Summing It All Up…


Excerpted from “Ignorance by Consensus” posted by David Korowicz at FEASTA,

But, very briefly and acknowledging some contention, the conditions for concern might be summarized as follows.

 

We are trying to comprehend our world within the world-views and economic orthodoxies developed over an extra-ordinary, two-hundred year period of compound economic growth. This growth was coincident with increasing wealth, complexity and globalized integration. Part of our dominant consensus is that this trend will continue. Much of what is important to us, how we live, our expectations, what we value and hold dear, was shaped by this process. And we, the global 10%, have done well out of it.

 

The fringe view is that this growth is over – we are at the limits to growth, now. At issue is the stability of the globalized economy. We are moving into a deepening global deflationary depression, interspersed with dangerous and possibly irreversible shocks to the systems that support our basic welfare. We will lose much of what we take for granted and things we have come to call our own. We are entering an era of real danger and unpredictability.

 

This is because we are at an historic point of convergence. Firstly, we have reached the limit in the credit backing of our financial, monetary and banking system. We are at the same time hitting profoundly destabilizing ecological limits preeminent at this time is that we are almost certainly at the peak of global oil and food production. Put another way, we are at the limits of the system of trust and solvency that underpins the trade upon which we depend. We are at the limits of the least substitutable energy source that, by the laws of physics, is necessary for economic maintenance and growth. We are at the limits of our most fundamental human sustenance. They are the three most critical structural pillars of the globalized economy. Like a three-legged stool, the whole system can become destabilized by the buckling of just one.

 

In addition, and almost completely unacknowledged is that the changing nature of the globalized economy – increasing integration, complexity, speed and inter-dependence – has made us very much more vulnerable to this convergence. Further, such complexity makes it very difficult, or even dangerous to try and ‘fix’ its parts.

 

If we were to acknowledge such a fringe view we would be urgently preparing for profound change – for when real change is forced upon us we may have much less room for manoeuvre. We would be embracing austerity because of its inevitability, and in doing so, transform it. From top to bottom, we would be working on our food security, the resilience of critical services such as sanitation, monetary systems, governance, and re-working work. We would have begun the personal and collective psychological processes that might allow us avoid some of our species most destructive passions that can emerge in a time of crisis, and instead use it as a source of creative and positive change.

 

Of course, no detailed explanation for such a fringe view has been provided here. For most though, none is needed. They already know this view is nonsense. Why worry, it’s a fringe view… why with shale gas, technology, markets, stopping austerity, green growth, changing the monetary system, getting rid of the ‘wrong’ people….so many options! Anyway haven’t people been saying such stuff since the time of Malthus, and they’re still wrong! Aren’t the experts in control?! But an economist said…! Quite….quite.

For-Profit Colleges: Another “Business Model” That Blew Up


Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Career Education, when it reported its quarterly financial results, shed more light on an industry that had ruthlessly taken advantage of quirks in the American way of funding higher education, and that, even more insidiously, had preyed on gullible prospective students who were desperately trying to better their lives. Then it handed the tab to the taxpayer who couldn’t say no. A perfect scam. And it contributed to a ruinous mountain of student loans [ Next: Bankruptcy for a whole Generation].

In the halcyon days of 2010, Career Education had $2.09 billion in annual revenues. Then a free-fall. By September 30, quarterly revenues hit $333 million. Enrollment was down 23%, in the health education category 41%. An additional 900 people will be laid off, on top of the previously announced 1,300. The company will “gradually” close 23 of its 90 campuses. Red ink is gushing, with no end in sight. The stock has plunged from $70 in June 2004 to today’s 52-week intraday low of $2.60.

“The inflection we all expected in the second half of the year has not and will not occur,” said CEO Steve Lesnik during the earnings call. But he proudly claimed that “we made tremendous progress in creating a culture of integrity and compliance.” That, after they’d gotten tangled up in all sorts of new “issues” this year, such as a Veterans Administration audit “involving housing allowances for online students.” Indeed!

