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oftwominds-Charles Hugh Smith: Two Powder Kegs Ready to Blow: China & India

oftwominds-Charles Hugh Smith: Two Powder Kegs Ready to Blow: China & India.

China and India are both powder kegs awaiting a spark for the same reason: systemic corruption.

The conventional view of China and India sports not one but two pair of rose-colored glasses: Chindia (even the portmanteau word is chirpy) is the world’s engine of growth, and this rapid economic growth is chipping away at structural political and social problems.

Nice, especially from a distance. But on the ground, China and India (not Chindia–there is no such entity) are both powder kegs awaiting a spark for the same reason: systemic corruption in every nook and cranny of both nations. The conventional rose-colored view is that corruption will inevitably decline with modernization and economic growth.

This is simply wrong on multiple levels: as the opportunities for crony/neofeudal skimming increase, so does corruption. As the scale of the economy increases, so does the scale of corruption.

China’s “princelings” (offspring and family of the inner political circle and top apparatchiks of the Communist Party) are billionaires, not mere millionaires. A recent expose of offshore accounts held by various Chinese billionaires estimated the wealth skimmed and transferred our of China at between $1 trillion and $4 trillion: China’s Epic Offshore Wealth Revealed: How Chinese Oligarchs Quietly Parked Up To $4 Trillion In The Caribbean.

Even the top number is a gross underestimate, as $4 trillion only accounts for the skim of the top layer; beneath that 1/10th of 1% is the rest of the top 1%, tens of thousands of lower-level political functionaries who skimmed billions of dollars forcing peasants off their land and selling development rights to crony developers–to name but one common skim of many.

A more realistic estimate might be $6 trillion–half of China’s gross domestic product (GDP). Consider the ramifications of the many models of systemic corruption at the top: How a PLA General Built a Web of Corruption to Amass a Fortune.

I know from confidential on-the-ground sources that a significant percentage of the entire top political layer of 3rd, 4th and 5th tier cities have left China for well-padded nests in the West: Australia and Canada are popular choices, as the right to immigrate can be purchased–just bring in the requisite sum of cash looted from peasants. (The U.S. also grants special immigration status to those bringing in major capital and declaring their intent to hire Americans: easy enough with looted millions.)

(Sidebar on how even the lowly functionary skimmer can get huge sums out of China: take a “vacation” to Macau. Buy $1 million in casino chips with your looted yuan. Lose $50,000 at the tables and then go cash in your remaining chips in U.S. dollars. Deposit the dollars in a Hong Kong or other Asian bank and then transfer the cash to L.A. or Vancouver to buy a house for cash. Repeat as necessary.)

All this systemic corruption is accepted as long as the conveyor belt of wealth is moving: that the previous political Plutocracy skimmed their $4 trillion and absconded with their ill-gotten gains is OK to their replacements, as long as there is another $6 trillion to be skimmed.

The problem is there isn’t another $6 trillion to be skimmed. It has taken an enormous credit bubble of $23 trillion (The $23 Trillion Credit Bubble In China Is Starting To Collapse – What Next?) plus the monumental credit expansion of the shadow banking system in China to enable the skimming of $6 trillion by the political/financial Plutocracy.

This $23 trillion credit bubble is roughly twice the size of China’s entire GDP ($12 trillion). That this credit bubble is generating less return in the real economy is obvious–diminishing returns have set in with a vengeance.

The revolution never starts with the oppressed peasantry–it starts with the bourgeois who bought the fantasy of another $6 trillion to be skimmed and credit bubbles/ real estate valuations that never go down. The leadership in China has managed to create a propaganda bubble of epic proportions: Chinese leaders are supposed to have a long-term view that puts the West to shame.

Alas, the secret view of China’s leadership is considerably shorter-term: U.S. dollars in Swiss bank accounts, real estate in Vancouver, San Francisco, New York City, London, Geneva, etc. and whatever other assets can be scooped up with looted billions.

Corruption isn’t just abstract: Much of China’s building boom will not last a generation, much less a long-term timeline. This toppled tower is an apt metaphor for China’s financialized crony-capitalist credit bubble and its shoddy corruption-riddled construction:

Nine held over Shanghai building collapse
The Chinese authorities are holding nine people in connection with the collapse of a 13-storey block of flats, raising fresh questions about corruption and shoddy practices in China’s construction industry.

China’s Towers and U.S. McMansions: When Things Fall Apart (Literally) (April 14, 2010).

India’s system is different, but equally corrupt. Combine feudalism and religious tradition with a helping of modern crony capitalism and neofeudal looting, add a dash of post-Imperial flavoring and voila, corruption on every level.

The sad irony of this pervasive, systemic corruption that enriches the Plutocracy is that the average Indian and Chinese citizen is basically honest. Non-Elites will tolerate the corruption at the top as long as they believe their own prosperity is advancing. Once it becomes clear that their prosperity has been hijacked by the Plutocracy, tolerance of oppression, corruption and the vast inequalities of wealth being skimmed by the well-connected few will wear thin.

The spark that ignites the powder keg cannot be predicted or suppressed. Don’t look to the disenfranchised peasantry as the source, though they are ready enough to cast off the Powers That Be; look to those who believed the gilded promises issued by the looters and discovered that the fruits of their labor and their hopes is disillusionment on a scale as vast as the skim looted from their nation by their self-serving leadership.

Charles Hugh Smith: What If Nations Were Less Dependent on One Another? | Peak Prosperity

Charles Hugh Smith: What If Nations Were Less Dependent on One Another? | Peak Prosperity.

Autarky is more than a ten-dollar word for self-sufficiency, as it implies a number of questions that “self-sufficiency” alone might not.

Autarky vs. Self-Sufficiency

The ability to survive without trade or aid from other nations, for example, is not the same as the ability to reap enormous profits or grow one’s economy without trade with other nations. In other words, ‘self-sufficiency’ in terms of survival does not necessarily imply prosperity, but it does imply freedom of action without dependency on foreign approval, capital, resources, and expertise.

