For a quick overview of what's going on lately, and where it is going, read this remarkable summary by Ty Andros, posted at financialsense.com
http://www.financialsense.com/fsu/editorials/andros/2008/1114.html
Keep your eyes and mind open,
Michael Childress
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Monday, November 17, 2008
Sunday, August 24, 2008
Building Wealth by Lester C. Thurow - EXCERPTS
Building Wealth: The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy. Lester C. Thurow.
EXCERPTS
In the new man-made brainpower industries of the twenty-first century, all of Europe is an also-ran. Nowhere is it an industrial leader.
For in the end, it is productivity growth (the ability to produce more output using fewer inputs) that ultimately drives real wealth creation.
At the end of the twentieth and beginning of the twenty-first centuries, six new technologies – microelectronics, computers, telecommunications, new man-made materials, robotics, and biotechnology – are interacting to create a new and very different economic world.
Knowledge is the new basis for wealth … Exactly how one controls (owns?) knowledge is in fact a central issue in a knowledge-based economy.
Just as the second industrial revolution moved us from local to national economies, so the third industrial revolution is moving us from national economies to a global economy … The existing international institutions – the International Monetary Fund, the World Bank, the United Nations, the World Trade Organization – were not meant to deal with a global economy.
In short, no one is going to set up a global government in the foreseeable future – regardless of whether it is or is not needed. As a result, the world is going to have a global economy without a global government. This means a global economy with no enforceable, agreed-upon set of rules and regulations, no sheriff to enforce codes of acceptable behavior, and no judges and juries to appeal to if one feels that justice is not being done.
In the twentieth century as local economies were replaced by national economies, national governments gained power. They needed to be given the powers necessary to control national economic systems. A global economy reverses this process.
To have great wealth is to have it all. It is not surprising that get-rich-quick books sell, even though the buyers know the books will convey nothing helpful. They are the modern equivalent of alchemy. Neither exists, but it would be so nice if they did that many are willing to suspend their critical faculties and believe in the unbelievable. Fairy tales both sell and give comfort – even when they are know to be fairly tales.
RULE ONE: No one has ever become very rich by saving their money. The rich see opportunities to work and invest in situations where large disequilibriums exist. This was as true for John D. Rockefeller as it is for Bill Gates. In both cases heir lifetime savings constitute a small fraction of their total wealth. Carefully saving one’s money and investing in normal equilibrium situations can make one comfortable in one’s old age but never really wealthy.
Big old firms understand, and often even invent, the new technologies that transform the world, but they have a structural problem that is almost impossible to solve. When new breakthrough technologies come along, old firms must destroy themselves to save themselves. They must cannibalize themselves, but they cannot.
“Entertainment” shopping will be able to compete with electronic shopping or some products, but no one knows which products. Which customers will be willing to pay more if they buy in an entertaining environment and which ones just want to buy at the cheapest possible price? Those who figure it out first will become rich.
Studies show that productivity falls sharply if workers telecommute for more than a day or two per week, but companies save most of their money by not having offices for the telecommuters.
If one takes a wide definition of culture (all leisure activities), culture is the world’s biggest industry.
New technologies mean change. Change means disequilibrium. Disequilibrium conditions create high-return, high-growth opportunities. The winners understand the new technologies, are lucky enough to be in the right place at the right time, and have the skills to take advantage of these new situations. They become rich.
The problem with wealth generated from sociological disequilibriums is that it usually reflects more a transfer of existing wealth rather than a generation of new wealth.
RULE THREE: Business that would grow rapidly with high profit margins must take advantage of technological disequilibriums, exploit developmental disequilibriums, or create sociological disequilibriums. All other activities are slow-growth, low-rate-of-return commodity businesses.
For some unknown reason the third industrial revolution simultaneously created great market wealth and a miserable productivity performance.
If countries attempt to protect their companies in home markets, their companies are increasingly shut out of global markets, and for most big companies global markets are now more important than home markets.
The wealth pyramid begins with social organization. Social organization constitutes the great building stones at the bottom of the pyramid. Think of any of the world’s poorest countries – Haiti, Bangladesh, central Africa, Albania. All are characterized by chaos, disorder, and an inability to organize themselves socially. They cannot maintain public order. They cannot build or repair infrastructure. They cannot organize and staff village schools. They cannot deliver health services.
The Americans invented mass universal public education, were its leaders for a century, and used it to create their twentieth century success. But an educational system that once led the world is no longer world-class. America has to reinvent itself if it doesn’t want falling wages for a poorly skilled bottom two-thirds of its workforce.
With the onset of the third industrial revolution, the ability to rapidly open up the new and close down the old became the central characteristic needed for economic success. The American system was built to open up the new and close down the old. That is what it does best.
Having tried to set up one’s own business, even if one fails, is the mark of a good potential employee – works hard, creative, takes risks, knows how the world works.
Capitalism is a process of creative destruction. The new destroys the old. Both the creation and the destruction are essential to driving the economy forward.
Entrepreneurs are risk takers, organizers, and doers, not usually thinkers and inventors. The characteristics needed to create new knowledge are very different from the characteristics necessary to bring that knowledge into active use.
Sustainable long-run competitive advantage can be had only through an advantage in skills, education, and knowledge. Yet this is precisely where Europe has its greatest competitive advantage. If ratings were given for top to bottom skills, Europe would get the best ratings. It is more creative at the top than Japan and better educated at the bottom than America. Relative to any comparatively sized group in the rest of the world it is the best educated. Europe is a continent rich in human capital. Why, then, is it a laggard when it comes to the creation of wealth?
Western Europe has not solved its unemployment problem because it won’t adopt policies to accelerate growth or to lower wages.
RULE SIX: There are no institutional substitutes for individual entrepreneurial change agents. The entrepreneur winners of the game become wealthy and powerful, but without entrepreneurs, economies become poor and weak. The old will not exit; the new cannot enter.
In the United States, where payroll taxes are low, the underground economy is small. In Western Europe, where payroll taxes are high, the underground economy is large.
Knowledge generates the basic breakthroughs in technology that create the disequilibrium conditions in which high returns and high growth rates are possible.
Creating technological disequilibriums is an art form that not all societies have mastered. Even within creative societies, creativity is not spread equally. American Jews win far more than their proportional share of America’s Nobel Prizes. (But Israelis win almost none.) America’s great research universities are not evenly spread across the country. Every area of America does not have its Silicon Valley or Route 128.
Creativity does not occur when it has to challenge authority. Creativity occurs when there is no authority to challenge – when there is an empty space without order where creativity can grow unmolested. But to many, an empty space without order is chaos – and chaos must be suppressed.
Einstein dropped out of high school at fifteen; renounced his citizenship one year later; lived on the margins socially, economically, and morally; called himself a gypsy and was considered a bohemian by others. His life was in some sense a search for order in disorder, both scientifically and sociologically. Great creativity requires hard facts, wild imagination, and nonlogical jumps forward that are then proved to be right by working backward to known principles. Only the rebellious can do it. Curiosity and the desire to explore can be enhanced. Useful curiosity requires individuals who have mastered the existing body of knowledge but are not paralyzed by it. Enhancing curiosity is what really good graduate education is all about. Societies that value and honor curiosity produce curious people.
The reason manufacturing does most of the R&D spending is that historically it has been impossible to make money on innovations unless one made and sold the products that were the fruits of that new knowledge. Selling knowledge so that others could make the products that came from it has never been a profitable strategy.
To be useful, inventions usually need a well-educated workforce that can absorb the technology and acquire the skills necessary to employ it. If this skill base does not exist, the invention lies unused. This is why well-educated inventors in the developing world often move to the United States. Because their fellow citizens are undereducated, they can’t get their invention to market in their home environment.
While there are obviously individual exceptions, technological breakthroughs aren’t usually made by older researchers who have been looking at the same things in the same ways for long periods of time. New ways are usually conceived by those who haven’t accepted the old ways.
Whatever the process for establishing clear, enforceable property rights, capitalism does not work unless who owns what is clear. The private ownership of productive assets and the ability to appropriate the output that flows from those assets lies at the heart of capitalism. This principle is what gave capitalism its name. To make capitalism function, legally enforceable ownership rights have to be established.
Capitalism cannot deal with pollution because it cannot establish the ownership rights to clean air and water.
The source of any retailer’s future success is apt to be buried in the software of its electronic information and logistics systems rather than in its advertising or the novelty of its products.
Without a clear, workable, enforceable system of intellectual property rights, knowledge-based capitalism is not going to work. No one is going to invest the necessary sums in research and development if they cannot garner the resulting gains.
The prevailing wisdom among those who earn their living within our system of intellectual property protection is that some minor tweaking here and there will fix the problem. Much of this wisdom flows from nothing more profound than the belief that to open up the system to fundamental change would be equivalent to opening Pandora’s box. All can vividly see themselves as potential losers. Few consider the private and public gains that might accrue from a different system. The prevailing wisdom is wrong. The time has come not for marginal changes but for wide-open thinking about designing a new system from the ground up. This is never going to happen if the problem is left to those who make their living operating the current system. They have too many vested interests in preserving it with the fewest possible modifications.
The differentiation must start with distinctions between fundamental advances in knowledge and logical extensions of existing knowledge. Each deserves a different kind of patent.
In nineteenth century capitalism, human skills weren’t seen as that important. Labor was a rented, hired-and-fired, marginal factor of production. Socialism arose as a response to the secondary position of labor in capitalism, promising to give labor a central position in the economic system. This is what gave it its political appeal. Interestingly, just as socialism and communism were dying, technology was elevating humans to a more central position in the productive framework of capitalism. Capitalism was being forced to put human skills and knowledge, rather than machinery, at the heart of its system.
In a global economy where employers arbitrage the world looking for the lowest wages, people’s pay is not based on whether they live in a rich or a poor country but upon their individual skills. The well-educated living in India make something that looks like American wages, while the uneducated living in America make something that looks like Indian wages.
Older workers sell experience and skills of an earlier vintage. Young workers sell newly acquired skills. Experience is just less valuable. Over the past quarter of a century the returns to experience have been going down for every level of education.
