Sunday, December 19, 2010

No promises for the Middleclass

Millions of people came to America to seek their fortunes and to raise their families in a land where it was possible to have a better life and pass that existence on to their descendants. This was a land unlike any other in the history of the world. This was a land of opportunity where anyone (well almost anyone) could strive, work hard and accumulate assets that would see you through your latter years and maybe have some remaining at your end that your children could inherit.

Under royal subjugation one could only accrue landed wealth at the pleasure of the throne. This landed wealth is the greatest asset that can be passed from generation to generation. It is the one medium of wealth that can gain value beyond any reason if someone wants to obtain it for themselves and there is a system of laws that recognize ones rights to buy, hold and sell such property.

Under Communist rule, there is no private ownership of real property and the only wealth a man can accrue is currency and control over family labor. One can hide away excess earnings and protect it from poachers, thieves and the government itself. Under Soviet rule, the national currency was periodically changed making the old currency worth only what the government chose for it to be worth. Until about the time of the collapse of the Soviet Union, the Ruble was not exchangeable for any other currencies. In this way the Russian people and the Russian Republics could not trade with the West.

In an economy that doesn’t recognize title to and ownership of property, there is no ability to earn an income greater than the labor market is willing to pay. In such systems there is no multi-million dollar or Ruble or Yaun salary for athletes to play a sport. There is no opportunity to write a song and get a few cents each time it is played on the radio, in a movie, or on the television. There is no way to derive monitory value from inventing an idea such as text messaging on a wireless hand-held electronic device and accumulating such vast wealth that descendants for many generations would not have to be part of the workforce, unless they want to be.

So people came to America and started their upward mobility through the officially classless society to become part of the vast Middleclass that everyone strives for unless they are already above that stratum by birthright or other good fortune. As upwardly mobile people we became quite accustomed to that idea that we were better off than the rest of the world. We had access to everything. We had energy. We had land and clear skies. We had the bread basket of the world in our backyard and could do anything we set our sites on.

Along the way someone forgot to tell us that such a social and economic situation may only be a respite from the work-a-day grind that most of the world experiences every day. We seem to have forgotten that we can fall a great distance from our perch far above the economic datum. No one ever said that ones place in the Middleclass stratum was guaranteed. We did think that one should never backslide into the realm of the poor.

The membership roster always had its ordinary level of churn. One man rises and another man slips back. One family gets the opportunity to buy a house, fix it up and send their children to good public schools. Another family loses its primary income when the automotive plant moves to another state. As long as the net membership level is maintained or grows slightly, the Middleclass itself is in a healthy place. The real trouble begins when the membership level decreases due to forces far beyond the ability of any member to counter.

Elizabeth Keebler-Ross described the five stages of dying that begins with denial. That is followed with anger, bargaining, grief and finally acceptance. A similar process works in all types of catastrophic losses. When other people observe the losses of people who have lost jobs and have few prospects for replacement, they seek to deny that there were external forces that could envelope them too. That unemployed person just did not want to work because it is so much easier to be paid to not work. That person doesn’t have the ‘work-ethic.’ That person feels he is too good to do a lesser job at lower pay. Anger ensues on everyone’s part. The unemployed person has to deal with the lack of income and the attitudes of people around him who call him a leech and a burden. The temporarily employed person is angry that he must pay the unemployment bill through taxation, debt creation and being prevailed upon to be charitable.

There are no quick fixes to be had for all the millions of unemployed people in this country. A 10% unemployment rate means about 14.5 million workers and possibly as many as 43.5 million additional family members who do not have gainful employment or access to private health care coverage. These 14.5 million unemployed people will be contending with the 200,000 or so new entries in the job market. Mature workers will be contending with the young for lower paying jobs that the business market will be offering.

This recessionary economic period has been a boon to the private sector that has been able to shed mass amounts of employees with the probable explanation that “it is the economy” that caused the reductions. When hiring is ramped up again, after just long enough to age out the former employees, wages and salaries will be substantially lower than they were when the job losses commenced. Benefits will be leaner. The job that any individual used to have is gone. A fresh new job is created in its place. Few people will be called back to the job they used to have and at the earnings they had become accustomed to. They will start all over and try to work their way back to their former status.

Analogously, private pension savings took the same hits. Many 401(k) and similar plans were decimated by three successive bubbles that burst. People who were on track for a well financed well planned retirement are now struggling to get their principle balances back to where they were in 2007. They who have the time, energy and continued employment may be able to rebuild their retirement balances before they reach an age where it is no longer possible. Many people are curtailing spending in favor of investing in their retirement accounts. Many people who are close to the date when they will cross over into retirement will not have a comfortable retirement.

Big decisions such as house buying are not on the mind of anyone who will retire in the next 15 years or less. Although they may have opted for a smaller dwelling after children are move out, the security of having that mortgage and a large paid in equity is a significant motivation to not attempt to move. With hoped-for prices at a low and continuing to fall, many home owners are waiting out the bad days of circa 2010. Another factor of not downsizing ones dwelling is the number of adult children who either remain at home or return there due to the lack of employment prospect even with a college degree. Living with ones parents in not part of the American Middleclass scenario. Adult children living with their parents may be a long term situation, one we become used to as part of what is the new normal. The multi-generational house may be on the comeback trail.

