Monday, April 29, 2013

Bubble Symmetry and Housing

If bubbles eventually revert to their starting level, Phase 3--capitulation and a return to pre-bubble prices--still lies ahead for the housing market.


Way back in 2006 at the height of the housing bubble, I prepared this chart proposing the housing bubble might exhibit symmetry, i.e. the decline would mirror the rise. I also proposed that the decline would be characterized by phase shifts that corresponded to the decay of whatever reason was being given for the "recovery" in housing, for example, "this must be the bottom."


Let's compare this idealized bubble symmetry with a chart from reality: housing in the bubblicious Los Angeles market.


Here's another look at the L.A. market as measured by Standard & Poors:


Hmm, what would have happened if the Federal Reserve hadn't dumped trillions of dollars into the mortgage market, and the Federal housing agencies hadn't subsidized mortgages and housing with 3% down payments and tax credits?

Perhaps all the trillions of dollars of intervention has accomplished is extend Phase 2. Central bank and state manipulation distorted the symmetry of housing's decline, but did they stave off Phase 3 permanently?

If bubbles eventually revert to their starting level, Phase 3--capitulation and a return to pre-bubble prices--still lies ahead. 



Special "the end of the world as we know it" sale on seeds from our longtime supplier Everlasting Seeds:TEOTWAWKI SALE! 20% OFF!
In light of the calamitous predictions regarding the Global Coastal Event [Clif High], Korean Nuclear tensions, and Solar/EMPs “Kill Shot” {Ed Dames}, we thought we'd offer folks the largest discount we've ever given. We're not 'fortune tellers' here, or Seers, or 'Intuitives': but if even ONE of these predictions come to pass, it'll definitely make for a 'bad hair day' {week/month/year...} for all of us... 


Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, G. Wayne A. ($25), for yet another wondrously generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Stuart T. ($5), for your most generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

Sunday, April 28, 2013

Wall Street Is a Rentier Rip-Off: Index Funds Beat 99.6% of Managers Over Ten Years

The entire financial management industry is a profit-skimming rentier arrangement.


It may seem uncharitable to note that only .4%--that's 4/10th of 1%--of mutual fund managers outperform a plain-vanilla S&P 500 index fund over 10 years, but that is being generous: by other measures, it's an infinitesimal 1/10th of 1%.

According to the folks at the Motley Fool, only ten of the ten thousand actively managed mutual funds available managed to beat the S&P 500 consistently over the course of the past ten years.Consider the following: a quick glance at Yahoo Finance reveals the average expense ratio for growth and income style mutual funds is 1.29%. As a result, approximately $1,883 of every $10,000 invested over the course of ten years will go to the fund company in the form of expenses. Compare that to the Vanguard 500 fund, designed to mirror the S&P 500 index, which boasts an annual expense ratio of only 0.12%, resulting in ten-year compounded expense of $154 for every $10,000 invested.
Frequent contributor B.C. recently screened 24,711 funds on Yahoo Finance's fund screener and 17,785 funds on the Wall Street Journal's online screening tool. The results were sobering, to say the least: using a basic set of criteria, the first screen turned up a mere 5 managers who beat the S&P 500 index over five years. Using a slightly different set of criteria, the second screen found 71 funds out of 17,785 outperformed the index over ten years.
That's .4% of managed funds, i.e. an index fund beat 99.6% of all fund managers.

So what do we get for investing our capital in mutual funds and hedge funds? The warm and fuzzy feeling that we've contributed the liquidity needed to grease a monumental skimming operation. Ten out of 10,000 is simply signal noise; in effect, nobody beats an index fund.

The entire financial management industry is a rentier arrangement: they skim immense profits and return no productive yield at all. This is of course a key characteristic of the neofeudal debtocracy that is the U.S. economy: various cartels and state fiefdoms operate rentier arrangements that skim a percentage of the national income, protected by the state and endless PR from any market forces or transparency.

B.C.'s analysis and commentary:

Here are the most recent results for the quarter ending Q1 '13 for mutual fund managers' performance vs. the total return to the S&P 500using the Mutual Fund Screener from Yahoo Finance (data from Morningstar):

First Screen Criteria:
All funds.
Manager tenure 5 years or more.
No load.
Management fee of less than 1%.