In the twenty-first century, no country that wishes to be rich can leave some of its citizens uneducated. This applies to women as well as men. Any society that does not educate women (the Taliban in Afghanistan) is not going to be successful … Successful societies will educate women because they contribute needed talent to the workforce, but they will also do so because uneducated mothers seldom have well-educated sons. A knowledge economy requires two interlocking but very different skill sets. Knowledge creation requires highly educated creative skills at the very top of the skill distribution. Knowledge deployment requires widespread high-quality skills and education in the middle and bottom of the skill distribution. The same country need not lead in both.
Looking at how wages rise as years of education go up, big economic payoffs exist for the first few years of education and the last few years of education, but only very small economic returns accrue per year of education in between these extremes.
An extra year of college education has very little positive effect on earnings if the student does not complete a degree program. From an economic perspective the right advice is “Get a degree or don’t go.”
Publicly financed education spreads the costs across the entire population (not just those with kids) and across each individual’s lifetime. Spread out in this way, the costs don’t seem so overwhelming.
Age discrimination laws can protect older employees against being unfairly dismissed by their old firms, but they cannot get them a good job at a new company. Employers get to decide whom they will hire. In a fast-changing world, older employees too often bring obsolete experience and out-of-date skills. There are always a lot of possible young employees who look better and are better. Older job seekers do not suffer from discrimination. They are objectively economically obsolete.
RULE TEN: The biggest unknown for the individual in a knowledge-based economy is how to have a career in a system where there are not careers.
Under capitalism those who own tools are the decision-makers, and market wealth consists of the ownership of tools and the output that flows from them.
Current consumption expenditures on the health care and pensions of the elderly (over 50 percent of the federal budget now goes to the elderly) are driving investment spending out of the federal budget.
Rising stock market values cannot be used to finance investment in new tools. The money received by those who sell stock must be equal to the money given up by those who buy stock. It is a zero-sum transaction as far as investments are concerned. It generates no new funds for building tools. Only holding consumption below earnings can provide the necessary resources to build tools.
In America, all of our social conditioning is now leading not just toward the primacy of individual consumption but toward the view that nothing else matters at all. Billions are spent advertising the benefits of different consumption goods. Little or nothing is spent advertising the importance of investment goods. When he first came into office in 1992, President Clinton was debating whether his new administration should focus on health care, education, or infrastructure. He chose health care, a form of public consumption, rather than education or infrastructure, both forms of public investment. He did not just make a political mistake. He focused Americans on a consumption problem when he should have focused them on investment problems. Even if he had succeeded in reforming health care, it was the wrong problem to address. He could and should have focused us in a very different direction.
In cities that have developed since the onset of the auto age, population densities simply aren’t high enough to justify the frequency of service that makes mass transit competitive with the auto in cost or time.
Market prices measure what is happening to the relative supplies and demands of natural resources. What has happened to oil is happening across the spectrum of other energy supplies, minerals, and agricultural products. Reductions in demand plus new technologies have created a world where natural resource availability is growing far faster than demand.
It is not possible to have American standards of living at home without at the same time having American production standards at work.
Americans want more than they have, but with marketable wealth of just $1.3 million invested in riskless government bonds, one could have those dreams without ever having to work, without ever touching one’s principal, and at death be able to leave one’s children $1.3 million in wealth.
In all countries, wealth is much more unequally distributed than earnings.
Falling equity in one’s own home is also the principle reason why the wealth of the median household is going down in absolute terms. When it comes to the wealth accumulation of the median family, home equity loans (something first allowed in the mid-1980s) have been a disaster.
Great wealth does not depend on personal savings, but modest wealth does. With lower savings rates in America, less wealth for those with lower savings rates should come as no surprise. Americans have a more unequal distribution of wealth because they have chosen to have more current consumption and less wealth. America’s greater inequality is simply a matter of different tastes.
Acquiring great wealth is best seen as a conditional lottery. Luck is necessary. One does have to be in the right place at the right time. Great wealth is created during times of change – the second and third industrial revolutions. Capitalizing on existing disequilibriums (technological, sociological, or developmental) is the name of the game.
Wealth is created in the financial markets but not by the financial markets. Financial markets capitalize the value of eliminating technological, developmental, or sociological disequilibriums.
With electronic shopping, where products are delivered to the home rather than carried home by the buyer, maybe the profits will be made by the delivery companies (UPS, Federal Express) and not by those that run the Internet stores. For what new, never-before-delivered services will people be willing to pay premium prices? What will have to be done to preserve those premium prices?
In the long run market wealth cannot grow unless productivity grows. Productivity is the putting together of the basic building blocks of the wealth pyramid so that humans with finite lifetimes and limited energy levels can produce ever greater levels of output. New technologies are staffed with new skills organized in new ways using new tools powered by new sources of energy to make new things. The difference between output and input growth is what causes wealth to increase.
Slower rates of growth in the capital-to-labor ratio inevitably mean slower rates of growth in productivity.
The antitrust suit against Microsoft is a dramatic case in point. It illustrates a type of regulatory chaos that doesn’t make sense in a well-ordered society. It’s a suit that would not have been brought in any other country in the world. In a short period of time Microsoft has become the most valuable company in the world, with a dominant global market position. It is precisely the kind of company that every country wants. Anywhere else it would be protected like a crown jewel. Other governments would ask what they could do to help it – not what they could do to hobble it … But such erratic, nonsensical actions reflect a type of regulatory chaos that does create economic space for other firms – even if those other firms are apt to be in other countries. American industry has too much chaos, but too much is clearly better than too little when a country reaches America’s position on the wealth pyramid. A high degree of chaos leads to economic creativity.
Revolutions cannot be organized from the top by those running the old system. Revolutions are always frightening to those with vested interests. Those at the top of any successful system, whether political or industrial, have vested interests.
Leaders are not entrepreneurs. Leaders are the order part of the system. Entrepreneurs are the chaos part of the system. Both are necessary, but neither can play the role of the other. Creativity cannot be organized. It is a product of disorganization. In very successful societies, creativity requires some chaos, but not so much chaos that there is not enough order to use what has been invented.
Large bureaucracies, whether government or private, always have too many vested interests in the old to be pioneers of the new technologies that will destroy the old … Capitalism’s only advantage is that death is easier if big firms are privately owned … Socialism never figured out how to kill its dinosaurs; they just went on using up resources until the system collapsed.
Big companies are where managers of the new companies learn the management skills (make mistakes on other people’s money) that allow them to start up their own companies with fewer mistakes.
Centrally organized economic change is theoretically possible but in practice impossible. The economic losers who already exist are always politically stronger than the potential winners who have yet to come into existence.
Capitalism does not work when assets have to carry debts whose value is greater than the market value of the assets themselves. Capitalism only works when profits can be earned.
If countries cannot do what is necessary, economic stagnation looms over their futures. But the causes of that stagnation are not in the economy. They lie in an unsolved political crisis – an inability to act when action is required – that leads to disastrous economic consequences.
Judges don’t think about what makes sense from the perspective of accelerating technological and economic progress. Their concern is with how new areas of technology can be inserted into the legal framework with the least disruption to existing legal interpretations.
As monopoly power wanes, and social interest in encouraging the development of new intellectual property grows, the balance in our system should shift toward encouraging the production of new knowledge and be less concerned about the distribution of existing knowledge. Tighter or longer-term patents and copyrights are warranted.
If someone cannot think of how a legal right can be enforced, it should not be a legal right.
The system must be able to determine rights and resolve disputes quickly, efficiently, and cheaply. Many of the problems with the current patent system flow from the lack of consistent, predictable, rapid, low-cost determinations about intellectual property rights and a means of quick, cheap dispute resolution.
To accomplish society’s interest in expanding knowledge as rapidly as possible, certain classes of knowledge ought to be in the public domain and freely available to everyone. The use of basic scientific knowledge is central in an era of man-made brainpower industries because it allows breakthrough technologies to be developed.
Because of low salaries, elementary and secondary teachers tend to come from the bottom of the education distribution. Americans are asking people who were not themselves good students to teach others to place a high value on being a good student.
Part of the American workforce will have the skills necessary to take advantage of the new technology-intensive global economy. They’ll march on to economic success, joining a global team and leaving the rest of the American workforce behind. The problem isn’t that this model won’t work. The problem is precisely that it will work … The problems are basically moral. Is one living in a good society if that society knowingly lets a major fraction of its citizens drop out of the first world and effectively become third world wage earners?
Governments can increase investment by spending more of their own funds on infrastructure tool-building … The tax system could be shifted from an income/payroll-based system to a consumption-based one in which citizens are taxed only on what they take out of a system (consumption) and not on what they put into it (tools or work effort).
The returns to capital are up and the returns to labor are down. On a global basis labor is more abundant relative to capital than it is in the developed world. As a consequence the earnings of capitalists grow, and the earnings of labor fall. Similarly the returns to skills are up and the returns to raw unskilled labor are down.
EXCERPTS
In the new man-made brainpower industries of the twenty-first century, all of Europe is an also-ran. Nowhere is it an industrial leader.
For in the end, it is productivity growth (the ability to produce more output using fewer inputs) that ultimately drives real wealth creation.
At the end of the twentieth and beginning of the twenty-first centuries, six new technologies – microelectronics, computers, telecommunications, new man-made materials, robotics, and biotechnology – are interacting to create a new and very different economic world.
Knowledge is the new basis for wealth … Exactly how one controls (owns?) knowledge is in fact a central issue in a knowledge-based economy.
Just as the second industrial revolution moved us from local to national economies, so the third industrial revolution is moving us from national economies to a global economy … The existing international institutions – the International Monetary Fund, the World Bank, the United Nations, the World Trade Organization – were not meant to deal with a global economy.
In short, no one is going to set up a global government in the foreseeable future – regardless of whether it is or is not needed. As a result, the world is going to have a global economy without a global government. This means a global economy with no enforceable, agreed-upon set of rules and regulations, no sheriff to enforce codes of acceptable behavior, and no judges and juries to appeal to if one feels that justice is not being done.
In the twentieth century as local economies were replaced by national economies, national governments gained power. They needed to be given the powers necessary to control national economic systems. A global economy reverses this process.
To have great wealth is to have it all. It is not surprising that get-rich-quick books sell, even though the buyers know the books will convey nothing helpful. They are the modern equivalent of alchemy. Neither exists, but it would be so nice if they did that many are willing to suspend their critical faculties and believe in the unbelievable. Fairy tales both sell and give comfort – even when they are know to be fairly tales.
