FedUpUSA

Archive for July, 2011

Does slavishly pursuing narrow self-interest benefit the nation? Clearly, the answer is no; a nation of self-interested pygmies leaves no one to advocate for the national interest.

The great cold lie at the heart of present-day America is that the nation will magically benefit if we each single-mindedly pursue our self-interest to the exclusion of all else. The idea has a sleek quasi-free-market sheen, as it borrows the market’s “invisible hand” and applies it to social, fiscal and environmental  policies.

That is a magical-thinking fantasy. If I pursued only my own self-interest, I  would dump the toxic effluent from my factory right into the river ( a la China’s very laissez faire economy) while I lived far away in an exclusive community far from the stench and poisons. Why pay for costly remediation when the “free” river beckons? After all,  it all works out wonderfully if we each pursue our own self-interest with methodical, nay maniacal, single-mindedness. (Recall that rivers in America caught fire in the 1960s, before environmental regulations limited corporate self-interest.)

“The good of the nation” is now a code-phrase for “good for me, and to heck with the country at large.” Every self-serving fiefdom, every self-serving cartel and every self-serving constituency (a.k.a. special interest) claims that its pathetically obvious self-serving lobbying “serves the national interest.” It’s all lies, blatant emotional manipulation of the vilest, crassest sort. Yet we as a nation have sunk so low that the entire notion of a national interest which doesn’t benefit a powerful lobby or constituency has been lost.

We are now a nation of self-interested pygmies, blind to any national interest that isn’t devoted to enriching us personally. If we ask cui bono– to whose benefit? (the first question in   the Survival+ critique), then the answer is always self-evident: some lobby, cartel, corporation, special interest or class of citizens who hope to stripmine the assets of the less-protected citizenry to line their own pockets with swag.

We are a nation slavishly devoted to feeding our herd of fattened sacred cows by any means necessary. The National Security State, a profit machine of Federal contractors stretching all the way back to LBJ  contributors Brown & Root, who built  bases in Vietnam for hefty profits? Untouchable: “we’re fighting the global war on Terror.”I guess that’s why it’s always an average citizen onboard who actually stops the bad guy.

The military industrial complex, which takes ten years to start building anything, by  which time it’s so costly we can’t afford it? Untouchable: “we’re keeping our military strong.” More like weakening it to the breaking point by stripmining all the resources in bloated weapons programs.

Social Security, a.k.a. generational wealth transfer? Untouchable: “I paid in, there’s this lockbox with my money in it….” It was always “pay as you go,” not a “lockbox.” Demographically, it’s broken. It worked when there were 10 workers for every retiree, and even with 5 workers for every retiree;  now with millions drawing disability benefits from the SSA (and hiring specialists to help them qualify for it–good ole self-interest at its best) and only 2.5 workers for every retiree–soon to be 2-to-1–the system is unsustainable.

Medicare, the Savior State arm of the sickcare cartel complex? Untouchable: “we have the best healthcare in the world.” Yeah, if you’re one of the select few who have gold-plated coverage. How is it in the national interest that we devote 17% of our vast GDP to sickcare and yet 40 million people aren’t even covered,  millions more have simulacra coverage (nothing is covered except 80% of catastrophic care, and the remaining 20% will bankrupt all but the wealthy), and other developed nations provide better care for all their citizens for half the cost per capita?

And of course there’s the “too big to fail” banks and Wall Street: Untouchable: “if you mess with us we’ll bring the country to its knees!” What a nice bunch of pygmies. They have nothing but self-interest, so they must be serving the national interest.

The core problem with President Obama and the political class in Washington is that they think governance boils down to placating the most powerful self-interested  pygmies. To the Demopublicans, politics is not about the national interest– whatever that is, since the concept has lost all meaning–it’s about carving up the swag so all the powerful self-interests don’t upset the Status Quo apple cart.