Freedom of action provided by independence/autarky also implies a pivotal reduction in vulnerability to foreign control of the cost and/or availability of essentials such as food and energy, and the resulting power of providers to blackmail or influence national priorities and policies.

Where self-sufficiency might suggest a binary state – you’re either self-sufficient or you’re not – autarky invites an exploration of which parts of one’s economy and political order are self-sufficient and which ones are critically dependent on foreign approval, capital, resources, and expertise.

In terms of military freedom of action, some nations are able to commit military forces and project power without the aid or approval of other nations. These nations have military autarky, though they might be entirely dependent on foreign countries for critical resources, capital, expertise, etc.

In this case, though their military may be self-sufficient in terms of capabilities (power projection, control of airspace, etc.), any dependency in other critical areas introduces an element of political, financial, or resource vulnerability should the key suppliers disapprove of a military action. These vulnerabilities impose often-ambiguous but nonetheless very real limits on freedom of action.

The key take-away from this brief overview is that autarky has two distinct states. One is absolute: i.e., Can a nation grow, process, and distribute enough food to feed its population if trade with other nations ceased?, and the other is relative: Is the we-can-feed-ourselves self-sufficiency of the subsistence-survival variety that requires great sacrifice and a drastic re-ordering of national priorities and capital? Or is it relatively painless in terms of national sacrifices and priorities?

Clearly, relative autarky invokes a series of trade-offs: Is the freedom of action and reduction in vulnerability gained by increasing autarky worth a national re-ordering of values, priorities, and capital, and quite possibly broad-based, long-term sacrifices?

There is an additional issue raised by autarky: Is the self-sufficiency a matter of being blessed with abundant resources, or is it the result of conscious national policy and resolve?

Autarky as Policy

Consider petroleum/fossil fuels as an example. Nations blessed with large reserves of fossil fuels are self-sufficient in terms of their own consumption, but the value of their resources on the international market generally leads to dependence on exports of oil/gas to fund the government, political elites, and general welfare. This dependence on the revenues derived from exporting oil/gas leads to what is known as the resource curse: The rest of the oil-exporting nation’s economy withers as capital and political favoritism concentrate on the revenues of exporting oil, and this distortion of the political order leads to cronyism, corruption, and misallocation of national wealth on a scale so vast that nations suffering from an abundance of marketable resources often decline into poverty and instability.

The other path to autarky is selecting and funding policies designed to directly increase self-sufficiency. One example might be Germany’s pursuit of alternative energy via state policies such as subsidies.

That policy-driven autarky requires trade-offs is apparent in Germany’s relative success in growing alternative energy production; the subsidies that have incentivized alternative energy production are now seen as costing more than the presumed gain in self-sufficiency, as fossil-fueled power generation is still needed as backup for fluctuating alt-energy production.

Though dependence on foreign energy has been lowered, Germany remains entirely dependent on its foreign energy suppliers, and as costs of that energy rise, Germany’s position as a competitive industrial powerhouse is being threatened: Industrial production is moving out of Germany to locales with lower energy costs, including the U.S. (Source)

The increase in domestic energy production was intended to reduce the vulnerability implicit in dependence on foreign energy providers, yet the increase in domestic energy production has not yet reached the critical threshold where vulnerability to price shocks has been significantly reduced.

Assessing the Trade-Offs

This highlights the critical nature of the autarchic thresholds of systemic costs and freedom of action. Above a difficult-to-define threshold, the trade-off required to increase self-sufficiency to the point of being meaningful is too high in sacrifice or cost to the economy or society; the trade-offs required aren’t worth the gain in freedom of action and self-sufficiency.

Put another way: Below a difficult-to-define threshold, an increase in self-sufficiency does not yield either lower or more reliable economic costs, nor does it decrease the nation’s vulnerability to blackmail, price shocks, etc.

In other words, though dependence always has potentially negative consequences, it can also be cheaper, more convenient, and more profitable than autarky.

The diffused benefits of autarky are often overshadowed by the presumed burdens of increasing self-sufficiency. But this trade-off can be illusory. Though the status-quo players benefiting from dependence on foreign markets, trade, and capital will shrilly claim that the nation is doomed should their foreign-derived profits be sacrificed in favor of increasing autarky, a desire for more autarky often pushes the economy and society into a highly positive and productive search for greater efficiencies and more productive uses of capital.

Is the sacrifice needed to reach self-sufficiency as steep as presumed, or is a new order of efficiency enough to meaningfully reduce dependence on foreign resources and capital?

A Thought Experiment in American Autarky

If we look at America’s consumption of fossil fuels and its dependence on oil imports to feed its consumption, autarky forces us to ask: Exactly how difficult would it be to lower consumption enough to eliminate the need for imported oil? Would the economy suffer a death-blow if vehicle, heating, and appliance-efficiency standards were raised, and business travel declined in favor of telecommuting and teleconferencing, etc.?

The answer of those profiting from the status quo is, of course, “Yes, the U.S. will be fatally harmed if energy consumption declines,” but the reality is that such creative destruction of wasteful inefficiencies and consumption is the heart of free enterprise and the rising productivity that creates widespread prosperity.

If the U.S. had listened to the 1970s-era defenders-of-the-status-quo doomsdayers, who claimed that environmental codes and higher energy-efficiency standards would doom the nation, the U.S. economy would in fact be doomed by the absurdly inefficient energy consumption of that era. The U.S. economy has remained vibrant and productive precisely because the defenders-of-the-status-quo doomsdayers lost the political conflict between the forces of improved efficiency and productivity and the defenders of the inefficient, wasteful, and diminishing-returns status quo.

