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Off the Cuff: 'Bizarre' Capitalism

When speculation is the only way to get ahead
Thursday, January 23, 2014, 6:13 PM

In this week's Off the Cuff podcast, Chris and Charles discuss:

  • 'Bizarre' Capitalism
    • Speculation, not productive work, is now the driver of gain
  • China's Future
    • Scary signs that cronyism and capital flight are big risks
  • Eroding Public Trust
    • Dangerous when your money system is trust-based
  • Canary Candidates
    • Which country will be the first to keel over?
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Why Your Own Plan Better Be Different

Because the cavalry isn't coming
Tuesday, January 21, 2014, 3:40 PM

Executive Summary

  • Why the insolvency hole the U.S. is in may be much deeper than appreciated.
  • Current 'best case' assumptions show us doubling the size of our economy TWICE over the next 75 years. Why that's just not achievable.
  • Why the above assumptions get even worse when the energy story is taken into account.
  • Why action at the individual level is your best bet now.

If you have not yet read Part I: "Endless Growth" Is the Plan & There's No Plan B available free to all readers, please click here to read it first.

A Big Hole

When the Treasury Department estimates that the U.S. has a ~$65 trillion NPV (Net Present Value) shortfall in its main accounts, it's saying that using its assumptions, the U.S. government would need to have $65 trillion today in an account, earning a stated rate of interest, in order to be solvent.

Since the U.S. government don't have that have that kind of scratch, it's insolvent. 

But the real picture is likely worse. The Fed calculates the NPV shortfall to be closer to $100 trillion. And if you believe Lawrence Kotlikoff's math, the figure is closer to $200 trillion. Either way $65 trillion, $100 trillion, or $200 trillion the sum cannot be paid.

So it won't be.

And the real trouble is that all of these numbers make the same implicit assumption: The future will more or less resemble the past. That is, some form of future growth exponential future growth of the economy is at the heart of every single calculation.

But we might question that, because somewhere between here and there, economic growth will have to come to an end. Or at least a pronounced deceleration. Why? Quite simply, because the earth is finite.

Now, we might comfort ourselves with the belief that our future date with hard limits is lifetimes away. But when we do, we shortchange ourselves (if we're wrong) and our progeny (if we're right). After all, the time to make an adjustment is when the resources and energy exist to make that change.

And that's now. Or, really, decades ago... » Read more

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Off the Cuff: All Hail the Mighty Fed!

Powerful? Yes. Wise? Hmm....
Thursday, January 16, 2014, 1:58 PM

In this week's Off the Cuff podcast, Chris and Mish discuss:

  • All Hail the Mighty Fed!
    • It's proven it wields more financial influence than the world thought
  • The Economy vs. The Markets
    • Despite its goal to influence the former, it only can the latter
  • A Congress of Millionaires
    • The rich are indeed running the show
  • The (Un)Affordable Care Act
    • Is anyone saving money under this plan?
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The NSA Scandal Is Just Getting Worse

Snowden's revelations are beginning to snowball
Wednesday, January 15, 2014, 6:32 PM

Now that the NSA scandal is hitting corporations (collaborators, if you will), does this mean people will pay more attention to it than when it was "just" our privacy being seriously invaded?

With every revelation from the Snowden documents, we've found that the snooping by the NSA was far more pervasive, sophisticated, and unlimited than practically anybody suspected. It's all but certain that even more startling releases are to come. » Read more

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The Consequences of American Autarky

A contrarian view that may be the U.S.'s best future bet
Wednesday, January 15, 2014, 4:13 PM

Executive Summary

  • Will profit-chasing bring corporate capital back to the U.S.?
  • China's dwindling T-bill leverage
  • The decline of dependence on Mid-East oil
  • Autarky may be the best investment for the U.S. (and similar nations)

If you have not yet read Part I: What If Nations Were Less Dependent on Another? available free to all readers, please click here to read it first.

In Part I, we sketched out a framework for evaluating the trade-offs implicit in autarky; i.e., national self-sufficiency.  In Part II, we’ll explore a few potential ramifications of America’s declining consumption of energy and increasing ability to replace foreign-supplied capital, resources, energy, and expertise with domestic sources.

The core issue of autarky boils down to: What are the risks and costs of exposing the nation to the vulnerabilities of dependence for the convenience and profitability of remaining dependent on foreign providers?

Of the potential consequences, let’s focus on several high-visibility possibilities:

  1. China’s ownership of U.S. Treasury bonds possibly giving it leverage that amounts to blackmail-type veto power over U.S. policies.
     
  2. The dependence of U.S. corporations on foreign sales and the weak dollar for profits
     
  3. The decline of oil imports changing the calculation of U.S. interests in the Middle East and other oil-exporting regions

Profits as Priority

As I have often noted, the stupendous profitability of U.S.-based corporations is largely the result of non-U.S. sales and the profits reaped from a weak U.S. dollar.  When the euro was at parity to the dollar a decade ago (1 euro = $1), U.S. corporations reaped $1 of profit on every euro of profit gained from sales in the European Union. Now the same one euro in profit generates an additional 35% in dollar-denominated profits due to the exchange rate.

I have also noted that the enormous importation of goods made in China has generated remarkable profit margins for U.S. corporations such as Apple, while the Chinese suppliers are eking out net profits in the 1% to 2% range for the privilege of manufacturing goods that generate gross margins of 50% to 60% for U.S. corporations.

In other words, the Chinese did not impose this trade on U.S. companies the U.S.-based corporations extracted maximum yield on capital invested by moving production to China, not just in terms of lowering manufacturing costs but also in the enhanced proximity to the world’s great consumer-profit opportunities in developing Asian nations.