YTD: >5%
1-yr.: >10%
3-yr.: >5%
5-yr.: >0%

Number of managers who beat the S&P 500 over the past five years: 0

Second Screen Criteria:
All funds.
Manager tenure 5 years or more.
Load less than 2%.
Management fee less than 2%.

YTD: >5%
1-yr.: >10%
3-yr.: >5%
5-yr.: >0%


Number of managers who beat the S&P 500 over the past five years: 5

The screener includes a universe of 24,711 funds, which means that those who "beat the market" were in the fifth-order Pareto distribution of 2-3 out of 10,000.

Using similar criteria for the WSJ.com Mutual Fund Screener without the option of choosing manager tenure but including Lipper relative performance to peers, load-adjusted performance, and with an A-AAA rating, only 71 funds (fewer managers because of multiple fund management by a manager) of 17,785 matched or beat the S&P 500 over 10 years.

Once again, evidence of a third- or fourth-order Pareto distribution of 2-4 out of 1,000 being "winners."

The results of the past 10-12 years during the ongoing secular bear market clearly demonstrate that the "money management" industry exists primarily, if not now exclusively, for the benefit of those who "manage" other people's money, not the investors/shareholders of the funds.

By definition "hedge" funds are no better, i.e., they hedge investors' returns to no better than cash:

Hedge Funds: Going nowhere fast (The Economist)

"The past year has been another mediocre one for hedge funds. The HFRX, a widely used measure of industry returns, is up by just 3%, compared with an 18% rise in the S&P 500 share index. Although it might be possible to shrug off one year’s underperformance, the hedgies’ problems run much deeper.

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation."

B.C.'s commentary resumes:

That there are so many "managers" in the game with AUMM (assets under mis-management), all manner of ETFs, and now pension funds "discovering" index funds and index ETFs, all trying to match or "beat the market", is a primary reason why the overwhelming majority of " managers" will underperform and thus add no value to an investors' portfolio. 

Eventually, a growing plurality of so-called "investors" will discover that the stock market is not for wealth accumulation for the majority of "investors" but a wealth-transfer mechanism from the second 9-19% with any financial surplus to the top 0.1-1% who hold a disproportionately large share of financial wealth, and to the so-called money "managers" who benefit from fee income generated by the wealth-transfer process.

However, the resources of the financial services industry generated by fee income will continue to fund mass-media advertising/propaganda in the ongoing attempt to convince the top next 19% that they can "beat the market" if only they turn over their savings to the industry to "manage". Little do most "investors" know that they are funding the perpetuation of the industry's fraud, their own underperformance, and failing to match risk-adjusted returns of cash and fixed income after fees, taxes, and inflation over a cycle.

Now, imagine what would happen to the financial services and banking industries and financial print, broadcast, and online media were these unsanitized facts about dismal money "manager" performance to be widely reported and internalized by a significant minority or small plurality of investors or the public at large.

Thank you, B.C. In my analysis, the financial services industry is simply one of many state-enabled cartels and rentier arrangements that are immune to market forces, price discovery and the bright light of truth.



Special "the end of the world as we know it" sale on seeds from our longtime supplier Everlasting Seeds:TEOTWAWKI SALE! 20% OFF!
In light of the calamitous predictions regarding the Global Coastal Event [Clif High], Korean Nuclear tensions, and Solar/EMPs “Kill Shot” {Ed Dames}, we thought we'd offer folks the largest discount we've ever given. We're not 'fortune tellers' here, or Seers, or 'Intuitives': but if even ONE of these predictions come to pass, it'll definitely make for a 'bad hair day' {week/month/year...} for all of us... 


Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, Karl L. ($50), for yet another astoundingly generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Helen S.C. ($10), for yet another wondrously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Read more...

Saturday, April 27, 2013

What's Been Cooking at Our House

A healthy homecooked family meal and a home garden are revolutionary acts.


Longtime readers know that my political, financial and spiritual philosophy starts here: "A healthy homecooked family meal and a home garden are revolutionary acts." If this sounds preposterous, then it's time for an analysis of our politics of experience and an examination of how derealized our culture and economy have become.

Though all my books address the politics of experience and derealizationSurvival+ and Resistance, Revolution, Liberation develop the analysis most fully.

I recently read an explanation of convenience: why go to the trouble of cleaning and preparing vegetables and then having to do dishes, when you can buy a fast-food cheeseburger, crumple up the wrapper and toss it in the trash?

