The Cost Basis Of Our Economy Is Spiraling Out Of Control

Authored by Charles Hugh Smith via OfTwoMinds blog,

What will it take to radically reduce the cost basis of our economy?

If we had to choose one "big picture" reason why the vast majority of households are losing ground, it would either be the stagnation of income or the spiraling out of control cost basis of our economy, that is, the essential foundational expenses of households, government and enterprise.

Clearly, both rising costs and stagnating income cause households to lose ground, i.e. their income buys fewer goods and services every year.

I've often covered the dynamics of stagnating income for the bottom 95%, and real-world inflation, i.e. a decline in purchasing power.

But neither of these dynamics fully describes the relentless upward spiral of the cost basis of our economy, that is, the cost of essentials and the foundations of the economy: education, healthcare, energy and labor.

These expenses are pushing the costs of virtually every good and service, public and private, higher in a self-reinforcing spiral. The costs of education are spiraling out of control, stripping households of income as an entire generation is transformed into debt-serfs by student loan debt. The soaring costs of healthcare are a core driver of higher costs in the education complex (and goverment in general), and to cover these higher costs, counties raise property taxes, which add additional cost burdens to households and enterprises as rents rise.

Rising rents push the cost structure of almost every enterprise and agency higher.

Then there's the asset inflation created by central bank ZIRP (zero interest rate policy) which has inflated a second echo-bubble in housing that has pushed home ownership out of reach of many, adding demand for rental housing that has pushed rents into the stratosphere in Left and Right Coast cities.

Let's look at a few charts that illustrate the relentless rise in the cost basis of our economy:

Do you reckon these two charts are connected--soaring costs and ballooning administrative payrolls?

Student loan debt is soaring above $1 trillion, guaranteeing profits to lenders and debt-serfdom to the students exiting with degrees that are in over-supply, i.e. possessing little scarcity value in an over-credentialed economy:

The echo housing bubbles in many locales exceed the nosebleed valuations of the previous bubble:

And how do we pay for these spiraling out of control costs? By borrowing more, of course:

Courtesy of Lance Roberts, here's a chart depicting how households are filling the widening gap between income and expenses with debt. This is another self-reinforcing spiral of rising costs, as debt accrues interest, adding costs at every turn of the spiral.

What will it take to radically reduce the cost basis of our economy? A fundamental re-ordering that breaks up all the cartels and quasi-monopolies that push prices higher even as they deliver lower quality goods and services would be a good start.

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A Sentinel Five Star Tue, 12/05/2017 - 22:35 Permalink

There are entire professions that are all waste: hr is the worst, then there’s every race and gender post, academic, etc. there are government regulator armies writing and enforcing nooses around the county’s production, there are illegals galore. And who can forget the endless administrative waste in all the regulated/subsidized industry like education, health.

The Chrysler building was built to house accountants. Lotus 123 and then ms excel freed up the space in a jiffy. But Chrysler wanted to make a profit.

I FIRMLY believe that “WE” don’t even understand what profit is. Not yet. But when the iPhone accounts go delinquent and it’s expensive to buy dried soybeans (forget meat or especially organic anything) then “WE” will suddenly have an incentive to look around. And the government paid and government mandated jobs will be among the last to go — people will see that.

Hopefully we can hang Congress ornaments in our cities then, and give local reps the due appreciation for their bond issues. Sadly the rage won’t be carefully directed.

Despotism comes from those situations, not renewed Golden ages. Educating the younger generations that previous cultures weren’t dumb even though they didn’t use Facebook and had crazy ideas about chivalry, morals and (gasp! Even God!) — educating them will not be easy.

In reply to by Five Star

MonetaryApostate A Sentinel Tue, 12/05/2017 - 23:05 Permalink

Since 2009 alone the ultra wealthy running America have printed over $551 Trillion dollars, & they can loan out 90x that.It's not that hard to see we are all serfs now, they can call it debt, but what is the cost to print money?That's right zero if you can print it infinitely, & that very same fact applies to paying for your labor!The earth & machines provide all the materials.

In reply to by A Sentinel

new game Ajax-1 Tue, 12/05/2017 - 18:49 Permalink

perfect scam:health insurance as an entitlement. all the suporting cast in place. guv oversight. big pharma. many more sub scams, like a wheelchair from medicare for $5000(worth about 250 max). it is like a sticky web; once in, fuked like an insect as the system sucks your money out of ya...

