Guest Post: Essays In Fragility: The Efficient Subsidize The Inefficient

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

As surpluses dwindle, borrowing money becomes the only way to prop up the Status Quo. Too bad that path inevitably leads to insolvency.

Consider the consequences of the efficient subsidizing the inefficient. As long as the surplus generated by the efficient is larger than the cost of supporting the inefficient, the system can continue.

But once the cost of subsidizing the inefficient exceeds the surplus generated by the efficient, the system is doomed to eventual insolvency.

There is one way to fill the deficit, of course: borrow money. This is the strategy being pursued by the Status Quo in developed and developing economies alike.

Identifying the efficient and inefficient sectors is not straightforward, as everyone reports they are being highly efficient. Since most of the economy is controlled by the State (a monopoly) and its favored private monopolies/cartels, the market has few opportunities to exert competition.

How much competition is there in the higher education cartel or the sickcare (a.k.a. healthcare) cartels? Very little.

As long as the inefficient are protected from competition and amply subsidized, there are no incentives to become more efficient. In effect, becoming more inefficient is rewarded.

One broad measure of efficiency for nations which do not own the global reserve currency is trade. Nations with highly efficient sectors tend to export the products of those sectors, while nations with inefficient sectors tend to import more than they export. (Owning the reserve currency creates a unique situation I have discussed elsewhere: Understanding the "Exorbitant Privilege" of the U.S. Dollar November 19, 2012)

There are many other factors in trade, of course, such as currency valuations, trade agreements, and so on. But as a rule of thumb we can posit that efficient sectors tend to generate exports, and those revenues and profits help prop up the inefficient sectors of the home economy.

It is instructive to use Japan as an example. For two decades, Japan's immense export sector generated vast surpluses that flowed into the home economy, supporting the inefficient monopoly/cartel sectors of government and banking, and the protected-from-global-competition sectors such as retail.

Even these surpluses were not enough to fund the inefficient sectors, so Japan borrowed gargantuan sums of money to pour into the infinitely deep rathole of its Status Quo.

Now the surplus from trade has vanished. Consider this chart, courtesy of Zero Hedge (Meanwhile In Japan...)

Here is another view, courtesy of Japan's Balance of Trade:

Here is a snapshot of the staggering debt accumulated to prop up inefficient government and private monopolies and cartels:

Those of you who are familiar with Japan know that the State-private cartel partnership actively subsidized protected (i.e. inefficient) sectors as a means of distributing employment and income: a highly efficient export factory subsidized an overstaffed retail sector, for example. Where a U.S. department store might have one clerk behind a counter, a Japanese equivalent might have three or four clerks per counter.

There has been some reduction in overstaffing but it is still readily apparent when compared to U.S. staffing in retail, grounds maintenance, etc. In other words, the efficient subsidized the inefficient as a matter of redistribution policy.

Unfortunately, the deflation of the credit/stock/real estate bubble in the early 1990s wiped out trillions of yen of assets and collateral, and the Status Quo's need to protect the banking sector from insolvency tore a giant gaping hole in this cozy subsidization/ redistribution policy.

The dead weight of an insolvent financial sector and a Central State devoted to crony-capitalist malinvestment created a drag on the entire economy, one that soaked up much of the remaining export-generated surplus.

The loss of the nation's nuclear power has certainly added to the trade imbalance, as billions of dollars in fossil fuels are now being imported to offset the lost nuclear-generated power.

But that is not the only factor. In some areas, Japan's export machine has lost its consumer mojo. For example, as recently as 2005, our Japanese friends carried Japanese-brand mobile phones with excellent cameras and features. Now they carry iPhones. Yes, some of the parts in the iPhone are made in Japan, but the major profits flow to Cupertino, not Tokyo.

What happens when the efficient sectors that are propping up a vast array of inefficient sectors falter? The politically expedient answer is of course to borrow more money. But that creates another kind of financial fragility.

Borrowing money only masks the fragility for a time, while adding another layer of fragility beneath the apparently prosperous surface.

We can discern this dynamic in many nations. Even export-dependent Germany is starting to experience the consequences of dependence on its most efficient sectors. As exports dry up, so do the surpluses, profits and tax revenues that distribute money from the efficient to the inefficient.

