H.L. Mencken

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H.L. Mencken Was Right

~ Jim Quinn from The Burning Platform

…  [edited ~R]

H.L. Mencken was a renowned newspaper columnist for the Baltimore Sun from 1906 until 1948.

His acerbic satirical writings on government, democracy, politicians and the ignorant masses are as true today as they were then.  He was writing during the last Unraveling and Crisis periods in America, the similarities cannot be denied.

There are no journalists of his stature working in the mainstream media today, among the lightweight shills that parrot their corporate masters’ propaganda and unquestioningly report the fabrications spewed by our government.

Mencken’s skepticism of all institutions is an unknown quality in the vapid world of present day journalism.  The Roaring Twenties of decadence, financial crisis caused by loose Fed monetary policies, stock market crash, Depression, colossal government redistribution of wealth, and ultimately a World War, all occurred during his prime writing years.

The cycles of history reveal that people do not change, just the circumstances.  We are currently in a Crisis period when practical, truth telling realists like Mencken are most useful and necessary.  Mencken captured the essence of American politics and a disconnected populace 80 years ago. Even though many people today feel the average American is less intelligent, more materialistic, and less informed than ever before, it was just as true in 1930 based on Mencken’s assessment:

“…As democracy is perfected, public office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned by a downright moron.”

You can make your own judgment on the accuracy of his statement.

People still read newspapers in the 1930s to acquire credible information about the economy, politics and economy. Today’s corporate owned rags aren’t fit to line a bird cage. The mainstream media is a platform for the lies of their corporate sponsors.  The upcoming presidential campaign will be a nightmare of endless negative advertisements created by Madison Avenue maggots and paid for by rich powerful men attempting to herd the mindless sheeple

Fear has worked for 100 years in controlling the masses, as Mencken noted during his time:

“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.”

The purpose of those who wield power is to keep the masses dumbed down and paranoid regarding artificial enemies.  By making life an inexhaustible bureaucratic nightmare or rules, regulations, forms, ID cards, registrations, and red tape, those in power maintain control and accumulate power. H.L. Mencken would be proud.

The corporate / government / banking oligarchy started the fire. The world is burning to the ground and politicians have thrown gasoline onto the fire with passage of debt financing programs, and a myriad of other government solutions.

Other than Ron Paul and a few other truth tellers, everything being spewed at the public from the MSM, Wall Street, and Washington DC is intellectually dishonest, manipulated and packaged by pollsters and PR firms. I’ve come to the conclusion that those in power desire that public school systems of the United States churn out ignorant, non-questioning morons.

Critical thinking is the careful, deliberate determination of whether one should accept, reject, or suspend judgment about a claim and the degree of confidence with which one accepts or rejects it.  Any thinking would be a shocking change of pace from the corrupt corporate owned politicians in Washington DC.   But, I know many college educated people who haven’t read a book in 20 years or could care less about economic issues. They have made a choice to be ignorant.

Most Americans are incapable of looking beyond a 2 to 3 year time horizon.   Politicians, banks, and marketers take advantage of this witlessness to enslave the average American. We’ve come to love our slavery, appearing successful is more important than actually doing the hard work to actually become successful.

An informed, interested, questioning public would be a danger to the government as described by Mencken:

“The most dangerous man to any government is the man who is able to think things out … without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, intolerable.”

The combination of; educationally uninformed, ignorant by choice, and intellectually dishonest, will be fatal for the country.

The financial crisis was caused by excessive utilization of debt. In order to correct these imbalances, the country needed to undergo a deleveraging and reversion back to a country of savers. Savings equals investment. Instead, our “leaders” have reduced interest rates to 0% and have gone on an unprecedented government borrowing and spending spree. Savers and senior citizens are punished, while gamblers and speculators are rewarded. Anyone who thinks about this strategy for a few minutes will realize it is asinine and hopeless.

It seems one thing Republicans and Democrats can agree on though is that spending money they don’t have will have no negative consequences (“deficits don’t matter” ~Cheney). When you have a Federal Reserve willing to print to infinity there is no limit to how much you can spend. Only a fool would believe there won’t be consequences. That fool writes and opinion column for the NYT and has a Nobel Prize on his bookshelf.

