Decline of the Empire — Now What? (dave)

 

 

November 05, 2009

Decline of the Empire — Now What?

All the world’s a stage,
And all the men and women merely players
They have their exits and their entrances
And one man in his time plays many parts
—Shakespeare

The greatest action is not conforming with the world’s ways…
The greatest effort is not concerned with results…
—the Buddhist teacher Atisha

It is now 4 months since I wrote The Decline of the American Empire. The time is ripe for a follow-up. I will tell a sad story first, talk a little about our precarious banking system, and then relate the lessons learned back to my Decline theme. At the end I will talk about what all this means for the loosely structured peak oil “movement”.

This is important stuff, folks. America’s tragic decline is affecting your life everyday. I urge you to read through this through from beginning to end, even if doing so is painful. (As usual, I feel compelled to document everything I write so that current and future readers fully understand the context of my remarks.)

CIT Files For Bankruptcy, Taxpayers Lose

I was watching Tech Ticker’s Aaron Task and Henry Blodget interview Professor William Black, a former top federal banking regulator, on the CIT bankruptcy (AP, Yahoo). Why should you care about CIT? “For over 100 years, CIT has provided lending, leasing & advisory services to small and middle market businesses.” But now—

[CIT’s] Chapter 11 filing is one of the biggest in U.S. corporate history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors…

CIT is the financier for about 2,000 vendors that supply merchandise to more than 300,000 stores, many of which are gearing up for the critical holiday shopping season. They rely on the lender to cover costs ranging from paying for orders to making payroll. Any disruption caused by bankruptcy could wreak havoc on their operations, [said] Joe Alouf, a partner with Eaglepoint Advisors…

“CIT is the 600-pound gorilla in the industry,” Alouf said.

Put that in your pipe and smoke it.

CIT received $2.3 billion from the U.S. Treasury on December 31, 2008 when the Treasury purchased CIT preferred stock and warrants (Bloomberg). CIT’s senior bondholders will receive 70 cents on the dollar but we taxpayers will not get any of that money back.

“We will be following developments very closely with an eye towards protecting taxpayers during the bankruptcy proceeding,” Treasury spokesman Andrew Williams said today in an e-mailed statement. “But as the company’s disclosure on the prepackaged bankruptcy makes clear, with debt holders receiving less than face value of their instruments, recovery to preferred and common equity holders [including the taxpayers] will be minimal.”

[My note: Recovery for preferred equity holders will be “minimal”, that is to say — zero.]

Professor Black comments—

We put ourselves on the hook in a completely inept way where we lose first. We lose entirely as the taxpayers. It’s just like the AIG bailout… [we shouldn’t have had to pay the AIG counter-parties at par, i.e. 100% of claims.]

Why do we keep a Treasury secretary [Tim Geithner] who negotiates supposedly on behalf of the United States of America that does the opposite of what any commercially reasonable person would do … it’s like he burned billions of dollars again in government money, our money, gratuitously.

Blodget then asks “what was the thinking, if we assume that this was not just bad faith, that in fact it’s just incompetence, what was the thinking [by the Treasury] at the time?” Here is the gist of the discussion that follows. Black believes the Treasury, flying in the face of reality, would argue that—

If we [the Treasury] had put ourselves up as senior bondholders in CIT charging a high rate of interest on our $2.3 billion investment, we would have simply increased CIT’s debt obligations rather than providing equity to the company, and CIT would have died. Since CIT could not meet its debt-carry already, we would have made it obvious that they were insolvent.

The Treasury would not admit that CIT was insolvent. Instead, they pretended CIT had a temporary liquidity problem, so they gave them $2.3 billion of the taxpayer’s money. If the Treasury had protected the taxpayer money they put into CIT, it would have exposed CIT as insolvent, which of course they were! Got it?

And now CIT is officially bankrupt, an outcome which was unavoidable. Black comments on the Treasury’s apparent “logic”—

I’m not a psychotherapist… [laughs] … It’s the insanity of not resolving insolvent places, and instead feeding money in, good after bad… it’s a trap, I can’t cause a liquidity crisis by charging much interest, I can’t make myself [a] senior [bondholder], we just hose money down the drain… The answer to accounting fraud is more accounting fraud… You hide the losses, and you let them grow, and you hope they’ll get better.”

Hiding the losses, letting them grow, and hoping they’ll get better is known as Extend & Pretend. Black believes “the [denial] problem stems from regulators’ fears that if the banks recognize a loss on the bad assets [they hold], it will create a domino effect that will wipe out the entire financial system.”

So in the story above, where it says CIT, you could substitute Citigroup, or Bank of America, or Wells Fargo, or JP Morgan Chase, etc. The only difference between CIT and Citigroup is that the latter was deemed Too-Big-To-Fail whereas CIT was not.

That’s the end of this sad story. As you read on, remember Henry Blodget’s important qualification: if we assume that this [CIT deal] was not just bad faith.

Extend & Pretend

This chart from Rolfe Winkler’s Banks’ Capital Cushions: Thicker, But Still Not Comfy scares the bejesus out of me (Figure 1 and the quote below).

Figure 1 — Leverage = Tangible Common Equity/Tangible Assets. From Winkler: “Measured by tangible common equity, the biggest banks are levered [on average] 20 to 1, a solid improvement from last quarter’s 24 to 1 and a giant leap from 30 to 1 in the third quarter a year ago. (These figures exclude off-balance sheet assets, which will increase leverage when they are consolidated beginning next year)… Now it’s up to regulators to deliver higher capital requirements so that banks can withstand the end of government support. After all, 20 to 1 leverage is still very high. It only looks prudent against the insane levels reached last year.”

Tangible common equity is the crucial measure of bank capital because it is the primary cushion banks have to absorb losses. When it gets too low, creditors panic and bank runs ensue. From a systemic risk perspective, it’s great that banks are rebuilding this cushion.

The crucial question is how they’ll fare in a less favorable monetary environment. While consumer prices show little sign of inflating, asset prices are another story. Interest rates near zero have encouraged investors to chase risky assets. If that trend continues, the Fed may have to unwind its balance sheet and raise rates sooner than it would like, putting banks in a tough position.

FBR Capital Markets points out in a recent note to clients that many banks have poured excess liquidity into their securities portfolios, “which could present significant interest rate risk” when the Fed reverses course.

Compared with last year, the top 10 commercial banks have increased the size of their securities portfolios nearly 40 percent, with JPMorgan Chase’s rising over 150 percent.

I discussed the dangers of the carry-trade asset bubble fueled by free dollars in Big Crash Coming?  If asset values suddenly deflate once the Fed unwinds its balance sheet and raises interest rates, the banks will be imperiled to the extent that they have purchased these risky assets to inflate their balance sheets. There are also concerns about increased bond purchases by the banks—see Bank Insolvency Is Not A Dead Issue by Daniel Aaronson and Lee Markowitz.

For bank solvency, loan portfolios may be a greater danger than investments in Treasury bonds or riskier securities (Figure 2).

Figure 2 — As of September 1, 2009, the banks held $3.776 in outstanding real estate loans. Source: FRED.

Here is the crucial passage from Winkler—

And while securities prices are more immediately sensitive to monetary policy, loan portfolios would be impacted as well. Early next year, after the Fed turns off its printing press and after the home-buyer tax credit expires, real estate prices could resume falling. This will put more owners upside down on their loans, keeping default rates high.

Banks are extending loans, pretending that asset prices will recover past peaks, an unlikely prospect if the Fed does its job.

[My note: “Upside down on their loans” refers to negative equity in which you owe more on your mortgage than your house is worth. This is also called being underwater.]

Extend & Pretend. This is a variation on the CIT theme presented above, in which the Treasury extended credit (through stock purchases) to CIT and pretended they were solvent.

The real estate market in the United States continues to be very shaky. I could write an entire column on this subject, so I will just touch on a few high points here, relating the market weakness to officially sanctioned delays in which banks do not fully account for their actual losses. To wit—

• From a USA Today report: “Moody’s Economy.com estimates the number of underwater borrowers will peak at 17.4 million in the third quarter of 2010. An even higher estimate comes from Deutsche Bank, which predicted in an August study that the number of homeowners underwater will grow from 14 million (or 27% of all homeowners with mortgages) in 2009 to 25 million homeowners, or 48% of all those with a mortgage, by the time home prices stabilize.” So-called “strategic defaults”—you walk away from your mortgage—rise when people get upside down on their loans. 13.2% of all mortgage loans were in foreclosure or delinquent as of the last Mortgage Bankers Association survey. Foreclosures or delinquencies now threaten prime mortgages, and joblessness is now the major factor driving foreclosures.
• There is a ticking time bomb with maturing pay Option Arm (POA) mortgages. “However, there is a significant problem with POA recasts, as those payments can double or triple at recast, and – due to negative amortization – an estimated 80% or more may owe more than the value at the time of recast. So the risk of POA defaults is both larger and more concentrated than the risk from Alt-A [mortgages]”
• The commercial real estate (CRE) market is still crashing. Calculated Risk reports that “the Moody’s/REAL Commercial Property Price Index (CPPI) … showed commercial real estate prices fell 3 percent in August, and are down almost 41 percent since the peak in October 2007.”

Of course a bank can not re-finance (extend) an Option ARM home mortgage and pretend everything will work out once the property goes into foreclosure. But it is the deteriorating CRE market that makes the Fed nervous.

Prices of existing commercial properties have already declined substantially from the peak in 2007 and will likely decline further. As job losses have accelerated, demand for commercial property has declined and vacancy rates have increased…

As a result, Federal Reserve examiners are reporting a sharp deterioration in the credit performance of loans in banks’ portfolios and loans in commercial mortgage-backed securities (CMBS). At the end of the second quarter of 2009, approximately $3.5 trillion of outstanding debt was associated with CRE, including loans for housing developments. Of this, $1.7 trillion was held on the books of banks and thrifts… Also at the end of the second quarter, about 9 percent of CRE loans in bank portfolios were considered delinquent, almost double the level of a year earlier…

Of particular concern, almost $500 billion of CRE loans will mature during each of the next few years…

[My note: Read Jon D. Greenlee’s full testimony (link above) for all the grim details. He is the Fed’s top bank regulator.]

This is where things get interesting. Federal regulators have issued new guidelines for Extending & Pretending! These guidelines are apparently a kind of “how-to” guide for the banks. The Wall Street Journal reported on the new rules in Banks Get New Rules on Property on October 31, 2009.

Federal bank regulators issued guidelines allowing banks to keep loans on their books as “performing” even if the value of the underlying properties have fallen below the loan amount.

The volume of troubled commercial real-estate loans is skyrocketing. Regulators said that the rules were designed to encourage banks to restructure problem commercial mortgages with borrowers rather than foreclose on them. But the move has prompted criticism that regulators are simply prolonging the financial crisis by not forcing borrowers and lenders to confront, rather than delay, inevitable problems… [i.e. extend & pretend]

Regulators have been expressing increasing concern that problems in commercial real estate could unglue the nascent economic recovery by slamming financial institutions with billions of dollars in new losses. FDIC Chairman Sheila Bair told a Senate subcommittee earlier this month that reworking the terms of these loans could help banks avoid larger losses. She likened it to the push regulators made last year for banks to rework troubled residential mortgages.

About $770 billion of the $1.4 trillion commercial mortgages that will mature in the next five years are currently underwater, according to Foresight Analytics. As of last week, 106 banks had failed this year, the most since 1992—the peak of the savings-and-loan crisis. Regional and community banks especially have been paying dearly for their aggressive push into commercial real-estate lending during the boom years.

This concludes my brief summary of where we stand concerning the real estate markets and looming bank losses. As with the Treasury’s investment in CIT, the strategy of choice is denial—Extend & Pretend. How does this relate to my original article The Decline of the American Empire? It’s no great surprise that the relationship is simple and straightforward.

More Futility—And Bad Faith, Too

In the Decline article I presented the Vicious Circle of Futility—it’s kind of a Buddhist Wheel of American Suffering. Here it is again with the original caption (Figure 3).

Figure 3 — As problems become more intractable over time, our resistance to making real changes to confront those problems, our social inertia, becomes more entrenched. Thus the solution to debt-based economic problems is more debt. The solution to liquid fuels problems is marginally more fuel efficient cars, not alternatives to driving. We study an expansion of the rail system instead of building one to provide an actual alternative to flying or driving between cities. We dream of hypothetical biofuels in the far-off future to solve an oil supply problem in the here & now.

The only real difference between my remarks here and those in my original article is that this time I am relating the vicious circle to the wacky world of make believe bank solvency. And if you think about it, what’s the difference between Extend & Pretend and Futility’s Vicious Cycle? There is no difference. Conceptually, they are identical.

The problem is Bank Solvency. Social inertia manifests as dithering or active obstruction by banks, Federal regulators, the Fed, the Treasury, and the Congress. The President talks pretty, but does nothing of substance. Unrecognized bank losses continue to pile up but resistance to remedial actions and reform in Finance only becomes more entrenched. Policy-makers act as if the crisis does not exist. Futility reigns as we approach a new day of reckoning.

As Professor Black said above, “it’s the insanity of not resolving insolvent places … [but] instead feeding money in, good after bad.” The longer this unwillingness to come to grips with reality goes on, the more likely it becomes that the banking system will blow up again, and again take all of us down with it.

Let us explore another aspect of America’s decline. You will recall that Tech Ticker’s Henry Blodget qualified his question to Professor Black, assuming that this [CIT deal] was not simply a matter of bad faith. He framed his question in terms of Tim Geithner’s incompetence instead. There is little doubt that Geithner is incompetent, but that’s not the whole story.

I am not criticizing Henry Blodget, whom I respect, when I say out loud what he didn’t care to go into: the entire Finance reform issue has been a charade, a matter of Bad Faith, since the October, 2008 post-Lehman meltdown. Here is the legal definition of Bad Faith—

The fraudulent deception of another person; the intentional or malicious refusal to perform some duty or contractual obligation.

In this case, the fraudulent deception has been carried out against the American People by the Too-Big-To-Fail Banks in cahoots with the Federal Reserve, and the Executive (e.g. the Treasury, the regulators) and Legislative branches of government. It is plainly the duty of the Federal government, if not that of the banks, to reduce our exposure to insolvent banks which pose a systemic risk should they fail.

The law always imputes intentionality. Hence the definition of Bad Faith. But I don’t care whether this is a complex conspiracy—a conscious collaboration—between the banks and policy-makers, or whether it’s just that all these people see things exactly the same way—an unconscious collusion. Nothing relies on this distinction, for it does not change the ultimately destructive effects of an unreformed Finance system.

(However, if you follow the money, apparent influence is exactly where you’d expect it to be. And if you look at Tim Geithner’s appointment book, he does spend an inordinate amount of time on the phone with the heads of Goldman Sacks, Citigroup and JP Morgan Chase. As usual, we can prove nothing.)

In perpetuating this fraud, Wall Street & Washington ensure that we are forever stuck on the Futility merry-go-round.

I would have to write a book to fully document the persistent pattern of government catering to Big Finance. Like Kevin Phillips, many people have written one or are doing so now. The entire raison d’etre for Simon Johnson’s Baseline Scenario is to tell you about this stuff everyday. So I will only mention a couple egregious recent examples of Bad Faith here. And away we go—

• “The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system” (Bloomberg). For additional details, read the New York Times’ Bill Seeks To Shift Rescue Costs To Big Banks. Barney Frank helped craft this brainstorm, which is called the Financial Stability Improvement Act of 2009.The best part of the “Stability Improvement” legislation decrees that “the identification of systemically dangerous financial firms by federal regulators remain entirely secret, and never be revealed to the public” (Baseline Scenario). This clandestine group of Too-Big-To-Fail institutions will be regulated by “a powerful financial services oversight council, led by the Treasury secretary and composed of top regulators, to set policy and tougher regulations for the largest companies and mediate disputes between federal agencies. It would also give the Federal Reserve Board a lead role in directly supervising many of the largest financial conglomerates” (New York Times).

The “Stability Improvement” act applies to a super-secret list of institutions who will be regulated by the Treasury secretary and other regulatory ne’er-do-wells. The Fed will supervise this group of never-to-revealed-to-the-public super-sized institutions. No one will be accountable to the public for anything this group does or does not do. Perfect!

The Obama administration and the Congress are putting forward a new plan to handle the next, inevitable round of Too-Big-To-Fail bank failures instead of breaking up large institutions that pose a systemic risk. Rather than dispose of the problem, the government proposes to drain the rest of the banking system and put ordinary citizens—those of us who are not Masters of the Universe— at risk again. The Powers-That-Be would rather bend over backwards to preserve the status quo than put JP Morgan Chase or Citigroup out of the rent-seeking business (whereby one obtains competitive advantage through political manipulation).

Nobody, including Barney, seems to have asked a pertinent question. What happens when runs on 3 or 4 Too-Big-To-Fail banks cause them all to fail more or less at the same time? See Rolfe Winkler’s article cited above. This would have happened in October, 2008 if then Treasury secretary and former giant vampire squid CEO Hank Paulson hadn’t extorted us—ah, sorry, I meant “scared us silly”—to get $700 billion from Congress to bail out the banks.

What was it Einstein said? Insanity is doing the same thing over and over again and expecting different results.

Here’s a second item from Yves Smith at Naked Capitalism—

• Harper’s Magazine has written up the lengths to which the authorities will go in censoring views that dissent with what is the unstated official policy: that no demand of the banking industry is too unreasonable not to be catered to.

  The object lesson is the gutting of the falsely-branded derivatives reform bill. It arrived with a loophole so large you could drive a truck through it, namely that customized derivatives were not covered. So this bill will do nothing to impede the growth of complex opaque products; in fact, it encourages it, since banks will have no oversight if they tweak a product so that is can be deemed “customized.” It was further weakened by excluding most of the banks in America and by excluding a whole swathe of end users. The final insult was making the derivatives clearing house self-regulating.The hearings on the bill had testimony scheduled only from what amounted to industry flacks. Someone apparently realized at the 11th hour that that might not go over with the correctly angry public too well. So less than 24 hours prior to the session before the House Financial Services Committee, an invitation was issued to Rob Johnson, a former managing director at Bankers Trust Company and former economist at the Senate Banking Committee and Senate Budget Committee.

And what happened to genuine reformer Rob Johnson? Congresswoman Melissa Bean (D, Ill), filling in for the curiously absent Barney Frank, cut his testimony short. At first, Johnson refused to quit.

Johnson gamely continued. “When I hear the testimony today that are largely financial institutions and end users, I believe that I represent a third group that comes to the table, which is the taxpayers, the working people of the United States,” he said.

But Melissa, whose 2009-10 campaign committee has collected $107,700 from the Securities and Investment industry, cut Johnson off again. And then came the final insult, not only to Johnson, but to all of us—

The House Financial Services Committee has refused to publish [Johnson’s] testimony, offering “the dog ate my homework” level excuses, first that they hadn’t gotten it, then that it was in the wrong format, then that their IT department was experiencing difficulties (always a good one when real reasons are running thin). The last one was pure Catch-22: that he had gotten his written testimony in too late.

You can read Johnson’s statement to the committee, which they themselves never heard or published, at the Roosevelt Institute.

It’s Bad Faith everywhere you look. There is no escaping the Futility’s Vicious Circle in the current, entrenched political arrangement. As with the all-encompassing Buddhist Wheel of Suffering, our tragic Fate appears to be Cast In Stone.

Now What?

Mike Shedlock (Mish) of Global Economic Analysis asks Where the Hell Is The Outrage? That’s a good question, but it appears that the American people are now incapable of fostering the revolutionary acts required to take down the corrupt clowns that govern us. If we elect a new set of bozos in 2010 and 2012, we will quickly find out that only the words have changed—the song remains the same.

If you doubt that entrenched power and corruption runs very, very deep, I suggest you watch Bill Moyers’ interview with Glenn Greenwald. Washington is now a place unto itself. Those of us outside the Beltway are merely a backdrop that lends the Capital a false legitimacy. Empires in decline always go through this phase.

Those of us who have written about the dangers of peak oil, declining domestic oil production, and recessions accompanying oil price shocks must come to grips with the Vicious Circle of Futility. If our goal was to promote public interest and understanding in these problems, we have succeeded to some extent. Sophisticates in the university and investment communities know all about peak oil. It’s mostly denizens of our Nation’s capital who have never heard of it.

We must also come to grips with Bad Faith. If our interest was to foster policy actions to mitigate future oil supply problems, we have failed and will always fail. We are merely bit players on the Wheel of Suffering. In this, we do not differ much from those concerned  about health care costs—Congress has done nothing, climate change—Congress has done nothing, and Financial Reform—Congress has done nothing. In this sense, we are like any other group with a cause, no more, no less.

(Of course, many would argue that peak oil is a civilization-changing issue, and they are right. But we are living & doing things now, not a decade from now or two decades from now.)

This is not to say that we have wasted our time raising concerns about energy availability—far from it. I am merely describing the hand we’ve been dealt. We have to play the cards we’re holding. Progress is always an illusion anyway. Oil made lots of stuff possible, but the Really Big Picture tells us that oil comes and oil goes.

