End of an Era: What Isn't Coming Back
March 16, 2009

Six conditions which underpinned the bogus prosperity of the past decade have changed for good. But the mainstream economists and media are still in denial, focusing on "freeing up lending" as if consumers are able to borrow more in an unsustainably debt-burdened economy.

For a snapshot of Mainstream Economist denial, please read this from Foreign Affairs:
The Japan Fallacy: Today's U.S. Financial Crisis Is Not Like Tokyo's "Lost Decade":
Summary -- The financial crisis of 2008 is not a replay of Japan’s “lost decade” of the 1990s. The current crisis is the result of correctable policy mistakes rather than deep structural flaws in the economy.

And there you have it in a nutshell: there is nothing structurally wrong with the U.S. economy that a few policy tweaks can't fix.

I beg to differ on these grounds:

1. Permanent decline of the assets which supported rampant consumerism. Having gleefully swallowed the fiction that real estate could rise indefinitely, and thus fund not only a plump retirement but a never-ending consumer binge, the American middle-class is now coming to grips with the reality that real estate valuations were a bubble which has burst. The bust is taking down the primary asset of the Baby Boom generation (housing) and the equity-extraction-machine of home equity lines of credit (HELOC).

We get a clearer picture of just how deep the rot of consumerism has reached in correspondent Jeff R.'s cogent commentary from this weekend:

Do you see the subtle parallel with what happened to the evangelism movement? It became something to serve our wants not address our needs. We need spiritual clarity and self-honesty; we also need informed people snooping around the workings of business and government. Both journalism and church transmuted into instruments for financial gain and market share. We simply pampered ourselves with the luxury to stay in big homes grossly uninformed and easily persuaded until we saw the raging grass fire headed toward our backyard. Some are still staring at it convinced it will get the neighbors house but not ours.

I have long said that the sophistication and ability of marketers outpaced our society's intellectual growth starting in the 60’s.

In other words, everyone from marketers to the evangelical movement perceived rising ownership of material goods as an "obvious" metric for "the good life." But the entire superficial surface of jewelry, lavish cruises, huge suburban homes, etc. was based not on a foundation of savings and productive real wealth but on astonishing increases in debt. It was never sustainable, and the fantasy that it was sustainable, and perhaps even "deserved," was always visibly absurd.

The mainstream economists seem to believe that everything will ramp right back up to 2005 as soon as those pesky banks start lending again. Oops, except that all the policy tweaks which these same economists are suggesting will restrict the very sort of insanely risky, unmoored lending which enabled a decade of wild consumer spending.

The entire edifice of consumerism is a "false god" which has now been toppled from its gold-leafed perch. Buying more and owning more did not create a sustainable, healthy happiness or a sense of self-identity; the insecurity and anxiety which were masked by shopping and prescription drugs have now been laid bare.

But it's not just housing which has plummeted; it's all assets classes. And that decline hasn't just shattered consumer borrowing, it's also wiped out much of the retirement wealth of the Baby Boomers. (Physical gold has risen in value, but other commodities have seen boom-bust cycles of appalling volatility.)

2. With their assets diminished, Boomers must now save rather than spend. The decimation of Boomer assets and retirement funding is documented in this report sent to me by longtime correspondent J.F.B., who has been presciently pointing out the risks to the Boomer retirement for some time:

The Wealth of the Baby Boom Cohorts After the Collapse (Center for Economic and Policy Research)

The median household with a person between the ages of 45 to 54 saw its net worth fall by more than 45 percent between 2004 and 2009, from $172,400 in 2004 to just $94,200 in 2009 (all amounts are in 2009 dollars). If the median late baby boomer household took all of the wealth they had accumulated during their lifetime, they would still owe approximately 45 percent of the price of a typical house1 and have no other assets whatsoever.

As a result of the plunge in house prices, many baby boomers now have little or no equity in their home. According to our calculations, of those who own their primary residence, nearly 30 percent of households headed by someone between the ages of 45 to 54 will need to bring money to their closing (to cover their mortgage and transactions costs) if they were to sell their home. More than 15 percent of the early baby boomers, people between the ages of 55 and 64, will need to bring money to a closing when they sell their home.

As if that isn't bad enough, then other assets like stocks and bonds held in 401Ks and public pensions have also been trashed. Even those like myself who foresee a stock market rally don't expect the market to shoot back to its 2007 highs anytime soon; stock valuations are correlated to profits, and in a global recession profits are unlikely to grow for most public companies.

As companies lose revenue they look for ways to trim expenses, and unsurprisingly, employee retirement benefits (matching 401Ks, etc.) are already on the chopping block. here is another article on the topic submitted by J.F.B.: Retirement funds in danger for millions of Americans

For millions of Americans, the deepening recession has meant a dramatic drop in funds put aside for their retirement. While many have seen the value of these accounts slashed in half, the pensions of others have been rendered virtually worthless as their employers file for bankruptcy. For others, a layoff in the family spells disaster, and saving for retirement is out of the question.

Many older workers have been forced to cash out their 401(k)s to cover mortgages and pay credit card debt and other expenses, with the amount withdrawn sharply reduced from their original investment. For other, particularly young, workers, the prospect of putting aside anything out of their weekly paychecks is out of the question.

Take away easy credit and rising assets and replace them with falling asset valuations and tight credit. Now add in a pressing need to save rather than spend, and it's easy to see why consumers cannot recover their free-spending ways.

