We have made several arguments in the past that the United States is following the Soviet Union's path to oblivion. Although we do feel that the basic trajectory is a reasonable one for analysing the U.S.'s descent, we have been giving the matter some thought recently. Some results from this pondering have been critiques of the U.S.S.R./U.S.A. collapse comparison.
First, though, is a proposal we have to offer the Obama Administration, although we expect it would be very unpopular. The first step would be to have President Obama admit the banking system is completely fracked up. He would then nationalise the entire banking system, thus wiping out the stockholders, the bondholders, and all uninsured depositors. From there, two new sectors would be formed: a national system of "good" banks, which would hold all insured deposits; and a trust to hold all the toxic 'assets' in an attempt to wind down the contracts and garner a profit therefrom.
After this schism is complete, the Federal Government would then issue vouchers to every American citizen. These vouchers would be good for stock or bonds in either the 'good' banking system, or in the trust of bad 'assets.' Through this system, the profit from both the renewed banking system, as well as the winding-down of toxic assets, will accrue to the Citizenry, and not to some banking elite or corrupt political toadies.
This voucher concept is not original; it was something that arose from the Soviet Union, in an attempt by the post-Soviet Government to unwind failed economic models and structures. The effort failed, because the Soviet system failed so utterly, but the concept behind the vouchers is brilliant: it distributes the potential benefit amongst the largest number of people, something that the United States desperately needs in dealing with its failed banking system (and automobile manufacturers).
However, we honestly would be shocked if a system of vouchers was ever implemented in the United States. The 'why' is simple: to do so would be a proactive admission of failure, which is anathema to the American ethic. Very few citizens in the U.S. would be able to admit that the entire U.S. banking system is in failure-mode, and needs to be liquidated as rapidly and efficiently as possible. The post-Soviet voucher system would be better a 'cure' than simply tossing vast sums of money indirectly into the over-seas retirement funds of the CEOs.
Americans are not able to understand that something so pervasive as banking could collapse utterly... and they really would not understand that, if the Federal Government were to lose its effectiveness in keeping the zombie super-huge banks limping along, the banking industry would utterly implode overnight. Failure of Government is totally alien to the American Citizenry, whereas it was very familiar to the Soviet populace. Soviets could clearly see that their economic system was non-functional, and cavorting with utter failure. Americans cannot understand that the "American Way" is just as hopelessly flawed as the Soviet's system, and just as doomed to failure.
It is in this great difference between the collapse of the Soviet Union and the decay of the United States that comparisons break down. The Citizenry of those two systems are so incredibly different in skills and outlook it boggles the mind; Soviets were lean, mean, frugal machines... while Americans go ape when they can't park their SUV right at the entrance to the strip mall. Comparative analysis between the U.S.S.R. and the U.S. are still valid, we feel, but it must be done with a caveat: the average American is likely going to suffer far worse than an average Soviet.
Thursday, April 30, 2009
Wednesday, April 29, 2009
Some Hopeful Signs
The first bit of good news comes from Italy. In Milan, authorities have seized the assets of several large banks who sold fraudulent derivatives to the city. This will be an important precedent in obtaining justice for many local governments and non-profits world-wide who were subject to a wide variety of fleecings at the hands of unctuous bankers.
The next bit comes from the U.S. Senate, where the Banking Committee comes closer to holding hearings on the Paulson-Bernanke-Lewis affair. This is a bit of 'he said - she said' drama that everyone should be looking forward to. The matter is quite serious for them as at least one in the group is probably going to end up in prison, and with their pants sued off. We seriously hope the drowsy Senate will start doing their jobs again and make the U.S. a nation of laws and not of strongmen.
Finally, we are heartened by news from Belgium, where normally sleepy shareholders showed some righteous indignation at the Board of Directors of Fortis. Throwing shoes is probably too good for the greedy, incompetent banksters who have done so much damage.
Now that shock and denial over losses are past, perhaps some healthy anger will be directed at deserving culprits. More importantly, it looks like legal reform may be in the works as well. Ironically, much of the recent financial damage resulted from recent undoing reforms of earlier eras. Perhaps a future of low- or no economic growth will have a plus: the cycle of reform and 'liberalising innovation' will come to an end along with the myth of growth.
The next bit comes from the U.S. Senate, where the Banking Committee comes closer to holding hearings on the Paulson-Bernanke-Lewis affair. This is a bit of 'he said - she said' drama that everyone should be looking forward to. The matter is quite serious for them as at least one in the group is probably going to end up in prison, and with their pants sued off. We seriously hope the drowsy Senate will start doing their jobs again and make the U.S. a nation of laws and not of strongmen.
Finally, we are heartened by news from Belgium, where normally sleepy shareholders showed some righteous indignation at the Board of Directors of Fortis. Throwing shoes is probably too good for the greedy, incompetent banksters who have done so much damage.
Now that shock and denial over losses are past, perhaps some healthy anger will be directed at deserving culprits. More importantly, it looks like legal reform may be in the works as well. Ironically, much of the recent financial damage resulted from recent undoing reforms of earlier eras. Perhaps a future of low- or no economic growth will have a plus: the cycle of reform and 'liberalising innovation' will come to an end along with the myth of growth.
Tuesday, April 28, 2009
An Economic Effect of Mexican Swine Flu
We've been hearing quite a bit about the recent outbreak of swine flu in Mexico over the last few days. According to what we've read so far, only 149 people have died in Mexico, with the forty-odd cases in the United States and Canada proving to be non-lethal. The knee-jerk reactionary nature of the Mexican Federal Government's actions (closing schools, pondering cancelling Cinco de Mayo, et cetera) is amusing to us, but we suppose it is not without good reason.
The last great influenza outbreak, in 1918 was quite a nasty episode, with up to a 50% infection rate and 5% mortality. If the Mexican swine flu does indeed prove even half as potent, a lot of people could become very dead very soon. We frankly don't expect this flu to be anything particularly deadly, as it seems to be already following the common path of viruses: a potently deadly burst at the beginning, with a rapid decay in lethality. This is evidenced by the lack of any fatalities from the flu outside of Mexico... and Mexico is not known for its sanitary qualities.
However, let's suppose that we're - gasp - wrong, and the Mexican flu is indeed the next deadly flu; we'll be reasonable, and further suppose that the Mexican swine flu is as potent as the Spanish flu (i.e. 50% infection rate, 5% mortality rate). Once this flu runs its theoretical course, about 162 million people will be dead world-wide.
This level of mortalities would have a very serious effect on an already-seriously-damaged world economy. Perhaps most immediately, the flu would help to foster the nascent protectionism which is seething just below the surface of international policy (but especially in the case of the United States and Russia). It is, of course, understandable for a nation to close its borders during a medical crisis, but if that were to happen in the near future it would be a very serious blow to international trade.
The last great influenza outbreak, in 1918 was quite a nasty episode, with up to a 50% infection rate and 5% mortality. If the Mexican swine flu does indeed prove even half as potent, a lot of people could become very dead very soon. We frankly don't expect this flu to be anything particularly deadly, as it seems to be already following the common path of viruses: a potently deadly burst at the beginning, with a rapid decay in lethality. This is evidenced by the lack of any fatalities from the flu outside of Mexico... and Mexico is not known for its sanitary qualities.
However, let's suppose that we're - gasp - wrong, and the Mexican flu is indeed the next deadly flu; we'll be reasonable, and further suppose that the Mexican swine flu is as potent as the Spanish flu (i.e. 50% infection rate, 5% mortality rate). Once this flu runs its theoretical course, about 162 million people will be dead world-wide.
This level of mortalities would have a very serious effect on an already-seriously-damaged world economy. Perhaps most immediately, the flu would help to foster the nascent protectionism which is seething just below the surface of international policy (but especially in the case of the United States and Russia). It is, of course, understandable for a nation to close its borders during a medical crisis, but if that were to happen in the near future it would be a very serious blow to international trade.
Monday, April 27, 2009
Post-Agricultural Society
During the Depression many businesses will die, many households will become impoverished or dissolve. The rest will recover. Is the damage done randomly, or are there discernable patterns to who is hurt most?
We would like to present a pet theory today. Our theory is that industrial society, in spite of so much that has only evolved in the past two hundred fifty years, is still largely agrarian in its outlook on economic life.
For example, take such concepts as the steady paycheck, the rent check, the interest payment, the dividend. All of these payments occur on a periodic basis. Yields on investments are calculated as annual returns on investment. All of these conventions derive directly from annual crop yields.
Where annual yields make perfect sense for agriculture, they may not for commerce and industry. It makes more sense for workers and investors to share in the profits of an enterprise, which are uncertain both in timing and quantity. Instead of accepting the variability of the industrial way of life, society has attempted to pound the round peg of industrialism into the square hole of agriculturalism. The results have not been happy. More job and tax 'farms' and 'gravy trains' have been built than can be supported. The imminent disappointment of many auto worker pensioners is testimony to this fact.
If you can thrive with an uncertain yet dynamic income stream, you are more in tune with the realities of the industrial system. If you are a 'rent seeker' or looking for a steady job, you are chasing a fading way of life.
We would like to present a pet theory today. Our theory is that industrial society, in spite of so much that has only evolved in the past two hundred fifty years, is still largely agrarian in its outlook on economic life.
For example, take such concepts as the steady paycheck, the rent check, the interest payment, the dividend. All of these payments occur on a periodic basis. Yields on investments are calculated as annual returns on investment. All of these conventions derive directly from annual crop yields.
Where annual yields make perfect sense for agriculture, they may not for commerce and industry. It makes more sense for workers and investors to share in the profits of an enterprise, which are uncertain both in timing and quantity. Instead of accepting the variability of the industrial way of life, society has attempted to pound the round peg of industrialism into the square hole of agriculturalism. The results have not been happy. More job and tax 'farms' and 'gravy trains' have been built than can be supported. The imminent disappointment of many auto worker pensioners is testimony to this fact.
If you can thrive with an uncertain yet dynamic income stream, you are more in tune with the realities of the industrial system. If you are a 'rent seeker' or looking for a steady job, you are chasing a fading way of life.
Sunday, April 26, 2009
Is the FDIC Inept, Panicked, or Corrupt?
We looked over the latest bank closures by the Federal Deposit Insurance Corporation (FDIC), and we noted with some alarm how costly these closures were. Putting the cost to the FDIC in terms of losses/assets, the four closures (as of 25/04/09) were insolvent to the tune of 26% to 39% of assets! This level of insolvency is horrible, and marks an incredible deterioration of the health of the United States' banking system. Below is a chart of the losses/assets of all bank closures since December 2007 to April 25, 2009(the beginning of the Depression). We used the data from the FDIC's failed bank list to construct the graph.
Needless to say, the closures by the FDIC are not getting better; we suppose the bright side it that they're not getting worse, either.
Let's look at the hard data: Total assets of all FDIC-failed banks, December 2007 to April 25 2009, and including Washington Mutual (WaMu), in millions, is $388,388.03 - that's $388,388,030,000. The cost to the FDIC for these failures was $18,783.20, in millions. That's a losses/assets percentage of 4.84%; not bad, we suppose...
But WaMu didn't cost the FDIC anything, so let's throw out their assets ($307,000 in millions) from the equations. Revised total assets becomes a modest $81,388.08 in millions, while the cost to the FDIC stays $18,783.20. Sitting down, dear Reader? The losses/assets percentage on these numbers is a whopping 23.08%! On average, approximately a full quarter of every failed bank's assets are trash, and if the latest percentages continue to get higher, that number will be getting much, much worse.
The horrifying insolvency of these FDIC-failed banks begs the question in our post's title: is the FDIC inept, panicked, or corrupt? Bear with us as we ponder each in turn.
All jokes about the Government aside, it is quite possible that the FDIC's leadership is indeed inept. Many other policy-makers in the U.S. Government are showing themselves to be very inept, so we can't rule out the FDIC. However, we don't feel the FDIC is necessarily inept in the classic sense; we posit the FDIC is instead following in the footsteps of the Federal Savings and Loan Insurance Corporation. Simply put, the FSLIC sat on its hands at the beginning of the Savings and Loan Crisis, hoping that the situation with the thrifts would solve itself. Instead, the situation deteriorated and the FSLIC itself went insolvent, and its mission was absorbed by the FDIC. We would be hardly surprised of the FDIC is likewise hoping that the banks will heal themselves. Perhaps by sitting on its hands, the FDIC is rendering itself insolvent, and therefore dooming its mission to be absorbed by a bigger Government agency... oh, perhaps the Federal Reserve.