Many people don’t realize that it’s hope that’s killing them. Almost invariably, our greatest hopes are dashed. When we realize that our hopes are unattainable, disillusionment and bitterness often follow. And then, maybe, wisdom. This is the Human Condition. It is our Fate to live in Times when we are much closer to the end of the American Empire than we are to its beginning. When life gives you lemons, make lemonade.

Contact the author at dave.aspo@gmail.com

Economic Collapse A Mathematical Certainty

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interesting analysis:

Economic Collapse a Mathematical Certainty –

Top 5 Places Where Not To Be

Text For Economic Collapse
A Mathematical Certainty
By Jim Kirwan
8-6-11

From New America Productions 2011   “There is no greater disaster that to underestimate danger. Underestimation can be fatal.   The Dollar Collapse will be the single largest event in human history. This will be the first event that will touch every single living person in the world. All human activity is controlled by money. Our wealth, our work, our food, our government even our relationships are affected by money.   No money in human history has had as much reach, in both breadth and depth as the dollar. It is the defacto world currency. All other currency collapses will pale in comparison to this “big one.” All other currency crises have been regional and there have always been other currencies for people to grasp onto. This collapse will be global and it will bring down not only the dollar but all other fiat currencies as they are fundamentally; no different.   The collapse of currencies will lead to the collapse of all paper assets. The repercussions to this will have incredible results worldwide. The dollar is the world’s currency. It supports the global economy in setting foreign trade; most importantly the petro-dollar trade. This fuels our corporate vampires and acquires and harvests’ the wealth of the world.   The corporate powers suppress real assets like natural resources and labor to provide themselves with massive profits. The fascist statists, collectivist’s model provides the money to the economy to fun an ever-increasing federal government. That government then grows larger and larger, enriching its minions, with jobs to control their fellow citizens. Finally to come full circle; the government then controls other nations through the military-industrial complex.   This cycle will be cut when the mathematical and inevitable collapse of the dollar occurs. In order for our debt-based money to function we must increase the DEBT every year in excess of the debt and interest accrued the year before, or we will enter a deflationary death spiral. When Debt is created, money is created. When the debt is paid-off money is destroyed. There is never enough to pay off the debt because there would be not one dollar in existence,   We are at a point where we either default on the debt, willingly or unwillingly or create more money or debt: To keep the cycle moving. The problem is if you understand anything about compounding interest is that we are reaching the hockey-stick-moment (on the graph that is the moment when everything goes vertical); where the more debt that is incurred the more debt that is incurred the less effective it is: And this leads us to hyper-inflation. There are only two actors needed for this hyper-inflation: The lender of last resort, or the FED, and the spender of last resort the government. These two can and will blow up the system.   I believe they will wait until the next crises and the whiff of deflationary depression before they fire up the printing presses. That crisis is coming very soon, at the end of the summer or fall. The money and emergency measures are worn-out. The fact that none of the underlying problems that caused the 2008 crises have been resolved: The only thing that has happened is that instead of corporate problems we now have national problems.   In this movie Greece will play the role of Leman Brothers and the United States will play the role of AIG. The problem is there is no where (left) to kick the can down the road: And there is no world-government to absorb the DEBT- yet. So this leads me to the top five places NOT to be when the dollar collapses.   Number one, Israel. This Anglo-American beachhead in the Middle-East was first conceived by the most powerful family in the world; the Rothschilds in 1917. The Balfour Declaration said that there will be a Zionist Israel , years before WWII, and the eventual establishment of Israel. Israel has not been a very good neighbor to the Muslim nations: And has always had the world’s two biggest bullies on the block at its back. When the dollar collapses the United States will have much too much on its plate, both domestically and internationally to worry about such a non-strategic piece of land. This will leave Israel very weak at a time when tensions will be high. This very thin strip of desert land will not be able to withstand the economic realities of needing to import its food and fuel or the political reality of being surrounded by Muslims.   Number two, Southern California, the land of fruits and nuts turns into Battlefield Los Angeles . Twenty-million people packed into an area that has no water and thus food is not good to say the least. Throw on top of the huge wealth disparities, and the proximity to a narco-state and this does not bode well. We have seen riots from Rodney King. What will happen when the dollar is destroyed and food and fuel stop coming into this area? People will get desperate and do crazy things especially when a huge proportion of its citizens are on anti-depressants. If food and fuel cannot get in, what about Prozac? At a time when people’s worlds are falling apart they lack the ability to deal with this new paradigm. If people come off these drugs too fast they will suffer psychotic breaks and you will thousands of shootings or suicides.   Number three, England the land of the former Big Brother and the Empire of the worldwide slave and drug trade; will suffer heavily.   The “Stiff upper lip” that the British Elite ingrained in to the sheeple will not work anymore, as the British population explodes. The humans character will sacrifice for a foreign enemy, but not if the enemy has always been the elite. The Anglo-American Empire may pull off another false flag to distract its population but I feel this collapse will happen before they pull it off. This will make all eyes point at the British Elite as being solely responsible for this catastrophe. We have seen massive riots for soccer-matches with Hooligans. What will happen when this island with very little food and fuel gets cut off?   Number 4, New York City ; another large urban area living too high on the dollar-hog. There is little doubt that all of the wealth in New York City , New Jersey , and Connecticut is derived off of Wall Street Wealth. The savings and investments of the whole nation and much of the world flows through this financial capital. As the world wakes up to the massive financial fraud; this will lead to the destruction of capital like we have never seen before (the picture is of NYC in ruins just as Berlin looked after the West bombed it into Oblivion at the end of WWII).This will have tremendous effects upon the regional economy, as people driving in Mercedes suddenly wonder where their next meal is coming from.   Number five, Washington D.C. The political collapse of the Federal Government will reek havoc on the hugely inflated local economy as more and more states find it necessary to assert their natural control the federal government will suddenly lose power and importance, as the whole world suffers from a global Hurricane Katrina (the city in flames). The money that they create and spend will become worthless and government minion’s pensions will evaporate. Millions that once relied upon the ability to force others to send their money to them, will learn that the real power has always been at the most local level. Massive decentralization will be the answer to ‘Globalization Gone Mad. ‘ Local families and communities will forego spending money and power out of their communities as they will care about their next meal and keeping warm. As Ayn Rand once said: “You can ignore reality, but you cannot ignore the consequences of ignoring reality.”   To sum those areas that have lived highest on the hog on the dollar-paradigm will most-likely be the worst places to live, when the dollar collapses. Many of you will see this video with passing interest; but rest assured this dollar collapse is coming!   It is a mathematical inevitability. We will not be as fortunate to muddle through this collapse, like we did in 2008, when it was a corporate problem.” This time around it is a national and a global problem. The global Ponzi-Scheme has run out of gas: As the demographics decline; as cheap abundant oil declines, as hegemonic power declines: This comes at a time when we reach the exponential or collapse-phase of our money.   The irresistible force paradox says; “what happens when an unstoppable force meets an immovable object: We are about to find out, when infinite money hits a very-finite world!”   http://www.youtube.com/watch?v=b3-vwYJiD8g&feature=youtu.be   The video was read and occasionally paraphrased from an article Written By: Silver Shield Titled: Top 5 Places NOT To Be When The Dollar Collapses; transcribed by Jim Kirwan

Disclaimer

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Economic Collapse A Mathematical Certainty

 http://www.youtube.com/watch?v=b3-vwYJiD8g

Posted on November 14, 2011 by Gekko

via YouTube

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Living Off the Grid in California’s Badlands

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“Chicago” Joe Angio and his wife Anna did everything by the book to secure their slice of the American Dream. They earned college degrees, started a small business, bought a house and pair of cars, paid their taxes and credit-card bills on time. But when the economy tanked, so did the dream. Between two jobs they could barely pay their mortgage, reaching a point where they had to choose which creditor to shortchange at the end of the month in order to keep the lights on. With foreclosure no longer a matter of if, but of when, the couple looked on the Internet for the ideal place to lay low, spend less and experiment with solar power to “get more for our buck out of our environment.” They bought a used RV and went off the grid. Way off.

Slab City, their home for the past three months, is a squatters’ camp deep in the badlands of California’s poorest county, where the road ends and the sun reigns, about 190 miles southeast of Los Angeles and hour’s drive from the Mexican border. The vast state-owned property gets its name from the concrete slabs spread out across the desert floor, the last remnants of a World War II–era military base. In the decades since it was decommissioned, dropouts and fugitives of all stripes have swelled its winter population to close to a thousand, though no one’s really counting. These days, their numbers are growing thanks to a modest influx of recession refugees like the Angios, attracted by do-it-yourself, rent-free living beyond the reach of electricity, running water and the law. And while the complexion of the Slabs, as the place is locally known, may be changing in some ways, the same old rule applies: respect your neighbor, or stay the hell away.

“It’s pretty much as close to the Old West as you’re gonna get. Most of us don’t own guns or none of that garbage, but if we have problems, we take care of [them],” says Ray, 56, a former drug addict turned born-again Christian who has traversed the country six times with a giant wooden cross on his back. Katie Ray, 30, a perennial visitor from Oakland, Calif., calls the place a “postapocalyptic vacation zone.” (PHOTOS: After Foreclosure: A Photographer’s Requiem for the American Home)

Although Slabbers tend to defy easy characterization, de facto neighborhoods (“Poverty Flats,” “Lows”) and tribes have emerged. There are Year-Rounders who brave the 120°F summer inferno, and Snowbirds who land from as far as Canada with their souped-up RVs and pensions, soul-searching Gypsy Kids who arrive by train with little more than the ragged clothes on their back, Spaz Kids and their electro-psychedelic outdoor parties, and Scrappers who risk life and limb to collect shrapnel from the gunnery range that flanks the camp, where Navy SEAL teams train year-round (and where rumor has it they prepared for the Osama bin Laden raid). That’s to say nothing of the rowdy bikers who pass through, or the meth-addled loners on the outer edges inclined to greet a trespasser with a gunshot. If the Burning Man festival were a permanent settlement instead of a weeklong escape — remixed with a hard dose of reality — this might be it.

“The Last Free Place in America” lives up to its nickname. Want to hang out nude in thermal mud baths or skateboard stoned in the bowl of an Olympic-size pool? Go for it. In the mood to construct outlandish pieces of art with scrap metal, dig an SUV-size trench for no particular reason or play 18 holes of golf on a grassless course to the sound of bombs in the distance? This is the place. Yet despite the anything-goes reputation, those who stick around the Slabs long enough insist they are made to feel welcome, provided they have the right attitude. Free meals and entertainment are on offer, capped by Saturday-night concerts at the Range, a clapboard venue that showcases live acts of varying quality. This bohemian aspect was featured in the 2007 film Into the Wild, rare mainstream attention that drew a surge of newcomers to Slab City.

One of them is Sandra “Sandi” Andrews, 61, a nomadic mother of eight without a retirement plan. Her daughter saw the film and figured it was her mom’s kind of place. She was right. “When I first got here, I thought this is a whole new planet, there’s no place like it,” she exclaims. Initial concerns about her safety as a woman alone did not last long. Three years on, she’s surrounded by friends and lives on less than $100 a month, supplementing her Social Security check with paintings she sells to tourists that stop by her studio, a converted school bus. Among her neighbors are two widows in their 90s and an 89-year-old who jokes that she’d die as soon as she set foot in a retirement home. “We’ve all chosen and like Slab City,” Andrews says, “so the caring and sharing is always there.” (MORE: The Tale of a Lost Mortgage)

Well, it depends on whom you ask too. “Builder Bill” Ammon, 63, a year-round resident who manages the Range, says that when he moved from San Diego to the Slabs back in 1999, the community was more tight-knit. “In those days, you could be poor and be separate from the engine of the world and still be all right,” he says, fondly recalling how most everyone talked to one another on their CB radios and exchanged services and goods at regular swap meets to support themselves. “People had skills to offer.” These days, he grumbles, a new generation of youngsters is turning up ill equipped for the sobering demands of life off the grid, looking for handouts. No one is left to go hungry, he notes. But if they don’t adapt, they are given the cold shoulder, which may help explain the rise in petty theft at the camp. “A kind of segregation has developed here” between young and old, he says.

No one would disagree that the Wild West element has its darker side. Hang around the evening campfires a while and strange stories pour out: disappearances, mysterious drownings in the mud baths, the man who showed up in camp with his finger apparently bitten off, claiming he’d been attacked by a cannibal. The border patrol keeps a visible presence, searching for illegal immigrants that ply the region. When there’s serious trouble, though, firemen must drive over from Niland, a derelict town five miles to the west that boasts the closest grocery store and post office. In 40-plus years on the job, Michael Aleksick, 63, the recently retired fire marshal, says he’s been repeatedly shot at, stabbed and gotten in too many fistfights to remember, often with people he knows. Crime has worsened. “The crystal-meth influence,” he says, “has been huge.”

“There’s the good, bad and the ugly,” says “Shotgun” Vince Neill, 38, a newcomer who got his nickname partly for stopping a man from stealing a friend’s solar panels with a blast of rock salt. He first visited the Slabs as a boy and returned this winter with his wife and six children in tow after he lost his audiovisual business and their home in Northern California. Sometimes he worries about his family’s safety, but Neill reckons that Slab City’s problems are proportionate to any normal city in the country. And he has no regrets about bringing his kids (ages 2 to 18). In this case, math and English lessons are rounded out with training on catching scorpions and rattlesnakes. “They’re much happier learning in the great outdoors; it’s the best school,” he says. Still, Slab City is more of a parking spot than a long-term solution: come summer, the family will head to Los Angeles so he can look for full-time work. (VIDEO: The New Poor of Fresno)

Others, like “Radio” Mike Depraida, 60, keep choosing to return. The native New Yorker was living the fast life as a consultant and photographer but grew weary of the hectic pace and an apartment building where he didn’t know his neighbors. A chance visit with friends three years ago got him hooked on the Slabs, and he’s since become the perpetually tan guy in a polo shirt who operates a radio station and greets travelers with a gin and tonic at his makeshift tiki bar. The freedom and mix of people keep him coming back, a dearth of single women notwithstanding. “Why are these some of the most intelligent people I’ve met in my life?” he asks aloud. “I came to the conclusion that if you’re smart enough to get out of the rat race, well, then, you’re pretty damn bright.”

Chicago Joe and Anna are proof positive. They ended up parking their trailer in East Jesus, a renegade open-air art space with Mad Max accents. The view outside their window features a half-buried coach bus and, beyond that, a giant mammoth made of tires; their neighbors include an ex-chef, a documentary filmmaker and a wandering magician cum tattoo artist. What started as an adventure has settled into a routine filled with solar projects and other odd jobs that will keep them busy and fit. Joe’s already lost 80 lb. “People back home still think we’re crazy for doing what we’ve done,” he says. “It’s not for everyone, but this lifestyle has grown on us, tremendously.” The couple swear their relationship has also improved because they no longer fight about money. It’s not hard to understand why: their living expenses have dropped from about $4,000 to $200 a month. Less than their electricity bill when they owned a house.

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Decline of the Middle Class as Metaphor for the Decline of America

>

22 Statistics That Prove The Middle Class

Is Being Systematically

Wiped Out Of Existence In America

Michael Snyder | Jul. 15, 2010, 12:21 PM | 3,057,159 | 446

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• Americans Gone Wild

The 22 statistics that you are about to read prove beyond a shadow of a doubt that the middle class is being systematically wiped out of existence in America.The rich are getting richer and the poor are getting poorer at a staggering rate.  Once upon a time, the United States had the largest and most prosperous middle class in the history of the world, but now that is changing at a blinding pace.

See proof of the Middle Class extermination –>

So why are we witnessing such fundamental changes?  Well, the globalism and “free trade” that our politicians and business leaders insisted would be so good for us have had some rather nasty side effects.  It turns out that they didn’t tell us that the “global economy” would mean that middle class American workers would eventually have to directly compete for jobs with people on the other side of the world where there is no minimum wage and very few regulations.  The big global corporations have greatly benefited by exploiting third world labor pools over the last several decades, but middle class American workers have increasingly found things to be very tough.

The reality is that no matter how smart, how strong, how educated or how hard working American workers are, they just cannot compete with people who are desperate to put in 10 to 12 hour days at less than a dollar an hour on the other side of the world.  After all, what corporation in their right mind is going to pay an American worker ten times more (plus benefits) to do the same job?  The world is fundamentally changing.  Wealth and power are rapidly becoming concentrated at the top and the big global corporations are making massive amounts of money.  Meanwhile, the American middle class is being systematically wiped out of existence as U.S. workers are slowly being merged into the new “global” labor pool.

What do most Americans have to offer in the marketplace other than their labor?  Not much.  The truth is that most Americans are absolutely dependent on someone else giving them a job.  But today, U.S. workers are “less attractive” than ever.  Compared to the rest of the world, American workers are extremely expensive, and the government keeps passing more rules and regulations seemingly on a monthly basis that makes it even more difficult to conduct business in the United States.

So corporations are moving operations out of the U.S. at breathtaking speed.  Since the U.S. government does not penalize them for doing so, there really is no incentive for them to stay.

What has developed is a situation where the people at the top are doing quite well, while most Americans are finding it increasingly difficult to make it.  There are now about 6 unemployed Americans for every new job opening in the United States, and the number of “chronically unemployed” is absolutely soaring.  There simply are not nearly enough jobs for everyone.

Many of those who are able to get jobs are finding that they are making less money than they used to.  In fact, an increasingly large percentage of Americans are working at low wage retail and service jobs.

But you can’t raise a family on what you make flipping burgers at McDonald’s or on what you bring in from greeting customers down at the local Wal-Mart.

The truth is that the middle class in America is dying — and once it is gone it will be incredibly difficult to rebuild.

83 percent of all U.S. stocks are in the hands of 1 percent of the people.

Source: ACS, Lending Report via Financemymoney.com

61 percent of Americans “always or usually” live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007.

Image: Flickr User orphanjones (www.flickr.com

Source: Careerbuilder.com poll via CNBC

66% of the income growth between 2001 and 2007 went to the top 1% of all Americans.

Image: Flickr User Itzafineday (www.flickr.com

Source: Harvard Magazine

36 percent of Americans say that they don’t contribute anything to retirement savings.

Image: Flickr User Algo (www.flickr.com

Source: Careerbuilder.com poll via CNBC

A staggering 43 percent of Americans have less than $10,000 saved up for retirement.

Image: Flickr User Alancleaver 2000 (www.flickr.com

Source: Employment Benefit Research Institute via CNN

24% of American workers say that they have postponed their planned retirement age in the past year.

Image: Flickr User Thomas Hawk (www.flickr.com

Source: Employment Benefit Research Institute via CNN

Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.

Source: mybudget360.comNote: 2005 spike preceded tougher bankruptcy filing laws

Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975.

Image: Flickr User Smittenkittenorig (www.flickr.com

Source: Dailyfinance.com

For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

Source: Federal Reserve Board via endoftheamericandream.com

In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.

Image: Flickr User Zepfanman.com (www.flickr.com

Source: Smirkingchimp.com

As of 2007, the bottom 80 percent of American households held about 7% of the liquid financial assets.

Source: Dailyfinance.com Source: Institute for Policy Studies

The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.

Source: UN via informationclearinghouse.info

Average Wall Street bonuses for 2009 were up 17 percent when compared with 2008.

Image: Flickr User Tony The Misfit (www.flickr.com

Source: Washington Times

In the United States, the average federal worker now earns 60% MORE than the average worker in the private sector.

Image: Flickr User Stuck in Customs (www.flickr.com

Source: USA Today[Author’s statistic altered to provide valid source.]

The top 1% of U.S. households own nearly twice as much of America’s corporate wealth as they did just 15 years ago.

Image: Flickr User AMagill (www.flickr.com

Source: CBO via MSN

In America today, the average time needed to find a job has risen to a record 35.2 weeks.

Image: Flickr User deanmeyersnet (www.flickr.com

Source: Telegraph

More than 40% of Americans who actually are employed are now working in service jobs, which are often very low paying.

Image: Flickr User H Dragon (www.flickr.com

Source: CNN

For the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.

Image: Flickr User Clementine Gallot (www.flickr.com

Source: Boston Globe

This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.

Image: Flickr User NeilsPhotography (www.flickr.com

Source: World Socialist Web Site via axisoflogic.com

Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.

Image: Flickr User D’Arcy Norman (www.flickr.com

Source: Reuters

Approximately 21 percent of all children in the United States are living below the poverty line in 2010 – the highest rate in 20 years.

Image: Flickr User cambodia4kidsorg (www.flickr.com

Source: Foundation for Child Development via CNN

The top 10% of Americans now earn around 50% of our national income.

Image: Flickr User greggoconnell (www.flickr.com

Source: Professor Emmanuel Saez of the UC Berkeley

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Read more: http://www.businessinsider.com/22-statistics-that-prove-the-middle-class-is-being-systematically-wiped-out-of-existence-in-america-2010-7?op=1#ixzz1LrKvNqqQ

>

America’s Middle Class Crisis: The Sobering Facts

By Peter Gorenstein | Daily Ticker – Wed, May 4, 2011 10:19 AM EDT

• Print

Two recessions, a couple of market crashes, and stubbornly high unemployment are all wreaking havoc on America’s middle class.

