Conventional 'Wisdom'?

Greetings good citizen,

Welcome to this edition of ‘mythbusters’.

No, this is not that popular show on the Discovery channel. This edition is brought to you by the corporate owned media, that occasionally publicly admits that a widely advertised ‘belief’ has been proven to be ‘wrong’!

First up in our in our parade of debunked ‘conventional wisdom’ is the belief that a college education will ‘guarantee’ access to a comfortable, middle class lifestyle.

Why blow all of that cash on a college education if you’re doomed to end up pushing a broom for the bulk of your (brief) productive life?

Which is to point out what we already know, if you haven’t ‘made it’ by 40, you ain’t gonna!

But don’t take my word for it:

Now evidence is emerging that the damage wrought by the sour economy is more widespread than just a few careers led astray or postponed. Even for college graduates — the people who were most protected from the slings and arrows of recession — the outlook is rather bleak.

Employment rates for new college graduates have fallen sharply in the last two years, as have starting salaries for those who can find work. What’s more, only half of the jobs landed by these new graduates even require a college degree, reviving debates about whether higher education is “worth it” after all.

How sad is it that if you DON’T put your hard won degree to work ASAP, you will be ‘competeing’ with next year’s graduates who possess the ‘latest and greatest’ (knowledge) in your chosen field of endeavor.

You may be able to ‘underbid’ them when it comes to an open position but the fact that you weren’t hired right out of the box marks you as ‘damaged goods’, diminishing the ‘likelihood of success’.

Bringing us back to the other old truism, it isn’t WHAT you know but WHO that matters when it comes to your ‘career path’.

Once upon a time a ‘useful idiot’ with a college degree (and a generous dose of chutzpah) could ‘break in’ to the lower reaches of the highest stratum of society…but you had to be the ‘real deal’, a modern day Machiavelli if you will.

Today, not so much.

Automation and the trend of ‘renting’ brainpower on an ‘as needed’ basis serves to leave those precious openings at the ‘golden trough’ for the offspring of the ‘deserving’.

But this is not the the time or place to discuss the ‘worthiness’ of our future leaders, whose first best qualification to lead us is being ‘born to greatness’ (by virtue of being born to the criminal ‘ruling class’.)

I’ll bet you thought we got rid of that royalty bullshit, didn’t you…

Surprise!

Anyway, the second myth to get busted in today’s paper is one of those ‘what the hell are they smoking’ deals in the first place.

Which is to point out that it didn’t ‘make sense’ in the first place.

The conviction that private prisons save money helped drive more than 30 states to turn to them for housing inmates. But Arizona shows that popular wisdom might be wrong: Data there suggest that privately operated prisons can cost more to operate than state-run prisons — even though they often steer clear of the sickest, costliest inmates. [snip]

“There’s a perception that the private sector is always going to do it more efficiently and less costly,” said Russ Van Vleet, a former co-director of the University of Utah Criminal Justice Center. “But there really isn’t much out there that says that’s correct.”

Such has been the case lately in Arizona. Despite a state law stipulating that private prisons must create “cost savings,” the state’s own data indicate that inmates in private prisons can cost as much as $1,600 more per year, while many cost about the same as they do in state-run prisons.

The first thing to hit the average person in the eye was the idea of doing ‘prison on the cheap’.

How the hell do you ‘reform’ a convict ‘on the cheap’?

Which is to ask how much ‘emphasis’ is being put on ‘reforming convicts’ (which is the actual ‘purpose’ of prison in the first place!)

Why even bother sending felons to prison if they don’t benefit from it?

Getting criminals ‘off the streets’ is a temporary solution at best. I’d posit that if the goal was to remove those unwilling to obey the rules from society that the removal process should have a more permanent methodology employed.

Naturally, those who favor ‘privatizing’ prisons are more interested in milking the public than they are in providing a ‘necessary service’.

Worse, punishment for profit isn’t even remotely ‘humane’. We already know what bloodthirsty employers do to their employees and the employees are ‘free’ to find less onerous employment, inmates are not!

Naturally, this brings us full circle to the central problem facing our civilization, that it is being run by ruthless criminals.

If we can’t keep our own house in order, do we ‘deserve’ what becomes of us?

Because that’s what THEY think!

Thanks for letting me inside your head,

Gegner

The disease of private debt is not 'cured'

Greetings good citizen,

Well, here we are again and so far (we’re not there yet) everything is a ‘go’ for tomorrow, the only ‘casualty’ so far is breakfast (last week I could have it, this week I can’t…go figure?)

If only for the ‘symbolism’ tonight’s offering really hits the mark…

The disease of private debt is not cured

You have just come from your annual medical check-up where your doctor assures you that you are in robust health.

Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look at you and declares, “You have a serious tumour! It must be removed or you will die.”

You ignore him as you always have, and continue your merry way down the street. One day later, a stabbing pain suddenly cripples you, and you collapse to the pavement.

In agony, your call your doctor, who initially refuses to send an ambulance because he knows you are well.

When you lapse into a coma and stop talking mid-sentence, your doctor concludes that perhaps something is wrong, and sends an ambulance to take you to hospital.

Initially the doctor waits for you to revive spontaneously, because he still knows there's nothing really wrong with you. But as your pulse starts to weaken, he reluctantly calls a retired doctor who had experience of a similar inexplicable malady in the distant past.

She prescribes massive doses of tranquilisers, pain-killers, vitamins, and oxygen – all substances that had been removed from the medical panoply due to recent advances in medical theory. Reluctantly, your doctor follows his retired colleague's advice – and miraculously, you start to revive.

After a year of expensive medical treatment, you return to the same robust health you displayed before your inexplicable illness. Triumphant, if somewhat puzzled, your doctor declares you well once more, and releases you from intensive care.

As you stride confidently away from the hospital, you have the misfortune to once again bump into the practitioner of alternative medicine.

“But they haven't removed the tumour!”, he declares.

One shouldn't have to spell out the details of such an analogy, but in times of widespread denial, one has to:

– You are the economy;

– The tumour is a massive accumulation of private debt;

– Your doctor is Neoclassical Economics, and the retired colleague is a so-called "Keynesian" Economist (who doesn’t know it – since his medical textbooks were poorly written – but he’s actually following another economist called Paul Samuelson, not Keynes);

– The alternative medicine practitioner follows Hyman Minsky's "Financial Instability Hypothesis" (which is based on what Keynes actually did say – as well as the wisdom of Joseph Schumpeter and, in whispers, Karl Marx);

– The moment you hit the pavement is the beginning of the Subprime Crisis; The collapse of Lehman Brothers is the moment when you slip into a coma; and

– The day the doctor takes you off life support and declares all is well … is next month.

The final reason for me being a bear is that I am that practitioner of alternative medicine. Minsky’s “Financial Instability Hypothesis” has been ignored by conventional economists for reasons that are both ideological and delusional. A small band of “Post-Keynesian” economists, of whom I am one, have kept this theory alive.

According to Minsky’s theory:

– Capitalist economies can and do periodically experience financial crises (something that believers in the dominant “Neoclassical” approach to economics vehemently denied until reality – in the form of the Global Financial Crisis – slapped them in the face last year);

– These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices;

– These bubbles must eventually burst, because they add nothing to the economy’s productive capacity while simultaneously increasing the debt-servicing burden the economy faces;

– When they burst, asset prices collapse but the debt remains;

– The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession;

– If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash; but

– Ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt. Then a Depression ensues.

That is where we were … in 1987. The great tragedy of today is that naïve Neoclassical economists like Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would [not] have occurred without their rescues.

In 2008, they did it again – only with methods they would have disparaged a mere year earlier (“Rational Expectations Macroeconomics”, a modern neoclassical fad, preaches that government intervention can’t influence the level of economic activity at all – yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterwards can’t happen – because there’s almost no-one left who will willingly take on any more debt.

This time, there’s no re-leveraging way out. The tumour of debt has to be removed.

Well done! Oddly appropriate, considering my personal circumstances…(and no, the only ‘tumor’ I have is a ‘Milwaukee tumor’!)

All kidding aside, Mr. Keen is a very astute economic observer. We will not put this economic crisis behind us until, er, we, they, urg, somebody knocks down the enormous amount of debt clogging the financial system.

One of the problems with debt is its someone else’s income…but what do you do when the situation screams for a ‘jubilee’? (Across the board forgiveness of debts.)

Because the ‘choices’, as poor as they are, is either wiping out debt or standing back and watching helplessly as civilization ‘crashes and burns’.

It’s what ‘needs to be done’ and they all know it, so you should be somewhat concerned that they are even considering the, er, ‘flame option’…

No amount of ‘debt’ is worth that.

Thanks for letting me inside your head,

Gegner

P.S. What do you suppose it means when even the ‘old timer’s’ don’t understand why the market is rallying?

Socialized risk and Privatized profits.

Greetings good citizen,

I know. If I’ve bitched about it once I’ve bitched about it a hundred times and you certainly don’t want to hear it again.

