Tag: Charles Hugh Smith

From James W.

“I told my seven-year-old daughter to hold her breath and that it was okay because I would be breathing. She looked at me quizzically but complied (she innately understood the absurdity of the proposition). After she could no longer hold her breath, she blew it out and did the obligatory gasping. I asked her why she let out her breath. She yelled at me angrily, “DADDY, YOU CAN’T BREATHE FOR ME. I HAD TO BREATHE OR I WOULD DIE!” I smiled and quietly told her, “Just as breathing is essential to life and can be done only by you for you, so is thinking. Do not ever believe that you can let someone else do your thinking.”

Taken from Charles Hugh Smith blog Of Two Minds Denial, Fear, Anger: The Real Depression Part II (July 21, 2009)

Link: http://www.oftwominds.com/blogjuly09/anger-greed07-09.html

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

This is how empires collapse: one complicit participant at a time.

Before an empire collapses, it first erodes from within. The collapse may appear sudden, but the processes of internal rot hollowed out the resilience, resolve, purpose and vitality of the empire long before its final implosion.
What are these processes of internal rot? Here are a few of the most pervasive and destructive forces of internal corrosion:

1. Each institution within the system loses sight of its original purpose of serving the populace and becomes self-serving. This erosion of common purpose serving the common good is so gradual that participants forget there was a time when the focus wasn’t on gaming the system to avoid work and accountability but serving the common good.

2. The corrupt Status Quo corrupts every individual who works within the system.Once an institution loses its original purpose and becomes self-serving, everyone within either seeks to maximize their own personal share of the swag and minimize their accountability, or they are forced out as a potentially dangerous uncorrupted insider.

The justification is always the same: everybody else is getting away with it, why shouldn’t I? Empires decline one corruptible individual at a time.
3. Self-serving institutions select sociopathic leaders whose skills are not competency or leadership but conning others into believing the institution is functioning optimally when in reality it is faltering/failing.

The late Roman Empire offers a fine example: entire Army legions in the hinterlands were listed as full-strength on the official rolls in Rome and payroll was issued accordingly, but the legions only existed on paper: corrupt officials pocketed the payroll for phantom legions.

Self-serving institutions reward con-artists in leadership roles because only con-artists can mask the internal rot with happy-story PR and get away with it.

4. The institutional memory rewards conserving the existing Status Quo and punishes innovation. Innovation necessarily entails risk, and those busy feathering their own nests (i.e. accepting money for phantom work, phantom legions, etc.) have no desire to place their share of the swag at risk just to improve sagging output and accountability.

So reforms and innovations that might salvage the institution are shelved or buried.

5. As the sunk costs of the subsystems increase, the institutional resistance to new technologies and processes increases accordingly. Those manufacturing steam locomotives in the early 20th century had an enormous amount of capital and institutional knowledge sunk in their factories. Tossing all of that out to invest in building diesel-electric locomotives that were much more efficient than the old-tech steam locomotives made little sense to those looking at sunk costs.
As a result, the steam locomotive manufacturers clung to the old ways and went out of business. The sunk costs of empire are enormous, as is the internal resistance to change.

6. Institutional memory and knowledge support “doing more of what worked in the past” even when it is clearly failing. I refer to this institutional risk-avoidance and lack of imagination as doing more of what has failed spectacularly.

Inept leadership keeps doing more of what once worked, even when it is clearly failing, in effect ignoring real-world feedback in favor of magical-thinking. The Federal Reserve is an excellent example.

7. These dynamics of eroding accountability, effectiveness and purpose lead to systemic diminishing returns. Each failing institution now needs more money to sustain its operations, as inefficiencies, corruption and incompetence reduce output while dramatically raising costs (phantom legions still get paid).

8. Incompetence is rewarded and competence punished. The classic example of this was “Good job, Brownie:” cronies and con-artists are elevated to leadership roles to reward loyalty and the ability to mask the rot with good PR. Serving the common good is set aside as sychophancy (obedient flattery) to incompetent leaders is rewarded and real competence is punished as a threat to the self-serving leadership.

9. As returns diminish and costs rise, systemic fragility increases. This can be illustrated as a rising wedge: as output declines and costs rise, the break-even point keeps edging higher, until even a modest reduction of input (revenue, energy, etc.) causes the system to break down:



A modern-day example is oil-exporting states that have bought the complicity of their citizenry with generous welfare benefits and subsidies. As their populations and welfare benefits keep rising, the revenues they need to keep the system going require an ever-higher price of oil. Should the price of oil decline, these regimes will be unable to fund their welfare. With the social contract broken, there is nothing left to stem the tide of revolt.

10. Economies of scale no longer generate returns. In the good old days, stretching out supply lines to reach lower-cost suppliers and digitizing management reaped huge gains in productivity. Now that the scale of enterprise is global, the gains from economies of scale have faltered and the high overhead costs of maintaining this vast managerial infrastructure have become a drain.

11. Redundancy is sacrificed to preserve a corrupt and failing core. Rather than demand sacrifices of the Roman Elites and the entertainment-addicted bread-and-circus masses to maintain the forces protecting the Imperial borders, late-Roman Empire leaders eliminated defense-in-depth (redundancy). This left the borders thinly defended. With no legions in reserve, an invasion could no longer be stopped without mobilizing the entire border defense, in effect leaving huge swaths of the border undefended to push back the invaders.

Phantom legions line the pockets of insiders and cronies while creating a useful illusion of stability and strength.

12. The feedback from those tasked with doing the real work of the Empire is ignored as Elites and vested interests dominate decision-making. As I noted yesterday in The Political Poison of Vested Interests, when this bottoms-up feedback is tossed out, ignored or marginalized, all decisions are necessarily unwise because they are no longer grounded in the consequences experienced by the 95% doing the real work.

This lack of feedback from the bottom 95% is captured by the expression “Let them eat cake.” (Though attributed to Marie Antoinette, there is no evidence that she actually said Qu’ils mangent de la brioche.)

The point is that decisions made with no feedback from the real-world of the bottom 95%, that is, decisions made solely in response to the demands of cronies, vested interests and various elites, are intrinsically unsound and doomed to fail catastrophically.

How does an Empire end up with phantom legions? The same way the U.S. ended up with ObamaCare/Affordable Care Act. The payroll is being paid but there is no real-world feedback, no accountability, no purpose other than private profit/gain and no common good being served.

That’s how empires collapse: one corrupted, self-serving individual at a time, gaming one corrupted, self-serving institution or another; it no longer matters which one because they’re all equally compromised. It’s not just the border legions that are phantom; the entire stability and strength of the empire is phantom. The uncorruptible and competent are banished or punished, and the corrupt, self-serving and inept are lavished with treasure.