In the accompanying interview, The Daily Ticker’s Aaron Task discusses the state of the middle class with Sherle Schwenninger, director of economic growth and American strategy programs at the New America Foundation. Schwenninger’s recent report “The American Middle Class Under Stress” has some stunning facts that highlight the struggles the average American is having getting a decent-paying job and keeping up with rising cost of living.

Here are just some of the sobering facts:

— There are 8.5 million people receiving unemployment insurance and over 40 million receiving food stamps.

— At the current pace of job creation, the economy won’t return to full employment until 2018.

— Middle-income jobs are disappearing from the economy. The share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010.

— Middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment.

— 17 million Americans with college degrees are doing jobs that require less than the skill levels associated with a bachelor’s degree.

— Over the past year, nominal wages grew only 1.7% while all consumer prices, including food and energy, increased by 2.7%.

— Wages and salaries have fallen from 60% of personal income in 1980 to 51% in 2010. Government transfers have risen from 11.7% of personal income in 1980 to 18.4% in 2010, a post-war high.

The bottom line is simple says Schwenninger: The middle class is shrinking, which threatens the social composition and stability of the world’s biggest economy. “I worry that we’re becoming a barbell society – a lot of money wealth and power at the top, increasing hollowness at the center, which I think provides the stability and the heart and soul of the society… and then too many people in fear of falling down.”

>

Raymond J. Learsy

Scholar and author, “Over a Barrel: Breaking Oil’s Grip on Our Future”

Posted: August 8, 2010 08:58 PM

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Over the last decade this nation has experienced a massive loss of productive and high value jobs in manufacturing, trade, and the professions sending many overseas and having many destroyed through the egregious misdirection of the self serving priorities of our financial institutions encumbering viable companies making real goods and services with untenable debt. Leveraging their assets in order to maximize profits for the financial engineers before flipping the company or taking it to market as an IPO. Too often the workers who made the company are left with little or nothing while the Wall Street “whiz kids” march off with a bundle having destroyed the vision, imagination and the hard work that went into creating these companies, to their benefit and to the detriment of its workers and society at large.
‘Disproportionate’ is the freighted word that shackles our society. Over the past few years some two-thirds of the gain in national income has gone to the top one percent of Americans. Mostly those in the financial industry harbored in such government protected entities as ‘bank holding companies’, part of something that has come to be ominously called the “shadow banking system”. They bring virtually nothing viable to the economic landscape other than egregious speculation gorging on complex derivatives enriching the financial players, while through their malign impact, impoverishing great swaths of the American and world economy (i.e. betting on the collapse of the housing market). When these bets go dramatically wrong also collapsing the institutions that took the long side of the bets, they are then bailed out by the government making good the value of these ‘bet’ instruments whose function had no greater economic justification than a compulsive gambler’s casino bets. And the grim irony, when the red comes up instead of black it’s the local inhabitants of the casino’s venue who are asked to pay to keep the casino afloat, while the casino lets the gambler keep his chips.
And the local inhabitants pay dearly. Their services are curtailed, their stores are forced to close, their local banks are driven to the edge, the value of their houses plummet or are repossessed. Not having insider status their financial assets deteriorate dramatically and even in desperation had they wanted to get back into the casino to try their own luck given their new world being bereft of all other opportunity, the house wont extend them credit. Its just as well, because they wouldn’t have to see our compulsive gambler swilling Dom Perignon and downing a small mountain of Pate de Foie Gras after having feasted on Beluga Caviar at the casino’s resplendent restaurant.
The gambler is there, and he or his proxy will always be there. And the town and its inhabitants, tattered and poorer are still there trying to make do as best they can and trying to contain their simmering anger at the unfairness of it all, not quite knowing what to do. Some joining in the regional meanderings of the Tea Party, or some equivalent movement that promises to address the clear wrongs that are being inflicted and tolerated by those in charge.
When all is said and done it becomes clear that it is the Casino that needs fixing because it is the Casino that the set the rules, it is the Casino that has permitted the outrages that have resulted in the destabilizing of the norm and sanctioning the unexpected and unfair.
Now with a small leap of imagination lets transpose our government for the nefarious Casino. Clearly it needs a new management or a new way of managing. What has come before is not functioning and major changes are needed. The local inhabitants need a voice in running the Casino, which in a sense has been denied them because they are unable to foot either the entry tab, or the needed cash to play at the tables. And that is what it has come to be, without access and without money no one at the Casino pays attention.
And that must now change for the inhabitants to ever again have a chance to rectify the wrongs imposed by the Casino’s management and to fairly share in an equitable distribution of benefits should they accrue ahead.
As here, today too much of our political system is bought and paid for. Too much of our political system is self serving, responsive to the wings of our two parties and indifferent to the day to day concerns of middle Americans in spite of the incessant lip service extended to them. Yes, there is limp Wall Street reform, but no clawback of the exigencies that drove the nation to the brink. Yes there is a stimulus program, but faltering shamelesly through lack of clear direction. Yes, there is an alternative energy program without clear mandates nor meaningful results as the transfer of billions to the oil providers continues unabated. Yes, there are our soldiers dying in fragmented nation states far away without a modicum of sacrifice being asked of the home front. Yes, there are moneyed interests both domestic and foreign who have access to those who govern, without limitation and a shameless Congress ready to do their bidding in spite of the promises made in Presidential campaigns to curtail their influence. Yes we have courts of law who, through judicial minutiae rather than pragmatic sense of national welfare have given these moneyed interests even greater influence by striking down financial restraints on the powerfully funded in election laws, that make the middle class even more disenfranchised. Yes, there is talk of restraining government spending while special interests with access to government and its earmarks are encumbering the nation into ever greater indebtedness. Yes, while Main Street and middle class Americans continue to lose jobs, the pay checks on Wall Street and corporate boardrooms continue in their unabated and inflated manner while middle class Americans are absorbing pay cuts or shortened work weeks if they have any jobs at all, while teachers, the backbone of the nations future, police and firemen are losing their employment.
And so it goes, leaving the nation with a Frankenstein system whose core objective of governance has become self preservation of power and personal influence. This, while governing for the greater good of the nation has become a secondary and distant gerrymandered priority leaving the great body of the American electorate virtually without meaningful representation and forestalling and diminishing America’s middle class’ engagement with its government with every passing day.
And yet something is stirring. People throughout the land understand that the political system is broken, and Americans throughout the length and breadth of the country, that their government no longer speaks for them no matter which party happens to be in power. They feel the system is gamed from within, for and about those who have access and the money to follow through to assure their parochial interests are taken into account and acted upon. How those interests impact the greater good has become dangerously secondary. Checks and balances seem to have gone by the board long ago.
Grass roots movements are beginning to stubbornly emerge from the depths of these frustrations of which I have touched on only a few, as the list could go on almost endlessly. Yes, there are the Tea Parties, and they should be listened to in order to begin to understand how people feel. But out there something much more significant is beginning to take hold. A movement new to many, headed by people of impeccable credentials who are devising a program using the new age technology to bring all Americans back into the political process in a meaningful way and most importantly in a way that each American can once again feel that he/she as a citizen has the stature and sense of prideful responsibility that his vote was meant to convey unto him as a meaningful participant in the process of nationhood.

The new organization is called “Americans Elect“. I don’t want to steal its thunder because it can much better directly convey its goals and points of engagement. It has the potential of becoming the salutary wave of America’s political future. Their contact information is given as Kahlil.Byrd@AmericansElect.org.

>

Wednesday, July 28, 2010

The Middle Class in America Is Radically Shrinking.

Here Are the Stats to Prove it 

Posted Jul 15, 2010 02:25pm EDT by Michael Snyder

Editor’s note: Michael Snyder is editor of theeconomiccollapseblog.com

The 22 statistics detailed here prove beyond a shadow of a doubt that the middle class is being systematically wiped out of existence in America.

The rich are getting richer and the poor are getting poorer at a staggering rate. Once upon a time, the United States had the largest and most prosperous middle class in the history of the world, but now that is changing at a blinding pace.

So why are we witnessing such fundamental changes? Well, the globalism and “free trade” that our politicians and business leaders insisted would be so good for us have had some rather nasty side effects. It turns out that they didn’t tell us that the “global economy” would mean that middle class American workers would eventually have to directly compete for jobs with people on the other side of the world where there is no minimum wage and very few regulations. The big global corporations have greatly benefited by exploiting third world labor pools over the last several decades, but middle class American workers have increasingly found things to be very tough.

Here are the statistics to prove it:

• 83 percent of all U.S. stocks are in the hands of 1 percent of the people.

• 61 percent of Americans “always or usually” live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007.

• 66 percent of the income growth between 2001 and 2007 went to the top 1% of all Americans.

• 36 percent of Americans say that they don’t contribute anything to retirement savings.

• A staggering 43 percent of Americans have less than $10,000 saved up for retirement.

• 24 percent of American workers say that they have postponed their planned retirement age in the past year.

• Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.

• Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975.

• For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

• In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.

• As of 2007, the bottom 80 percent of American households held about 7% of the liquid financial assets.

• The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.

• Average Wall Street bonuses for 2009 were up 17 percent when compared with 2008.

• In the United States, the average federal worker now earns 60% MORE than the average worker in the private sector.

• The top 1 percent of U.S. households own nearly twice as much of America’s corporate wealth as they did just 15 years ago.

• In America today, the average time needed to find a job has risen to a record 35.2 weeks.

• More than 40 percent of Americans who actually are employed are now working in service jobs, which are often very low paying.

• or the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.

• This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.

• Approximately 21 percent of all children in the United States are living below the poverty line in 2010 – the highest rate in 20 years.

• Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.

• The top 10 percent of Americans now earn around 50 percent of our national income. more

Consumer Confidence Drops By More Than Expected

Vincent Fernando, CFA | Jul. 27, 2010, 10:02 AM | 901 | 21

The consumer confidence index dropped to 50.4 in July, which was a larger decline than consensus had anticipated.

The consensus forecast was 51.0 according to Finviz and June’s reading was 54.3.

The Present Situation Index and The Expectations Index declined to 26.1 from 26.8, and 66.6 from 72.7 respectively.

Conference Board:

Says Lynn Franco, Director of The Conference Board Consumer Research Center: “Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season.”

Consumers’ assessment of current conditions was more downbeat in July. Those saying conditions are “bad” increased to 43.6 percent from 41.0 percent, however, those saying business conditions are “good” increased to 9.0 percent from 8.4 percent. Consumers’ appraisal of the job market was also more negative. Those claiming jobs are “hard to get” increased to 45.8 percent from 43.5 percent, while those saying jobs are “plentiful” remained unchanged at 4.3 percent.

Consumers’ short-term outlook also deteriorated further in July. The percentage of consumers expecting an improvement in business conditions over the next six months decreased to 15.9 percent from 17.1 percent, while those anticipating conditions will worsen rose to 15.7 percent from 13.9 percent.

Consumers were also more pessimistic about future job prospects. Those expecting more jobs in the months ahead decreased to 14.3 percent from 16.2 percent, while those anticipating fewer jobs increased to 21.1 percent from 20.1 percent. The proportion of consumers expecting an increase in their incomes declined to 10.0 percent from 10.6 percent. more

Industries Find Surging Profits in Deeper Cuts

By NELSON D. SCHWARTZ

Published: July 25, 2010

By most measures, Harley-Davidson has been having a rough ride.

Motorcycle sales are falling in 2010, as they have for each of the last three years. The company does not expect a turnaround anytime soon.

But despite that drought, Harley’s profits are rising — soaring, in fact. Last week, Harley reported a $71 million profit in the second quarter, more than triple what it earned a year ago.

This seeming contradiction — falling sales and rising profits — is one reason the mood on Wall Street is so much more buoyant than in households, where pessimism runs deep and joblessness shows few signs of easing.

Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production. Harley, for example, has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. That is on top of 2,000 job cuts last year — more than a fifth of its work force.

As companies this month report earnings for the second quarter, news of healthy profits has helped the stock market — the Standard & Poor’s 500-stock index is up 7 percent for July — but the source of those gains raises deep questions about the sustainability of the growth, as well as the fate of more than 14 million unemployed workers hoping to rejoin the work force as the economy recovers. more

And of course, Carlin got it right before he died too.  This may be his best rant ever.

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05/05/2011

Documenting The Demise Of The Middle Class

The American Dream is now to get out of debt
— David Rosenberg, Chief Economist & Strategist, Gluskin Sheff

http://peakwatch.typepad.com/decline_of_the_empire/

05/05/2011

Documenting The Demise Of The Middle Class

The American Dream is now to get out of debt
— David Rosenberg, Chief Economist & Strategist, Gluskin Sheff

A new report has surfaced called The American Middle Class Under Stress (pdf). In a set of easy to understand graphs, New American Foundation researchers Sherle R. Schwenninger and Samuel Sherraden present a compelling case that America’s Middle Class is gradually disappearing, and has been for some time. Many of their graphs show pressures on Middle Class incomes beginning in the early 1980s, which is when I date the decline of the American Empire. I have covered many (if not all) of the subjects covered in the report, so I have included links to older posts where relevant.

I believe the Empire’s decline is inextricably associated with the decline of Middle Class living standards. America’s ability to enforce its military and financial “interests” all over the world will inexorably decline as a result. When wealthy interests took over the country, the Middle Class got left behind. I agree with many of the views expressed by Richard Kirsch in We’re not Broke. We’ve been Robbed! Actually, the United States is broke. But we’ve been robbed, that’s for sure.

We’re not broke, but the wealth grab [by monied special interests] is wrecking our economy. The rich can’t spend enough to keep the economy going. The engine that drives it is a strong middle class. The problem isn’t that we haven’t generated wealth, it’s that we’ve stopped sharing the wealth we’ve generated. If wages had kept up with productivity over the past 30 years, the median wage would be 60% higher than it is now. If income had increased at the same rate for everyone from 1979 to 2006, the average family would make about $10,000 more a year, but the top 1% would make $700,000 less…

The middle class is not only the engine of our economy, it’s the glue of our democracy. A bigger middle class leads to higher voting rates and lower levels of public corruption. When we believe that the system is stacked against us, we’re more likely to drop out or cheat.

It’s no wonder that despite elite celebration of economic recovery, Americans are deeply pessimistic about the future. Much of the public believes that our best days are behind us. And unless we build a movement for change, they will be right.

It would be naive to expect the deplorable trends documented by the New American Foundation to be reversed in the future. Your best days are behind you—if you’re still in the Middle Class and still struggling to make ends meet, or you’re a young person hoping for a decent life. Our “Democracy” exists in name only. Corruption is rampant in the Imperial Capital. A majority of desperate Americans voted for Barack Obama in the hope he would bring The Change. If you were among them, you have been betrayed in the profoundest way.

And now, some of the data. Look at the New America Foundation report for the rest.

More of the Employed Have Low-Income Jobs — “The share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010. Middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment.” David Stockman has done the best work on this subject. See my post No New Jobs Is The New Normal. 

The Under-Employed American — “The problem is not lack of skills, but the structure of the job market.17 million Americans with college degrees are doing jobs that require less than the skill levels associated with a bachelor’s degree. Just under 30% of flight attendants and 16% of telemarketers have bachelor’s degrees even though this credential is not necessary for these jobs. See my post A Resurgence Of Lousy Jobs.

Government Transfers Have Partly Offset the Stagnation of Wages — “Wages and salaries have fallen from 60% of personal income in 1980 to 51% in 2010. Government transfers have risen from 11.7% of personal income in 1980 to 18.4% in 2010, a post-War high. There are 8.5 million people receiving unemployment insurance and over 40 million receiving food stamps.” See my recent post America’s Road To Perdition.

Rising Health Expenditures — “Despite an increase in government transfers, America’s social wage has been eroded by the rising cost of health care and education. Health care spending increased from 9.5% of personal consumption in 1980 to 16.3% in 2010. Many households cannot afford rising insurance premiums and out-of-pocket health care costs, leaving nearly 50 million Americans without adequate health coverage.”

Higher Education is Not Affordable — “A college education is considered necessary to get a good job, but for many families college is no longer affordable. The average cost of one year of college is $21,000. After adjusting for inflation, it has risen 72% since 1990. For households with incomes at the 40th and 60th percentiles, one year of college tuition makes up 54% and 40% of their annual income, respectively.” See my recent post The College Degree Scam Goes Ballistic, and follow the links therein.

The Emergence of “Screwflation” — ““Screwflation,” a term coined by Wall Street guru Doug Kass, describes how falling wages and rising costs of basic goods are squeezing the middle class. The share of personal consumption spent on food and energy has risen from 13.4% in 2002 to 15.3% in 2010. Elizabeth Warren warned that the rising costs of basic middle class goods and stagnant incomes have put many Americans in an “economic vice.” I have written about the dangers of food & energy (“non-core”) inflation on several occasions. I most recently touched on these issues in Tim Geithner Knows Diddly-Squat.

The Great Recession Dealt a Blow to Middle Class Wealth — “Household net worth declined from $65.7 trillion in the second quarter of 2007 to $56.8 trillion in the fourth quarter of 2010. The middle class, which has much more of its net worth tied up in home equity, has borne the brunt of this decline. Wealth recovered $8.1 trillion since the first quarter of 2009 due mostly to the recovery in stock prices.” Not only has Middle Class wealth declined as house prices have fallen, but the large debt they incurred (mostly in mortgages) remains behind. Default (foreclosures) is the only option for many Americans. See my post Decending The Household Debt Mountain.

Home Equity and Wealth — “Home equity makes up a greater share of total wealth for the middle class than it does for wealthy families. For families up to the 90th percentile of net worth, home values make up over 50% of total wealth. But with the decline in home values, many homeowners are now underwater, meaning that the value of their home is less than the amount owed on their mortgage.”

Aaron Task of Yahoo’s Daily Ticker did a story on the New America Foundation report called America’s Middle Class Crisis: The Sobering Facts. If you like reading lists of “sobering” facts, visit there for stuff like this—

• There are 8.5 million people receiving unemployment insurance and over 40 million
• At the current pace of job creation, the economy won’t return to full employment until 2018.
• Middle-income jobs are disappearing from the economy. The share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010.
• Middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment.
• 17 million Americans with college degrees are doing jobs that require less than the skill levels associated with a bachelor’s degree.
• Over the past year, nominal wages grew only 1.7% while all consumer prices, including food and energy, increased by 2.7%.

And so on. Here’s Aaron’s interview with Sherle Schwenninger, director of economic growth and American strategy programs at the New America Foundation.

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This is powerful information.
Any one who has any sense of community, would be sick to their stomachs.
Those who feel they can pull themselves up by their own bootstraps won’t be phased one bit – unless their bootstraps have broken!
Don Levit

Posted by: Don Levit | 05/05/2011 at 12:17 PM

My bootstraps broke a long time ago!.

I have believed for sometime that the American idea that if you work hard you can get ahead is the only thing from keeping most of the people in this country from coming unglued.

People think its them,that if they just work harder then can get ahead.

I figured out a long time ago that you can work really hard in this country and get nothing but tired!

A wise man said ‘i might die rich and tired or poor and rested,but i sure dont want to die poor and tired.

Posted by: Chris in Chicago | 05/05/2011 at 01:56 PM

This is an exellent post. Thank you.

I am a college prof and I am deeply saddened by the utter lack of professional work opportunities available for our graduating students.

So many of them turn back to the university thinking graduate school is the answer. I tell them that even a master’s degree is no magic ticket and may simply increase their debt load.

I feel angry for them, but they feel it is somehow their fault, their lack. I wish they would get angry also and demand government investment policies that employ people in sustainable ways instead of policies that transfer wealth while pillaging what is left in natural resources…

Posted by: majia | 05/05/2011 at 05:27 PM

Dear college prof: instead of handing them a master’s degree, hand them a torch and pitchfork. I’m at the point where I feel only a really good violent protest, that includes burning down the Bank of America or some hedge fund manager’s mansion, will get us somewhere.

Phone calls, letters, and emails are all ignored by politicians unless a fat bribe or great perk accompanies it. If you want John Boehner’s attention, you’ve got to send him to a golf course in Scotland. I’m not sure what will get a Democrat’s attention anymore. They used to care about the average person, but they seem to have morphed into Republicans.

Posted by: sharonsj | 05/05/2011 at 07:13 PM

I think we adults who have a grasp of what is happening have a responsibility to tell young people the truth, and have a responsibility to help them to understand it isn’t their fault.

U.S. History professors can do this very easily by changing the curriculum to include primarily studies about immigrants, labor history, and civil rights.

Other teachers can get the message out as well.

In fact, I propose that adults are only true adults when they show this kind of integrity and courage in guiding the young.

Posted by: John Andersen | 05/06/2011 at 08:15 AM

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Globalization

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10/24/2006

A Superpower in Decline

America’s Middle Class Has Become Globalization’s Loser

By Gabor Steingart

At the beginning of the 21st century, the United States is still a superpower. But it’s a superpower facing competition from beyond its borders as well as internal difficulties. Its lower and middle classes are turning out to be the losers of globalization.

Editor’s Note: The following essay has been excerpted from the German best-seller “World War for Wealth: The Global Grab for Power and Prosperity” by SPIEGEL editor Gabor Steingart. SPIEGEL ONLINE is publishing a series of daily excerpts from the book.

