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Brace for Impact

Scorpio

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#1
Brace for Impact

February 6, 2019

As credit-asset bubbles pop, the dominoes start falling.

The economy is far more precarious than the surface boom/bubble suggests. A great many households, enterprises and municipalities are in overloaded boats whose gunwales are just a few inches above the water; the slightest wave will swamp and sink them.

The cost structure of the economy is completely out of whack with what households and enterprises can afford. There are several dynamics in play:

1. Enterprises have already stripped out all the expenses they can: head count has been cut, quality has been gutted, quantity has been reduced, supply chains have been squeezed, inventory controls trimmed to just-in-time and so on. There are no easy, quick cost reductions available except laying off employees. Every other cost-cutting strategy has been milked dry.

2. Costs are soaring despite the low rate of officially measured inflation. I recently found some notes from 1995--a long time ago, 24 years. The dot-com bubble--the first of this era's three great asset bubbles--was inflating rapidly but official inflation was low, around 2.5% to 3% annually.

A slice of pizza was $1.50, a main dish in a Chinese restaurant was $4.50 and rent for a one-bedroom apartment in the S.F. Bay Area was $650/month. Now the pizza slice is $4.25 plus 9.25% tax, $4.65; the main dish is $11.95 plus 9.25% tax, $13.05, and rents for one-bedroom apartments far exceed $2,000/month in desirable neighborhoods.

Official inflation is $1 in 1995 equals $1.67 today. So a $1.50 slice of pizza in 1995 should cost $2.50 today, the $4.50 main dish should cost $7.50, and the $650 monthly rent should be $1,085. Real-world inflation has outstripped the bogus official rate in sector after sector. So TVs have dropped in price; big deal. How often do you buy a TV?

Costs have tripled in 24 years, but have wages tripled? No. In many cases, they haven't even kept pace with official inflation, much less real-world inflation. How many people earning $40,000 in 1995 are now earning $67,000, the minimum increase needed to match the rise in official inflation? Nobody I know. How many positions paying $40,000 in 1995 are now paying $120,000 for the same job? I think we can safely say none.

3. The majority of gains in income and wealth have flowed to the top 5%, and most of the gains in the top 5% have flowed to the apex of that income bracket. So when we read that average household wealth has increased or median wages have increased, the reality is these statistics mask the actual distribution of income and wealth gains, which are skewed heavily to the top 5% income/wealth brackets.

This chart is a few years old but the trend hasn't changed.



Long-term distribution of gains continues to favor the top 1%.



Enterprises are precarious because their costs are high and there's nothing left to cut. A relatively modest decline in revenues will cut profits / owners' incomes to less than zero.

Households in high-cost regions are barely above water. Any reduction in household income will push these households into insolvency.

As credit-asset bubbles pop, the dominoes start falling. As real estate rolls over, lending and construction activity decline, triggering layoffs. As household income takes a hit, the days of spending $15 for lunch every day plus a $5 coffee and $4 bagel go away. The only way for enterprises absorbing revenue declines to survive is to lay off employees, which reduces the pool of consumers with disposable income.

Relying on the free-spending top 5% is also a recipe for fragility. The highest paid employees are the last plum target left for corporate cost-cutters, and the biggest targets for software/AI/automation. The janitors making minimum wage ($15/hour now in many locales) are not that exposed to automation, and the gains would be modest any way. But reducing the head count of employees earning $120,000 and up makes a significant positive impact on the bottom line as revenues stagnate or plummet.

Sorry, boom-time America: the lifestyle you ordered in now out of stock and we have no indication it will be in stock again within the foreseeable future.



In summary: brace for impact.


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My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

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https://www.oftwominds.com/blogfeb19/impact1-19.html
 

Strawboss

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#2
You just presented the case for 70% tax rates...
 

Usury

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#3
I’m sorry Scorp but anytime I read an article spouting BS about the top x% class warfare and such, my red flags are raised and I pretty much stop paying attention.
 

Cigarlover

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#4
In other words, the greedy 1% at the top sucked so much out of the system and didn't care enough about the working people that now they bled their own customers dry.
 

Unca Walt

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#7
Too late for that.

The Fed has ensured its own abolishment; the USD will go Zimbabwe.

That is not a guess. A guess would be "when".

It is a logical statement of fact that Humanity's richest nation is Humanity's poorest nation.

When the dollar crashes... now what?

I haven't a clue.
 

Buck

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#8
How long can this go on?

We've all been discussing topics such as this for years, and here we are, in a 'new low', a 'new era' would probably be a better way to state that, and it still isn't over

The Socialists are here, the Communists are here, and we're still here

The rest of the world's economies seem to be doing worse, perhaps that's the relationship I'm seeing, we're all going to hell in a hand-basket all at the same time
 

Joseph

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#9
Too late for that.

The Fed has ensured its own abolishment; the USD will go Zimbabwe.

That is not a guess. A guess would be "when".

It is a logical statement of fact that Humanity's richest nation is Humanity's poorest nation.

When the dollar crashes... now what?

I haven't a clue.

I'd rather be prepared 4 years early than 4 days late
 

FunnyMoney

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#13
Every time I read these arguments I want to go out and buy another ounce of gold.
There is something out there, it is a feeling or a whisper in your ear that suddenly appears and then disappears so fast that it makes you wonder how could it be real. But it is real and deep down, for some unknown reason, you know it is true.

It's that there's something not right. It's that there's a lie out there and it's a bigger lie than anyone is willing to admit.

The illusion of freedom will continue as long as it's profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.” -Frank Zappa
 

southfork

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#14
Every time I read these arguments I want to go out and buy another ounce of gold.
,
Bottom dropped out in 2008, tptb pumped it back up, fed printed over 16 T, by rights we should be a 5th world country with our debt and unfunded entitlements, I just dont know it seems they can keep the house of cards going forever, getting ready to sink the ship and say fk it, at 68 I was hoping to see 3 digit silver