This is how empires collapse: one complicit participant at a time.

by Charles Hugh Smith

Though the mainstream financial media and the blogosphere differ radically on their forecasts—the MFM sees near-zero systemic risk while the alternative media sees a critical confluence of it—they agree on one thing: the Federal Reserve and the “too big to fail” (TBTF) Wall Street banks have their hands on the political and financial tiller of the nation, and nothing will dislodge their dominance.

Given how easily the bankers bamboozled the Washington establishment into bailing them out in 2008 to the tune of tens of trillions of dollars in backstops, guarantees, subsidies and zero-interest loans, this is a reasonable assumption. Especially when coupled with the free hand the Fed has to reward the banks with zero-interest loans and limitless liquidity.

Add in the unsurpassed political power of the banks’ lobbying and campaign contributions and the hog-tying of regulatory agencies, and it’s no wonder few see any threat to the Fed/financial sector’s dominance.

There’s also a compelling narrative that supports the Fed’s policies of keeping interest rates near-zero by printing money to buy mortgages and Treasury bonds: were the Fed to allow interest rates to normalize back up to the historically average range, credit-based consumption and housing sales would dry up, pushing the nation into a recession or even a depression.

What’s left unsaid is that such a contraction in credit would severely undermine the banks’ profits and solvency, and that it’s that which is driving the Fed policy more than a concern for Main Street. Take a look at what happened to phenomenally robust financial profits in 2008: a contraction in credit caused financial profits (and solvency) to absolutely crater.

Interestingly, the collapse of financial profits back to 1.5% of GDP (gross domestic product) merely returned the financial sector to the level of profit it had earned in the 1960s and 70s. No one reckoned the high-growth 1960s were a depression, yet the collapse of financial profits back to the level of the go-go 1960s triggered the systemic insolvency of America’s financial sector.

This chart reveals the key driver of Fed policy: the enormous profits of Wall Street and the TBTF banks are based on an extraordinary expansion of leveraged credit that is visible in the red line—the ratio of total credit to GDP.  This line traces out the birth of financialization in the early 1980s and the implosion of leveraged debt in 2008.

Simply put, the only way the financial sector (Wall Street and the banks) could continue to grab almost 5% of the nation’s entire output as profit is if the Fed keeps interest rates near-zero and floods the system with the limitless liquidity of expanding credit and money-printing. Here is a snapshot of the Fed’s balance sheet, which reflects its unprecedented expansion of money:

This chart shows that the Fed manipulates interest rates by buying equally unprecedented amounts of mortgages and Treasury bonds:

Thus there are three reasons why analysts extrapolate the Fed’s current policies in a straight line into the future:

1. Any contraction in credit would once again imperil the financial sector’s profits and solvency.
2. Since Wall Street is politically dominant, the Fed will not allow credit to contract.
3. Mainstream economists and politicians fear a recession triggered by credit contraction more than they fear a collapse of the U.S. dollar.

Analysts extrapolating Fed money-printing into the future conclude this expansion of the U.S. money supply will eventually devalue the U.S. dollar.  The mechanism for this devaluation is easy to understand: potential buyers of Treasury bonds will begin wondering if the piddling inflation-adjusted returns on Treasury bonds are worth the risk that their bonds will be redeemed with currency that is worth a fraction of the value they bought them with.

The Fed could respond to this bond buyers’ strike by printing even more trillions to buy even more Treasury bonds than it already buys every year, but the fact that the Fed might be forced to become the buyer of last resort is hardly a vote of confidence in the policies that support financial profits at the expense of market discovery of price and value.

Stripped of obfuscating complexity, a bond is a claim on future national income, and a bet that the currency used to redeem the bond in the future will have the same value as the currency initially traded for the bond.  If doubt arises about this, buying the bond or owning the currency is a bad bet.

As a consequence, many observers have concluded that the Fed can’t stop printing money and keeping interest rates near-zero (because those policies enable the financial sector to skim its hundreds of billions of dollars in profits) and so the U.S. dollar is doomed to devaluation and eventual loss of its status as the world’s primary reserve currency.

The Reserve Currency

What is a reserve currency?  Although the subject deserves a book-length explanation, let’s pare it down to the essentials.

First, we need to understand that currency (money issued by nations) is a commodity like any other. The global currency exchange (called the FX market) discovers the price of currencies by supply and demand, just like the markets for wheat, oil, lumber or other commodities.  Various nations can arbitrarily peg their own currency to another currency, but ultimately the value of every currency is set by supply and demand.

Second, we need to differentiate between a trading currency and a reserve currency. Many people confuse the two. Let’s say a Chinese company buys sugar from Brazil and a Brazilian company buys electronics from China. The firms exchange Renminbi (yuan) and Brazilian Reals.  These are trading currencies, as they facilitate trade between two nations.

A reserve currency is a currency that nations hold as reserves to protect their own currencies from market shocks and as collateral for credit issued by the nation holding the reserve currency.

Gold is one form of reserve/collateral. In a gold-backed currency, the currency is directly pegged to physical gold. When the U.S. dollar was gold-backed, other nations could trade $35 for an ounce of gold.

Nowadays, there are no explicitly gold-backed currencies, though many nations hold gold as a form of collateral.

A reserve currency acts in a similar fashion, as a predictable store of value that can be easily bought and sold on the global marketplace.

When markets lose faith in a currency’s value, traders sell the currency before it loses any more value.  This selling lowers the value, creating a self-reinforcing feedback loop of selling triggering more selling.  This creates a currency crisis as the currency rapidly loses value. To stop the crisis, the issuing nation must sell collateral (gold, reserves of other currencies) to sop up all the selling. If the nation fails to stem the crisis, its currency collapses once its reserves are gone.

What does all this mean? What it boils down to is the global currency markets impose a discipline on money-printing. If a country prints its own currency with abandon and does not build up equivalent reserves/collateral to back that expansion of currency, eventually the nation’s money-printing devalues the currency.  Once the currency loses most of its value, the country no longer has the means to buy oil or other goods from other nations.

There is one general exception to this discipline: the nation that issues the reserve currency can print more currency and as long as there is sufficient demand for that currency as reserves, the issuing country has the “exorbitant privilege” of issuing intrinsically worthless paper and exchanging it for very valuable commodities such as oil, electronics, autos, etc. (For more on this topic, please see Understanding the “Exorbitant Privilege” of the U.S. Dollar)

Currently, the primary reserve currencies are the U.S. dollar and the euro.

Though some analysts argue that the reserve currency is a burden whose benefits are outweighed by its liabilities, the privilege of being able to issue your currency and exchange it for real goods and services without regard for one’s own collateral reserves should not be underestimated.

Simply put, the U.S. dollar’s status as a reserve currency is a key component of U.S. global dominance. Were the dollar to be devalued by Fed/Wall Street policies to the point that it lost its reserve status, the damage to American influence and wealth would be irreversible.

What if Wall Street is Recognized as a Strategic Threat to the Nation?

As a result, I discern another possibility to the consensus view that the Fed/Wall Street will continue to issue credit and currency with abandon until the inevitable consequence occurs, i.e. the dollar is devalued and loses its reserve status.