There are essentially three exclusive characteristics whose simultaneous development have served as the foundations of the United States’s success up until now — and they only appear in this particular combination in America. They are not only the country’s biggest strengths, but also its greatest weaknesses. It’s worth scrutinizing them more closely.

REUTERS

New York City: A constant replenishment of daring in America

First, nowhere in the world can you find such a high concentration of optimism and daring. America is the country that strives hardest for what is new — not just since yesterday (like Eastern Europeans) and not just for the last three decades (like the Chinese); rather from the very instant settlers began arriving. Unabashed curiosity seems to be hardwired into the nation’s genetic code.

The steady influx of the adventurous and hard-working — which helped increase the country’s labor force by about 44 million people since 1980 alone and continues today — ensures a constant replenishment of daring. After all, it’s not just the additional people that make the difference. The mere addition of 17 million people into Germany following reunification in 1990 – newcomers more concerned with preserving their guaranteed rights than with making the extraordinary effort necessary for success – did nothing to foster the kind of daring you see in the United States. Indeed, the result was exactly the opposite, and it has been a painful lesson for Germany.

Second, the United States is radically global. Its very origins — in the rebellious citizens from every country in the world who assembled on the territory that is now the United States — mark its people as true children of the world. Former German Chancellor Helmut Schmidt calls the founding fathers of the United States a “vital elite,” one that continues to pass down its genes to this very day. Their language is dominant, having marginalized Spanish and French during the second half of the past century. Their everyday culture — from the T-shirt and rock ‘n’ roll to e-mail — has peacefully colonized half the world. And from the very beginning, US corporations were eager to venture abroad in order to trade and set up production sites in other countries. Multinational corporations may not have been a US invention, but they became its specialty.

Third, the United States is the only nation on earth that can do business globally in its own currency. Indeed, the dollar has established itself as the world’s currency. Whoever wants to own it has to purchase it in the United States. All important decisions about the quantity of cash that circulates or the setting of interest rates are made within the nation’s borders, which guarantees a maximum degree of national independence. It’s American blood that flows through the veins of the global economy. Almost half of all business deals are closed using dollars as the currency, and two-thirds of all currency reserves are held in dollars. Charles de Gaulle, who was president of France after World War II, admired this “exorbitant privilege” even then.

The trial of strength

But there is a flip side to the coin. First, Americans are so optimistic that they often blur the line between optimism and naivete. Public, private and corporate debt far exceeds any previously known dimensions. Forever piously trusting in a future rosier than the present, millions of households are borrowing so much money that they end up endangering the very future they’re looking forward to. The lower and middle classes have practically given up on putting aside any savings. They’re going into the 21st century like a poverty-stricken, Third World family, living from hand to mouth without any financial reserves whatsoever.

Second, globalization is striking back. The United States has promoted the worldwide exchange of commodities like no other nation, and the result is that their local industry has begun to be eroded. Some production sectors — such as the furniture industry, consumer electronics, many automobile part suppliers, and now computer manufacturers — have left the country for good. In the recent past, free trade has primarily benefited the very rival states that are now mounting an economic offensive on the United States — and which have cut off a large slice of America’s global market share for themselves.

Third, the dollar doesn’t just strengthen the United States; it also makes it vulnerable. The government has pumped its currency into the world economy so vigorously that the dollar can now be brought to the point of collapse by external forces – such as those in Beijing, for example. Former US President Bill Clinton spoke of a “strategic partnership.” Current President George W. Bush would later speak of a “strategic rivalry.” They meant the same thing. There’s a form of dependence that obliges economic actors to cooperate in normal times. But when times change, there is the temptation to engage in a show of strength.

Buchtipp

This essay has been excerpted from “War for Wealth: The Global Grab for Power and Prosperity”, Germany’s best-selling book by Gabor Steingart. SPIEGEL ONLINE is publishing a series of excerpts from the book in English.

Piper Verlag, Munich; 384 pages; €19.90. The German-language edition of the book is available online at SPIEGEL Shop.

Delinked from prosperity

Make no mistake about it: at the start of the new century, the United States is still a superpower. But it is a superpower that faces tough competition from outside and difficulties within. The feedback effects involved in globalization are especially intense for the US economy — so much so that large parts of the US workforce are now standing with their backs against the wall.

The rise of Asia has only led to a relative decline of the US national economy. At least so far. But for many blue- and white-collar workers, this decline is already absolute because they have less of everything than they used to. They possess less money, they are shown less respect in society and their chances for climbing up the social ladder have deteriorated dramatically. They’re the losers in the world war for wealth. But while that may be their fate, they cannot be faulted for it. And it’s certainly not a private affair. Every nation has to face uncomfortable questions when an ever-larger part of its citizenry is delinked from the nation’s overall wealth. This is all the more true of a society that has made the pursuit of happiness a fundamental right.

On Oct. 28, 1998, the US Congress established a commission that brought together highly respected experts to examine the effects of the country’s trade deficit and the withering away of industrial labor. Donald Rumsfeld, the current US defense secretary, then-US Trade Representative Robert Zoellick, Anne Krueger, the number two at the International Monetary Fund (IMF) and Massachusetts Institute of Technology (MIT) Professor Lester Thurow provided their assessment of the situation at the behest of the president.

The Author

MARCO-URBAN.DE

Gabor Steingart, 44, heads DER SPIEGEL’s Berlin office. His last book was titled “Germany: The Decline of a Superstar” and, like “World War for Prosperity,” was a bestseller in Germany. Steingart was chosen as “The Economic Writer of the Year” in 2004.

Things were going swimmingly for the Americans until the end of the 1970s, the commission report concluded. Family incomes grew virtually at the same rate in all sections of the population during the first three decades after World War II, with those of the poor growing slightly faster. The lowest fifth of US society saw a 120 percent increase in incomes, the second fifth 101 percent, the third 107 percent, the fourth 114 percent and the fifth 94 percent. It was as if the American dream had manifested itself in statistics.

But then the trend reversed, and not just in the United States. Japan had awakened, and global trade had shifted directions. Capitalists left their home turf and went looking for suitable locations to invest in. Direct investment abroad – which had been more or less in harmony with exports until then – rose dramatically.

Until then, investment abroad had served mainly to boost the export of German, US or French products. But then factories themselves began to be relocated, mainly to cut manufacturing costs. Production for the world market became increasingly global itself, which led to a redistribution of capital and labor. Global production increased by a solid 100 percent between 1985 and 1995. But direct investment abroad increased by 400 percent during the same time period. Capital’s new mobility began to make the other factor of production, labor, restless, too.

Producing all over the world

The new jobs were created elsewhere, which had to have an effect on family income in the United States. Within the next two decades, the income of the lowest fifth sank by 1.4 percent. The second fifth still managed to gain by 6.2 percent, the third by 11.1 percent and the fourth by 19 percent. At the tip of the pyramid – where the promoters and planners of globalization reside, and those who profit most from it – income gains climbed by 42 percent.

The US national economy clearly bears the signs of this break with its golden age, when the country produced prosperity for almost everyone. Until the 1970s, the productive core of the country burned with such a fiery light that it illuminated the entire world. The United States provided dollars and products for everyone. The American empire’s nuclear power helped in the reconstruction of war-torn Europe and Japan. The United States was the world’s greatest net exporter and greatest creditor for four decades. Everything went just the way the economy textbooks said it should: The world’s wealthiest nation pumped money and products into the poorer states. The United States used the energy from its own productive core to make other countries glow or at least glimmer. It was indisputably the world’s center of power, a source of energy that radiated out in all directions.

US capital was at home everywhere in the world, even without military backing. Many experienced this state of affairs as a blessing, some as a curse. Either way, it was good business for the United States: At the peak of its economic power, the West’s leading nation disposed of assets abroad whose net value amounted to 13 percent of its GNP. To put it differently: The country’s productive core had expanded so dramatically that it opened up branches and subsidiaries all over the world.

What remains

This undoubtedly superior United States doesn’t exist anymore. As a center of power, it is still more powerful than others, but for some years now that energy has been flowing in the opposite direction. Today, Asian, Latin American and European nations are also playing a role in the United States’s productive core. The world’s greatest exporter became its greatest importer. The most important creditor became the most important debtor. Today, foreigners dispose of assets in the United States with a net value of $2.5 trillion, or 21 percent of gross domestic product. Nine percent of shares, 17 percent of corporate bonds and 24 percent of government bonds are held by foreigners.

Neither laziness nor the obvious American penchant for consumerism can be blamed for this changed reality in America. US industry — or at least what little is left of it — is responsible. In the span of only a few decades, US industry has shrunken to half what it once was. It makes up only 17 percent of the country’s GDP, compared to 26 percent in Europe.

Every important national economy in the world now exports products to the United States without purchasing an equivalent amount of US goods in return. The US trade deficit with China was about $200 billion dollars in 2005; it was a solid $80 billion with Japan; and more than $120 billion with Europe. The United States can’t even achieve a surplus in its trade with less developed national economies like those of Ukraine and Russia. Everyday, container-laden ships arrive in the United States – and after they unload their wares at American ports, many return home empty.

Those looking for something good to say about the superpower won’t find it in the trade balance. The growing imbalance can’t be attributed to natural resources or the import of parts for manufacturing firms. Oil imports, for example, don’t make as significant a difference to the trade balance as is often assumed: They account for only $160 billion dollars, a comparably small sum. Instead, it’s the top products of a developed national economy that the United States is importing from everywhere in the world – cars, computers, TV sets, game consoles – without being able to sell as many of its own products on the world market.

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Decline of the Middle Class; Bernanke Warns Congress

TruthBTold

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Congress | Economic Policy | House of Representatives | Marxism | Military Technology | Senate | Worker’s Rights

by TruthBTold | February 17, 2007 – 3:01am

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The following is a post from my blog www.jbpeebles.blogspot.com
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The first part of this post discusses the economic crisis being faced by middle income Americans. The rich are getting richer. A debt spiral to nowhere impairs the financial future of millions of Americans.

I devote the latter part to this post to the debt our government is generating. Our borrowings are the result of what I call deferred taxation, which are government expenditures made through borrowed money. I focus on Fed Reserve Chairman Bernanke’s recent comments before the Senate Banking Committee (February 14th) and a January report to the Senate Budget Committee.

The state of fiscal deficits which the US now faces call for immediate action. Rather than leap from a state of denial to one of desperation, as Al Gore said of global warming in An Inconvient Truth, we should take steps to reduce borrowing now, both by our government and ourselves. Lower government spending will be essential to prevent heavier taxes on already burdened taxpayers.

Financial Uncertainty for the Middle Class

Senator Bernie Sanders provided some hard statistics on truthout.org:

“…since he (Bush) has been in office, 5.4 million middle class Americans have slipped into poverty, 6.8 million Americans have lost their health insurance, median income for working-age families has declined for five consecutive years, and 3 million manufacturing workers have lost their jobs. At the same time, the costs of education, prescription drugs, energy, and housing have risen dramatically.”

Numbers don’t lie; they can however, be bent. One of the easiest ways to underestimate income is to average incomes of a group of people. Just one multi-billionare can dramatically inflate the income of thousands of others. Skewed results lead to faulty analysis of income trends.

For measurements of income, a far more appropriate statistical tool is the median–a level exactly in the middle, where half of the population earns more, and the other half less.

According to “US income figures show staggering rise in social inequality” by Jerry White, “median household income…fell by 3 percent, or about $1,600, between 2000 and 2004…”

Average increases in wages really mean little to the majority. A far more important source of information on the state of financial health of the American public lies in looking at how the average person is doing, or what the average wage is, not to average all wages paid.

In their article “What’s Hurting the Middle Class” (September/October 2005 issue of Boston Review), Elizabeth Warren and Amelia Warren Tyagi describe the situation so many now face:

“Today there are five times as many families filing for bankruptcy as there were in the early 1980s. Home foreclosures have more than tripled in less than 25years. Nearly half of families with credit cards report that they cannot afford to pay more than their minimum monthly payments. One in every three families with an income above $35,000 reports owing medical bills they cannot pay.

“…a 255 percent increase in the foreclosure rate, a 430 percent increase in the bankruptcy rolls, and a 570 percent increase in credit-card debt.

“The impact of rising mortgage costs has been huge. The proportion of families who are “house-poor”—that is, who spend more than 35 percent of their incomes on housing—has quadrupled in a single generation. Today it often takes two working people to support a mortgage. A police officer or elementary-school teacher earning an average salary could not afford to pay the mortgage of a median-priced home in two thirds of the nation’s metropolitan areas.”(source

The costs of passing on unpaid taxes have begun to show in the area of debt burden. Already taxes have increased. Is there room to increase the tax burden in the future?

“…The total tax burden for today’s two-income family is about 38 percent larger than that of their one-income counterparts of a generation ago.(source)

More woes merged out of the Senate Banking Committee on the 14th, where Senator Menendez stated:”The percentage of middle-class families who had three or more months salary in savings rose 72 percent, from 16.7 percent in 1992 to 28.8 percent in 2001. So families, middle-class families, were becoming more secure, year by year. But unfortunately, in the span of less than four years, that percentage dropped by over 36 percent, down to 18.3 percent in 2004.”(link)

He continues, this time about debt:”…By the third quarter of 2006, outstanding household debt was 130 percent relative to disposable income. That means that the average family is in debt of over $130 for every $100 it has to spend. And, additionally, the average household savings rate has actually been negative for the past seven quarters, averaging about a negative 1 percent rate for 2006.”

The US on the whole faces a debt trap not very different from that of many Americans. The desire to spend is always present in both; people like to spend like our government likes to spend. Both consumers of debt find it easier to borrow rather than earn, in the governments case, to tax (that word has gained awful connotations.) Like the errant personal spender, government faces a cut-off time certain, which is where traditional sources of credit choose not to lend as the risk of default is too high.

The government must spend and tax. Critics of taxation are incapable of shrinking government, so lower taxes do nothing to enhance fiscal discipline. Both our government and people spend more and more. And if the spending stops, everyone suffers.

My personal experience with debt led me into serious difficulties, so I know well the temptation of debt. I think acknowledging my problem was a crucial step in designing a way out. Now as far as addictive behaviours are concerned, I would rank the US and the vast majority of its people in the denial phase.

Fiscal responsibility is hardly acknowledged in our society, but is of critical importance in order to keep the country’s economy running smoothly. A big part of assuming responsibility for one’s financial situation requires a willingness to learn more about personal finance, and how our government spends money, our money.

Perhaps Americans–and their government–have been lulled into a sense of complacency. Changing spending habits is vital to solving the debt problem. Like most disorders, the longer we take in admitting we have a problem, the worse it becomes.

Over-Consumption

A few years ago, Congress passed a law making bankruptcy harder, much to the delight of the credit card industry. The propensity of consumers to overspend recklessly has been blamed for much of surge in personal bankruptcy (which is more often than not declared for medical purposes.)

The Warren/Tiyagi article brings up the “over-consumption myth”:

“The idea that families are in financial trouble because they spend irresponsibly is deeply intertwined with the politics of personal responsibility…So long as Americans can be persuaded that families in financial trouble have only themselves to blame, there will be no demand to change anything.”(source)

A Center for American Progress report released in January 2007 focuses on the absence of financial reserves. Its author, Christian Weller, points out:

“Since 2002, the share of families capable of coping financially with a period of joblessness has declined by 6.9 percentage points.”

Perhaps more frightening even than the distinct possibility of losing a job, is the reality that it could take months to find another, and that expenses would continue unabated.

Massive layoffs have been announced by Ford, Hershey’s, Chrysler, and other large corporations. Companies need little justification for mass firings; individuals are typically terminated en masse and without regard to job performance. Anyone could be downsized at any time.

Downsizing has become part of the American economic landscape; with the possibility of a lost job comes massive uncertainty over the length of time needed to find a new job. And as manufacturing jobs are lost, wage earners face the prospect of working in the service industry, or for smaller companies offering fewer benefits than their former employers.

The bare minimum living expenses for an average family are $3500 a month, with perhaps double that in some cities. A new job on average may require 60-90 days to acquire, with better paying ones perhas taking even longer. So where is the family to come up with ten or twenty thousand dollars if it hasn’t been saved? They will likely borrow.

The Warren/Tiyagi article summarizes the situation faced by so many Americans:

“With 75 percent of income earmarked for fixed expenses, today’s family has no margin for error. There is no way to cut back if one person’s working hours are cut or if the other gets laid off. There is no room in the budget if someone needs to take a few months off to care for Grandma, or if someone hurts his back and can’t work. The modern American family is walking on a high wire without a net; they pray there won’t be any wind. If all goes well, they will make it across safely: their children will grow up and finish college, and they will move on to retirement. But if anything—anything at all—goes wrong, they are in big, big trouble.”(source)

Primer on Saving

When I was working in the field of insurance and financial products, selling to the public, we would customarily identify family financial reserves, called the “emergency fund.” Our principle, which we believed to also be the right thing to do, was to make sure a family had a bare minimum amount in the emergency fund before selling them anything. Then we’d look to make sure they’d have insurance. Then we’d confirm that the emergency fund had been fully funded–this meant 3 to 6 months worth of living expenses.

Working with lower middle income people, we virtually never found a family with anything more than a rudimentary savings account. What’s more, money there was usually being saved for some specific purpose, and thus an emergency would deny that purchase down the road. Things break down, emergencies happen; as a direct financial consequence, a nest egg can be crushed, a vacation denied, or a business opportunity lost.

We found that most often credit cards were the method of financing emergencies. People had therefore been dependent on going into more debt, since emergencies always came up. Often the ease of borrowing through credit cards became an incentive to spend, not for the benefit of short-term emergency, but rather as a ticket to greater consumption, typically unnecessary.

Perhaps if the financial services industry were to pre-qualify customers, more people would be aware of the need to fully fund an emergency fund. The pragmatic inevitability of an emergency is surely beyond doubt; the average American will go through multiple jobs and most likely face being downsized, so the need for longer-term resources is vital.

As it is, financial intermediaries push product and the middle and lower classes are mass marketed, their situation weighed and measured for maximum short-term profitability. Ideally, salespeople need to make emergency funds a requirement, even before insurance or mutual funds are sold. Otherwise the marketing of investing and insurance products can undermine a family’s overall financial security.

Absent any funds for emergency, retirement savings will diminish as they are cashed in to make up for some unexpected yet entirely predictable crisis that will occur. The lack of solid basic savings will invariably push people into greater debt and expose them to risks which would otherwise be covered by insurance.

The advance of age is clearly an enemy when people are spending more than they save. Debt accumulates then later, at a stage in life where they would rather not work, many will find themselves working til their deaths.

The future financial situation for the Middle Class looks bleak. Retirement investments require an excess of income over expenditures–a positive savings rate.

According to Warren/Tiyagi, “…half of all families have not one dollar of savings put aside for their retirements, and 73 percent have not one dollar in the stock market.”(source)

Financial Report Card

How are you doing under George W. Bush? I could probably know how you would answer based on your income. If you were rich chances are you’ve grown much richer; if you income was average before, it probably hasn’t gone up that much.

Americans often blame the President changes in the economy. It’s a personal kind of animosity, blaming the President as we do when things get bad for us.

Holding the President personally accountable may also be a positive for Presidents who claim credit for sustained economic growth, low inflation, and low unemployment.

Presidents don’t direct our economy. Changes in the macroeconomic environment may be the result of factors way outside the control of the US government.

Did Bill Clinton lead the economy? No, but his free trade policies created wealth for the middle class, who invested their new higher incomes in the market. The misery index (inflation + unemployment) was low during his time. Productivity improved, which slowed inflation and allowed corporations to increase their profitability.

The general impression people had of the economy was positive at the time, and Americans thought Clinton was in some part responsible. In this sense Presidents lay claim to the positive aspects of the economy, to show off the results of their policies and leadership. Presidents can bolster confidence in the state of the economy, and their speeches build on signs of economic progress.

How things have changed. First and foremost, the wealthy are making more money, a lot more money. Bush tax cuts passed in 2001 have yielded dramatic benefits for the already-rich. Just how much?

The Congressional Budget Office produced a powerful report on the Bush Tax Windfall for the rich:

“…income inequality widened significantly between 2003 and 2004. The share of after-tax income going to the top one percent rose from 12.2 percent in 2003 to 14.0 percent in 2004, an increase of 1.8 percentage points. As noted above, this amounts to $146,000 per household in the top one percent, equivalent to an additional $128 billion in income for the top one percent as a whole.”

The rich are growing richer; the “…top one percent own more wealth than the bottom 90 percent” (source).

Under Bush, the tax cuts have largely benefitted the rich, and contributed to rapidly rising public debt.

Revolutionary Economics

Historically, the amalgamation of wealth can create a popular impetus for political change. The multitudes might seek to redistribute wealth through political mobilization.

Societies do become more unstable when wealth gets too concentrated. Always few in number, the political elite are often forced to adopt harsh conditions to maintain their rule against the popular will. Economic exploitation also justifies political action and even violence.

Popular revolutions were seen in Iran (1979) and Cuba (1959), two nations whose dictators were backed by the United States prior to their ouster. Economic factors may have played a large part. Much to the chagrin of powerful business interests from outside the country, private industries were nationalized, as we now see under Venezuelan leader Hugo Chavez.

The United States is not immune from the effects of a growing economic gap between the have and have-nots. Our middle class may be a buffer between more radical political change and its decline could signal a turn toward political extremism.

