Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, is a daily compendium of observations and analysis on the global economy and financial markets, as well as notable political, social and cultural trends. Charles has authored a number of books across several genres, including the recent "Survival+: Structuring Prosperity for Yourself and the Nation."
1. Of the many forces at play that you write about within the economy, society, and politics, which ones do you see as the most defining for the future? How do you expect things to unfold?Charles Hugh Smith:
Clearly, demographics and Peak Oil are forces which cannot be massaged away by policy tweaks or financial engineering. I think the exhaustion of Global Neoliberal Capitalism and State Capitalism is apparent, as is the bankruptcy of the two ideologies that more or less define our politics. The reliance on expansion of credit and State power is a dynamic with only unhappy endings.
There are also structural end-games such as Baumol's Disease at work: The inefficient sectors of the economy end up dominating the national income. Services such as health care, education, and the Armed Forces become more productive at much slower rates than the overall economy. Looking ahead, the Empire (the hundreds of overseas military installations, the diplomatic and financial reach into every nook and cranny of the planet, etc.), health care, and other entitlements will require most of the national income. That is an unsustainable trajectory, especially as Peak Oil/peak everything kicks in.
As readers know, I am intensely interested in dynamics which are subtle and not quantifiable. Since they can't be quantified, they are generally ignored. Yet they are very real, even though we may not even be conscious of them.
The reliance on propaganda, for instance, has become so pervasive that the notions of truth and honesty have been hollowed out. Nobody expects the President or Ben Bernanke to speak honestly, as the truth would shatter an increasingly fragile status quo. But this reliance on artifice, half-truths, and propaganda has a cost; people are losing faith in government , in all levels of authority, and in the Mainstream Media -- and for good reason.
The marketing obsession with instant gratification and self-glorification has led to a culture of what I call permanent adolescence. Politicians who promise a pain-free continuation of the status quo are rewarded by re-election, and those who speak of sacrifice are punished. An unhealthy dependence on the State to organize and fund everything manifests in a peculiar split-personality disorder: People want their entitlement check and their corporate welfare, yet they rail against the State's increasing power. You can't have it both ways, but the adolescent response is to whine and cajole Mom and Dad (or the State) for more allowance and more “freedom.” But freedom without responsibility and accountability is not really freedom; it's simply an extended childhood.2. You’ve written recently that you expect us to enter deflation because the amount of QE dollars pale in comparison to the amount of bad debt still to be destroyed. How can you be so sure? Why should anyone trust the dollar as a viable long-term unit of wealth preservation in an environment where the natural checks and balances of the interest rate mechanism is being subverted?CHS:
Can I please have a softball question instead?
The words “deflation” and “inflation” are so loaded nowadays that I try to substitute “purchasing power” whenever possible. Conceptually, we tend to lump all sorts of things into words which may or may not actually be related. So we have to separate asset deflation/inflation from resource/currency prices.
One way to understand this is to measure everything in terms of what an hour of work can buy, and how much real goods an asset can buy. If you sold your house in 1995, how many barrels of oil could you have bought? How about now?
How many hours of labor did it take in 1975 to buy health insurance? How about now?
This sort of analysis helps us understand that the average household has seen purchasing power stagnate or decline for 35 years, and that capital has seen its purchasing power rise. The Great Housing/Credit Bubble seemed to offer households a chance to “catch up,” and perhaps the lucky few who sold at the top and have been renting since did restore their lost purchasing power. But most households have seen their wealth decline.
There are so many moving parts to value and price that it's very difficult to make sense of deflation and inflation. I start with simple numbers: Americans have collectively seen their assets decline by about $12 trillion since 2007, $6 trillion of which is lost residential home equity. That has effectively destroyed the balance sheet of most homeowners with recent-vintage mortgages. As interest rates rise and the stock market rolls over along with corporate profits, then another $10 trillion or so of bond and stock equity will evaporate. Given a decline of $20 trillion, then the Fed's expansion of its balance sheet by $2 trillion doesn't seem so mighty or irresistible.
As for the dollar's long-term viability as a store of wealth: There is precious little evidence right now for its long-term future, but the value of a currency is a political process more than a financial one. A currency is a claim on a nation-state's income stream and viability, so if those are devolving then so too will the currency.
Sentiment is so negative on the dollar that I expect the opposite to occur. How could this happen? A political change in 2012 might shift priorities and instill some confidence that the US is actually ready to deal with reality.
That said, assets such as income property, productive land and energy will retain value whether the dollar is destroyed or if it confounds us all by stabilizing. Wealth held in any currency carries intrinsic risk, but over the next few years the dollar may surprise us by strengthening considerably. That would give those holding dollars a golden opportunity to transform paper into real assets which have been depreciated by the global depression.
You make a key point about interest rates being subverted. I suspect that State manipulation can only run so far, and then market forces and asset deflation will kick in. Again, the high-probability catalyst in my view will be the public and political class's loss of faith in the Federal Reserve's manipulations of the economy. I expect 2012 to be a pivotal year. 3. Do you think we as a society/world are going to pull back from the brink of collapse we appear to be teetering on? Or do you think it's more practical to plan for how best to pick up the pieces afterward?
There are numerous feedback loops at work and so things rarely proceed in a straight line. Governments will continue creating credit and money in hopes of overcoming the destruction of assets, and nobody knows how long that charade can continue. It may run longer than seems possible, just as the housing bubble ran for three years past what was already an unprecedented top.
I lean towards a “defense in depth” approach where we have an A, B, and C response. What can we do in present circumstances to increase our resilience and sustainability? That would be A (the simple things like conservation and cutting expenses) and B (harder things, like creating a new income stream or moving closer to your job/source of income). Option C would be a plan of action if things fall apart. Even then, most of us might be better off staying where we are, if we have a social network of support and sharing.4. There is no shortage of criticism for the mess we find ourselves in. Far more scarce but much more important are solutions. How does the world restore fiscal “soundness” and what needs to be done to set the stage for a rebirth?CHS:
The reliance on credit rather than on capital will have to end, and that means the demise of the credit-based consumer economy run by the Central State and global cartels.
The State fiefdoms and corporate cartels have every incentive to maintain the status quo, so change will probably come from unconventional innovations. I'd like to see a private, asset-based global currency arise, for instance. Since it would not be a nation-state's currency, it would be relatively free of political intervention.
I tend to see parallel private-sector structures (opt-in, open-source) as solutions rather than counting on the bold revamping of status quo, Financial Power Elite-dominated structures. The incentives in these dominant structures are all to retain the status quo at all costs. So solutions which don't rely on their approval are more likely to occur.
5. How does the general citizenry take power back from the plutocracy you write about that has amassed a supermajority of wealth and power in the world?CHS:
I think voting against conventional politicos who are indebted to the status quo Power Elites and voting for any politico who dares to speak honestly about power structures and sacrifice is worth a try, as it is essentially cost-free.
Voting for third-party candidates seems quixotic but as the public loses faith in the traditional sources of authority then viable third-parties might arise, at least locally.
“Starving the beast” by eliminating debt and financial churn is also a twofer: It reduces the income streams of the Plutocracy and accumulates capital for households. A society without mortgages or credit cards would also be a society without “too big to fail” banks. Commercial credit of the sort needed for business does not require global investment banks or shadow banking empires.Check back here for Part 2.
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