Regional surpluses and subsidies are sparking divisions in Europe that were not apparent when borrowed money subsidized everyone under the sun. Once borrowing becomes prohibitive, the structural imbalance between surplus that can be spent and what everyone expects to receive is revealed.

As surpluses dwindle, borrowing money becomes the only way to prop up the Status Quo. Too bad that path inevitably leads to insolvency.

My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mr Lennon Hendrix's picture

Why do I feel like the talking points have become as recycled as a Paul McCartney jingle?

RockyRacoon's picture

Yup.  And those talking points are getting pretty boring.

I was looking for the "You Are Here" point on the charts but didn't see it. 

I'll just guess.

LFMayor's picture

I think we're upstream someplace on Shit Creek, Rocky.  In a chickenwire boat!

Bay of Pigs's picture

He says "insolvency".

Sounds like a reason to own some gold and silver and other hard assets.

LFMayor's picture

We all know...
that people are the saaaaame
Wherever you go.

Plus, he lost the ass-kicking contest to a one-legged woman.  Not sure which is more piss poor.

flattrader's picture

I think the point of this was...

>>>My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.<<<

No mention of Fukushima???

Some analysis.

and this???

>>>Yes, some of the parts in the iPhone are made in Japan, but the major profits flow to Cupertino, not Tokyo.<<<

Good gawd.  This guy really thinks that the major profits are flowing to the U.S. (and being taxed in the U.S.?)

The guy needs a primer on how MNCs work.

DosZap's picture

HOW can the GOP do any deal that has to cede the power of Congress to up the debt limits/budgets, and  HAND it over to the  gwina be Diktater?.

They cannot, may as well shoot yourself in the head!................NO way, no how.

Give him 100% control of the financial helm,to raise at his whim and favor?, and we will all be eating out of dumpsters!.

Agree w/ the 39% @ 250k, and no more.(and say we are forced into this deal,we do not want to do it)

Then it's his 1000%  let him own it.(the entire thing is about knocking off as many small to med business's as possible.Stunt growth even more,since he was inaugurated 171 new GOOBER jobs per day have been added.

Beam Me Up Scotty's picture

This sounds like oil.  If it takes more than one barrel of oil to pump another barrel out of the ground, it doesn't matter how much money you print.  You are out of oil.

otto skorzeny's picture

actually ethanol is already there as far as the massive amount of energy needed to produce 1 gallon of it

Omen IV's picture

Charles Hugh-Smith - you are using Nassim Nicholas Taleb from his book Antifragile - should give him attribution -

there is more to it than just efficient and less so - those less efficent are not dragging down the system but may be supporting it - case can be made that the most efficient are also the most fragile  given their potential competition are doing the same thing

GernB's picture

With all due respect that sounds like rationalization. I think you'd be hard pressed to provide a example (at least an example that would hold up to the hard light of scrutiny) of where those less effificen are not dragging down the system.

kaiserhoff's picture

Two of my favorite writers are on the same page.  Just got Taleb's new book, Anti-fragile, in the mail.  Looks good, but he's a bit inconsistent.  Will give a thumbs up or down in a few days.

Jack Sheet's picture

Another incredibly incisive analysis with no presentation of WHAT exactly is going to happen WHEN.

ForTheWorld's picture

To be fair, if someone were able to say what was going to happen, and when it was going to happen, you could almost guarantee that someone (or some people) would have already taken advantage of that knowledge to the fullest.

optionsman's picture

this is a never ending issue. the more efficient should be smart enough to realize the situation and work hard (not harder) to help those who are inefficent be less so. imho


Frederic Bastiat's picture

Yet another poor soul assuming that borrowing is bad and saving is good--when borrowing and saving make each other possible.  Wealth is goods, not money.  Time for everyone to sit down and read "Economic Sophisms" and then repeat the refrain over and over.   

The problem is that too many poor people are consuming goods without producing them (ex: welfare), and too many rich people are finding themselves with surplus claims on goods (money), without actually adding to the a set of available goods through production (ex: high-frequency trading).

We continue to hear the "jobs! jobs! jobs!" chant from our politicians. But Frederic Basitat would ask: if jobs are what you need, then why not make a law that all goods being moved from one location to another inside the US, must be carried on the backs of human beings? There you are! Billions, and possibly Trillions of jobs! 