During the Depression, radicalism was embraced by many disenfranchised by the harsh volatility associated with Industrial Age economic cycles. Many Americans viewed communism as a viable alternative to the economic starvation faced by the masses at the time. Communist and revolutionary dogma found fertile ground amongst the unemployed.

Marx believed that capitalism was inherently flawed and inadequate, more prone to favor the individual over the society. The idea was that the more dehumanizing aspects of capitalism could be overcome through socialism; Lenin utilized the resources of a totalitarian State with centralized economy. Both philosophies defined a common goal of economic prosperity revolving around full employment and fiscal equality. Capitalism was seen a stage in political evolution, its advanced economy and hard-working proletariat the base upon which a more advanced socialist state could be built.

Today in America, the wealth gap is maintained through political power. The wealthy exert an inordinate level of influence over our government. If you were rich, wouldn’t you use your wealth to lobby government, to lower tax rates and thereby make more wealth?

Marx would have said controlling the means of production leverages the political influence of the wealthiest Americans, who’ve shaped our tax policies to their benefit. Marx would claim that political equality will remain impossible as long financial disparity abounds.

Lenin’s state, command-controlled, failed economically. Some have said the Soviet Union moved too quickly into a socialist model, and that Marx’s called for conversion of a fully developed capitalist economy, rather than an agrarian one, as the Soviet Union was in 1919.

Debt Politics

Contrary to the musings of radio talk show hosts and self-labelled “small government conservatives”, the scope of tax reduction symbolize a future tax deficit. Tax reduction is tax deferral–subsequent generations will have to pay even more in taxes, not to mention interest. The idea of lower taxes is politically expedient; who wants to give up more of their money to government?

The promotion of a lower taxes theme appeals to the leadership of our country today. Lower taxation is being sold as inherently good because it benefits the individual and–theoretically–reduces the size of government. But “conservatives” aren’t fiscally conservative, if the results of Republican control over Washington is any indicator of “conservative” frugality.

The Republican theory of less government has become an hypocritical oddyssey of spending. Raising taxes has been positioned as the greatest political sin among those calling themself conservative.

Regressive taxation is nothing new to the Republicans, who ballyhoo lower taxes even as the country slides into ever more debt as a result. As a percentage of income, the poor and middle class pay more since the Bush tax cuts were enacted.

It’s simply easier and politically popular to defer taxes; the young don’t vote as often, so the elderly may be able to continue passing the costs down to the unborn. Sooner or later there will be a reckoning, probably in a generation or two.

One great danger of tax deferral is a shock to the economic system as the higher costs of government are passed on in the form of higher taxes. The longer the US waits to enact spending reform–or tax reform to prevent the deficit from growing, the harder the change will be on the economy.

Our fiscal imprudence is already being reflected in increasing interest on debt incurred in order to reduce taxes.

According to Senator Casey who spoke on February 14th in the Senate Banking Committee (link), “we are up to 8.6 trillion in government debt. Interest payments on that debt in 2006 increased by 23%.”

In testimony February 15th, I believe Bernanke indicated that a combination of rising interest on the debt and entitlements would force taxes to be raised about 40% in 30 years, assuming no new spending. [ I’ve been unable to find Bernanke’s statement cited here. I did see that he had made similar comments to the Senate Budget Committee in January. A transcript of Bernanke’s address is available here.]

A written transcript for Bernanke’s Question and Answer Session on Wednesday, February 14th, is available here. Hopefully I’ll be able to find more from Thursday’s Question and Answer Session, in front of the House Financial Services Committee and post it in a comment at the bottom of this post.

For more see Looking for Mr. Bernanke below, alongside Additional Commentary.

Summary

Unfortunately, Americans will have to face a world of higher taxes and a standard of living that will be lower than those of their parents. There will be exceptions, of course, but the economic trend will invariably turn down at some point. Some would say there is nothing we can do to change our future, but the fiscal solvency of our government is vital.

The cost of entitlements will rise. Coupled with increased borrowing, higher taxes will come in order to pay interest on the federal debt.Payroll taxes may have to be raised to sustain entitlements, and the tax burden compounded by the fact fewer workers must support more retirees.

The financial problems of the masses might impact the rich and corporations who are the chief beneficiaries of lower taxes at this time, so it is in there long-term interest to reduce government spending and borrowing. Many people left in the Middle Class could face the higher taxes necessary to keep up with entitlements, not just the wealthy and corporations, who would theoretically but not necessarily be the first to be taxed more.

We can simply borrow from creditors abroad to sustain our ways, but for how long? Millions of American face a retirement insulted from poverty only by Social Security. The Baby Boom generation begins to retire in just a year or two. Many will be unable to amass sufficient financial resources prior to retirement based on their current savings.

We can forestall the long-term consequences of so much borrowing now, before federal debt becomes too large. Like global warming, the US can either recognize the problem and lead the solution or be led by the folly of our mistakes to the true cost of doing too little.

While government can borrow, eventually it must pay for the money it borrows. So the individual must pay a price for governmental indiscretion one way or another–through taxes or inflation.

Without any individual savings, and the accumulation of massive amounts of debt, taxes will have to be raised. Otherwise we will see money simply continue to be spent, resulting in inflation and ever higher cost burdens, as we now see in the medical care fields. Theoretically, dollars could continually be printed and spent, to the point they have to be carted about in wheelbarrows as they were in Depression-era Germany.

We are facing a situation where continued spending will bankrupt our nation, which will make future borrowing nearly impossible. Our creditors will stop loaning to us, which will lead to a shortage of capital to spend, which will in turn lead to a massive recession. The pistol has been cocked, the bullet loaded into the chamber. We can change the time at which a reckoning might come, but we can cannot expect what is unsustainable to be sustained indefinitely.

* * *

Free Money

Bernanke’s employer, the Federal Reserve, is the only private corporation in America that pays no taxes. Its Board sets the interest rates charged by banks which affect the overall economy. Media scrutinize what the Chairman, Mr. Bernanke, says and does vis-a-vis the economy.

The Fed essentially makes money from nothing. One startling fact is that money in fact is free; it’s the banking system that survives based on its ability to charge interest.

There’ve been periods when the US government has sought to assert control over our money; Kennedy tried it and Lincoln did it, printing dollars called “greenbacks.” Both those Presidencies ended harshly.

The principle is simple: have the Treasury make and distribute currency directly for what it spends. Money could be loaned at no interest, with nothing in collateral save to have the initial loan paid back. Interest-free money is an intriguing idea.

Money should be free; the right to produce money lies with Congress under our Constitution. Yet if Congress gained a monopoly and sole issuer of our nation’s currency, spending would come without consequence. Congress would spend too much (look at them now.) The unrestricted spending would lead to an inevitable collapse in the value of our currency, with the money buying less and less over time.

Another key constituency would be banking industry which exists based on its ability to borrow and lend at interest. Both functions would be broken, perhaps much in the same way medical insurance industry might collapse–overnight–were national health care achieved.

If we removed Fed control over the issuance of money, we would in fact be asking for hyperinflation out of Congress, not to mention a lot of out-of-work bankers, however tragic that notion seems.

Looking for Mr. Bernanke

I sought any record of the comments from Bernanke’s Question and Answer session with the House Financial Services Committee on Thursday, February 15th. While the Chairman’s prepared testimony was only click away, I searched in vain through pages and pages to find any written record of Bernanke’s answers to questions from the House Financial Services Committee. Apparently I haven’t given my resources sufficient time to transcribe the event.

As a side note, I did find international reporting on Bernanke’s commentary quite different from that presented in the domestic Media. Bernanke is clearly a man of tremendous influence. So playing to image, the Media fixates on anything which might roil the markets. Captivated by Alan Greenspan’s whimsical style, financial media treat Fed commentary as if each kernel were the embodiment of ultimate truth.

The absence of transparent reporting sets a dangerous precedent in controlling the flow of information. The absence of hard facts in the Mainstream Media narrative means that people have little reason to be curious, or alarmed. The absence of substantive insights into the core economic issues helps news divisions simplify their obligations. The American people to some degree oblige the dumbing-down process, content in their ignorance of anything beyond their immediate financial condition.

Like the Mainstream Media, the financial press encapsulates personal opinion–even that of the Fed Chairman–into neat packages. Celebrity-worship is after all at the heart of the mass commercialization process. For the Media, it’s simply more convenient to have Fed commentary described in broad strokes like bullish or hawkish, than confront specific position or delve into details.

I also found transcripts of the Question and Answer sessions far harder to obtain than the prepared statements. It’s not without risk that the Fed Chairman speaks; where Bernanke might stray from prepared comments, a breath of fresh air threatens the status quo. Spontaneity is not a friend of market conservatism; better than Bernanke’s comments stay framed in expectations than risk rattling the boat.

One general perception I noticed in reporting on Bernanke is that he’s seen as still new to the job. There seems to exist the premise in much of the reporting on him that he shouldn’t be challenged or confronted this early in his reign. The lesson is clearly that what Bernanke says is wise and true, yes, and that Congress hasn’t earned the privilege of challenging the Chairman of the mighty Federal Reserve Board, a company that in fact depends upon Congress’ annual ratification of authority for the Federal Reserve.

I’m leery of any Media agenda that makes the people’s sole representatives subordinate to the Fed in financial matters–or any other matter. Unfortunately, matters pertaining to our nation’s money have essentially been delegated (or abdicated) to the Fed Reserve, who sets interest rates. Interest rates may be crucial in understanding the future direction of the markets, but fewer Americans are interested than during the bull market days of the late 90’s.

Perhaps the Media feels dumbing down is acceptable, considering the absence of public understanding about basic economic issues. Maybe Big Media is content the sheer breath of financial analysis devoted to every detail of Bernanke’s “Fed-speak” stand in lieu of more balanced coverage.

The public must commit to becoming better informed and learning more about personal finance and economics. To cut the budget, Americans must apply political pressure by voting for candidates who actually reduce spending.

Additional Commentary

Fed Chairman Bernanke comments Before the Committee on the Budget, U.S. Senate on January 18, 2007:

“…a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits. According to the CBO projection that I have been discussing, interest payments on the government’s debt will reach 4-1/2 percent of GDP in 2030, nearly three times their current size relative to national output. Under this scenario, the ratio of federal debt held by the public to GDP would climb from 37 percent currently to roughly 100 percent in 2030 and would continue to grow exponentially after that.”

…Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both.6

…if government debt and deficits were actually to grow at the pace envisioned by the CBO’s scenario, the effects on the U.S. economy would be severe. High rates of government borrowing would drain funds away from private capital formation and thus slow the growth of real incomes and living standards over time. Some fraction of the additional debt would likely be financed abroad, which would lessen the negative influence on domestic investment; however, the necessity of paying interest on the foreign-held debt would leave a smaller portion of our nation’s future output available for domestic consumption.

…future generations of Americans will bear a growing burden of the debt and experience slower growth in per-capita incomes than would otherwise have been the case.

…in ensuring that we leave behind a stronger economy than we inherited, as did virtually all previous generations in this country, will be to move over time toward fiscal policies that are sustainable, efficient, and equitable across generations. Policies that promote private as well as public saving would also help us leave a more productive economy to our children and grandchildren. In addition, we should explore ways to make the labor market as accommodating as possible to older people who wish to continue working…

…if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost.”(Source)

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Arianna Huffington Zeroes in on Declining Middle Class in New Book

Transcript

MARGARET WARNER: Now: the second of two conversations with ideological opposites this election season. Last week, we talked with former House Majority Leader and conservative Dick Armey about his book on the Tea Party movement.Tonight: the perspective from the left and a book by Arianna Huffington. Gwen Ifill sat down with her last week.

GWEN IFILL: Arianna Huffington is co-founder and editor in chief of The Huffington Post and author of a new book, “Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream.” She joins us now from New York. Welcome.

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ARIANNA HUFFINGTON, co-founder, The Huffington Post: Thank you, Gwen.

GWEN IFILL: Arianna, I have to look at the cover of your book and I think to myself, America is still the world’s most prosperous nation. How do you define Third World?

ARIANNA HUFFINGTON: Well, I know it’s a jarring phrase, Gwen, but I chose it deliberately, because I felt that we needed a warning. We needed to sort of sound the alarm about the trajectory we’re on about the middle class crumbling. And the middle class is the foundation, not just of our democracy and our prosperity, but our political stability.

And so, as the middle class is — is crumbling, we really have a certain time, a window during which we can course-correct and turn things around. And I end the book on an optimistic note, that we can do that, but only if we bring a sense of urgency to the undertaking.

GWEN IFILL: You’re a political animal. When you say that the middle class is crumbling, what are the events that you would say led us to this point?

ARIANNA HUFFINGTON: Well, it has been going on for about 30 years. It didn’t just happen because of the financial meltdown. It’s been a combination of the kind of tricks and traps that we see in the mortgages that were offered, the credit card contracts that were offered, the assumption somehow that people could just buy into the American dream without any kind of down payment.

So, there’s a combination of a collective delusion about how we could put everything on our credit cards and use our houses as an ATM machine. And then suddenly, when the cards came tumbling down, we saw that, in fact, there were — there was nothing to fall back on.

And, as a result, we’re now seeing a country of extremes. You know, the income inequalities have been dramatic. You know, we went from CEOs making 30 times as much as their workers 40 years ago to them making 300 times as much now. As, as a result — that’s really the most troubling thing — people have this incredible sense of unfairness and injustice about what is happening.

GWEN IFILL: And, as a result, people are angry on the right and the left. But who does — whose responsibility is it to try to straighten this out, the folks who are in power, theoretically, at least for the moment, in Congress and at the White House on the left, or the people like the Tea Party conservatives who are agitating in the same way, using a lot of the same language you’re using, on the right?

ARIANNA HUFFINGTON: Well, in fact, I think that the solutions are beyond left and right, and I think we in the media have a responsibility to stop framing everything as a right-left issue, because this has been obviously a failure of the Bush years that put their faith in free market economics and deregulation, but also the Democrats during the Obama years, when they had control of the White House, the House, and the Senate, but, instead of going forward with bold proposals that would address the fundamental problems in the country, they tried to basically do what they can to bring everybody along, sort of flirt with Olympia Snowe, and bring Larry Summers to head the economic team in a way that put Wall Street ahead of Main Street.

And they lost very precious time. So, here we are, 20 months into the Obama administration, and, as Lloyd George put it, you cannot jump across a chasm in two leaps. And that’s what they tried to do with a stimulus bill that wasn’t adequate, without putting any strings to the kind of bailout that Wall Street received, which meant that they were bailed out, but they cut lending to small businesses, to the tune of $100 billion. And now the chickens are coming home to roost, both economically and politically, for the Democrats.

GWEN IFILL: The energy seems to be — at least the anger energy that you talk about seems to coalesce in — in the Tea Party movement that we talk about. So — so, I wonder whether you think that — Dick Armey, for instance, was on this program.

He says that the Tea Party movement is out to reform the Republican Party, not be the Republican Party. Would you say that people who are more liberal need to reform the Democratic Party, to do some of the things you just — you just outlined?

ARIANNA HUFFINGTON: I think we need to reform both the Democratic Party and our entire political system, which remains at the moment captured by special interests, you know, with 26 lobbyists for every one elected official. And we have seen that again and again. We have seen it when the special interests defeated cram-down legislation. So, the president this week spoke about hundreds of thousands of people losing their homes. That didn’t need to happen.

If we had had cram-down legislation, if the White House had pushed to make sure that there were loan modifications that were mandatory, a lot of that didn’t have to happen. That’s really why the anger is at the moment focused on the Democrats. They were in charge. And, unfortunately, that’s the — the problem with incumbency.

GWEN IFILL: It seems also that the Democrats are the focus of anger from Democrats and Republicans. Who will speak — who does or who should be speaking for the people who are actually in the jobs currently?

ARIANNA HUFFINGTON: Well, the president gave the best speech he has given since he’s been in the White House. It was a speech that — that had the kind of eloquence that we expected from him and that dealt with the real problems. The problem is, is it too late in terms of the midterms? It’s never too late in terms of his own presidency and in terms of 2012.

But the cards have been dealt for November. Obviously, whatever he does between now and then isn’t really fundamentally going to change the economy, the job numbers, or the foreclosure numbers.

GWEN IFILL: When you say the cards have been dealt for November, do you believe, then, Democrats will lose the House and the Senate? And if that’s the case — and even if it’s not — what does that bode for 2012, really?

ARIANNA HUFFINGTON: Well, at the moment, if the election were held today — and we know a lot can change between now and the election — they would lose the House.

The Senate is too hard to tell yet. But that is really, for me, largely a product of how they underestimated the economic crisis. Remember, Gwen, up until very recently, really up until the GDP numbers were recalculated, we were still talking about a recovery in much more glowing terms.

We were still talking about unemployment as a lagging indicator. Now the language has changed. The tone has changed. The White House itself has — is singing a very different tune, because it’s now clear there’s no fundamental recovery. There are improvements, but it’s all painfully slow, as the president himself acknowledged.

GWEN IFILL: And you believe they should be spending more money in order to overcome this, rather than thinking about ways of cutting the amount of money that’s going out the door, with the deficit in mind?

ARIANNA HUFFINGTON: You know, it’s not just more money. It’s not just more money. It’s really, we didn’t have the sense of urgency that we had about saving Wall Street, you know, the famous weekend when everybody came together, and they basically said, we cannot afford to let the financial system collapse. We throw everything against the wall and see what works.

We never did that. We never did things like a payroll tax holiday. The kind of credit, tax credits for R&D that the president is talking about now, why didn’t we propose this earlier? The kind of infrastructure spending that is desperately needed, that conservatives and Democrats can agree is needed, and that would keep jobs for sure here in this country, that wasn’t there.

Even though the president talked in the State of the Union that jobs were going to be his primary focus, we didn’t see that until we got two months before the midterm election.

GWEN IFILL: OK. Well, we will see what happens during those midterm elections.

Arianna Huffington, author of “Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream,” thanks so much for joining us.

ARIANNA HUFFINGTON: Thank you, Gwen.

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Saturday, September 11, 2010

Decline of America, or Decline of the Middle Class

A couple of days ago, David Brooks offered his thoughts on the decline of the British Empire and, potentially, of the United States. Paul Krugman took a gentle pokeat the column,

Reading David Brooks today, I couldn’t help thinking of Bob Solow’s old line that efforts to explain Britain’s relative decline always end up in a “blaze of amateur sociology.” That’s not an attack on David; everyone does it — although I might point out that the reason so many smart kids go into finance, not manufacturing, is that the pay is much better.

It seems fair to also note in relation to sociology (or economics, or psychology, or a lot of other ‘ologies’) the professional practitioners are potentially more dangerous than the amateurs. It is possible to make those fields relatively scientific, but it’s difficult to see how even the best of the professional class can avoid introducing elements of subjectivity, ideology and overgeneralization. Various models or theories will work better in some contexts than in others.

In relation to the decline of the United States, Brooks offers his personal opinion, “Personally, I’m not convinced we’re in decline”. It’s fair to note that earlier in the editorial he argued the opposite,

This history [of Britain’s decline] is relevant today because 65 percent of Americans believe their nation is now in decline, according to this week’s NBC/Wall Street Journal poll. And it is true: Today’s economic problems are structural, not cyclical. We are in the middle of yet another jobless recovery. Wages have been lagging for decades. Our labor market woes are deep and intractable.

The most charitable reading of Brooks’ inconsistency is that he believes the nation as a whole can avoid decline, even as its middle class is unquestionably in decline. Such a perspective would either seem out-of-touch, a variant of “I can’t understand why those factory workers don’t realize that if they quit their unions, abandon job protections and take pay cuts, and they would be better off”, or vested in the notion that an incredibly wealthy minority can rule over a flourishing nation of, in terms of comparative wealth and political power, serfs.

The Krugman passage quoted above partially rebuts Brooks’ leading point, that “the elites. America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism.” Brooks argues,

It would be embarrassing or at least countercultural for an Ivy League grad to go to Akron and work for a small manufacturing company. By contrast, in 2007, 58 percent of male Harvard¹ graduates and 43 percent of female graduates went into finance and consulting.

Sure, after pursuing the most expensive academic degrees available, large numbers of students will chase the largest paychecks available. No surprise there. But my guess is that if an Akron manufacturing concern were doing well enough to pay a competitive salary, it could attract job applications from ivy league grads. I won’t say that there aren’t graduates who would see anything but a six figure job with a fortune 100 company as beneath them, but the larger impediment to a small company’s hiring a new college graduate, even from Harvard, is that they come with an inflated sticker price and no job experience. Smaller businesses can’t invest as much money in training and shaping college graduates; they often need their new hires to hit the ground running.

Brooks’ larger point is misleading – many college graduates are eager to start businesses, work independently, and be masters of their own fate. Not that our society makes it easy to be an entrepreneur, or that it’s easy to pick up the associated skill set in a standard college degree program.

Oddly, just after stating that too many college graduates are chasing big paychecks, Brooks holds up a quote attributed to Michelle Obama, in which she reportedly² urged women to join helping professions, as reflecting a “shift away from commercial values”. Which is it – are we shifting toward commercial values, putting salary head of everything else, or are we dropping out of the corporate world to become teachers, community organizers and social workers?