3. Incomes for many in the middle class are in permanent decline due to the very structural changes the mainstream economists refuse to acknowledge. J.F.B. also sent me this sobering analysis of the erosion of jobs from the "middle" of the middle class: The middle-age, middle-income squeeze: Older workers taking lower-wage jobs due to broad-based market shifts, MIT study shows

Dramatic shifts in the U.S. labor market in the last 25 years are relegating older workers -- even those with a college education -- to lower-wage jobs, according to a research paper by MIT Economics Professor David Autor.

This trend appears likely to steepen in the current recession, as employers accelerate the rate at which they shed nonessential positions.

In a paper co-authored with graduate student David Dorn, "This Job is 'Getting Old': Measuring Change in Job Opportunities using Occupational Age Structure," which was presented last month at the American Economics Association conference, Autor analyzes a phenomenon that he refers to as the "hollowing out" of the U.S. job market from 1980 to 2005.

"One of the most remarkable developments in the U.S. labor market of the past two and a half decades has been the rapid, simultaneous growth of employment in both the highest- and lowest-skilled jobs," Autor says. European labor markets echo this shift.

Automation, computerization and offshoring are reducing the number of middle-wage, skilled occupations -- stock clerks, inspectors, telemarketers, payroll workers, sales agents and software programmers -- Autor finds. These jobs are particularly vulnerable to automation because their core tasks follow well-understood routines that can increasingly be codified in software and executed by machinery.

Ironically, many jobs that require less formal education -- such as construction workers, janitors, truck drivers, auto mechanics, home health workers and wait staff -- are more difficult to automate than these white-collar positions because they demand physical flexibility and rapid adaptation to unpredictable circumstances (e.g., oncoming traffic, unhappy customers). Humans excel at this form of flexibility while current technology falls short. Demand also remains high for high-wage, high-skill jobs, such as attorneys, physicians, engineers and top managers -- all of which perform analytic, interpersonal and problem-solving tasks requiring both expertise and intellectual flexibility.

Here are some recent entries on the structural demographic and employment challenges we face:
White Collar, Blue Collar, No Collar (February 9, 2009)
The European Model Is Also Doomed (February 7, 2009)
Endgame 3: The End of (Paying) Work (January 21, 2009)
End of Work, End of Affluence (December 5, 2008)

4. Much of the "wealth" of the past decade resulted from the velocity of money bouncing between new credit, financial legerdemain and millions of real estate transactions. The so-called FIRE economy (finance, real estate and insurance) thrived on three conditions which have now closed out: cheap, abundant credit, unrestricted financial legerdemain (risky assets labeled AAA, etc.) and a bubble-fueled peak of transactions.

The "average" house-flipper bought and sold up to 6 or even more properties at a time, creating stupendous fees for mortgage brokers, lenders, realtors, etc. Much of that velocity is gone, and without a bubble in credit and real estate, then it will never return to its bubble heights.

5. Interest rates will rise for the foreseeable future. As noted here many times, you can't borrow $3 trillion a year (or was it $9 trillion, or $13 trillion?) in a world of foundering profits and surplus capital and expect interest rates to stay low forever. This will further depress borrowing/debt and asset valuations like real estate which depend on low interest rates.

All of these forces are self-reinforcing; as interest rates rise, housing valuations will continue their decline, further lowering Boomers' assets and ability to borrow more, etc.

6. Selling big-screen TVs made in Asia at Best Buy is not a formula for national wealth. It's all well and good for every family to yearn for a big-screen TV made in Asia, but we as a nation have subscribed to the fantasy that charging the purchase of a big-screen TV is "wealth" when in fact it was only a simulacrum of wealth. Real wealth is making something others value enough to buy it from you at a profit, which then creates surplus capital which can be distributed and invested on a national scale.

If someone who created some of that wealth decides to use that surplus capital to buy a TV from Asia, fine; but charging the purchase on credit is not the same as deploying surplus/earned capital.

In other words, a consumerist economy based on ever-rising debt and trade deficits is completely unsustainable. The current "recession" might be called, "The Revenge of Reality."
There are many other structural flaws in the American economy, and rather than repeat myself, please glance at these recent entries:
The Middle Class Is Crumbling (February 3, 2009)
What Won't Change (February 2, 2009)

What's for dinner at your house? has been updated with a new recipe: Classic Chili and Cornbread.

NOTE: The serialization of my new ebook "Survival +" starts March 21.

Of Two Minds reader forum (hosted offsite, reader moderated)

New Operation SERF Installment:
Operation SERF, Part 11
Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

Thank you, "Goldie" ($50) for your stupendous generosity and online friendship. I am greatly honored by your support and readership.

Read more...

Reader Comments

March 14, 2009

No matter how broadly I try to read, readers always identify new and provocative lines of thinking and analysis. Here is a sampling of recent reader commentary; I will try to post a more complete accounting this weekend.

Real life and online life are a zero-sum situation; real life has taken much of my time recently, (carpentry for friends, babysitting, etc.) severely limiting computer time, and as always I apologize for the tardy email responses.

Jeff R.


I couldn’t agree more to the upcoming slow dissolve from overconsumption forced upon the unsuspecting public. I follow the 7/93 rule on this one; 7% of the population understands what the “Great Disruption” will mean and is preparing themselves as best possible. The remaining 93% are in denial or unable to remove themselves from their debt/cost-of-living serfdom.
Personally, my response to the slow train wreck playing out before our eyes is to purchase land that has good soil and water. My social security will comprise of home grown food, a chicken house and a couple of freezers and a root cellar. Perhaps I’ll tip my hat to our California Yankee and call it “Greenspan Acres”.