There is one other element in the calculus of dependence, vulnerability, and freedom of action implicit in any discussion of autarky. Despite the rapid increase in production of oil and gas in the U.S., America remains dependent on imports of oil. But not all foreign sources of oil, capital, expertise, etc. are equal; some suppliers may be stable, close allies, and share borders and standards of trade (for example: Canada, Mexico, and the U.S.), while others may be distant, unstable, and unreliable.

In other words, autarky may not be worth the cost if a nation is dependent on stable, close neighbors, but the value of autarky rises very quickly when a nation’s survival is dependent on distant, unstable nations with few ties other than the profitable export of resources.

Though a survey of America’s relative dependence and self-sufficiency would require a book, let’s look at a few charts to get a taste of America’s declining dependence on foreign-supplied oil.

Declines in consumption have the same effect in terms of reducing dependency as do increases in domestic production. Has the U.S. economy imploded as miles driven have declined? Or has the increased efficiency this implies boosted productivity?

U.S. imports of petroleum have declined:

U.S. domestic crude oil production has increased:

U.S. natural gas production has risen:

The U.S. oil/gas rig count is still far lower than the peak in the 1980s:

There are many issues raised by these charts, including the sustainability of increased production, the possibility of further declines in consumption, policies that affect production and consumption, and so on, but similar charts of grain, capital, expertise, goods, etc. would help to fill out the complex set of issues raised by declining consumption and increasing domestic production and productivity.

In finance, dependence can mean dependence on other nations for capital and/or profits. What is the consequence of rising autarky for an economy such as America’s that is heavily dependent on foreign markets and trade for the stupendous profitability of its corporations?

In Part II: The Consequences of American Autarky, we discuss this and other ramifications of America’s rising autarky.

America’s ability to project power and maintain its freedom of action both presume a network of diplomatic, military, and economic alliances and trading relationships which have (not coincidentally) fueled American corporation’s unprecedented profits.

The recent past has created an assumption that the U.S. can only prosper if it imports oil, goods, and services on a vast scale. Could the U.S. shift production from overseas to domestic suppliers, and reduce its consumption of oil and other resources imported from other nations?

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

oftwominds-Charles Hugh Smith: Janet Yellen, the Nation’s New Chief Slumlord

oftwominds-Charles Hugh Smith: Janet Yellen, the Nation’s New Chief Slumlord.

Janet Yellen’s role as the nation’s slumlord is masked by her apparent distance from the Fed’s money spigot and the resulting institutional ownership of the nation’s rental housing stock.

Please welcome the nation’s new chief slumlord, Janet Yellen. The previous top slumlord, Ben Bernanke, has retired from the position of Chief Slumlord (i.e. chair of the Federal Reserve) to the accolades of those who benefited from his extraordinary transfer of wealth from the many to the few.

Why is the chairperson of the Fed the nation’s top slumlord? Allow me to explain.We only need to understand two facts to understand the Fed’s role as Slumlord.

1. Rental housing has long been a decentralized, locally owned industry. Over 90% of rental properties under 50 units have historically been owned by individuals or couples: the nation’s landlords have historically been Mom and Pop, middle-class folks who saved capital and used those savings to buy a single-family home or small apartment building (duplex, triplex, four-plex) as an investment that they own and manage.

Very few amass a huge portfolio of properties, as few have the income or assets (i.e. the collateral) to leverage the purchase of dozens of rental properties.

Buildings up to four units qualify for conventional mortgages; small rental properties are not considered commercial properties like strip malls or large apartment complexes.

This diverse, local ownership provided a wide spectrum of residential rentals. The wider the variety of rentals and owners, the greater the diversity of prices, locales and requirements. This is the essence of free enterprise: sellers (landlords) and buyers (renters) agree to price and conditions in a dynamic, open and adaptive marketplace.

2. No Mom and Pop real estate investor can compete with financial institutions who can borrow unlimited sums of money from the Federal Reserve at near-zero rates of interest.

Let’s start by asking what happens to the price of real estate when mortgages fall from 8% interest to 4%: prices basically double, because buyers can “afford” to pay more at low rates of interest.

When conventional mortgage rates are 8%, a rental that costs $200,000 requires a 30% down payment in cash (because the buyers are not owner-occupants) or $60,000. The simple interest on a $140,000 mortgage is about $11,200 annually. (Let’s use simple annual interest for simplicity’s sake.)

At 4%, the price can double to $400,000, with a 30% down of $120,000 and a mortgage of $280,000, and the mortgage accrues the same $11,200 in annual interest.

Declining interest rates push real estate prices higher.

At first glance, this doubling in price doesn’t seem to affect the cost of ownership. But that is deceptive; consider how many households can scrape up $120,000 in cash compared to the number who can scrape up $60,000. The higher the price, the bigger the down payment required. The higher the down payment, the fewer the number of households who can accumulate that much cash.

To households that live paycheck-to-paycheck, both sums are out of reach. But a significant number of middle class households could accumulate $60,000: such a sum could come from a family house that was sold and divided amongst the offspring, for example, or a Solo 401K that allows the retirement fund to own real estate, or from saving $5,000 a year for 12 years.

The Federal Reserve’s Zero Interest Rate Policy (ZIRP) was designed to push real estate prices higher. The Fed’s public justification was “the wealth effect”: the idea was that as the family home increased in value, homeowners would begin to borrow and spend more money due to their increased home equity.

The second Fed goal was to increase home sales by lowering mortgage rates, theoretically enabling more marginal buyers to buy a home. But since prices rise as mortgage rates drop, this goal is mooted unless marginal buyers are also given a free ride on down payments and qualifying income, i.e. offered near-zero down payments and no-document mortgage qualification processes.

But zero interest rates and unlimited liquidity don’t just push real estate prices higher–they give institutions with access to the Fed’s nearly-free money an unbeatable advantage over Mom and Pop real estate investors.

