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Guest Post: The Devolution Of The Consumer Economy, Part II: Rising Costs, Declining Wages

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Submitted by Charles Hugh Smith from Of Two Minds

The Devolution of the Consumer Economy, Part II: Rising Costs, Declining Wages (Part 1 here)

The widening gap between declining incomes and higher costs has been filled with borrowed money. Now that borrowing has reached its limit, and the consumer economy is devolving.

Earlier this week I discussed the devolution of the consumer economy with a focus on the diminishing returns of consumption and the limits imposed by servicing ever-growing debts. Today I will address a series of other interconnected reasons why the consumer economy is devolving.

The cost structure of the entire U.S. economy has bloated to unsustainable levels. I have discussed this rarely-covered issue for years, for example Lowering the Cost Structure of the U.S. Economy (August 29, 2008)

Here's the basic mechanism: when money is "free," costs rise. If you had to explain why sickcare in the U.S. consumes 17% of our nation's GDP while other developed nations provide universal care for half that cost per capita (7-9% of their GDP), the answer boils down to "there's an unlimited amount of free money here for sickcare." There are no real limits on Medicaid or Medicare spending, and none on insurance cartels (it's a free market for health insurance, except there's only two providers in your area and their prices are the same--welcome to a "free market," hahahahaha).

In other words, thanks to lack of competition via Central State-granted quasi-monopolies to cartels, and virtually unlimited sums of money for Federal programs, then the sky's the limit on cost.

If Medicare limits the cost of an MRI, just triple the number of MRIs you give. Don't laugh--that's exactly what happens. Then there's the hundreds of billions of dollars in outright fraud the system routinely pays.

You provide endless free money, costs go up. Look at the education cartel, another parasitic system latched onto the Central State. Once you enable students to borrow $36,000 a year, then magically the costs of a year in college (or for-profit school offering worthless "skills" that do no more for the hapless student than a high school diploma) rise to $36,000.

The same dynamic results when oceans of credit are available: assets inflate into bubbles, and costs rise concurrently. The commercial space that once was valued at $1 million magically rises to $3 million when cheap, abundant credit sparks a real estate bubble. As hot money chases higher returns, the costs of servicing that debt rise with every flip and purchase. And it's not just debt servicing which costs more as a result--property taxes jump, too.

After a few lucrative flips, the new owner is staggering under a huge mortgage and crushing property taxes. So the space which only a few years ago rented for $1 a square foot now costs $3.50 a foot, just for the owner to break even.

That pushes the higher costs down on the small business tenant, who sees their profits vanish. When business sours in the inevitable credit-bubble bust downturn, then the tenant bails, and the landlord is underwater.

Bureaucracies and institutions may suffer from Baumol's Disease, but they also suffer from the Ratchet Effect: they only know how to add expenses and scale up. Productivity, Baumol's Disease and the Cliff Just Ahead (December 8, 2010) Baumol's Disease describes the rising costs of sectors whose productivity gains lag behind more productive sectors. Thus education costs more even as manufactured goods fall in price, as labor-intensive education doesn't lend itself to leaps in productivity.

But Baumol's Disease doesn't explain why fighter aircraft now cost $300 million each when the "best of the best" five years ago cost $56 million, or how Medicare has leaped from $52 billion a year to $600 billion a year in a decade. Nor does it explain why property taxes have risen 60% above inflation in the past 10 years.

What does explain these gigantic increases is monopoly powers granted to cartels by unaccountable State fiefdoms. With the Federal government able to borrow and spend without any visible limits, then the sky's the limit on everything from MRI tests to Medicaid to foreign wars. With the public unable to opt out of local government, then local government expands and passes the costs onto the private-sector tax donkeys.

Real wages have been stagnant for decades--but in the last decade, they actually fell by 8%. Median household income of the U.S. fell from over $52,000 in 1999 to $49,777 in 2010: The Lost Decade.

As costs for medical care, education, property taxes, etc. skyrocketed far above inflation, credit-driven asset bubbles drove up the cost of housing. Tax policies provided ample incentives to borrowers while super-low interest rates punished savers.

The key feature of financialization is that the outsized profits and opportunities come not from producing goods and services but from leveraging, borrowing, obscuring risk and gaming widely ignored regulations. Banks made money not from prudent loans but from taking $1 in deposits and originating $50 of risk-laden loans from that paltry capital. Wall Street reaped billions by packaging high-risk mortgages as "low-risk" investments.

The housing bubble offered the ambitious debt serf a rare opportunity to lie and leverage just like Wall Street. Anyone with sufficient chutzpah could buy a number of houses with no-document "liar loans" with option-adjustable rate loans at super-low rates of interest, hold the homes for a few months and then flip them for profits.