You have to be delusional to believe this claptrap. Luckily for the politicians, most Americans are delusional and apathetic.  Americans’ inability to deal with reality and fondness for not thinking beyond tomorrow has shown them to be an inferior species, as Mencken noted:

“The one permanent emotion of the inferior man is fear – fear of the unknown, the complex, the inexplicable. What he wants above everything else is safety.”

Mencken understood the false promises of democracy 80 years ago:

“Democracy is also a form of worship. It is the worship of Jackals by Jackasses. It is the theory that the common people know what they want, and deserve to get it good and hard.”

We deserve to get it good and hard, and we will.

“The worst government is often the most moral. One composed of cynics is often very tolerant and humane. But when fanatics are on top there is no limit to oppression.”

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Which came first…

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…the Spending or the Debt?

~ Professor Antony Davies/Zero Hedge

…  [edited.  ~R]

It is an often cited perspective that Government has a debt problem.

While correct in fact, examining the data shows that debt is caused by deficits: leaving the question of what is to blame – too much spending or too little tax revenues?

The dramatic rise in spending per-capita by the government is exponentially larger than the rise in price levels, which pale in significance relatively.

The lesson:  we don’t have a debt problem, we don’t even have a deficit problem, what we have is a spending problem – leaving a tax solution impotent.

An interesting conclusion on the day when the Fed once again promises to keep (interest) rates low forever, implicitly supporting a continuing government budget deficit.

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Comment:

On the the right track …

Even more directly – we don’t have a SPENDING problem, we have a GOVERNMENT problem.

Until we take a chainsaw to federal, state and local governments – we will ALWAYS have a spending problem.

~ barliman

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The Lorax

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 Scary Extreme Energy Sources Being Tapped  to Fuel the Post Peak Oil Economy

April 15, 2012  |  ~ Dr. Michael I. Niman        [Edited.   ~R]

Professor of journalism and media studies at Buffalo State College. 

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In a few short years the term “fracking” went from obscurity, mostly mistaken for an obscenity, to a household word, now often associated with flammable tap water. The technology is not new, but the market conditions are. Welcome to the post peak oil energy economy. What’s online to follow fracking is even scarier.

The problem is we’re addicted to oil, and like most addicts, we can’t take that first step and admit our addiction. For over a century, we mostly glided, enjoying the high that cheap oil gave our economy and consumptive lifestyles, while not facing many consequences. But, now we’re seeing the results of that five generation-long binge, we’re coming into a period that energy economists call “peak oil.”

As more and more people compete for the last reserves of cheap easy to get sweet crude oil, energy prices are rising. Rising prices mean that more expensive extraction technologies, not feasible in the days of $40 barrels of oil, are now profitable. With natural gas easily able to replace oil in most applications, with minimal adaptation (it can be used for heating, electric generation and even transportation), we’re seeing a new rush to tap this “clean energy” as well. But like oil, most of the easy to get natural gas is also already tapped out.

Higher energy prices, however, allow aggressive technologies into this market. The result is fracking, it represents an addict’s self-destructive drive, in the quest to maintain our hydrocarbon dependent economy and lifestyles.  Fracking could be the beginning of the end – the triumph of pathological greed over reason. But it’s also made some folks very rich, relatively quickly. It’s a feedback loop. Environmentally reckless greed enriches frackers, whose wealth clears the political path for more fracking.

Energy prices will continue to rise, opening the door of economic opportunity to a plethora of energy extraction technologies. These are wildly irresponsible, terribly dangerous processes that only an addiction-maddened mind would contemplate, and only a greed-addled sociopath would execute.

1. Light Tight Oil

The next frack-like rush is for “Light Tight Oil” (LTO), also known as “Tight Light Oil” and “Tight Shale Oil.” The extraction technology and the environmental problems it causes, are much the same as those we see with natural gas fracking. It is produced by the same hydraulic fracturing method employing horizontal bores at the ends of deep vertical wells that inject a plethora of toxic fluids and sand into deep shale formations, breaking up that shale and releasing embedded oil. Today’s high oil prices make this technology immediately profitable.

Like with natural gas fracking, the process, by design, also produces billions of gallons of toxic waste water. The race to tap LTO has made the US the number one oil driller in the world, by some estimates, drilling more wells this year than the rest of the planet combined. As global oil prices rise, expect the drilling to move east into the Utica shale formations, starting in Ohio.