Do the idiots that do the ‘phone survey’ look for the lowest unemployment in the nation before they decide where to call? Bizarrely, there is no ‘co-relation’ between the number of new claims for unemployment and the ‘survey’ data. You don’t get 500,000 new unemployment claims a week then tell everyone that the survey showed only 275,000 for the entire freaking month!

But that didn’t stop the ‘idiot market’ from tacking on another 100+ points today! They too obviously have no regard for facts whatsoever. But ‘sane’ people aren’t buying stocks, only Goldman Sachs is.

Sorry, had to get that out of my system before my head exploded…that done, unemployment is NOT the topic of tonight’s offering Ironically, tonight’s piece is on the same subject as the last two I posted…but from a different source.

Comstock Partners on Deleveraging (Not for the Fainthearted)

Comstock Partners has a new newsletter out, and it makes a cogent case that there is no pretty way out of our over-leveraged mess. The disheartening bit is not only the narrative but a series of charts. One, on debt to GDP, show that it has risen in the last year (debt was roughly $49 trillion as of last year, it is now $52 trillion this year.) So we have had a lot of economic pain with NO reduction in aggregate indebtedness, This isn't simply shifting private debt onto the public balance sheet (in effect); this is actually an increase in the underlying pathology. [Ahem, the only ‘Comstock’ I know about are the people that make pie fillings and dessert toppings…and I’m pretty sure these aren’t the same folks. More distressing, as Yves points out, is the notion that here we are two years down-line, trillions of taxpayer dollars later and they’ve only succeeded in making things worse!]

That debt to GDP chart is controversial, because the comparability of older data to current figures is debatable. But the key message is that debt to GDP shot up after the stock market fall in the Great Depression due to the collapse in GDP. And while large scale deficit spending did help pull the economy out of the rubble, it was also accompanied by large scale debt reduction, via bankruptcies and bank failures (not pretty, mind you) and restructurings. But in this time around, there is perilously little in the way (yet) of restructurings of underlying debt. That does not bode well for recovery.

From Comstock Partners (hat tip DoctoRx):

We are in the process of deleveraging the most leveraged economy in history....this deleveraging as a major negative that will weigh on the economy for years to come and we could wind up with a lost couple of decades just as Japan experienced over the past 20 years. It is true that Japan didn't act as quickly as we did but our debt ratio presently is much worse than Japan's debt ratios throughout their deleveraging process...

This seems to us to be a "mini bubble" of stocks reacting to an abundance of "money printing" by governments all over the world since stocks are rising worldwide. Of course, if the U.S. doesn't recover there will be no worldwide recovery since the rest of the world is still dependent upon the U.S. consumers' appetite for their goods and services (despite the so called growth of domestic consumption in China and India). We, however, don't believe that the U.S. massive stimulus programs and money printing can solve a problem of excess debt generation that resulted from greed and living way beyond our means. If this were the answer Argentina would be one of the most prosperous countries in the world....

Most investors believe the bailouts, stimulus plans, and quantitative easing will lead to inflation. In fact, almost all of the bearish prognosticators are negative because of the fear that interest rates will rise once the inflation starts to work its way into the economy. They point to the doubling of the monetary base which they believe will soon lead to rising prices as more dollars are created chasing the same amount of goods. We, on the other hand, are not as concerned about the doubling of the monetary base because we believe the excess money will need the money multiplier and increases in velocity in order to increase aggregate demand and eventually inflation. As long as velocity (turnover of money) is stagnant we expect the increases in the monetary base and all the quantitative easing will lead to a stagnant economy and deflation until the consumer goes into the same borrowing and spending patterns that was characteristic of the 1990s through 2007.


Yves here. This point echoes a Gillian Tett piece today. Back to the newsletter"

Remember, over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to slow down the private deleveraging by helping out the entities and individuals in the most trouble with debt (such as over-extended homeowners).

We wrote a special report in January of this year titled "Substituting Debt for Savings and Productive Investment" in which we explained why the U.S. economy historically prospered because of hard working Americans saving a substantial amount of their income which was used for productive investment. Unfortunately, all of this changed over the past few decades and got worse over the past decade. In fact, we stated in the report that it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the '70s, $2.90 in the '80s, $3.20 in the '90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade. Over the past two decades, while most investors thought this trend could continue indefinitely, we have been warning them of the catastrophic problems associated with this ballooning debt....

We expect the total debt in the U.S. to decline during the deleveraging period directly ahead, with the government debt exploding while the private debt collapses. The private debt in Japan was almost the reverse of the U.S. where most of our excess debt was in the household sector and most of the excess debt in Japan was in the corporate sector. The debt to GDP figures in Japan were not easy to come by from the typical sources until the mid 1990s and had to be estimated, but should be pretty close to the numbers used above. Our sources on the above Japanese debt figures came from Ned Davis Research and the Federal Reserve Bank of San Francisco. NDR's report, "Japan's Lost Decade-- Is the U.S. Next?" have great statistics and information and the Fed's report "U.S. Household Deleveraging and Future Consumption Growth" is well worth reading.