With all the millions of vacant foreclosed houses and the huge slowdown in new house construction, it is obvious that former single families have moved in with someone. They are not all living under the freeway over-pass and homeless shelters or cars.

There will be a huge psychological price to pay on all of this economic downturn. Few parents have ever had to prepare their children for the indignity of jobless parents, foreclosures and being looked upon as a burden. Even now the appearance of the insolvency of a family is kept quiet and is spoken about in hushed whispers. If there was a great conflagration such as war, flood, or earthquake, that lowered everyone equally, then there would be an easy explanation as to why the family is living so far beneath its former level. Lighting candles for light and bundling up in a cold room would be de rigueur.

America has been special for most of its history. That special nature was mainly attributable to its self reliance for food resources and energy. But after we outgrew those domestic resources and came to depend on the resources of other nations, we have made ourselves vulnerable to the reliability, availability and cost of those resources. Even as our consumption of energy has increased so has the consumption of the rest of the world. Their socio-economic standards have been steadily rising as ours have declined. They have become more Middleclass and the American Middleclass has diminished based on the mathematical principle of “average.”

There are only so much resources to go around. There is only a fixed amount of petroleum to get from the ground. Unless we develop an innovative solution to power and fund our lifestyle and/or modify that lifestyle we will continue to slide toward that average.

While the remainder of the world still envies living at that average, we view that average from the other side of the equal sign as wholly unacceptable.

Thursday, June 3, 2010

Oil and Water and the Principle of Imminent Collapse

What you don't know about the Principle of Imminent Collapse will kill you. It will kill many people, animals and plant life on which we depend. One only ignores the Principle of Imminent Collapse at the peril of our lives.

The 2010 hurricane season is soon upon us and there is oil in that there water that will be spread over the land in a fashion never before seen. It is not a matter of if, but when the storm will come. There are 14 to 24 major storm events predicted by NOAA for this year. Hurricane intensity numbers of 2, 3, 4 and 5 will have a much lesser degree of importance than whether the storm track coincides with the oil-laden waters of the Gulf of Mexico and possibly the East coast of the US if the oil tracks around the southern tip of Florida.

Hurricane Rita roared into the Gulf of Mexico and then skipped across the southern portion of Florida from the Gulf side to the Atlantic side. Katina took aim at New Orleans and made a storm surge of 17 feet carrying gulf water far inland. Flooding raised toxins and petro chemicals from the rivers and out of the damaged industrial plants along the Mississippi River. Now that the "source water" is so heavily laden with crude oil, it will be pushed ashore and be lifted by the evaporation and convection forces of the storms that make their way into the Gulf. We may even see oily rain coating everything for hundreds of square miles of land area far from the Gulf Waters.

The rupture of the pipes at the Deepwater Horizon well and the resultant spew of crude into the water may only be the smaller portion of the damage done to the global environment. When the oil reached the coastal marshes and beaches, that is when the greater damage was done. The oceans do have a large albeit finite capacity to mitigate the oil itself. Oil is an organic compound and there are natural processes that will degrade it over time. There is also the "Dilution Solution" where if it is churned enough, the concentration will fall. But the halving effect of adding equal parts contaminated water to uncontaminated water may indeed reduce the concentration of the oil but it doesn't eliminate it. Time will do that part.

The problem with allowing time to solve this problem is that we have so little of it until the first tropical depressions start heading toward the Gulf and the oil there. The 75 to 100 mph winds of even moderate hurricanes will pick up the surface oil and whip it inland. Oil plumes, still deep in the water will be pushed landward and be heaped up on the shores in a manner like never before.

As of the early month of June 2010, the oil has only been in the Gulf waters. The ecological damage to the shoreline was 24 miles of beach and marsh. That would only be the beginning. Thirty-three percent of the Gulf waters were placed of-limits for fishing. What we say about the magnitude of this oil drilling blow out in October 2010 will be the more significant.

When an Engineer ignores the Principle of Imminent Collapse he/she can set off a catastrophe of global proportions. It is not very comforting to think that everything could end with someone tripping over the extension cord.

One could argue that it was not a terrible decision to circumvent a safety measure for a system that has a small change of needing to be activated while it is off-line. Ordering a small change in a complex mechanical system may seem innocuous , but doing that was the cause of the skywalk collapse in Kansas City Hyatt Regency in 2001 that killed 114 people in 1981. Writing a test procedure that involved using a candle flame to check for air leakage around foam insulation in a nuclear power plant almost touched off a disaster of Chernobyl proportions at the Browns Ferry nuclear facility in 1975. One could argue that the use of 20/20 hindsight is not a good predictor of future events.

Past performance is not an indicator of how well a stock will do in the marketplace, is what every financial advisor and purveyor of recommendations to buy has to say to cover their butts. This being true doesn't exempt professionals from the responsibility of looking into the near future and saying, "if I do THAT, will THAT come back to bite me?" All too often the question is asked, "what is the worst case scenario?" Almost as often, the answer is wrong. The Carlson Corollary says that Murphy was an optimist.

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