Brooks next goes off on the lower middle class:

Then there’s the middle class. The emergence of a service economy created a large population of junior and midlevel office workers. These white-collar workers absorbed their lifestyle standards from the Huxtable family of “The Cosby Show,” not the Kramden family of “The Honeymooners.” As these information workers tried to build lifestyles that fit their station, consumption and debt levels soared. The trade deficit exploded. The economy adjusted to meet their demand — underinvesting in manufacturing and tradable goods and overinvesting in retail and housing.

First, the Huxtable family was not depicted as middle class – Dad was a doctor, Mom was a lawyer, and they were affluent. There are many situation comedies which depict people living far beyond the income potential of their nominal jobs, but that’s not something which which Bill Cosby can be faulted. Second, the lead male characters in “The Honeymooners” were a bus driver and a sewer worker, the sole breadwinners for their families, save for a period during which Ralph Kramden was unemployed and Alice returned to work as a secretary. The most remembered line from the show evokes domestic violence. Ralph, frustrated by his economic circumstances, was often scheming about how to make money.

More to the point, the era of the Huxtables brought us a modern equivalent of “The Honeymooners”, a show called “Married With Children.” If you think about it, shows like Married With Children” are far more misleading about what it takes to build a middle class lifestyle (a shoe salesman and his stay-at-home, spendthrift wife support two children in a pretty large ranch house, while paying lip service to the economics of their situation) – a successful lawyer and established doctor can easily replicate the affluence of the Huxtables, who arguably lived below their means.

There’s plenty of reason to doubt Brooks’ notion that it was some form of “Keeping up with the Joneses” (or Huxtables) that led to increased consumer spending and debt. You know what played a huge role in the growth of consumer debt? The broad availability of credit. Can’t he imagine a Honeymooner’s episode along the lines of, “A credit card arrives in the name of the Kramden’s dog, the family goes on a spending spree, and is shocked to learn that they have to pay back the debt.” That is the summary of an episode of “Married With Children”.

As for the idea that the loss of manufacturing jobs overseas was the result of a shift in U.S. culture – that poor little manufacturers were forced to seek out less skilled, less educated workers in the developing world who would work for a fraction of the wages of their U.S. counterparts, because there weren’t enough U.S. workers willing or able to perform those jobs? Come on.

Brooks carries on,

Finally, there’s the lower class. The problem here is social breakdown. Something like a quarter to a third of American children are living with one or no parents, in chaotic neighborhoods with failing schools. A gigantic slice of America’s human capital is vastly underused, and it has been that way for a generation.

First, it should be noted that Brooks paints with a very broad brush, implying that the children of divorce fall into the “lower class”. The reality is that, yes, divorce can cause a newly single parent to fall below the poverty line, and can cause longer-term economic stress, but most families bounce back within a few years. Beyond that, Brooks is speaking of an underclass – and it cannot be said that his “lower classes” are a product of the past generation. I’ll give Brooks credit for not falling into Bell Curve-style reasoning and excuses, but people have strugged with poverty for the whole of human history.

As an amateur sociologist, Brooks misses the boat on this one:

These office workers did not want their children regressing back to the working class, so you saw an explosion of communications majors and a shortage of high-skill technical workers. One of the perversities of this recession is that as the unemployment rate has risen, the job vacancy rate has risen, too. Manufacturing firms can’t find skilled machinists.

First, children tend to learn from and model themselves after their parents, and learn how to do certain types of work by watching their parents. Certainly, the parents of a couple of generations ago may have urged their children to get college degrees as a path to upward mobility, their children entered the white collar middle class, and their grandchildren may not be becoming machinists, but that’s a progression to be expected. Further, how often does Brooks imagine parents telling their children, “Don’t become an engineer – there’s no money in it.” One of the leading reasons why we have a surplus of communications majors is because it’s a relatively easy degree to earn, whereas engineering, architecture and the hard sciences are much more demanding. There’s a reason David Brooks was a history major, and I dare say it has very little to do with his desire to give himself marketable job skills.

Meanwhile, what’s the lesson for machinists? Perhaps, “Move to a non-union state or at least be prepared to do a lot of business travel to Mexico… no, sorry, we’ve decided to outsource engineering to India and manufacturing to China.” Sure, it’s true that there are jobs available for experienced welders and machinists, but how does Brooks imagine that they’ll develop the skills to qualify for the jobs presently available given the decline of domestic manufacturing? Brooks complains,

Narayana Kocherlakota of the Minneapolis Federal Reserve Bank calculates that if we had a normal match between the skills workers possess and the skills employers require, then the unemployment rate would be 6.5 percent, not 9.6 percent.

I think it’s a truism that if every employer had a candidate perfectly matched to every job opening, unemployment would drop considerably. But the displaced workers who cannot find employment, or have to take significant income cuts to find jobs, are not without job skills – it’s that the skills and experience from their prior jobs aren’t necessarily relevant to the modern workplace. If you have to train or retrain workers, you incur a significant cost and delay in obtaining new, qualified workers. But I see no reason to believe Brooks’ suggestion that the underlying problem is that too many college students are graduating (as did he) with degrees in the humanities.

It’s of course interesting to inject a bit of history into Brooks’ theory that the industrial revolution emerged, like magic, due to “cultural shifts” that caused “technicians” to take scientific knowledge and put it to practical use. It would seem reasonable to mention that the industrial revolution was spurred in no small part by the development of energy sources sufficient to run large factories and foudries. The underclass Brooks appears to believe did not exist at the time in fact provided the necessary “human capital” for the industrial revolution, often working extremely long hours in hellish conditions. Eventually the labor movement emerged and transformed the workplace, but that’s not to say that industries didn’t find similar sources of labor to abuse in the colonies and, ultimately, in the sweatshops of the post-colonial developing world. And during that era, Brooks believes that the elite of Britain, the heirs of the landed gentry, were studying applied science and industrial management, as opposed to hiring professionals and managers to run their enterprises?³ Not a banker or a lawyer among them?

One of the big reasons that the great-grandchildren of Britain’s “empire builders” didn’t follow in their great-grandparents’ footsteps is that the British Empire collapsed. Secondary to that, the colonies were no longer available as a captive market that could be forced to buy Britain’s exports. (Ah, the good old days, when a nation would go to war to protect the rights and profits of its drug traffickers.) And let’s not forget the catastrophically expensive World War I, followed all too quickly by the necessary but also catastrophically expensive World War II. Britain’s fall was hastened by the amount of wealth it poured into those wars, along with the damage to its industrial infrastructure resulting from WWII. The U.S. benefited from distance, emerging from the war with its manufacturing infrastructure intact. That advantage started to falter as Germany and Japan rebuilt their industrial infrastructure and emerged as competitors.

No matter how you look at things, Brooks should have addressed the role of outsourcing in the decline of middle class jobs in the industrial fields. Over the last generation we have not only seen the loss of huge numbers of solidly middle class manufacturing jobs, those that remain tend not to pay particularly well or offer a path of career advancement. If there’s a shortage of machinists, it can reasonably be said to be the result of parents and students looking at the nation’s declining industrial base and questioning whether it makes sense to pursue a job that will pay, what, about $40K in a declining market? For all of Brooks’ apparent scorn at choosing service jobs such as teaching or nursing, those jobs pay as well or better and are in growing fields. Meanwhile, the mantra of the past couple of generations has been that the future lies in the domestic service sector, so it’s hardly a surprise that many students have internalized that message.

There is a disconnect between the manufacturing industries and U.S. employees. While I have little doubt that a manufacturer would get a stack of résumés applying for entry level assembly line work, even at minimum wage and with a minimal benefits package most employers see the advantages of operating overseas, in nations that have weak wage, employment and environmental laws (or weak enforcement of their laws) over building a plant in the U.S. The outsourced factories typically develop products developed in the west, so some jobs remain, but unless energy prices spike and stay high we can expect that the present situation will continue. That means Brooks’ “lower class” will lack entry level job opportunities, his “middle class” will attempt to maintain its lifestyle as real incomes decline, and his elite? The change he describes, in fact, appears to be no change at all.

———–
1. How quickly Brooks leaps from “brightest minds” to “Harvard”. There are a lot of bright minds who attend academic institutions that aren’t as elite (or expensive) as Harvard, and Bill Gates would have more bright kids explore alternatives to a traditional college education. I suspect we can all think of mediocre minds who number among Harvard’s alumni.

I’m also not clear on how having students go into fields such as “law, finance, [and] consulting” represents a “shift away from commercial values”.

2. I tried to track down the actual quote and find that, although attributed to Michelle Obama at an early 2008 campaign event in Zanesville, Ohio, no official transcript appears to exist and the unofficial quote is difficult to interpret due to its unfortunate use of ellipses.

3. Brooks cites Correlli Barnett for his point that “the great-great-grandchildren of the empire builders withdrew from commerce, tried to rise above practical knowledge and had more genteel attitudes about how to live.” But Barnett has made that same point about the great-grandparents.

Together with what Barnett describes as “the British distaste for a functionally coherent national system” this bias against technology led to the UK’s eventual decline from the position of world leader in economics in 1870 to fifteenth place a century later.

Posted by Aaron at 9:49 PM

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Labels: David Brooks, Employee Benefits, Jobs, Manual Labor, Middle Class, Poverty, Unemployment

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Op-Ed Columnist

The Unwisdom of Elites

By PAUL KRUGMAN

Published: May 8, 2011

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The past three years have been a disaster for most Western economies. The United States has mass long-term unemployment for the first time since the 1930s. Meanwhile, Europe’s single currency is coming apart at the seams. How did it all go so wrong?

Fred R. Conrad/The New York Times

Paul Krugman

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Well, what I’ve been hearing with growing frequency from members of the policy elite — self-appointed wise men, officials, and pundits in good standing — is the claim that it’s mostly the public’s fault. The idea is that we got into this mess because voters wanted something for nothing, and weak-minded politicians catered to the electorate’s foolishness.

So this seems like a good time to point out that this blame-the-public view isn’t just self-serving, it’s dead wrong.

The fact is that what we’re experiencing right now is a top-down disaster. The policies that got us into this mess weren’t responses to public demand. They were, with few exceptions, policies championed by small groups of influential people — in many cases, the same people now lecturing the rest of us on the need to get serious. And by trying to shift the blame to the general populace, elites are ducking some much-needed reflection on their own catastrophic mistakes.

Let me focus mainly on what happened in the United States, then say a few words about Europe.

These days Americans get constant lectures about the need to reduce the budget deficit. That focus in itself represents distorted priorities, since our immediate concern should be job creation. But suppose we restrict ourselves to talking about the deficit, and ask: What happened to the budget surplus the federal government had in 2000?

The answer is, three main things. First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs.

So who was responsible for these budget busters? It wasn’t the man in the street.

President George W. Bush cut taxes in the service of his party’s ideology, not in response to a groundswell of popular demand — and the bulk of the cuts went to a small, affluent minority.

Similarly, Mr. Bush chose to invade Iraq because that was something he and his advisers wanted to do, not because Americans were clamoring for war against a regime that had nothing to do with 9/11. In fact, it took a highly deceptive sales campaign to get Americans to support the invasion, and even so, voters were never as solidly behind the war as America’s political and pundit elite.

Finally, the Great Recession was brought on by a runaway financial sector, empowered by reckless deregulation. And who was responsible for that deregulation? Powerful people in Washington with close ties to the financial industry, that’s who. Let me give a particular shout-out to Alan Greenspan, who played a crucial role both in financial deregulation and in the passage of the Bush tax cuts — and who is now, of course, among those hectoring us about the deficit.

So it was the bad judgment of the elite, not the greediness of the common man, that caused America’s deficit. And much the same is true of the European crisis.

Needless to say, that’s not what you hear from European policy makers. The official story in Europe these days is that governments of troubled nations catered too much to the masses, promising too much to voters while collecting too little in taxes. And that is, to be fair, a reasonably accurate story for Greece. But it’s not at all what happened in Ireland and Spain, both of which had low debt and budget surpluses on the eve of the crisis.

The real story of Europe’s crisis is that leaders created a single currency, the euro, without creating the institutions that were needed to cope with booms and busts within the euro zone. And the drive for a single European currency was the ultimate top-down project, an elite vision imposed on highly reluctant voters.

Does any of this matter? Why should we be concerned about the effort to shift the blame for bad policies onto the general public?

One answer is simple accountability. People who advocated budget-busting policies during the Bush years shouldn’t be allowed to pass themselves off as deficit hawks; people who praised Ireland as a role model shouldn’t be giving lectures on responsible government.

But the larger answer, I’d argue, is that by making up stories about our current predicament that absolve the people who put us here there, we cut off any chance to learn from the crisis. We need to place the blame where it belongs, to chasten our policy elites. Otherwise, they’ll do even more damage in the years ahead.

A version of this op-ed appeared in print on May 9, 2011, on page A23 of the New York edition with the headline: The Unwisdom of Elites.

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Editorial

Where Will You Go When the Sovereign Debt Volcano Blows?

Thursday, June 30, 2011 – by Ron Holland

Ron Holland

“People never believe in volcanoes until the lava actually overtakes them.” – George Santayana

Last fall, while on an investment cruise, I had the opportunity to visit a “dormant” volcano in Chile. There was even a ski area with lift, restaurants etc. near the top on the lava and cinders. I thought at the time how I would ski the volcano but never risk my funds on a real estate investment there for obvious reasons.

Today we find the United States and most of Europe in a similar situation. We risk an eruption and collapse of the mountain of unsustainable sovereign debt built up over the last two decades. Frankly, the US dollar and national debt situation is so dire and our means to contain a sovereign debt crisis so limited by multiple wars, Washington’s debt and political incompetence at home, that anything could happen – almost overnight. Even a minor foreign policy or economic event like a Greek default or Middle East crisis could reap havoc with the precarious interlocking sovereign debt pyramid in the West.

Of course, no nation wants a collapse – especially China – because a western debt collapse and write down is certainly uncharted financial waters and the contagion risks are global. Still, America and most European governments and the central banking elites, which created the criminal sovereign debt fiasco, are only trying to buy more time and delay the inevitable. This inaction means the threat of an immediate US debt and dollar collapse cannot be ruled out. Therefore, readers who have not protected themselves certainly have cause to worry because now could be too late.

It Is Exit Time For Your Gold, Wealth & Family

Although you may have some time, nothing else has to happen before a big collapse could take place, even within days. Consequently, after 30 years of watching, writing and creating protective retirement planning and financial strategies, today I’m finally going to yell “FIRE” inside the closed ‘financial iron curtain” which is America.

If you have failed to store your precious metals outside the US, diversify out of the dollar or reduce or terminate your private retirement plan, there is now a clear danger of a Washington dollar and sovereign debt crisis which could sweep away most of your remaining wealth and financial security.

I do not have a crystal ball or inside political information on a specific imminent threat, only the observation that the sovereign debt crisis from Europe, a debt ceiling misstep from the clowns in Washington or a Middle East event could suddenly trigger the collapse. Actually any major political or economic shock could bring the Madoff style Ponzi scheme, which Greenspan and Bernanke have created, down almost overnight on top of us.

This will likely happen over a weekend and the following Monday morning you could wake up to Presidential Executive Orders “means testing” you out of Social Security benefits if you still have substantial retirement benefits or personal savings. You’ll likely discover an end to your home interest deductions, new confiscatory taxes and restrictions on US gold and silver, controls on moving private wealth and funds to safety offshore and dramatic hikes in taxes and cuts in government programs. In addition, spiking inflation rates, violence and massive protests will immediately follow these confiscatory actions and cutbacks. You can also expect severe banking and stock market liquidity restrictions, or closures, and this will only be the beginning. In short your wealth will be trapped in dollars and locked up for the duration of the emergency inside the American jurisdiction.

Therefore if you haven’t already prepared for this type of crisis contingency ahead of time, I’m telling you there will be little you can do after the fact. Washington will simply take and throw your wealth and promised benefits at the problem thus buying them more time with your wealth.

The Central Banks, City of London & Wall Street Have Looted America and the World

Back in 2007, did the Federal Reserve or your politicians or financial experts predict a collapse in housing prices of 30 to 50 percent? Remember, Bernanke, Greorge W. Ben Bush and Barack Obama all promised this was a temporary blip in the long-term upward trend in housing values. All advised you to “stay the course.”

Today, Tim Geithner claims we have a “strong dollar policy” but have you observed the 35% plus appreciation in the currencies of Brazil and Switzerland to the dollar in the last year? The EU establishment has repeatedly claimed over the last few months that the Greek problems are solved but these fake solutions usually only last a few days at best.

Back here in the US, there is talk about deficit reduction, cutting programs and tax increases but nothing really happens because solving the problem is political suicide. The American and European elites are buying time knowing that only a crash or war will give them the opportunity to act as they did in the 2008 meltdown. They only wait for a cataclysmic event to provide the fear, excuse and public support for government action needed to grab our private wealth and to delay their problems.

The mainstream American press doesn’t cover it, however the rest of the world knows that Wall Street banks and their central banking buddies in London and New York created the sovereign debt crisis. They then sold their profitable template, or imposed it on the end of a gun, for debt democracy to politicians around the world as a means to buy votes and maintain political control. The scam is now over and no one has a solution to the tens of trillions in debt already spent.

While many millions of poor people overseas are going hungry because of our exported inflation on food costs, now the foreign middle classes are being impoverished just to pay interest on the sovereign debts to our banking elites. Although, much of the world correctly blames their thieving politicians who’ve been bought off by our banking elites as the problem, our nation is also a target for their outrage.

Foreign politicians will attempt to shift the blame to America and this will speed the end of our American free ride from the fiat dollar and our reserve currency status. The world is just waiting for the spark to start the run out of the dollar and our Treasury debt. No nation will really help us when the collapse comes.

What If You Have More Time?

Maybe we have months instead of weeks – or at most a couple of years before the event takes place. Allow our politicians “buying time” to work for your benefit instead of theirs:

1. Educate Yourself With Free Subscriptions: First, to protect yourself, you must assume the balance of establishment news coverage and opinion is all disinformation designed to delay panic and create actions which will benefit the establishment probably to the detriment of your best interests. Therefore I suggest you subscribe to the following free e-mail publications:

• Follow what the elites are planning ahead of time with The Daily Bell – Subscribe.

• Keep up with the real freedom news and philosophy by subscribing to LewRockwell.com – Subscribe.

• Get an Austrian economics view on the markets and gold with Mountain Vision – Subscribe.

2. Maintain Liquidity & Reduce Political Risk: Legally and following all reporting requirements, move your private wealth outside the US into safe secure investments which will remain liquid and trading should US markets close as they did following 9/11.

3. Create A Domestic Safe-Haven Location: The potential for violence, theft and property destruction in the US dwarfs what could happen in Greece. If you can afford a safe-haven second home away from major cities and high crime locations, then do so. Consider taking advantage of the real estate collapse and buying something you can enjoy in good times and have as insurance for bad times.

4. You Will Likely Be Safer Outside the US: In a serious crisis, most of the criminals out to steal your property and do harm to you will come with official government sanction and not from traditional criminal elements. Consider a more secure safe-haven jurisdiction where the rule of law might still prevail with a condo, second citizenship or residency in a nation outside the United States for the duration of the domestic disorder and economic collapse. Remember, currency and government debt collapse is common throughout the world and history shows the difficulties don’t last forever. My fear is we haven’t seen a world reserve currency collapse before and the aftermath is uncharted waters. I would expect a scenario several magnitudes worse than the 1991 Russian collapse.

5. Secure Your Gold: Finally move most of your gold or silver offshore where it will remain secure rather than become a tempting target for confiscation from parasitical groups and individuals. Washington will need your gold as I doubt there has been substantial gold at Fort Knox since Nixon closed the gold window. The eventual outcome of the crisis may well be some fake gold backing for the dollar. Why else would anyone use a collapsed currency?

6. Don’t Trust Washington With Your Retirement Benefits: Consider closing and taking a withdrawal from your retirement plans to avoid new taxes and penalties at withdrawal, the means testing and loss of your Social Security benefits or the forced investment into collapsing Treasury obligations.

You can read all about the gold and retirement threats in my Lew Rockwell archive. Pay specific attention to the following essays:

The Greek Tragedy
There’s Gold In Fort Knox?
Retire In Poverty- Retirement Plan Nationalization
The Obama Retirement Trap

The debt crisis is here and I promise you only that you will not hear the truth on cable financial news or from your establishment investment firm or professional. To avoid a panic, neither the government, the Federal Reserve or Wall Street will be honest with you about the risks we face, just like they all lied and covered-up before the market meltdown in 2008.

If you are an American, the last place you should keep most of your wealth now is in the dollar or your home country. You might personally get out but your wealth will be trapped for the duration and probably lost during the disruption.

Final note: In my bio below, you can read more about my efforts and others who are fighting for our/your liberty. Addiotionally, Take some time to peruse the biographies and glossary setions of the Daily Bell ThinkTank to familiarize yourself with current and past powerful elites and the means they utilize to control and destroy our/your life, liberty and property.

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Ron Holland on the Inevitability of Societal Chaos, How the Elites Will Try to Maintain Control – And How You Can Protect Your Wealth From Confiscation

Sunday, July 10, 2011 – with Anthony Wile

Ron Holland

The Daily Bell is pleased to present an exclusive interview with Ron Holland (left).