A few thousand dollars in closing and carrying costs could be leveraged into tens of thousands of dollars in profits which could then be pyramided into more leverage.

Debt serfs soon discovered a key difference between their own reckless speculation and Wall Street's reckless speculation: the over-leveraged debt serf was chided as irresponsible when his mini-empire of debt collapsed in a heap, while Wall Street was "saved" by trillions of dollars in Federal cash, credit, backstops and guarantees.

With incomes declining, assets imploding and reckless banks suddenly risk-averse, consumers can no longer borrow to fill the widening gap between their income and their consumption. Not to worry--the Federal government has stepped in and borrowed and blown the $5 trillion that the consumer would have borrowed in the past four years if he'd been able to. (Make that $6.5 trillion by October 2012.)



So now one unsustainable course of debt expansion has been replaced by another unsustainable course of debt expansion. The apologists and apparatchiks of the Status Quo keep claiming that the State is borrowing 11% of GDP only until private demand roars back to life.

This conveniently overlooks the fact that the private sector has been squeezed by declining incomes and rising costs to the point that it no longer has any discretionary spending money nor does it have the leverage to borrow more. It also no longer has enough assets to support reckless bubble borrowing.

Debt has this funny characteristic: interest must be paid. Even at low interest rates, this interest becomes an ever-larger drag on income. At some point the interest costs take every last dollar of disposable income, and carefree consumption disappears from the economy.

That point was reached in 2008. The Federal debt orgy has simply created an illusory stability and normalcy via "extend and pretend" manipulation and intervention. But the debt serf and his bubble-era mini-empire of expanding debt has been insolvent for three years. The two-decade game of backfilling the widening gap between stagnant income and carefree consumption can no longer be filled with borrowed money.

 

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Fri, 04/08/2011 - 11:24 | 1150000 The Axe
The Axe's picture

ANF AND TPX AND BBBY  all making new highs,  the consumer seems to have plenty of money to spend...

Fri, 04/08/2011 - 11:56 | 1150083 oh_bama
oh_bama's picture

this guy is way TOO NEGATIVE!!!

dupe 

Fri, 04/08/2011 - 13:05 | 1150454 theXman
theXman's picture

The author is absolutely right. I like Prez Reagan, but one of his main legacies is growing devide between rich and poor and the shrinking middle class.

Obama says that he wants to be like Reagan to change the trajectory of history, but he has failed miserably so far. He has sold his presidency and himself to the financial elite of this country. There is no hope and no change.

Fri, 04/08/2011 - 11:55 | 1150084 oh_bama
oh_bama's picture

dupe 

 

Fri, 04/08/2011 - 11:43 | 1150085 oh_bama
oh_bama's picture

this guy is way TOO NEGATIVE!!!

DID YOU BTFD? If so you would have made a ton of money already on SILVER AND STOCKS!!

IF YOU DIDNOT THAT IS YOUR PROBLEM!
MORE AMERICANS RETIRED EARLY DUE TO WEALTH EFFECT AND LOW INFLATION EXPECTATIONS!!!

 

 

Fri, 04/08/2011 - 11:28 | 1150006 lynnybee
lynnybee's picture

......& to think that it was all deliberately & purposefully planned to happen just this way.   that's the part that's so difficult for most people to understand...... deliberate policy out of WASHINGTON & WALL ST. 

Fri, 04/08/2011 - 11:49 | 1150112 B9K9
B9K9's picture

You need to go further back than that; in fact, much much further. Oh, say around 5,000+ years.

Someone, somewhere, stumbled across the notion of exponential math. It must have been a real 'eureka' moment to realize what happens, what MUST HAPPEN, every single time the power curve is realized.

The rest is easy. You've got the majority of the population who aren't much smarter than chimps. You lure them with babels & trinkets - just sign on the dotted line. Once they're hooked, it's like a hauling in a school of tuna.

The only problem is, there isn't any intellectual stimulation involved in the practice. Its not like you're discovering or inventing something new. In fact, it becomes so downright dreary, one must create other diversions & entertainments.

Enter the boom-bust cycle. At the heart of the aggregate financial system, there are only two components (credit & currency) and two states (inflation & deflation). Thus, there are four primary conditions by which one can easily manipulate. Again, not really to garner additional wealth (which already comes easily), but activities targeted more towards staving off boredom.

So they fuck with people, because they have nothing better to do with themselves. Run credit expansion, then let it collapse. Run currency expansion, then let it collapse. So far, we've had credit inflation/deflation, and currency inflation - what comes next?