I propose an alternative narrative for consideration, in which the other power centers of the U.S. government (known as the Deep State) awaken from their ignorance of finance and awaken to the fact that Fed/Wall Street policies constitute a strategic threat to the dominance and prosperity of the U.S. nation-state.

In this view, Wall Street’s power has peaked and is about to be challenged by forces that it has never faced before. Put another way, the power of Wall Street has reached a systemic extreme where a decline or reversal is inevitable.

Part 2: The Implications of a ‘War of Elites’ focuses on how, as a result of its over-reach, Wall Street is at risk of encountering blowback from forces that the financial sector assumed were benign or under its control. Now that Wall Street poses a strategic threat to the viability of the American Project, its dominance may well be about to be challenged in ways few imagine possible.

What would such a power struggle look like? How would it unfold? What would the costs be to society? How will the rest of us be affected?

Click here to access Part 2 of this report (free executive summary, enrollment required for full access).

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

UPDATE: As expected (see my analysis of ocean currents and drift-time below), the purported debris was a false lead. The revelation that the automated ACARS was still sending data on the Rolls Royce engines is not surprising given what else is known, nor is the Malaysian claim that the data is false. Engine data indicates Malaysian plane flew four hours after disappearing

Like many other people, I am following the story of what happened to Malaysia Airlines Flight 370 with keen interest. Much of what we’ve been told doesn’t add up, deepening the mystery.

It seems to me that we can already draw a number of conclusions from the known data by pursuing a logic-based analysis of what is possible and what can be excluded as illogical.

Let’s start with what is known:

1. The Malaysian authorities have been evasive to the point of misdirection, in other words, they’ve hidden the facts to serve an undisclosed agenda.
What is the agenda driving their evasion? What is known is that Malaysian security is obviously lax. This fact has caused Malaysian authorities to lose face, i.e. be humiliated on the global stage. Malaysia is an Asian nation, and maintaining face in Asia is of critical importance. We can conclude that one reason the Malaysian authorities are dissembling is to hide their gross incompetence.

It is also suspected that Malaysia is a safe haven for potentially dangerous Islamic groups. (Follow the threads from Pakistan’s secret nuclear proliferation program to Malaysia for documentation of this possibility.) The Malaysian government may have an informal quid pro quo along these lines: you are welcome to set up shop as long as you don’t cause any trouble here or do anything to cause Malaysia to lose face.

This provides another logical source of Malaysian evasion: if there is indeed a terrorist connection to the loss of the aircraft, this would focus the global spotlight on Malaysian tolerance of potentially dangerous groups.

That the Malaysian military was unable to effectively monitor the aircraft or coordinate with civilian air traffic control (ATC) also suggests incompetence at the most sensitive levels. Revealing this would also cause a loss of face.

Summary: Malaysian authorities have not been truthful or timely in their reporting. The logical conclusion is that they’re hiding data to protect national pride and the true state of their abysmal security.

2. Additional information is available but is not being shared with the public. To take one example, the Aircraft Communications Addressing and Reporting System (ACARS) on Flight 370 was functioning and automatically sent data on four critical systems, including the engines. This data has not been released by Malaysian Airlines.

It also appears that the pilot of another 777 airliner heading to Japan contacted the pilot in Flight 370 and reported the transmission was garbled.

Even with the transponder off, the aircraft would appear on primary (military) radar. The Malaysian military tracked Flight 370 but is dissembling. Clearly the authorities are not revealing the full extent of what is known.

3. Satellite imagery did not detect a high-altitude explosion. This excludes all scenarios in which the aircraft crashes into another plane, explodes in mid-air, etc.

4. Flight 370 changed course and altitude, and then maintained the new bearing for hundreds of miles and an additional hour of flight after losing contact with ATC (air traffic control). This limits scenarios in which decompression causes everyone on board to lose consciousness or a catastrophic electrical fire incapacitating the flight deck to an emergency that enabled the pilots to set a new course before losing consciousness or control of the aircraft.

5. The Malaysian military reported Flight 370’s altitude as 29,500 feet. This conflicts with eyewitness accounts from fishermen reporting a large aircraft at a much lower altitude around 1,000 meters (3,000 feet). If the radar altitude is correct, this suggests the aircraft was not experiencing decompression, as the pilots would descend as an emergency response to decompression. If the fishermen’s report is accurate, then decompression would not be an issue.

6. Mobile phone data suggests the passengers’ phones were still functioning after the aircraft lost contact with air traffic control (ATC) and the transponder was turned off/failed.

7. Releasing data from the U.S. intelligence space-based network would reveal U.S. capabilities. The Strait of Malacca is a key shipping lanes chokepoint, and is thus of strategic interest to the U.S. and other nations with space-based assets. U.S. authorities have already revealed that U.S. coverage of the area is “thorough.”

This confirms that U.S. communications monitoring and space-based assets cover the seas around the Strait of Malacca. Given what is known about these monitoring and space-based assets, it is likely that the U.S. intelligence agencies have additional data but are not revealing them, as this would provide direct evidence of U.S. capabilities.

We can surmise that the U.S. maintains thermal imaging capabilities that can detect more than large explosions. We can also surmise that the communications monitoring networks picked up any signals from the aircraft or related to the aircraft.

That the head of the C.I.A. publicly professed ignorance is interesting. What course of action would one pursue if one wanted to keep U.S. capabilities secret? Publicly proclaim ignorance.

This is not to suggest that the U.S. “knows where flight 370 is;” it is simply to note that this is not “open ocean” comparable to the mid-Atlantic where Air France Flight 447 went down five years ago. This is a strategic chokepoint of great interest to the U.S., and therefore it is likely that U.S. networks and space-based assets collected data that would either exclude certain possibilities or make other possibilities more likely.

What can we logically conclude from the most reliable and trustworthy data available?

1. The pilots were conscious when they turned off the transponder (or the transponder failed) around 1:30 a.m. and when they changed course soon after.The aircraft was under the control of the pilots long enough for them to set a new course.

2. The aircraft flew an additional hour or more on the new westward course at cruising altitude.

3. No distress signal was sent during this 1+ hour flight after whatever event caused the the pilots to change course.

If we put these together, we can establish a number of logical parameters around each plausible scenario, where plausible scenario means a situation based on previous losses of commercial aircraft.

1. Pilot suicide. If the pilot had decided to commit suicide by crashing the plane, why not ditch the aircraft in the South China Sea? Why change course and fly for another hour?

Alternatively, the Malaysian military’s reports are completely false and they were tracking an unknown aircraft near Pulau Perak at 2:15 a.m. (previously reported as 2:40 a.m.)

How many unidentified large aircraft are flying around Pulau Perak at 2:15 a.m. on a typical night? The possibility that the radar signal was not Flight 370 seems remote.

