug-resistant bug in the hospital and is now very ill--and therefore needs more treatment at $120,000 a week (this was the actual bill for my friend's father's 5-day stay in a hospital, a stay he was forced into accepting lest he be a "bad patient." He could have easily been treated in an out-patient clinic.) Nice return on a $120,000 "investment" to meet the "infinite demand" for sickcare.

You see the point: "investing" disposable income in debt service to borrow more money to blow satisfying "infinite demand" has left consumers over-leveraged and insolvent, crushed under impossible-to-pay debt loads, while all that debt-fueled spending has yielded increasingly marginal returns.

The amount of debt that can be leveraged has diminished to near-zero, and so has the return on that spending.

There's another deeply pernicious facet to a consumer-based economy: our identity and meaning now flow from consumption, not from production or inner resources. I spent a considerable amount of Survival+ explaining how marketing and consumption are two side of the same coin.

The marketing complex has hijacked our sense of identity by engendering a deep, soul-destroying anxiety that only buying more stuff can assuage: since we are judged and valued solely by our purchased externalities, we are constantly in danger of being rendered worthless if we fail to measure up to the current metric of brand-group identity (wearing all black and a tattoo for one "brand," a BMW and designer clothing for another, reading the New Yorker and claiming to only wear vintage clothing for another, etc.)

What we do in the real world is simply part of the "brand" which we must project, or cloak, to sooth the gnawing anxiety that is the bedrock of a consumer society. The iconography and totems of consumerism define our identity, our strivings, our sense of purpose and our experience of meaning: what I call the politics of experience, a phrase coined by R.D. Laing.

Consumption is our god, our faith and our religion. Like a cargo cult dependent on a magical connection to prosperity, we are terrified by the prospect that our religion is based on a false god--that is, that consumption and consumption alone leads to prosperity and happiness.

Like a cargo cult that we mock in our infinite industrious superiority, we worship the equivalent of rocks painted to look like radios that we can use to "call" the gods of endless prosperity.

This rock that's painted to look like a radio is called "debt," and we call upon it to magically provide us with prosperity from over the seas.

This other rock that's painted to look like a radio is called "aggregate demand," and it's carefully worshipped by a special troop of voodoo-wielding witch doctors called Keynesians.

We are chanting magical phrases to these rock-painted "radios," pleading for a return to easy prosperity, but nothing's happening. We fear the magic no longer works, and that possibility terrifies us so much we can't even bear to speak of this loss.

The consumer economy is expiring for two good reasons: we borrowed too much and will never be able to pay it back, never mind borrow even more, and we have too much crap and useless services as it is. Instead of paying people to dig a hole and then fill it, we give millions of tests that serve no real function other than to bill Medicare or the provider.

An economy can only sustainably spend what it generates in surplus. The U.S. has been exchanging paper with funny green ink on it for real stuff, far in excess of the surplus generated by our own labor and production. That is our trade deficit. To extend "aggregate demand" to the moon, we borrow trillions of dollars via Federal deficits to fill the gap left by imploding consumer borrowing. This is not spending a surplus we have earned, it is borrowing against future surpluses, surpluses of national income which we are now committing to debt service.

Future generations won't get to spend their surplus; they will have to devote it to servicing the debts we have gaily borrowed and blown on digging holes and refilling them, part of our worship of the magical painted rocks of our false and hollow religion, Consumerism.

By degrading ourselves from producers to consumers, we have not only lost our identity and our meaning, we have lost the ability to create surpluses and invest those surpluses wisely.

My new book An Unconventional Guide to Investing in Troubled Times is an attempt to chart a path from the anxious, unhappy dead-end of consumerism back to a decentralized, self-reliant productive economy.

That is the transformation that terrifies the Status Quo, for it is a transformation for which there is no model of control and exploitation: the demise of the consumer economy and the rise of a productive economy with no need for Wall Street or rocks painted to look like magic radios.

Recommended reading on this topic: The Cultural Contradictions of Capitalism.


Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

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, Robert C. ($40), for your marvelously generous contribution to this site -- I am greatly honored by your support and readership.

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

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