Fri, 04/08/2011 - 12:41 | 1150362 samsara
samsara's picture

Someone, somewhere, stumbled across the notion of exponential math

 

Yes,  Wages go up in a Linear track.   Interest goes up Geometrically.

queue Dr. Albert Bartlett

http://www.youtube.com/watch?v=F-QA2rkpBSY

Fri, 04/08/2011 - 11:36 | 1150056 Lost My Shorts
Lost My Shorts's picture

I don't understand why everyone is so hopped up about this.  It's the standard prescription imposed countless times by the IMF on banana republics that got too deep in debt:  austerity and devalue.  Why should the USA be different?  Who thought it would be different?  Bernanke is just applying the orthodox medicine.  Driving the dollar down reduces the American standard of living to something more in line with what we produce (i.e. not much).  Isn't that necessary?  How would you avoid that?

Fri, 04/08/2011 - 11:50 | 1150077 depression
depression's picture

Using the reserve currency as a mechanism to export Inflation across the globe, Bernanke is engaging in a form of economic and currency centric warfare.  Rather than launching an ICBM strike, we do the equivalent with our persistent currency devaluation policy.

Fri, 04/08/2011 - 12:40 | 1150365 Lost My Shorts
Lost My Shorts's picture

Bernanke and the oligarchs had two choices:

1) Tell the Euros and China: all that American GSE and bank debt you bought is looking at a 50% haircut.  Your bad for financing a real estate bubble.

2) Bail out all the debts, but devalue the dollar to give them an FX haircut.  (Hey you with the peg, America's not your daddy.  Lose the peg.)

They chose (2) -- better apparently for Wall Street, multinational coprorations, and the rich.  But there was no third choice.  If you don't agree, tell me what was the third choice?

Fri, 04/08/2011 - 11:44 | 1150096 lynnybee
lynnybee's picture

now,how do i argue with this comment ? !   I DID NOT PERSONALLY GO INTO DEBT, I DID NOT CHARGE & TAKE OUT LOANS FROM BANKS ~~ someone, anyone, tell me ......... why must i go into austerity !!! (honest question, please don't junk me) ......... is this when the prudent / honest people in our country go into revolution ?

Fri, 04/08/2011 - 11:58 | 1150144 B9K9
B9K9's picture

See my comment above. It matters not what you personally wish/want/desire. You are merely a cog, a herd animal in the pen, to be nurtured & supported before harvest.

There are only two financial vehicles (credit/currency) and two states (inflation/deflation). Where do you think you're going to hide when the entire game is controlled? Go into debt? They'll crash the underlying values. Save your 'money' in currency/bonds? They'll inflate away the values.

How about, bail out of the system using PMs, etc? Well, they'll get you via taxes. First property, then whatever else they can think of to make sure all strays are round up and once again in the pen.

Our only possible chance out of this state of affairs is peak oil. The entire underlying model is dependent on growth. The crimes they commit in broad daylight are supported by 'the rule of law'. Take away the basic underpinnings of civilization, and all bets might be off.

Fri, 04/08/2011 - 12:13 | 1150203 lynnybee
lynnybee's picture

now i'm just a cog.   i used to be a citizen, then i became a taxpayer, then, WALL ST. considered me a consumer & NOW ...... I'M A COG ! ?   .......... NO MORE !   off the grid for me / extricating myself from a system that i have no control over.

Fri, 04/08/2011 - 12:37 | 1150345 samsara
samsara's picture

Sorry Lynny.  (I love ya btw) we have always been cogs to them.  We just didn't know it. 

Fri, 04/08/2011 - 19:15 | 1151976 Bob
Bob's picture

Good luck with that, lynnybee.

Fri, 04/08/2011 - 12:36 | 1150331 samsara
samsara's picture

Jeez, I love your posts B9.

Dead on in every case.

How about, bail out of the system using PMs, etc? Well, they'll get you via taxes.

A way for a few is to live outside the system.  Cash/Barter 95% of your business.

As I have tried to tell people,  You have to THINK like an outlaw if you want to survive.

Ask anyone from the 'Raw Milk" subculture who have seen Swat teams busting down doors of healthfood stores.   They now KNOW how and why to think like an outlaw.

 

Our only possible chance out of this state of affairs is peak oil

That has been my one cheerful thought for the last 10 years,  They CANNOT keep the Global thing going with out Petro.  

COME ON PEAK OIL  !!!!!

(to quote Dylan.  ... To live Outside the Law,  You must be Honest....   )right Marie?

 

Thanks B9

Fri, 04/08/2011 - 15:25 | 1151000 pazmaker
pazmaker's picture

There is another way out..... I don't feel comfortable talking about it here...but there is another way.