Imagine being able to borrow $400,000 at 1% with zero collateral. You can now buy the rental property for cash, and pay only $4,000 in simple annual interest. And you didn’t have to put up a dollar of actual collateral to buy the property.

Consider the huge advantages you now have over the competing Mom and Pop bidders. Sellers typically prefer cash offers, so your cash offer (of Fed money) is more attractive than Mom and Pop’s loan-based bid.

If the price jumps to $500,000, Mom and Pop are blown out of the water: they don’t have the additional $30,000 cash required as collateral.

Thanks to the Fed, you don’t need any collateral. You can borrow $500,000 as easily as $400,000, and the increase in annual interest is trivial: a mere $1,000.

Now consider the operating costs: you have a $7,000 annual advantage because you have access to the Fed’s nearly-free money. Mom and Pop have to pay $11,200 in simple annual interest, while you pay only $4,000. A property that is break-even to Mom and Pop reaps you a $7,000 annual profit, just because you can borrow money from the Fed for next to nothing.

Now multiply the $400,000 and the $7,000 by 1,000. Now you can buy $400,000,000 of rental properties and skim $7,000,000 in annual profits, just from the advantage of having access to the Fed’s quantitative easing (QE) nearly-free money.

Any advantages you can accrue from economies of scale from owning tens of thousands of rental properties are also yours to keep, courtesy of the Fed.

Now you understand why Janet Yellen is the nation’s new top slumlord. Her policies of unlimited liquidity, QE and zero interest rates directly enable financial Elites to beat out Mom and Pop rental housing investors and buy tens of thousands of rental properties at will.

Access to free money and near-zero interest rates gives institutional buyers a built-in advantage over Mom and Pop rental property owners: no collateral and free profits from super-low rates available to those closest to the Fed’s QE money spigot.

Institutional ownership turns the rental housing stock into a Fed-enabled financial monoculture. Individual Mom and Pop owners may not require a credit check, or they might not raise the rents very often; the odds that you will be treated as a human being are higher because the scale of the operation is small and local.

To Fed-enabled Institutional landlords, you are an income stream to be skimmed.You will be processed and managed remotely, and variations are not allowed, as they mess up the profit machine.

Fed-enabled Institutional landlords may or may not hire competent, responsive managerial firms to manage their thousands of properties: from the point of view of Fed-enabled Institutional landlords, the lower the costs, the larger the profits. One way to lower costs is to not respond to tenant complaints or requests for service. Another is to hire the lowest-cost (and likely understaffed) management firm.

Janet Yellen’s role as the nation’s slumlord is masked by her apparent distance from the Fed’s money spigot and the resulting institutional ownership of the nation’s rental housing stock. But guess what, Chairperson Yellen: we’re not fooled. Your phony facade of “progressivism” doesn’t mask your real role as the nation’s top slumlord.

oftwominds-Charles Hugh Smith: Pimping the Empire, Progressive-Style

oftwominds-Charles Hugh Smith: Pimping the Empire, Progressive-Style.

Supporting the central state to protect your favored cartels is simply pimping for the Empire.

The central illusion of both Left (so-called Progressives) and Right (so-called conservatives) is that the Central State’s essentially unlimited powers can be narrowly directed to further their agenda.

(I say “so-called” because the “Progressives” are not actually progressive, and the “Conservatives” are not actually conservative. Those labels are Orwellian double-speak, designed to mask the disastrous consequences of each ideology’s actual policies.)

Let’s begin by stipulating that ideology, any ideology, is an intellectual and emotional shortcut that offers believers ready-made explanations, goals, narratives and enemies without any difficult, time-consuming analysis, study or skeptical inquiry. This is the ultimate appeal of ideology: accepting the ideology relieves the believer of the burdens of analysis, skeptical inquiry, uncertainty/doubt and responsibility: all the answers, goals and narratives are prepackaged and mashed together for easy consumption.

This is one of the core messages of Erich Fromm’s classic exploration of ideology and authoritarianism, Escape from Freedom.

And what is the essential foundation of authoritarianism? A central state. This is not coincidental.

What few grasp is the teleology of the centralized state: by its very nature (i.e. as a consequence of its essentially unlimited powers), the central state is genetically programmed to become an authoritarian state devoted to self-preservation and the extension of its reach and power.

The central illusion of Progressives is that an all-powerful central state will not become a self-serving expansive empire, but will be content to wield its vast powers to protect its favored cartels/monopolies and distribute money skimmed from the citizenry to Progressive constituencies such as public unions, healthcare and education.

This is an absurd fantasy. Once you give a central state essentially unlimited power to stripmine income and wealth from its citizens, create and/or borrow essentially unlimited sums of money, protect private (and politically powerful) cartels from competition and project military, financial and diplomatic power around the globe, the state will pursue Authoritarianism and Empire as a consequence of possessing those powers.

You can’t cede unlimited, highly concentrated powers to the central state and then expect the state not to fulfill its teleogical imperative to protect and extend its powers. The state with unlimited powers will be ontologically predisposed to view any citizen that seeks to limit its expansion of power as an enemy to be suppressed, imprisoned or marginalized.

The state with unlimited powers will be ontologically predisposed to protecting its powers by cloaking all the important inner workings of the state behind a veil of secrecy, and pursuing and punishing any whistleblowers who reveal the corrupt, self-serving workings of the state.

The state with unlimited powers will be ontologically predisposed to view any other nation or alliance as a potential threat, and thus the state will pursue any and all means to distrupt or counter those potential threats.

The state with unlimited powers will be ontologically predisposed to create and distribute propaganda to mask its self-serving nature and its perpetual agenda of extending its powers, lest some threat arise that limits those powers.

Democracy and a central state with unlimited powers are teleologically incompatible.

Progressives worship the central state and cede it essentially unlimited powers because they want that state to be powerful enough to impose their agenda on others and reward their constituencies.

