Charles Hugh Smith – Page 3 – The Burning Platform

“I Sure Am Glad There’s No Inflation”

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

I sure am glad there’s no inflation, because these “stable prices” the Federal Reserve keeps jaw-jacking about are putting us in a world of hurt.

We are constantly bombarded with two messages about inflation:

1. Inflation is near-zero

2. This worries the Federal Reserve terribly, because stable prices are deflationary and deflation is (for reasons that are never explained) like the financial Black Plague that will wipe out humanity if it isn’t vanquished by a healthy dose of inflation (i.e. getting less for your money).

Those of us outside the inner circles of power are glad there’s no inflation, because we’d rather get more for our money (deflation) rather than less for our money (inflation). You know what I mean: the package that once held 16 ounces now only holds 13 ounces. A medication that once cost $79 now costs $79,000. (This is a much slighter exaggeration than you might imagine.)

Our excellent F-18 Super Hornet fighter aircraft cost us taxpayers $54 million a piece. Now the replacement fighter, the wallowing collection of defective parts flying in close proximity known as the F-35 costs $250 million each–unless you want an engine in it. That’ll cost you extra, partner.

Despite all these widely known examples of rampant inflation, every month we’re told there’s no inflation. Just to reassure myself there’s no inflation, I looked up a few charts on the St. Louis Fed’s FRED database.

I have to say, I’m scratching my head here because the cost of things has gone up a lot since 2000.

The consumer price index is up 38% from 2000. Now if somebody were to give me a choice between getting 10 gallons of gasoline and 10 gallons minus 3.8 gallons of gasoline, I’d take the 10 gallons. So how the heck can a 38% increase be near-zero inflation?

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Are Tech Giants’ New Buildings Signs Of The Top?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If pouring billions of dollars into outrageous “look at me” buildings isn’t tempting the gods, what is it?

When banks build new gleaming headquarters, that generally marks the top of the bank’s fortunes. There appears to be some sort of hubris in constructing a monumental new headquarters that shouts “we’re rich beyond all conception” that angers the stock market gods.

For this reason, we should ponder the glamorous new headquarters Facebook just completed and Apple’s “spaceship” campus that is under construction. Google’s plans for an ultra-modernist headquarters were recently tabled by the city of Mountain View, but the grandiose plans themselves may count as hubris to the stock market gods.

Here is an interior view of Facebook’s new digs: note that it’s literally dripping with arty decor:

Here is Facebook’s stock chart:

Here is a drone-cam view of Apple’s spaceship campus under construction:

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Memo To The Fed And Jon Hilsenrath: We’re Not Here To Enrich Your Corporate Cronies

Guest Post by Charles Hugh Smith

Memo to the Fed: you are the enemy of the middle class, capitalism and the nation.

The Federal Reserve is appalled that we’re not spending enough to further inflate the value of its corporate and banking cronies. In the Fed’s eyes, your reason for being is to channel whatever income you have to the Fed’s private-sector cronies–banks and corporations.

If you’re being “stingy” and actually conserving some of your income for savings and investment, you are Public Enemy #1 to the Fed. Your financial security is nothing compared to the need of banks and corporations to earn even more obscene profits. According to the Fed, all our problems stem from not funneling enough money to the Fed’s private-sector cronies.

Fed media tool Jon Hilsenrath recently gave voice to the Fed’s obsessive concern for its cronies’ profits, and received a rebuke from the middle class he chastised as “stingy.” Hilsenrath Confused Midde-Class “Responded Strongly” To “Offensive” Question Why It Isn’t Spending.

Memo to the Fed and its media tool Hilsenrath: we’re not here to further enrich your already obscenely rich banker and corporate cronies by buying overpriced goods and services we don’t need. Our job is not to spend every cent we earn on interest to banks and mostly-garbage corporate goods and services. Our job is to limit the amount we squander on interest and needless spending. Our job is to build the financial security of our families by saving capital and prudently investing it in assets we control (as opposed to letting Wall Street control our assets parked in equity and bond funds).

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U.S. Households Under Pressure: Stagnant Incomes, Rising Basic Expenses

Guest Post by Charles Hugh Smith

How do you support a consumer economy with stagnant incomes for the bottom 90%, rising basic expenses and crashing employment for males ages 25-54? Answer: you don’t.