In other words, while other nations may focus on self-sufficiency, the American priority is profitability and maximizing return on capital invested. If and when profitability is threatened, capital pulls up stakes and relocates to whatever locale makes the best financial sense.

That the locale that makes the best financial sense is the U.S. is a new thought for many... » Read more

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Off the Cuff: Distortions, Manipulations, Interventions & Perversities

It's hard to chart a clear course these days
Thursday, January 9, 2014, 9:03 PM

In this week's Off the Cuff podcast, Chris and James discuss:

  • Unpunished Crime
    • Justice remains very blind right now
  • Cultural Malnourishment
    • We are holding ourselves to lower standards
  • Options for Civil Disobedience
    • Will 'old school' protesting work anymore?
  • The Current Crack-Up Boom
    • Will 2014 be another 2013?
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Get Ready For Strange Days

We're in the twilight of American Federalism
Wednesday, January 8, 2014, 12:52 PM

Executive Summary

  • The case for a regional fracturing of the US
  • Why the balance of power will shift from the Federal government to local seats
  • How each US region will likely fare during this transition, given their idiosyncrasies
  • Why chaos will trump order moving forward

If you have not yet read Part I of The Disenchantment of American Politics, available free to all readers, please click here to read it first.

The last time the USA faced a comparable political convulsion was the decade leading into the Civil War, but this time it will be more complex and confusing and it will have a different ending.

A Preview of What's to Come?

In the 1850s, the dominant Whig party choked to death on its own internal contradictions — mainly its failure to take a coherent position on slavery — and morphed into the Republican Party. The original Democratic Party broke apart into southern and northern factions. All of the doctrinal and legal debates of the day — states’ rights, property rights, et cet. — could not overcome the growing moral revulsion against human bondage. When Lincoln was elected in 1860, seven southern slave states seceded from the Union before his inauguration. The ferocity of the ensuing Civil War — the world’s first industrial-strength slaughterfest — came as a great shock to many who had expected little more than a few symbolic romantic skirmishes on horseback preceding a negotiated settlement.

I believe we are headed now into a breakup of the nation into smaller units, but this time there will be no reconstituting the original USA as in 1865. I realize this is a severe view, but the circumstances we face are more severe than the public seems to imagine. To some degree the coming political rearrangement would appear to be the unfinished business of the 1860s. The old animosities remain, mainly in cultural rather than economic terms. But the real driving force of schism will be catabolic economic collapse expressing itself in scale reduction of all our support systems: food production, energy production, transportation, finance, commerce, and governance. Everything is going to have to get smaller, get more local, and be run differently. Just as political rhetoric failed to contain the revulsion against slavery, all the debates of the Left and Right in our time will not overcome the geophysical limits of energy resource scarcity and its affect on the other major systems of everyday life. Environmental degradation (including climate change) will amplify the journey downward in the viable scale of human operations... » Read more

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Here We Go (Again)

We've seen this movie before
Tuesday, January 7, 2014, 2:12 AM

One of the things I am fond of pointing out is that it seems like nobody in high finance or the central banks learned anything from the great crisis of 2008.  The very same excesses that created the prior crises are being committed again.

I know...maybe this time it will turn out differently. » Read more

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Off the Cuff: Trend Reversal?

The New Year begins with a stark break from the old
Friday, January 3, 2014, 11:35 AM

In this week's Off the Cuff podcast, Chris and Mish discuss:

  • Trend Reversal?
    • The New Year starts with a surprise
  • 6 Years of Extreme Global Monetary Intervention
    • With more to come?
  • Big Trouble Brewing in Asia
    • Don't bet on East eclipsing West anytime soon
  • Middle-Class Squeeze
    • Getting even tighter in the future
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Outcomes to Bet On in 2014

Challenges to central authority will break out
Tuesday, December 31, 2013, 2:10 AM

Executive Summary

  • The productive class will increasingly look for ways to protect its income and wealth from State hands
  • Geographic redistribution of classes will increase, favoring lower-cost locales
  • Expect tax revolts to start breaking out
  • Diminishing returns and increased fragility of the status quo will result in a resurgence of volatility

If you have not yet read Part I of The Trends to Watch For in 2014, available free to all readers, please click here to read it first.

In Part I, I listed eight more trends to watch in 2014, in addition to the eight that are still in play from 2013.  Following last year’s format, here are some of the consequences to look for in 2014-15:

Outcomes

1. Opting out will become increasingly attractive for the productive class.  Since the Status Quo suppresses political resistance (in official eyes, the line between protest and domestic terrorism is awfully thin) while it loads on higher costs of friction, complexity, junk fees, taxes, etc. on the still-productive, opting out—retiring, quitting, cutting back, selling out—becomes a compelling option for those who can afford to do so.

Many have opted out simply because they have no other choice.  Those who are close to retirement age and unable to find employment that pays more than Social Security benefits opt to retire and take the benefits early.  The Social Security Administration has professed surprise that Baby Boomers are retiring early in larger numbers than the SSA projected.  (File under “Duh!”)  Millions of others have managed to qualify for Social Security disability (SSI), another form of opting out.

The Affordable Care Act (Obamacare) is one of many forces incentivizing opting out. The perverse incentives of the ACA make it “smart” to not enroll and not pay the penalty, either, as the IRS has already said that it won’t enforce the penalty for some time.

The ACA also heavily incentivizes managing your income to levels that qualify the household for subsidies. Higher-income households have a big incentive to lower their incomes to avoid paying sky-high premiums.  Those with salaries cannot easily adjust their incomes, but households with self-employed or contract workers can opt to work less and thus earn less... » Read more