But it doesn’t work that way. Once you cede unlimited, highly concentrated power to the central state, you get an authoritarian empire that is driven to protect itself from any threat at all costs–including democracy, though the state may maintain a facade of carefully managed “democracy” as part of its propaganda machinery.

You cannot have a state with essentially unlimited power and not end up with cartel-capitalism. So-called Progressives defend their favored cartel-fiefdoms of healthcare and education (and the “conservative” banking and defense cartels, too, to insure banks fund their campaigns and to protect their political flank with a “strong on defense” carte blanche to the National Security cartels), yet these cartels are busy bankrupting the nation and destroying the very programs Progressives claim to hold dear.

You can’t have it both ways, Progressives: if you support a central state with essentially unlimited power to protect and fund your constituent cartels, you end up with self-liquidating cartel-capitalism, a state bent on protecting itself from the uncertainties/risks of democracy and a global Empire that is teleologically driven to expand its reach and power by any and all means available.

Once you choose to cede essentially unlimited powers to the central state, all decisions after that are made in service of the state. The idea that the state can be limited to helping the needy is illusory.

The only legitimate duties of the state are limited: 1) protect the commons from destruction and exploitation; 2) protect the citizenry from exploitation or oppression by those with superior power or resources; 3) maintain transparency in all governance and 4) maintain a system of sound money.

The so-called Progressives will learn what the teleology of the state means in the real world when the state comes after them. Once you cede unlimited power to the central state, any attempt to limit that power marks you as an enemy.

War at Home: Covert action against U.S. activists.

Supporting the central state to protect your favored cartels and protect your political power over the state’s tax revenues is simply pimping for the Empire. You can call it “progressive,” but it’s still pimping for the Empire.

The Trends to Watch For in 2014: Charles Hugh Smith | Peak Prosperity

The Trends to Watch For in 2014: Charles Hugh Smith | Peak Prosperity.

At the beginning of this year (2013), I identified eight key dynamics that will play out over the next two to three years (2013-2015):

Trend #1:  Central Planning intervention in stock and bond markets will continue, despite diminishing returns on Central State/Bank intervention

Trend #2:  The omnipotence of the Federal Reserve will suffer a fatal erosion of confidence as recession voids Fed policy and pronouncements of “recovery”

Trend #3:  The Mainstream Media (MSM) will continue to lose credibility as it parrots Central Planners’ perception management

Trend #4:  The failure of what is effectively the “state religion,” Keynesianism, will leave policy makers in the Central State and Bank bereft of policy alternatives

Trend #5:  Economic Stagnation will fuel the rise of Permanent Adolescence

Trend #6:  Income, the foundation of real economic growth and wealth-distribution stability, will continue to stagnate

Trend #7:  Small business—the engine of growth—will continue to decline for structural reasons

Trend #8:  Territorial disputes will continue to be invoked to distract domestic audiences from domestic instability and inequality

I know it may strike some as “cheating” that my forecast is for these trends to be consequential within a three-year window rather than by a specific date, but note these are trends, not events, and trends tend not to matter until suddenly they do. This is the nature of Pareto Distributions, in which trends are inconsequential until they reach a critical mass of 4% of the populace, at which point the “vital few” exert outsized influence on 64% of the populace.

Let’s see how the trends developed in 2013:

Trend #1:  Intervention yielded outstanding returns on corporate profits and stocks, but diminishing returns on employment, household incomes for the bottom 80%, and growth, all of which are historically subpar:

Trend #2:  The Fed’s members are still regarded as heroic demigods who benignly manage the Earth’s economy. When (not if) the stock market rolls over in 2014-15, Fed omnipotence will suffer.

Trend #3:  This one is difficult to track, but anecdotal evidence (declining circulation of many mainstream print media, declining viewership in some cable news channels, etc.) may reflect rising disenchantment with the media’s coverage of key issues.

Trend #4:  I think it is quite clear that the Fed and its posse of experts have no alternatives to ZIRP (zero interest rate policy) and QE (quantitative easing).

Trend #5:  This one is difficult to monitor. If we use the percentage of young people still living at home and the rise of “selfies” (photos taken of oneself), then perhaps a case can be made that this trend is already visible.

Trend #6:  Median household income has edged up, but I suspect this is the result of higher incomes for the top 10% rather than widely distributed gains. Since the top 10% collect 51% of all income, it stands to reason that increases flowing to the top will boost median income even if the bottom 90% sees declines in income:

Trend #7:  The unintended consequences of the Affordable Care Act have yet to fully play out.

Trend #8:  China’s recent invocation of a “defense zone” that includes the Senkaku Islands suggests this trend is definitely in play.

I also listed eight outcomes:

Outcome #1:  The counterfeiting of risk-free assets will continue to be a primary policy of the Status Quo.

Outcome #2:  Risk will continue to be transferred en masse to the public.

Outcome #3:  Democracy in America is officially dysfunctional.

Outcome #4:  Incentives will continue to be structurally perverse, and the rule of law will continue to be bent by individuals, enterprises, and the government.

Outcome #5:  Health care (a.k.a. sick care) will continue to be an enormous drag on the economy as diminishing returns, fraud, complexity, and defensive medicine add costs without equivalent improvements in health.

Outcome #6:  The costs of complying with Obamacare will act as an inflection point in the decline of small business

Outcome #7:  The trend of the Status Quo “solving” perceived problems by adding layers of immense complexity to systems already suffering from marginal returns will continue.

Outcome #8:  The informal cash economy will continue expanding, as those who choose to opt out of the Status Quo and those who must opt out as a survival mechanism do so.

Without going into detail, I think a self-evident case can be made that each of these outcomes is already visible at the end of 2013.