Instead of inept, let us assume that the FDIC is, instead in a panic. The leadership knows that the greater part of the U.S. banking system is horrifyingly insolvent. They also know that the FDIC insurance fund is completely unable to absorb the losses incurred from fast and hard failures of all the insolvent banks in the U.S. (i.e. most of them). So, instead of having a proactive plan for dealing with the major problems within the banking system, the FDIC instead is reactively lurching from one super-insolvent bank to another with no cohesive plan of attack - or, indeed, of how to pay for all the damage. This panic is only allowing the problems in the banking system to fester, thereby creating even bigger problems down the road. Those could come sooner than anyone might imagine...
Finally, let's assume that the FDIC is corrupt. In this situation, the FDIC's actions are planned and carefully implemented. They are starting with the smallest banks in the nation, and slowly forcing mergers into larger ones, selling off the good assets to the bigger banks and holding the bad assets on its books. As the banking crisis continues, the FDIC will work its way up the food chain, successively cleaning out the banks, until the only remaining banks are the nineteen (or so) super-huge money-centre banks. At this point, the best assets in the U.S. will be in the hands of quasi-private banks, while the worst will be on the books of the Federal Government. Simply put, all losses will be paid for by the American Citizenry, while all potential profits will accrue to the super-huge banks.
Frankly, we can see aspects of all three possibilities at work; any and all combinations thereof would not surprise us. The big question in our mind is, which one is dominant?
Needless to say, the closures by the FDIC are not getting better; we suppose the bright side it that they're not getting worse, either.Let's look at the hard data: Total assets of all FDIC-failed banks, December 2007 to April 25 2009, and including Washington Mutual (WaMu), in millions, is $388,388.03 - that's $388,388,030,000. The cost to the FDIC for these failures was $18,783.20, in millions. That's a losses/assets percentage of 4.84%; not bad, we suppose...
But WaMu didn't cost the FDIC anything, so let's throw out their assets ($307,000 in millions) from the equations. Revised total assets becomes a modest $81,388.08 in millions, while the cost to the FDIC stays $18,783.20. Sitting down, dear Reader? The losses/assets percentage on these numbers is a whopping 23.08%! On average, approximately a full quarter of every failed bank's assets are trash, and if the latest percentages continue to get higher, that number will be getting much, much worse.
The horrifying insolvency of these FDIC-failed banks begs the question in our post's title: is the FDIC inept, panicked, or corrupt? Bear with us as we ponder each in turn.
All jokes about the Government aside, it is quite possible that the FDIC's leadership is indeed inept. Many other policy-makers in the U.S. Government are showing themselves to be very inept, so we can't rule out the FDIC. However, we don't feel the FDIC is necessarily inept in the classic sense; we posit the FDIC is instead following in the footsteps of the Federal Savings and Loan Insurance Corporation. Simply put, the FSLIC sat on its hands at the beginning of the Savings and Loan Crisis, hoping that the situation with the thrifts would solve itself. Instead, the situation deteriorated and the FSLIC itself went insolvent, and its mission was absorbed by the FDIC. We would be hardly surprised of the FDIC is likewise hoping that the banks will heal themselves. Perhaps by sitting on its hands, the FDIC is rendering itself insolvent, and therefore dooming its mission to be absorbed by a bigger Government agency... oh, perhaps the Federal Reserve.
Instead of inept, let us assume that the FDIC is, instead in a panic. The leadership knows that the greater part of the U.S. banking system is horrifyingly insolvent. They also know that the FDIC insurance fund is completely unable to absorb the losses incurred from fast and hard failures of all the insolvent banks in the U.S. (i.e. most of them). So, instead of having a proactive plan for dealing with the major problems within the banking system, the FDIC instead is reactively lurching from one super-insolvent bank to another with no cohesive plan of attack - or, indeed, of how to pay for all the damage. This panic is only allowing the problems in the banking system to fester, thereby creating even bigger problems down the road. Those could come sooner than anyone might imagine...
Finally, let's assume that the FDIC is corrupt. In this situation, the FDIC's actions are planned and carefully implemented. They are starting with the smallest banks in the nation, and slowly forcing mergers into larger ones, selling off the good assets to the bigger banks and holding the bad assets on its books. As the banking crisis continues, the FDIC will work its way up the food chain, successively cleaning out the banks, until the only remaining banks are the nineteen (or so) super-huge money-centre banks. At this point, the best assets in the U.S. will be in the hands of quasi-private banks, while the worst will be on the books of the Federal Government. Simply put, all losses will be paid for by the American Citizenry, while all potential profits will accrue to the super-huge banks.
Frankly, we can see aspects of all three possibilities at work; any and all combinations thereof would not surprise us. The big question in our mind is, which one is dominant?
Saturday, April 25, 2009
Laying the Groundwork for Recovery
As the Depression takes its destructive course, many institutions will fail to deliver what they have promised. By institutions we mean everything from individual enterprises to government itself, and even abstract institutions such as "the American Way of Life," or the stories people tell themselves about how life is supposed to go.
This will be more or less disillusioning for everyone. But it will be a necessary component of what must follow: a reorganising of life - from day-to-day activities, to aims and ambitions - along new lines. Those new lines will be what promotes getting along in the world.
Of course, it could be said the life is constantly being reorganised - in good times and bad. But in the aftermath of a Depression, like a War, much is destroyed and much needs to be rebuilt, often in a hurry. Many will find themselves with careers and finances in tatters. Or, at the extreme, homeless and hungry. These people will need a new method of securing financial well-being.
Will discredited institutions manage to reinvent themselves to stay relevant? Or will they get the hook, being yanked from the stage of society babbling and gesticulating? Will new political parties form? New companies and even states? Or will people turn inwards to themselves, their friends and families for support, identity, and focus?
We put this in the interrogative simply because we do not care to prognosticate. These are very chaotic times and events could go any number of ways. Nevertheless, we are certain that the social landscape will be greatly altered, and in recognition of the new lies the path to recovery.
By the way, in using the term recovery, we mean neither getting back to the way things were nor getting the economy growing again. We simply mean the finding of a new norms after the old ones have finished breaking down. For example, this could mean anything from learning to get along without credit because it is no longer available, to choosing to live without it. Another example would be the creation of public transportation, perhaps ad hoc with informal taxi and bus services started by individuals, or perhaps by for-profit companies.
People will do what they need to do to get along in the world. It always happens that way, and it is a fascinating process to observe. Keep this in mind as so much falls apart around you in the coming months.
This will be more or less disillusioning for everyone. But it will be a necessary component of what must follow: a reorganising of life - from day-to-day activities, to aims and ambitions - along new lines. Those new lines will be what promotes getting along in the world.
Of course, it could be said the life is constantly being reorganised - in good times and bad. But in the aftermath of a Depression, like a War, much is destroyed and much needs to be rebuilt, often in a hurry. Many will find themselves with careers and finances in tatters. Or, at the extreme, homeless and hungry. These people will need a new method of securing financial well-being.
Will discredited institutions manage to reinvent themselves to stay relevant? Or will they get the hook, being yanked from the stage of society babbling and gesticulating? Will new political parties form? New companies and even states? Or will people turn inwards to themselves, their friends and families for support, identity, and focus?
We put this in the interrogative simply because we do not care to prognosticate. These are very chaotic times and events could go any number of ways. Nevertheless, we are certain that the social landscape will be greatly altered, and in recognition of the new lies the path to recovery.
By the way, in using the term recovery, we mean neither getting back to the way things were nor getting the economy growing again. We simply mean the finding of a new norms after the old ones have finished breaking down. For example, this could mean anything from learning to get along without credit because it is no longer available, to choosing to live without it. Another example would be the creation of public transportation, perhaps ad hoc with informal taxi and bus services started by individuals, or perhaps by for-profit companies.
People will do what they need to do to get along in the world. It always happens that way, and it is a fascinating process to observe. Keep this in mind as so much falls apart around you in the coming months.
Friday, April 24, 2009
Destructive Qualities of Stupidity in Government
Click here for part one of this topic.
Yesterday we wrote that we feel horrifyingly bad mis-investment has become the norm on the part of the U.S. Federal Government. As awful as that mis-investment is, at the same time, it only seems reasonable to assume that such activities can only go on for just so long before they cannot continue. When that end comes is anyone's guess, but we feel certain that the end will come.
At that time, American Citizens will collectively realise they live in a blasted country, and they will probably decide that changes are in order. The nation will have to learn humility and discipline. However, we feel the United States will likely have no domestic vision left to rebuild upon more-realistic and sustainable lines. The only choice will be to turn to the greatest economic and social friend the U.S. presently has: Canada.
As the largest trading partner of the U.S., as well as a cultural ally, Canada has been in a very good position to study the American mindset; it isn't a stretch to say that Canada understands the U.S. better than it does itself. In the future, it will likely be Canada, as the impartial observer, which will both understand the problems in the U.S., and have the best solutions.
That is, of course, unless the United States distances itself sufficiently from its northern neighbour. Although we understand the high-level visit by President Barack Obama to Canada was a warm success, we've been noticing what we feel is a very cold undercurrent in the Obama Administration. Point and case are the recent comments by Homeland Security Secretary Janet Napolitano. Here are some of the highlights:
Such a clamping-down on the U,S./Canadian border is the worst possible thing to do during the Depression. There is no other time when international friendship and cooperation more important than a Depression, and Canada is the nearest functional neighbour of the U.S. What Secretary Napolitano proposes to do is, in a word, madness. She is voicing a destructive, out-of-control obsession with 'terrorists' and 'national security,' and she does not have the wits to see what she is doing.
There are many more examples of this stupidity in the Federal Government, but we feel that Secretary Napolitano's personal brand does not get the attention it deserves. We frankly consider her as destructive as Treasury Secretary Timothy Geithner's incessant Goldman Sachs donations, or Federal Reserve Chairman Ben Bernanke's voodoo monetary policies. All three persons are working hard to destroy what hopes the United States has: Geithner destroys the wealth; Bernanke destroys the money; Napolitano destroys relationships with those who can help save us from the previous two.
Yesterday we wrote that we feel horrifyingly bad mis-investment has become the norm on the part of the U.S. Federal Government. As awful as that mis-investment is, at the same time, it only seems reasonable to assume that such activities can only go on for just so long before they cannot continue. When that end comes is anyone's guess, but we feel certain that the end will come.
At that time, American Citizens will collectively realise they live in a blasted country, and they will probably decide that changes are in order. The nation will have to learn humility and discipline. However, we feel the United States will likely have no domestic vision left to rebuild upon more-realistic and sustainable lines. The only choice will be to turn to the greatest economic and social friend the U.S. presently has: Canada.
As the largest trading partner of the U.S., as well as a cultural ally, Canada has been in a very good position to study the American mindset; it isn't a stretch to say that Canada understands the U.S. better than it does itself. In the future, it will likely be Canada, as the impartial observer, which will both understand the problems in the U.S., and have the best solutions.
That is, of course, unless the United States distances itself sufficiently from its northern neighbour. Although we understand the high-level visit by President Barack Obama to Canada was a warm success, we've been noticing what we feel is a very cold undercurrent in the Obama Administration. Point and case are the recent comments by Homeland Security Secretary Janet Napolitano. Here are some of the highlights:
"Yes, Canada is not Mexico... Nonetheless, to the extent that terrorists have come into our country or suspected or known terrorists have entered our country across a border, it's been across the Canadian border." "The fact of the matter is that Canada allows people into its country that we do not allow into ours."These are not the first blatantly untrue things the Secretary has stated (read our article here). It confuses us: Secretary Napolitano is supposed to be one of the most informed persons in the U.S. Federal Government. In her hands rest the administration of, well, homeland security. Nevertheless, her comments are hogwash. As the Canadian ambassador to the U.S., Michal Wilson, to comment:
As the 9/11 commission reported in 2004, all of the 9/11 terrorists arrived in the United States from outside North America. They flew to major U.S. airports. They entered the U.S. with documents issued by the United States government, and no 9/11 terrorists came from Canada.Since Secretary Napolitano should know this, we are forced to conclude she must, in fact, be an idiot. Her powerful position in the Obama Administration makes her a dangerous idiot. If she is successful in her attempts to strangle the U.S./Canadian border, in a manner akin to the U.S./Mexico border, we fear she will be negatively impacting the ability of the United States to pull itself together at the end of the 2007 Depression.
Such a clamping-down on the U,S./Canadian border is the worst possible thing to do during the Depression. There is no other time when international friendship and cooperation more important than a Depression, and Canada is the nearest functional neighbour of the U.S. What Secretary Napolitano proposes to do is, in a word, madness. She is voicing a destructive, out-of-control obsession with 'terrorists' and 'national security,' and she does not have the wits to see what she is doing.