 

Is that German Shepard as your pic?   Do you train dogs?   Are you familiar with the Belgian Malinois

Fri, 04/08/2011 - 12:00 | 1150150 kridkrid
kridkrid's picture

While it is a little unfair for that person... that person did actually benifit from the illusion.... we worked for companies who sold widgets to people who didn't need and likely couldn't afford them, if not for the ponzi scheme.  We can't escape it.  Not at fault... but a part of the system.

Fri, 04/08/2011 - 12:09 | 1150189 Cruel Aid
Cruel Aid's picture

I don't do debt either.

Digital age bubble, levered banks and housing rocket (with congressional holy water on it).

Look at the monthly S&P going back to '80.

Nothing organic about it.

Fiat pain is part of this scheme.

Triple top or Fed dream of BTFO seems to be in progress.

I'd love to see that chart in 50 years.

 

Fri, 04/08/2011 - 19:27 | 1151994 6_7_42
6_7_42's picture

Now is the time to lever up and have inflation destroy the principal. 40yr take out, buy rental property.

Fri, 04/08/2011 - 12:25 | 1150293 Lost My Shorts
Lost My Shorts's picture

In every banana republic that ever flamed out and got the IMF treatment, there were nice, honest, frugal people who didn't cause the problem.  They all suffered with their clueless and/or kleptocratic countrymen.  No man is an island.  Or as the song went, "fools to the left of me, jokers to the right, here I am, stuck int he middle with you ..."

Fri, 04/08/2011 - 11:56 | 1150143 flattrader
flattrader's picture

>>>I don't understand why everyone is so hopped up about this.<<<

It's just CHS yelling at the rain again.

No new info for us here.  Perhaps for his readership at his blog.

The Tyler(s) can give even the most mediocre of bloggers a bigger soapbox by just posting to ZH.

Fri, 04/08/2011 - 11:45 | 1150099 Eureka Springs
Eureka Springs's picture

Medicare, or V.A. have problems, but are not the problem... They are the closest entities we have to a solution. SIngle payer or tri-care systems work far better in terms of providing actual care without threat of bankruptcy for those who are sick or injured. And it's done at far lower cost by every country in the world who has it now.

Private insurance in America will always be 20 to 35 percent more in over all health costs than a government billing system.. it is now an will be until we kill it.

Government ( viasingle payer or tri-care) must take our massive pool of 300 million people and bargian down drug prices to or well below what small European country's have done long ago.

We can easily provide access to care for all at half our current overall costs once we quit arguing for profiteers. Get out of the box!

Basic human dignity, public safety, as well as individual and business economics demand this. It's the only way to be healthy and the only way to compete on a civilized playing field.

I'm not even religious and it's plain to see this is the moral thing to do any way one looks at it. Just follow any of the 35 other countries who are far better at this than we... any of them.

Fri, 04/08/2011 - 12:03 | 1150167 Doubleguns
Doubleguns's picture

China, Portugal, Greece, Libya, Iran, Ireland, Pakistan, Afganistan, Egypt?

Who are those 35?

Fri, 04/08/2011 - 23:46 | 1152711 thames222
thames222's picture

We're next!  Our people are so demoralized right now it's not even funny...even the news that the govt won't be shutting down is bittersweet.

 

www.forecastfortomorrow.com

Fri, 04/08/2011 - 12:19 | 1150253 Robert Neville
Robert Neville's picture

We subsidize world health care with our high costs. The cost of development is recouped here and the drugs and technology are sold elsewhere for the cost of production and a small profit. The government here is the problem. Ggovernment payments to health care companies, government created insurance monopolies, and tort laws drive costs higher. The way to fix the problem is to end Medicare and Medicaid. Make health insurance illegal and make it illegal to sell medical supplies and technology in other countries for less than they sell for here. Eliminate tort law and make malpractice a criminal offense. The health care industry would have to provide a quality service that we could afford or go out of business. I work on cancer therapy equipment. Treatments for humans cost $85,000. You can have your dog treated for $4,000 on the same machine. The difference is no government payments, no insurance payments, and no lawyers.

Fri, 04/08/2011 - 12:32 | 1150320 tawdzilla
tawdzilla's picture

Eureka, You may be barking up the wrong tree:

$60B annual fraud in the Medicare system (2009)

$12.2B annual profit of top 5 insurance companies (2009) 

 

Fri, 04/08/2011 - 13:24 | 1150520 Eureka Springs
Eureka Springs's picture

Look over the other successful countries, instead of inside our systemic failed box. When I last checked we spend as a a whole well over a trillion bucks a year for all health costs... that's more than enough by comparisons to many other existing models to provide care for all.