2. Mechanical failure that caused decompression or an electrical fire that incapacitated the flight deck. If such an emergency occurred, it enabled the pilots to change course and altitude.

Assuming a decompression event, we could expect the pilots to descend rapidly. If Flight 370 was indeed at 29,500 feet at 2:15 a.m., that suggests the aircraft was still capable of flight at cruising altitude. So either the pilots were still flying the aircraft or the decompression event enabled them to change course and set the autopilot before losing consciousness.

If the aircraft was being flown by autopilot, it could have flown for many more hours, given its fuel load, which raises the question: if the pilots were unconscious at 2:15 a.m., why did the aircraft suddenly crash 10 minutes later? Or did the aircraft simply leave the airspace covered by the Malaysian military?

If an emergency had crippled the aircraft’s electrical system, it’s unlikely the plane could have continued flying at cruising altitude for an additional hour. If a catastrophic electrical fire crippled the flight deck, how could the plane continue flying at cruising altitude for another hour, given that the battery backup would last at best 30 minutes?

In other words, the additional hour of flight time on a new course does not logically align with an emergency decompression or fire that led to the flight deck and pilots being incapacitated. A decompression event would have led to either A. a rapid controlled descent or B. the pilots unconscious/unable to take control and the autopilot flying the aircraft on the new course for many hours.

Alternatively, a catastrophic electrical fire would have either brought the aircraft down within minutes of the event or at best provided 30 minutes on emergency battery power. Neither jibes with an additional hour of flight at cruising altitude.

This leads to the conclusion that the aircraft was still being flown by the pilots, i.e. conscious decisions were being made by either the pilots or someone who had seized control of the flight deck.

If a mechanical emergency had crippled the aircraft, it seems unlikely that the pilots could change course and altitude but not be able to send a distress signal. If the pilots had lost consciousness but the rest of the plane’s systems were nominal, the autopilot would have continued flying the aircraft until the fuel ran out, many hours beyond 2:15 a.m.

That suggests there was conscious control of the aircraft and that those in charge made a decision sometime after 2:15 a.m. that led to the loss of the aircraft. This scenario strongly suggests human action or error as the operative emergency rather than mechanical failure.

Either that, or some key data that has been released as fact is actually false.

Late breaking news: if the satellite images released by China (taken one day after Flight 370 went missing) are in fact photos of wreckage, then the Malaysian military was obviously not tracking Flight 370 to the west an hour later.

The blurry photo does not reveal much, but several features are noteworthy:

1. The three pieces are very large, which means they must be intact sections of the wings or fuselage. It is unlikely these would still be floating hours after a crash. We might also wonder, what sort of impact would create three large pieces rather than a debris field?

2. The three pieces are close together. Unless the aircraft landed intact in the water and sank in one piece, there would likely be a field of much smaller floating debris.

3. What else could this be? The large size of the pieces is certainly consistent with the scale of a 777.

4. Why did China withhold the imagery for three days? Did their own search ships reach the coordinates identified by the satellite?

5. The ocean currents and the location of the presumed debris do not compute. Ocean currents in the area are 2 kilometers/hour. Presumed debris is 141 miles from last known position This doesn’t compute: the satellite image was taken 11 am Sunday 33 hours after MH370 presumably crashed; debris would only drift 33 hr X 2 KM=66 KM or about 40 miles from the last known position of HM370. Debris was 140 miles to the east–100 miles beyond what’s possible in terms of debris drifting with currents from the presumed crash site.

In summary, these images open additional questions. There is no substitute for actually finding the aircraft or debris.

MH370: Satellite images show possible crash debris in South China sea

Malaysian military now reveals it tracked MH370 to the Malacca strait

Radar Blips Baffle Officials in Malaysian Jet Inquiry

The Mystery of Malaysia Airlines Flight 370

Malaysian plane sent out engine data before vanishing

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Why is our government so incompetent? Short answer: because incompetence has been fully institutionalized in every branch, every agency and every nook and cranny of the state.

Though many may reckon the U.S. government (and its Deep State) are not so much incompetent as merely evil, I suggest incompetence sows the seeds of evil consequences.

It’s easy to lay the responsibility for the state’s incompetence on its staggering size and complexity, and there is much truth in the notion that no system of this scale and complexity can possibly be governable or accountable.

But I think we owe it to ourselves to dig a bit deeper than this to understand why our visible government (executive, Congress, regulatory agencies, the Federal Reserve, etc.) and the Deep State (everything that’s decided and run behind closed doors) is so monumentally incompetent.

The policies and decisions of the past 15 years can be reduced to three catastrophic blunders: the discretionary war in Iraq and “nation-building” in Afghanistan; allowing those responsible for the 2008 financial meltdown to become even more invulnerable and predatory, i.e. enabling a “too big to fail” banking sector, and Obamacare, the Orwellian-named Affordable Care Act (ACA).
Each of these policy decisions has been enormously destructive to the nation, and the opportunities lost in their wake are irreversible.

I have covered the systemic reasons for incompetence and failure many times.These boil down to the accumulating sclerosis of bureaucracy and the ratchet effect.

I have addressed The Lifecycle of Bureaucracy on a number of occasions:

Our Legacy Systems: Dysfunctional, Unreformable (July 1, 2013)
The Way Forward (April 25, 2013)

When Escape from a Previously Successful Model Is Impossible (November 29, 2012)

Complexity: Bureaucratic (Death Spiral) and Self-Organizing (Sustainable) (February 17, 2011)

The ratchet effect can also be visualized as a rising wedge, in which costs and inefficiencies continue rising until any slight decrease in funding collapses the organization.

Dislocations Ahead: The Ratchet Effect, Stick-Slip and QE3 (February 14, 2011)

The Ratchet Effect: Fiefdom Bloat and Resistance to Declining Incomes (August 23, 2010)

I think we can add a few other factors:

1. That which is cheap and abundant will be squandered until it is no longer cheap or abundant. Our default programming is to squander what is easily available and abundant. This is true not just of resources such as food and energy but of health, trust, power and all sorts of other intangibles.

For example, when the Soviet Union collapsed, the U.S. was left with an abundance of soft and hard power on the global stage. The natural response was to squander it on misadventures instead of investing it wisely.

When we’re young and healthy, we squander this reservoir of vitality rather than invest it wisely in habits that will maintain our health as we age.

There are countless examples of this dynamic. The irony of this dynamic is tragic: by the time we realize we’ve squandered an irreplaceable resource, it’s too late.

2. The prime directive of any bureaucracy is to eliminate all accountability. The raison d’etre of bureaucracy, the very reason for its existence, is not to manage complex affairs but to dissipate accountability into a formless cloud so that no member of the bureaucracy will ever face any consequences for his/her actions.

In other words, the prime directive of any bureaucracy is to enforce the perfection of moral hazard, i.e. those making decisions suffer no consequences when the decisions are disastrous.

The entire structure of a bureaucracy boils down to this: we followed the rules, and therefore we are blameless.