Two points I would offer. First are that Federal insolvency and the tumble of the American dollar will create a disruption more abrupt than the soft fall from over-consumption grace. Fine exports quickly become out of reach (the re-birth of the America car company?) and oil cost slips a little higher. (Exxon would be one of the few companies to be able to ride the exchange rate up).

Second is more a psychological shift, one deeper than the endless transactions in the age of affluence.

Many of today’s evangelists equated successful living with prosperity. Not saying that the well-off are not generous but I’m speaking instead of the mega-church’s embrace of personal salvation as a path to financial reward. Not to dive to deep into the pool here but I keep thinking of the post-modernism threat talked of in the 50’s that the messenger and its cleverly-packaged delivery would replace content and concreteness of truth.

I have long said that the sophistication and ability of marketers outpaced our societies’ intellectual growth starting in the 60’s. I think the climax of this movement occurred with Fox News. I know they simply took right wing radio to video but its impact was that it completely separated the integrity of journalism (what is left of it at least) to a group-think preference of what you would rather believe.

Do you see the subtle parallel with what happened to the evangelism movement? It became something to serve our wants not address our needs. We need spiritual clarity and self-honesty; we also need informed people snooping around the workings of business and government. Both journalism and church transmuted into instruments for financial gain and market share. We simply pampered ourselves with the luxury to stay in big homes grossly uninformed and easily persuaded until we saw the raging grass fire headed toward our backyard. Some are still staring at it convinced it will get the neighbors house but not ours.

To me the Great Disruption will be a tearing away of the façade. We shall all find out that food doesn’t simply come from the grocery store and that civilization is a thin veener. That when governments fail they fail on a mammoth scale (they are indeed “not too big” to collapse but only too big to survive). The success isn’t measured in dollars but in happiness. Do you know what makes me happy? Not big expensive toys and adventures, not fine cloths, not expensive cars. I’m halfway through my life and all I want to do is build and grow things. Build my love for my children and wife, build my intellect, and grow my food and my curiosity of the world around me. America will awake to find that all that stuff the right wing talked about in their hot button and superficial mantra of “family values” is about the only thing they can afford.

Chris S.


In Thoughts on the USA – 1968 to 2009 (March 4, 2009) John Kinsella wrote:
I now knew that America had definitely changed. New Orleans still bore the scars of Hurricane Katrina, which hit the city at the end of August 2005, and a new urgent hedonistic form of tourism had taken over; drink, shout and be merry for tomorrow the fun could suddenly end. A twenty-four hour Casino drew the not only tourists but also a good number of the citizens of New Orleans, who by the appearance of many could certainly not afford to lose the little money they possessed.

Sounds like the NOLA I visited back in 1990 a few weeks after Mardi Gras. A place where when the lights went out for a few seconds city-wide, you could already hear the whooping, cheering, and hollering. You waited for the sounds of breaking glass and sirens. A place where hotels had 20 foot tall concrete security walls. Streets where lone drunks wandered around with their bottles in paper bags at 6am. The city where I saw my first knife fight and a family member was mugged for his last $20.

Sadly, all Katrina did was knock the entire plate off the table of a city where the pieces were already quite jumbled on a good day. The plate had been on the edge for quite some time and falling off the table and breaking was going to happen one way or another.

So it was with great interest that while in Iraq I saw NOLA fall from Katrina and it became a sort of "Rime of the Ancient Mariner" for an administration, gov't, and people. I wondered to myself how would people react and more importantly: how would they pick up those shattered pieces?

And life went on, just not as how we had expected and not like the time "before". It's different there now. My wife visited NOLA post-Katrina. I have not. I can transpose Baghdad with a broken infrastructure and few services to NOLA with little difficulty. All I have to do is subtract the suicide bombings and the Iraqi city's far more violent body-count to have a good idea of what life is like in NOLA now.

How much will any other broken American city in the future resemble NOLA post 2005 or today's Baghdad? Hard to tell. Depends on how the people themselves react and interact.

Kevin M.


You've taken a contrarian position on a subject ( Could Cities Be Safer Than Suburbs?, March 11, 2009) which is near and dear to the hearts of tens of millions of people, one which is contrary even by your own standards (but not without merit either).
One thing that you didn't bring up as possible fodder for suburban/exurban deterioration, is the attitude of entitlement that pervades throughout. Violence on different levels may be more likely when people feel that something has been taken from them, something they "deserve" for what ever reason. So where most people in urban centers and rural areas may be content with food, shelter and being a part of a truly functional community (rural or urban), suburbanites live lives mirroring the TV life, with all kinds of perks like expansive homes, top schools, SUVs, and more prosperous neighbors--amid faux community.

Not only is there a lot more to lose in the suburbs from a material standpoint, but there's also a less intimate connection to the community and it's people than is typically seen in urban neighborhoods and rural communities. The combination makes it easier to get ugly in the attempt to claim one's "rightful share" of the American dream.

christine B.


RE: Retooling the Education Factory (March 5, 2009):
I have no idea what the official definition is now of special needs (http://www.concordspedpac.org/WhatIEP.htm), but it includes ADD, ADHD, and very mild forms of autism as in, "I know these kids well and would never have guessed that there was anything amiss with them."

At my first parent night when the staff was introduced, I was floored at how many people there were to serve grades K through 2. Occupational therapists, physical therapists, one librarian specifically for K-2, reading tutors, etc. The next night covered 3 through 5. There is even a small group of kids that gathers for lunch to practice social skills. When my child's class picture came home, I asked my daughter who are all these adults? I obviously knew what her teacher looked like and the student teacher. But there were other adults that I had never seen before. My daughter nonchalantly replied "this one helps Matt and this one helps ..."