Why, indeed. The cheeseburger is hands-down more convenient. But if your diet revolves around this sort of convenience, you quickly become overweight and chronically ill because you're starving yourself even as you fill yourself up.

This is an excellent metaphor for the entirety of derealized American life. Stop engaging in real life and what are you left with?

Growing food and preparing food are two anchors to the real world. Each is an act of caring and an engagement with the pleasures of living.

Over the years I have heard many excuses why nobody has time or energy to prepare real food at home. Since I typically work 12-hour days, I find the usual excuses rather thin. Americans are "too busy" to cook (or learn how to cook) yet they magically find 4 to 6 hours a day to watch TV, surf the web, text, etc.

Yes, everyone who works long hours feels whipped at the end of the day. The trick is to prepare main dishes on the weekend that last several meals, and to perfect some quick cooking techniques for vegetables such as stir-frying. (A pressure cooker speeds up cooking rice and beans wonderfully.)

Here's a recent weekend meal at our house: Korean-style chicken BBQ (enough to last a few main meals on weekdays), steamed asparagus, stir-fried pea sprouts (Chinese style), kimchee (store-bought), Hawaii-style white rice and a bit of white wine.


Another meal: grilled pork in a Vietnamese marinade, stir-fried green beans (from a Fuchsia Dunlop recipe, as I recall), a dollop of zinfandel red wine and white rice. (We eat both brown and white rice; those of you from Hawaii will understand why we can't switch completely to brown rice.)


Here's a closeup of the black-bean flavored green beans:


I recently picked the last of our winter beets and prepared the beets and beet tops in a vinaigrette:


My wife learned how to make potstickers (Jiaozuo in Mandarin Chinese) some years ago; here's a recently prepared pan. (No, these are not machine-made; they are made by hand.) We freeze them in bags for easy preparation when we're trashed at day's end. They can be either vegetarian or with pork.


I recently rediscovered how easy it is to make brownies from scratch. I decorated this batch with walnuts and macadamia nuts. Ridiculously addictive.


Other than the Jiaozuo, nothing presented here is elaborate or takes a lot of time to prepare. It's possible to make these dishes in an elaborate fashion, but it isn't necessary. A cheap little Weber grill or hibachi and a quickly assembled marinade are all that's needed for a great little BBQ.


As Aristotle observed, "We are what we repeatedly do." Combine that with Ralph Waldo Emerson's admonition, "Do the thing and you shall have the power," and you have a pretty good philosophy of cooking and life. 



Special "the end of the world as we know it" sale on seeds from our longtime supplier Everlasting Seeds:TEOTWAWKI SALE! 20% OFF!
In light of the calamitous predictions regarding the Global Coastal Event [Clif High], Korean Nuclear tensions, and Solar/EMPs “Kill Shot” {Ed Dames}, we thought we'd offer folks the largest discount we've ever given. We're not 'fortune tellers' here, or Seers, or 'Intuitives': but if even ONE of these predictions come to pass, it'll definitely make for a 'bad hair day' {week/month/year...} for all of us... 


Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, Michael E. ($25), for your much-appreciated generous contribution to this site -- I am greatly honored by your support and readership.Thank you, Tom P. ($25), for your most-welcome generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

Thursday, April 25, 2013

China 2.0 Is in Trouble

Despite the many differences between China and the U.S., their basic problems are remarkably similiar: an economy that increasingly serves a tiny Elite, and a political/financial system that is incapable of meaningful reform.


Setting aside the latest bird flu outbreak and sagging indicators of growth, China 2.0 is in trouble (with 1.0 being the Communist era of 1949 -1977 and 2.0 being the modernization/globalization era of 1978 - 2013), for it remains overly reliant on unsustainable growth dynamics.

The following is my summary of the excellent talks given by Jim Chanos and Michael Pettis at Mish's insight-packed Wine Country Conference in Sonoma earlier this month. (Any errors in presenting the speakers' views are of course mine.)

Here are Chanos' lecture slides and interviews with Chanos and Pettis:

Michael Pettis observed that he'd spent time in Haiti earlier in his career, and pockets of poverty in China today equal those he'd witnessed in Haiti. Experienced China hands know the central government takes pains to limit media exposure of this level of poverty, as it reflects poorly on China's claim to being a superpower.