Additional Trends to Watch in 2014

Since the trends listed above are still operant, these eight are additional rather than replacement trends:

Trend #1:  The Number One growth industry in the private sector will increasingly be lobbying the government for favors.  When the State selects the winners and losers throughout the economy, then companies are essentially forced to make their case for special dispensations via campaign contributions and unrelenting lobbying. Elected officials benefit from their centralized powers as the line of corporations anxiously pressing campaign cash on them lengthens in direct proportion to the expansion of State power.

This is the essence of what some call the Corporatocracy that effectively governs the U.S.A. and what I call the Neofeudal Cartel/State system, as the State and its chosen cartels dominate the economy and society in a fashion that can only be described as neofeudal.

Since organic growth from increases in wages and purchasing power are limited to the top 10%, the only sectors that can possibly gain growth from rising sales are Porsche dealerships and other luxury outlets that cater to the top 10%.  But since the number of households adding income is a thin 10 million out of 121 million households, moving more luxury goods offers little growth opportunities for the rest of the economy, which is stagnant at best.

As a result, lobbying the central State for favors is the default “growth industry.”

Trend #2:  The difference between anemic growth and recession will increasingly be semantic. This is another “How many angels can dance on the head of a pin?” debate in which Ivory Tower/State economists parse juiced or manipulated data to conclude the economy is “growing slowly” or slipping into negative growth; i.e., recession.

Experientially, if purchasing power and discretionary income (what’s left after paying taxes, rent, mortgages, food, utilities, etc.) are both declining for 90% of households, the “growth” in inventories, exports, and other factors that feed into gross domestic product (GDP) are not reflecting the economy we actually inhabit.

Trumpeting what amounts to signal noise as “steady growth” is adept perception management (i.e., propaganda), but if it doesn’t include increases in purchasing power and discretionary income for the bottom 90%, it’s a propaganda embarrassment, like the Fed official hyping the declining cost of tablet computers while someone in the audience shouts, I can’t eat an iPad!

Trend #3:  The decline in local government services will accelerate as rising pension/healthcare costs squeeze budgets.  Local governments (city, county, state) have avoided the politically combustible collision of rising pension/healthcare costs and angry taxpayers tired of service cuts by accounting trickery and jacking up fees and taxes. Crunch-time has also been put off by rising home values that pushed property tax revenues higher.

These solutions are running out of rope: Property values have topped out, and accounting trickery hasn’t solved the fiscal impossibility of maintaining services and meeting pension obligations in a stagnant economy. When push comes to shove, services must be cut, either by bankruptcy or by negotiation. Since the likelihood that taxes will drop is zero, taxpayers will get fewer services for their taxes.

Trend #4:  Middle-class income, purchasing power, and discretionary income will all continue to stagnate.  Unless you define “middle class” as those households earning $150,000 and up (9.1% of households)—and if you define the top 9% as “middle” class, your definition has lost all meaning—what’s left of the middle class will see real and discretionary income continue to stagnate. The causes of this decline in labor’s share of the economy are structural and cannot be remedied by lowering interest rates to zero or jacking up the stock market: Zero-interest rates have deprived households of income, and few in the bottom 90% own enough stock to affect their wealth. (Source: The Distribution of Household Income and the Middle Class)

Trend #5:  Junk fees will continue to replace legitimate taxes.  Fearful of blowback from ever-rising taxes, local governments have turned to junk fees as the preferred method of “revenue enhancement.”  These include sharply higher fees for recreation, parking tickets, permits, etc., and a multitude of add-ons to property taxes and other existing tax structures. Local authorities are counting on the taxpayers to sigh but do nothing as long as the fee increases are small enough to avoid triggering political resistance.

In our small California town, the city has raised the fees for trash pickup by more than 100% in recent years—ironically, their reason is that recycling (which they encourage) has reduced the amount of trash being collected.  This sort of nonsensical rationalization for radically higher fees will join the usual justifications; i.e.,We can no longer fill potholes and pave streets unless we raise your taxes.

How did they manage to perform these basic services 10 or 20 years ago with much smaller budgets? The answer: See Trend #3, skyrocketing pension and healthcare costs.

Trend #6:  The African oil exporting nations will move from the back burner to the front ranks of geopolitical flashpoints, joining the South China Sea, the Mid-East, and North Korea. I recently discussedThe Scramble for Africa’s Oil and the “resource curse” that is fueling the potential for conflict over Africa’s untapped oil wealth:

Trend #7:  Americans will continue to passively accept the rise of the Police/National Security State. This may eventually change, but for the next few years the existing motivations for passive acceptance of increasing centralization of power will continue to hold sway.

The first is complicity: The 49% of all Americans—156 million out of 317 million—who receive direct transfers/benefits from the Federal government see little reason to rock the boat or put their cash from the government at risk.  (Source)

The second reason is a rational fear of State power: fear of getting tear-gassed and arrested should you join a protest, for example, and a generalized fear of putting whatever you still have at risk by confronting a government given to secrecy and retribution against whistleblowers, protesters, etc.

Trend #8:  The Federal government will quietly absorb the rising losses from defaulting student loans rather than reveal the bankruptcy of the entire Higher Education/Student Loan Cartel.  There are myriad ways to quash the recognition that the Higher Education/Student Loan Cartel is failing to provide useful education while it burdens younger generations with $1+ trillion in high-interest debt: quietly forgive some defaulted loans, stop enforcing collection of defaulted loans, etc.  The Federal government doesn’t want to call attention to its management of this powder keg, as widespread recognition that the system is broken will unleash calls for a general debt amnesty that will blow the big-debt-for-worthless-degrees system wide apart.

In Part II: Outcomes to Bet On in 2014, we’ll forecast the most likely consequences of these trends. With such understanding comes the opportunity to position ourselves in front of them for protection and/or profit.

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


oftwominds-Charles Hugh Smith: The Only Leverage We Have Is Extreme Frugality

oftwominds-Charles Hugh Smith: The Only Leverage We Have Is Extreme Frugality.