Career schools—culinary, health, and art and design schools—were one of the hotspots for abuse. Career Education admitted, for example, that it had inflated job placement rates for its graduates. In March, it agreed to settle a class action lawsuit for $40 million, involving one of its subsidiaries, the California Culinary Academy here in San Francisco. Former students alleged that they’d been bamboozled into enrolling by its claim that 97% of graduates found jobs in the field.

Turns out, that number included graduates who were working as wait staff, baristas, prep cooks, and the like. The complaint further alleged that the college fabricated outright some job placement data. The company’s new job placement rates are mostly below 65%, thus below the minimum required by the Accrediting Council for Independent Colleges and Schools.

But the company is moving forward: “Our goal is to no longer put disproportionate emphasis on starts and population,” explained CEO Steve Lesnik. Enrolling as many students as possible to grab their financial aid is apparently no longer top priority. We’ll see.

Career Education is in good company. The largest player in the industry, University of Phoenix, which is owned by Apollo Group, is also getting hammered by scandals and declining revenues. Enrolment has plummeted from over 400,000 students to 328,000. To halt the bleeding, it shuttered 115 locations in 30 states.

Corinthian Colleges got hit as well. One of its specialties was the Ability-to-Benefit program, under which students without high school diploma or GED had been receiving student loans and grants to attend classes though they had virtually no chance of graduating. As of July 1, 2012, the government shut off the spigot.

Now scrambling to get back on that gravy train, the school is offering free GED preparation programs to high-school dropouts, expecting for “some portion of successful GED completers to enroll” in its institutions. And it’s trying hard to sign up new students to pocket their financial aid: marketing and admission expenses were about 25% of revenues…. “Our mission is to change students’ lives,” the press release said.

Corinthian Colleges is selling some campuses and shuttering others, particularly in California where the crackdown has become more aggressive. For a reason: the out-of-money state is trying to reign in the cost of its Cal Grants, a financial aid system that ballooned from $915 million to $1.6 billion in eight years.

These schools are facing tighter regulations all around. On the federal level, the Department of Education, for instance, banned incentives paid to admissions reps or recruiters for the number of students they hoodwinked into enrolling. Pressures are rising to get these schools to prioritize student graduation and job placement, rather than just grabbing financial-aid money. But, as the financial results demonstrate, that push blew up their entire business model.

In its dazzling manner, the for-profit post-secondary education boom left behind a long trail of wrecked dreams, unfinished or worthless degrees, wasted time, and a huge pile of student loans resting on the shoulders of people who were unable to find jobs in the fields they’d studied and who are now unable to pay back these loans. In the process, these outfits sucked up taxpayer-funded state and federal financial aid of all types and made early investors and executives rich. At their peaks, the stocks were picked up by mutual funds and were thus sneakily stuffed into well-diversified portfolios and 401k’s, as recommended by all of Wall Street. Because somebody has got to buy this stuff on the way down.

Republican Party insiders would love to blame their election losses on emerging demographic voting patterns. This excuse does provide cover for some Republican PACs, but Ron Paul eloquently points at other, more powerful reasons, writes Chriss Street. Read…. Romney Would Be President If He Picked Ron Paul As VP.

You've Only Got Yourself To Blame


The questions of who are the 1% and what level of income demarcates the fat cats from the rest of Americans are likely to become more and more polarizing in the coming weeks. What is perhaps the most intriguing is the apparent dichotomy between the demographics (youth – who face considerably worse employment trends) and state-wealth who voted for Obama. As ConvergEx’s Nick Colas notes, of all the U.S. states with an above-average incidence of their citizens earning over $200,000 (14 in total), all but one (Alaska) went for President Obama in last week’s election.  At the other end of the income spectrum, only 2 states in the bottom 10 for +$200K earners (Maine and Iowa) had a majority of voters who sided with the President.

Via Nick Colas, ConvergEx:

In the spirit of the notion that politics makes strange bedfellows – we’ll interpret that to include roommates as well – I went looking for some examples from the recent Presidential election.  And since there is so much fuss about the question of “What level of income makes a household well-off?” we threw that into the mix as well.  In the tabel above you will find an analysis of state-by-state income levels, wealth disparity, cost of housing, and which candidate that state favored in last week’s election. 