He then described in some detail how the Chinese leadership has created a "no-win" policy by encouraging a dependence on fixed investment to fuel rapid growth of GDP. If it shifts income to households to enable more consumer spending, GDP growth will decline. But if it continues borrowing and spending on increasingly marginal fixed investments, growth will also slow.

In effect, China has suppressed wages to fuel GDP growth. Financial repression (low interest rates) has further suppressed household income and encouraged misallocation of capital on a vast scale.

Pettis said the Chinese government is pushing a "go west" campaign. While "go west" worked in America's development, it failed miserably in Soviet Russia and Brazil. The difference, he said, is that in America, the private sector moved west and the government simply followed. In China, Russia and Brazil, the government pushed infrastructure west but without private-sector participation. Pettis reported that private sector contractors go west to build the infrastructure and then return east once the work is done.

In Pettis' view, the key metrics are debt and the ability to service debt: if debt is rising but the ability to service that debt (disposable income) is stagnant, then the system is unsustainable. He said this is the case in China: debt is rising but the ability to service that debt is not.

Given the political power of the state-owned enterprises (SOEs), China's political and financial systems do not have self-correcting mechanisms. Such mechanisms require transparency and feedback that is lacking in China.

Pettis flatly stated that the PBoC (China's central bank) is insolvent. Debt levels are high and much of the collateral is impaired.

He also noted that pollution is estimated to shave 3.5% off GDP annually, which means that if the 7% reported GDP growth rate is overstated, as many believe, then actual GDP growth after accounting for environmental damage might well be zero.


Jim Chanos addressed a number of financial and real estate issues. In the last downturn in the late 1990s, he noted, 40% of outstanding loans in China went sour. People in China only have 15 years' experience owning property, and so they have no experience of either a housing crash or long-term maintenance of housing.

One of the attendees asked: since China's population is ageing, doesn't the overbuilding of residential real estate make sense? That is, invest in housing now, anticipating that in 10 years more national income will have to be devoted to caring for the elderly?

Chanos' response was succinct: "Most of the buildings in China won't be livable in 10 years." His point was that the infrastructure required to maintain buildings is undeveloped in China: most highrise residential buildings do not have a functioning common-area expense/maintenance system in place. If the elevator breaks, there is rarely money set aside to fix it or a person responsible for making it happen.

The quality of construction in China, though greatly improved by some accounts, is still sketchy; Chanos said that when a bridge recently collapsed, inspectors found that the reinforcing bars that were supposed to be in the concrete were missing. This might be an extreme example, but the basic point is that much of the money poured into construction over the past decade has not produced a product that will last 50 or 100 years.

Wealthy Chinese people often visit him in New York, Chanos reported, and there is one striking blind spot in their grasp of real estate. None of the visitors are aware that uninhabited buildings decay. The average middle class household in China is sinking all their savings into investment flats, assuming real estate will be a durable store of value, without understanding that these vacant units degrade. At some tipping point, entire buildings could become unlivable as elevators break down, leaks feed mold, etc.

The store of value is a chimera unless the building is actively maintained, but maintenance is not yet part of the culture.

As for the "if we build it, they will come" narrative that underpins the China Bulls' case, Chanos said that there is already 15 square meters of empty space per capita in China, meaning that there is 135 sq. ft. of empty interior area per person in China, and another 10 billion square meters is under construction.

Housing is already astronomically high in terms of the average urban annual income-- the annual cost/income of a flat ratio is higher in China, even in 2nd and 3rd tier cities, than in high-cost locales such as London and New York.

Most of China's populace cannot possibly afford the tens of millions of flats being built or sitting empty.

Chanos also noted that repression is not just financial; China spends more on internal security than it does on its military.

An estimated $2.7 trillion in private wealth has left China in the last decade. This is roughly 22% of China's $12 trillion GDP. What does this say about the leadership's faith in their system?

As a matter of "face" and policy, China's leadership focuses almost exclusively on GDP growth; GDP is the tail wagging the dog, Chanos noted, and it leads to absurdly unproductive allocation of credit and capital to projects that will never earn the cost of that capital.

The easist way to boost GDP is to put a shovel in the ground--build something, anything. That has been China's strategy for 20 years, and it is now yielding diminishing returns.

Add all this up and you get a clear picture of a government and economy that is incapable of making the kind of structural reforms that are needed to make growth sustainable. My conclusion is that despite the many differences between China and the U.S., their basic problems are remarkably similiar: an economy that increasingly serves a tiny Elite, and a political/financial system that is incapable of meaningful reform. 