RULE ONE: No one has ever become very rich by saving their money. The rich see opportunities to work and invest in situations where large disequilibriums exist. This was as true for John D. Rockefeller as it is for Bill Gates. In both cases heir lifetime savings constitute a small fraction of their total wealth. Carefully saving one’s money and investing in normal equilibrium situations can make one comfortable in one’s old age but never really wealthy.
Big old firms understand, and often even invent, the new technologies that transform the world, but they have a structural problem that is almost impossible to solve. When new breakthrough technologies come along, old firms must destroy themselves to save themselves. They must cannibalize themselves, but they cannot.
“Entertainment” shopping will be able to compete with electronic shopping or some products, but no one knows which products. Which customers will be willing to pay more if they buy in an entertaining environment and which ones just want to buy at the cheapest possible price? Those who figure it out first will become rich.
Studies show that productivity falls sharply if workers telecommute for more than a day or two per week, but companies save most of their money by not having offices for the telecommuters.
If one takes a wide definition of culture (all leisure activities), culture is the world’s biggest industry.
New technologies mean change. Change means disequilibrium. Disequilibrium conditions create high-return, high-growth opportunities. The winners understand the new technologies, are lucky enough to be in the right place at the right time, and have the skills to take advantage of these new situations. They become rich.
The problem with wealth generated from sociological disequilibriums is that it usually reflects more a transfer of existing wealth rather than a generation of new wealth.
RULE THREE: Business that would grow rapidly with high profit margins must take advantage of technological disequilibriums, exploit developmental disequilibriums, or create sociological disequilibriums. All other activities are slow-growth, low-rate-of-return commodity businesses.
For some unknown reason the third industrial revolution simultaneously created great market wealth and a miserable productivity performance.
If countries attempt to protect their companies in home markets, their companies are increasingly shut out of global markets, and for most big companies global markets are now more important than home markets.
The wealth pyramid begins with social organization. Social organization constitutes the great building stones at the bottom of the pyramid. Think of any of the world’s poorest countries – Haiti, Bangladesh, central Africa, Albania. All are characterized by chaos, disorder, and an inability to organize themselves socially. They cannot maintain public order. They cannot build or repair infrastructure. They cannot organize and staff village schools. They cannot deliver health services.
The Americans invented mass universal public education, were its leaders for a century, and used it to create their twentieth century success. But an educational system that once led the world is no longer world-class. America has to reinvent itself if it doesn’t want falling wages for a poorly skilled bottom two-thirds of its workforce.
With the onset of the third industrial revolution, the ability to rapidly open up the new and close down the old became the central characteristic needed for economic success. The American system was built to open up the new and close down the old. That is what it does best.
Having tried to set up one’s own business, even if one fails, is the mark of a good potential employee – works hard, creative, takes risks, knows how the world works.
Capitalism is a process of creative destruction. The new destroys the old. Both the creation and the destruction are essential to driving the economy forward.
Entrepreneurs are risk takers, organizers, and doers, not usually thinkers and inventors. The characteristics needed to create new knowledge are very different from the characteristics necessary to bring that knowledge into active use.
Sustainable long-run competitive advantage can be had only through an advantage in skills, education, and knowledge. Yet this is precisely where Europe has its greatest competitive advantage. If ratings were given for top to bottom skills, Europe would get the best ratings. It is more creative at the top than Japan and better educated at the bottom than America. Relative to any comparatively sized group in the rest of the world it is the best educated. Europe is a continent rich in human capital. Why, then, is it a laggard when it comes to the creation of wealth?
Western Europe has not solved its unemployment problem because it won’t adopt policies to accelerate growth or to lower wages.
RULE SIX: There are no institutional substitutes for individual entrepreneurial change agents. The entrepreneur winners of the game become wealthy and powerful, but without entrepreneurs, economies become poor and weak. The old will not exit; the new cannot enter.
In the United States, where payroll taxes are low, the underground economy is small. In Western Europe, where payroll taxes are high, the underground economy is large.
Knowledge generates the basic breakthroughs in technology that create the disequilibrium conditions in which high returns and high growth rates are possible.
Creating technological disequilibriums is an art form that not all societies have mastered. Even within creative societies, creativity is not spread equally. American Jews win far more than their proportional share of America’s Nobel Prizes. (But Israelis win almost none.) America’s great research universities are not evenly spread across the country. Every area of America does not have its Silicon Valley or Route 128.
Creativity does not occur when it has to challenge authority. Creativity occurs when there is no authority to challenge – when there is an empty space without order where creativity can grow unmolested. But to many, an empty space without order is chaos – and chaos must be suppressed.
Einstein dropped out of high school at fifteen; renounced his citizenship one year later; lived on the margins socially, economically, and morally; called himself a gypsy and was considered a bohemian by others. His life was in some sense a search for order in disorder, both scientifically and sociologically. Great creativity requires hard facts, wild imagination, and nonlogical jumps forward that are then proved to be right by working backward to known principles. Only the rebellious can do it. Curiosity and the desire to explore can be enhanced. Useful curiosity requires individuals who have mastered the existing body of knowledge but are not paralyzed by it. Enhancing curiosity is what really good graduate education is all about. Societies that value and honor curiosity produce curious people.
The reason manufacturing does most of the R&D spending is that historically it has been impossible to make money on innovations unless one made and sold the products that were the fruits of that new knowledge. Selling knowledge so that others could make the products that came from it has never been a profitable strategy.
To be useful, inventions usually need a well-educated workforce that can absorb the technology and acquire the skills necessary to employ it. If this skill base does not exist, the invention lies unused. This is why well-educated inventors in the developing world often move to the United States. Because their fellow citizens are undereducated, they can’t get their invention to market in their home environment.
While there are obviously individual exceptions, technological breakthroughs aren’t usually made by older researchers who have been looking at the same things in the same ways for long periods of time. New ways are usually conceived by those who haven’t accepted the old ways.
Whatever the process for establishing clear, enforceable property rights, capitalism does not work unless who owns what is clear. The private ownership of productive assets and the ability to appropriate the output that flows from those assets lies at the heart of capitalism. This principle is what gave capitalism its name. To make capitalism function, legally enforceable ownership rights have to be established.
Capitalism cannot deal with pollution because it cannot establish the ownership rights to clean air and water.
The source of any retailer’s future success is apt to be buried in the software of its electronic information and logistics systems rather than in its advertising or the novelty of its products.
Without a clear, workable, enforceable system of intellectual property rights, knowledge-based capitalism is not going to work. No one is going to invest the necessary sums in research and development if they cannot garner the resulting gains.
The prevailing wisdom among those who earn their living within our system of intellectual property protection is that some minor tweaking here and there will fix the problem. Much of this wisdom flows from nothing more profound than the belief that to open up the system to fundamental change would be equivalent to opening Pandora’s box. All can vividly see themselves as potential losers. Few consider the private and public gains that might accrue from a different system. The prevailing wisdom is wrong. The time has come not for marginal changes but for wide-open thinking about designing a new system from the ground up. This is never going to happen if the problem is left to those who make their living operating the current system. They have too many vested interests in preserving it with the fewest possible modifications.
The differentiation must start with distinctions between fundamental advances in knowledge and logical extensions of existing knowledge. Each deserves a different kind of patent.
In nineteenth century capitalism, human skills weren’t seen as that important. Labor was a rented, hired-and-fired, marginal factor of production. Socialism arose as a response to the secondary position of labor in capitalism, promising to give labor a central position in the economic system. This is what gave it its political appeal. Interestingly, just as socialism and communism were dying, technology was elevating humans to a more central position in the productive framework of capitalism. Capitalism was being forced to put human skills and knowledge, rather than machinery, at the heart of its system.
In a global economy where employers arbitrage the world looking for the lowest wages, people’s pay is not based on whether they live in a rich or a poor country but upon their individual skills. The well-educated living in India make something that looks like American wages, while the uneducated living in America make something that looks like Indian wages.
Older workers sell experience and skills of an earlier vintage. Young workers sell newly acquired skills. Experience is just less valuable. Over the past quarter of a century the returns to experience have been going down for every level of education.
In the twenty-first century, no country that wishes to be rich can leave some of its citizens uneducated. This applies to women as well as men. Any society that does not educate women (the Taliban in Afghanistan) is not going to be successful … Successful societies will educate women because they contribute needed talent to the workforce, but they will also do so because uneducated mothers seldom have well-educated sons. A knowledge economy requires two interlocking but very different skill sets. Knowledge creation requires highly educated creative skills at the very top of the skill distribution. Knowledge deployment requires widespread high-quality skills and education in the middle and bottom of the skill distribution. The same country need not lead in both.
Looking at how wages rise as years of education go up, big economic payoffs exist for the first few years of education and the last few years of education, but only very small economic returns accrue per year of education in between these extremes.
An extra year of college education has very little positive effect on earnings if the student does not complete a degree program. From an economic perspective the right advice is “Get a degree or don’t go.”
Publicly financed education spreads the costs across the entire population (not just those with kids) and across each individual’s lifetime. Spread out in this way, the costs don’t seem so overwhelming.
Age discrimination laws can protect older employees against being unfairly dismissed by their old firms, but they cannot get them a good job at a new company. Employers get to decide whom they will hire. In a fast-changing world, older employees too often bring obsolete experience and out-of-date skills. There are always a lot of possible young employees who look better and are better. Older job seekers do not suffer from discrimination. They are objectively economically obsolete.
RULE TEN: The biggest unknown for the individual in a knowledge-based economy is how to have a career in a system where there are not careers.
Under capitalism those who own tools are the decision-makers, and market wealth consists of the ownership of tools and the output that flows from them.
Current consumption expenditures on the health care and pensions of the elderly (over 50 percent of the federal budget now goes to the elderly) are driving investment spending out of the federal budget.
Rising stock market values cannot be used to finance investment in new tools. The money received by those who sell stock must be equal to the money given up by those who buy stock. It is a zero-sum transaction as far as investments are concerned. It generates no new funds for building tools. Only holding consumption below earnings can provide the necessary resources to build tools.
