Charles Hugh Smith – Page 2 – The Burning Platform

WHAT KILLED THE MIDDLE CLASS?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If the four structural trends highlighted below don’t reverse, the middle class is heading for extinction.

Everyone knows the middle class is fading fast. I’ve covered this issue in depth for years, for example: Honey, I Shrunk the Middle Class: Perhaps 1/3 of Households Qualify (December 28, 2015) and What Does It Take To Be Middle Class? (December 5, 2013)

This raises an obvious question: what killed the middle class? While many commentators try to identify one killer cause (for example, the U.S. going off the gold standard in 1971), the die-off of the middle class is more akin to the die-off in honey bees, which is the result of the interaction of multiple causes (factors that increase the toxic load dumped on bees and other pollinators by modern agriculture).

Longtime collaborator Gordon T. Long and I discuss the decline of the middle class and other key topics in a new 29-minute video How did that work out for you?

So where do we begin this detective story? With the engine of all real prosperity, productivity. This chart reveals that wages stopped rising with productivity around 1980.

Here’s another look at the same phenomenon:

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Recipe For Collapse: Rising Military & Social Welfare Spending

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Leaders faced with unrest, rising demands and dwindling coffers always debauch their currency as the politically expedient “solution.”

Whatever you think of former Fed chair Alan Greenspan, he is one of the few public voices identifying runaway entitlement costs as a structural threat to the economy and nation. We can summarize Greenspan’s comments very succinctly: there is no free lunch. The more money that is siphoned off for entitlements, the less there is for investment needed to maintain productivity gains that are the foundation of future income generation: Greenspan: Worried About Inflation, Says “Entitlements Crowding Out Investment, Productivity is Dead” (via Mish)

Many people look to the rising costs of the U.S. military as the structural problem, and they have a point: there is no upper limit on military spending, and the demands (by the civilian leadership of the nation) on the services and the Pentagon’s demands for new weaponry are constantly pushing budgets higher.

But the truth is entitlement spending now dwarfs military spending: entitlements are more than $1.75 trillion, half of all Federal spending, while the Pentagon, VA, etc. costs around $700 billion annually.

We have a model for what happens when military and social welfare spending exceed the state’s resources to pay the rising costs: the state/empire collapses. The Western Roman Empire offers an excellent example of this dynamic.

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An Xmas Message From Satan – “Ignorance, My Poor Dear Americans, Will Not Save You”

Submitted by Charles Hugh-Smith of OfTwoMind blog,

The Devil pens a holiday letter.

Through means I am unable to disclose, I have obtained a copy of the Devil’s Christmas letter. Yes, Satan too sends a Yule letter, and no, I was not on his mailing list. I think Satan’s Holiday cheer should give us all pause.

“To my fallen angels Beelzebub, Lucifer and Leviathan, princes of Hell’s demons, and to my minions, lackeys, toadies and sycophants on Earth:

Due to the high cost of postage, please accept this miserly digital version of my holiday missive.

As you know, this time of year usually finds me quite despondent, as the Prince of Peace’s influence waxes most atrociously around his birthday. But this year I am in fine spirits, nay, let me even declare myself absolutely giddy, for the destruction of the United States of America by its own citizenry and government draws ever nearer.

Though my minions have long sown festering seeds of hate and disharmony in that now-benighted land, my favored weapons of destruction–leverage, debt, half-truths and endless, self-serving justifications for greed, sloth, lust, pride, envy, anger and gluttony–have wormed their way into the stricken heart of that Republic and are now the default setting of American culture.

My minions in the Federal Reserve – such loyal servants! – continue feeding an orgy of leverage and debt, spreading ruination under the false guise of prosperity. What a delicious irony, that the fools doomed to eternal damnation in my Empire believe themselves prosperous as they absorb the poison of exponentially rising leverage and debt.

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Why Has The Labor Participation Rate Plunged?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Combine this regulatory burden with the decline of entrepreneurship, and you get a bubbling brew that is toxic to self-employment/small business.

Why has the percentage of the population that’s in the work force declined so dramatically? It’s a question many have asked, and Gordon T. Long and I attempt to answer in our most recent video program The Participation Rate Mystery–Solved.

Why does the Participation Rate matter? Intuitively, we all understand that the lower the participation rate (i.e. the percentage of the population with a job or actively looking for a job), the greater the tax burden on the remaining workers.

We all understand that as the number of workers supporting each retiree declines, the remaining workers will have less income to support their own families, as the rising costs of retirees must be paid with higher taxes in our pay-as-you-go social and healthcare programs such as Social Security and Medicare /Medicaid.

Where there were once around eight workers for every retiree, now the ratio is down to 2.5 workers per retiree–and the cost of providing healthcare for the elderly has soared.

For context, let’s look at a few charts of the participation rate and related metrics. Let’s start with the engine of wealth creation–productivity. The productivity of industrialized nations’ work forces topped out in the cheap-oil boom years of the 1960s.