 

How much of that 60b was fraud/looting of our government while actually providing health care? How much of all privateer insurance actually provides care... they are nothing but a billing grifting entity... an entirely needless anti healthcare middleman.

It can and will never happen with a profiteer model. The goal of lowering costs, or providing care for all will never be the goal of a corporation... there should at least be concerted intent to do so by all of us through our government.

Fri, 04/08/2011 - 11:58 | 1150154 tawdzilla
tawdzilla's picture

Devolution (i.e. backward evolution) is the notion that a species can change into a more "primitive" form. 

Go long CQB (Chiquita Bananas.)

Fri, 04/08/2011 - 12:02 | 1150163 the grateful un...
the grateful unemployed's picture

there is a bear market in credit, and in a bear market vendors devalue their goods and services. What is a zero APR loan exactly? A loan with no interest.

The economic assumption in the housing market, is that lower interest rates allow the seller to raise his price. The valuation metric is constant. A house is worth what a house is worth. That assumption works when the market for interest rates is not fixed, or it is variable. When an interest rate fixing central bank enters the picture, the free market in interest rates disappears. (As we all know, a banker looks at your application and he decides what rate of interest you have to pay, those who have fewer assets, or collateral have to pay more interest, or points as they call it. Too bad that system went out the window.)

Some consumers enjoy a lower credit card rate than others, and that system works to a point, until the government starts subsidizing their needs, to better facilitate their wants. In the end your credit score doesn't matter, everyone is in the same boat, some just get there a bit differently, (food stamps and section 8 will take you to the promised land just as surely as hard work and a good business model) 

The rich live barely any differently than the rest of us, except with more credit, because they can leverage out their collateral. (What good is more credit in a bear market for credit) They drive the same roads, shop at the same stores, see the same movies. At some point consumerism fades away because, one the collateral is devalued along with the credit that money creates, and two, there is no point in having something if everyone has it. The idea of consumerism is to make your life unique, somehow. The president of Coca Cola (a universal substance in the last century, which spoke about a common experience) said that someday there will be a Coke for everyone. (Imagine the logistics!) Good luck, by that time the consumer society will have ended.

Fri, 04/08/2011 - 12:06 | 1150169 falak pema
falak pema's picture

The problem is the mindset of Imperial ruling elites in USA both red and blue :

For the reds the NONNEGOTIABLE monopoly/Oligopoly cartels since 50 years have been:

MIGC, OIL, PHARMA, NOW  the biggest : FIRE (WS, PDs, Fanny/Freddie, AIG, GS).

For the blues : Labour Unions, State bureaucracy (health, education, govt.), Entitlements galore. All this through cartel subs.

The mind set ensured, as USA was unquestioned world leader, we could spend unlimited by just printing reserve currency benefitting for extraordinary excessive privilege. 

So once the mind set goes west, the due diligence follows. It has and how! Now, we have no brakes, no checks and balances. And nobody knows how to take the foot off the print press accelerator.

Nobody wants to bites the bullet, admit defeat. The ship has only one destination : straight into the iceberg. Titannical.

Fri, 04/08/2011 - 15:20 | 1150976 pazmaker
pazmaker's picture

Nobody wants to bites the bullet, admit defeat. The ship has only one destination : straight into the iceberg. Titannical.

 

 

Instead of biting the bullet...how about using it for what it was intended for?....I'll leaveit at that and say no more

Fri, 04/08/2011 - 12:17 | 1150230 mcarthur
mcarthur's picture

Look on the bright side.  At least its cost push inflation instead of demand pull inflation.

Fri, 04/08/2011 - 13:31 | 1150534 Djirk
Djirk's picture

bi flation bitchez....next a supply shock to send inflation over the top and inflate away liabilities....wooo hooo

Fri, 04/08/2011 - 14:40 | 1150813 Bitch Tits
Bitch Tits's picture

Let's face it, folks - we've been had!

Somehow, the terrorists have won.

Our economy is down the tubes, businesses and jobs disappear every day, homes are lost once somewhat affluent people are sleeping in tents.

And to think that our own banksters sold us down the river for a few pieces of gold! Wow.

Fri, 04/08/2011 - 20:43 | 1152217 tomster0126
tomster0126's picture

the consumer economy is falling apart, Durden's hitting the nail on the head with this one.  I barely buy anything these days and I shop at the cheapest places available for most things I need.  Upping wages is a crucial tactic employers and the govt must use if they want to increase spending and get real liquid pumping back in the economy...until then I'll be holed up eating my cans of tuna and Ak-Mak crackers.

 

www.forecastfortomorrow.com

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