In America, all of our social conditioning is now leading not just toward the primacy of individual consumption but toward the view that nothing else matters at all. Billions are spent advertising the benefits of different consumption goods. Little or nothing is spent advertising the importance of investment goods. When he first came into office in 1992, President Clinton was debating whether his new administration should focus on health care, education, or infrastructure. He chose health care, a form of public consumption, rather than education or infrastructure, both forms of public investment. He did not just make a political mistake. He focused Americans on a consumption problem when he should have focused them on investment problems. Even if he had succeeded in reforming health care, it was the wrong problem to address. He could and should have focused us in a very different direction.
In cities that have developed since the onset of the auto age, population densities simply aren’t high enough to justify the frequency of service that makes mass transit competitive with the auto in cost or time.
Market prices measure what is happening to the relative supplies and demands of natural resources. What has happened to oil is happening across the spectrum of other energy supplies, minerals, and agricultural products. Reductions in demand plus new technologies have created a world where natural resource availability is growing far faster than demand.
It is not possible to have American standards of living at home without at the same time having American production standards at work.
Americans want more than they have, but with marketable wealth of just $1.3 million invested in riskless government bonds, one could have those dreams without ever having to work, without ever touching one’s principal, and at death be able to leave one’s children $1.3 million in wealth.
In all countries, wealth is much more unequally distributed than earnings.
Falling equity in one’s own home is also the principle reason why the wealth of the median household is going down in absolute terms. When it comes to the wealth accumulation of the median family, home equity loans (something first allowed in the mid-1980s) have been a disaster.
Great wealth does not depend on personal savings, but modest wealth does. With lower savings rates in America, less wealth for those with lower savings rates should come as no surprise. Americans have a more unequal distribution of wealth because they have chosen to have more current consumption and less wealth. America’s greater inequality is simply a matter of different tastes.
Acquiring great wealth is best seen as a conditional lottery. Luck is necessary. One does have to be in the right place at the right time. Great wealth is created during times of change – the second and third industrial revolutions. Capitalizing on existing disequilibriums (technological, sociological, or developmental) is the name of the game.
Wealth is created in the financial markets but not by the financial markets. Financial markets capitalize the value of eliminating technological, developmental, or sociological disequilibriums.
With electronic shopping, where products are delivered to the home rather than carried home by the buyer, maybe the profits will be made by the delivery companies (UPS, Federal Express) and not by those that run the Internet stores. For what new, never-before-delivered services will people be willing to pay premium prices? What will have to be done to preserve those premium prices?
In the long run market wealth cannot grow unless productivity grows. Productivity is the putting together of the basic building blocks of the wealth pyramid so that humans with finite lifetimes and limited energy levels can produce ever greater levels of output. New technologies are staffed with new skills organized in new ways using new tools powered by new sources of energy to make new things. The difference between output and input growth is what causes wealth to increase.
Slower rates of growth in the capital-to-labor ratio inevitably mean slower rates of growth in productivity.
The antitrust suit against Microsoft is a dramatic case in point. It illustrates a type of regulatory chaos that doesn’t make sense in a well-ordered society. It’s a suit that would not have been brought in any other country in the world. In a short period of time Microsoft has become the most valuable company in the world, with a dominant global market position. It is precisely the kind of company that every country wants. Anywhere else it would be protected like a crown jewel. Other governments would ask what they could do to help it – not what they could do to hobble it … But such erratic, nonsensical actions reflect a type of regulatory chaos that does create economic space for other firms – even if those other firms are apt to be in other countries. American industry has too much chaos, but too much is clearly better than too little when a country reaches America’s position on the wealth pyramid. A high degree of chaos leads to economic creativity.
Revolutions cannot be organized from the top by those running the old system. Revolutions are always frightening to those with vested interests. Those at the top of any successful system, whether political or industrial, have vested interests.
Leaders are not entrepreneurs. Leaders are the order part of the system. Entrepreneurs are the chaos part of the system. Both are necessary, but neither can play the role of the other. Creativity cannot be organized. It is a product of disorganization. In very successful societies, creativity requires some chaos, but not so much chaos that there is not enough order to use what has been invented.
Large bureaucracies, whether government or private, always have too many vested interests in the old to be pioneers of the new technologies that will destroy the old … Capitalism’s only advantage is that death is easier if big firms are privately owned … Socialism never figured out how to kill its dinosaurs; they just went on using up resources until the system collapsed.
Big companies are where managers of the new companies learn the management skills (make mistakes on other people’s money) that allow them to start up their own companies with fewer mistakes.
Centrally organized economic change is theoretically possible but in practice impossible. The economic losers who already exist are always politically stronger than the potential winners who have yet to come into existence.
Capitalism does not work when assets have to carry debts whose value is greater than the market value of the assets themselves. Capitalism only works when profits can be earned.
If countries cannot do what is necessary, economic stagnation looms over their futures. But the causes of that stagnation are not in the economy. They lie in an unsolved political crisis – an inability to act when action is required – that leads to disastrous economic consequences.
Judges don’t think about what makes sense from the perspective of accelerating technological and economic progress. Their concern is with how new areas of technology can be inserted into the legal framework with the least disruption to existing legal interpretations.
As monopoly power wanes, and social interest in encouraging the development of new intellectual property grows, the balance in our system should shift toward encouraging the production of new knowledge and be less concerned about the distribution of existing knowledge. Tighter or longer-term patents and copyrights are warranted.
If someone cannot think of how a legal right can be enforced, it should not be a legal right.
The system must be able to determine rights and resolve disputes quickly, efficiently, and cheaply. Many of the problems with the current patent system flow from the lack of consistent, predictable, rapid, low-cost determinations about intellectual property rights and a means of quick, cheap dispute resolution.
To accomplish society’s interest in expanding knowledge as rapidly as possible, certain classes of knowledge ought to be in the public domain and freely available to everyone. The use of basic scientific knowledge is central in an era of man-made brainpower industries because it allows breakthrough technologies to be developed.
Because of low salaries, elementary and secondary teachers tend to come from the bottom of the education distribution. Americans are asking people who were not themselves good students to teach others to place a high value on being a good student.
Part of the American workforce will have the skills necessary to take advantage of the new technology-intensive global economy. They’ll march on to economic success, joining a global team and leaving the rest of the American workforce behind. The problem isn’t that this model won’t work. The problem is precisely that it will work … The problems are basically moral. Is one living in a good society if that society knowingly lets a major fraction of its citizens drop out of the first world and effectively become third world wage earners?
Governments can increase investment by spending more of their own funds on infrastructure tool-building … The tax system could be shifted from an income/payroll-based system to a consumption-based one in which citizens are taxed only on what they take out of a system (consumption) and not on what they put into it (tools or work effort).
The returns to capital are up and the returns to labor are down. On a global basis labor is more abundant relative to capital than it is in the developed world. As a consequence the earnings of capitalists grow, and the earnings of labor fall. Similarly the returns to skills are up and the returns to raw unskilled labor are down.
Tuesday, August 5, 2008
Alternative News Columnists - Links
Two good sources of alternative socio-politico-econo-information:
Jim Willie
http://www.goldenjackass.com/main5.html
F. William Engdahl
http://www.financialsense.com/editorials/engdahl/main.html
You might want to bookmark these two sites to check their latest postings.
Keep your eyes and mind open,
Michael Childress
Jim Willie
http://www.goldenjackass.com/main5.html
F. William Engdahl
http://www.financialsense.com/editorials/engdahl/main.html
You might want to bookmark these two sites to check their latest postings.
Keep your eyes and mind open,
Michael Childress
Sunday, July 13, 2008
The Great Reckoning: Protect Yourself in the Coming Depression by James Dale Davidson and Sir William Rees-Mogg - Excerpts
This is the second book (1993) in a series of three written by investment advisors Davidson and Rees-Mogg. It is a fascinating history and commentary on megapolitics and the changing scale of violence in the world since World War I. They argue powerfully that economic power is shifting away from mega states like the U.S. to smaller entities, corresponding to decreasing scales of effective military force. Lots to consider, much to draw from the lucid writing style, and not a dull moment. Be forewarned.
Excerpts
History shows that once nominal growth slows in a heavily indebted economy, there can be no recovery until the excess debt is eliminated.
Just as we believed it was impossible to sustain an economic system which attempted to prevent anyone from profiting, so we believe it will prove impossible to sustain a political economy which attempts to prevent anyone from losing.
In a world with growing legions of unhappy losers, it may be important for you to anticipate coming episodes of delusional thinking.
The industrial economy based primarily upon the manipulation of raw materials at a large scale is giving way to the information economy based upon the manipulation of data at a small scale.
By 1992, gross interest on the national debt claimed 62 cents of every dollar of federal income tax.
More than you may now imagine, you are vulnerable to financial, economic, and political collapse. You may even be vulnerable to physical violence.
The Information Revolution made possible by the microchip helped overturn Communism and will contribute to the death of the welfare state.
Estimates of total losses in the Japanese property market range as high as 50 percent or $10 trillion, a loss wealth equivalent to every stock market on earth plunging to zero. Even more modest estimates, in the range of $3 trillion, amount to a loss of wealth roughly equivalent to that if all China had disappeared.
… the theory of “megapolitics.” According to this theory, historic changes in the ways that societies organize are largely determined by the physical limits on the exercise of power. In essence, we imagine how the world would change if there were no laws or constitutions, and human affairs fluctuated solely according to the changing dictates of physical force … As technology and other factors change the limits within which force can be exercised, they change society … Yet even the most polite and prosperous nations ultimately have no choice but to evolve according to the changing costs and rewards of projecting and resisting power.
You can depend on the fact that normal channels of information will seldom give you advance warning of major political and economic events.
Before violence in society can be controlled, the costs of policing violence must be low. It must be relatively easy to overpower those who act in violent and predatory ways. Whether this is possible depends on many factors beyond the reach of political authorities.
The 1990 will be a cold decade for the weak who must battle the strong for the savings of the thrifty.
… the ultimate logic of the Information Revolution is to undercut the effectiveness of offensive weaponry and undermine all organizations operating at a large scale.
Future aggression will be undertaken by guerrilla war, subversion, and terror, tactics that cannot be countered by cruise missiles and bombardments targeted from space. Henceforth, Third World dictators will rely less on armies and more on terrorists. When they gain nuclear weapons, they will deliver them by overnight express, not by missiles that can be shot down.