The Fed study charted the peak of the debt related bubble of the stock and real estate assets in Japan in 1991 (1989 for stocks and 1991 for real estate) and overlaid it with the peak of U.S. debt associated with the same assets in 2008. They concluded that if we are able to liquidate our debt at the same rate as Japan we would have to increase our savings rate from the present 6% (artificially high due to the recent stimulus paid to households) today to around 10% in 2018. If U.S. households were to undertake a similar deleveraging, the collective debt-to-income ratio which peaked in 2008 at 133% (H/H debt vs. Disposable Personal Income) would need to drop to around 100% by 2018, returning to the level that prevailed in 2002.

If the savings rate in the U.S. were to rise to the 10% level by 2018 (following the Japanese experience), the SF Fed economists calculate that it would subtract ¾ of 1% from annual consumption growth each year. We did a weekly comment about this very subject on June 25 of this year and came to a similar conclusion. In that same report we showed that from 1955 to 1985 that consumption accounted for around 62% of GDP. Because of the debt driven consumption over the past few years at the end of March 2009 consumption accounted for over 70% of GDP. If the percentage dropped to the normal low 60% area of GDP it would subtract about $1 trillion off of consumption (or from $10 trillion to $9 trillion)....

We expect that the U.S. deleveraging will follow along the path of Japan for years as real estate continues to decline and the deleveraging extracts a significant toll from any growth the economy might experience. We also expect that, just like Japan, the stock market will also be sluggish to down during the next few years as the most leveraged economy in history unwinds the debt.

Okay good citizen, once again we see ‘excessive indebtedness’ being called ‘over-leveraging’.
Left to your imagination is whether or not our civilization can tolerate 20 years (and likely longer) of, um, ‘economic contraction’ while the people responsible for this outcome skate away to enjoy their billions.

The uncommonly law abiding citizens of Japan may sit quietly while an entire generation is robbed but I can’t bring myself to believe the people of the US will behave likewise, especially when it is our children that will suffer for the crimes of the few.

This is one of the few articles that doesn’t point a finger at a prostrate public and blame them for their part in the profuse spending that so enriched a select few…although I did catch that well worn accusation “over-extended homeowners” in there. After going decades without a raise that outpaced inflation, I hold the average consumer ‘faultless’.

Who is to blame good citizen? The very same worthless system of government that has repeatedly failed to protect the public from the predatory practices of the ‘corporate alliance’.

If you want ‘change you can believe in’ good citizen, the first step is purging this nation of its failed protector.

As this article attests, the mountain of debt every individual in this nation has been saddled with will take at least a generation to pay off…and this is time our civilization doesn’t have.

Worse, we don’t dare pay this mountain of debt down while leaving the same system of ‘socialism for the rich and capitalism for everyone else’ responsible for this disaster intact.

Thanks for letting me inside your head,

Gegner

The elephant in the room

Greetings good citizen,

It would be so easy to just accept what the pundits tell us and expect everything to turn itself around over the next couple of months…if the pundits hadn’t been singing this exact same tune for the past two years.

More troubling is nothing has materially changed over that same period of time. Real Estate is still in the toilet and so is the job market. While the pundits like to call unemployment a ‘lagging’ indicator, you should recall that the number of help wanted ads fell dramatically long BEFORE the crisis hit.

On the surface is doesn’t seem credible that our civilization is only months away from collapse. In fact, on the surface, it certainly appears to be a rather ‘reckless’ statement to make. So you have to ask yourself a question: If the world were about to end, do you honestly think they’d tell us?

Maybe we need to add a qualifier to that question, if the world was about to end AND it was their fault, would they tell us? Somehow, I don’t think so. Just as there was no ‘official warning’ of the crisis (even though they could see it coming) it isn’t likely there will be an official warning ahead of the collapse of civilization either.

Like the crisis, they will all play ‘stupid’…’who coulda known?’ will be regurgitated repeatedly when that outcome is already visible if you know what you’re looking at.

Just like when everyone was mumbling to themselves ‘Who the hell can afford these prices’ when real estate ‘peaked’, it wasn’t a matter of ‘who knew’, everybody knew but nobody (of consequence) was admitting that anything was amiss!

Understand good citizen that there is a quadrillion dollar elephant in the room but nobody is acknowledging its presence…and that’s what’s going to ‘do us in’.