Special "the end of the world as we know it" sale on seeds from our longtime supplier Everlasting Seeds:TEOTWAWKI SALE! 20% OFF!
In light of the calamitous predictions regarding the Global Coastal Event [Clif High], Korean Nuclear tensions, and Solar/EMPs “Kill Shot” {Ed Dames}, we thought we'd offer folks the largest discount we've ever given. We're not 'fortune tellers' here, or Seers, or 'Intuitives': but if even ONE of these predictions come to pass, it'll definitely make for a 'bad hair day' {week/month/year...} for all of us... 


Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, Ben G. ($50), for yet another supremely generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Jeffrey S. ($5/month), for your outstandingly generous subscription to this site -- I am greatly honored by your support and readership.

Read more...

The Way Forward

Absolutely nothing within the Status Quo can possibly be truly reformed until the default option of doing nothing will guarantee collapse.


Even those at the top of the neofeudal debtocracy know our economy and political order need real reform. Behind closed doors, they will discuss this with others in the Power Elite and gloomily shake their heads.

The usual reasons why real reform is impossible are duly trotted out: political stalemate/gridlock, the power of vested interests, etc.

The real reasons are deeper than economics or politics. Humans have been selected to assess risk with two biases:

1. The short-term takes precedence over the long-term.

Given the precariousness of daily life for hunter-gatherers, this makes perfect sense. The hunter-gatherer lifestyle places a premium on acquiring food for today and accepting the background volatility and insecurity of constant movement as the price of the longer-term security gained by accessing multiple food sources.

Why risk one's life for a payoff in the distant future, when one might not live to collect the payoff? The lower-risk strategy is to keep moving and exploit the occasional windfall along the usual routes between waterholes, fruit trees, hunting grounds, etc.

2. One in the hand is worth two in the bush, i.e. protecting what wealth and power is in hand is more important than risking them on a potential improvement.

We can visualize this valuation of risk and security as a see-saw (teeter-totter):those with much to lose are naturally risk-averse, while those with little to lose and much to gain have a substantial appetite for risk that could pay off big.


Our problem is that the security provided by institutions (in my nomenclature,fiefdoms) and state-enabled cartels is so great that no risk is worth threatening the perquisites, power and security of these organizations. What possible benefit is large enough to offset the risks that reform could diminish the budget and power of the organization and its leadership?

The answer is: none. There is no conceivable payoff large enough to offset the guarantees offered by the Federal government, which can always borrow (or print, if the rules were changed) the money needed to meet its obligations.

In other words, the state-cartel debtocracy has essentially zero incentive to risk real reform and every incentive to stonewall, suppress or block any real reform as a potentially dangerous threat to the organization's security.

This explains why all the supposed reformations of our broken system are mere simulacrum reforms, facsimiles of reform that satisfy the PR need for some sort of going through the motions effort that leaves the existing cartel-state power structure intact.

The only thing that can modify this risk calculation is the certainty that doing nothing will lead to the complete collapse of the institution. It is only when it becomes painfully obvious that there is no way left to suck enough dollars from the Federal/state/county trough to keep the Status Quo intact will the managers of public institutions and state-enabled cartels risk reform.

Given the systemic lack of accountability and market discipline, it will be too late for most of these sclerotic, self-serving organizations. Real reform will trigger a collapse, as the institutional culture has lost adaptability and the ability to downsize input (headcount and costs) while increasing output.


Institutions have an innate tendency to expand even as they lose sight of their real function. If the function is complex and the political protection strong, the momentum behind these tendencies increases.

Individual contributions and institutional success are both difficult to measure in large bureaucracies, and it is tempting to define success by easily achieved metrics that reflect positively on the management. As the organization loses focus on its original purpose, personal aggrandizement, security and advancement become the focus of departments and individuals.

The core purpose of the institution is given lip service but has been replaced with facsimiles of managerial expertise and bureaucratic infighting over resources. Easily gamed metrics are substituted for actual success.

As noted many times here, people who have no skin in the game behave quite differently from those who face consequences--this is called moral hazard.

Bureaucracies tend to institutionalize moral hazard: those managing the institution’s departments rarely suffer any personal consequence when the institution fails to perform its function. Funds are spent, but the individuals spending the institution’s money suffer no losses should their policies result in failure.