Flakmeister's picture

Because it is easier and cheaper to use oil.... no profit margin....

I would argue that the sooner profit margins for many activities disappear, the sooner we will be to addressing many of the deficiencies of the political economy in whatever form that political economy is realized...

falak pema's picture

since we are on the subject of oil what make you of those 2020 projections of US oil and gas surge that everybody is talking about?

Can the US overtake Saudi in "phony" liquid oil (conventional / NGL/BAkken/Condensate/Bio OIL) to reach 10 MBPD asymtote?

Even that seems strectched...and for frack gas they don't seem take into account the fast depletion rate/well head curve.

And then this new oil patch in South texas...San Antonio. 


Flakmeister's picture

I doubt that the US will reach that high and on a BTU basis; it is about 65% of what is being advertised...

The most egregious slight of hand is "Refinery Gains" where the hydrocracked gunk leftover is reduced to primarily Ethane resulting in a volumetric gain...

In other words about 7% of that putative 10 mmbpd is actually from refining *imported* oil...

Frederic Bastiat's picture

I was just making a point when saying we should have people carry things--it is an example of something that would make us all poorer, yet it would 'create' jobs.  The point is that we should focus on increasing the weath of our nation (the goods we produce).  When making policy the government should attempt to create simple laws that make monetary rewards requiste to the effeciency and production the rewardees have created--ie make markets more effecient.  

High Frequency Trading is an example of an activity that produces very little to increase the wealth of our nation (goods), yet it has produced huge sums of claims on goods (money) for those who engage in it.  There are MANY more activities like this.    

A good example of a simple law that would encourage market effeciency when it comes to HFT is to make all offers valid for one second. 

Flakmeister's picture

HFT is an excellent example of the equivalence of worshipping false gods...

You can go on all you want about making markets efficient but ultimately it boils down to how you discount the value of the planet whose riches underlie the origin of all economic activity....

XOFnews's picture

idiot. so they (hft) wont make 8 million new quotes in the 1000 mils during that simple law you propose? then what is the next best price after you froze time? C'mon smart person, tell us how that simple law promotes efficiency. don't tread where you don't belong. Just offers? Not bids? What wealth of nation are you talking about?

flattrader's picture

>>>I would argue that the sooner profit margins for many activities disappear, the sooner we will be to addressing many of the deficiencies of the political economy in whatever form that political economy is realized...<<<

You mean if health care providers were co-op based and not run for the benefit of shareholders and greedy fucks who pretend to administer them and pretend to deliver health care, the cost might then be affordable and the service good?

Stop making sense!!!

Note--true health care co-ops still exist in some parts of the country and deliver exactly what I mentioned above.  The laws in those state provide for that kind of organization.  Only a handful of state allow that option.  Wonder why?

Also consider that back in the day many health care co-ops got run out of business...Wonder why?

three chord sloth's picture

Borrowing and saving are no longer connected. Back in the day, savings created the available pool of loanable money, but that is true no longer. Banks today are not even constrained by the 10 to 1 "restrictions" of the fractional reserve system... between "mark to fantasy" assets and infinite rehypothecation, the big banks can lend at will, unconstrained, and then later backfill their reserves with pretty much anything they find laying around.

There is far more lending in the world than savings. And there is naught but a trace of real, concrete assets backing up most of this excess lending.

Frederic Bastiat's picture

You are correct--there wasn't time in my original post to get to this one caveat. 

Regardless, it is not the fact that too much money is sloshing around in investment assets that makes us poor, it's that as an economy we spend too much of our time staring at the prices of our monetary assets, attempting to make those monetary assets represent a larger share of future goods, or tricking others into thinking a good or set of goods will make them more wealthy than it will (flipping houses--every salesman in our economy is essentially a tax)  Instead we should be spending our time in activities that do actually increase the wealth of our nation--'the pie' as it is called. 



AnAnonymous's picture

The problem is that too many poor people are consuming goods without producing them (ex: welfare), and too many rich people are finding themselves with surplus claims on goods (money), without actually adding to the a set of available goods through production (ex: high-frequency trading).

Another recanting on production is not consumption or how 'americans' can produce more than they consume or how 'americans' can overcome the environment.

'American' societies see their middle class as the King class so it has to be the other classes.