The military equipment and structure the United States has purchased with trillions in Cold War spending is largely unsuited to combating the threats of the 1990s. The new and ancient enemies of Western civilization that will emerge to disrupt the peace will not be continental powers like the former Soviet Union, or even anachronistic 1930s-style dictators like Saddam, but small countries and fragments of countries, bands of terrorists, religious fanatics, drug lords, and criminal gangs.
For forty-five years, the map of Europe was frozen by the Cold War. This was the longest period of stable borders in Europe since the fall of Rome. The 1990s will be a boom time for map-makers. It will be a period of devolution, not just in Europe, but throughout the globe. Multi-ethnic empires will come apart. We will see the breakup not just of the Soviet Union .. but of India, Canada, China, Yugoslavia, Ethiopia, and other countries.
In the days before TV newsmen started describing every story as a “crisis”, the word was not merely a term of suspense. It had a specific meaning now largely lost. A “crisis” was “a turning point, a critical time, or a decisive turn.” It was “a state of affairs in which a decisive change for better or worse is imminent.”
A society that has no use for information about getting ahead is likely to have little use for reason, either. Its day-to-day life is likely to be ridden with demons and delusions.
The hope that government can provide everyone with a high standard of living, good health, and security against misfortune, quite apart from his abilities and values, has been an article of faith in all Western democracies for most of this century. It is now an anachronism, bound to be disappointed, no matter how reckless the monetary or fiscal policy any set of leaders chooses to adopt.
There is a widespread assumption that economic progress since World War II has become permanent. Practically everyone in modern industrial countries accepts the unargued conviction that another depression is no more likely than an invasion from Mars. This illusion is part of a general overestimation of the powers of governments.
People who live in delightful, well-mannered suburbs, who never have to physically contest for their lives and property, often fail to grasp the subtle logic of violence. It is a mistake seldom made by hardened criminals. Criminals are normally connoisseurs of power’s subtleties.
The challenge to prosperity is precisely that predatory violence does pay well in many circumstances. War does change things. It changes the rules. It changes the distribution of assets and income. It even determines who lives and who dies. It is precisely the fact that violence does pay that makes it hard to control.
The ultimate cure for violence is superior force. It sounds like a simple contradiction, but it isn’t. To achieve peace, a society must find ways to muster enough force to suppress predatory violence and curtail the incentives to use it.
Settled agricultural society made both taxes and crime paying propositions. Where there was accumulated wealth to take, there was always someone willing to take it.
Miniaturized technologies miniaturize institutions. In time, the microchip will destroy the nation-state. It will give small groups and even individuals the capacity to employ violence in ways that could overturn governments and destroy large organizations.
When megapolitical conditions make the attainment of sufficient military power dependent upon greater national wealth, as has generally been the case in recent centuries, leaders have stronger incentives to tolerate the emergence of private property rights, sound money, and economic freedom.
Unfortunately, the trend of technology is increasing the number of groups that can employ predatory and destructive violence.
The breakdown of large political systems and the proliferation of borders and barriers are likely to be inimical to economic growth and human freedom.
Since the eighteenth century, those who have thought systematically about the rise and fall of nations have noted similar symptoms of decline: high taxes, high prices, widening gaps between the rich and poor, strong special-interest groups, failures of motivation, a decline in education and everyday competence, a high tendency to import, high budget deficits, and more.
A characteristic of empires in their twilight is that they are burdened with high costs and inflexible leadership. In each case where a predominant country has faltered since the sixteenth century, it did so after its leaders stiffly resisted efforts to cut costs to competitive levels, opting instead for higher taxes and more spending. In each case, resources were fatally overextended. Economic supremacy was forfeited to another country enjoying lower taxes and lower costs.
The educational system of a hegemonic power is likely to be geared toward training mandarins. It is a cliché that an Oxbridge education earlier in this century trained students for the civil service, rather than civil engineering. America’s elite education today is also more adept at training persons to redistribute income than to produce it. Ten lawyers graduate in America for every engineer, as compared to ten engineers for each lawyer in Japan.
The combination of vast law firms, litigation for profit, tight government regulation, and grotesque costs is regarded by many economists as one of the reasons why American industry has ceased to be competitive with Japan.
With health care bankrupting many individuals, while making small and even large businesses less competitive with foreign companies that operate without such hideous costs, it was all but inevitable that a cry would rise up for adoption of a latter-day version of the National Health Service. People going broke always wish for someone else to pay the bills. It is a marker on the road to bankruptcy. As in so many other respects, history repeats itself.
Typically, economic downturns sharpen the demands of selfish, local interests and reduce international cooperation. Indeed, this is one of the chief reasons that slow growth periods are times of protectionism and trade war.
The message of history is that cooperation declines along with economies. As world growth prospects diminish, ethnic solidarity and nationalism increase. Horizons narrow. Groups tend to hoard political advantages and seek regulations that reserve for themselves as much as possible of the smaller pie.
Military defeat in Afghanistan meant not just the end of the Soviet empire, but the public disgrace of the command economy in Russia as well. It meant the end of a century of enchantment with the doctrines of Marx. His ideas will still be in books. And many of them will still be believed. But they will be believed mainly in American universities and backwater, Third World mining towns. Marxism at long last ceased to be a contemporary ideology.
The building of factories for mass employment, along with the spread of firearms, gave unskilled workers a rare opportunity to seize wealth. Every such shift of megapolitical power engenders a new ideology to justify the new outcome.
What is happening is not that capitalists are suddenly succeeding in exploiting the workers, but rather that technological change is making it more difficult for workers to exploit the capitalists.
The advent of large-scale enterprises in the late nineteenth and twentieth centuries enabled labor unions to extract higher wages for their members – higher than would be justified by their true economic contributions. They did this by threatening to strike, or, in many cases, sabotage the operations of the enterprises in which they were employed … In essence, industrial workers received a political payoff in addition to their economic wage – a legalized shakedown payment for not sabotaging the operations of the firms where they worked.
The decay of union power as economies move into the Information Age is hardly a random development. It is a predictable consequence of the declining scale of enterprise and therefore the increasing costs of redistributing income through disguised blackmail. Both the economic base and the class ideology of socialism are in rapid decline. The industrial worker, having had his summer of class power, must now give way to new interests and ideas, based on emerging rather than declining technology. Because unions can no longer extract political blackmail from employers as readily as they used to, it is hardly surprising that the share of income claimed by essentially unskilled workers is falling while the percentage earned by the well-educated and the capitalists is rising.
One of the mysteries in the ordering of human life is the way that otherwise inadequate or even dysfunctional social systems can be made functional by religion.
Freedom of religion is possible only where governments function competently on a large scale. It was the advent of new megapolitical conditions – the Gunpowder Revolution – that made religion, in Radcliffe-Brown’s words, “primarily a matter of belief.” The new technology of power facilitated the development of markets and the growth of the nation-state, developments that altered religion’s previously crucial role in organizing social life. The fact that freedom of religion became possible in the most advanced economies over the past few centuries is itself evidence of religion’s declining importance. Religion could only become a matter of choice when it no longer mattered so much what religion one chose.
Part of what makes Islamic law effective in discouraging crime is that it is “old-time religion”, unamended by modern sociology and sophisticated apologies for crime. All religions discourage theft and murder. But where Islamic law is in force, this discouragement does not speak in a soft voice.
As the scale of enterprise rose over the past five centuries, and banking developed in its modern forms, it became ever more difficult for a nation operating under Islamic law to compete. A strict prohibition on lending for interest prohibits a passbook savings account, as well as a fixed-interest government bond.
In the Information Age, the traditional Islamic prohibition against usury will be less damaging to economic efficiency. Even if it is not set aside by an Islamic Luther, the falling scale of enterprise implies lower capital costs, and thus marginally less damage done by limiting debt markets.
Long wave crises in the economy recurring every fifty to sixty years are often associated with human life span. It is commonly argued that individuals who experienced the previous crisis must die out before their descendants can repeat their mistakes. There is logic in this. But it is possible that the causality is reversed. Humans may be limited to an adult life span of fifty to sixty years because crises recur with that rough frequency.
If there is a depression as we expect, one of its consequences is likely to be a thoroughgoing disillusionment with government, and government promises on intervention to forestall fluctuations of the business cycle. Nonetheless, so long as governments retain substantial resources at their disposal, there will always be a demand for rationalizations of far-reaching government actions.
Ironically, the best place to look for a market to go straight down is in the richest country. It is there that the bias towards optimism is likely to be most acute. The best place to find a stock that will shoot straight up is in an underdeveloped market in a poor country, because savings there will tend to be hidden under the mattress, and potential investors will persistently overlook opportunities.
A wicked feedback of perverse incentives reinforces the criminal values and delusional thinking that trap the underclass in poverty. This trap is shut all the tighter because its outlines are hidden by the miasma of race.
Recent estimates suggest that fully one-third of the adult population of the United States cannot perform simple arithmetic calculations. Anything more complicated than flicking to the channel with the music videos, and they are over their heads.
Far more than is commonly acknowledged, poverty is not the cause but the consequence of perverse values and antisocial behavior.
Claims of “racism” do not explain the failures of the underclass. But they bode ill for the future of major cities in the United States, and, to a lesser extent, Europe. They fit into an ancient patter of delusional thinking among the poor that has often culminated in violence. That such claims are now so prominent is itself a hint of both megapolitical vulnerability and economic closure.
By the peculiar logic of the welfare state – which seeks to prevent anyone from losing – to be a victim is to be a winner. The more victimized one is, the higher the recompense he can claim.
The turn away from analytic rationality and the blinking of facts by black leaders are sell signals for the central city. Historically, the claim for rewards based on status rather than achievement has been associated with economic decline. And that, in turn, encourages dishonesty, counterproductive behavior, and delusional thinking.
A general characteristic of the destitute is that they are prone to delusional thinking. They are far more likely than the rich to believe in black magic, the evil eye, predestination, astrology, and confining cultural taboos.