In reply to by Ajax-1

Antifaschistische new game Tue, 12/05/2017 - 21:37 Permalink

cost basis...this nails a very relevant point.I a perfectly healthy economic organism...this year you'd get a 10% raise, next year -12%, +4, -2, +5, etc.but we only ratchet upward and I'll say most fortune 500 companies are like one big union to protect their own organic self WAY before they protect the shareholder.This is what I believe will destroy the S&P.  Our companies inability to react at all to the downside when costs need to be compressed and everyone's driving their new car, maxed out everything and a new 8 year loan for their tempurpedic mattress.

In reply to by new game

hongdo Gatto Tue, 12/05/2017 - 20:18 Permalink

Absolutely.  Take .gov spending out of the GDP calculation and add taxes into the cost of living and inflation for a start.  Then get rid of .gov regulations and statute law and go back to common law.  Without .gov in the regulation business, you don't need all the hanger-on administrators.

In reply to by Gatto

nuerocaster ultraticum Tue, 12/05/2017 - 22:38 Permalink

Any sports fans present?Does it seem counter intuitive that people are paid 10s of millions or even 100s of millions of dollars to play childrens games? That someone can become a billionaire for organizing childrens games?But it's the free market right? That's the party line. Are high schools and colleges free enterprise? That's where the fan base and talent is developed. But what about the main advertising and marketing arm of pro sports, the media? The media oligopolies became so large and powerful in large part through government licensed monopolies. And broadcast media is still the cornerstone of sports. In turn the sports leauges are official or defacto monoplies themselves. They use that monopoly power to extract subsidies from local governments.The Clubs, Monopoly, Net Tax Receivers, Leverage are doing ok. It's about privatized profits and socialized costs.Cost basis? Compound growth? The OPM rackets aren't really that obscure. People don't really want to face the truth about themselves or the human condition. It's all too hard, too ugly, too complicated. Let's have something or someone to blame, something easy to understand and let us feel better about ourselves.

In reply to by ultraticum

ThirteenthFloor Shaznardicklez… Tue, 12/05/2017 - 19:00 Permalink

Yes. Zero percent, with direct fed (no pun intended) intravenous money to banks - all $ velocity slowed/froze, businesses liquidated capital equipment. US manufacturing economy has literally disappeared.

only at the shallow side of inflation curve too..the real ramp comes when usd foreign reserves are dumped faster (and the hens come home to roost).

In reply to by Shaznardicklez…

Lordflin Tue, 12/05/2017 - 18:22 Permalink

OH...  so it was't central banks charging interest on money made from nothing (not a fan, bitcoin)... well, guess I will stop concerning myself with that then...

swmnguy Tue, 12/05/2017 - 18:34 Permalink

The problem is that Finance has taken over our economy, and the Corporate Management Model has been imposed everywhere in our society.  The two factors compound each other with disastrous consequences.When our economy worked, Finance made up about 5% of activity.  Now it's nearing 50%.  And there were only a couple layers between the lowliest worker or customer and the Top Dog at all but the largest organizations.  Now all but the smallest business and organizations of any type have a hierarchical ladder that stratifies and complicates everything, and requires squadrons of Executives and layers of middle managment, each requiring their own squadrons of assistants and handlers.  The Org Chart resembles an upside-down pyramid in many companies.  There's next to nobody to do the work, and all the hierarchical levels of managers are in meetings with each other all day every day and functionally do nothing.Hey, it's good for me personally.  I get hired by a couple of large corporate entitites to do their work, since they don't have time to do it themselves.But it's a disaster for America, and it will collapse.  There are too few people, earning too little money, to support the bloated hierarchical authority structure in the lifestyle to which they've become accustomed.

silverer Tue, 12/05/2017 - 18:37 Permalink

I think all homes should have a minimum cost. Say, 5 million. That way, more homes will be built, and bankers will get rich and not have to blow up N Korea or force finance electric cars. See how easy it is to build a unicorn universe?

GreatUncle Tue, 12/05/2017 - 18:49 Permalink

The cost base is actually derived from the debt now unless you halt the growth of debt your cost base will increase no two ways about it.Of course they have no way to decrease the % level of debt that has been the flaw all along without human suffering.The current economic model is a one trick pony of inflate and be dammed no matter the consequences ... and the consequences are starting to look appalling.