A sidenote, since 'americans' have pushed division of labour up to specialization, it means that quite a many people consume goods they do not produce.

Actually, bigger chances to find among poor people who consume the products they make themselves.

As to the upper class, 'americanism' has allowed them to concentrate the ownership of environment as never before and this simple fact adds substantial goods to the chain.

But hey, 'americanism' is as 'american' does. The middle class is the King class and while being central in the crisis due to being the overconsumption center so if you want to be popular and 'americans' want to be popular to monetize their popularity, you have to cajole the 'american' middle class.

akak's picture

Blah blah blah blah blah blah consumption blah blah 'americans' blah blah blah blah blah consume blah blah 'americans' blah blah blah blah.

'American' blah blah blah middle class blah blah King class blah blah blah blah blah blah blah blah.

Blah blah blah 'americans' blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah consume blah blah blah blah blah.

Blah blah blah blah blah blah blah blah blah consume blah blah blah blah blah.

Blah blah blah blah blah 'americanism' blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah.

Blah blah 'americanism' blah blah 'american' blah. Blah middle class blah blah King class blah blah blah blah blah blah blah blah blah blah blah overconsumption blah blah blah blah blah blah blah blah blah 'americans' blah blah blah blah blah blah blah blah blah blah blah blah blah 'american' middle class.

Jumbotron's picture

The efficient subsidizing the inefficient.....


You mean robots and algorithms plus slave overseas labor supporting our broke, jobless asses...because of aforementioned effeciencies.


Got it.

GubbermintWorker's picture

At what point do I cash out the remainder of my IRA and buy gold and silver? Before or after December 31st.....decisions, decisions.

otto skorzeny's picture

I'm trying to figure that one out myself

SmittyinLA's picture

They wan't you to liquidate, cash out and buy gold, they are WileECoyote with a multi-pronged array of signs of fear, doom and gloom all pointing at a boobytrap that screams "LIQUIDATE BUY GOLD & SILVER" dont be a chump, dont go for the obvious booby trap, the Road Runner wouldn't.

"They" want you to dump your productive assets and buy their gold, while they buy your fear firesale assets for pieces of shiny metal, they control the fear, they can turn it on and off like a spicket.    

You can always buy gold with the income of a productive asset, gold has been annihilated over and over with the currency debasement fear model, "they" always win, gold aint a hedge, its a sucker's bet like SS.

GubbermintWorker's picture

What in the world are you talking about? What "productive assets"  would you recommend?

Pieces of shiny metal? Oh, do you mean gold and silver, money and store of value for numerous civilizations? Sounds good to me. But I am hedging a little by having a sizable amount of Gov't inflation protected treasury bonds. I think the shiny metal will ultimately win out.

Peterus's picture

When SHTF what will be the value of defaulted bonds and empty paper money? What will happen to multitude of ineffiecient companies, and just unlucky ones that don't manage to survive the crash? Who's saying gold is in some way similar to productive assets? It's a store of value. It has inherent uses and good qualities for exchange as money, whatever happens these still hold and even if food will be prices 5 times higher in gold than it is now - it will be priced 500 times higher in dollar bills.

BTW You could write exactly the same kind of scary story for any kind of good or investment. With some group of "them" looking for suckers for <insert type>.

Frederic Bastiat's picture

Silly "They".

Who is "they" anyway?  Are you "they"?

DosZap's picture

At what point do I cash out the remainder of my IRA and buy gold and silver? Before or after December 31st.....decisions, decisions.


Depends on HOW much you can cash out and not take the tax hit that takes you past your normal level of income bracket.

You will save at least 10k, on a 100k IRA if you do it this year,THAT way v.s. next year, the 250k BS is a joke, the TOP tier income range will after Jan 1st change to $50k  a year.

Think they need taxes, you think the great equalizer will stop at the SO called RICH?,most small med buisness bank around $40k-50k a year income, and invest the rest back into their companies to grow them, how can they in this onslaught?.

SmittyinLA's picture

Who is buying CA's debt and why?

I have a different take, I think most foreign investment in America now and for the past 30 years was done to promote a political agenda of mass immigration and Socialism, in essence "change" America through mass heavily subsidized immigration. 

It worked.