Frequent contributor B.C. passed along a sobering set of charts that provide context for How The Average U.S. Consumer Spends Their Paycheck. The basic story is well-known to the bottom 90%: most of the household income goes to taxes, housing, food and transportation, with healthcare and insurance, pensions and retirement contributions rounding out the big-ticket items. (Higher education is, as we all know, paid with student loans by all but the top-tier of families.)

Here’s the question this raises: is the sliver that’s left enough to support a $17 trillion consumer economy? The answer is obvious: no.

Stagnant household income has a number of systemic causes, including the generational decline of full-time employment (A Rising Share of Young Adults Live in Their Parents’ Home) and the concentration of wage gains in the top 10%. These dynamics are not easily addressed, for the simple yet profound reason that the amount of human labor that generates a meaningful profit in a stagnant, over-indebted, financialized economy is declining.

The only way most enterprises can sustainably earn a profit is to offload costly human labor (with its immense burdens of healthcare, pensions, workers compensation, disability insurance, etc., and the heavy regulatory burdens of workplace rules) and replace it with networked software and smart machines.

The types of human labor that generate hefty profits are increasingly scarce, and as a result entry-level pay and employment are both capped by the high costs of human labor (even at minimum wage) and the relatively meager profits generated by conventional labor.

Most of the big profits are generated not by labor but by financialization, stock buybacks and other financial gaming of debt and leverage.

The few areas of human labor that generate hefty profits are either in the protected fiefdoms of state-enforced cartels, or in financial services (i.e. those playing the financial games with debt and leverage) or those creating the software and machinery that replaces costly human labor.

Here are B.C.’s comments on the data:

Nearly half of disposable income is spent on housing and food.

More than 50% of disposable household income is spent on housing and transportation (overwhelmingly autos).

25% of disposable income is spent on autos and health care.

Two-thirds of gross income is spent on taxes, housing, transportation, and health care.

Millennials, most especially males, coming of age since the mid- to late 2000s do not earn enough to afford the major components of household spending, i.e., taxes, housing, autos, and health care (insurance).

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How Healthcare Is Dooming the U.S. Economy (In Just 3 Charts)

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

As it stands now, U.S. healthcare will bankrupt the nation and doom it to permanent stagnation and recession.

That healthcare alone is dooming the U.S. economy is not news to Of Two Minds readers, as I have been covering the catastrophic consequences of our runaway healthcare system for the past decade.

Three charts crystallize the healthcare dynamics that are dooming the U.S. economy. The first depicts the runaway growth of healthcare costs–a rapid expansion that is a permanent feature of U.S. healthcare, regardless of which party is in office or what reforms are instituted.

This expansion of costs has many drivers, most of which result from the system’s perverse incentives for fraud, overbilling, marginal treatments and defensive medicine.Technological and medical advances offer more options for treatment, and can push costs up–but advances can just as readily push costs down, too.

The primary drivers of rapidly increasing costs are:

1. The cartel/crony-capitalist structure of U.S. healthcare

2. Defensive medicine to stave off litigation

3. Profiteering from needless or ineffective tests, procedures and medications

4. Fraud and overbilling

5. The concentration of expenditures in a small sector of the population

6. America’s inability and/or unwillingness to have an adult discussion over end-of-life care for the elderly.

Here is a chart of the rising cost of U.S. healthcare, which is far outstripping the growth of GDP, which is another way of saying healthcare costs are outstripping our ability to pay for healthcare.

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Surplus Repression And The Self-Defeating Deep State

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The nation is wallowing self-piteously in a fetid trough of denial and adolescent rage/magical thinking now that the nation’s bogus, debt-based “prosperity” has crashed and cannot be restored.

If you type Deep State into the custom search window in the right sidebar, the search results fill 10 pages. I think it is fair to say I have long had a deep interest in the Deep State.

The Deep State is generally assumed to be monolithic: of one mind, so to speak, unified in worldview, strategy and goals.

In my view, this is an over-simplification of a constantly shifting battleground of paradigms and power between a number of factions and alliances within the Deep State.Disagreements are not publicized, of course, but they become apparent years or decades after the conflict was resolved, usually by one faction consolidating the Deep State’s group-think around their worldview and strategy.

History suggests that this low-intensity conflict within the ruling Elite is generally a healthy characteristic of leadership in good times. As times grow more troubled, however, the unity of the ruling Elite fractures into irreconcilable political disunity, which becomes a proximate cause of the dissolution of the Empire if it continues.