There are many more examples of this stupidity in the Federal Government, but we feel that Secretary Napolitano's personal brand does not get the attention it deserves. We frankly consider her as destructive as Treasury Secretary Timothy Geithner's incessant Goldman Sachs donations, or Federal Reserve Chairman Ben Bernanke's voodoo monetary policies. All three persons are working hard to destroy what hopes the United States has: Geithner destroys the wealth; Bernanke destroys the money; Napolitano destroys relationships with those who can help save us from the previous two.
Thursday, April 23, 2009
The United States Needs Canada to Survive
We have been pointing at the problems of the concentration of decision-making quite a bit recently, but we feel it bears repeating. Much blame for the 2007 Depression can be placed on, for example, the U.S. Federal Government allowing the super-huge American banks to become... well, super-huge. It gave those banks, and therefore their respective managements, so much power that the bad decisions made by the banks had global implications. The rest, as they say, is history.
Now the United States is hurtling down the first dip of the 2007 Depression, and the programmes for a quick "recovery" back to the consumer economy are only opium-induced hallucinations. In our opinion, the only real way to bring the Depression to a close is the old-fashioned way: liquidation, down-sizing, and reformation. If we were the optimistic type, we would suggest that the Government is running out of time to allow this. Realistically, though, we fear that the point-of-no-return is several economic pot-holes in the past.
So... where does that leave the average American citizen? Nowhere comfortable is our reply; the Citizenry is faced with a mind-numbingly-large (and exponentially growing) national debt, the fallout from the imploded consumer economy, and a world in a Depression. Whether or not the Citizenry is aware of this is another matter; the important point is that the United States probably will not be able to bring itself out of the 2007 Depression by its lonesome anymore.
Hence, the U.S. will need friends. Specifically, friends with usable industrial capacity, a less-unsound currency, a less-irresponsible Federal Government, and a Citizenry with a healthy work ethic. Bonus points for having a border with the U.S., as well as being a major trading partner.
We would suggest Canada: it is the only functional country which borders the U.S., and it offers the qualities we listed above, more-or-less. Canadian Citizens have their problems, to be sure, but Canada has not done many important things: the Federal Government hasn't been usurped by the super-huge banks; it isn't running massive wars of occupation; it hasn't annihilated its cities and industrial capacity in favour of strip malls and hair salons, it is the U.S.'s largest trading partner.
It seems, however, that the U.S. Federal Government is intent on de-friending Canada. We'll write more on this topic tomorrow.
Read part two here.
Now the United States is hurtling down the first dip of the 2007 Depression, and the programmes for a quick "recovery" back to the consumer economy are only opium-induced hallucinations. In our opinion, the only real way to bring the Depression to a close is the old-fashioned way: liquidation, down-sizing, and reformation. If we were the optimistic type, we would suggest that the Government is running out of time to allow this. Realistically, though, we fear that the point-of-no-return is several economic pot-holes in the past.
So... where does that leave the average American citizen? Nowhere comfortable is our reply; the Citizenry is faced with a mind-numbingly-large (and exponentially growing) national debt, the fallout from the imploded consumer economy, and a world in a Depression. Whether or not the Citizenry is aware of this is another matter; the important point is that the United States probably will not be able to bring itself out of the 2007 Depression by its lonesome anymore.
Hence, the U.S. will need friends. Specifically, friends with usable industrial capacity, a less-unsound currency, a less-irresponsible Federal Government, and a Citizenry with a healthy work ethic. Bonus points for having a border with the U.S., as well as being a major trading partner.
We would suggest Canada: it is the only functional country which borders the U.S., and it offers the qualities we listed above, more-or-less. Canadian Citizens have their problems, to be sure, but Canada has not done many important things: the Federal Government hasn't been usurped by the super-huge banks; it isn't running massive wars of occupation; it hasn't annihilated its cities and industrial capacity in favour of strip malls and hair salons, it is the U.S.'s largest trading partner.
It seems, however, that the U.S. Federal Government is intent on de-friending Canada. We'll write more on this topic tomorrow.
Read part two here.
Tuesday, April 21, 2009
What is the Significance of $1,000 Houses?
There was a recent report on CNN about how there are lots of listings for low-priced houses in places such as Cleveland, Detroit, and Indianapolis. The report admitted that these houses need work - say $20,000 worth - to make them livable, but they represent a golden opportunity to acquire real estate on the cheap.
Markets are generally pretty adept at conveying information. The first thing that comes to mind is that livable houses in these places aren't worth $21,000. If they were, the cheap houses would have all been snapped up.
One of the houses is mentioned as last having been sold at $70,000. Put another way, this means the value has declined from $70,000 to less than $20,000, or down about 70%. We believe that this is not an exceptional decline, but a fairly representative one.
The official numbers don't show this pervasive catastrophe yet because most owners who don't have an urgent need to sell, aren't selling. They are holding out for price recovery, and in their minds maintaining an inflated valuation.
There is a large, yet difficult-to-measure, overhang of houses whose owners imagine themselves patient, yet are probably just living in the past. Unable to let go of perceptual wealth, they can't sell the buildings for 'less than they are worth'.
This capital immobility is hurting the economy in at least two ways. First, it is keeping people stuck in place. Household mobility in the USA is at an all-time low. This hampers people's ability to relocate to better opportunities. Second, it is tying up capital in non-productive assets. Empty houses contribute very little to an economy. If sold, they could be inhabited, and thus a source of income - either landlord's rent, or owner's equivalent rent.
In time, most of the overhang will come to market and clear at the new equilibrium level. The rest will slowly rot in place, their deluded owners basking in their pride of ownership of an asset that is too valuable to sell at the market price.
Markets are generally pretty adept at conveying information. The first thing that comes to mind is that livable houses in these places aren't worth $21,000. If they were, the cheap houses would have all been snapped up.
One of the houses is mentioned as last having been sold at $70,000. Put another way, this means the value has declined from $70,000 to less than $20,000, or down about 70%. We believe that this is not an exceptional decline, but a fairly representative one.
The official numbers don't show this pervasive catastrophe yet because most owners who don't have an urgent need to sell, aren't selling. They are holding out for price recovery, and in their minds maintaining an inflated valuation.
There is a large, yet difficult-to-measure, overhang of houses whose owners imagine themselves patient, yet are probably just living in the past. Unable to let go of perceptual wealth, they can't sell the buildings for 'less than they are worth'.
This capital immobility is hurting the economy in at least two ways. First, it is keeping people stuck in place. Household mobility in the USA is at an all-time low. This hampers people's ability to relocate to better opportunities. Second, it is tying up capital in non-productive assets. Empty houses contribute very little to an economy. If sold, they could be inhabited, and thus a source of income - either landlord's rent, or owner's equivalent rent.
In time, most of the overhang will come to market and clear at the new equilibrium level. The rest will slowly rot in place, their deluded owners basking in their pride of ownership of an asset that is too valuable to sell at the market price.
Monday, April 20, 2009
Government and the Concentration of Decision Making
There is a trend we have noticed in the past: in the course of Depressions, a Federal or Republican Government will attempt to usurp various regulatory and legislative powers from its constituent nations (be they States, Provinces, Territories, et cetera). This can be seen in the efforts of the Hoover and Roosevelt Administrations during the 1929 Depression; many of Roosevelt's social programmes were so heavy-handed in their scope, they were struck down as unconstitutional.
The justification for this centralisation (in the U.S., as well as elsewhere) is simple: a single, cohesive approach to 'solving' a Depression has a higher chance for success than numerous, uncoordinated approaches. Logically this can make sense, as it would seem that, if a recovery programme (or programmes) are based on a Federal/Republic level, it would be less mired in regional politics.
In practise, we feel such a top-down approach simply does not work. One only needs to look at the American super-huge banks to see how a top-heavy administrative technique will inevitably pan out. Simply put, it concentrates the decision-making powers into too few hands... and those hands will make many mistakes. One person given the decision-making powers of ten thousand will eventually make one bad choice with the power of ten thousand bad choices.
It is a serious fallacy to assume that Government, somehow, is bereft of this concern, when it is just as mired by the problems of the concentration of decision-making. As a Federal/Republican Government works to gather-up the power of decision-making in various sectors - ostensibly to alleviate an economic problem - it increases the destructiveness of its bad decisions. Such concentration seems more efficient, but in actuality it is a very large problem.
That is why it is important for members (States and Provinces, cities and municipalities, et cetera) of a Federal or Republican Government to defend their decision-making powers. At the very least, this is to avoid the concentration of decision-making and the damaging actions which come from this concentration. Beyond that, though, the only feasible way to craft a regional recovery programme at the regional level; the best place of the Federal/Republican Government is to coordinate these various lower-level programmes, rather than usurp them.
If the sub-Federal/Republic level is gutted to such a degree that they are effectively rendered non-functional, this creates an even bigger problem: lack of resiliency. That is a serious concern in the 2007 Depression, as it is placing an unbelievable amount of stress upon the Federal/Republican Governments of the world. If such a Government were to collapse (or suffer 'interruptions'), having gutted the powers of its constituent entities, there would be no effective system of law-enforcement beneath it to ensure some degree of social order. Without State or municipal governments, it is not outside of the realm of possibility to see the rise of another Somalia, and the many problems which that non-nation experiences.
The justification for this centralisation (in the U.S., as well as elsewhere) is simple: a single, cohesive approach to 'solving' a Depression has a higher chance for success than numerous, uncoordinated approaches. Logically this can make sense, as it would seem that, if a recovery programme (or programmes) are based on a Federal/Republic level, it would be less mired in regional politics.
In practise, we feel such a top-down approach simply does not work. One only needs to look at the American super-huge banks to see how a top-heavy administrative technique will inevitably pan out. Simply put, it concentrates the decision-making powers into too few hands... and those hands will make many mistakes. One person given the decision-making powers of ten thousand will eventually make one bad choice with the power of ten thousand bad choices.
It is a serious fallacy to assume that Government, somehow, is bereft of this concern, when it is just as mired by the problems of the concentration of decision-making. As a Federal/Republican Government works to gather-up the power of decision-making in various sectors - ostensibly to alleviate an economic problem - it increases the destructiveness of its bad decisions. Such concentration seems more efficient, but in actuality it is a very large problem.
That is why it is important for members (States and Provinces, cities and municipalities, et cetera) of a Federal or Republican Government to defend their decision-making powers. At the very least, this is to avoid the concentration of decision-making and the damaging actions which come from this concentration. Beyond that, though, the only feasible way to craft a regional recovery programme at the regional level; the best place of the Federal/Republican Government is to coordinate these various lower-level programmes, rather than usurp them.
If the sub-Federal/Republic level is gutted to such a degree that they are effectively rendered non-functional, this creates an even bigger problem: lack of resiliency. That is a serious concern in the 2007 Depression, as it is placing an unbelievable amount of stress upon the Federal/Republican Governments of the world. If such a Government were to collapse (or suffer 'interruptions'), having gutted the powers of its constituent entities, there would be no effective system of law-enforcement beneath it to ensure some degree of social order. Without State or municipal governments, it is not outside of the realm of possibility to see the rise of another Somalia, and the many problems which that non-nation experiences.
Sunday, April 19, 2009
Is Globalisation at Risk?
One of our local 'dollar stores' sells some amazingly good pickled, roasted peppers from Turkey. Not only are they quite good, they are also quite inexpensive - costing far less than 'fresh' peppers at the grocery store (presumably grown somewhere on this continent). Although growing sweet peppers is possible in our Northerly latitude, it could hardly be construed as inexpensive when time and effort are taken into account.
Globalisation, has made its way to our heart via our stomach. Nothing in this world is ever unequivocally good, of course, but we think that having some access to the World's goods and culture generally enriches our lives and is a positive. We understand that this process has been everywhere disruptive, as well, but on balance it feels like progress.
Can globalisation fail? Is it an artifact of cheap energy? And if energy always gets more expensive from here on in, will globalisation decline? Our opinion is probably not. The advent of the Internet and peer-to-peer networks will provide opportunities for division of labour and broadening markets even as transportation costs become dearer. Some more localised production and distribution will gradually have a greater cost advantage if it is otherwise competitive, but as transportation is rarely a significant portion of costs, this is not likely to impede globalisation all that much.
Will the Depression kill globalisation? It certainly may set it back through trade financing problems, and through protectionist and autarkic public policies. However, as long as global exchange presents true efficiencies and opportunities for profit, those setbacks are likely to be temporary or geographically limited. If anything, the Depression will likely reinforce globalisation as marginal, less-efficient enterprises wind down.