Debt is serfdom, capital in all its forms is freedom. The only leverage available to all is extreme frugality in service of accumulating productive capital.

There are only three ways to better oneself financially: marry someone with money, inherit money or accumulate capital/savings and invest it in productive assets. (We’ll leave out lobbying the Federal government for a fat contract, faking disability, selling derivatives designed to default and other criminal activities.)

The only way to accumulate capital to invest is to spend considerably less than you earn. For a variety of reasons, humans seem predisposed to spend more as their income rises. Thus the person making $30,000 a year imagines that if only they could earn $100,000 a year, they could save half of their net income. Yet when that happy day arrives, they generally find their expenses have risen in tandem with their income, and the anticipated ease of saving large chunks of money never materializes.

What qualifies as extreme frugality? Saving a third of one’s net income is a good start, though putting aside half of one’s net income is even better.

The lower one’s income, the more creative one has to be to save a significant percentage of one’s net income. On the plus side, the income tax burden for lower-income workers is low, so relatively little of gross income is lost to taxes.

The second half of the job is investing the accumulated capital in productive assets and/or enterprises. The root of capitalism is capital, and that includes not just financial capital (cash) but social capital (the value of one’s networks and associations) and human capital (one’s skills and experience and ability to master new knowledge and skills).

Cash invested in tools and new skills and collaborative networks can leverage a relatively modest sum of cash capital into a significant income stream, something that cannot be said of financial investments in a zero-interest rate world.

We hear a lot about the rising cost of college and the impossibility of getting a degree without loans or tens of thousands of dollars contributed by parents. I think my own experience is instructive, as there is another path: extreme frugality.

At 19, my two sets of parents were unable to provide me with more than a rust-bucket old car. My father sent me an airline ticket to visit him, but nobody ponied up any cash for tuition, books, or living expenses.

Step One was eliminating housing costs until I earned enough to pay rent. By good fortune, I was able to secure a work-trade housing situation: I was given a room filled with boxes of accounting records, and a path through the boxes to a bathroom and tiny kitchenette in trade for yard work.

Step Two: cut all other expenses to the bone. Since I was working for a remodeling contractor, I needed the car to get to the various jobsites, but I bicycled whenever possible to save on gasoline. I prepared all my own meals and avoided buying snacks, drinks, etc. until my income rose enough to swing such luxuries. I can count the number of drinks or meals I bought on campus in four years on one hand.

Music purchased: none. (We played our own music or listened to the radio on the jobsite.) Clothes purchased new: none. (That’s what church jumble sales/bazaars are for: $1 shirts, etc.) And so on.

Step Three: find a job with upside earnings and skills. I’d worked in snack bars and mowed lawns, but construction opened up opportunities to advance my skills and gain sufficient proficiency to deserve a raise in pay.

Since I wasn’t guaranteed any opportunity for advancement, I volunteered to work Saturdays for my bosses or anyone else on the crew who had sidework on the weekends. I volunteered my construction services to community groups to gain experience (there’s nothing like being responsible for the project, as opposed to just following orders) and open access to new networks of productive, accomplished people.

For example, I rebuilt the rotted redwood rear steps to the historic Agee House in the back of Manoa Valley for free. (Sadly, this wonderful building burned down a few years later.)

In business, the word “hustle” has the negative connotation of high pressure sales or a scam. In sports, it has a positive connotation of devoting more energy and effort as a means of compensating for lower skills or physical size. Step Three requires hustle: when you don’t have any advantages of capital, connections or skills, you have to acquire those by hustle and initiative.

Step Four: apply for obscure, small-sum scholarships. $500 may not sound like a lot, but it means competition will be lower and if you get it, that’s $500 you don’t have to earn. As you build your networks in the community, put the word out you’re looking for small scholarships for next semester’s tuition. In general, people tend to respond more positively to helping you with a specific goal rather than an open-ended or undefined goal such as “I need money for college.”

Step Five: work productively and ambitiously, i.e. work a lot but work smart. It never occurred to me that working 25+ hours a week and taking a full load of classes (4-5 classes and 15+ credits a semester) was something to bemoan–I was having a great time, and earned a 3.5 grade point average and my B.A. in four years.

60-hour work weeks should be considered the minimum effort necessary–but only if those hours are 100% productive work, not hours interrupted with games, phone calls, goofing off, etc. Those 60 hours are flat-out, power-out-the-work hours, not hours diluted by half-effort, distractions, etc.

Step Six: learn to do things yourself that cost money, such as maintaining your car. It’s not that hard to change the oil and other basics of maintenance.

If you push yourself and maintain a disciplined life, huge amounts of work can be ground through in a few hours. This is as true of digging a ditch as it is of plowing through texts and writing papers.

Tuition at the state university I attended (the University of Hawaii at Manoa) has risen enormously in the decades since I worked my way through college (roughly $9,000 a year now), but it’s still possible to work one’s way through if the student pursues all six steps assiduously and with perseverance and hustle and secures full-time work in summers.

One reason I did not bemoan working long hours and practicing extreme frugality was that this was still the default setting in a few dwindling enclaves of our culture and economy. The idea that you could borrow money for everything you wanted had not yet conquered the culture and economy: thrift in service of big goals was still a cultural norm.

In other words, what I did wasn’t heroic or unusual; it was the norm.

I should mention that my university years overlapped with the deepest recession (at that time) since the Great Depression: 1973-74. Work was hard to come by, gasoline skyrocketed in price, and inflation started to outpace wages, especially in the low-wage jobs typically available to college students.

It was not a cakewalk by any means.

The upside of relentlessly pursuing Steps One – Six is tremendous: personal integrity, financial independence, and the other powerful freedoms that accrue to these foundations. Measured by income and things I owned, I was “poor.” But measured by independence and by skills and networks gained, I was wealthy in many important ways.