By breaking the institutional purpose into small pieces whose success is measured by easily reached targets, the institution can be failing its primary function even as every department reports continued success in meeting its goals. Repeated failure and loss of focus erode the institution even as those in charge advance up the administrative ladder.

The disconnection between the failure to fulfill the institution’s original function and the leadership’s rise feeds cynicism in the institution’s employees and erodes their purpose and initiative. Soon the institutional culture is one of self-aggrandizement, gaming of departmental targets, protection of budgets and a collapse of the work ethic to the minimum level needed to avoid dismissal.

I have addressed The Lifecycle of Bureaucracy on a number of occasions:


Since the collapse of the neofeudal cartel-state debtocracy is inevitable, I am an optimist. I wrote Survival+ and Resistance, Revolution, Liberation to not only illuminate the roots of institutional failure but to lay out guidelines for bypassing those institutions as they devolve and collapse.
I have addressed this many times, for example:


In sum: absolutely nothing within the Status Quo can possibly be truly reformed until the default option of doing nothing will guarantee collapse.


Recommended: Abnormality Bias (The Burning Platform/Jim Quinn) 



Special "the end of the world as we know it" sale on seeds from our longtime supplier Everlasting Seeds:TEOTWAWKI SALE! 20% OFF!
In light of the calamitous predictions regarding the Global Coastal Event [Clif High], Korean Nuclear tensions, and Solar/EMPs “Kill Shot” {Ed Dames}, we thought we'd offer folks the largest discount we've ever given. We're not 'fortune tellers' here, or Seers, or 'Intuitives': but if even ONE of these predictions come to pass, it'll definitely make for a 'bad hair day' {week/month/year...} for all of us... 


Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, Stephen L. ($30), for yet another supremely generous contribution to this site -- I am greatly honored by your steadfast support and readership.Thank you, Gregory H. ($25), for your much-appreciated generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

Tuesday, April 23, 2013

Why Krugman and the Keynesians Are Lackeys for the Neofeudal Debtocracy

If you set out to design a system that would implode with devastating consequences, it would be the Keynesian Cargo Cult's neofeudal financialization debtocracy.


The heart and soul of the Keynesian Cargo Cult is the dogma that the cure for all economic ailments is more aggregate demand, i.e. consumption. The Keynesians' fanatic faith in boosting consumption would be merely childishly naive if it didn't directly support a parasitic neofeudal debt-serfdom. Sadly, Krugman and his fellow cultists' single-minded parroting of "aggregate demand" makes them well-paid lackeys and toadies for an extractive neofeudal-neocolonial debtocracy.


If you are unfamiliar with the neofeudal, neocolonial model of financialization, please review:

Debt = Serfdom (April 2, 2013)
Crisis and Opportunity (February 1, 2013)

Like all cargo cults, Keynesians maintain a magical-thinking belief in the power of wanting more stuff. But in so doing, they embrace and support the mystification that protects the power structure that is dooming the nation and its economy to stagnation and eventual collapse (call it "reset" if you prefer).

By focusing on increasing demand and consumption by any means, the Keynesian Cultists miss the key dynamics of sustainable growth and fail utterly and completely to acknowledge the corrupt and exploitive nature of our cartel-state crony-capitalism economy.

Has their naivete blinded them to the power structure of the neofeudal-neocolonial debtocracy? It seems unlikely, and so that leaves a less savory motivation: co-option.They're raking in big bucks as apologists for cartel-state crony-capitalism, and as a result they don't dare question the power structure, much less hazard a critique of the hands that feed them.

The Krugman-Keynesian Cargo Cult is incapable of distinguishing between productive investment and profligate spending. Keynesian cultists focus on an incredibly blunt and misleading indicator of gross domestic product: GDP. Burn down a house and rebuild it, pay people to dig a hole and fill it, build bridges to nowhere, buy costly weapons systems the military doesn't even want, purchase boatloads of particle board furniture from China that's headed for the landfill: it's all equally wonderful to the Keynesian apologists because it boosts GDP.

Incredible as it seems to GDP-worshippers, there is a difference between productive investment and squandering money. A productive investment generates a multiplier effect: most importantly, it increases productivity which then creates value, surplus and wealth.