… the function of the delusion – to exonerate the loser from responsibility for his misfortune. The poor man’s pig cannot simply die. It must have been killed by the village “sorcerer”, who usually just happens to be the person in the village who is most successful at fattening his own pigs. It is not incidental that the farmer with the pigs is also likely to be most able to bear the burden of redistribution. For the sorcerer or conspirator to achieve this amazing feat requires that he possess occult knowledge not generally available. It also requires that the inner circle to which the sorcerer belongs have some wicked purpose. This could be devil worship, cannibalism, repugnant sexual practices, a commitment to enslave the world – or whatever seems likely to disqualify the conspiracy from common sympathy. The wicked purpose is essential. Otherwise the loser is still subject to the reproach that he failed to obtain the powerful knowledge himself. To be entirely exonerated, it must appear that he could not be privy to the occult knowledge without forgoing his moral standing – or even risking his soul.
Lacking an infrastructure capable of securing property and policing the safety of individuals, Third World countries have fallen prey to economic destitution, rampant crime, corrupt police, and guerrilla war. In these circumstances, the distinction between ordinary criminal gangs plundering the public and guerrilla movements imposing “taxes” has blurred. This is especially true as modern technology has made it easier for rebellions to sustain themselves with little or no outside help.
The drug lords are the wealthiest people on the planet … The drug cartels are not rinky-dink, back-alley criminals. They are financial superpowers, endowed with all the worst possible traits for attacking the foundations of social order. They are unscrupulous. Violent. Adept at clandestine organization. And richer than governments.
A stable system of property rights, an honest political force, and a dependable judiciary are historical accidents, rare in the experience of the world. They are hard to create, and easy to destroy, especially under current technological conditions, which make it easy for small groups to wield effective military power.
If governments, even in countries like Germany, Sweden, and France, cannot create jobs at tolerable costs during times of relative prosperity, what is the basis of confidence that they can do so in the face of true depression conditions?
We have argued that government spending per se did not cure the depression. Then what did? The answer is obvious, but not simple. World War II. The outbreak of a devastating war in Europe and the Pacific did restore demand to languishing sectors. Far from confirming the hypothesis that government spending can easily prevent depression, the World War II experience raises many doubts. Its effect did not merely rest with the fact that the war was expensive. Rather, a great part of World War II’s impact was that it curtailed supply, destroyed competitive capital, killed talented personnel, and reorganized world monetary, trade, and property rights.
The guerrilla wars that flared into the open after World War II were set in motion by the bitter reaction of peasants to the impoverishment that followed the collapse of the world price of rice.
The economies of much of Asia, Africa, and the Americas had experienced little or no growth for centuries before they were opened to European contact and their institutions forcibly changed. A reversion to old forms of misgovernment and institutional weakness could hobble growth into the indefinite future.
Dozens of economies, from Ethiopia to Mozambique, are not just temporarily depressed. They are collapsing. Falling apart at the seams. When slumps extend from years to decades, and the infrastructure decays, the roads fall apart, bridges wash away, and copper wire from the telephone lines is hammered into bracelets, this is not a temporary departure from the path of economic growth. It is something more permanent. Then end of the line.
The immense, and false, assumption was that the authorities could counteract a depression if one began. This proved untrue in 1930. It is no more likely to be true in the 1990s. Even recognizing that a slump is underway is often beyond the vision of the authorities.
We believe that a major reason why underdeveloped economies are more prone to inflationary than deflationary crises is that the great majority of assets in such economies are tangible assets, like land, mineral deposits, buildings, livestock, equipment, and inventories that cannot be completely wiped out by inflation. A plot of land and a buffalo will still be worth something, no matter how ruthlessly governments devalue the currency.
Personal property taxes are not well suited for an age of intangible assets that can be moved or hidden. But this won’t necessarily prevent some hard-pressed state and local governments from reaching for confiscatory personal property taxes in a slump – especially in jurisdictions where the owners will be a racial or ethnic minority distinct from the majority of voters. A wealth tax at the national level is also a possibility, in spite of the fact that it would be an obvious violation of the U.S. Constitution. The constitutional amendment that provided for an income tax did not repeal the earlier ban on a capital tax. But such niceties may not withstand the rush of circumstances. Remember, Franklin Roosevelt confiscated gold, which was a clear infringement of the prohibition against taking property without compensation.
The balance sheet of the United States has been run into the ground, not by the rich, but by politicians catering to constituencies who want something for nothing … part of the problem has been the growth of income redistribution – which reflects the deteriorating capacity of governments to maintain order.
We expect that taxes on the rich will rise in the coming depression, especially income taxes, because deflation increases the return to creditors.
As you consider the future, remember, it is unusual for a debtor country to allow its citizens free latitude to move capital outside its borders.
There is a likelihood of a surge of downgrades in asset prices of municipal bonds that will be triggered by defaults and redemptions of muni bond mutual funds that will drive down prices in illiquid markets. We anticipate a multi-stage process of collapse for instruments of state, municipality, and agency debt – much like that undergone by Third World debt during the 1980s.
We are optimists in believing that America will take a deflationary course, and thus retain its institutions. But make no mistake. At the depths of the coming depression, the very survival of the U.S. government will be widely questioned. Disillusionment and delusion will abound. Violence will be widespread. Tribal and nihilistic antagonisms will lead to greater terrorism, especially in the cities of America.
Part of the reason that Americans save so little is the assurance that they will be protected from many of the high-cost contingencies, like retirement security and medical care in old age, that induce savings in the first place. Too much income redistribution and too much income equality can actually undermine stability.
We can forecast with firm conviction that the government will not acknowledge that a depression has begun until it has been underway for eighteen months to two years.
A major confirmation of the onset of the depression will be a concerted effort on the part of political authorities to locate scapegoats for the slump. Every slump and market crash in history has been blamed on something other than a decline in economic prospects. The pattern is infallible.
Governments hungry for reelection will panic as the asset deflation gathers force. Their first response will be an attempt to counter the contraction with easy money.
Many believe that services are depression-proof. This is wrong. Spending on services is relatively stable in an ordinary recession, because most recessions are inventory adjustments. A depression is a different story. Services are slower to fall, in some cases, but when they do, they take longer to recover.
Insurance coverage will change to reflect the hardening attitude of society toward drug addition, alcoholism, and “illnesses” that reflect life-style choices. When potential employees are eager and plentiful, there will be less reason for employers to foot the bill for personal difficulties.
Within three to four years of the onset of the slump there will be significant reforms in the practice of law in the United States.
Oil was only one of three industries (the others being food and tobacco) to report net profits in 1932, the deepest year of the depression.
Because the U.S. government in particular is insolvent at its current level of promises, you almost can count on seeing more regulation that will do the wrong thing. It will protect dying industries, suppress innovation, and slow the transition to the new economy. The glacial pace of court action to resolve bankruptcy filings and provide clear titles to repossessed properties will also inevitably retard the adjustment process.
… it is more likely than most people now imagine that public schools in the United States will more or less disappear in the coming decade. Educational entrepreneurs will enjoy a rare opportunity to compete in providing effective elementary and secondary education to children whose parents will be able to spend vouchers on their services.
The hope of thinking people must be that the retrenchment leads to a more enlightened, nonlinear liberalism with enhanced appreciation for the market as a complex system, not to a fascist closure of the economy.
The U.S. government is destined to become the world’s largest pawn shop, converting and liquidating assets inherited from bankrupt financial institutions, failed government-sponsored enterprises, and citizens defaulting on government-insured mortgages.
To protect your liquid funds we recommend that you buy Treasury bills to park cash. U.S. Treasury bills will remain the lowest-risk debt instrument issued in America.
In investment, it is when things look their best that false values are being created. It is when things look their worst that the foundation for growth is being rebuilt.
Quotations
Daniel Patrick Moynihan
From the wild Irish slums of the 19th century Eastern seaboard to the riot-torn suburbs of Los Angeles, there is one unmistakable lesson in American history: a community that allows a large number of young men (and women) to grow up in broken families, dominated by women, never acquiring any stable relationship to male authority, never acquiring any set of rational expectations about the future … that community asks for and gets chaos.
G.J. Whitrow
Since the state of equilibrium between survival and starvation which they normally experience is often finely balanced, it is not surprising that they usually consider it dangerous to deviate from their traditional customs and habits.
Excerpts
History shows that once nominal growth slows in a heavily indebted economy, there can be no recovery until the excess debt is eliminated.
Just as we believed it was impossible to sustain an economic system which attempted to prevent anyone from profiting, so we believe it will prove impossible to sustain a political economy which attempts to prevent anyone from losing.
In a world with growing legions of unhappy losers, it may be important for you to anticipate coming episodes of delusional thinking.
The industrial economy based primarily upon the manipulation of raw materials at a large scale is giving way to the information economy based upon the manipulation of data at a small scale.
By 1992, gross interest on the national debt claimed 62 cents of every dollar of federal income tax.
More than you may now imagine, you are vulnerable to financial, economic, and political collapse. You may even be vulnerable to physical violence.
The Information Revolution made possible by the microchip helped overturn Communism and will contribute to the death of the welfare state.
Estimates of total losses in the Japanese property market range as high as 50 percent or $10 trillion, a loss wealth equivalent to every stock market on earth plunging to zero. Even more modest estimates, in the range of $3 trillion, amount to a loss of wealth roughly equivalent to that if all China had disappeared.
… the theory of “megapolitics.” According to this theory, historic changes in the ways that societies organize are largely determined by the physical limits on the exercise of power. In essence, we imagine how the world would change if there were no laws or constitutions, and human affairs fluctuated solely according to the changing dictates of physical force … As technology and other factors change the limits within which force can be exercised, they change society … Yet even the most polite and prosperous nations ultimately have no choice but to evolve according to the changing costs and rewards of projecting and resisting power.
You can depend on the fact that normal channels of information will seldom give you advance warning of major political and economic events.
Before violence in society can be controlled, the costs of policing violence must be low. It must be relatively easy to overpower those who act in violent and predatory ways. Whether this is possible depends on many factors beyond the reach of political authorities.
The 1990 will be a cold decade for the weak who must battle the strong for the savings of the thrifty.
… the ultimate logic of the Information Revolution is to undercut the effectiveness of offensive weaponry and undermine all organizations operating at a large scale.
Future aggression will be undertaken by guerrilla war, subversion, and terror, tactics that cannot be countered by cruise missiles and bombardments targeted from space. Henceforth, Third World dictators will rely less on armies and more on terrorists. When they gain nuclear weapons, they will deliver them by overnight express, not by missiles that can be shot down.