I recently proposed the idea that Wall Street now poses a strategic threat to national security and thus to the Deep State itself: Who Gets Thrown Under the Bus in the Next Financial Crisis?(March 3, 2014)

Many consider it “impossible” that Wall Street could possibly lose its political grip on the nation’s throat, but I suggest that Wall Street has over-reached, and is now teetering at the top of the S-Curve, i.e. it has reached Peak Wall Street.

Have We Reached Peak Wall Street?

Consider what the extremes of Wall Street/Federal Reserve predation, parasitism, avarice and power have done to the nation, and then ask if other factions within the Deep State are blind to the destructive consequences.

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What’s America’s Fragility Score?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

By this measure, the U.S. scores very poorly: 4 out of a possible 5 on the Fragility Index.

There is a certain logic to the idea that stability is a good predictor for future stability: if a nation’s economy and governance are stable and devoid of disorder, this trajectory of stability will be durable, right?

Well, actually, no. Nassim Nicholas Taleb and co-author Gregory F. Treverton argue in their essay The Calm Before the Storm: Why Volatility Signals Stability and Vice Versathat “the best indicator of a country’s future stability is not past stability but moderate volatility in the relatively recent past.”

Taleb and Treverton list five sources of systemic fragility:

“For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks. Applying these criteria, the world map looks a lot different. Disorderly regimes come out as safer bets than commonly thought, and seemingly placid states turn out to be ticking time bombs.”

These principles are drawn from Taleb’s work on fragility and anti-fragility as described in his book Antifragile: Things That Gain from Disorder.

These five factors function as a rough rating system to measure a nation’s fragility.Nations with near-zero scores in all five factors are anti-fragile (i.e. durable and able to weather crises) and nations with high scores in all five are fragile, i.e. prone to instability and failure when faced with crisis.

Let’s list all five sources of fragility:

1. centralized governing system

2. undiversified economy

3. excessive debt and leverage

4. lack of political variability

5. no history of surviving recent systemic shocks

How does the U.S. stack up? Let’s go through the list.

Continue reading “What’s America’s Fragility Score?”

The Looming “National Nervous Breakdown”

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

When the citizenry cease to believe the lies, the nation suffers a nervous breakdown.

Last week I used the phrase National Nervous Breakdown without clarifying its meaning. (The War on Our Intuition That Something Is Fundamentally Amiss)

By National Nervous Breakdown I do not mean the breakdown of civil order or the economy; I mean the breakdown of the officially sanctioned narratives that underpin the Status Quo. These Master Narratives legitimize the current arrangement; once they erode or break down, the legitimacy of the Status Quo is lost.

The shell remains in place, but nobody believes the system is a fair, just meritocracy.

Let’s consider the erosion or breakdown of these master narratives.

1. No accountability for abuse of power. The core narrative is no one is above the law, which means not only that everyone is supposedly treated equally before the law, but that abuses of power are punished or limited.

Now that police departments are essentially stealing from private citizens without due process via civil forfeiture, it’s clear there is no accountability for abuses of power.

This is simply one example of many in which blatant abuse of power is sanctioned by the Status Quo, and there is little recourse for citizens who have been abused unless they are wealthy enough to fund a high-powered legal team.

In effect, our legal system is broken. This mirrors the erosion and breakdown of accountability in the late 1960s and early 1970s, when abuse of power was rampant and there was little recourse for the citizenry.

2. Though U.S. foreign policy is guided by realpolitik, it is fundamentally based on the high moral ground of defending liberty, democracy and civil liberties. Wars of choice that squandered American lives, treasure and credibility and the use of torture for dubious gains have demolished the credibility and legitimacy of U.S. foreign policy–once again, mirroring the delegitimizing result of the Vietnam War and all the official lies that were issued to mask that war’s true costs and failures.

3. The manipulation of official data to mask the reality that the U.S. economy now operates to benefit the few at the expense of the many–crony capitalism writ large. Vested interests control the political and financial machinery to expand their share of the national income and power.

Meanwhile, the income and wealth of the vast majority of citizens stagnates.

4. The middle-class roadmap to financial security–earning a college degree and working hard for a corporate employer–is broken. A college degree leads to debt-serfdom in the form of crushing student loans, but the education gained has little value in the emerging economy.