There was an protest saw from a prior era: "Think globally, act locally." It is actually not bad advice under the current circumstances, though very far from the original intent. What are you doing to be globally competitive? What resources that you find in your immediate environment can you marshall to produce something for a globally-minded market? If you cannot come up with something, you may find the World passes you by.
Much of the Industrial era to date has consisted of efforts to make the Industrial way of life as much like the Agricultural as possible: the company or government as patronly employer for life; the financial investment dividend as reliable as land rent; and the bizarre experiment of Marxist Communism. These efforts have all failed, or are still in process of failing. What is emerging from the rubble is a much more dynamic and creative way of making one's way in the world.
Globalisation is really only at risk if humanity rises up to turn back the clock. Reactionary elements are now, as always, ever at work to stymie developments that threaten their turf. However it is certainly not in the best interest of the majority to embrace a reactionary world-view.
There are some ideas out there posing as progressive, voiced by intelligent people, which are actually reactionary: globalism is unequivocally bad; small towns are unequivocally good; all economy should be within mostly self-sufficient communities, etc. We know it often difficult to imagine a better and truly new tomorrow when trends in place have delivered so much disruption, but that imagining must be done if society is to avoid stagnation and decay.
Globalisation, has made its way to our heart via our stomach. Nothing in this world is ever unequivocally good, of course, but we think that having some access to the World's goods and culture generally enriches our lives and is a positive. We understand that this process has been everywhere disruptive, as well, but on balance it feels like progress.
Can globalisation fail? Is it an artifact of cheap energy? And if energy always gets more expensive from here on in, will globalisation decline? Our opinion is probably not. The advent of the Internet and peer-to-peer networks will provide opportunities for division of labour and broadening markets even as transportation costs become dearer. Some more localised production and distribution will gradually have a greater cost advantage if it is otherwise competitive, but as transportation is rarely a significant portion of costs, this is not likely to impede globalisation all that much.
Will the Depression kill globalisation? It certainly may set it back through trade financing problems, and through protectionist and autarkic public policies. However, as long as global exchange presents true efficiencies and opportunities for profit, those setbacks are likely to be temporary or geographically limited. If anything, the Depression will likely reinforce globalisation as marginal, less-efficient enterprises wind down.
There was an protest saw from a prior era: "Think globally, act locally." It is actually not bad advice under the current circumstances, though very far from the original intent. What are you doing to be globally competitive? What resources that you find in your immediate environment can you marshall to produce something for a globally-minded market? If you cannot come up with something, you may find the World passes you by.
Much of the Industrial era to date has consisted of efforts to make the Industrial way of life as much like the Agricultural as possible: the company or government as patronly employer for life; the financial investment dividend as reliable as land rent; and the bizarre experiment of Marxist Communism. These efforts have all failed, or are still in process of failing. What is emerging from the rubble is a much more dynamic and creative way of making one's way in the world.
Globalisation is really only at risk if humanity rises up to turn back the clock. Reactionary elements are now, as always, ever at work to stymie developments that threaten their turf. However it is certainly not in the best interest of the majority to embrace a reactionary world-view.
There are some ideas out there posing as progressive, voiced by intelligent people, which are actually reactionary: globalism is unequivocally bad; small towns are unequivocally good; all economy should be within mostly self-sufficient communities, etc. We know it often difficult to imagine a better and truly new tomorrow when trends in place have delivered so much disruption, but that imagining must be done if society is to avoid stagnation and decay.
Saturday, April 18, 2009
What is the Likelihood of Rebellion?
The recent 'tea parties' on April 15th bring to the foreground that which has been seething under the surface of discourse in the United States: the anger against the course which the Federal Government has taken in managing the 2007 Depression. One need to look no further than these 'tea parties' to realise that this anger is indeed present. The question is, how far will this anger go?
Measuring this public sentiment is quite difficult, as the anger could simply result in the next elections ending in favour of one political party or another. However, there are - as far as the Federal Government is concerned - more serious implications of this anger. This can bee seen in the comments of Governor Rick Perry of Texas (as well as the following discussion thereof):
Secession from the Union of the United States need not necessarily be the end result of the justifiable anger felt by Citizens against the actions of both private and public figures. In fact, we would not be surprised if Gerald Celente's prediction of the rise of a third party came true: the dissatisfaction felt by the Citizenry with the present format of politics may indeed give rise to such a new power in the American political arena.
A new, powerful third party would be a relief, actually: it would help bleed off the pressure which the building anger is causing within the Citizenry. It would, at least on the surface, seem as if 'something' was actually being done. We only hope that this new party will be one which stands for actual, honest change, not warmed-over rhetoric from a teleprompter. The United States, if it is to survive as a viable political entity, needs to be overhauled in every way imaginable.
However, we are not willing to rule out rebellion entirely. Texas is just one of several States which have a historical propensity to 'bolt,' if you will. The Union has been left in tatters before, and we would frankly not be surprised if again it is shredded by the very People in whose name the Federal Government claims to act. Mr. Celente predicts tax riots and a revolution; we cannot argue with him on those points, as the foundations for those acts have already been built.
What we come down to, when thinking about the possibility of rebellion, is this: a vast number of Citizens would say "I did everything right. I played by the rules. I got screwed." They feel entitled to some sort of reward for what they perceive as their labours, and if they do not get said reward, they will feel greatly betrayed. They will look for new answers to the problem; answers which will probably be outside of the present de facto two-party political system. Hence, a new third party; we honestly see such a change as inevitable.
Take that same discontent, however, and add into it a long, horrific, destructive, hyperinflationary depression... say, like the 2007 Depression will probably be. In that case, the discontent will be vastly magnified: not only did the system not provide to those who feel entitled to a better life, but the system destroyed what life was had by these people. Imagine, if you will, the white-hot rage at that, especially if the destruction occurs over a relatively short amount of time. In that scenario, secession and violent rebellion would not be out of the picture by any means at all.
In our opinion, we don't think violent rebellion will be seen in the 2007 Depression. The American Citizenry is probably too pacified and unimaginative to resort to violent overthrow of the Federal Government. What wouldn't surprise us, however, would be systemic, nonviolent rebellion against the Federal Government by States. Those States which were fiscally responsible - for example, North Dakota - may come to resent continual bail-outs of profligate states - say, California - and indeed the Federal Government itself. Also, when the U.S. dollar blows out, the States may of necessity come up with their own monetary systems. At some point, the Federal Government could be so impotent that it will no longer have the power necessary to force the States to toe the line, as it were; at that point, the Union will be effectively dissolved.
How this building anger and discontent will be expressed is, in our opinion, still uncertain. Much of the future venting thereof will likely rest heavily upon the nature of whatever new political parties arise in the coming years. If those parties wish to rebuild the United States into a frugal, efficient, and thrifty nation, then there is hope for the Union to survive. If, on the other hand, those parties instead try to reinforce what was once the status quo at all costs... then we believe that all bets will be off.
Measuring this public sentiment is quite difficult, as the anger could simply result in the next elections ending in favour of one political party or another. However, there are - as far as the Federal Government is concerned - more serious implications of this anger. This can bee seen in the comments of Governor Rick Perry of Texas (as well as the following discussion thereof):
"We've got a great union. There's absolutely no reason to dissolve it. But if Washington continues to thumb their nose at the American people, you know, who knows what might come out of that. But Texas is a very unique place, and we're a pretty independent lot to boot."It is this 'independence' which started a little-remembered altercation known as the Mexican-American War. This also ties into the concept of State's Rights, which has been severely trampled upon by the Federal Government since the War Between the States. The Confederate States of America was founded upon the notion that States, having voluntarily entered into the Union, could also voluntarily leave it. This is the tradition which Governor Perry touched.
Secession from the Union of the United States need not necessarily be the end result of the justifiable anger felt by Citizens against the actions of both private and public figures. In fact, we would not be surprised if Gerald Celente's prediction of the rise of a third party came true: the dissatisfaction felt by the Citizenry with the present format of politics may indeed give rise to such a new power in the American political arena.
A new, powerful third party would be a relief, actually: it would help bleed off the pressure which the building anger is causing within the Citizenry. It would, at least on the surface, seem as if 'something' was actually being done. We only hope that this new party will be one which stands for actual, honest change, not warmed-over rhetoric from a teleprompter. The United States, if it is to survive as a viable political entity, needs to be overhauled in every way imaginable.
However, we are not willing to rule out rebellion entirely. Texas is just one of several States which have a historical propensity to 'bolt,' if you will. The Union has been left in tatters before, and we would frankly not be surprised if again it is shredded by the very People in whose name the Federal Government claims to act. Mr. Celente predicts tax riots and a revolution; we cannot argue with him on those points, as the foundations for those acts have already been built.
What we come down to, when thinking about the possibility of rebellion, is this: a vast number of Citizens would say "I did everything right. I played by the rules. I got screwed." They feel entitled to some sort of reward for what they perceive as their labours, and if they do not get said reward, they will feel greatly betrayed. They will look for new answers to the problem; answers which will probably be outside of the present de facto two-party political system. Hence, a new third party; we honestly see such a change as inevitable.
Take that same discontent, however, and add into it a long, horrific, destructive, hyperinflationary depression... say, like the 2007 Depression will probably be. In that case, the discontent will be vastly magnified: not only did the system not provide to those who feel entitled to a better life, but the system destroyed what life was had by these people. Imagine, if you will, the white-hot rage at that, especially if the destruction occurs over a relatively short amount of time. In that scenario, secession and violent rebellion would not be out of the picture by any means at all.
In our opinion, we don't think violent rebellion will be seen in the 2007 Depression. The American Citizenry is probably too pacified and unimaginative to resort to violent overthrow of the Federal Government. What wouldn't surprise us, however, would be systemic, nonviolent rebellion against the Federal Government by States. Those States which were fiscally responsible - for example, North Dakota - may come to resent continual bail-outs of profligate states - say, California - and indeed the Federal Government itself. Also, when the U.S. dollar blows out, the States may of necessity come up with their own monetary systems. At some point, the Federal Government could be so impotent that it will no longer have the power necessary to force the States to toe the line, as it were; at that point, the Union will be effectively dissolved.
How this building anger and discontent will be expressed is, in our opinion, still uncertain. Much of the future venting thereof will likely rest heavily upon the nature of whatever new political parties arise in the coming years. If those parties wish to rebuild the United States into a frugal, efficient, and thrifty nation, then there is hope for the Union to survive. If, on the other hand, those parties instead try to reinforce what was once the status quo at all costs... then we believe that all bets will be off.
Friday, April 17, 2009
Depression and Transformation
As we have stated repeatedly in prior posts, this Depression will be a life-changing event for everyone who lives through it. It is not an interruption to the economic routine. The economy is not going to 'recover' to where it used to be.
The world is going to look very different on the other side of the Depression. Most of the old rules of economics and finance - both high and personal - will be tossed out the window. There may be vast political and social changes as well. We don't know what they will look like, only that they will happen. However, we shall speculate on some changes that may take place, and the opportunities that will lie therein.
First and foremost, the economy at all levels will be focused on efficiency. This will be necessary due to less available investment capital and depleting natural resources. We do not doubt that efficiency can theoretically make up for many lacks. But it will not necessarily do so. There is a great deal of cultural inertia, especially in (but not limited to) the USA, that looks at conspicuous consumption as the non plus ultra of human existence.
Compounding this problem there is a lot of turf that is going to get vigorously defended. Bank bailouts (for example) are not for preserving the integrity of the economic system, but for preserving an opulent lifestyle for well-connected bankers even after their banks stop creating value for society.
But moving along, what sort of efficiencies are waiting in the wings? The Internet will enable a wide range of peer-to-peer markets. You can buy and sell stuff on an auction market or classifieds, you can make loans or borrow on a lending network, you can put up a website and sell your services. All of these markets capitalise on the process of disintermediation, or cutting out the middle man.
Another, less glamorous level of efficiency is simply making do with less: smaller living spaces, perhaps shared with (more) others; a smaller car - or no car. Beyond efficiency, there is becoming more of a producer: growing a garden; cooking home meals, mending and fixing instead of replacing.
All of the above mentioned activities involve learning new skills and attitudes. Multiply these and more across all of society and you have transformation. If this change is resisted by individuals and institutions, change will be slower, and the Depression will be prolonged. Nevertheless, if you embrace the trend, your personal circumstances should prove manageable and you may find the quality of your life even improves.
The world is going to look very different on the other side of the Depression. Most of the old rules of economics and finance - both high and personal - will be tossed out the window. There may be vast political and social changes as well. We don't know what they will look like, only that they will happen. However, we shall speculate on some changes that may take place, and the opportunities that will lie therein.
