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Interview: Straight Talk With Independent Journalist, Charles Hugh Smith, Part 1

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Charles Hugh Smith explains why the status quo is unsustainable in answers to questions submitted by readers.

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Editor's Note: Chris Martenson is an economic researcher and futurist specializing in energy and resource depletion.

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.
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No positions in stocks mentioned.

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