This explains Obama’s blindness to the opportunity to break the grip of the “too big to fail” banks and Wall Street, and the current inability to actually cut any sacred-cow budgets. There literally is no national interest left in the land of self-interested pygmies; all those think tanks are just dumping out agitprop to serve one bloated, entrenched self-serving fiefdom or another behind a facile claim of “national interest.” Oh, really? Cui Bono?

When politics has been debased to the point that it is all about placating  self-serving monopolies and “interest groups,” then there is no mind or heart left in the nation; it is a money-burning robot, blindly borrowing however much cash is needed to placate the piranhas and parasites.

I think the most apt metaphor for present-day America is the leaky lifeboat.All the single-mindedly self-interested pygmies are swimming over to the one lifeboat, pursuing their wondrously golden self-interest as the highest good. They all try to save themselves–it’s only self-interest, and that will magically serve us all–and as a result of their frantic thrashing to preserve themselves, the lifeboat sinks and they all drown.

A nation of self-interested pygmies leaves no one to advocate for the national interest. The lifeboat is already taking on water, but everyone climbing on board is loudly announcing that they’re “serving the national interest.”   The irony is rather rich:  by sinking the entire Status Quo, then they truly will be serving the nation.

There is another shore nearby; it’s called self-reliance and a personally disinterested national interest.

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Here’s a photo of the concrete slab I helped a buddy pour and finish earlier this month. He was kind enough to honor me with my name imprinted for all time in the slab–right about where the trash cans will be stored. What is the significance of this photo?

Just this: I am a practical guy. I have little use for ideologies, wishful thinking, false reassurances, empty promises, media double-speak, official obfuscation, simulacra reforms, soaring rhetoric, bogus statistics, shadow Elites, or blatant self-interest  masquerading as policy. That practicality is the heart of this book.

Read the Intro, Table of Contents and Chapter One of  An Unconventional Guide to Investing in Troubled Times.

Of Two Minds

Charles Hugh Smith’s new book is available in Kindle format.You do not need a Kindle Reader to read it, you can easily download the free Kindle app and read it on virtually any device or computer.Get the links, read the Intro, Table of Contents and Chapter One, and buy the ebook of An Unconventional Guide to Investing in Troubled Times on the info page. As a modest thank-you to loyal readers, the ebook is discounted 30% ($6.85) through  this Friday, July 29, 2011.

Here’s how it all can come apart, and why Congress – and Obama – are both on the wrong track.

Note this story from Bloomberg:

Political wrangling over a plan to reduce the deficit may cost the U.S. its AAA rating, adding $100 billion a year to government costs while dragging down economic growth, according to Wall Street bond dealers.

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan Chase & Co.’s Terry Belton said today on a conference call hosted by the Securities Industry and Financial Markets Association.

But that’s just the start, you see.

Right now rates are at historic lows.  So let’s presume that the economy “improves”; if that happens then rates go up.  In fact, there was a hearing this afternoon in the House Banking Subcommittee talking about exactly that.

Here’s the current Treasury MTS; it shows total interest on the public debt last year was $355 billion, and this year thus far is $386 billion. This implies (on a grossed-up 8/12ths basis) that the blended interest rate on the debt is running about 4%.

Here’s the problem, in short: Rates have nowhere to go but up.

So is 70 basis points “realistic”?  No.  If the economy improves, they’ll go up double that or more just on their own on the short end. Then you get to add this “penalty” from the downgrade.

We have the government claiming they will “cut” about $1 trillion in real spending (the rest is gimmicks – the wind-down of the wars that were going to happen anyway) over the next ten years.

But if the economy improves the increased cost of the interest on the existing debt will be double that over the same ten years, and if we get downgraded you can double that again!

Each 100 basis points on $15 trillion in debt is $150 billion a year – every year – and the CBO says we’ll have $25 trillion in debt by 2020.

At a 5% blended interest rate this load on that $25 trillion will come to $1.25 trillion in interest annually – just 1 percent higher in interest than we’re paying now!