So hyper kids who can't sit still get a personal aide. Some of these kids find school boring and have trouble concentrating, it has nothing to do with their intelligence or ability to learn. A child who was deemed three months behind in reading is pulled out of the class room for special reading tutoring.

In Massachusetts it is called an IEP - Individual Education Plan. Instead of being embarassed that their child needs one, parents bend over backwards trying to get their child an IEP so their child can have individual tutoring. Or in some cases an excuse as to why their child isn't an exceptional student.

As for the schools, it is all about the MCAS exam (Massachusett's standardized testing). My niece's first year of teaching they gave her a class with no IEPs. We thought they were taking it easy on the newbie. Turns out the reason was that they gave her all the good students who would do good on the MCAS exams regardless of what kind of teacher she turned out to be. By the way, since house prices correlate to how good the schools are, your house price rest on the backs of these kids.

As the parents demand higher and higher test results not realizing that you get to a point of no return more quickly in some districts than others, the staff simply points to the number of IEPs in their schools.

I asked my husband what he thought would happen when the school budgets get cut dramatically over the next couple years. He said that the parents with the IEPs will be the squeakiest wheels.

Followup observation via second email:

I was a parent helper one day in the classroom as the parent volunteers were presenting a program. There was one kid in the classroom who literally got up every minute or two to wander around, then he'd sit down and a minute or two later would get up again and wander. The teacher said nothing, his personal aide said nothing, the kids weren't distracted by him as apparently this is the norm. Whenever the person leading the lesson asked a question, this kid did have the answer, so despite getting up to browse a book and poke at various things in the classroom, he was listening and absorbing the material.

These parents send their kids to Boston for neurological testing and have a range of neurological diagnoses. One parent told me that her son's brain literally shuts down when people talk to him.

Currently class sizes range about 18 to 22 kids. And most parents believe that is way too high and are stunned when they can't get me riled up about it. Now with the budgets the way they are, there are rumors of class sizes of up to 30 kids in the future. How will the teachers handle multiple kids like this within the classroom then?

Pankaj R.


RE: John KInsella's Thoughts on the USA – 1968 to 2009 (March 4, 2009):
"is this the end capitalism as we know it? Is it the end of America? The response is certainly no, but what I have seen does show the way to a future world where things will be very different. The kind of freewheeling capitalism that has dominated US economic policies and society is almost certainly a thing of the past."

This is a misconception shared by many, many people around the world. It's kinda late here, but I just cannot let this go unsaid. What the US has been practicing for the better part of the 20th century is not capitalism - certainly not of the "free market' variety. It is a "managed" form of capitalism - a managed economy - managed by the powers-that-be comprising the US Govt. and the Federal Reserve. Free markets ended a long time ago with the establishment of the Central Bank in the US.

When the money supply is in the hands of a central authority, it means that the authority can direct the resources wherever it wants for the benefit of maintaining it's own power, causing massive misallocations throughout the economy - such as war and pork projects. The real estate bubble in US was a direct result of the Fed manipulating the interest rates, and not caused by the free market.

Now granted that the US is a less managed economy than, let's say, the Soviet Union, but managed nevertheless. The collapse of the Soviet Union was the collapse of a more managed economy in the face of a less managed one. But the reason's behind the current collapse in US are similar to the reasons behind USSR's collapse - Central Planning. What the Fed and US Govt. are doing openly now - acquiring stakes in banks and deciding which company/industry gets the bailout money - is just a formal recognition of the former's control over the latter.

Michael


RE: How to Play the Oil "Head-Fake" or, The Saudis Strike Back (March 2, 2009)
First of all, this version of the position of Saudis would make sense only if their declared oil reserves are real. There are a lot of evidences they are wildly exaggerated. In fact, they may be 2-3 times lower than the official figures Saudis publish. Also for Saudis conventional oil is their practically only reserve unlike for Russia or Iran whose natural gas reserves are much more significant or even Venezuela who has huge reserves of heavy oil. In this situation it would be very stupid for Saudis to crash the price of their only reserve just to cause some damage to rivals who have more significant backups.

Second, IMO the following passage makes no snese: "The Saudis are certainly grateful that the U.S. helpfully removed Saddam from power and acted to create a buffer state between Iran and the Sunni states."

Saudis know very well that Saddam WAS such a buffer state. That's why they supported him during the Iran-Iraq war (together with USA). They also know that Iraq as a Shi'ite nation is a fait accompli (thank you, Bush). The only ones who may be grateful are Iranians.

In terms of geopolitical benefits for USA, these are also very questionable. Yes, the oil crash came after the failure of Georgia to capture its brake-away provinces. (A war, in which USA invested huge amount of money and its geopolitical influence.) The failure demonstrated the vulnerability of the BTC pipeline. This came on top of the burial of the plans for natural gas pipeline from Central Asia through Afghanistan to Pakistan and India.

But orchestrating the crash to punish Russia for these two failures of American geopolitics would be at least stupid. Yes, low oil prices do cause a crisis in Russia, but the hardest hit countries are Eastern European allies of USA. The economies of Ukraine and small Baltic states are practically destroyed, Ireland, Greece, Hungary, Romania and Bulgaria are not much better. Poland, Czech Republic, and Slovakia are all in worst shape than Russia. (Note, most of American allies in Iraq war are on this list.) At the pace Russia uses its foreign currency reserves it can go on for two more years with no severe consequences.