The military equipment and structure the United States has purchased with trillions in Cold War spending is largely unsuited to combating the threats of the 1990s. The new and ancient enemies of Western civilization that will emerge to disrupt the peace will not be continental powers like the former Soviet Union, or even anachronistic 1930s-style dictators like Saddam, but small countries and fragments of countries, bands of terrorists, religious fanatics, drug lords, and criminal gangs.
For forty-five years, the map of Europe was frozen by the Cold War. This was the longest period of stable borders in Europe since the fall of Rome. The 1990s will be a boom time for map-makers. It will be a period of devolution, not just in Europe, but throughout the globe. Multi-ethnic empires will come apart. We will see the breakup not just of the Soviet Union .. but of India, Canada, China, Yugoslavia, Ethiopia, and other countries.
In the days before TV newsmen started describing every story as a “crisis”, the word was not merely a term of suspense. It had a specific meaning now largely lost. A “crisis” was “a turning point, a critical time, or a decisive turn.” It was “a state of affairs in which a decisive change for better or worse is imminent.”
A society that has no use for information about getting ahead is likely to have little use for reason, either. Its day-to-day life is likely to be ridden with demons and delusions.
The hope that government can provide everyone with a high standard of living, good health, and security against misfortune, quite apart from his abilities and values, has been an article of faith in all Western democracies for most of this century. It is now an anachronism, bound to be disappointed, no matter how reckless the monetary or fiscal policy any set of leaders chooses to adopt.
There is a widespread assumption that economic progress since World War II has become permanent. Practically everyone in modern industrial countries accepts the unargued conviction that another depression is no more likely than an invasion from Mars. This illusion is part of a general overestimation of the powers of governments.
People who live in delightful, well-mannered suburbs, who never have to physically contest for their lives and property, often fail to grasp the subtle logic of violence. It is a mistake seldom made by hardened criminals. Criminals are normally connoisseurs of power’s subtleties.
The challenge to prosperity is precisely that predatory violence does pay well in many circumstances. War does change things. It changes the rules. It changes the distribution of assets and income. It even determines who lives and who dies. It is precisely the fact that violence does pay that makes it hard to control.
The ultimate cure for violence is superior force. It sounds like a simple contradiction, but it isn’t. To achieve peace, a society must find ways to muster enough force to suppress predatory violence and curtail the incentives to use it.
Settled agricultural society made both taxes and crime paying propositions. Where there was accumulated wealth to take, there was always someone willing to take it.
Miniaturized technologies miniaturize institutions. In time, the microchip will destroy the nation-state. It will give small groups and even individuals the capacity to employ violence in ways that could overturn governments and destroy large organizations.
When megapolitical conditions make the attainment of sufficient military power dependent upon greater national wealth, as has generally been the case in recent centuries, leaders have stronger incentives to tolerate the emergence of private property rights, sound money, and economic freedom.
Unfortunately, the trend of technology is increasing the number of groups that can employ predatory and destructive violence.
The breakdown of large political systems and the proliferation of borders and barriers are likely to be inimical to economic growth and human freedom.
Since the eighteenth century, those who have thought systematically about the rise and fall of nations have noted similar symptoms of decline: high taxes, high prices, widening gaps between the rich and poor, strong special-interest groups, failures of motivation, a decline in education and everyday competence, a high tendency to import, high budget deficits, and more.
A characteristic of empires in their twilight is that they are burdened with high costs and inflexible leadership. In each case where a predominant country has faltered since the sixteenth century, it did so after its leaders stiffly resisted efforts to cut costs to competitive levels, opting instead for higher taxes and more spending. In each case, resources were fatally overextended. Economic supremacy was forfeited to another country enjoying lower taxes and lower costs.
The educational system of a hegemonic power is likely to be geared toward training mandarins. It is a cliché that an Oxbridge education earlier in this century trained students for the civil service, rather than civil engineering. America’s elite education today is also more adept at training persons to redistribute income than to produce it. Ten lawyers graduate in America for every engineer, as compared to ten engineers for each lawyer in Japan.
The combination of vast law firms, litigation for profit, tight government regulation, and grotesque costs is regarded by many economists as one of the reasons why American industry has ceased to be competitive with Japan.
With health care bankrupting many individuals, while making small and even large businesses less competitive with foreign companies that operate without such hideous costs, it was all but inevitable that a cry would rise up for adoption of a latter-day version of the National Health Service. People going broke always wish for someone else to pay the bills. It is a marker on the road to bankruptcy. As in so many other respects, history repeats itself.
Typically, economic downturns sharpen the demands of selfish, local interests and reduce international cooperation. Indeed, this is one of the chief reasons that slow growth periods are times of protectionism and trade war.
The message of history is that cooperation declines along with economies. As world growth prospects diminish, ethnic solidarity and nationalism increase. Horizons narrow. Groups tend to hoard political advantages and seek regulations that reserve for themselves as much as possible of the smaller pie.
Military defeat in Afghanistan meant not just the end of the Soviet empire, but the public disgrace of the command economy in Russia as well. It meant the end of a century of enchantment with the doctrines of Marx. His ideas will still be in books. And many of them will still be believed. But they will be believed mainly in American universities and backwater, Third World mining towns. Marxism at long last ceased to be a contemporary ideology.
The building of factories for mass employment, along with the spread of firearms, gave unskilled workers a rare opportunity to seize wealth. Every such shift of megapolitical power engenders a new ideology to justify the new outcome.
What is happening is not that capitalists are suddenly succeeding in exploiting the workers, but rather that technological change is making it more difficult for workers to exploit the capitalists.
The advent of large-scale enterprises in the late nineteenth and twentieth centuries enabled labor unions to extract higher wages for their members – higher than would be justified by their true economic contributions. They did this by threatening to strike, or, in many cases, sabotage the operations of the enterprises in which they were employed … In essence, industrial workers received a political payoff in addition to their economic wage – a legalized shakedown payment for not sabotaging the operations of the firms where they worked.
The decay of union power as economies move into the Information Age is hardly a random development. It is a predictable consequence of the declining scale of enterprise and therefore the increasing costs of redistributing income through disguised blackmail. Both the economic base and the class ideology of socialism are in rapid decline. The industrial worker, having had his summer of class power, must now give way to new interests and ideas, based on emerging rather than declining technology. Because unions can no longer extract political blackmail from employers as readily as they used to, it is hardly surprising that the share of income claimed by essentially unskilled workers is falling while the percentage earned by the well-educated and the capitalists is rising.
One of the mysteries in the ordering of human life is the way that otherwise inadequate or even dysfunctional social systems can be made functional by religion.
Freedom of religion is possible only where governments function competently on a large scale. It was the advent of new megapolitical conditions – the Gunpowder Revolution – that made religion, in Radcliffe-Brown’s words, “primarily a matter of belief.” The new technology of power facilitated the development of markets and the growth of the nation-state, developments that altered religion’s previously crucial role in organizing social life. The fact that freedom of religion became possible in the most advanced economies over the past few centuries is itself evidence of religion’s declining importance. Religion could only become a matter of choice when it no longer mattered so much what religion one chose.
Part of what makes Islamic law effective in discouraging crime is that it is “old-time religion”, unamended by modern sociology and sophisticated apologies for crime. All religions discourage theft and murder. But where Islamic law is in force, this discouragement does not speak in a soft voice.
As the scale of enterprise rose over the past five centuries, and banking developed in its modern forms, it became ever more difficult for a nation operating under Islamic law to compete. A strict prohibition on lending for interest prohibits a passbook savings account, as well as a fixed-interest government bond.
In the Information Age, the traditional Islamic prohibition against usury will be less damaging to economic efficiency. Even if it is not set aside by an Islamic Luther, the falling scale of enterprise implies lower capital costs, and thus marginally less damage done by limiting debt markets.
Long wave crises in the economy recurring every fifty to sixty years are often associated with human life span. It is commonly argued that individuals who experienced the previous crisis must die out before their descendants can repeat their mistakes. There is logic in this. But it is possible that the causality is reversed. Humans may be limited to an adult life span of fifty to sixty years because crises recur with that rough frequency.
If there is a depression as we expect, one of its consequences is likely to be a thoroughgoing disillusionment with government, and government promises on intervention to forestall fluctuations of the business cycle. Nonetheless, so long as governments retain substantial resources at their disposal, there will always be a demand for rationalizations of far-reaching government actions.
Ironically, the best place to look for a market to go straight down is in the richest country. It is there that the bias towards optimism is likely to be most acute. The best place to find a stock that will shoot straight up is in an underdeveloped market in a poor country, because savings there will tend to be hidden under the mattress, and potential investors will persistently overlook opportunities.
A wicked feedback of perverse incentives reinforces the criminal values and delusional thinking that trap the underclass in poverty. This trap is shut all the tighter because its outlines are hidden by the miasma of race.
Recent estimates suggest that fully one-third of the adult population of the United States cannot perform simple arithmetic calculations. Anything more complicated than flicking to the channel with the music videos, and they are over their heads.
Far more than is commonly acknowledged, poverty is not the cause but the consequence of perverse values and antisocial behavior.
Claims of “racism” do not explain the failures of the underclass. But they bode ill for the future of major cities in the United States, and, to a lesser extent, Europe. They fit into an ancient patter of delusional thinking among the poor that has often culminated in violence. That such claims are now so prominent is itself a hint of both megapolitical vulnerability and economic closure.
By the peculiar logic of the welfare state – which seeks to prevent anyone from losing – to be a victim is to be a winner. The more victimized one is, the higher the recompense he can claim.
The turn away from analytic rationality and the blinking of facts by black leaders are sell signals for the central city. Historically, the claim for rewards based on status rather than achievement has been associated with economic decline. And that, in turn, encourages dishonesty, counterproductive behavior, and delusional thinking.
A general characteristic of the destitute is that they are prone to delusional thinking. They are far more likely than the rich to believe in black magic, the evil eye, predestination, astrology, and confining cultural taboos.
… the function of the delusion – to exonerate the loser from responsibility for his misfortune. The poor man’s pig cannot simply die. It must have been killed by the village “sorcerer”, who usually just happens to be the person in the village who is most successful at fattening his own pigs. It is not incidental that the farmer with the pigs is also likely to be most able to bear the burden of redistribution. For the sorcerer or conspirator to achieve this amazing feat requires that he possess occult knowledge not generally available. It also requires that the inner circle to which the sorcerer belongs have some wicked purpose. This could be devil worship, cannibalism, repugnant sexual practices, a commitment to enslave the world – or whatever seems likely to disqualify the conspiracy from common sympathy. The wicked purpose is essential. Otherwise the loser is still subject to the reproach that he failed to obtain the powerful knowledge himself. To be entirely exonerated, it must appear that he could not be privy to the occult knowledge without forgoing his moral standing – or even risking his soul.