There is no multiplier in building McMansions in the middle of nowhere, bridges to nowhere, particle board shelving from China or a university degree in film studies, etc. Housing is consumption, a bridge to nowhere is consumption, particle board shelving is consumption, and a $180,000 bachelor's degree in a field of study with near-zero economic premium in the real economy is also consumption.

The Keynesian Cultists and their fellow apologists/neofeudal apparatchiks attempt to mystify this consumption by labeling it "investment." The misdirection may fool craven politicos seeking to buy votes, but the real world is not fooled.

Value, surplus and wealth can only be created by increasing productivity. If an investment doesn't increase productivity, it is either malinvestment, misallocation of scarce capital or consumption.

How does buying particle board shelving from China improve productivity in America? It does not. Does dumping trillions of borrowed dollars into cartels like sickcare, Big Pharma, higher education or the military-industrial complex increase productivity? No, it actively lowers it by diverting national income to the most corrupt, inefficient and least productive sectors of the economy.

The Keynesians are also blind to the dynamic of improving household income. It their magical-thinking universe, buying particle board shelving from China (yippee, aggregate demand!) is supposed to magically turn lead (wasteful consumption) into gold (higher wages). Wages can only increase as productivity increases. Any other apparent increase is simply a subsidy that shifts money from a more productive sector to a less productive sector.

This is how you end up with a healthcare system that is 50% fraud, paper-shuffling, and inefficiency. We know America's sickcare is 50% waste, fraud and paper-shuffling because our competitors provide their citizens healthcare for half of what we spend per person.

The Keynesians' inability to distinguish between consumption and investment that increases productivity is fatal.

The Cargo Cult is also blind to the metric that matters: debt and the ability to service debt. As financialization creates an unproductive nation of debt-serfs who depend on debt to fund their consumption, household income declines. This leaves households less able to service higher debt.

But since aggregate demand (i.e. financialization) is dependent on ever-expanding debt, the system falls apart once households cannot increase their debt loads. ( The Global Status Quo Strategy: Do More of What Has Failed Spectacularly)

In response, the Status Quo increases government borrowing and spending (either directly, or for subsidies to favored cartels like the mortgage industry) to fill the gap left by debt-serfs unable (or unwilling) to borrow more for shelving from China, etc.

The problem with borrowing money for unproductive consumption is the cheap shelving breaks and is hauled to the dump but the interest payment remains--in the case of government borrowing, essentially forever. Unproductive spending of cash is wasteful, as that scarce capital could have been invested in productive assets.

But spending borrowed money on unproductive consumption--McMansions, degrees in critical studies, duplicative medical tests, marginal-utility meds and weapons systems--is truly insane, for the cost of that consumption continues to rise over time as interest is paid, until the debt is retired (paid off) or renounced (defaulted). All that interest is diverting income that could have been invested in higher productivity.

The Keynesian Cultists are also blind to the enormous opportunity cost of funding consumption with debt. Over time, servicing debt bleeds the economy dry as productivity, wages and investment stagnate.

If you set out to design a system that would implode with devastating consequences, it would be the Keynesian Cargo Cult's neofeudal financialization debtocracy. All the incentives favor increasing debt, misallocation of capital and mindless consumption, and all the disincentives weaken investments in productivity and the creative destruction of malinvestments and subsidies to favored cartels.

Why do the Keynesian Cargo Cultists continue dancing around the campfire waving dead chickens and worshipping aggregate demand? Toadies, lackeys and apologists are always well-paid to support the party line. Aggregate demand, aggregate demand, brawk! 



Special "the end of the world as we know it" sale on seeds from our longtime supplier Everlasting Seeds:TEOTWAWKI SALE! 20% OFF!
In light of the calamitous predictions regarding the Global Coastal Event [Clif High], Korean Nuclear tensions, and Solar/EMPs “Kill Shot” {Ed Dames}, we thought we'd offer folks the largest discount we've ever given. We're not 'fortune tellers' here, or Seers, or 'Intuitives': but if even ONE of these predictions come to pass, it'll definitely make for a 'bad hair day' {week/month/year...} for all of us... 


Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



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

Read more...

Monday, April 22, 2013

The Global Status Quo Strategy: Do More of What Has Failed Spectacularly

The global Status Quo--the U.S., the E.U., China, Japan, Cyprus, Greece, Italy, Spain, et al.--has only one choice: do more of what has failed spectacularly.