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2015: The Last Christmas in America

Guest Post by Charles Hugh Smith

If we define Christmas as consumer spending going up while earnings are going down, 2015 will be the last Christmas in America for a long time to come. In broad brush, Christmas (along with all other consumer spending) has been funded by financialization, i.e. debt and leverage, not by increased earnings.

The primary financial trick that’s propped up the “recovery” for seven years is piling more debt on stagnating incomes. How does this magic work? Lower interest rates.

In a healthy economy, households earn more money (after adjusting for inflation, a.k.a. loss of purchasing power), and the increased earnings enable households to save, spend and borrow more.

In an unhealthy, doomed-to-implode economy, earnings are declining, and central banks enable more borrowing by lowering interest rates to zero and loosening lending standards so anyone who can fog a mirror can buy a new pickup truck with a subprime auto loan.

The problem with financialization is that it eventually runs out of oxygen. As earnings decline, eventually there’s no more income to support more debt. And once debt stops expanding, the economy doesn’t just stagnate, it implodes, because the entire ramshackle con game of financialization requires a steady increase in debt and leverage to keep from crashing.

The trickery of substituting financialization for earned income–the trickery that fueled the last seven years of “recovery”–is exhausted.

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Untangling America From The American Empire

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Those calling for an end of the Empire don’t seem to realize that the federal state’s vast entitlement programs are ultimately funded by the Empire.

The Status Quo would have us believe that America and its Empire are one entity. This is handy for those with Imperial designs but it is false: America could be untangled from its Empire, and many of us believe it is essential that America untangles itself from its Imperial structures and ideologies.

What I call The Imperial Project was cobbled together in the aftermath of World War II, when the Soviet Union and America posed an existential threat to each other’s ideologies and systems. It may be hard to believe, but the U.S. did not have a Central Intelligence Agency (CIA) or other espionage/intelligence gathering agency prior to World War II.

America had no spy agency and no Black Operations/Special Forces capabilities. The National Security State as we know it today did not exist.

Though the Deep State has long been an essential feature of the American power structure, the post-war Deep State extended its reach globally in ways that the pre-war Deep State could not.

I have covered the Deep State for many years:

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Don’t Think the Status Quo Will Save You

Guest Post by Charles Hugh Smith

Here’s a chart that shows how the Status Quo “fixes” every problem: it transfers more debt and more losses to the taxpayers.

Many hold a touchingly naive faith that the Status Quo will save them even as the current system unravels. Why is this faith naive?

Let’s start with this key question: does the Status Quo strike you as being even remotely competent?

If you answer “yes,” we have to ask: what planet are you on? Mars? Here on Earth, no one that isn’t a bought-and-paid for-shill of the Status Quo would even make the risible claim of Status Quo competence, except as a bitter joke.

The Status Quo assumes we can’t deal with the truth like adults, and so it sugar-coats every unsolvable problem with lies and false assurances. The Status Quo assumption is the Great Unwashed 90% will shoot the messenger, i.e. toss out our public leadership should they be foolish enough to tell us the truth: the promises issued to you cannot possibly be fulfilled.

Not because of an evil cabal, but because the demographics and financial realities render the promises impossible to keep, regardless of who’s in office.

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Here’s Why Housing Must Be Propped Up

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If housing tanks, the last prop under the veneer of middle class wealth collapses.

The Powers That Be have gone to extraordinary lengths to prop up housing by whatever means are necessary since the collapse of the housing bubble in 2008: the Federal Reserve has pushed mortgages rates down by buying mortgage-backed securities, the federal housing agencies (FHA, VA) have issued millions of low-down payment loans, and the federal government has essentially taken over the mortgage industry, backing 90+% of all mortgage loans.

Why is the status quo so keen on propping up housing? If we examine this chart of U.S. and Chinese household assets, we understand why Chinese authorities would be keen to prop up housing values–75% of China’s household assets are in real estate. Meanwhile, U.S. household assets are predominantly financial:

So why are U.S. authorities going all out to prop up housing if it represents such a modest share of total household wealth? I see two dynamics at work.

The majority of household assets are owned by the top 10%, and this includes the majority of financial assets. The top .1% own 22% of all U.S. household wealth, the top 1% own 35% and the top 10% own 75%.

Households below the top 10% may have financial assets such as insurance policies, 401K accounts or pensions funded by employers, but a house is typically the largest store of value the household owns.

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What Happens To Our Economy As Millions Of People Lose The Habits Of Hard Work?

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

If we’re going to dig our way out of what lies ahead, we need people who can work hard and start/operate new businesses.

Simply put, job growth is not keeping pace with population growth–specifically, the growth of the labor force which is generally defined as the population between the ages of 18 and 64.

So what happens to the economy as millions of people never acquire the habits of hard work or lose them due to chronic joblessness?