Beside this, both Russia and Iran have much higher natural gas reserves than oil reserves. Venezuelan economy may be hit quite hard by low oil prices, but in the long run Canada may suffer more than Venezuela.

On top of all this, current low prices damage R&D in oil industry, which is the best insurance of oil shortages within the next several years. This will damage oil importers much more than Russia, Iran or Venezuela.

Thank you, readers. As always, please note the views of readers are their own and do not reflect my own views, though I am constantly influenced by readers' experiences and analyses. It is the policy of this site to purposefully reprint commentary which runs counter to views I have put forth as a way of broadening a healthy skepticism and debate on important issues.

What's for dinner at your house? has been updated with a new recipe: Classic Chili and Cornbread.
NOTE: The serialization of my new ebook "Survival +" starts March 21.

Of Two Minds reader forum (hosted offsite, reader moderated)

New Operation SERF Installment:
Operation SERF, Part 11
Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

Thank you, Don E. ($15) for your ongoing great generosity and encouragement; this site is definitely, and gratefully, on the list of of those on your tab. I am greatly honored by your support and readership.

Read more...

Friday Quiz: Inventor of the Web
March 13, 2009

Q: Did the inventor of the World Wide Web get rich?
A: No.
Is the inventor upset about that?
A: No.
Q: Who is the inventor?

A: Tim Berners-Lee The Mind Behind the Web (Scientific American)

"Now the man you've been waiting for: Tim Berners-Lee, inventor of the World Wide Web." The crowd hushes and arches forward, for they know the name but not the man. Out from the shadows strides a sprightly 43-year-old Briton, smiling beneath a short crop of blond hair.
The large audience is excited, anticipating a breathless account of how the Web came to be. But they don't get it. Berners-Lee steps to the podium and delivers a sobering warning: The Web is not done. In fact, he says in measured words, it could self-destruct if the immense forces now buffeting it are not coordinated. Patents could prevent users from moving freely around the Web, killing the universal access to information the world now enjoys. Proprietary products could fragment the one big Web into smaller, rival webs, making it impossible to link information globally.

Furthermore, the crusader says, now in inspiring tones, he has a much grander vision. If advanced properly, the Web could powerfully bind people across geographic, ethnic, economic and political bounds, leading to a society in which cooperation, rather than conflict, is the agent of change. But it will require much more work.

The crowd is a bit bewildered. They wanted to revel in a finished Web. But its parent is telling them the Web is only in adolescence, and an unruly one at that. It needs concerted guidance if it is to reach its full potential.

Tim Berners-Lee has remained unknown to the public because he has never gotten rich or famous from the Web. He likes money just fine, but is driven by his larger dream. Every dot.com millionaire, every person who's found a nugget of information searching the Web, owes a debt to Berners-Lee, but he's not looking to collect or be lionized. "I'm happy to let others play the role of royalty," the ego-free inventor says. "Just as long as they don't try to control the Web."

What's for dinner at your house? has been updated with a new recipe: Classic Chili and Cornbread.

NOTE: The serialization of my new ebook "Survival +" starts March 21.

Of Two Minds reader forum (hosted offsite, reader moderated)

New Operation SERF Installment:
Operation SERF, Part 11
Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

Thank you, Todd S. ($25) for your ongoing great generosity and kind words of encouragement (via mail) to this site. I am greatly honored by your support and readership.

Read more...

The Dematerialization of America
March 12, 2009

Dematerialization needn't involve rayguns. It is the process of an economy with too many material goods losing the excess through attrition.

It's been far too long since we posted a haiku, and longtime correspondent Jed H. broke the drought with this little gem:

Rampant Fraud and Greed
Bernie and Banks stole BILLIONS
Great Depression TWO ? (or TOO?)

Thank you, Jed--excellent. Hopefully your creativity will inspire other readers to work the 5-7-5 syllable form of haiku.

Along similar lines, "A California Yankee in Arthur's Pass National Park" sent in this clever reworking of a classic 60s TV ditty:

With apologies to Mr. Ziffel...

Greenspan Acres is the place to be.
Tent livin' is the life for me.
Homeless spreadin' out so far and wide
Keep my foreclosure, just give it back to countrywide.
Back home is where I'd rather stay.
I got allergic to having to pay.
I just adore the poorhouse view.
Dah-ling I love it, but it ain't no Park Avenue.

...No stores.
...Out doors.
...Fresh air.
...Despair.

You are my dive.
Good bye, city life.
Greenspan Acres we are there.

California Yankee also offered these comments about life in the Iron Curtain countries after the Soviet Empire crumbled. Since his familywas from "the old coutnry," his report is first-hand:

What's about to happen to the USA is a complete and utter flip-flop, compared to the fall of communism, some 20 years ago.

Very few people in our country really understood what life behind the iron curtain was like, and many that complain about pending socialism here currently, should be much more concerned with the idea of pending communist-like shopping possibilities.

When the wall came tumbling down a score of years ago, the lion's share of people previously in its shadow were only too happy to see communism go, as it really was a "we pretend to work and they pretend to pay us and how nice it is to pretend the stores have anything to sell" based economy. How bad was it, you might inquire?

It was standard operating procedure for my parents to each pack a roll of toilet paper in anticipation of there not being any in any public toilet, nor could the idea of buying some there be assured either, when they would travel back to the land of my father, in the 1970's.

The various countries caught behind the curtain all had their own currencies, which in theory had set exchange values, but in reality on the black market were worth a fraction of stated value. It wasn't uncommon for my parents to get offered 3-4x the "official" rate in local currency for their Yankee Dollars, but what could one buy with it? The stores had plenty of nothing.