We will not get to 2020 folks; this is, in fact, exactly how the death spiral happens.

Interest expense as a percentage of government, this year, if the MTS thus far is 8/12ths of the total (through June), will run $579 billion.  This out of a budget of $3.8 trillion (approximately) is ~15% of the total federal budget.  To put this in perspective this is about 50% of the total receipts under federal income tax – just to pay interest!

Now I’m probably being pessimistic, because there’s a roughly $80 billion “whack” that comes from semi-annual coupon payments in the trust funds, and we’ve already gotten both of those.  So let’s be nice and call the trust fund interest accrued already, which means we now get $280 + $199, or $479ish, which is about 12% of the budget.

And that assumes that neither interest rates go up due to an improving economy or a downgrade.

What happens if that 4% blended rate goes up 70 basis points on a downgrade?  Oh that’s easy – just multiply that number by 117% and you’re close enough.  Call that $560, or ~$80 billion a year more.  Each and every year for the next ten, that’s $800 billion.

The problem is that the downgrade cannot be avoided without an actual credible $4 trillion in actual reductions in the deficit from the baseline. This means you can’t count anything that was already expected to happen like the wars being wound down.

It also means at least $400 billion in actual spending reductions for FY 2012 and then $400 billion more in each of the next three to four years! Or we can just do it in two – $750 now and $750 in FY2013.

We might get away with either of those plans, although the impact on the economy will be very significant – the exposure of the Depression we have been in since 2008 will occur with certainty.  GDP will contract and coverage – that is, the percentage of federal income that goes to interest – will actually go up for a while rather than down! It has to because as the economy adjusts to the lack of deficit spending GDP will contract and tax revenue will fall.

It is, in fact, precisely this inescapable mathematical reality that means that we must deal with this now rather than attempting to kick the can and have the market make these choices for us.

The outcome of taking our medicine will be bad.  Very bad.

But if we don’t do it – and do it now – it’s going to be worse.

Much worse.

Coming in October, 2011.  While they don’t come right out and say it, this is the story of the collapse of Lehman Brothers.  A must-see for anyone who wants to further understand the massive and immense amount of fraud that took place in our financial industry over the past decade (and is still taking place today).

Read more at IMDb.

You’re losing purchasing power by the second.  Every dollar you earn is worth less and less every day.

Things have gotten very ugly for the US Dollar.

Up until last week, the US Dollar looked as though it might be staging some kind of a rally with a series of higher lows. However, we never quite made it above resistance but have taken out
the multi-month trendline instead.

Worse still, we’ve seen a new lower low formed, which indicates the upward momentum (however small) has been broken. We now have only two lines of support standing between the US Dollar and
all time lows:

This is quite a development as stocks have been showing pronounced weakness over the last month or so. And typically when the markets switch to a “risk off” mode money pours into the US Dollar.

But then again, we have the Fed still juicing the system behind the scenes:

As you can see, aside from a brief dip at the beginning of July, the US monetary base continues its near vertical trajectory, which tells us that the Fed continues to print money despite QE 2 ending.

It’s not much of a surprise, the Fed knows how to do one thing only: print money. However, the fact the Dollar is showing so poorly while Europe is taking a hit is a major warning that all is not well with the greenback.

I’ve long said that we were heading into some kind of inflationary collapse. We might get another round of deflation first (courtesy of Europe imploding), but the end result will be the same: the US Dollar falling when the US defaults on its debts.

On that note, our FREE Special Report titled The Inflationary Disaster explains not only why inflation is definitely coming to the US financial system, why the Fed will be powerless to stop it, and three investments that absolutely EXPLODE as a result of this.

All in all its 14 pages contain a literal treasure trove of information on how to take steps to prepare AND profit from what’s to come. And it’s all 100% FREE.

To pick up your copy today, go to http://www.gainspainscapital.com and click on FREE REPORTS.