Yesterday I presented data on not in the labor force, which is defined as “persons aged 16 years and older in the civilian noninstitutional population who are neither employed nor unemployed.”

The federal government reckons about 95 million people are not in the labor force. But this doesn’t necessarily tell us whether these people could take a job or not.

To get some sense of what this means, let’s look at the U.S. population in basic terms. The U.S. Census reckons there are about 322 million residents of the U.S.

About 74 million are under the age of 18, and about 42 million are retired (i.e. receiving Social Security benefits) and almost 11 million receive Social Security disability benefits.

About 2.4 million people are in prison.

Roughly 1.4 million are in active duty in the U.S. Armed Forces.

That totals about 130 million people who aren’t in the civilian labor force, with some caveats: workers can draw Social Security benefits and still earn a wages, for example.

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One True Measure Of Stagnation: Not In The Labor Force

Submitted by Charles Hugh Smith from Of Two Minds

One True Measure of Stagnation: Not in the Labor Force

This is a stark depiction of underlying stagnation: paid work is not being created as population expands.

Heroic efforts are being made to cloak the stagnation of the U.S. economy. One of these is to shift the unemployed work force from the negative-sounding jobless category to the benign-sounding Not in the Labor Force (NILF) category.

But re-labeling stagnation does not magically transform a stagnant economy. To get a sense of long-term stagnation, let’s look at the data going back 38 years, to 1977.

NOT IN LABOR FORCE (NILF) 1976 to 2015

I’ve selected data from three representative eras:

The 20-year period from 1977 to 1997, as this encompasses a variety of macro-economic conditions: five years of stagflation and two back-to-back recessions (1977 – 1982), strong growth from 1983 to 1990, a mild recession in 1991, and growth from 1993 to 1997.
The period of broad-based expansion from 1982 to 2000
The period 2000 to 2015, an era characterized by bubbles, post-bubble crises and low-growth “recovery”

In all cases, I list the Not in Labor Force (NILF) data and the population of the U.S.

1977-01-01: 61.491 million NILF population 220 million

1997-01-01 67.968 million NILF population 272 million

Population rose 52 million 23.6%

NILF rose 6.477 million 10.5%

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As The “Prosperity” Tide Recedes, The Ugly Reality Of Wealth Inequality Is Exposed

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

This chart of median household income illustrates why so many of us feel poorer– we are poorer in terms of the purchasing power of our income.

A rising tide raises all boats, from rowboats to yachts–this is the narrative of “prosperity.”

A rising tide is also the political cover for rising inequality: if the guy in the rowboat makes $100 more a month, he feels like he’s participating in the prosperity.

Meanwhile, the guy in the speedboat is making $1,000 more a month and the guy in the yacht is making $1 million more a month.

But this doesn’t bother the guy in the rowboat, for two reasons:

1. He thinks of himself as a guy who is currently in a rowboat on his way to buying a speedboat

2. Studies have found that our sense of wealth and “falling behind” is not defined by our actual increases in income or wealth, but by how we’re doing relative to our peer group. If everyone else in rowboats is making $200 more a month in the rising tide of prosperity, the guy making only $100 more feels like he’s falling behind–even if his absolute income and wealth is rising.

Conversely, if his peers are all suffering declines in income while his income is holding steady, he feels like he’s doing pretty well for himself, even though his income is stagnant.

The fact that the wealthy are gaining far more in “prosperity” in both absolute and relative terms doesn’t bother him as long as he’s doing as well or better as his peers and feels he has a chance to eventually move up from a rowboat to a speedboat.

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The Decline Of Oil: Head-Fake Or New Normal?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

When production does finally collapse, that will set up the “nobody saw this coming” ramp in the price of oil.

In May 2008 I proposed the Oil “Head-Fake” Scenario in which global recession pushes oil demand down as oil exporters pump their maximum production in a futile attempt to fund their vast welfare states and thus retain their precarious political power.

Oil: One Last Head-Fake? (May 9, 2008)

The terrible irony of the head-fake, of course, is that the exporters’ efforts to pump more oil exacerbates the oversupply, further depressing prices. As exporters receive fewer dollars for their production, they attempt to compensate by pumping even more oil. Perniciously, this suppresses prices even more, setting up a positive feedback loop which pushes prices to the point that exporters are no longer able to fund their welfare states and Elites.

Something has to give, and that something is the existing power structure in oil exporting nations.

Another factor deepens the eventual crisis triggered by drastically lower oil revenues. The majority of exporting nations under-invest in their oil production and exploration infrastructures, essentially guaranteeing declining production once the easy oil has been extracted.

This cycle of spending the fruits of current production while starving investment for the future is part of what is known as the resource curse: nations with an abundance of resources rely on the income generated by the sale of their resources which effectively stunts the development of a diverse economy and the institutions which such a diverse economy requires as a foundation.

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