Obamacare and the Pentagon are both perfections of this purposeful loss of accountability. I recently saw a video clip of a journalist who had asked 12 different government functionaries who was in charge of implementing the Obamacare website before its flawed launch and he’d received 12 different answers.

In other words, accountability had already been extinguished well before the site was even launched.

3. Bureaucracies are intrinsically prone to group-think. The more closed the bureaucracy, the greater this tendency to eliminate skeptics, heretics, independent thinkers, etc.: Who Gets Thrown Under the Bus in the Next Financial Crisis? (March 3, 2014).

The foundational group-think concepts behind each of the three policy disasters listed above have all been discredited, but only after group-think insured the destruction of vital national interests: for example, the neo-conservative “failed-state” concept that guided a decade of foreign policy misadventures: The Rise and Fall of the Failed-State Paradigm: Requiem for a Decade of Distraction (Foreign Affairs).

4. As correspondent Lew G. has pointed out, bureaucracies are not designed to be fail-safe; their complexity and lack of accountability lead not to resilience but to fragility and vulnerability.

5. One systems-level consequence of tightly connected, interactive complex systems is that they generate routinely failures known as “normal accidents,” catastrophes that result from seemingly small miscalculations and miscues that cascade into systemic crises. When accountability has been lost, there are no feedback loops left to correct these “normal accidents,” so the damage piles up within the organization until it collapses in a supernova model of accumulated incompetence.

6. The moral-hazard-riddled leadership of bureaucracies will choose whatever short-term politically expedient fix reduces the immediate political pain (also known as “kicking the can down the road”) rather than risk shaking up the organization by imposing accountability and clearing out the deadwood. This dependence on short-term politically expedient “fixes” that ignore the real problems piles up more moral hazard, failed policies, ineffective deadwood and cost, increasing the system’s fragility and vulnerability to any shock that cannot be dissolved with another short-term can-kicking “fix.”

Why is our government so incompetent? Short answer: because incompetence has been fully institutionalized in every branch, every agency and every nook and cranny of both the visible state and the Deep State.

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Once the mafia state of mind has seeped into every nook and cranny of the society and economy, it’s not even recognized as corruption: it’s simply the way the system works.

We recently spent a few days with a friend who was born and raised in Sicily who now lives elsewhere in Europe with his wife (also Italian, from Naples). Though we talked of many things, one of his comments struck me like a bolt of lightning.

The Mafia isn’t about shoot-outs, he said; the mafia is a state of mind.

He then pointed to a city trash collection truck driving by. Those guys are mafia.

I should stipulate that our friends are left-liberal in their views, and deeply concerned about the direction of free enterprise, democracy and social equality in Europe. He did not make these comments as a joke but with the utmost seriousness.

Why are the union sanitation workers a mafia? Because they have the leverage (via strikes) to extract and extort what they want from a populace who earns less than they do in wages, benefits and salaries–a population with no other choice. Is there some other option to giving the striking municipal workers what they demand? Is there another choice to clear the streets of garbage? Is there another train system to get to work when the train operators are on strike? No.

The mafia state of mind is all about establishing a monopoly that leaves the populace no other choice, and that creates sufficient leverage to enable systemic extortion. In the mafia state of mind, the government is a partner in the racket. When thugs arrive in a peasant village in China to drive the residents off their land so a corrupt developer can build hundreds of highrise flats, where are the corrupt officials of the government? In line to collect their “fees”, which will fund their purchase of homes in Vancouver, B.C. or Sydney, Australia.

Where were the government officials when BART employees held the San Francisco Bay Area hostage? Quietly collecting their usual bribes (politely called “contributions”) from the union mafia.

The mafia state of mind is all about extracting wealth that could not be extracted without state enforcement, monopoly and covert systems of control and extortion. When the “too big to fail” banks received $16 trillion in direct subsidies and loans to keep from imploding (i.e. what would have happened in a truly free enterprise system), that was the mafia state of mind in action: the central state extorted whatever was necessary from the populace to aid and protect its banker cronies.

What is the shadow banking system other than a shadow financial mafia? The “too big to fail” banking sector is a mafia of the cartel-crony capitalist sort, and the shadow banking system is a cloaked version of the same extortionist system that depends on the government for protection. In the shadow banking mafia, the government protects the racket by acting as if it doesn’t exist.

When there is no other choice but submission, when voting for either party yields the same results, the mafia state of mind reigns supreme. The mafia state of mind exists in all ideological flavors–socialist, capitalist, communist. The mafia state of mind is simple: leave the populace no choice but submission, enforce monopolies of control and power, and then extract and extort to your heart’s content.

Once the mafia state of mind has seeped into every nook and cranny of the society and economy, it’s not even recognized as corruption: it’s simply the way the system works. And so the residents of nominal democracies in Asia, Europe and the Americas do not even realize how thoroughly corrupted their societies and economies really are; they cling to the illusions of choice even as their incomes, wealth and political influence are funneled into the hands of various elites by overlapping extortion rackets.

Once you realize that the mafia is a state of mind, you recognize just how thoroughly it has corrupted and criminalized our entire society and economy.

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Should The Fed Stop The Dominoes From Falling?

The forest (the economy) can only remain vibrant and healthy if the dead wood is burned off in bankruptcy and insolvency. Retail commercial real estate is over-built and over-leveraged. If it is allowed to burn off as Nature intended, we can finally move forward.

Last week I suggested that Retail-CRE (Commercial Real Estate) would be The First Domino to Fall in the domestic U.S. economy. The reason is simple supply and demand: for a variety of structural reasons, there is an enormous oversupply of retail commercial space and an ever-declining demand for bricks-n-mortar commercial space.

I laid all this out in a three-part series last week:

Dead Mall Syndrome: The Self-Reinforcing Death Spiral of Retail (January 22, 2014)
The First Domino to Fall: Retail-CRE (Commercial Real Estate) (January 21, 2014)

After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects (January 20, 2014)

I’ve prepared a graphic depiction of dominoes falling that depicts the causal chain:

1. Standard-Issue Financial Pundits (SIFP) underestimate the CRE implosion, just as they underestimated the domino-like consequence of subprime residential mortgages blowing up in 2007-2008.

2. Few grasp how over-leveraged CRE is, so the “surprise” will be considerable, i.e. the shock-and-awe of malls being recognized as near-worthless will be outsized.

3. Occupancy and lease rates plummet in retail, resorts and office space.

4. These dynamics (fewer leases and lower lease rates) push leveraged owners of CRE into bankrupty.

(Recall that rolling over existing mortgages doesn’t increase dwindling cash flow.)
5. The Fed may want to add $1 trillion in impaired commercial real estate mortgages to its bloated $4 trillion balance sheet, but the bond market may question yet another open-ended bailout of the Fed’s cronies, i.e. the banks who foolishly lent monumental sums against marginal commercial properties.