In the corporate world, loyalty has been reduced to a facade of rah-rah PR that masks a culture of insecurity.

5. The government at all levels–local, state and federal–responds to any questioning of its authority or abuse of power with increasing over-reach and violence. There are so many examples of this, it’s difficult to know where to start: the federal government’s war on truthtellers regarding domestic spying abuses, and the state of California’s blatantly unconstitutional confiscation of taxpayer bank accounts with zero due process–the mere suspicion that income hasn’t been fully reported in California is sufficient grounds for the theft of citizens’ money by the state.

Welcome to the United States of Orwell, Part 2: Law-Abiding Taxpayers Are Treated as Criminals While the Real Criminals Go Free (March 27, 2012)

When the master narratives have broken down, legitimacy is lost. What’s left is authority without accountability or recourse and abuse of power without limits.

When the citizenry cease to believe the lies, the nation suffers a nervous breakdown.

Don’t Just Follow The Money – Follow The Income

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Lies are no substitute for truth and fantasy is no substitute for reality.

Follow the money is a good start–but what matters going forward is income, and most especially, net income and disposable income. Debt is important, money/capital flow is important, but when push comes to shove, all that matters is having net income/disposable income: to service debts, to invest, to spend.

Debt can be substituted for income, but not for long. Central banks have been playing a game for six long years: by lowering interest rates and making credit available, the central banks have encouraged households, enterprises and governments to substitute borrowed money (debt) for income.

This works as a stop-gap, but debt accrues a funny thing called interest that eventually eats the borrower alive. Income is (supposedly) the driver of stock valuations, the financial foundation of rental property and the ultimate arbiter of solvency: households, enterprises and governments whose income cannot meet their debt and spending obligations are insolvent and eventually declare bankruptcy.

The reality that all that really matters is income incentivizes gaming income. Corporations and their officers/stockholders benefit greatly when net income appears to rise smartly, as rising income boosts stock prices and the value of stock options.

So it’s no wonder that S&P 500 Profits Are 86% Higher Than They Would Be Without Accounting Fudges. Fudging operating income with accounting trickery pays such huge dividends, why not indulge in a bit of financial flummery? The chances of anyone questioning the sleight of hand is nil, since the entire financial sector relies on systemic flummery for its profits.

Following the income leads us to wonder how the 99% of households whose income is declining in real terms can borrow and spend more every year.

Following the income leads us to wonder how OPEC oil exporters will manage with $250 billion less income in 2015, after suffering a $200 billion decline in 2014.That’s a total of $450 billion of income that’s vanished in a few years.

Since OPEC accounts for about 40% of global oil production, that means oil producers globally will earn $1 trillion less than they did in 2012.

Such primary industrial income has a multiplier effect, which means every $1 of oil income that vanishes means $3 down the spending chain vanishes as workers earn less or are laid off, the stores that depended on oil workers’ spending take a hit, and so on down the line.

Thus the reality is the loss of income isn’t merely $1 trillion–it’s more on the order of $4 trillion, as the multiplier effect subtracts income from everyone in the food chain who depends on oil revenues in a secondary or tertiary role.

Income matters for another reason. Most households, enterprises and governments spend the vast majority of their income in one way or another. If income declines by 5%, that may not appear like much. But if the household, enterprise or government spends 98% of its income on debt service and essentials, that 5% decline puts them in the red by 3%.

It may be possible to borrow more to fill that gap–in essence, borrowing money to pay the interest on previous debt–but this is a financial Black Hole, as there is less income to service rising interest payments.

Once the gravity of insufficient income pulls the household, enterprise or government over the event horizon of insolvency, implosion is inevitable.

So when you read about ever-rising corporate profits, ask if that’s pro forma or actual net income. When the government claims its deficits are declining, check whether its debts are rising faster than the media is reporting.

When your neighbor seems to be spending more, ask if they’re making more net income, or simply borrowing more.

Borrowed money is no substitute for net income. The global economy has been living a Grand Lie for the past six years: that borrowing money can be substituted for declining income, and bogus accounting can be substituted for real net income.

Six long years of lies has persuaded many that the lies can be sustained for another six years–or even sixty years.

But lies are no substitute for truth and fantasy is no substitute for reality. The erosion of net income will eventually matter, maybe not in six years but within six months.

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