What was the reasoning that caused ordinary citizens to risk going to jail in attempting to procure Dollars from my parents? There were "hard-money" stores that had many items for sale that were generally unavailable, the only catch being they only took Dollars/Marks/Pounds etc.

The fall of communism wasn't a collapse, as in a proper collapse scenario, nobody fills the void and things fall apart. Capitalism filled the void.

When communism went away, so did empty shelves. For the 1st time in virtually everybody's life, there was soon a cornucopia of consumer goods to choose from, like going from nothing to plenty virtually overnight.

The fall of capitaism will be a proper collapse scenario, who's gonna fill the void?
When capitalism goes away, so will full shelves. For the 1st time in virtually everybody's life, there will be a dearth of consumer goods to choose from, like going from plenty to nothing virtually overnight.

Can you imagine how lost people of a certain age were after the fall of communism, as it was all they knew and it's hard to teach an old dog new tricks?

That's the hurdle facing us.

Thank you, California Yankee for this report.

While I confess my crystal ball is a bit cloudy, I foresee not so much empty shelves as empty storefronts. If you go to the remaining Wal-Marts and Targets, the shelves will be as loaded as they are now--but few will have the surplus cash or credit to be buying.

What will be empty is all the storefronts which once housed retails outlets selling superfluous goods. The storefronts occupied by ethnic groceries--yes, we all have to eat, and their prices are lower than Safeway's--will still be bustling.

The malls will be empty, barricaded, ghostly, but the swap meets will be crammed with people still programmed to consider acquisition their primary form of entertainment, purpose, therapy and socializing. Since many if not most will have few surplus dollars to spend, the main fun will be looking, not buying.

Dematerialization in my view will occur much like the mass unemployment we will experience: by attrition, by erosion, not by a sudden collapse. Another store will give up the ghost and close, another mall will surrender to the inevitable, another auto dealership will shutter, and so on.

The family with three cars will get by on two when the third one becomes too costly to repair; the family with two cars will get by with one, and some of those living in locales with decent public transport or cycling weather will sell their only care and get by with transit, ride-sharing and a bike or scooter.

Please see my latest addition to the blogroll in the right column, Imagine No Cars for more.
Many people believe we will have shortages of goods. I respectfully disagree for these reasons:

1. The export model has no Plan B. Asian and European nations which have prospered by exporting to the U.S. have no Plan B; their domestic demand is simply too low to support their manufacturing sectors. They literally have no choice but to keep trying to sell to the U.S. consumer, even at a loss, lest they face insurrection from millions of unemployed.

2. Retail has no Plan B except to close. Retail, like a shark, must keep moving forward or it dies. Some retail will remain in business and it will survive by selling at deep discounts.

What we will have is not a shortage of goods but a shortage of surplus cash and credit. All the "free money" lines of credit (home equity lines, credit cards with $29,000 limits, etc.) will get pulled and that alone will put consumer largesse in deep freeze for years to come.

Dematerialization is an endless garage sale. As people move out of huge recently-built homes stuffed with furniture, skiis, three TVs, etc. and move into apartments or much smaller dwellings, they will sell or give away the surplus they no longer have room to store. People who declare bankruptcy will get rid of all the stuff in their storage lockers.

The surplus of an entire generation of consumerist excess is stupendous. Much will end up in landfill because it was poorly made or poorly maintained or both. Quality goods will be sold for pennies on the dollar because there are too many of everything. Our car is 10 years old and will last another 10 years without any major effort (it was made in Kentucky). I have a leather jacket that's 20 years old and is a bit worn but it still keeps me warm. My bicycle is basically a forever machine; so are my hand tools. You can make your own list of stuff which will last for many years if not decades.

As California Yankee observed, the real "shock to the system" will be to those for whom consumption, acquisition of another material object and the act of shopping formed their identity, their pastime and their quest for status/self-worth. Dematerialization will change the national focus in a number of ways. I was discussing status and retail with my old friend G.F.B. recently, and he commented that people will still want visible status symbols; but they will no longer be handbags plastered with a "luxury" brand name. That is out, declasse, gauche, embarrassing.

What will be "in" and chic will not be gaudy designer-label goods but hand-adorned generic clothing and the like. Luxury cars will become declasse, and superficial conspicuous consumption will be reviled by the very consumers who followed that false god right over the cliff.

Dematerialization is what happens when the velocity of money falls to near-zero. When people have to save up to buy an item cash, they will buy far fewer goods than when they could pile up tens of thousands of dollars in credit card debt. When people don't buy a new car and house every three years, they will generate zero transaction/loan fees--the very churn which fueled the false prosperity of the last decade.

The invisible ray of credit contraction and decelerating money is dematerializing the nation. We can mourn what has been lost or celebrate the passing of a scourge.

New essays and readers' comments in Readers' Journal.

NOTE: The serialization of my new ebook "Survival +" starts March 21. Of Two Minds reader forum (hosted offsite, reader moderated)

What's for dinner at your house? has been updated with two new recipes:
Quick Easy Vegetable Soup and Pork Butt Stew.

New Operation SERF Installment:
Operation SERF, Part 11
Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

Thank you, Kent M. ($50) for your continuing astonishingly generous contributions via mail to this site. I am greatly honored by your support and readership.

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Could Cities Be Safer Than Suburbs?
March 11, 2009

Many assume cities will be reduced to chaotic hellholes overrun by raging mobs and armed looters as the economy deteriorates. Perhaps this is backwards, and the real criminal hellholes will be partially-abandoned suburbs and exurbs.