Lacking an infrastructure capable of securing property and policing the safety of individuals, Third World countries have fallen prey to economic destitution, rampant crime, corrupt police, and guerrilla war. In these circumstances, the distinction between ordinary criminal gangs plundering the public and guerrilla movements imposing “taxes” has blurred. This is especially true as modern technology has made it easier for rebellions to sustain themselves with little or no outside help.
The drug lords are the wealthiest people on the planet … The drug cartels are not rinky-dink, back-alley criminals. They are financial superpowers, endowed with all the worst possible traits for attacking the foundations of social order. They are unscrupulous. Violent. Adept at clandestine organization. And richer than governments.
A stable system of property rights, an honest political force, and a dependable judiciary are historical accidents, rare in the experience of the world. They are hard to create, and easy to destroy, especially under current technological conditions, which make it easy for small groups to wield effective military power.
If governments, even in countries like Germany, Sweden, and France, cannot create jobs at tolerable costs during times of relative prosperity, what is the basis of confidence that they can do so in the face of true depression conditions?
We have argued that government spending per se did not cure the depression. Then what did? The answer is obvious, but not simple. World War II. The outbreak of a devastating war in Europe and the Pacific did restore demand to languishing sectors. Far from confirming the hypothesis that government spending can easily prevent depression, the World War II experience raises many doubts. Its effect did not merely rest with the fact that the war was expensive. Rather, a great part of World War II’s impact was that it curtailed supply, destroyed competitive capital, killed talented personnel, and reorganized world monetary, trade, and property rights.
The guerrilla wars that flared into the open after World War II were set in motion by the bitter reaction of peasants to the impoverishment that followed the collapse of the world price of rice.
The economies of much of Asia, Africa, and the Americas had experienced little or no growth for centuries before they were opened to European contact and their institutions forcibly changed. A reversion to old forms of misgovernment and institutional weakness could hobble growth into the indefinite future.
Dozens of economies, from Ethiopia to Mozambique, are not just temporarily depressed. They are collapsing. Falling apart at the seams. When slumps extend from years to decades, and the infrastructure decays, the roads fall apart, bridges wash away, and copper wire from the telephone lines is hammered into bracelets, this is not a temporary departure from the path of economic growth. It is something more permanent. Then end of the line.
The immense, and false, assumption was that the authorities could counteract a depression if one began. This proved untrue in 1930. It is no more likely to be true in the 1990s. Even recognizing that a slump is underway is often beyond the vision of the authorities.
We believe that a major reason why underdeveloped economies are more prone to inflationary than deflationary crises is that the great majority of assets in such economies are tangible assets, like land, mineral deposits, buildings, livestock, equipment, and inventories that cannot be completely wiped out by inflation. A plot of land and a buffalo will still be worth something, no matter how ruthlessly governments devalue the currency.
Personal property taxes are not well suited for an age of intangible assets that can be moved or hidden. But this won’t necessarily prevent some hard-pressed state and local governments from reaching for confiscatory personal property taxes in a slump – especially in jurisdictions where the owners will be a racial or ethnic minority distinct from the majority of voters. A wealth tax at the national level is also a possibility, in spite of the fact that it would be an obvious violation of the U.S. Constitution. The constitutional amendment that provided for an income tax did not repeal the earlier ban on a capital tax. But such niceties may not withstand the rush of circumstances. Remember, Franklin Roosevelt confiscated gold, which was a clear infringement of the prohibition against taking property without compensation.
The balance sheet of the United States has been run into the ground, not by the rich, but by politicians catering to constituencies who want something for nothing … part of the problem has been the growth of income redistribution – which reflects the deteriorating capacity of governments to maintain order.
We expect that taxes on the rich will rise in the coming depression, especially income taxes, because deflation increases the return to creditors.
As you consider the future, remember, it is unusual for a debtor country to allow its citizens free latitude to move capital outside its borders.
There is a likelihood of a surge of downgrades in asset prices of municipal bonds that will be triggered by defaults and redemptions of muni bond mutual funds that will drive down prices in illiquid markets. We anticipate a multi-stage process of collapse for instruments of state, municipality, and agency debt – much like that undergone by Third World debt during the 1980s.
We are optimists in believing that America will take a deflationary course, and thus retain its institutions. But make no mistake. At the depths of the coming depression, the very survival of the U.S. government will be widely questioned. Disillusionment and delusion will abound. Violence will be widespread. Tribal and nihilistic antagonisms will lead to greater terrorism, especially in the cities of America.
Part of the reason that Americans save so little is the assurance that they will be protected from many of the high-cost contingencies, like retirement security and medical care in old age, that induce savings in the first place. Too much income redistribution and too much income equality can actually undermine stability.
We can forecast with firm conviction that the government will not acknowledge that a depression has begun until it has been underway for eighteen months to two years.
A major confirmation of the onset of the depression will be a concerted effort on the part of political authorities to locate scapegoats for the slump. Every slump and market crash in history has been blamed on something other than a decline in economic prospects. The pattern is infallible.
Governments hungry for reelection will panic as the asset deflation gathers force. Their first response will be an attempt to counter the contraction with easy money.
Many believe that services are depression-proof. This is wrong. Spending on services is relatively stable in an ordinary recession, because most recessions are inventory adjustments. A depression is a different story. Services are slower to fall, in some cases, but when they do, they take longer to recover.
Insurance coverage will change to reflect the hardening attitude of society toward drug addition, alcoholism, and “illnesses” that reflect life-style choices. When potential employees are eager and plentiful, there will be less reason for employers to foot the bill for personal difficulties.
Within three to four years of the onset of the slump there will be significant reforms in the practice of law in the United States.
Oil was only one of three industries (the others being food and tobacco) to report net profits in 1932, the deepest year of the depression.
Because the U.S. government in particular is insolvent at its current level of promises, you almost can count on seeing more regulation that will do the wrong thing. It will protect dying industries, suppress innovation, and slow the transition to the new economy. The glacial pace of court action to resolve bankruptcy filings and provide clear titles to repossessed properties will also inevitably retard the adjustment process.
… it is more likely than most people now imagine that public schools in the United States will more or less disappear in the coming decade. Educational entrepreneurs will enjoy a rare opportunity to compete in providing effective elementary and secondary education to children whose parents will be able to spend vouchers on their services.
The hope of thinking people must be that the retrenchment leads to a more enlightened, nonlinear liberalism with enhanced appreciation for the market as a complex system, not to a fascist closure of the economy.
The U.S. government is destined to become the world’s largest pawn shop, converting and liquidating assets inherited from bankrupt financial institutions, failed government-sponsored enterprises, and citizens defaulting on government-insured mortgages.
To protect your liquid funds we recommend that you buy Treasury bills to park cash. U.S. Treasury bills will remain the lowest-risk debt instrument issued in America.
In investment, it is when things look their best that false values are being created. It is when things look their worst that the foundation for growth is being rebuilt.
Quotations
Daniel Patrick Moynihan
From the wild Irish slums of the 19th century Eastern seaboard to the riot-torn suburbs of Los Angeles, there is one unmistakable lesson in American history: a community that allows a large number of young men (and women) to grow up in broken families, dominated by women, never acquiring any stable relationship to male authority, never acquiring any set of rational expectations about the future … that community asks for and gets chaos.
G.J. Whitrow
Since the state of equilibrium between survival and starvation which they normally experience is often finely balanced, it is not surprising that they usually consider it dangerous to deviate from their traditional customs and habits.
Monday, October 8, 2007
Michael Childress Blog - Kickoff
Hello Readers (readers-to-be, that is)
This blog is designed to fill several roles:
This blog is designed to fill several roles:
- A personal perspective on the state of the country and of the world. This will tend to be dark, because the American Dream, and the dreams of the Founding Fathers, are almost completely undermined now by the REAL powers that be - who I will generally refer to as Our Masters. I will be providing evidence and commentary on this over time.
- A survey of ideas about how to dodge, as much as possible, the bad effects of the dark changes coming over the American scene. Dropping out of the system is one idea, with lots of alternatives, protecting your extremely vulnerable assets any way possible is another, although everything you have and hold is in peril, and ways and means to drop out of the sight and consciousness of Our Masters is a third.
- A personal chronicle of sorts as I try to effect some of these ideas. I don't want to detail my life and moods or anything like that, but instead talk about decisions and consequences, what worked and what didn't. I'll also report on what I have discovered about other people's efforts along these lines.
The content will be varied, and will include:
- What I call "Resource Reviews". These are mostly excerpts and quotes from relevant books.
- Links to resources and information. There are some good web sites and blogs and commentaries out there on the Net (none in the mainstream media of course: "The Revolution will not be televised."), and I will present links and other means of access as I come across them.
- News. If something important happens, I'll provide links and possibly commentaries.
- Chronicle. I have some decisions to make, and, indeed, we all have some decisions to make. Things are changing very rapidly, and a lot of people, in fact, probably 95% of the American "Sheeple" are going to get run over. So I will report on what I want to accomplish, how I go about it, and what the results are. And for other people's efforts, too.
- Anything else that I think would be enlightening or helpful for those of you with similar perspectives.
Comments to this blog are welcome. However, lots of what I will present will appear to be controversial and, for some of you, outrageous and provocative. That is not my intent. I just want to report on things as I see them. I welcome alternative viewpoints, but comments will be moderated - there is just too much incivility, rudeness, anger, frustration, and fear out there in the world, and a lot of this mind-set flows in the anonymous blogosphere. Drama and confrontation are tools of Our Masters, providing emotional distraction from the more important issues at hand.
Some basic themes:
"Be a tree not worth cutting down."
- Reg Saner
"War is peace.
Freedom is slavery.
Ignorance is strength."
- George Orwell's Newspeak
"Fiat is money.
Debt is wealth.
Ignorance is Knowledge."
- Modern-Day Newspeak
Keep your eyes, ears, and mind open.
Mike Childress
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