First and foremost, the economy at all levels will be focused on efficiency. This will be necessary due to less available investment capital and depleting natural resources. We do not doubt that efficiency can theoretically make up for many lacks. But it will not necessarily do so. There is a great deal of cultural inertia, especially in (but not limited to) the USA, that looks at conspicuous consumption as the non plus ultra of human existence.
Compounding this problem there is a lot of turf that is going to get vigorously defended. Bank bailouts (for example) are not for preserving the integrity of the economic system, but for preserving an opulent lifestyle for well-connected bankers even after their banks stop creating value for society.
But moving along, what sort of efficiencies are waiting in the wings? The Internet will enable a wide range of peer-to-peer markets. You can buy and sell stuff on an auction market or classifieds, you can make loans or borrow on a lending network, you can put up a website and sell your services. All of these markets capitalise on the process of disintermediation, or cutting out the middle man.
Another, less glamorous level of efficiency is simply making do with less: smaller living spaces, perhaps shared with (more) others; a smaller car - or no car. Beyond efficiency, there is becoming more of a producer: growing a garden; cooking home meals, mending and fixing instead of replacing.
All of the above mentioned activities involve learning new skills and attitudes. Multiply these and more across all of society and you have transformation. If this change is resisted by individuals and institutions, change will be slower, and the Depression will be prolonged. Nevertheless, if you embrace the trend, your personal circumstances should prove manageable and you may find the quality of your life even improves.
Thursday, April 16, 2009
U.S. Industrial Output Does The Time Warp
One of the traditional ways to define a Depression from a recession (or "deep recession," as some prefer), is to see 1) a minimum 10% decline in Gross Domestic Product, as well as 2) a recession which lasts over three years. We have argued previously that the United States has been in a recession since 1999 or 2000, so the second proviso is probably well exceeded. The first is more difficult to pin down, since the GDP numbers in the United States are typically manipulated for political reasons.
One can find reasonable proxies for GDP data in the news organs of the U.S., as well as Government data. As our co-writer has previously noted, retail sales were down an adjusted 9.2% (source, see Table 2) year-over-year from this past February.
Additionally, the latest information suggests that U.S. industrial output has dropped a whopping 12.8%, year-over-year this March. This is the lowest level of output since December of 1998; an entire decade of output has already been lost in the 2007 Depression, only a year and a half in.
Add to that the Federal Reserve's report that industrial capacity utilisation fell to 69.3%, the lowest level on record since recording began in 1967, and the economy is looking pretty grim indeed.
As it is industry, not retail or High Finance, which makes an economy functional, this drop is very troubling. It represents both serious unemployment, and - perhaps worse still - the destruction of productive capacity via lack of maintenance. We say worse, because although new workers can be trained by old workers, the knowledge is useless if the machines are unusable. It is exactly this in the oil industry: the longer prices stay down, the more capacity to meet future demands will be annihilated.
Whatever the case, though, the picture can be shaded even darker, as the Census Bureau suggests that, year-over-year in February, the drop was more like 14.8% (source, Table 2).
Considering all this information, we feel it is possible to give a hypothetical time-frame for the duration of this Depression. Assuming a 15% year-over-year drop in output, and also assuming that the economy will find an initial bottom after a 50% drop, we posit that the bottom will possibly be in about three years from now (as one additional year has already past). After that, we think a 75% drop-from-peak is probably the longer-term outlook, but that time-frame is not predictable at present.
One can find reasonable proxies for GDP data in the news organs of the U.S., as well as Government data. As our co-writer has previously noted, retail sales were down an adjusted 9.2% (source, see Table 2) year-over-year from this past February.
Additionally, the latest information suggests that U.S. industrial output has dropped a whopping 12.8%, year-over-year this March. This is the lowest level of output since December of 1998; an entire decade of output has already been lost in the 2007 Depression, only a year and a half in.
Add to that the Federal Reserve's report that industrial capacity utilisation fell to 69.3%, the lowest level on record since recording began in 1967, and the economy is looking pretty grim indeed.
As it is industry, not retail or High Finance, which makes an economy functional, this drop is very troubling. It represents both serious unemployment, and - perhaps worse still - the destruction of productive capacity via lack of maintenance. We say worse, because although new workers can be trained by old workers, the knowledge is useless if the machines are unusable. It is exactly this in the oil industry: the longer prices stay down, the more capacity to meet future demands will be annihilated.
Whatever the case, though, the picture can be shaded even darker, as the Census Bureau suggests that, year-over-year in February, the drop was more like 14.8% (source, Table 2).
Considering all this information, we feel it is possible to give a hypothetical time-frame for the duration of this Depression. Assuming a 15% year-over-year drop in output, and also assuming that the economy will find an initial bottom after a 50% drop, we posit that the bottom will possibly be in about three years from now (as one additional year has already past). After that, we think a 75% drop-from-peak is probably the longer-term outlook, but that time-frame is not predictable at present.
Wednesday, April 15, 2009
Approaching the 10% Decline
Although there is no single, consensus definition of what a Depression is, one widely accepted marker is a 10% contraction in the GDP. So far, by official numbers, this is still a ways off in most countries. But it is getting harder to fudge away the increasingly obvious.
March retail sales in the USA were reported yesterday having declined 9.4% year-over-year. This is now the fourth month in a row of sales declines in the vicinity of 9% year-over-year. Granted retail sales aren't the whole economy, but they are a fair proxy for the economy.
We don't expect this crash level of sales declines to continue - although it is possible - but it won't take too much longer for this shrinkage to put the economy into deeply red territory for the year. As we have stated before, we expect the Depression to continue for years. Even if there are a number of "growth quarters" sprinkled here and there (and we do expect them), the contraction should prove relentless.
For some time forward there will be a recovery bias to all reports about the economy. The drivel coming out of the Federal Reserve System is especially illustrative. It is going to take a while for it to sink in that things are bad, getting worse, and not going to recovery quickly.
March retail sales in the USA were reported yesterday having declined 9.4% year-over-year. This is now the fourth month in a row of sales declines in the vicinity of 9% year-over-year. Granted retail sales aren't the whole economy, but they are a fair proxy for the economy.
We don't expect this crash level of sales declines to continue - although it is possible - but it won't take too much longer for this shrinkage to put the economy into deeply red territory for the year. As we have stated before, we expect the Depression to continue for years. Even if there are a number of "growth quarters" sprinkled here and there (and we do expect them), the contraction should prove relentless.
For some time forward there will be a recovery bias to all reports about the economy. The drivel coming out of the Federal Reserve System is especially illustrative. It is going to take a while for it to sink in that things are bad, getting worse, and not going to recovery quickly.
Tuesday, April 14, 2009
America's "Security" Obsession Out of Control
"National security" has long since become a euphemism for all sorts of excesses by a government. It has similar connotations than the classic "we're from the government, and we're here to help," albeit grimmer and more sinister. As experiences under the George W. Bush Administration demonstrated, the United States Federal Government can leverage a 'need' for 'increased security' into, in no particular order: two military invasions of sovereign nations; unknown numbers of illegal prisons worldwide; torture; and so on, and so forth.
To make things clear, we do not have a copy of Orwell's 1984 or Huxley's Brave New World to wave around every time a new surveillance program or technology becomes available. We also do not block the street when Google Earth photography vans are approaching. We do, however, believe that there is a distinct limit to how security-conscious a Government can become, until it starts turning into something much darker.
It is this article from Associated Press that made us think about this topic long and hard. We strongly recommend that you read that article well, Dear Reader; read it very, very well. The implications of what it represents are most dire.
If indeed the Government can continue to get away with harassing, illegally imprisoning, and illegally exporting American Citizens, then the situation in the United States will be impossibly grim. Realistically, if the Government is allowed by the judicial system to continue export law-abiding citizens (even Army soldiers!), then there is no limit to who can be treated in this manner.
In the case of the examples given by the AP article, those persons of Hispanic parentage are automatically 'Mexican,' according to Immigration and Customs Enforcement; the racism of this act alone should be inflammatory to any Citizen. However, that is not necessarily the worst reading of the situation.
History shows that when a society is under severe economic stress, it typically searches for a scapegoat. These unfortunates are easily visually identifiable, and suffer very harsh treatment, to say the least. The United States is indeed following that well-worn path to "finding someone to blame." In this case, it appears to be that Hispanic-appearing persons are to blame, and citizenship be damned.
There is a point in the favour of the United States: a simple deportation is more humane than a gulag, or summary execution. However, we fear that, as the 2007 Depression deepens, the number of incidents, and the violence, of these actions may indeed increase. Carried to the inevitable extreme, any Citizen can be singled out by I.C.E., harassed into signing a document (in which the Citizen agrees to be exported from the U.S. as an illegal immigrant), and then dumped on a plane to wherever I.C.E. feels the Citizen 'belongs.'
We wonder if, someday, I.C.E. won't bother with the plane anymore...
To make things clear, we do not have a copy of Orwell's 1984 or Huxley's Brave New World to wave around every time a new surveillance program or technology becomes available. We also do not block the street when Google Earth photography vans are approaching. We do, however, believe that there is a distinct limit to how security-conscious a Government can become, until it starts turning into something much darker.
It is this article from Associated Press that made us think about this topic long and hard. We strongly recommend that you read that article well, Dear Reader; read it very, very well. The implications of what it represents are most dire.
If indeed the Government can continue to get away with harassing, illegally imprisoning, and illegally exporting American Citizens, then the situation in the United States will be impossibly grim. Realistically, if the Government is allowed by the judicial system to continue export law-abiding citizens (even Army soldiers!), then there is no limit to who can be treated in this manner.
In the case of the examples given by the AP article, those persons of Hispanic parentage are automatically 'Mexican,' according to Immigration and Customs Enforcement; the racism of this act alone should be inflammatory to any Citizen. However, that is not necessarily the worst reading of the situation.
History shows that when a society is under severe economic stress, it typically searches for a scapegoat. These unfortunates are easily visually identifiable, and suffer very harsh treatment, to say the least. The United States is indeed following that well-worn path to "finding someone to blame." In this case, it appears to be that Hispanic-appearing persons are to blame, and citizenship be damned.
There is a point in the favour of the United States: a simple deportation is more humane than a gulag, or summary execution. However, we fear that, as the 2007 Depression deepens, the number of incidents, and the violence, of these actions may indeed increase. Carried to the inevitable extreme, any Citizen can be singled out by I.C.E., harassed into signing a document (in which the Citizen agrees to be exported from the U.S. as an illegal immigrant), and then dumped on a plane to wherever I.C.E. feels the Citizen 'belongs.'
We wonder if, someday, I.C.E. won't bother with the plane anymore...
Monday, April 13, 2009
Too Many Obligations, Too Few Resources
Within the OECD nations, at all levels of society - from the household, to business, to government - obligations have been piling up for years: debts, pensions, social programmes - to name a few. Clearly, these obligations can only be met with continual economic growth. But what happens when anticipated growth fails to materialise?
This question is hardly academic. Virtually everyone and every institution is struggling with the fact of a less than expected actual income slamming into financial obligations. The general consensus is that this is a crisis, a mere interruption of the norm of perpetual growth. Once the crisis is passed, like a fever, economic health (a.k.a. growth) will return.
Our opinion departs from the general consensus. We expect growth to become the interruption in the general economic routine. It will become even more difficult for individuals or enterprises to amass wealth. The present uncertainty of employment and profit will continue and be normal.
In such an environment the notion of taking on any obligations is questionable. There will be an enormous cultural lag for the realisation of this however. Expect to see a lot of bad decisions to be made over the coming years: investments made with the expectation of a return to a prosperity that never comes.
Economic actors - everyone, that is - need to learn the new rules of economic life in a world turned upside down. We don't know them - no one does - but we could hazard a few guesses: you must live on half (or less) of your income; much of what comes in is not true income but a windfall and must be treated as such; never borrow money; investments must be recovered from cash flow in a very short time frame - perhaps three or four years for low-risk endeavours, perhaps one or two years for risky ones; all investments are riskier than they used to be.
At present, society is following a set of economic rules completely at variance with our guesses of the new rules. The transition to new rules will nevertheless be made, no matter how impossible it seems at the moment.
This question is hardly academic. Virtually everyone and every institution is struggling with the fact of a less than expected actual income slamming into financial obligations. The general consensus is that this is a crisis, a mere interruption of the norm of perpetual growth. Once the crisis is passed, like a fever, economic health (a.k.a. growth) will return.
Our opinion departs from the general consensus. We expect growth to become the interruption in the general economic routine. It will become even more difficult for individuals or enterprises to amass wealth. The present uncertainty of employment and profit will continue and be normal.