Let it Go Tue, 12/05/2017 - 18:54 Permalink

With the passage of time, things change and evolve. This transformation can be seen in both society and the economy. A question we must ask is just how relevant today's comparisons are with prior economic cycles? The situation today is in many ways "historically unique" due to the rampant expansion of credit during the last forty years. More on this train of thought in the article below. http://Economic Evolution Renders Many Comparisons Obsolete.html

JBPeebles Tue, 12/05/2017 - 19:18 Permalink

Gold's getting abused in advance of year end reports from the various money managers who want the rigged S&P to beat out gold Y/o/Y. Doubt it can climb past its predetermined high. Squeeze isn't as bad as last year at this time when it dropped and forced weaker players to liquidate.The Comex rigging is reaching its inflection point. The Russians and Chinese have started a gold exchange. This will further deplete stores of gold in Western vaults. SCO member state central banks have been accumulating in huge quantities. Take their depletion rate out fo annual production and nothing's left over--India, China, Russia have all been loading up. These CBs have NO intent of letting Western banks operate a fractional reserve gold system through ever-growing fabrications based on re-hypothecation (re-counting and ownership sharing.) They know that the West can't sell gold it doesn't have but plays along to buy on the dips.That said, many gold investors have been waiting for breakouts above 1300, which appears to be the dividing line. Some people have been waiting since last summer. They may sell if the metal breaks above key price points as they've been waiting a long time--expect pent up sales at these periods. Weaker players are vulnerable to short run price declines, which are intended to flush them out of the market at the lowest price possible. Still, physical reserves are so low that actualizing physical delivery is impossible unless gold hoarders are forced to liquidate--something that gets less likely at these artificially suppressed prices. You're less vulnerable than Bitcoin but only if you own phyz.Now if you have physical, don't get suckered in! We know the banks create naked shorts and the Comex allows them to pretend they actually have the gold. The reality is that gold is a store of value and its price is repressed to diminish the rapid decline in the purchasing power of the dollar. Foreign exchanges like the Shanghai one require daily settlement in physical so smart money will move into the real physical metal on those exchanges, not into fraudulent derivatives with no tangible backing.Silver's looking great and I'd stack at these prices. Don't need to sell, keep your phyz safe, and trust in the things made by God not men, like derivatives posing as assets which are bank IOUs that can't be collateralized--claims to each Comex ounce are far too many and none of the contracts will be available for delivery in physical form in a crisis.

CHoward Tue, 12/05/2017 - 19:57 Permalink

Face it - the U.S. has created quite a few monsters and it's obviously becoming more and more and more difficult to feed them.  Can this even be stopped? 

Common_Cents22 Tue, 12/05/2017 - 20:18 Permalink

$1500 rent/mortgage200 utilities500 car payment/insurance500 foodno extra goodies, no trips, no clothing, no movies, no nothing.there's 2700 a month cash going out the door monthly for an average person with a decent place to live and a newer financed car in the last few years.If you are making 50k a year gross.    You have nothing left after taxes.Throw in Fraudbamacare of 400-600 a month and you literally dont have a single dime left over and maybe in the red for the month depending on your state/local taxes.   Heaven forbid you get sick and have a hospital stay, you get dinged for 5-10,000 deductibles and co-pays and you are totally screwed even if you have fraudbamacare insurance.forget about retirement, forget about vacations, forget about raising any kids and college.      

bloofer Tue, 12/05/2017 - 20:24 Permalink

The reason the cost of essentials is continually spiralling higher is because virtually all these goods and services are either government monopolies or government-conferred monopolies. Where they are not explicity so, they are effectively so due to government regulations and taxation that create a very high bar to entry for competitors.Housing is a good example of the last item. In the late 1940s and early 1950s, it was not uncommon for a man to build the family's home himself, beginning with a kitchen, living room, and one bedroom. The indoor bathroom came later, followed by additional bedrooms, a dining room, and a garage.Small towns had many very small houses.Building codes in most places today make this impossible with minimum square footage requirements and other regulations. In most areas, large acreages are required if you want to build in the country.These and other codes and regulations make home ownership very costly--effectively giving construction companies a monopoly on building, as well as forcing people to take out (large) bank loans. You used to be able to build a house with a line of credit at the lumber yard. No mortgage or construction loan needed.

Common_Cents22 bloofer Tue, 12/05/2017 - 20:30 Permalink

yep, and skyrocketing property taxes, even minimum property taxes even if you tore down your home.  I have a spendy vacant lakefront property.   cost me 10 grand to take down the shitty little house and took 3 months to get city approval, all kinds of permits and tests GF father has rural 200acre farm and put up a 12x16 hunting shack.   His county patrols the property BY AIRPLANE and swoops in to tax and fee the heck out of any new structures.    A fucking shed hunting shack on rural woodsy farm property needs fucking city and county approvals!!! 

In reply to by bloofer