A key goal of propaganda is to mystify and obscure the Power Elites' real quandary and agenda. For example: we're just trying to help you out here, folks, by inflating another "wealth effect" bubble that will make you feel more prosperous. You're gonna love the warm fuzzy feeling of a return to the good times, even if you own zip-zero-nada in the way of productive assets.

Or: we're raising your taxes and expropriating your money via inflation to stabilize the system that benefits you. (And yes, you may kneel and kiss Janet Yellen's ring.)

The current level of mystification is truly extraordinary. But fortunately, oftwominds.com owns a demystification device that scrubs out the mystification, leaving only stark, unforgiving reality:

1. The global Power Elites know reform is necessary, but the risks of reform are unacceptably high. Why are they unacceptably high? The Status Quo players might lose power and perquisites, and that is unacceptable. These include crony capitalists, cartels, quasi-monopolies, public unions, state fiefdoms, the banking sector and assorted other predators and parasites.

In other words, real reform is impossible because that would implode the Status Quo.
2. Doing nothing will also bring down the Status Quo. Now that the global Status Quo is entirely dependent on rising debt to fund state deficits and marginal growth of investment and consumption, the Status Quo has been backed into a corner: expand debt or die.

Since households and companies can decide not to borrow more money even if they qualify to borrow more, it falls on the central states to borrow and blow money to keep their economies from imploding. This stupendous borrowing then falls on the central banks, which must monetize most of the state debt to keep interest rates low and force investors to chase risky assets and savers to squander their precious capital on gew-gaws and trifles, otherwise known as "aggregate demand" to the Keynesian Cargo Cultists dancing around Krugman's campfire.

3. Since the only endgames to ballooning debts and declining household incomes are runaway inflation or renunciation of debt, the Status Quo has only one choice left to preserve its neofeudal arrangement: do more of what has failed spectacularly, i.e. inflate more asset bubbles as a way to mask the system's phantom collateral for a few more months or perhaps years.

Unfortunately for central banks and their politico cronies, serial asset bubbles face the headwinds of diminishing returns. All the Fed and Federal agencies had to do to launch the first housing bubble was lower interest rates and encourage subprime mortgages.

Now it takes the Fed buying trillions of dollars in impaired mortgages, lowering interest rates to zero, guaranteeing FHA loans to anyone with a pulse and a paycheck, etc. just to keep housing from flatlining. See that little blip up that trillions of dollars in subsidies and intervention bought the Status Quo?


The other serial bubble in progress is of course stocks, which recently scored nominal new highs even as the adjusted-for-inflation (consumer price index) market notched a classic diminishing-return lower high:


4. The only metrics that count are debt and the ability to service that debt.Households have this tiny little problem known as declining income that makes it impossible to service more debt unless interest rates fall to near-zero. Presto-magico, real interest rates (adjusted for inflation) are near-zero, and can't fall any lower.



(Note that this is median income, and since only the top 5% have seen an increase in income, the lower 95% have actually experienced a steeper decline than shown here.)

That means the Fed has run out of room to lower rates. From here on, households will only be able to service more debt if their income rises. Alas, with full-time employment (the only measure that counts--sorry, Federal bean-counters, political lackeys and media toadies, 12-hour a week minimum-wage barista jobs and self-employed people with net earnings of $154 a year don't count) back to 1980 levels, that is not even a remote possibility.


That leaves the global Status Quo--the U.S., the E.U., China, Japan, Cyprus, Greece, Italy, Spain, et al.--only one choice: do more of what has failed spectacularly. Yes, it will fail spectacularly again, but until then, the mystification machine is running full tilt. 



Special "the end of the world as we know it" sale on seeds from our longtime supplier Everlasting Seeds:TEOTWAWKI SALE! 20% OFF!
In light of the calamitous predictions regarding the Global Coastal Event [Clif High], Korean Nuclear tensions, and Solar/EMPs “Kill Shot” {Ed Dames}, we thought we'd offer folks the largest discount we've ever given. We're not 'fortune tellers' here, or Seers, or 'Intuitives': but if even ONE of these predictions come to pass, it'll definitely make for a 'bad hair day' {week/month/year...} for all of us... 


Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, Daniel K. ($100), for your outrageously generous contribution to this site -- I am greatly honored by your support and readership.Thank you, Edward M. ($50), for your superbly generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

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