In such an environment the notion of taking on any obligations is questionable. There will be an enormous cultural lag for the realisation of this however. Expect to see a lot of bad decisions to be made over the coming years: investments made with the expectation of a return to a prosperity that never comes.
Economic actors - everyone, that is - need to learn the new rules of economic life in a world turned upside down. We don't know them - no one does - but we could hazard a few guesses: you must live on half (or less) of your income; much of what comes in is not true income but a windfall and must be treated as such; never borrow money; investments must be recovered from cash flow in a very short time frame - perhaps three or four years for low-risk endeavours, perhaps one or two years for risky ones; all investments are riskier than they used to be.
At present, society is following a set of economic rules completely at variance with our guesses of the new rules. The transition to new rules will nevertheless be made, no matter how impossible it seems at the moment.
Sunday, April 12, 2009
The Rising Attraction of Socialism
A new Rasmussen Reports telephone poll has found that the percentile of American citizens who favour socialism is 20%, while 53% said capitalism is the better system. This is a very interesting trend, one that we will be watching with great interest. Although 20% is a relative minority in the United States, it is impressive to see this form of Governing garnering such popularity in the U.S.
This deserves a bit of reflection: socialism is antithetical to the American ethos. Socialism is a system which, in a basic interpretation, emphasises the importance of supporting the society as a whole. The Scandinavian countries, Germany, Switzerland, and Canada (as examples) all exhibit successful application of socialist policies; unsurprisingly, these nations give the appearance of being able to more easily soften the harsh blows of the Depression - it remains to be seen how that softening holds up in the future.
As the U.S. is a nation which promotes the individual at the cost of the greater society, socialism is typically regarded as a perversion at best, and a whole-sale attack on "freedom" at worst. For socialism to be supported by 20% of the Citizenry, we can only assume that the 2007 Depression is beginning to make people feel the need for a change.
We can't argue against that need. However, we suspect that people have the idea that President Obama is the man who will bring promised change. As we've said on numerous occasions, we do not think he will deliver the kind of socialism the 20% of Americans are expecting. The United States, since it has been so adamantly opposed to socialism (to the point of its being an outright violation of the Constitution), has no particular framework upon which to build a functional socialist system.
President Obama was elected on the promise of change, and that change is commonly considered to smack of socialism. However, if the continual, hapless bailout-ing of super-huge, super-insolvent banks, and trashy, useless, bankrupt automobile manufacturers is any indication, the Obama Administration's peculiar brand of socialism is the kind previously discovered in the Soviet Union.
It should be said, though, that the Government is merely building upon what previous Administrations have put in place. This is true going back further into American history than most would care to admit. One can point, and rightly so, an accusing finger at President Herbert Hoover as the first major lemon socialist. Lemon socialism is not proper socialism; it is sovietism.
This deserves a bit of reflection: socialism is antithetical to the American ethos. Socialism is a system which, in a basic interpretation, emphasises the importance of supporting the society as a whole. The Scandinavian countries, Germany, Switzerland, and Canada (as examples) all exhibit successful application of socialist policies; unsurprisingly, these nations give the appearance of being able to more easily soften the harsh blows of the Depression - it remains to be seen how that softening holds up in the future.
As the U.S. is a nation which promotes the individual at the cost of the greater society, socialism is typically regarded as a perversion at best, and a whole-sale attack on "freedom" at worst. For socialism to be supported by 20% of the Citizenry, we can only assume that the 2007 Depression is beginning to make people feel the need for a change.
We can't argue against that need. However, we suspect that people have the idea that President Obama is the man who will bring promised change. As we've said on numerous occasions, we do not think he will deliver the kind of socialism the 20% of Americans are expecting. The United States, since it has been so adamantly opposed to socialism (to the point of its being an outright violation of the Constitution), has no particular framework upon which to build a functional socialist system.
President Obama was elected on the promise of change, and that change is commonly considered to smack of socialism. However, if the continual, hapless bailout-ing of super-huge, super-insolvent banks, and trashy, useless, bankrupt automobile manufacturers is any indication, the Obama Administration's peculiar brand of socialism is the kind previously discovered in the Soviet Union.
It should be said, though, that the Government is merely building upon what previous Administrations have put in place. This is true going back further into American history than most would care to admit. One can point, and rightly so, an accusing finger at President Herbert Hoover as the first major lemon socialist. Lemon socialism is not proper socialism; it is sovietism.
Saturday, April 11, 2009
The Obama Bounce is Yet to Come
The classic form of an economic depression sees the occurrence of major rallies. These "bear market rallies" tend to be huge, setting records for size-of-rally, and luring in those who are foolish enough to believe 'the worst is over.' Such rallies are easily observable in any graph of the Dow Jones (see this one as an example; source), and are impressive for their ability to both capture the painfully credulous, and extract from them their money.
In this depression there have not yet been any similar, massive rebounds in the stock market. A quick perusal of this chart will show this to be the case. The recent rally-ette is nothing like the scale of the first rebound of the 1929 Depression, so it is likely that the big first false-flag rebound of the 2007 Depression has yet to appear.
It is, of course, possible that the shape of this Depression will be different from historical ones. Past performance is no guarantee of future performance, in bad times as well as good. That said, we're fairly confident that such a big rally will occur at some point in the future. The reasoning behind our statement is fairly simple:
We're pretty certain that times are bad, and they will be getting a whole lot worse. Still, too many people are getting gloomy; far more than we would have expected. As a contrarian investor and cynic, we feel that, when people are being this gloomy, it is with their tongue firmly in their cheek. People say they expect horror and doom, doom, doom... but they're just waiting for the next big rally, so they can buy in just as "the bottom is in."
Simply put, we see a value trap. The average person now living does not know a person who was working for a living (i.e. to pay the rent, buy the food, support the family) in the 1929 Depression. Absolutely no one now living has any idea of just how bad a depression can actually get. People have, generally speaking, convinced themselves that the stock markets only go up; when 'up' is not happening, it is a road-bump. Eternal prosperity is a huge part of the American ethos, and everyone wants their share of that prosperity.
So, we feel confident in saying that things are going to go up, and in a big way. At some point in the future, for no particular reason, all the people sitting on the sidelines, wringing their hands and fretting profusely, will suddenly lose their inhibitions. They will feel rich again; their pockets will spring forth with great gobs of money to buy... anything! The stock markets will soar wildly, houses will be bought and sold, cars will zoom off the lots (perhaps on going-out-of-business clearance from the Big Three?), and life will seem to return to a generally-accepted normal. President Obama's approval rating will zip up to record levels, and he will be hailed as the hero who saved the consumer economy; it was the "Obama Bounce" that turned America around. So too will the rally be touted as the triumph of the consumer economy. Happy days are here again!
This will be the greatest disillusion of the 2007 Depression, when the rally inevitably fails. The reason the rally will crash is the same reason why the markets first crashed in October 2008: a crash happened. For whatever reason, people then, as they will in the future, simply got spooked and started selling to spooked buyers. It doesn't matter how, or why, these crashes occur. Rest assured, though, crashes will indeed happen, and no amount of wishful-thinking and lucky-rabbit-foot-stroking will stop them.
In this depression there have not yet been any similar, massive rebounds in the stock market. A quick perusal of this chart will show this to be the case. The recent rally-ette is nothing like the scale of the first rebound of the 1929 Depression, so it is likely that the big first false-flag rebound of the 2007 Depression has yet to appear.
It is, of course, possible that the shape of this Depression will be different from historical ones. Past performance is no guarantee of future performance, in bad times as well as good. That said, we're fairly confident that such a big rally will occur at some point in the future. The reasoning behind our statement is fairly simple:
We're pretty certain that times are bad, and they will be getting a whole lot worse. Still, too many people are getting gloomy; far more than we would have expected. As a contrarian investor and cynic, we feel that, when people are being this gloomy, it is with their tongue firmly in their cheek. People say they expect horror and doom, doom, doom... but they're just waiting for the next big rally, so they can buy in just as "the bottom is in."
Simply put, we see a value trap. The average person now living does not know a person who was working for a living (i.e. to pay the rent, buy the food, support the family) in the 1929 Depression. Absolutely no one now living has any idea of just how bad a depression can actually get. People have, generally speaking, convinced themselves that the stock markets only go up; when 'up' is not happening, it is a road-bump. Eternal prosperity is a huge part of the American ethos, and everyone wants their share of that prosperity.
So, we feel confident in saying that things are going to go up, and in a big way. At some point in the future, for no particular reason, all the people sitting on the sidelines, wringing their hands and fretting profusely, will suddenly lose their inhibitions. They will feel rich again; their pockets will spring forth with great gobs of money to buy... anything! The stock markets will soar wildly, houses will be bought and sold, cars will zoom off the lots (perhaps on going-out-of-business clearance from the Big Three?), and life will seem to return to a generally-accepted normal. President Obama's approval rating will zip up to record levels, and he will be hailed as the hero who saved the consumer economy; it was the "Obama Bounce" that turned America around. So too will the rally be touted as the triumph of the consumer economy. Happy days are here again!
This will be the greatest disillusion of the 2007 Depression, when the rally inevitably fails. The reason the rally will crash is the same reason why the markets first crashed in October 2008: a crash happened. For whatever reason, people then, as they will in the future, simply got spooked and started selling to spooked buyers. It doesn't matter how, or why, these crashes occur. Rest assured, though, crashes will indeed happen, and no amount of wishful-thinking and lucky-rabbit-foot-stroking will stop them.
Friday, April 10, 2009
Underestimating the Damage
Thoughtful commentators on the economy are noticing big changes afoot: less dining out; more 'value' shopping; and so forth. So far, they are being rather conservative in their estimations of how far the citizenry is going to be cutting their spending on consumer items. For example, people speak of dining out in the USA being reduced from 50% of the food budget to 40%, returning to the level of 2000.
We believe this is ridiculously over-optimistic. In 1955, dining out was 25% of the food budget. Remember, 1955 was a time of prosperity. Since the world is sinking into a Depression that will last for ten years or more, it would be more realistic to see the luxury of dining out returning to a very low proportion of food spending - say 10%.
In a nutshell, we expect to see this collapse in restaurant and other luxury spending because making it through the next ten years is going to be increasingly a matter of economic survival. More and more of the population will be feeding themselves primarily by way of government food assistance (which does not allow for prepared meals) - as long as such assistance lasts, and most of the rest will sensibly economise by eliminating dining out.
For households not to commence draconian economisations at this point is an invitation to poverty and potential destitution. Such economisations will become more and more evident on a survivor basis. Functioning households will be economical, non-economical households will be dissolved or become economical.
In spite of increasing awareness of deterioration, there is an almost ubiquitous fantasy that recovery is nigh, and when it arrives the population will return to its consumeristic ways. Such a recovery is simply never going to materialise. When, and more importantly if, something akin to economic progress resumes at some point in the increasingly distant future, the economic landscape of the world will be utterly and permanently changed.
We intend to survive this transition and, more than that, experience as much as we can of our idea of the good life. We hope, Reader, the same for you. The severity of the Depression and its consequences must not be underestimated if you wish to be a survivor.
Consider the lessons of the survivors of the Great Depression (1929-1939): pay for everything with cash; make do, mend, use it up, do without; throw away nothing that could be put to use. Our progenitors were altered (often traumatically considering most survivors became compulsive hoarders at least to some extent) by the experience. And remember these are the survivors! Think how much worse it was for the non-survivors!
We believe this is ridiculously over-optimistic. In 1955, dining out was 25% of the food budget. Remember, 1955 was a time of prosperity. Since the world is sinking into a Depression that will last for ten years or more, it would be more realistic to see the luxury of dining out returning to a very low proportion of food spending - say 10%.
In a nutshell, we expect to see this collapse in restaurant and other luxury spending because making it through the next ten years is going to be increasingly a matter of economic survival. More and more of the population will be feeding themselves primarily by way of government food assistance (which does not allow for prepared meals) - as long as such assistance lasts, and most of the rest will sensibly economise by eliminating dining out.
For households not to commence draconian economisations at this point is an invitation to poverty and potential destitution. Such economisations will become more and more evident on a survivor basis. Functioning households will be economical, non-economical households will be dissolved or become economical.
In spite of increasing awareness of deterioration, there is an almost ubiquitous fantasy that recovery is nigh, and when it arrives the population will return to its consumeristic ways. Such a recovery is simply never going to materialise. When, and more importantly if, something akin to economic progress resumes at some point in the increasingly distant future, the economic landscape of the world will be utterly and permanently changed.
We intend to survive this transition and, more than that, experience as much as we can of our idea of the good life. We hope, Reader, the same for you. The severity of the Depression and its consequences must not be underestimated if you wish to be a survivor.