Way back in 2006 longtime correspondent UKC and I began a dialog about the Pareto Principle and the way the popping of the housing bubble would hollow out exurbs and suburbs. At the risk of parading about our prescience, please read this entry from August 1, 2006: Twilight for Exurbia?
Here are UKC's comments in that entry:

"If there is a crash in the housing market many people will be forced to sell or will have it done for them by the lenders. One can then expect the price to drop and the demand then to pick up. However home ownership is not without costs - property taxes and maintenance being the most obvious. Will demand pick up to meet the supply? - maybe not.

It is a reasonable assumption that if there is massive oversupply then there may well not be buyers for some homes at any price. The source of the oversupply could be in the many empty properties held by speculators, but also in hard economic times people move in with family members to save on costs - all of which conspires to reduce demand. Empty properties soon deteriorate and a reasonable assumption is that many properties will be abandoned.

But, here's the kicker, is the number of abandoned properties likely to be evenly distributed across every neighbourhood with every street taking its ration of a couple of empty houses. I think not - these effects tend to concentrate. There will be always some purchases if the price is right and some neighbourhoods will remain vibrant and others will become sinks in a classic feedback cycle inhibits or promotes purchases in the area.

Sooo... assuming the thesis of asymetrical desolation distribution is correct - what will be the determining factors in whether a suburb will survive or die? It is possible that the future viability of a location will not be predictable a priori - a bit like chaos theory where small changes can effect improbably large outcomes. For some years in the future it may be that the value of a property could be almost entirely dependent on the maintenance level of the surrounding area. This was always the case, but now the effect may be greatly amplified.

In conditions of massive oversupply, it is possible that once an area gets perceived as being on the downhill slide then the surrounding houses will rapidly become unsaleable at any price. In physics this is known as a phase transition (more recently popularized as the Tipping Point) and it happens rapidly. After a housing price crash, until things settle down, this effect could introduce extreme price volatility as the market determines which suburbs flip from being viable to being sinks."

I posited three possible suburban situations which might well experience just this sort of phase shift:
1. exurban areas (far from urban job centers) which lack nearby employment
2. new suburbs in areas of declining demographics
3. hastily constructed homes in hurricane-prone, high-insurance locales.

As an example of scenario #1, we might speculate that new tracts of homes in exurban areas like Modesto, calif., a long (or even extreme) commute away from job centers, might remain empty regardless of price. The reason is that massive overbuilding in such areas far exceeds native population growth; once all the speculators have exited, the thousands of available homes may well exceed the demand created by new residents supported by local jobs.

Exurban wages tend to be far lower than in urban centers or suburban business parks, which means that prices for new homes would have to drop appreciably before local wage earners could afford the new homes. Additionally, employment typically drops in recessions, which may well translate into a smaller pool of people willing to endure extreme commutes required to live in exurbia.

I updated the topic in November, 2007: The Great Fall: How Suburbs De-gentrify to Ghettos (November 20, 2007)

UKC's comments from that entry:

Remember how (many months ago) we were discussing how the some of the suburbs and exurbs might be hit harder by the housing downturn than others? The idea was that the empty houses would not be evenly distributed but would tend to accumulate in sink neighbourhoods. This means you could have a fully paid for house and still see its value reduced to zero as the area becomes unliveable. (emphasis added) You did a post on this. Well, its happening.

I added these conclusions:

Given the forces at work and the evidence trickling in from the real world, I wonder if the Pareto Principle isn't at work here. If so, perhaps we can posit a quantitative model of de-gentrification: 1. When 20% of the homes in a neighborhood have negative equity, then prices begin falling rapidly.
2. When 20% of the mortgages in a neighborhood of rising negative equity re-set higher, then foreclosures rise rapidly.
3. Once 20% of the homes in a neighborhood are distressed, abandoned or foreclosed, then de-gentrification accelerates rapidly.
4. Should a critical inflection point (tipping point) be reached, the remaining responsible homeowners abandon the neighborhood to the forces of de-gentrification. This process can be illustrated by a chart such as this:

I have previously invoked the Pareto Principle to explain how a seemingly modest percentage of defaulting mortgages could (and did) bring down the entire $21 trillion U.S. housing market:
Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)
How 4% of Mortgages Have Brought Down the Entire Market (August 21, 2007)

Correspondent Richard Metzger recently submitted this story from the Los Angeles Times on precisely the topic of how depopulating suburbs become attractors for crime:

California's Inland Empire: Hard times hit, and we slowly disappear.
This story describes all too chillingly how depopulating suburbs become havens for criminal activity: petty thefts, carjackings, arson, etc.

What many seem to have forgotten is the biggest deterrent to crime is "eyes on the street": precisely what you have in densely populated cities and precisely what you don't have in partially abandoned suburbs in which most of the remaining residents are away at work.

Lively urban neighborhoods, even poor ones, are inherently much safer than demographically degentrifying exurbs. The classic text on this complex phenomenon is The Death and Life of Great American Cities by Jane Jacobs; another excellent if largely overlooked book is Streets for People: A Primer for Americans by Bernard Rudofsky.

Think about it from the point of view of the criminal: which neighborhood enables you maximum time to case the place and maximum opportunity to work undetected? Not a busy neighbhorhood with pedestrians, kids playing, retirees looking out their windows, etc. The ideal setting for crime is a sparsely inhabited exurb, far from police, essentially empty all day long, a place with no street life whatsoever.