Extreme frugality enabled me to not just finish college in four years but to buy a (cheap) parcel of land while still a student with cash and have a substantial savings account by graduation day.

I don’t look back on those years of voluntary deprivation in service of independence, freedom, knowledge, and social and human capital as “poor me:” I see them as the extremely positive, productive template that I have followed in the decades since. I never did marry or inherit money, and so whatever I have now is the direct result of extreme frugality in service of integrity, independence and the accrual of capital that can be productively invested.

The only leverage available to all is extreme frugality in service of accumulating savings that can be productively invested in building human, social and financial capital.

Debt is serfdom, capital in all its forms is freedom.

Debt = Serfdom (April 2, 2013)

How Frugal Are You? (August 7, 2010)


oftwominds-Charles Hugh Smith: The Grand Narrative: Legitimize the Authoritarian State

oftwominds-Charles Hugh Smith: The Grand Narrative: Legitimize the Authoritarian State. (source)

As the status quo crumbles, the state responds in the only way it knows: expand control and become increasingly authoritarian.

The Grand Narrative of the 21st century is the legitimization of the authoritarian state. The authoritarian state comes in many ideological flavors, but retains the commonalities of central control. It may label the system it controls communist, socialist or capitalist, but these distinctions are semantic: the authoritarian state controls the system, by one means or another.

Regardless of which version of the 9/11 story you believe or disbelieve, the reality is the same: the U.S. is engaged in an Orwellian global war without end, a war that doesn’t just justify monitoring every communication on the planet but actively requires monitoring every communication on the the planet.

The Federal Reserve has extended its control of the U.S. economy, transforming it into a wealth-skimming machine for the top 1/10th of 1% with access to the Fed’s credit creation. The Fed claims independence from the U.S. government, but this is also merely semantics: the Fed and U.S. Treasury are simply two facets of the authoritarian state.

We see the same narrative playing out around the world. In socialist France, the central state is extending its control over what little of the economy is still quasi-private; in nominally communist China, any weakening of the economy that can’t be papered over with bogus statistics is soon followed by nationalist propaganda hyping one red-button issue or another (Senkaku Islands, etc.) to distract the populace from the increasingly fragile “recovery” in China’s asset-bubble-dependent economy.

As the status quo crumbles, the state responds in the only way it knows: expand control and become increasingly authoritarian. This is of course a key dynamic in why things are falling apart: increasing central control only further distorts the mechanisms in the economy that seek equilibrium by self-correcting means.

Why is the authoritarian state illegitimate? Among the many reasons, we can start with three: the authoritarian state is the enemy, always and in all places, of individual liberty and free expression/the free press, and the authoritarian state is intrinsically a failed state, for the mechanisms of centralization and authoritarian control are ontologically destabilizing, regardless of the ideological flavor of the system the state controls.


oftwominds-Charles Hugh Smith: What Do We Expect to Happen?

oftwominds-Charles Hugh Smith: What Do We Expect to Happen?. (source)

What we can expect to happen generally happens, as the causal chain cannot be disrupted by wishful thinking.

If I go to Las Vegas and gamble with abandon, what do I expect to happen? If I wander alone through a tough part of town waving my iPhone around, what do I expect to happen? If I insist on hiking up a muddy rain forest trail in street clothes in the pouring rain, what do I expect to happen?

We all know what is likely to happen: In Las Vegas, we will lose our stake; in the tough part of town, our iPhone will be stolen, and on the tropical trail, we will get soaking wet.

These consequences are easily predictable. What we can expect to happen generally happens, as the causal chain cannot be disrupted by wishful thinking.

Yet when we re-elect the same politicos who have failed miserably for years, we somehow expect they will magically succeed in providing leadership the next time around. When we eat visibly unhealthy packaged junk food that is engineered to trigger our reward centers with massive doses of fat, salt and sugar, we somehow expect there will be no consequences of eating this “food.”

We sit in front of digital devices all day and eliminate physical fitness from our schools, yet we expect there will be no consequences from this inactivity.

We create trillions of dollars from thin air and borrow trillions of additional dollars into existence, yet we expect there will be no consequences from this unprecedented monetary and credit expansion.

We borrow a third of all government expenditures, yet we expect there will be no consequences from this monumental dependence on public debt to maintain the Status Quo.

We buy the cheapest quality goods, yet complain about the poor quality.

We pursue a plan of borrowing our way to prosperity, yet we are flummoxed that prosperity is elusive.

We push everyone with any assets into risky asset bubbles with zero-interest rates, yet we are surprised when asset bubbles pop.

What do you expect to happen? The causal chain cannot be disrupted by wishful thinking. Bubbles will pop, and increasingly leveraged, fragile systems will crash. Hoping causal consequences will magically vanish is a strategy doomed to catastrophe.


oftwominds-Charles Hugh Smith: Have We Reached Peak Government?

oftwominds-Charles Hugh Smith: Have We Reached Peak Government?.

If we are not yet at Peak Debt, we are getting close, and that means we are also getting close to Peak Government.

Have we reached Peak Government? That is, a structural point beyond which government can no longer grow sustainably?

To help answer the question, I’ve assembled charts of the foundations of growth: population, gross domestic product (GDP), private employment and output per person (i.e. productivity). These have grown 28%, 75%, 28% and 58% respectively. (I have used 1990 as a baseline, as the past 23 years gives us a reasonably accurate clue as to the long-term trendlines of the current economy.)

In other words, if growth depended entirely on population growth, the real (inflation-adjusted) economy would have grown 28% since 1990. Instead, the GDP rose by 75%. This is the result of rising output per person, i.e. an increase in productivity.

U.S. population:…


oftwominds-Charles Hugh Smith: The Source of Systemic Crisis: Risk and Moral Hazard

oftwominds-Charles Hugh Smith: The Source of Systemic Crisis: Risk and Moral Hazard.


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