Consider the lessons of the survivors of the Great Depression (1929-1939): pay for everything with cash; make do, mend, use it up, do without; throw away nothing that could be put to use. Our progenitors were altered (often traumatically considering most survivors became compulsive hoarders at least to some extent) by the experience. And remember these are the survivors! Think how much worse it was for the non-survivors!
Thursday, April 9, 2009
Ireland Doesn't Need a Bailout?
Anyway you look at it, Ireland's economy is in shambles. The formerly fastest growing member of the EU is now the fastest shrinking - with a rosy, Government forecast of -8% change in GDP this year.
Finance minister Lenihan defiantly claims the nation does not need a bailout from the EU. He defiantly claims that in spite of his staggeringly expensive (1/2 annual GDP equivalent) rescue of the Irish banks, "there will be no bailout of the banks."
The government, not having the luxury of being able to print up money, is being forced to raise taxes to service the new debt as well as meet existing obligations in the face of what would otherwise be rapidly declining tax revenues. This, of course, will soon be seen as a fatal policy blunder. Raising taxes in a Depression is, as everyone who was paying attention in economics class knows, a big no-no. It is taking money out of the hands of the people when they need it most.
Mr. Lenihan is merely a crony and cannot exactly be blamed for this misstep. Presumably, some policy wonks in the Irish Finance Ministry - taking a cue from the Yanks perhaps - are thinking (in Irish Gaelic, of course), "If we reliquify the banks, they will lend again and people can buy houses again, 'n stuff." So pinching the average worker is an acceptable trade-off.
We'll bet any taker that Irish banks won't do squat to revivify the Irish economy, and that the masses are going to have to cut spending even more. We sense a vicious cycle forming.
The end state will be Ireland out of the EU (sans bailout) and its economy worse off than it has been in decades. Emigration will not prove the safety-valve it has in the past as the former destination lands will look less kindly on newcomers. We suspect Ireland is where damage from the 2007 Depression may be most acutely felt, completing the rags-to-riches-to-rags cycle.
Finance minister Lenihan defiantly claims the nation does not need a bailout from the EU. He defiantly claims that in spite of his staggeringly expensive (1/2 annual GDP equivalent) rescue of the Irish banks, "there will be no bailout of the banks."
The government, not having the luxury of being able to print up money, is being forced to raise taxes to service the new debt as well as meet existing obligations in the face of what would otherwise be rapidly declining tax revenues. This, of course, will soon be seen as a fatal policy blunder. Raising taxes in a Depression is, as everyone who was paying attention in economics class knows, a big no-no. It is taking money out of the hands of the people when they need it most.
Mr. Lenihan is merely a crony and cannot exactly be blamed for this misstep. Presumably, some policy wonks in the Irish Finance Ministry - taking a cue from the Yanks perhaps - are thinking (in Irish Gaelic, of course), "If we reliquify the banks, they will lend again and people can buy houses again, 'n stuff." So pinching the average worker is an acceptable trade-off.
We'll bet any taker that Irish banks won't do squat to revivify the Irish economy, and that the masses are going to have to cut spending even more. We sense a vicious cycle forming.
The end state will be Ireland out of the EU (sans bailout) and its economy worse off than it has been in decades. Emigration will not prove the safety-valve it has in the past as the former destination lands will look less kindly on newcomers. We suspect Ireland is where damage from the 2007 Depression may be most acutely felt, completing the rags-to-riches-to-rags cycle.
Wednesday, April 8, 2009
Cranking Up the Disinformation Machine
It is perhaps inevitable that, when the order which society has become accustomed to enjoying is under attack, the change is derided as something nonsensical. Such a derision is reactive; the argument against the change is flimsy and fallacious, but it can be attractive for one who does not wish the greater order in one's life to change a jot.
As can be expected, those news organs which sell their wares to the general public can be fully expected to say what the public wants to hear. We're certain the public enjoys hearing what they want to hear, but that does not change the situation: the 'news' which is consumed is disinformation. Not only does it not say what is going on in the world, but it typically conveys the precise opposite.
This piece from Forbes is perhaps a perfect gem of disinformation. It is thankfully filed as an opinion piece, but that does not excuse the self-justifying information and wishful thinking that Joel Kotkin indulges. We will shred his article specifically on the Curmudgeon Report, but here we would like to look at this phenomenon of derision in a general sense.
We have no doubt that disinformation will become increasingly prevalent in the coming years, especially as the 2007 Depression deepens. The sources of the disinformation will probably cease being 'commentary,' and start becoming formal news. Government information agencies are already fairly fanciful, but out-and-out fallacy is not out of the question by any means.
Simply put, we have a suspicion that the normal sources for news and information are likely going to become unreliable. The will for self-deception of the majority of people is a powerful thing, and any for-profit news agencies (or public services, for that matter) are unlikely to publish that which does not 'sell.'
Such prevalence of disinformation is going to make investing, choosing jobs, relocating to new cities, and countless other activities extremely difficult. The best one will be able to hope for is to learn how to gather raw data on a subject, and then synthesise it to make useful information upon which decisions can be based. Those who wish to thrive must become independent from many things, and this includes independence from the wishful-thinking disinformation trap.
As can be expected, those news organs which sell their wares to the general public can be fully expected to say what the public wants to hear. We're certain the public enjoys hearing what they want to hear, but that does not change the situation: the 'news' which is consumed is disinformation. Not only does it not say what is going on in the world, but it typically conveys the precise opposite.
This piece from Forbes is perhaps a perfect gem of disinformation. It is thankfully filed as an opinion piece, but that does not excuse the self-justifying information and wishful thinking that Joel Kotkin indulges. We will shred his article specifically on the Curmudgeon Report, but here we would like to look at this phenomenon of derision in a general sense.
We have no doubt that disinformation will become increasingly prevalent in the coming years, especially as the 2007 Depression deepens. The sources of the disinformation will probably cease being 'commentary,' and start becoming formal news. Government information agencies are already fairly fanciful, but out-and-out fallacy is not out of the question by any means.
Simply put, we have a suspicion that the normal sources for news and information are likely going to become unreliable. The will for self-deception of the majority of people is a powerful thing, and any for-profit news agencies (or public services, for that matter) are unlikely to publish that which does not 'sell.'
Such prevalence of disinformation is going to make investing, choosing jobs, relocating to new cities, and countless other activities extremely difficult. The best one will be able to hope for is to learn how to gather raw data on a subject, and then synthesise it to make useful information upon which decisions can be based. Those who wish to thrive must become independent from many things, and this includes independence from the wishful-thinking disinformation trap.
Tuesday, April 7, 2009
Man of the People
It seems that Mr. Lawrence Summers, chief economic adviser for the Obama Administration, has had a comfortable existence post-Harvard. According to the Financial Times, Mr. Summers received "$5.2m in compensation over the past [two years] for a part-time advisory role at D.E. Shaw," as well as "about $2.7m for speaking appearances, including several to banks such as Citigroup, Goldman Sachs,... JP Morgan," among others (we've seen references to the investment banks, like Lehman and Merrill Lynch).
Mr. Summers worked for D.E. Shaw for only one day a week for two years. We find it is rather difficult to see why he enjoyed such a kingly stipend from an hedge fund with such a stringent recruitment process. He did not seem to do very much, other than being an overpaid glad-hander and a recognised name to make D.E. Shaw look snazzy. Perhaps he was indeed just a sounding-board for the traders at the hedge fund... but we think even a really smart person would be happy to be a once-a-week sounding-board for less than $50,000 a sounding.
It is probably very true that Mr. Summers has not actually done anything inappropriate or illegal, as the Financial Times points out. However, we feel it is not a good sign that the chief economic adviser to this Administration is a person who made millions working a nebulous job at a math-heavy hedge fund like D.E. Shaw. Mr. Summers was notorious for his bulldozer tactics as President of Harvard, so we wonder for whom will he now bulldoze. Will it be for the benefit of the taxpaying American citizens, or for his past (and, presumably, future), employers?
Frankly, we feel that Mr. Summers' revealed relationship with D.E. Shaw, as well as the super-banks and investment banks, is a black mark on the Obama Administration. It is becoming increasingly clear - perhaps excruciatingly so - that the brains behind the Administration are not young, fresh faces. Rather, they are the hardened gamblers who helped to get the United States, and indeed the entire world, into the Depression in the first place.
Mr. Summers worked for D.E. Shaw for only one day a week for two years. We find it is rather difficult to see why he enjoyed such a kingly stipend from an hedge fund with such a stringent recruitment process. He did not seem to do very much, other than being an overpaid glad-hander and a recognised name to make D.E. Shaw look snazzy. Perhaps he was indeed just a sounding-board for the traders at the hedge fund... but we think even a really smart person would be happy to be a once-a-week sounding-board for less than $50,000 a sounding.
It is probably very true that Mr. Summers has not actually done anything inappropriate or illegal, as the Financial Times points out. However, we feel it is not a good sign that the chief economic adviser to this Administration is a person who made millions working a nebulous job at a math-heavy hedge fund like D.E. Shaw. Mr. Summers was notorious for his bulldozer tactics as President of Harvard, so we wonder for whom will he now bulldoze. Will it be for the benefit of the taxpaying American citizens, or for his past (and, presumably, future), employers?
Frankly, we feel that Mr. Summers' revealed relationship with D.E. Shaw, as well as the super-banks and investment banks, is a black mark on the Obama Administration. It is becoming increasingly clear - perhaps excruciatingly so - that the brains behind the Administration are not young, fresh faces. Rather, they are the hardened gamblers who helped to get the United States, and indeed the entire world, into the Depression in the first place.
Monday, April 6, 2009
Welfare State Crash
According to recent reports, the US Social Security system will start paying out more in benefits than it receives in taxes next year. The US is hardly alone in having stresses on its old-age pension programmes. This raises the larger question, can society afford to pay people not to work?
It is ironic to ask this question at a time millions are being thrown out of work, and there doesn't seem to be enough to do. Of course, there always is plenty to do - it's just that it is uncertain what are profitable undertakings, and what are not.
The basic premise of the Welfare State is that those who are lucky enough to stumble upon something profitable to occupy their time should 'share' a portion of their wages (or winnings) with the portion of the populace who are not so lucky. This 'sharing' is enforced through taxation and the coercive power of the State.
During the growthy era from World War II to the end of the last century, there were plenty of profitable occupations in the Industrialised Nations and the dependent class was a minority. In recent years the dependent class has been growing much faster than the productive one. How many non-productives can society support? And at what level?
In a saner world, these questions would be coming to the front of public debate. But as that is not the case, we expect an overburdening of the productive sector and an accelerating economic decline. The end state is likely to involve the OECD nations little better off than the more advanced of the developing nations. In that case, there will be essentially no public resources for the disadvantaged and unmotivated to draw upon. Expect to see shocking poverty once again where it was supposed to have been eradicated.
It is ironic to ask this question at a time millions are being thrown out of work, and there doesn't seem to be enough to do. Of course, there always is plenty to do - it's just that it is uncertain what are profitable undertakings, and what are not.
The basic premise of the Welfare State is that those who are lucky enough to stumble upon something profitable to occupy their time should 'share' a portion of their wages (or winnings) with the portion of the populace who are not so lucky. This 'sharing' is enforced through taxation and the coercive power of the State.
During the growthy era from World War II to the end of the last century, there were plenty of profitable occupations in the Industrialised Nations and the dependent class was a minority. In recent years the dependent class has been growing much faster than the productive one. How many non-productives can society support? And at what level?
In a saner world, these questions would be coming to the front of public debate. But as that is not the case, we expect an overburdening of the productive sector and an accelerating economic decline. The end state is likely to involve the OECD nations little better off than the more advanced of the developing nations. In that case, there will be essentially no public resources for the disadvantaged and unmotivated to draw upon. Expect to see shocking poverty once again where it was supposed to have been eradicated.
Sunday, April 5, 2009
Conceptually Grasping an Inflection Point
Now that everyone knows there is a Recession on, of course the next step will be for the masses to gradually acknowledge that there is actually a Depression going on. It will probably take only a few more false dawns and startling crashes to get to that point. A greater conceptual challenge will come when people struggle to realise the economic landscape has changed permanently - that the era of ever-increasing prosperity is over for good.
The economic boom of the last fifty years is an abberation in human history - though everyone now living sees it as normal. How long will it take to acknowledge that growth isn't coming back? And that any economic climate that doesn't involve serious decline is the new prosperity?
Truth is always the first casuality, and it should be expected that governments and financial institutions (or is that redundant now?) will lie with statistics. The mass media who are always so eager to sell things will be happy to go along with the lie. The people will just have to rely on their own power of perception to see what is really happening.