In my gritty neighborhood, hundreds of people walk by each and every day. As the recession drives people out of their suburban homes, they move into neighborhoods like this. Fine with me; what's a few more thousand people in one of the most densely populated urban areas of the U.S.?

As city budgets are slashed as tax revenues plummet, there will be a fight to the finish for those declining budget dollars; but you can bet the police force will receive the lightest cuts because middle-class people who pay the property taxes and run the businesses will demand some police presence.

Guess where you'll be most likely to receive some police support: a mile from the station or 20 miles out in the middle of a low-tax, low activity exurban zone? It's no contest, folks; the police dispatcher has to perform triage all day and night, and she/he can't afford to send a valuable patrol car out to the boonies.

If you want a preview of living in a city of poor people, then simply visit any large developing-world metropolis. (For more on this topic, please read Planet of Slums by Mike Davis.)

Densely populated cities like Bangkok are tough on street criminals; people are everywhere at all hours of the day and night. The vast majority of buildings, be they schools, highrise apartments or commercial complexes have watchful eyes: either formal uniformed guards or informal night watchmen/women.

Let's also consider the entire "raging mob" scenario a bit more. If we look at mobs and looters from the point of view of The Art Of War by Sun Tzu, then we might observe that mobs have all sorts of inherent disadvantages. Just off the top of my head:

1. Mobs lack leadership, discipline and unit cohesion. If you're in a conflict, which group would you rather be in? The disorganized, undisciplined riot or the well-disciplined group with strong unit cohesion and leadership?
As Napoleon showed back in the 1790s, a "whiff of grapeshot" is remarkably effective in scattering an unruly mob.
2. Mobs lack sustainable purpose. Looting seems like a fine idea until bad things start happening to those around you. Then the cost-benefit analysis shifts from "opportunity" to "high risk" and the mob disperses.
3. Mobs are gatherings which enable concentration of force. If 100 burglars knock off 100 scattered houses, they are hard to locate and hard to stop. But if a mob of 500 is storming down the street, they are concentrated and thus easier to control/disperse.

I would also add that as the Iraq War winds down and Regular Army recruitments pick up as the recession reduces other opportunities, many National Guard units will be returning stateside. Urban riots are precisely the sort of situation where the National Guard can be mobilized and where a strict curfew works wonders.

Most "urban breakdown" scenarios seem to ignore various contexts and feedback loops which would act against uncontrolled urban rioting. For instance, the U.S. still pumps about 5 million barrels of oil a day, plus large quantities of natural gas. The U.S. also retains about 600 million barrels of oil in its strategic reserves. If shortages develop, you can bet the police and the National Guard will be more mobile than the mobs.

Each culture is different, but it seems to me the American public has little tolerance for urban mobs and looting. We might recall that the San Francisco earthquake and the subsequent fire in 1906 offered various opportunities for urban looting of what hadn't burned, and the Navy (followed by the Army) was quickly called in with "shoot to kill" orders to restore order. A number of people were indeed shot and killed, and perhaps not all were guilty of looting. But order was restored and in the circumstances, few complained about the rough-and-ready restoration of order.

Nowadays there are non-lethal means of crowd control and curfew enforcement, but the point is that cultural tolerance of mobs remains low. Mobs melt at the first show of organized resistance, and looting a smashed storefront is quite a bit different from looting an inhabited street. Trying to do the latter is a very good way to get shot.

In this context we note that the U.S. citizenry is almost as heavily armed as the residents of Sadr City, Iraq, and a mob that proved tiresomely destructive might just find itself under heavy civilian fire (which could not be identifed after the fact) if civilian authorities let it get out of hand.
There is an unspoken ethnic subtext to the "urban mob" scenario which is not supported by history. Urban riots have been basically confined to the neighborhoods in which they started; once they move beyond the political boundaries of their area, official and informal resistance increases proportionately. Poor people don't have any great affection for looting and mobs, either; for all the blogosphere chatter about U.S. troops on U.S. soil, we might want to recall that the National Guard are U.S. troops on U.S. soil tasked to protect civilians and maintain order.

Anthropologist Desmond Morris once remarked that he'd predicted the U.S. would lose the war in Vietnam for the simple reason that the Vietnamese were defending their homeland from what they perceived as an invading force. Well-organized, densely populated neighborhoods might well respond to a mob with just the sort of ferocity other defenders use against invading forces.

Our genetic relatives the chimps eradicate enemy troops not by frontal assault but by picking off one member at a time in isolated circumstances. If we take this insight to a comparison of depopulating suburbia and a densely populated urban neighborhood, where are you going to feel safer? A sparsely populated exurb/suburb or a densely populated city?

Give me a Third-World city any time, as long as it has a active, open street life and I can blend in with the rest of the residents--or better yet, a densely populated small town. In a way, a city can be an amalgamation of small towns which simply border other small towns. Not all cities fit this description, but many do.

Lagniappe thought: where do most voters live in the U.S.? Cities. Where are politicians going to need votes to stay in power? Cities. Who will lose their precious power if they let services to cities vanish? Politicians.

New essays and readers' comments in Readers' Journal.

NOTE: The serialization of my new ebook "Survival +" starts March 21. Of Two Minds reader forum (hosted offsite, reader moderated)

What's for dinner at your house? has been updated with two new recipes:
Quick Easy Vegetable Soup and Pork Butt Stew.

New Operation SERF Installment:
Operation SERF, Part 11
Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

Thank you, Jason M. ($40) for your most valuable and generous contributions to this site. I am greatly honored by your support and readership.

Read more...