Introduction: Ron Holland is the author of three books, numerous special reports and hundreds of articles on investment and political topics, many of which focus on the interplay between politics and the investment markets. Selections of his essays can be found in the archives of LewRockwell.com and The Daily Bell.com. He currently is a contributing editor to several newsletters dealing with political and investing topics, a member of the Advisory Board of Zurich-based BFI-Consulting and Chairman of the Advisory Board of The Foundation for the Advancement of Free-Market Thinking (FAFMT).

Daily Bell: Thanks for taking the time to participate in another interview. Since you were here last time in December, things have continued to erode in the global economy. Do you feel the downward trend for the US dollar is going to change anytime soon?

Ron Holland: Thanks for having me back, always a pleasure. With respect to your question about the future of the US dollar, before I answer it, I would like to say that I am not anti-American in anyway and, in fact, quite the opposite. My views are firmly aligned with those who believe in an individual’s right to life, liberty and the pursuit of happiness. But today in America we see these rights eroding right along with the dollar. So I have begun to speak out along with millions of other Americans.

Daily Bell: It does seem as if people are growing angrier, and more awake about what’s going on. Or maybe that’s just our bias.

Ron Holland: It’s because the system is falling apart and growing more obviously unfair at the same time. The Anglosphere power elite has taken complete control of the US – of the entire West, as a matter of fact. Of course it’s always been that way to some extent.

Daily Bell: You have a point about the obviousness.

Ron Holland: It used to be that they tried to hide it but the Internet has made that increasingly impossible as the DB often points out. So, it’s like they don’t care anymore. They’re pursuing their one-world vision no matter what. If you get in their way, they’ll try to run you over. And people resent it. Trouble for them is there are a lot more of us than them.

Daily Bell: You think people are seeing a pattern?

Ron Holland: It’s a combination of the economic downturn and the new communication technology. People see the amount of money being thrown around on bailouts and wars. It can’t be hidden anymore because it’s available for anyone with a computer.

First they instituted central bank around the world and then they began to build their new world order, funding it by printing money-from-nothing. When the business cycle soured, they’d distract people with war. But again none of this is working so well now. It’s a fairly brutal and even obvious system once you understand it.

Daily Bell: It certainly worked well in the 20th century.

Ron Holland: No doubt about it. Still, today, despite what I consider an awakening, we still have large number of people who don’t understand what’s going on and maybe never will. Some of them are barely capable of critical thought. But those who are aware are growing too and at a faster rate than ever before. What gets people’s attention is when the economy is not working. And today there’s nothing left to milk in the West. The cow is dry and the cream has been siphoned off – and it sure as heck isn’t in my or your cup.

Daily Bell: We like to use the term Internet Reformation.

Ron Holland: It sums it up rather well. Internet Reformation. John Q. Public is starting to understand that they have been the subject of a massive mind manipulation ever since they first walked through the doors of an American public school. It’s like a warm bath. Even after you get out of school, you’re subject to the same propaganda. The mainstream media is there to reinforce it as are the establishment historians. In the 20th century there was literally no respite. But in the 21st century the alternative has really come on strong. Sites like yours (to which I encourage all readers of this article to subscribe – it’s free: click here to subscribe now, Mises.org and LewRockwell.com – just to name a few – are speaking truth to power. It’s an entirely different kind of illumination and it’s making a real difference.

Daily Bell: We’ve noticed it’s hard to take sometimes, to accept how badly you may have been manipulated and fooled. We certainly know the feeling. It makes you sick.

Ron Holland: It’s not something you have a choice about. This knowledge is filtering around the world. People are waking up from a bad dream – or at least understanding why their lives are as they are. They’ve been robbed, and it’s better to live with that knowledge than without it. Once people start to see this gigantic cage of world government being built around them, they start to do something. That’s what’s behind the Tea Party movement. Even if those in the Tea Party don’t understand everything the same way, they know something’s wrong.

It ultimately comes back to the dysfunction of the current economy, the centralization, the inflation, joblessness, etc. Central banking and the Federal Reserve in the United States has got to be the greatest fraud of all time – the idea that a small group of chosen people can set the value of money for everyone else. They can’t. All they can do is print and inflate/devalue. That’s why more and more people understand they have to get out of paper money into gold and/or silver.

Daily Bell: Where do you think this is all headed, this awakening and what people are starting to do about it?

Ron Holland: Well, I’m probably more optimistic now than I have been in the past couple of decades. People have been asleep, but now, like Rip van Winkle, they’re stretching and stirring.

They are beginning to “get it” now in a fundamental way, in the gut. The system today is a series of lies and illusions. Everything that comes out of the mouth of the power elite structure is a lie – especially here in America where the political, media and business establishment supply us with endless lies.

We’re told this is a capitalist free market system. But because of central banking it’s a command and control system. We’re told to go get an education but what we receive from these institutions of higher learning is mind control – degrees in global warming and social diversity. Nonsensical stuff.

The mind manipulation needs to stop. The wealth-siphoning must cease. I think it will. I think there’s going to be some kind of social explosion if it doesn’t.

Daily Bell: Social discontent is definitely rising. That’s not news anymore. You see it coming to the US as well?

Ron Holland: As I prepare to leave for Mark Skousen‘s FreedomFest conference in Las Vegas, I am more optimistic about peaceful change, painful though it may be. I think what’s going on is going to become massive and overwhelming. I don’t think it can be stopped and my hope is that it will get so large so quickly that violence is not even going to be an option. The Internet Reformation is exactly that – a reformation of the systems of control and it doesn’t have to be violent to happen.

Daily Bell: Well, even it’s not violent it can be painful.

Ron Holland: Absolutely. People can lose everything in troubled times.

Daily Bell: Not just in America or Europe.

Ron Holland: You’ve run a number of articles on China and that’s a key country. I tend to agree with you that it’s a troubled situation over there now and that not enough people understand the stakes. If China collapses, the rest of the world economy gets hit with a chain reaction that’ll hit harder than Tyson in his prime.

Daily Bell: They’re at a critical stage now with their tightening. They’re raised rates something like five times recently.

Ron Holland: There’s obviously a criticality here. Food prices are continuing to go up fast from what I’ve read. I believe the price of pork has gone up something like 50 percent and the Chinese like their pork. Real estate is going up – even though China made it illegal even to buy apartments for a while as I recall.

In these situations, where you already have what is basically out-of-control price inflation, governments have no choice. They have to slow the economy, really put the brakes on. This isn’t like other times for the Chinese economy … this is the real thing. They slowed down with everyone else in 2008, but the Chinese never slowed down all the way. They dumped something like one trillion dollars into the economy and they’ve been trying to wring it out ever since.

Daily Bell: You’re correct in these instances; it’s almost impossible for central bankers to get it right.

Ron Holland: They won’t get it right. How can they? They got it wrong with the initial inflation and now they’ll probably overshoot. They’ll tighten so hard that they’ll shove the economy into a real recession.

Daily Bell: That seems to be the choice. A significant slowdown or continued price rises. And those price rises are giving rise to considerable social unrest.

Ron Holland: As I said, China is the key. Europe has already collapsed and America is not rebounding either. As you guys have pointed out, the dollar reserve system is all but dead. China is propping up the world but China has significant – really important – economic problems. All the BRICS do. Certainly Brazil, even Russia and India have significant inflation. Though it’s obviously most out-of-control in China.

Daily Bell: China is buying a lot of European debt. Wonder how long that will last. We did an article on it.

Ron Holland: With China it’s not if … but when. And these days “when” is looking sooner rather than later.

Daily Bell: It’s surely an important anchor for the world economy at this point. And if the economy goes down hill, what happens then?

Ron Holland: Well, as we know there’s always war to distract the public and frame future historical accounts. There are lots of wars already and more on the way.

Daily Bell: We think there’s a good chance of a real regional war blowing up in the Middle East – one that would involve Iran.

Ron Holland: In these sour economic times, the elites start wars. It’s a fact of life. History teaches us that. Of course war puts an even greater stress on the economy.

Daily Bell: But people are so miserable they don’t notice.

Ron Holland: War is a great distracter. A full-scale world war probably isn’t feasible any longer because of the nuclear threat but you can certainly have a bad war in the Middle East. And it will probably have a continuing impact on oil prices.

Daily Bell: Yes, more price inflation. Europe and America on the ropes. China’s not doing so well and the Western elites seem headed for war. What do you do in a scenario like this? There’s really no safety net.

Ron Holland: Well, it’s true – wealth protection is the name of the game at the moment. These are unusual times. I don’t pretend to know where gold and silver are going in terms of purchasing power, but the trend seems well established and I’d continue to examine wealth protection options in both gold and silver.

I’d actually prefer gold for wealth protection and long-term savings, as that is its history, but also think everyone should have some silver too for situations in which a real crisis develops. I mean one in which no merchant will accept dollars because of some sort of hyperinflationary devaluation.

As far as other currencies, none are linked to gold that I am aware of and therefore they are all inflatable – including the Swiss franc. There are more than 100 central banks in the world all operating under the direction of the elite controlled Bank for International Settlements in Basel, Switzerland – a globalist institution for sure. And all of the central banks inflate – all of them! And that means holders of those debt instruments are losing purchasing power.

If you want to get out of harm’s way, I think you must get out of US dollars and into gold – even at these prices. I don’t see much of a retreat as a matter of fact, not with the world’s economy in its current shape. These are big forces at work.

Daily Bell: So … physical gold, OK. But how about ETFs? Gold shares?

Ron Holland: Gold is only gold if you can touch it, under these conditions. Now I don’t mean you have to physically touch it every day, but you must have the real thing and keep it out of reach from those who would try and take it from you. You know, many people still find it hard to believe that in 1933 FDR passed the Gold Confiscation Act making it, essentially, an illegal act for American’s to own physical gold. And it stayed that way for 40 years!

Now that did happen in the United States and it happened when the confidence in the Federal Reserve and the overall economy was rapidly eroding during the Great Depression. So why would you think that the confiscation playbook wouldn’t be trotted out again? What makes you think that the yellow metal won’t be portrayed as a medium of use for illegal criminals, tax evaders, terrorists etc.?

I would hope the Internet Reformation will prove strong enough that people won’t be easily swayed into believing the propaganda and “democratically” support another wave of theft. And although it would be much more difficult this time to pull off such a confiscation attempt, I would not put it past them to try.

Daily Bell: So definitely not ETFs?

Ron Holland: ETFs are not physical gold. They are securities. Gold shares are not physical gold either; they are investments that entail many risks. Only physical gold itself is desirable, in my opinion, when a person is trying to protect the purchasing power of their wealth. And the gains in purchasing power that have been witnessed over the past 7 or 8 years is rather impressive, to say the least.

Daily Bell: What is the best type of gold to buy? Where does one store it for safety, considering the argument that a potential gold confiscation looms ahead?

Ron Holland: I only recommend buying bullion. Not numismatics or any other “scarcity-sell.” The cheapest form of bullion is gold bars. Coins carry additional costs. If you can afford it, transfer out of your devaluing paper money and into gold bars and acquire them with the least amount of fees involved.

With all fairness to US-based gold dealers, they have many costs associated with running their business. These costs add on to what you inevitably pay to acquire gold. However, even if you are able to acquire it for reasonable charge, you still are left owning it in the US and for me, right now, that is an unacceptable risk.

I recommend buying some gold for US storage where you can get your hands on it from reputable dealers here in the US. But for major investment diversification, consider an international specialist that handles both the buy and the sell and stores it for your account. In Switzerland, there are several providers of such services, but unfortunately either it is too burdensome for most to go there and open an account, or the minimums are too high.

Daily Bell: Switzerland’s not an option?

Ron Holland: Besides the travel costs, most Swiss banks will no longer accept American clients at all after the pressure the US has brought on that country.

Daily Bell: it was significant for sure, and remains so.

Ron Holland: There is one group to consider. I follow a program called Global Gold. Frank Suess heads the firm, and he is a dear friend of mine and a member of the advisory board for the Foundation for the Advancement of Free-Market Thinking (FAFMT). Frank’s team has developed this program with a full understanding of the issues American’s face and why it is important to not only own gold but also own it in the right secure location.

Daily Bell: In Switzerland?

Ron Holland: Yes, Global Gold offers competitive rates, it is virtually commission free, and provides safe and secure storage of gold in a secure Swiss vault that is audited regularly by Ernst & Young. I think the Global Gold Program is definitely something for Americans to consider. The minimums, and this is important, are fairly low to participate – starting at US$50,000.

Daily Bell: That’s very low.

Ron Holland: This sort of service, to reconstruct for the individual is expensive – if not impossible. It’s a millionaire’s type service. But by making it available, broadly instead of exclusively, we think we’re offering a great service that people can take advantage of. What is most important, no matter how you do it, is that people get out of devaluing dollars and into honest money – Gold. And they should strongly consider the history of their government and its propensity to act in irrational and confiscatory ways. People think government is some sort of logical, rational power. It’s not. People who go into government, more than most, are out simply for themselves. They’re willing to put up with an unchallenging – even useless – job because of the security.

The idea that people with this mindset are going to “protect” society when things go wrong is ludicrous. These people are WHY things are going wrong in the first place. And you have to protect yourself from them. Doesn’t matter what the form of government is – democracy, monarchy, communism … its all the same after a certain point. Human nature doesn’t change. No one is going to protect your family but you if things get really bad.

Daily Bell: Speaking of governments, shouldn’t Americans be concerned with the tax authorities coming after them if they participate in a program such as what you are describing? Switzerland isn’t all that popular these days.

Ron Holland: Actually, because of the scrutiny Switzerland has received it’s actually a lot lower on the radar screen than most places. A lot of offshore venues are coming in for considerable scrutiny now. Switzerland has already taken its shots.

Daily Bell: Certainly it has had a workout.

Ron Holland: The authorities have been over Switzerland with a fine-toothed comb. And this is a fully declared program. There is nothing illegal about Global Gold. Just file the appropriate reporting forms and pay your taxes just like you would in the US. The only difference between this program and buying the gold in the US – besides the costs of the purchase being lower with Global Gold – is that the metal is safely stored in Switzerland. But do your own due diligence. You can find out more about here: Secure your gold in Switzerland with Global Gold.

Daily Bell: Any other recommendations?

Ron Holland: Yes, there is something else. I’m investigating it now and it has to do with South America, but I’m not prepared to talk about it. I have a few more trips to make down there.

Daily Bell: Is it investment oriented?

Ron Holland: Not really. It’s an extension of this wealth protection idea. It has to do with family protection actually.

Daily Bell: Anymore hints?

Ron Holland: Not now. Only than to say it is not only important to have your wealth safely secured in jurisdictions that are welcoming, but also to have an option of similar character for you and your family physically as well.

Daily Bell: We’ll have to have you back. Thanks for sitting down again and enjoy FreedomFest. Please say hi and congratulations to Mark Skousen and Tami Holland from DB.

Ron Holland: I’ll be pleased to come back. It’s been my pleasure. And before I go, I would like to encourge all readers to help support the non-profit Foundation for the Advancement of Free-Market Thinking by making a financial donation – of any size.

As I mentioned above, I am more optimistic now than ever before that real change is possible, perhaps even likely – thanks to the ‘Net Reformation that is taking place. The efforts of the DB staff in bringing forth an advertising-free and uncompromised educational effort is helping to make a real difference out there and the audience is surely growing rapidly. Many people email me daily with complimentary words of encouragement about the good work the DB is doing and the bottom line is that the word is really starting to get out there about the benefits of free-market thinking. Consider helping the DB team in their efforts to build on this momentum and move the Internet Reformation forward even faster: Click here to help.

Ron Holland does us the favor of reminding us once again of the bigger picture when it comes to the world’s economy. For several years now we have heard that those in power knew what to do about the economic crisis affecting the West. There would “stimuli” and, later on, “austerity.” There would be QE1 and QE2 – and in Europe there would be loans and then (unconstitutional) bailouts.

We’ve been barraged by numbers these past few years. Every uptick is a green shoot; every meeting of the G20 and the G7 provides us with yet more good news about ways the world’s economy has “turned the corner.” But really … it hasn’t.

Fortunately, there is the Chinese Miracle. China is pulling the weight of the world right now, but as Ron Holland points out, China has its own problems. When a single food item rockets upward by 50 percent (pork) that counts as serious price inflation in our book. And of course, that’s only one tiny example that is symptomatic of deeper problems.

It’s just like the economies in the West: Every month or two we read about another measure that the Dear Leaders have taken to ensure that price inflation is damped. Each measure is accompanied by soothing reports that this time the measures will be effective before prices get out of control.

And what have the ChiComs proposed? We can’t remember all of it. One that jumped out at us a few months ago was when China forbade the buying and selling of real estate, at last regionally. That seemed to us to be a pretty extreme action – the kind of Draconian price fixing regimes resort to when they are desperate – but it caused nary a ripple of concern in the Western press.

China, you see, is a very healthy economy. It is a “miracle.” No, Ron has it right: China has big problems. Now they’re raising rates significantly. Five times already, as a matter of fact. This is a big economy we’re talking about – so here’s the real miracle: It’ll be one if they get it right and bring that country in for a smooth landing. Hyperinflation, or more likely … a “hard-landing.”

China is already experiencing significant social unrest – not just here or there but across the country, which is just what we’ve been predicting these past few years. The ChiComs have at least two strikes against them (the starvations of the Great Leap Forward and the repression of Tiananmen Square) and if the economy sours severely, that will be strike three. Yer out.

Between the West’s “failure to launch” and China’s unstoppable price inflation, the world is in a difficult position. The BRICS generally have price inflation worries and the PIGS may back away from the trough, but in doing so there will only be more civil unrest.

The solution to all of this as we understand it is war. We’ve been predicting war – serial, elite wars – for years. Well, lo and behold, the US is now somehow involved in seven or more separate conflicts. There are reasons for each of these conflicts – spurious ones to be sure. But the nice thing about the War on Terror (which we think generally is a flawed elite promotion) is that it is like a portmanteau war. You can pack it up and carry it anywhere.

Yes, al-Qaeda can be dead or alive, depending on the domestic political situation (whether the US needs a victory or not) and it can mysteriously emerge wherever the US is best positioned to attack another impoverished country to keep the dollars flowing to the military-industrial complex and the Department of Homeland Security complex.

These are mighty wealth operations. Homeland Security has done to America what the military-industrial complex has done overseas – introduce a continued, destructive strain of authoritarianism to the larger populace. This can be carried out with bombs or body scanners. But the results are the same: repression, intimidation and growing chaos.

It may well be chaos that the elites want. Out of chaos … order. However, in this case, we don’t see the order part happening anytime soon – and neither apparently does Ron Holland. Ron makes a proposal for keeping one’s gold offshore and he may well be right about that.

Gold confiscation has happened before and we don’t see the price (purchasing power) of gold or silver going down anytime, or not for another few years anyway. This business cycle has yet to turn. There’s a limit to how much wealth in private hands the elites will likely tolerate. If chaos is to be implemented, people will have to starve in the dark.

Ron has another solution in mind as well for people worried about upcoming, potential, domestic chaos, but he’s not suggested that one to us yet – though we are certainly interested to find out. We’ll surely have him back.

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Complexity and Collapse: Empires on the Edge of Chaos

Posted: August 3, 2010 by Kiljaeden in General Arcanum
Tags: Chaos, Empire Collapse

1

Cole Thomas, The Course of Empire – Destruction. Click to enlarge.

By Niall Ferguson

Summary: – Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.

There is no better illustration of the life cycle of a great power than The Course of Empire, a series of five paintings by Thomas Cole that hang in the New-York Historical Society. Cole was a founder of the Hudson River School and one of the pioneers of nineteenth-century American landscape painting; in The Course of Empire, he beautifully captured a theory of imperial rise and fall to which most people remain in thrall to this day.

Each of the five imagined scenes depicts the mouth of a great river beneath a rocky outcrop. In the first, The Savage State, a lush wilderness is populated by a handful of hunter-gatherers eking out a primitive existence at the break of a stormy dawn. The second picture, The Arcadian or Pastoral State, is of an agrarian idyll: the inhabitants have cleared the trees, planted fields, and built an elegant Greek temple. The third and largest of the paintings is The Consummation of Empire. Now, the landscape is covered by a magnificent marble entrepôt, and the contented farmer-philosophers of the previous tableau have been replaced by a throng of opulently clad merchants, proconsuls, and citizen-consumers. It is midday in the life cycle. Then comes Destruction. The city is ablaze, its citizens fleeing an invading horde that rapes and pillages beneath a brooding evening sky. Finally, the moon rises over the fifth painting, Desolation. There is not a living soul to be seen, only a few decaying columns and colonnades overgrown by briars and ivy.

Conceived in the mid-1830s, Cole’s great pentaptych has a clear message: all empires, no matter how magnificent, are condemned to decline and fall. The implicit suggestion was that the young American republic of Cole’s age would be better served by sticking to its bucolic first principles and resisting the imperial temptations of commerce, conquest, and colonization.