We suspect that society will divide roughly into two camps: those who 'get it' and adopt dramatically more frugal lifestyles; and those who persist in an increasingly delusionary attitude of affluence. Given that the latter attitude will become an ever shorter and quicker road to ruin, it won't be too long before the first group becomes ascendant.
The economic boom of the last fifty years is an abberation in human history - though everyone now living sees it as normal. How long will it take to acknowledge that growth isn't coming back? And that any economic climate that doesn't involve serious decline is the new prosperity?
Truth is always the first casuality, and it should be expected that governments and financial institutions (or is that redundant now?) will lie with statistics. The mass media who are always so eager to sell things will be happy to go along with the lie. The people will just have to rely on their own power of perception to see what is really happening.
We suspect that society will divide roughly into two camps: those who 'get it' and adopt dramatically more frugal lifestyles; and those who persist in an increasingly delusionary attitude of affluence. Given that the latter attitude will become an ever shorter and quicker road to ruin, it won't be too long before the first group becomes ascendant.
Saturday, April 4, 2009
Let's Play Pretend: Letting Banks 'Mark to Make-Believe'
Many of the problems presently facing the world financial system (and consequently the world economy as a whole) can be blamed squarely on the deregulation of American super-banks. Although it would be a somewhat hollow gesture, one of the primary pursuits of policy-makers probably should be to un-deregulate the U.S. banking system, and bring these super-destructive super-banks to heel.
Unfortunately, it seems that quite the opposite is going to happen. The Financial Accounting Standards Board has just untied one of the few remaining mooring lines holding these super-banks to reality. The change in policy means that banks will no longer need to mark their mortgage-backed securities to market values, but rather "value the securities instead at their value in a normal market."
The problem centres around this concept of a "normal market." Who defines what "normal" is, and how it is defined? We sincerely doubt the FASB will be defining "normal." The most likely definer is the super-banks themselves. These banks are not known for their, shall we say, sobriety. Simply put, the FASB has effectively allowed banks holding mortgage-backed securities to value them in their favourite manner: marked to make-believe.
If this isn't an invitation to cook the books, we don't know what is. Given the track record of these super-banks, we would be very surprised indeed if this new policy isn't thouroughly abused to the hilt. Now that the super-banks can call the value of their mortgage-backed securites whatever they wish, they can use them to effectively wipe out most (if not all) of their gambling debts. They will then appear much stronger (i.e. solvent) then they actually are, and thereby dig an even deeper grave for themselves, their customers, and their investors.
Unfortunately, it seems that quite the opposite is going to happen. The Financial Accounting Standards Board has just untied one of the few remaining mooring lines holding these super-banks to reality. The change in policy means that banks will no longer need to mark their mortgage-backed securities to market values, but rather "value the securities instead at their value in a normal market."
The problem centres around this concept of a "normal market." Who defines what "normal" is, and how it is defined? We sincerely doubt the FASB will be defining "normal." The most likely definer is the super-banks themselves. These banks are not known for their, shall we say, sobriety. Simply put, the FASB has effectively allowed banks holding mortgage-backed securities to value them in their favourite manner: marked to make-believe.
If this isn't an invitation to cook the books, we don't know what is. Given the track record of these super-banks, we would be very surprised indeed if this new policy isn't thouroughly abused to the hilt. Now that the super-banks can call the value of their mortgage-backed securites whatever they wish, they can use them to effectively wipe out most (if not all) of their gambling debts. They will then appear much stronger (i.e. solvent) then they actually are, and thereby dig an even deeper grave for themselves, their customers, and their investors.
Friday, April 3, 2009
The Worst is Yet to Come
What caused this Depression? Can anything be done to make things better? Can anything be done to make them worse?
A lot of things caused this Depression. It might be easier to to list what didn't cause it. At the top of the list would be 'a loss of consumer confidence'. In a nutshell, the origin of the Depression can be found in the prosperity which preceded it. Flaws in the economic system eventually crashed the system. There are many theories of what causes Depressions - many of them have much merit and they are not mutually exclusive.
One theory is that disparities of income and wealth create Depressions. These disparities were glaringly obvious in both the 1920s and the 1990s. So, to answer the second question, perhaps ameliorating these disparities would be helpful - some novel approaches could include creating a maximum wage, or introducing property taxes on financial assets. And, to answer the third question, if the opposite direction is being taken by public policy, it is probable that policy is actually making things worse.
In the present bailout-of-banks mode, financial assets are being protected even as millions of ordinary workers lose their jobs. The result of this is that the very wealthy are becoming less poor than they otherwise would in a freer system, while workers become comparatively much poorer. Thus disparities of wealth and income are not being allowed to narrow and lay the groundwork for a healthier economy. Public policy is actually making the situation worse.
Another theory of Depressions is that too much capital has been allocated towards uses where it is not really productive. This applies very neatly in the present circumstances to - say - automobile manufacturers or making McMansions in exurbia. What could be done to make things better is allow capital to slip away from these uses and towards what people want. Unfortunately, public policy is attempting to prop up both failing automakers and sagging house prices. Again, this will make the Depression worse.
We could go on. At almost every step, the reaction of policy makers is not only to not do helpful things, but to do exactly the worst possible thing. It's going to be a rough ride, folks.
A lot of things caused this Depression. It might be easier to to list what didn't cause it. At the top of the list would be 'a loss of consumer confidence'. In a nutshell, the origin of the Depression can be found in the prosperity which preceded it. Flaws in the economic system eventually crashed the system. There are many theories of what causes Depressions - many of them have much merit and they are not mutually exclusive.
One theory is that disparities of income and wealth create Depressions. These disparities were glaringly obvious in both the 1920s and the 1990s. So, to answer the second question, perhaps ameliorating these disparities would be helpful - some novel approaches could include creating a maximum wage, or introducing property taxes on financial assets. And, to answer the third question, if the opposite direction is being taken by public policy, it is probable that policy is actually making things worse.
In the present bailout-of-banks mode, financial assets are being protected even as millions of ordinary workers lose their jobs. The result of this is that the very wealthy are becoming less poor than they otherwise would in a freer system, while workers become comparatively much poorer. Thus disparities of wealth and income are not being allowed to narrow and lay the groundwork for a healthier economy. Public policy is actually making the situation worse.
Another theory of Depressions is that too much capital has been allocated towards uses where it is not really productive. This applies very neatly in the present circumstances to - say - automobile manufacturers or making McMansions in exurbia. What could be done to make things better is allow capital to slip away from these uses and towards what people want. Unfortunately, public policy is attempting to prop up both failing automakers and sagging house prices. Again, this will make the Depression worse.
We could go on. At almost every step, the reaction of policy makers is not only to not do helpful things, but to do exactly the worst possible thing. It's going to be a rough ride, folks.
Thursday, April 2, 2009
A Modest Proposal to Save the United States
We've been following the affairs of the United States' automobile manufacturers rather closely. It's an interesting situation, one that we think deserves more analysis that it seems to be getting. The moves to nationalise the companies, as we wrote about in an earlier article, seem to suggest that one of the most probable outcomes will be the foundation of 'AmeriCar'.
The notion of a nationalised automobile manufacturer is not outside of the realm of possibility, in this bailout-happy era of U.S. policy-making. It carries with it a guarantee of employing thousands of people, backstops what James Kunstler calls the "Happy Motoring fiesta," and more-or-less (mostly less) preserves the appearance of the status quo. All these appear to be the avowed goals of the Obama Administration, so the situation really is ripe for this particular flavour of Lemon Socialism. If the AmeriCar future is true, we have some thoughts as to how the Government can help make the continuation of the Happy Motoring fiesta more durable.
All that we suggest is the phasing in of a national speed limit of 35 miles per hour. Municipalities could, of course, have lower speed limits, but the highest legal speed in the United States would be 35 mph. Ignoring the indignant screams of rage from the Citizenry, this vastly lower limit would bring many positive changes:
The loss of life in automobile accidents would fall dramatically to near zero, reducing the cost of cleaning up the wreck, the medical bills, and fixing any damage done to public roadways. The repair cost of automobile collisions would be greatly reduced, since at 35 mph the force involved in any one collision is relatively low. The wear on public roadways and bridges would fall dramatically, allowing for more maintenance money to be diverted from maintenance to building more infrastructure.
Additionally, the reduced speed limit would force citizens to live closer to their places of work. By vastly cutting commutes, this would give citizens more time to spend with their families (or work more, according to preference). Also, the amount of energy burned daily by citizens going to work would be vastly reduced, thereby cutting the United States' dependence on 'foreign oil.' At the same time, this would automatically increase the density of American cities, which would both give a larger tax base to those cities, as well as make public services cheaper (i.e. more people are paying less).
We could go on, but we hope the point is made. A simple and elegant piece of legislation, like a vastly reduced national speed limit, could perform a world of change. Many of the apparent goals of the Obama Administration could be serviced by a lower speed limit. To be honest, we fully believe that this sort of legislation will never see the light of day. Such well-reasoned, functional mandates seem to be beyond the abilities of the Government.
The notion of a nationalised automobile manufacturer is not outside of the realm of possibility, in this bailout-happy era of U.S. policy-making. It carries with it a guarantee of employing thousands of people, backstops what James Kunstler calls the "Happy Motoring fiesta," and more-or-less (mostly less) preserves the appearance of the status quo. All these appear to be the avowed goals of the Obama Administration, so the situation really is ripe for this particular flavour of Lemon Socialism. If the AmeriCar future is true, we have some thoughts as to how the Government can help make the continuation of the Happy Motoring fiesta more durable.
All that we suggest is the phasing in of a national speed limit of 35 miles per hour. Municipalities could, of course, have lower speed limits, but the highest legal speed in the United States would be 35 mph. Ignoring the indignant screams of rage from the Citizenry, this vastly lower limit would bring many positive changes:
The loss of life in automobile accidents would fall dramatically to near zero, reducing the cost of cleaning up the wreck, the medical bills, and fixing any damage done to public roadways. The repair cost of automobile collisions would be greatly reduced, since at 35 mph the force involved in any one collision is relatively low. The wear on public roadways and bridges would fall dramatically, allowing for more maintenance money to be diverted from maintenance to building more infrastructure.
Additionally, the reduced speed limit would force citizens to live closer to their places of work. By vastly cutting commutes, this would give citizens more time to spend with their families (or work more, according to preference). Also, the amount of energy burned daily by citizens going to work would be vastly reduced, thereby cutting the United States' dependence on 'foreign oil.' At the same time, this would automatically increase the density of American cities, which would both give a larger tax base to those cities, as well as make public services cheaper (i.e. more people are paying less).
We could go on, but we hope the point is made. A simple and elegant piece of legislation, like a vastly reduced national speed limit, could perform a world of change. Many of the apparent goals of the Obama Administration could be serviced by a lower speed limit. To be honest, we fully believe that this sort of legislation will never see the light of day. Such well-reasoned, functional mandates seem to be beyond the abilities of the Government.
Wednesday, April 1, 2009
Recovery and Mobility
In order for any kind of recovery to arise out of this Depression, workers must have the mobility to move to where the jobs are. The housing crash in the USA and policy response to it is impeding this necessary step.
In areas where jobs are vanishing, housing prices are falling as well. Many owners, whose houses are worth less than the mortgages, who can still afford their housing payments feel trapped in their houses because to sell would mean bringing cash to the close. They feel unable to move to areas where job prospects are better.
Government efforts to "keep people in their homes" are misguided for this reason as well. It is little benefit to a person to keep him in his house when his long term economic prospects are poor in that locale.
We propose as a better policy and an aid to stuck property owners a system of municipally-owned housing trusts to take title to physically sound, but financially impaired, properties. The former owners would formally lose their equity (the market has already taken the value away) but with out the negative credit event associated with default, and banks would accept conversion of their mortgages into municipal bonds secured by the properties. The former owners would then have the option to continue renting their homes at market rates, or move on to greener pastures.
In areas where jobs are vanishing, housing prices are falling as well. Many owners, whose houses are worth less than the mortgages, who can still afford their housing payments feel trapped in their houses because to sell would mean bringing cash to the close. They feel unable to move to areas where job prospects are better.
Government efforts to "keep people in their homes" are misguided for this reason as well. It is little benefit to a person to keep him in his house when his long term economic prospects are poor in that locale.
We propose as a better policy and an aid to stuck property owners a system of municipally-owned housing trusts to take title to physically sound, but financially impaired, properties. The former owners would formally lose their equity (the market has already taken the value away) but with out the negative credit event associated with default, and banks would accept conversion of their mortgages into municipal bonds secured by the properties. The former owners would then have the option to continue renting their homes at market rates, or move on to greener pastures.
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