 

A few summary points:

  • The greater the percentage of households making over $200,000/year in a given state, the more likely it is that its citizens voted for President Obama rather than Governor Romney.  Of the top 10 states in terms of “high income” households as a percentage of the total state-wide population, nine of them will be awarding their Electoral College votes to Obama.  The only holdout here is Alaska.
  • There are a total of 13 states (plus DC) where the number of +$200,000/year households as a percentage of the state-wide exceed the national average of 3.93%.  They are: the District of Columbia, Connecticut, New Jersey, Maryland, Massachusetts, New York, Virginia, California, Alaska, Hawaii, Illinois, Colorado, New Hampshire, and Rhode Island.  As mentioned, Alaska went for Governor Romney.  And it is the only state on this list that did.
  • At the other end of the spectrum, the 10 states with the lowest percentage of +$200,000/year income households relative to the local population are Mississippi, Montana, West Virginia, Arkansas, Idaho, Kentucky, Indiana, Maine, Alabama, and Iowa.  Eight of those states swung Republican in last week’s Presidential contest.  The two exceptions were Iowa and Maine.
  • The central irony of this straightforward math is that any increase in income taxes on the “Wealthy” will be disproportionately borne by the states which secured the President’s reelection.  Only 1.87% of the households in the states mentioned in the last bullet – the Republican leaning ones – earn over $200,000.  Conversely, an average of 6.48% of the households at the top end of the state-by-state list earns this much.  And, as mentioned, with the exception of Alaska they all favored President Obama over Governor Romney.
  • Whether this is merely correlation or causation is the subject of countless articles in political science journals, for as you review these lists of states you’ll see that this isn’t just about Election Day 2012.  The hard-core “Red” states tend to have lower percentages of wealthy households, and the dyed-in-the-wool “Blue” states have more.  Much more.
  • Also, if you look at the GINI Index – a measure of income inequality – Republican leaning states enjoy more equality on these terms than the citizens of traditionally Democratic areas of the country.  They may not be Sweden (GINI Index 23.0), but Romney-voting Mississippi, Montana, West Virginia, Arkansas and Idaho average 44.9 on the GINI scale.  On the other side of the political and economic coin, Democratic strongholds New York, Massachusetts, Maryland, New Jersey, Connecticut and DC have an average GINI score of 48.0. That is a three-point difference – about the same as currently exists between the U.S. average (GINI score 47) and Iran (GINI score 45).
  • You might argue that a dollar goes a lot further in some states than others, and you’d have a point.  For example, the average median listing price for a single family home in the five states with the lowest percentage of +$200,000 households is $169,780 as of 2011.  For the top five states (plus DC) in terms of high-income households, that number is almost twice as much at $304,140.  “Wealthy” in Mississippi is different than “wealthy” in New York. Not that any attempt to implement a higher tax rate on the much-referenced “1%” will take that into account…

Ron Paul: "0% Chance Of 'Grand Bargain' Over Fiscal Cliff"


Shining a little reality light on the otherwise pollyanna-like dearth of pragmatism that is the mainstream media’s guest-list, Ron Paul provided Bloomberg TV’s Trish Regan a little more than we suspect she bargained for when asked if he had any hope that we avoid the fiscal cliff. The constant “delaying-of-the-inevitable” enables our politicians to avoid facing up to the serious consequences of our reality and as Representative Paul notes the chances of a grand bargain are “probably zero… that’s why I think we’re over the cliff [already].” Just like the handling of the debt ceiling debacle, Paul notes they will “pretend they are going to do it” until we get a total crash of the dollar and the entire financial system (which he notes is what will occur if we continue the status quo). “We are at a point of no return” unless certain things change, since “we are not the productive nation we used to be.”

Paul on the fiscal cliff and whether politicians are under more pressure to just do what they need to do to get votes:

“Well I think that’s true and I think it’s been that way for a long time but the big difference is the Treasury is bare. It isn’t like we’re in the 1950s and 1960s where economic growth could work our way out of these problems that you could print money forever. Printing the money right now, what does it do, it fills the banks with excessive reserves and they get paid to park it at the Federal Reserve. So it’s quite different. We’re not the productive nation we used to be…we have a lot of jobs gone overseas. Our dollar is weakening because prices do go up and as long as we do that, the politicians are going to keep pushing that and trying to get away with that but the big question is how long will politicians will be able to get away with that.”