For centuries, historians, political theorists, anthropologists, and the public at large have tended to think about empires in such cyclical and gradual terms. “The best instituted governments,” the British political philosopher Henry St. John, First Viscount Bolingbroke, wrote in 1738, “carry in them the seeds of their destruction: and, though they grow and improve for a time, they will soon tend visibly to their dissolution. Every hour they live is an hour the less that they have to live.”

Idealists and materialists alike have shared that assumption. In his book Scienza nuova, the Italian philosopher Giambattista Vico describes all civilizations as passing through three phases: the divine, the heroic, and the human, finally dissolving into what Vico called “the barbarism of reflection.” For Hegel and Marx, it was the dialectic that gave history its unmistakable beat. History was seasonal for Oswald Spengler, the German historian, who wrote in his 1918-22 book, The Decline of the West, that the nineteenth century had been “the winter of the West, the victory of materialism and skepticism, of socialism, parliamentarianism, and money.” The British historian Arnold Toynbee’s universal theory of civilization proposed a cycle of challenge, response, and suicide. Each of these models is different, but all share the idea that history has rhythm.

Although hardly anyone reads Spengler or Toynbee today, similar strains of thought are visible in contemporary bestsellers. Paul Kennedy’s The Rise and Fall of the Great Powers is another work of cyclical history — despite its profusion of statistical tables, which at first sight make it seem the very antithesis of Spenglerian grand theory. In Kennedy’s model, great powers rise and fall according to the growth rates of their industrial bases and the costs of their imperial commitments relative to their GDPs. Just as in Cole’s The Course of Empire, imperial expansion carries the seeds of future decline. As Kennedy writes, “If a state overextends itself strategically . . . it runs the risk that the potential benefits from external expansion may be outweighed by the great expense of it all.” This phenomenon of “imperial overstretch,” Kennedy argues, is common to all great powers. In 1987, when Kennedy’s book was published, the United States worried that it might be succumbing to this disease. Just because the Soviet Union fell first did not necessarily invalidate the hypothesis.

More recently, it is Jared Diamond, an anthropologist, who has captured the public imagination with a grand theory of rise and fall. His 2005 book, Collapse: How Societies Choose to Fail or Succeed, is cyclical history for the so-called Green Age: tales of past societies, from seventeenth-century Easter Island to twenty-first-century China, that risked, or now risk, destroying themselves by abusing their natural environments. Diamond quotes John Lloyd Stevens, the American explorer and amateur archaeologist who discovered the eerily dead Mayan cities of Mexico: “Here were the remains of a cultivated, polished, and peculiar people, who had passed through all the stages incident to the rise and fall of nations, reached their golden age, and perished.” According to Diamond, the Maya fell into a classic Malthusian trap as their population grew larger than their fragile and inefficient agricultural system could support. More people meant more cultivation, but more cultivation meant deforestation, erosion, drought, and soil exhaustion. The result was civil war over dwindling resources and, finally, collapse.

Diamond’s warning is that today’s world could go the way of the Maya. This is an important message, no doubt. But in reviving the cyclical theory of history, Collapse reproduces an old conceptual defect. Diamond makes the mistake of focusing on what historians of the French Annales school called la longue durée, the long term. No matter whether civilizations commit suicide culturally, economically, or ecologically, the downfall is very protracted. Just as it takes centuries for imperial overstretch to undermine a great power, so, too, does it take centuries to wreck an ecosystem. As Diamond points out, political leaders in almost any society — primitive or sophisticated — have little incentive to address problems that are unlikely to manifest themselves for a hundred years or more.

Did the proconsuls in Cole’s The Consummation of Empire really care if the fate of their great-great-grandchildren was destruction? No. Would they have accepted a tax increase that would have financed a preemptive strike against the next millennium’s barbarian horde? Again, no. As the UN Climate Change Conference in Copenhagen last December made clear, rhetorical pleas to save the planet for future generations are insufficient to overcome the conflicts over economic distribution between rich and poor countries that exist in the here and now.

The current economic challenges facing the United States are also often represented as long-term threats. It is the slow march of demographics — which is driving up the ratio of retirees to workers — and not current policy, that condemns the public finances of the United States to sink deeper into the red. According to the Congressional Budget Office’s “alternative fiscal scenario,” which takes into account likely changes in government policy, public debt could rise from 44 percent before the financial crisis to a staggering 716 percent by 2080. In its “extended-baseline scenario,” which assumes current policies will remain the same, the figure is closer to 280 percent. It hardly seems to matter which number is correct. Is there a single member of Congress who is willing to cut entitlements or increase taxes in order to avert a crisis that will culminate only when today’s babies are retirees?

Similarly, when it comes to the global economy, the wheel of history seems to revolve slowly, like an old water mill in high summer. Some projections suggest that China’s GDP will overtake the United States’ GDP in 2027; others say that this will not happen until 2040. By 2050, India’s economy will supposedly catch up with that of the United States, too. But to many, these great changes in the balance of economic power seem very remote compared with the timeframe for the deployment of U.S. soldiers to Afghanistan and then their withdrawal, for which the unit of account is months, not years, much less decades.

Yet it is possible that this whole conceptual framework is, in fact, flawed. Perhaps Cole’s artistic representation of imperial birth, growth, and eventual death is a misrepresentation of the historical process. What if history is not cyclical and slow moving but arrhythmic — at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

WHEN GOOD SYSTEMS GO BAD
Great powers and empires are, I would suggest, complex systems, made up of a very large number of interacting components that are asymmetrically organized, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder — on “the edge of chaos,” in the phrase of the computer scientist Christopher Langton. Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting. But there comes a moment when complex systems “go critical.” A very small trigger can set off a “phase transition” from a benign equilibrium to a crisis — a single grain of sand causes a whole pile to collapse, or a butterfly flaps its wings in the Amazon and brings about a hurricane in southeastern England.

Not long after such crises happen, historians arrive on the scene. They are the scholars who specialize in the study of “fat tail” events — the low-frequency, high-impact moments that inhabit the tails of probability distributions, such as wars, revolutions, financial crashes, and imperial collapses. But historians often misunderstand complexity in decoding these events. They are trained to explain calamity in terms of long-term causes, often dating back decades. This is what Nassim Taleb rightly condemned in The Black Swan as “the narrative fallacy”: the construction of psychologically satisfying stories on the principle of post hoc, ergo propter hoc.

Drawing casual inferences about causation is an age-old habit. Take World War I. A huge war breaks out in the summer of 1914, to the great surprise of nearly everyone. Before long, historians have devised a story line commensurate with the disaster: a treaty governing the neutrality of Belgium that was signed in 1839, the waning of Ottoman power in the Balkans dating back to the 1870s, and malevolent Germans and the navy they began building in 1897. A contemporary version of this fallacy traces the 9/11 attacks back to the Egyptian government’s 1966 execution of Sayyid Qutb, the Islamist writer who inspired the Muslim Brotherhood. Most recently, the financial crisis that began in 2007 has been attributed to measures of financial deregulation taken in the United States in the 1980s.

In reality, the proximate triggers of a crisis are often sufficient to explain the sudden shift from a good equilibrium to a bad mess. Thus, World War I was actually caused by a series of diplomatic miscalculations in the summer of 1914, the real origins of 9/11 lie in the politics of Saudi Arabia in the 1990s, and the financial crisis was principally due to errors in monetary policy by the U.S. Federal Reserve and to China’s rapid accumulation of dollar reserves after 2001. Most of the fat-tail phenomena that historians study are not the climaxes of prolonged and deterministic story lines; instead, they represent perturbations, and sometimes the complete breakdowns, of complex systems.

To understand complexity, it is helpful to examine how natural scientists use the concept. Think of the spontaneous organization of half a million ants or termites, which allows them to construct complex hills and nests, or the fractal geometry of water molecules as they form intricate snowflakes. Human intelligence itself is a complex system, a product of the interaction of billions of neurons in the central nervous system, or what Charles Sherrington, the pioneering neuroscientist, called “an enchanted loom.”

The political and economic structures made by humans share many of the features of complex adaptive systems. Heterodox economists such as W. Brian Arthur have been arguing along these lines for decades. To Arthur, a complex economy is characterized by the interaction of dispersed agents, a lack of central control, multiple levels of organization, continual adaptation, incessant creation of new market niches, and the absence of general equilibrium. This conception of economics goes beyond both Adam Smith’s hallowed idea that an “invisible hand” causes markets to work through the interactions of profit-maximizing individuals and Friedrich von Hayek’s critique of economic planning and demand management. In contradiction to the classic economic prediction that competition causes diminishing returns, a complex economy makes increasing returns possible. In this version of economics, Silicon Valley is a complex adaptive system; so is the Internet itself.

Researchers at the Santa Fe Institute, a nonprofit center devoted to the study of complex systems, are currently looking at how such insights can be applied to other aspects of collective human activity, including international relations. This effort may recall the futile struggle of Edward Casaubon to find “the key to all mythologies” in George Eliot’s novel Middlemarch. But the attempt is worthwhile, because an understanding of how complex systems function is an essential part of any strategy to anticipate and delay their failure.

Whether the canopy of a rain forest or the trading floor of Wall Street, complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes — what scientists call “the amplifier effect.” A vaccine, for example, stimulates the immune system to become resistant to, say, measles or mumps. But administer too large a dose, and the patient dies. Meanwhile, causal relationships are often nonlinear, which means that traditional methods of generalizing through observation (such as trend analysis and sampling) are of little use. Some theorists of complexity would go so far as to say that complex systems are wholly nondeterministic, meaning that it is impossible to make predictions about their future behavior based on existing data.

When things go wrong in a complex system, the scale of disruption is nearly impossible to anticipate. There is no such thing as a typical or average forest fire, for example. To use the jargon of modern physics, a forest before a fire is in a state of “self-organized criticality”: it is teetering on the verge of a breakdown, but the size of the breakdown is unknown. Will there be a small fire or a huge one? It is very hard to say: a forest fire twice as large as last year’s is roughly four or six or eight times less likely to happen this year. This kind of pattern — known as a “power-law distribution” — is remarkably common in the natural world. It can be seen not just in forest fires but also in earthquakes and epidemics. Some researchers claim that conflicts follow a similar pattern, ranging from local skirmishes to full-scale world wars.

What matters most is that in such systems a relatively minor shock can cause a disproportionate — and sometimes fatal — disruption. As Taleb has argued, by 2007, the global economy had grown to resemble an over-optimized electrical grid. Defaults on subprime mortgages produced a relatively small surge in the United States that tipped the entire world economy into a financial blackout, which, for a moment, threatened to bring about a complete collapse of international trade. But blaming such a crash on a policy of deregulation under U.S. President Ronald Reagan is about as plausible as blaming World War I on the buildup of the German navy under Admiral Alfred von Tirpitz.

EMPIRE STATE OF MIND
Regardless of whether it is a dictatorship or a democracy, any large-scale political unit is a complex system. Most great empires have a nominal central authority — either a hereditary emperor or an elected president — but in practice the power of any individual ruler is a function of the network of economic, social, and political relations over which he or she presides. As such, empires exhibit many of the characteristics of other complex adaptive systems — including the tendency to move from stability to instability quite suddenly. But this fact is rarely recognized because of the collective addiction to cyclical theories of history.

Perhaps the most famous story of imperial decline is that of ancient Rome. In The History of the Decline and Fall of the Roman Empire, published in six volumes between 1776 and 1788, Edward Gibbon covered more than 1,400 years of history, from 180 to 1590. This was history over the very long run, in which the causes of decline ranged from the personality disorders of individual emperors to the power of the Praetorian Guard and the rise of monotheism. After the death of Marcus Aurelius in 180, civil war became a recurring problem, as aspiring emperors competed for the spoils of supreme power. By the fourth century, barbarian invasions or migrations were well under way and only intensified as the Huns moved west. Meanwhile, the challenge posed by Sassanid Persia to the Eastern Roman Empire was steadily growing.

But what if fourth-century Rome was simply functioning normally as a complex adaptive system, with political strife, barbarian migration, and imperial rivalry all just integral features of late antiquity? Through this lens, Rome’s fall was sudden and dramatic — just as one would expect when such a system goes critical. As the Oxford historians Peter Heather and Bryan Ward-Perkins have argued, the final breakdown in the Western Roman Empire began in 406, when Germanic invaders poured across the Rhine into Gaul and then Italy. Rome itself was sacked by the Goths in 410. Co-opted by an enfeebled emperor, the Goths then fought the Vandals for control of Spain, but this merely shifted the problem south. Between 429 and 439, Genseric led the Vandals to victory after victory in North Africa, culminating in the fall of Carthage. Rome lost its southern Mediterranean breadbasket and, along with it, a huge source of tax revenue. Roman soldiers were just barely able to defeat Attila’s Huns as they swept west from the Balkans. By 452, the Western Roman Empire had lost all of Britain, most of Spain, the richest provinces of North Africa, and southwestern and southeastern Gaul. Not much was left besides Italy. Basiliscus, brother-in-law of Emperor Leo I, tried and failed to recapture Carthage in 468. Byzantium lived on, but the Western Roman Empire was dead. By 476, Rome was the fiefdom of Odoacer, king of the Goths.

What is most striking about this history is the speed of the Roman Empire’s collapse. In just five decades, the population of Rome itself fell by three-quarters. Archaeological evidence from the late fifth century — inferior housing, more primitive pottery, fewer coins, smaller cattle — shows that the benign influence of Rome diminished rapidly in the rest of western Europe. What Ward-Perkins calls “the end of civilization” came within the span of a single generation.

Other great empires have suffered comparably swift collapses. The Ming dynasty in China began in 1368, when the warlord Zhu Yuanzhang renamed himself Emperor Hongwu, the word hongwu meaning “vast military power.” For most of the next three centuries, Ming China was the world’s most sophisticated civilization by almost any measure. Then, in the mid-seventeenth century, political factionalism, fiscal crisis, famine, and epidemic disease opened the door to rebellion within and incursions from without. In 1636, the Manchu leader Huang Taiji proclaimed the advent of the Qing dynasty. Just eight years later, Beijing, the magnificent Ming capital, fell to the rebel leader Li Zicheng, and the last Ming emperor hanged himself out of shame. The transition from Confucian equipoise to anarchy took little more than a decade.

In much the same way, the Bourbon monarchy in France passed from triumph to terror with astonishing rapidity. French intervention on the side of the colonial rebels against British rule in North America in the 1770s seemed like a good idea at the time — a chance for revenge after Great Britain’s victory in the Seven Years’ War a decade earlier — but it served to tip French finances into a critical state. In May 1789, the summoning of the Estates-General, France’s long-dormant representative assembly, unleashed a political chain reaction that led to a swift collapse of royal legitimacy in France. Only four years later, in January 1793, Louis XVI was decapitated by guillotine.

Although several narrative fallacies suggest that the Hapsburg, Ottoman, and Romanov empires were doomed for decades before World War I, the disintegration of the dynastic land empires of eastern Europe came with equal swiftness. What was impressive, in fact, was how well these ancient empires were able to withstand the test of total war. Their collapse only began with the Bolshevik Revolution of October 1917. A mere five years later, Mehmed VI, the last sultan of the Ottoman Empire, departed Constantinople aboard a British warship. With that, all three dynasties were defunct.

The sun set on the British Empire almost as suddenly. In February 1945, Prime Minister Winston Churchill was at Yalta, dividing up the world with U.S. President Franklin Roosevelt and Soviet Premier Joseph Stalin. As World War II was ending, he was swept from office in the July 1945 general election. Within a decade, the United Kingdom had conceded independence to Bangladesh, Bhutan, Burma, Egypt, Eritrea, India, Iran, Israel, Jordan, Libya, Madagascar, Pakistan, and Sri Lanka. The Suez crisis in 1956 proved that the United Kingdom could not act in defiance of the United States in the Middle East, setting the seal on the end of empire. Although it took until the 1960s for independence to reach sub-Saharan Africa and the remnants of colonial rule east of the Suez, the United Kingdom’s age of hegemony was effectively over less than a dozen years after its victories over Germany and Japan.

The most recent and familiar example of precipitous decline is, of course, the collapse of the Soviet Union. With the benefit of hindsight, historians have traced all kinds of rot within the Soviet system back to the Brezhnev era and beyond. Perhaps, as the historian and political scientist Stephen Kotkin has argued, it was only the high oil prices of the 1970s that “averted Armageddon.” But this did not seem to be the case at the time. In March 1985, when Mikhail Gorbachev became general secretary of the Soviet Communist Party, the CIA estimated the Soviet economy to be approximately 60 percent the size of the U.S. economy. This estimate is now known to have been wrong, but the Soviet nuclear arsenal was genuinely larger than the U.S. stockpile. And governments in what was then called the Third World, from Vietnam to Nicaragua, had been tilting in the Soviets’ favor for most of the previous 20 years. Yet less than five years after Gorbachev took power, the Soviet imperium in central and Eastern Europe had fallen apart, followed by the Soviet Union itself in 1991. If ever an empire fell off a cliff — rather than gently declining — it was the one founded by Lenin.

OVER THE EDGE
If empires are complex systems that sooner or later succumb to sudden and catastrophic malfunctions, rather than cycling sedately from Arcadia to Apogee to Armageddon, what are the implications for the United States today? First, debating the stages of decline may be a waste of time — it is a precipitous and unexpected fall that should most concern policymakers and citizens. Second, most imperial falls are associated with fiscal crises. All the above cases were marked by sharp imbalances between revenues and expenditures, as well as difficulties with financing public debt. Alarm bells should therefore be ringing very loudly, indeed, as the United States contemplates a deficit for 2009 of more than $1.4 trillion — about 11.2 percent of GDP, the biggest deficit in 60 years — and another for 2010 that will not be much smaller. Public debt, meanwhile, is set to more than double in the coming decade, from $5.8 trillion in 2008 to $14.3 trillion in 2019. Within the same timeframe, interest payments on that debt are forecast to leap from eight percent of federal revenues to 17 percent.

These numbers are bad, but in the realm of political entities, the role of perception is just as crucial, if not more so. In imperial crises, it is not the material underpinnings of power that really matter but expectations about future power. The fiscal numbers cited above cannot erode U.S. strength on their own, but they can work to weaken a long-assumed faith in the United States’ ability to weather any crisis. For now, the world still expects the United States to muddle through, eventually confronting its problems when, as Churchill famously said, all the alternatives have been exhausted. Through this lens, past alarms about the deficit seem overblown, and 2080 — when the U.S. debt may reach staggering proportions — seems a long way off, leaving plenty of time to plug the fiscal hole. But one day, a seemingly random piece of bad news — perhaps a negative report by a rating agency — will make the headlines during an otherwise quiet news cycle. Suddenly, it will be not just a few policy wonks who worry about the sustainability of U.S. fiscal policy but also the public at large, not to mention investors abroad. It is this shift that is crucial: a complex adaptive system is in big trouble when its component parts lose faith in its viability.

Over the last three years, the complex system of the global economy flipped from boom to bust — all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the public begins to reassess the credibility of the monetary and fiscal measures that the Obama administration has taken in response. Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide, overnight, that such measures will lead to much higher inflation rates or outright default. As Thomas Sargent, an economist who pioneered the idea of rational expectations, demonstrated more than 20 years ago, such decisions are self-fulfilling: it is not the base supply of money that determines inflation but the velocity of its circulation, which in turn is a function of expectations. In the same way, it is not the debt-to-GDP ratio that determines government solvency but the interest rate that investors demand. Bond yields can shoot up if expectations change about future government solvency, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. Just ask Greece — it happened there at the end of last year, plunging the country into fiscal and political crisis.

Finally, a shift in expectations about monetary and fiscal policy could force a reassessment of future U.S. foreign policy. There is a zero-sum game at the heart of the budgetary process: if interest payments consume a rising proportion of tax revenue, military expenditure is the item most likely to be cut because, unlike mandatory entitlements, it is discretionary. A U.S. president who says he will deploy 30,000 additional troops to Afghanistan and then, in 18 months’ time, start withdrawing them again already has something of a credibility problem. And what about the United States’ other strategic challenges? For the United States’ enemies in Iran and Iraq, it must be consoling to know that U.S. fiscal policy today is preprogrammed to reduce the resources available for all overseas military operations in the years ahead.

Defeat in the mountains of the Hindu Kush or on the plains of Mesopotamia has long been a harbinger of imperial fall. It is no coincidence that the Soviet Union withdrew from Afghanistan in the annus mirabilis of 1989. What happened 20 years ago, like the events of the distant fifth century, is a reminder that empires do not in fact appear, rise, reign, decline, and fall according to some recurrent and predictable life cycle. It is historians who retrospectively portray the process of imperial dissolution as slow-acting, with multiple overdetermining causes. Rather, empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse. To return to the terminology of Thomas Cole, the painter of The Course of Empire, the shift from consummation to destruction and then to desolation is not cyclical. It is sudden.

A more appropriate visual representation of the way complex systems collapse may be the old poster, once so popular in thousands of college dorm rooms, of a runaway steam train that has crashed through the wall of a Victorian railway terminus and hit the street below nose first. A defective brake or a sleeping driver can be all it takes to go over the edge of chaos.

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NIALL FERGUSON is Laurence A. Tisch Professor of History at Harvard University, a Fellow at Jesus College, Oxford, and a Senior Fellow at the Hoover Institution at Stanford University. His most recent book is The Ascent of Money: A Financial History of the World.

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