6. The lenders foolish enough to leverage loans against phantom collateral fail as $1+ trillion in CRE loans default.

7. The “recovery” in the U.S. economy is revealed as just another fiction sold as fact by the Fed, the political Status Quo, the organs of Federal propaganda, etc.

(The Recent “New High” in Stocks Is as Bogus as the Unemployment Rate January 25, 2014)

Here’s the key issue at stake: propping up failed private enterprises with Fed or Federal money throws up roadblocks to the real growth of our economy. Rather than bail out more banks and save over-valued, over-leveraged mall owners from the consequences of the economy changing, we should be casting off what’s been holding the economy back–phantom assets, debt that should be written off and failed financial sectors bailed out with taxpayer funds and Fed trickery.

The question shouldn’t be could the Fed bail out the imploding retail-commercial real estate (CRE) sector? but should the Fed bail out the imploding retail-CRE sector?

We may as well ask if the Fed should have bailed out the buggy whip industry in 1914. The retail-CRE sector is imploding for a very good reason: speculators built way too much space with way too much credit and leverage supplied by banks emboldened by the notion that the Fed will never let crony-capitalists suffer the consequences of their insanely risky bets.

On top of that cheap-credited-fueled over-building, Web shopping and the systemic decline in household income for the bottom 90% (please look at the income charts in The First Domino to Fall) have undercut the need for ever-more commercial real estate space.

In any economy with the slightest bit of free enterprise still left breathing, the retail CRE sector would be allowed to go bankrupt and all those exposed to the risks (mall owners, banks with CRE loans, etc.) would absorb the losses. Anything less than the creative destruction of a failed sector that time has passed by will impede the economy in terribly negative ways.

Yes, the Fed can print up another $1 trillion and buy every CRE loan that’s worth $1 for $1 million and bury the defaulted loan away from public view. But should it be allowed to do so? Should the Fed’s role of savior of every crony-capitalist in America who loses a leveraged bet go unchallenged?

Should the Fed end up owning every dead mall in America so the owners and lenders can be cashed out at a fat profit? Janet Yellen, the Nation’s New Chief Slumlord (January 9, 2014)

Should the Fed be allowed free rein to bail out its owners (private banks) and crony capitalists with limitless newly created money? Is that what the U.S. is all about now, bailing out failed speculative bets by crony capitalists and banks? Most commentators believe the Fed has a totally free hand to create as much money as it wants whenever it wants and to use those funds to bail out banks and speculators by buying their defaulted mortgages and hiding them away in the Fed balance sheet.

But I believe the political resistance to this neofeudal arrangement is rising, and the Fed’s ability to bail out crony capitalists and banks is not as infinite as its supporters believe. The bond market might start pricing in negative consequences to the Fed floating yet another $1+ trillion bailout of super-wealthy cronies.

Maybe the public will finally tire of yet more bailouts of the super-wealthy and their failed sectors and failed bets. Maybe the Nation’s New Chief Slumlord, Janet Yellen, will hesitate to pursue Ben Bernanke’s policy of bailing out every failed crony capitalist regardless of the costs to the nation’s economy and the injustice of backstopping foolish risks made for private gain.

“It can’t happen here” includes the Fed. The average SIFP (Standard-Issue Financial Pundit) believes the Fed is politically unconstrained as a matter of unquestioned fact, on the order of a belief in a Cargo Cultish quasi-religion such as Keynesian “stimulus.” (Wow, Paul Krugman can really dance the humba-humba and wave a dead chicken!)

Just as it turns out “it can happen here” (runaway central state suppression, spying, etc.), the Fed can encounter political limits on its Grand Plan of bailing out every crony capitalist in America.

Maybe we should let the retail CRE sector go the way of the buggy whip manufacturers instead of bailing out every super-wealthy crony involved in the orgy of over-building and over-leverage. The forest (the economy) can only remain vibrant and healthy if the dead wood is burned off in bankruptcy and insolvency. One of the biggest pile of dead wood in the U.S. is retail-CRE. If it is allowed to burn off as Nature intended, we can finally start moving forward.

Who Has The Time And Motivation to Comprehend The Mess We’re In? Almost Nobody

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If we don’t understand the problem or the dynamics that are generating the problem, it is impossible to reach a solution or practical plan of action.

When it comes time to assess our grasp of the dynamics of this unprecedented era, how do you reckon historians will grade our collective political “leadership,” intelligentsia, central state, corporate leadership and the “common man/woman” citizen? Did we rise to the occasion or did we falter, not in acting to counter the dissolution of the Status Quo, but in simply making a concerted effort to understand the tangled web of lies, corruption, perverse incentives, unintended consequences, simplistic (and utterly misguided) ideologies, not to mention the real-world limits of a supposedly limitless world, that have become the key dynamics of this era?

I suspect future historians (presuming the funding of such scholarly assessments survives) will grade all categories either F or D-. The reasons are not difficult to discern, and it behooves us to understand why we are collectively so ill-prepared to understand our era, much less fix what’s broken before the whole over-ripe mess collapses in a heap.

1. Intellectual laziness. Very few people are willing to work hard enough to figure things out on their own. It’s so much easier to join Paul Krugman dancing around the fire of the Keynesian Cargo Cult, chanting “aggregate demand! Humba-Humba!” while waving dead chickens than ditch reductionist, naive ideologies and actually work through an independent analysis.

2. Independent thinking is an excellent way to get fired, demoted or sent to Siberia. Though America claims to value independent thinking, this is just another pernicious lie: what America values is the ability to mask failing conventional ideas and systems with a thin gloss of “fresh thinking.”
In other words, what the American state and corporatocracy value is the appearance of independent thinking, not the real thing. Since the real thing will get you fired, everyone who works for government or Corporate America masters the fine arts of producing simulacra, legerdemain and illusion. This only further obscures the real dynamics, making legitimate analysis that much more difficult.

3. Relatively few have any incentive to question authority, the state or the corporatocracy. Humans excel at figuring out which side of the bread is buttered, and who’s lathering on the butter: self-interest is the ultimate human survival trait (we cooperate because it serves our self-interest to do so).

While we cannot hold the pursuit of self-interest against any individual–after all, who among us truly acts selflessly when push comes to shove?–we can monitor the monumentally negative consequences of self-interest and complicity on the systems and Commons we share.

When roughly half of all households are drawing direct cash/benefits from the central state, how many of those people are interested in doing anything that might put their place at the feeding trough at risk? Sure, people will grouse about this or that (usually related to the conviction that they deserve more or have been cheated out of “their fair share”), but as long as the government payments, direct deposits and benefits keep coming, what possible motivation is there for the recipients to devote energy to investigating the potential collapse of the gravy train?