Good Investing!

Graham Summers for Zero Hedge

Adding complexity offers a facsimile of “reform” that actually serves the Prime Directive of fiefdoms and cartels: self-preservation.

The most obvious features of recent political and financial “solutions” are their staggering complexity and their failure to fix what’s broken. The first leads to the second. Consider the healthcare “reform,” thousands of pages of mind-numbing complexity which slathers on thick layers of  bureaucratic control on a system which already costs twice as much per capita as competing developed-world systems.

Sadly, the “reform” simply solidifies the Status Quo fiefdoms and cartels that control the U.S. sickcare system.

The healthcare reform fixes nothing, while further burdening the nation with useless complexity and cost. The same can be said of the Dodd-Frank “reforms” of the embezzlement-based U.S. financial system. The original Glass–Steagall Act separating investment banking from depository banking was a few pages in length; by one count, Dodd-Frank  requires that regulators  create 243 rules, conduct 67 studies, and issue 22 periodic reports.

Meanwhile, back in reality, the Financial Elites of Wall Street and the  “too big to fail” banks still have the nation (and Europe) by the throat.

Complexity is itself a tax; the maintenance cost of complexity is high, and can only be justified when the added complexity solves a critical problem of the society as a whole.

Adding ineffectual complexity leads to diminishing returns, as the complexity itself crushes the system supposedly being “improved” or “reformed.”

Here is the “problem” which complexity “solves”: it protects Savior State fiefdoms and private-sector cartels from losses. State fiefdoms and cartels have one goal: self-preservation. Once sufficient power and wealth (or control of wealth) is concentrated in a fiefdom or cartel (generally the two are partnered, as each supports the other), then the power can be devoted to limiting losses or encroachment.

That becomes the raison d’etre of the agency or enterprise.

Complexity works beautifully as self-preservation, because it actually expands the bureaucratic power of fiefdoms and widens the moat protecting cartels. Once the fiefdom expands to manage all those new rules, only a handful of corporations can possibly afford the regulatory reporting burdens. They are thus free to exploit the populace as an informal cartel.

I addressed some of these issues inThe Cycle of Dependency and the Atrophy of Self-Reliance (July 2, 2011).

Put another way: in the competition with the private sector for scarce capital, the State and corruption always win. That’s why kleptocracies and banana republics are characterized by bloated, unaccountable State bureaucracies and systemic corruption: sweetheart deals, no-bid contracts, shadow banking, shadow governance by Elites, inefficient workforces that cannot be fired or held accountable, and so on.

Real solutions require radically simplifying ossified, top-heavy, costly systems.Complexity serves to protect the existing constituencies and cartels; it allows those with the most to lose the cover of “reform.” But the reform is only a simulacrum; it claims reform along with its expanded powers, but the result is system that is so complex that it loses all accountability. Complexity is the perfect moat.

This is the idea, of course: banana republics and other kleptocracies always manage to support vast State bureaucracies which enable and support private cartel stripmining of the national wealth.

Note that the Status Quo always supports complex “reforms” and dismisses radical simplification as “impractical.”  What “impractical” means is that various fiefdoms and cartels would lose swag and power, and that would be painful; thus it is verboten.

The single goal is preserving the revenue and reach of concentrated power centers:State fiefdoms with large constituencies and headcounts, and cartels with no competition and stupendous profits. The two are hand in glove.

But complexity does have an eventual cost: collapse. Keep adding decks to the ship and eventually it capsizes and sinks. One the ship is sufficiently top-heavy, all it takes is a small wave.

Of Two Minds

The theory behind the higher education bubble says that while the cost of an education increases, the ability to pay back student loans decreases.

The theory has its roots in the late 1980s when Secretary of Education William Bennett, Jr. suggested student loans could be leading to drastic tuition increases and a coming education bubble.

The following chart offers some perspective on the rate of tuition increases compared to the consumer price index and home prices.

Business Insider