On the probability that a grand bargain will be reached on the fiscal cliff:

“Probably zero… that’s why I think we’re over the cliff. We’re past bargaining states because they will not address those things I just stated. They’re going to try to pretend that they are going to do it. The way they handled the debt increase, last summer, that is a pretty good example. And matter of fact the debt increase might be the big event come February that might be big because they can roll things over…they can postpone big decisions in January and yet that still does not remove the uncertainty. Uncertainty is a major cause of the inability for the market to get moving again and they have to revamp it in a much more detailed fashion than they are even talking about right now.”

On whether Obama will be able to bring Congress together for some kind of reform before the end of the year:

“Oh no, I think there will be something, but it will be very temporary, it won’t be long lasting and restore confidence and fix the problem. But there will be some type of reconciliation of saying we’ll do this and a little of that and it may even help the financial markets for a little while, but since it won’t solve the problems it will only be temporary. “

Guest Post: 1000% Inflation?


Submitted by John Aziz of Azizonomics blog,

UBS’ Larry Hatheway — who once issued some fairly sane advice when he recommended the purchase of tinned goods and small calibre firearms in the case of a Euro collapse — thinks 1000% inflation could be beneficial:

When 1000% inflation can be desirable


In fact, the costs associated with inflation (price change) are less than commonly supposed. There is the famous “sticker price cost” – the cost of constantly changing price labels – but in a world of electronic displays and web based ordering this is not a serious economic cost (in fact, it never was). To take an extreme position, one can make the economic argument that there are only limited costs in having inflation running at 1000% per year, with one caveat. 1000% inflation is perfectly acceptable, as long as the 1000% inflation rate is stable at 1000%, and it is anticipated. Of course, one can argue that high inflation tends to be associated with high inflation volatility and uncertainty (and that is true empirically), but economically it is the volatility and uncertainty that does most of the damage.

 

The maximum damage from inflation comes if it is unexpected or if it is unpredictable.Unexpected inflation causes damage, because the investor who holds bonds yielding 1% for a decade is going to feel cheated if inflation turns out to be 1000%. Of course, no one would voluntarily buy 1% yielding bonds if 1000% inflation was expected. Thaler’s Law comes into operation here; people dislike losing money more than they like making money. As a result episodes of unexpected inflation will lead to a significant adverse reaction on the part of consumers.

 

Unpredictable inflation is damaging because it causes uncertainty over an investment time horizon – and that uncertainty is a risk that will demand a compensating premium. What the inflation uncertainty risk does is raise the real cost of capital. If I think inflation will be 3% but I am not sure whether it will be 3%, 0%, or 6%, I am likely to demand compensation for the 3% inflation risk but then additional compensation for the possibility that the inflation risk is as high as 6%. The additional compensation is an addition to the real cost of capital.

Nope.

This is fairly typical mistake for an economist. In an imaginary economic model, it is possible to assume that inflation is stable, and that it is predictable, and to draw conclusions based on those (absurd) assumptions. In the real world, inflation and the effects of inflation are never predictable, because human behaviour — the micro-level phenomena on which macro-level phenomena like “inflation” are founded — is never fully predictable or stable. This means that future rates of inflation will always be uncertain, and renders Hatheway’s point meaningless.

As Hatheway readily admits, high inflation is associated in the real world with inflation volatility and uncertainty. It is not relevant to say that the real issue is not the high rate of inflation, because there has not been a single case in history where such a high rate of inflation has resulted in stability or predictability. Getting to a 1000% inflation rate is an inherently volatile path, historically one which has resulted in panics, crashes and breakdowns.

And beyond that, such a path would completely undermine the currency and instruments denominated in the currency as a store of value. There are no empirical examples of such high rates of inflation being tolerated, because at every stage in history such effects have been intolerable; when such rates of inflation set in, nations just end up ditching the currency, as happened most recently in Zimbabwe.

That is why 1000% (or 100%, or 50%, or probably even 10%) inflation will never be “perfectly acceptable”.

Gossip and views about privacy, gold, wealth, asset preservation