Corporate America is no different. The store may be devoid of customers, but the employees will strive to look busy to keep the paychecks coming until the inevitable lay-off/implosion occurs. How many Corporate America employees will critique their way out of a paycheck? In an environment this difficult for job-seekers, you’d be nuts to bother figuring out why your division is failing, knowing as you do that the truth will result in the “termination with extreme prejudice” of the naive fools who presented the truth as if it would be welcome
.
Does anyone seriously imagine that any employee of a bloated bureaucracy will ever voluntarily challenge the squandering of revenues when that might cost them their own paycheck, bonus, contract for their brother-in-law, etc.? A few protected people (professors with tenure, for example) can be “brave,” but their “bravery” is cheap: their protestations cannot trigger termination with extreme prejudice, so the gesture of resistance is just that, a gesture.

4. Those relative few who might have a real motivation to undertake independent analysis have little time to pursue this noble project. They are working absurd hours and enduring absurd commutes. Between getting the bundles of diapers into the elevator and planning what to cook for dinner, there is precious little time or energy left for figuring out the mess we’re in. Just getting to a second or third job can suck up a significant amount of time, money amd energy.

And so the busy employee/sole-proprietor/contract worker listens to NPR or some talk radio program for a few minutes, reinforcing their ideology of choice, and turns on the “news” (laughably bad propaganda churned up with “if it bleeds, it leads”) as background noise and spends whatever personal time they have on Roku, Netflix, Facebook, Twitter, email, etc. seeking distraction or solace from the daily workload.

In a strange irony, there are plenty of citizens who have plenty of time (recall that Americans manage to watch 6-8 hours of TV a day), but their marginalized status and dependence on the state drains them of motivation to do anything but seek amusement and distraction.

If we don’t understand the problem or the dynamics that are generating the problem, it is impossible to reach a solution or practical plan of action. In other words, the four points above doom us just as surely as the dynamics of insolvency, corruption, debt servitude, Tyranny of the Majority, etc. etc. etc.

Choose your metaphor of choice, but rearranging the deck chairs on the Titanic has a nice ironic texture in an election year, when the “news” will be focusing on rearranging the political deck chairs on the first class deck–at least when there’s no celebrity ruckus or “if it bleeds, it leads” to crowd out what passes for “hard news” in a regime dedicated to the distractions of bread and circuses.

Everything’s Fixed, Everything’s Great

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

A brief summary of everything that’s been fixed.

Much to the amazement of doom-and-gloomers, everything’s been fixed and as a result, everything’s great. The list is impressive: China: fixed. Japan: fixed. Europe: fixed. U.S. healthcare: fixed. Africa: fixed. Mideast: well, not fixed, but no worse than a month ago, and that qualifies as fixed.

Let’s scroll through a brief summary of everything that’s been fixed.

1. China’s economy. It was slowing down, which would have been bad for the global economy. But the recent PMI (preliminary made-up indicator) readings have been the strongest since the Great Leap Forward.

The basic story here is China needs a million more of everything: a million more concrete highrises, a million more airports, a million more miles of highway, and so on. And because there are 200 million rural peasants anxious to open nail shops in all those empty ghost cities, there is no end to growth in China.

And thanks to central banking and a wide-open spigot of credit, there’s also a million times more leverage and debt in China. It’s a perpetual growth machine.

There are growth stories on top of growth stories in China. There are 300 million diabetics and pre-diabetics in China right now–the equivalent of the U.S. population. Think of all the growth possibilities for diabetes clinics in those ghost cities. All the owners of those nail shops and diabetes clinics will be getting so rich, Goldman Sachs will be needed to sell them safe investments like Detroit Muni Bonds.

2. Japan’a Abenomics has worked, and Japan is back. Need proof? Just look at the Japanese stock market: it’s up. What more do you need? Hello Kitty is expanding its market share of the global Cute market–yee-hah!–and the 2020 Olympics will be a growth story for seven years–a Biblical cornucopia of growth, growth, growth.

3. Europe is on the mend. European stocks are at 5-year highs–proof everything’s fixed. Greece’s budget is near surplus (if you exclude interest payments on their debt), and there’s light at the end of the tunnel on Europe’s debt crisis. The fix is LTRO (long-term ripoff operation)–basically another perpetual growth machine funded by free money issued by the European Central Bank. Can’t pay your debts? No problem, just borrow more!

It won’t take more than a couple trillion euros to set things right and get things moving.

Sure, unemployment in some countries is 25% (or is it 40%? hard to be sure), but that’s stabilized, and there are sure to be more jobs for waiters/waitresses as tourism works its growth magic.

4. The U.S. healthcare system is fixed, thanks to ObamaCare. I can’t understand the details, of course, but then neither can anybody else, and that’s the beauty of it: there’s a practically unlimited demand for people who know how all this works. Job growth will be through the roof.

Here’s a summary of how ObamaCare works. There’s three levels, kind of like a credit card: silver, gold and platinum. Silver is like your current lousy plan, only the government will give you $167 if your plan costs more than $10,000 (or maybe it’s $1,670–nobody knows).

The Gold level is much better, similar to gold-plated healthcare plans enjoyed by government workers, but it costs a lot more. Platinum is equivalent to what everyone in other advanced democracies gets from national healthcare, only it costs twice as much here in the U.S.

But hey, you get what you pay for, and that’s why the U.S. healthcare system is the best in the world–we spend twice as much per person as anyone else.

If you refuse to get insurance, the government penalizes you $167–or maybe it’s $1,670. Nobody really knows yet because there are thousands of pages of fine print to sort out.

5. America has its own perpetual money machine to fuel growth. The Federal Reserve creates money and then buys Treasury bonds. The Federal government sells the bonds and uses the cash (just created by the Fed) to pay for everything: $300 million a piece F-35 fighters, 47 million Food Stamp SNAP vouchers, bridges to nowhere, tax breaks for billionaires, you name it.

And here’s the beauty of it: there’s no limit to this money machine. The Fed can print a gazillion dollars and buy a gazillion dollars of Treasury bonds so the government can spend a gazillion dollars. There is no consequence of this, it can go on forever. That means we can borrow as much money as we want to buy everything we want, forever.

So you see, everything’s fixed, because everybody that can create their own money can do so without limit or consequence. It’s a perpetual money machine, and that fuels a perpetual growth machine. No limits on credit and debt means no limit on spending. Free money for everyone and everything–it’s unbelievably easy.

Doom and gloomers have been wrong, just like Paul Krugman said. The solution to every problem is at hand: create more money and credit, in ever larger sums, until a tsunami of cash washes away all difficulties.

Please note this is a satire.

Looks like the Fourth Turning is intersecting with a few more cycles to set up an epic show in the next decade. Get out the popcorn.

Submitted by Charles Hugh Smith from Of Two Minds

When Does This Travesty of a Mockery of a Sham Finally End?

Intersecting global crises cannot be papered over with artifice and propaganda for long.