Heck, CA needs billions in new debt every month just to maintain the alien herd and keep them from leaving.


dexter_morgan's picture

If it's bad debt, sell it to the Fed, get greenbacks, and eureka - the debt is laundered in to brand new dough.

dexter_morgan's picture

Current wisdom: PRINT MO MONEY!

Waterfallsparkles's picture

We need to start Taxing all of the working people of China so they can support our non working people on Welfare.

earleflorida's picture

just my two cents?

'A Jackal in the Fed's tool-shed... preys upon Regulatory-capture-- as Mr. Statism becomes a Satanist meister[?]-- this evanescence rendering in a boilerplate  fomc  cauldron... that being a snared-- once healthy and sound Mr. Treasury... now a rendered monetary skeleton-- a tasty base for many a-soup-kitchen's clientele, as we bow our heads, and praise, thy kingdom done?'

and this: __  'China's Indigenous Innovation Policy Bigger Threat to the U.S. Economy Than Offshore Outsourcing'__  Robert Oak [6/18/12]

thankyou C H-S

Mediocritas's picture

Efficiency leads to the creation of surplus, just waiting to be consumed by other processes that will, of course, be less efficient (if they were more efficient they would have been at the head of the queue). The more "efficient" have always and always will subsidize the less efficient. (I use quotes there because "efficient" in this context is a relative term, not an absolute). To be surprised by this is like being surprised that water is wet. 

This pattern is a mathematical certainty and can be observed wherever one cares to look.

In 1865, Jevons observed it with regard to coal consumption (Jevons Paradox). The greater the efficiency of coal use, the greater the subsequent demand, the more diverse the applications, and less efficient those other applications (relative to the efficient source that enabled the surplus).


Neil Postman wrote an interesting book in 1985 observing this phenomenon with regard to information. The more efficient the signal, the more reserve capacity and the more that could be packed in to a message, the worse the signal to noise ratio becomes. (Modern, high-capacity communications are disastrously inefficient / mostly noise rather than any useful information). 


Multiple people have observed that as computers and software have "improved", productivity has not kept up the pace (relatively). In terms of turning out copy, modern word processing software actually gets in the way vs older software. Increased computational efficiency only creates excess reserve cycles that are consumed by pointless software tasks that waste user time.


In summary, OP is yet another observation of a natural phenomenon. There's little point complaining about it because there's nothing you can do about it.

AnAnonymous's picture

Another streak of propaganda by this 'american' author who has the knack of having it wrong nearly every time. Voiding his propaganda attempt.

In 'americanism', self indiction is a big thing.
So it gives this kind of article when the central tenet is so disconnected from reality it gives another exhibition how 'americanism' is all about submission.

What is efficiency in 'american' economics?

The efficiency 'americans' have displayed is their outstanding capacity to mindlessly consume the environment, faster and larger than anyone else, with no exit plan and no other horizon that depletion of resources.

That is the actual efficiency as portrayed by 'americans''every day's doings.

In this context, the efficient do not subsidize the inefficient.

That is the reverse: the inefficient subsidize the efficient.

Today's crisis is this 'american' world is due to a stalling in expansion. As shown, 'americans' do not know how to overcome the environment. But they know for sure how to overcome other groups of human beings to steal the environment from them.

There is a big scarcity of Indians these days, that is groups of people who are inefficient in consumption their environment, and sit on an environment that is still to be stolen by 'americans'

The crisis shows who has been subsidizing the other: there is no lack of 'americans' but a lack of Indians. Cut the subsidizing source and poof, magic, 'americans' struggle.

But as self indiction is a big thing, added to the 'american' being a commercial writer, he can not tell it as it is, and has to perpetuate some 'american' myth, that in 'american' economics, the efficient subsidize the inefficient when it is the opposite.

And this is because of their eternal nature. 'Americans' can not change and are trapped in 'americanism'

Funnily enough, it makes of future a quasi certainty. It is funny because this should disqualify all the professional fortune tellers.

But this is an 'american' world where propaganda and fantasy are highly priced and consumed.

So instead of taking it as it is, knowing that their fortune telling venture is nothing but an overconsumption activity, totally useless as it paints unlikely to come events, 'americans' remain 'american'. They cling to their overconsumption for the sake of overconsumption.

Obeying their 'american' eternal nature.

Stuff like this allows to place depletion of resources as a quasi certainty in the future in an 'american' world.