So we arrive at tonight’s offering for a considerably more honest look at our current situation than we’re being fed by the corporate owned MSM.

US Consumer Demand Off a Cliff as the Crisis Deepens

[purloined from: Jesse’s Crossroads Café ]

As we said, we would be taking a closer look behind the headline GDP numbers recently released. The advantage of procrastination is that eventually a capable person will chart up the data which you have been studying. So thank you to ContraryInvestor for his excellent charts. His site is among the best, and we read it regularly.

The big story is the collapse of the US consumer, unprecedented since WW II, and possibly the Great Depression. This is apparent in the numbers despite the epic restatement of GDP having just been done by the BLS in their benchmark revisions.

If the Fed and Treasury were not actively monetizing everything in sight, we would certainly be seeing a more pronounced deflation as prices fall WITH demand. And if they continue, we may very well feel a touch of the lash of that hyperinflation that John Williams is predicting. We still think a stiff stagflation is more likely, but are allowing that the Fed and Treasury may indeed be 'just that dumb enough' to trigger something less probable.

Until the consumer returns to some semblance of health, there will be no sustained recovery. It really is that simple.

The Fed will have to stop artificially draining credit supply by paying such a high rate of interest on reserves. They know this. It will stimulate lending, even to less worthy borrowers. But this is not a cure. It is one of the paths to more inflation, fresh asset bubbles, and the devaluation of the dollar. And 'stimulus' handouts are no better. Healthcare reform is a step in the right direction. The US consumer pays far too much for the same (or less) level of care in most of the developed nations. But that is not enough. [Insidious how Jesse is kicking gaping wholes in all of the ‘life rafts’ but that doesn’t make it any less true…]

The cure will be to increase the median wage, and to stop the transfer of the national income to fewer and fewer hands. For that is how the system is set up today. It is not the result of 'free markets' but a sustained transfer of wealth through regulatory and tax policies, and a pernicious corruption of the nation most significantly starting in 1980, although a case has been made for 1913.

It is an ironic echo that our inexperienced, badly advised President seeks to place more and broader powers into the hands of the Federal Reserve and its owners, the banks, in the spirit of Woodrow Wilson. [What did ‘Woody’ get for his troubles? He got his puss on the hundred thousand-dollar bill! You don’t suppose they were mocking him, do you?]

Obama needs to bring in fresh thinking. Volcker and Stiglitz would be a step in the right direction, but it is ironic that they are much older than the Bobsey twins, Geithner and Summers. Bobsey being, of course, Bob Rubin. They should be sacked.

The problem as we see it is that Obama is hopelessly over his head, and failing badly. His stump speeches to admiring crowds, as the most recent in Elkhart, Indiana, ring increasingly hollow. Granted his situation is difficult to say the least. He reminds us increasingly of Jack Kennedy in his first year in office, and his manipulation by 'handpicked advisors.' Remember the Bay of Pigs? He did manage to find his own voice, and was beginning to make his own way. There is still some hope that Obama can find his, but the trend is not hopeful.

Look for several third party candidates to rise in the next election, as both the Democrats and the Republicans fail to deliver an honest performance for the country. The problem is that at least one of them will be a toxic choice, probably the one that is most narrowly financed.

It does not look hopeful at this moment in history. But tomorrow is another day.

Anyone who wishes to be taken ‘seriously’ fails to acknowledge that quadrillion dollar elephant in the room. It is fairly obvious that we have no way to pay it down, equally as obvious is that it isn’t going to ‘disappear’ either.

The part that is truly hilarious is while it can’t be paid down, it can be ‘erased’…but as long as we have our current banking system that’s not going to happen either.

Erase the ‘mountain of debt’ and you’ll erase roughly 1,400 billionaires along with it. You’d also send the Dow back under the 2,000 mark but that wouldn’t be a matter of serious concern for most of us.

Also part of tonight’s offering is the following quote by Abraham Lincoln…most of you should recognize it.

Jesse's Café Américain

[From the header]

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. Corporations have been enthroned, an era of corruption in high places will follow, and the money-power of the country will endeavor to prolong it's reign by working upon the prejudices of the people until the wealth is aggregated in a few hands and the Republic is destroyed.” Abraham Lincoln

Lincoln is the greatest Republican this nation has ever known. It is speeches like the one above that makes us wonder what happens to political parties over time.

You’d be hard pressed to find a card carrying Republican today that wouldn’t denounce this speech as being ‘socialist’. (You’d be equally as hard pressed to find a Republican who was aware of who spoke these words…)

Thanks for letting me inside your head,

Gegner