We all know the Status Quo’s response to the global financial meltdown of 2008 has been a travesty of a mockery of a sham–smoke and mirrors, flimsy facades of “recovery,” simulacrum “reforms,” and serial can-kicking, all based on borrowing and printing trillions of dollars, yen, euros and yuan, quatloos, etc.

So when will the travesty of a mockery of a sham finally come to an end? Probably around 2021-22, with a few global crises and “saves” along the way to break up the monotony of devolution. The foundation of this forecast is this chart I prepared back in 2008:

This is of course only a selection of cycles; many more may be active but these four give us a flavor of the confluence of crises ahead.

Cycles are not laws of Nature, of course; they are only records of previous periods of growth/excess/depletion/collapse, not predictions per se. Nonetheless their repetition reflects the systemic dynamic of growth, crisis and collapse, and so the study of cycles is instructive even though we stipulate they are not predictive.

What is predictable is the way systems tend to follow an S-curve of rapid growth with then tops out in excess, stagnates in depletion and then devolves or implodes. We can see all sorts of things topping out and entering depletion/collapse: debt, financialization, the Savior State, Chinese auto sales, oil production, and so on.

Since each mechanism that burns out or implodes tends to be replaced with some other mechanism, this creates the recurring cycle of growth/excess/depletion/collapse.

I plotted four long-wave cycles in the first chart:

1. The credit expansion/renunciation cycle. a.k.a. the Kondratieff cycle. Credit expands when credit is costly and invested in productive assets. Credit reaches excess when it is cheap and it’s dumped into malinvestments, and as collateral vanishes then credit is renunciated/written off.

This is inexact, but obviously the postwar cycle of expansion has ended and is now rolling over into the collapse/renunciation stage.

2. The generational cycle of four generations/80 years described in the seminal book The Fourth Turning. American history uncannily tracks an 80-year cycle of crises and profound transformation: 1860 (Civil War), 1940 (world war and global Empire) and next up to bat, 2020, the implosion of the debt-based Savior State and the financialized economy.

3. The 100-year cycle of inflation-deflation described in the masterful book The Great Wave: Price Revolutions and the Rhythm of History. The price of bread remained almost constant in Britain throughout the 19th century. In contrast, the 20th century has been characterized by inflation–the U.S. dollar has lost approximately 96% of its value since the early 20th century.

Another characteristic of this cycle is wage stagnation: people earn less even as costs of essentials rise, a dynamic that inevitably leads to political crisis and upheaval.

The end-game for inflation is destruction of fiat currencies, i.e. hyper-inflation or complete loss of faith in paper money. This is of course “impossible,” just like World War I, the Titanic sinking, the global meltdown of 2008, etc. Impossible things happen with alarming regularity.

4. Peak oil, which does not mean the world runs out of oil, it simply means oil production no longer rises to meet demand and eventually declines even as new fields are brought online.

Many observers are confident that fracking and other technologies will enable current energy proligacy to continue unabated as the U.S. replaces oil and coal with newly abundant natural gas. Not only will this lessen American dependence on non-U.S. oil exporters, but domestic energy will spark a jobs boom as well: Fuel to Burn: Now What? (via Joel M.).

 

 

“The reduced vulnerability of North America — and the world market — to oil price spikes also has deep consequences geopolitically, including the reduced strategic importance to the U.S. of changes in oil- and natural gas-producing countries worldwide,” Mr. Morse said in a recent 92-page report called Energy 2020. ”Pressures towards isolationism in the U.S. will likely grow, with consequences for global stability that can only just begin to become understood.”

 

“In a world of high energy prices, the potential economic activity generated by this wave of new hydrocarbon production is extraordinary and should strongly boost national output, increase incomes, create wealth, stimulate consumption and create jobs,” according to Citigroup.

 

Mr. Morse of Citigroup forecast that North American oil production could reach an astounding 27 million barrels a day by 2020, almost twice the rate of production of 15 million barrels a day at the end of 2011. Production from the United States could grow to 15.6 million barrels a day by 2020, up from nine million barrels a day in 2011.

 

If that trend continues, the growth in oil and natural gas supplies in the next decades could turn the United States into a top energy exporter, rivaling some members of the Organization of the Petroleum Exporting Countries. Natural gas could be sold to Mexico and Canada (because exploiting oil sands is so energy-intensive, Canada might have to import natural gas to produce its oil). Refined petroleum products, and even crude oil, could find customers in Europe and Latin America. Coal could be exported to China.

 

With less gasoline demand, the nation’s surplus refining capacity means the United States is already exporting petroleum products — like gasoline and diesel. The United States is now the top exporter of refined products, just ahead of Russia.

 

James Brick, an energy analyst with Wood Mackenzie, a research firm, said in a recent report that by 2030 the United States could end up exporting 500 million tons of coal a year, 3.2 billion cubic feet a day of natural gas and 2.5 million barrels a day of oil products.

 

All this surplus energy in North America sounds wonderful, but that doesn’t mean the world as a whole has escaped Peak Oil. Even if these projections turn out to be accurate, that expansion of production will not replace the loss of production as supergiant fields in Mexico, the North Sea and the Mideast enter the depletion phase. Yes, technology can extract more oil, but technology is costly. The days of cheap natural gas may have arrived, but the days of cheap oil are numbered.

How all this plays out is unknown, but even raising U.S. production by 10 million barrels of oil equivalents a day–quite a challenge in the real world despite the easy-to-pen hype– might not be enough to maintain current production levels. Since several billion more people desire the U.S.-type lifestyle of energy profligacy, then what are the consequences of the mismatch between global demand and supply?

We can also posit that “good-paying jobs” in developed economies are also tracking an S-curve. The post-industrial decline in labor has many causes, but the Internet is a key factor going forward as the Web leverages all sorts of productivity gains without the pesky overhead, costs and trouble of workers.

This reality was masked by the initial boom in Web infrastructure that topped out in 2000, and again by the credit-fueled global malinvestment in real estate that topped out in 2007. Now that those bubbles have popped, the reality of long-term employment stagnation can no longer be masked.

Credit bubbles are not engines of employment, they are only engines of mis-investment and wealth destruction on a grand scale.

A number of other questions arise as we ponder these dynamics. How “cheap” will all that cheap energy be to those without full-time jobs? How will 100 million workers support 100 million retirees, pensioners, welfare recipients and parasitic Elites as costs rise and wages stagnate?

The Status Quo is unsustainable on a number of fundamental fronts. How long it can maintain the facade of stability and sustainability is unknown, but the global willingness to squander four years on artifice and propaganda suggests that another decade will fly by and the end-game will be at hand whether we approve of it or not.

I address these dynamics in various ways in all my books:

Resistance, Revolution, Liberation (Kindle edition)
Survival+: Structuring Prosperity for Yourself and the Nation
Survival+ Kindle edition
Survival+ The Primer
Primer Kindle edition
Weblogs & New Media: Marketing in Crisis
An Unconventional Guide to Investing in Troubled Times (print edition)
An Unconventional Guide Kindle edition.