2. Utlra Deepwater Pre-Salt Oil

This technology is too new for a name for itself, so I’ll go with the easy to use, “Pre-Salt Oil,” or PSO. Costing slightly more than Light Tight, PSO is only now just entering the market, buoyed by the promise of continually rising oil prices.  PSO is currently “the most technically challenging ultra-deepwater oil recovery” process. It involves drilling in water that is over 8,000 feet deep, through another 5,000 or so feet of salt deposits at the bottom of the ocean, to finally hit oil. The only reserves currently tapped are off the cost of Brazil. Plugging a well blowout under these conditions would make dealing with the Deepwater Horizon disaster look like child’s play. According to Rio de Janeiro’s The Rio Times, the first PSO leak occurred in January of this year. Luck held out this time, preventing the pipe rupture from evolving into a full scale blowout. With perhaps 100 billion barrels of PSO off the coast of Brazil, expect rapid expansion of this gamble.

3. Oil Sands

Add ten bucks a barrel to the cost of PSO and you can extract oil from a sandy mix scraped from massive open cast mines. Currently exploitable Oil Sand reserves are primarily in Alberta, Canada. The actual oil that is harvested is bitumen, which is risky to transport since it makes clean-up and decontamination of water resources difficult or impossible. Oil-industry funded members of the US Congress are currently lobbying aggressively to fast-track transport of this oil from Canada onto the global market. Downplaying the risks while promising decades more of carefree motoring, if only we drink the brown Kool-Aid.

4. Offshore Arctic OIl

As both oil prices and global temperatures continue to rise over the next decade, expect to see a push for drilling in newly thawed areas of the Arctic Ocean. Try capping or cleaning up after a spill in this inaccessible inhospitable frigid wilderness. This is a move that only an addict would make.

5. Shale Oil

Not to be confused with LTO, this “oil” is solid, and it’s embedded in shale, which is technically a rock. Think mining, only in this case, the oil embedded in rock come in the form of kerogen, which is only converted to synthetic oil after the rock is processed by cooking to almost 1,000 degrees Fahrenheit. The extraction process is extraordinarily destructive and dirty, like coal mining on steroids. The processing, essentially melting rock, requires a remarkable amount of the fuel being harvested, making this one of the most greenhouse gas producing energy schemes ever devised. Again, this is an end-game scenario. An addict’s last hit before overdosing.

6. Nuclear

There are vested energy interests out there that would like all of this oily doomsday talk to lead us to the dreamy la la land of a “clean green carbon-free” nuclear future.  But let’s not fall for more of the same insanity.

The Nissan Leaf and plug-in Prius are now hitting the market all enshrined in Greenieness. The fantasy is that we can drive our cars and do all sorts of previously oily things with clean electricity. Of course, our clean electricity is only as clean as our toilets, which magically take our wastes to the enchanted land of “away”. Waste has to go somewhere. And energy has to come from somewhere. And that nice green electric car is more often than not powered by a dirty coal-fired electric plant. So why not a nice new nuclear plant?

Lost in this story is the reality that of all of the dirty energy technologies that we are addicted to, nuclear power, is the dirtiest. The very existence of this industry represents a reverse socialism, whereby only profit is privatized, with governments and publics assuming almost all of the risk. That’s because the risk is unfathomable, and hence, uninsurable.

Look at the Fukushima disaster, one year later. Most folks think this is over, last year’s news, cleaned up, the scientists took care of it. But the meltdown is continuing in all three General Electric-built Fukushima Dai-ichi reactors apparently unabated, as we don’t seem to have the technology to contain it – only the technology to temporarily distract ourselves from it.

Conditions, however, have recently gotten so bad at the plant, that the environment inside is too hot for even robots to operate in. With the growing possibility of a comprehensive containment breach at the Fukushima plant, CBS News reported last week that damage to the #2 reactor is so severe that “the plant operator will have to develop special equipment and technology to tolerate the harsh environment and decommission the plant, a process expected to last decades.”

Get it? We don’t have the know-how to deal with this, a year after the catastrophe began, yet the other two Fukushima Dai-ichi reactors “could be in even worse shape”, but no one has been able to find out as our current technology limits our ability to easily see into a melting nuclear core.  Meanwhile in Japan, the government keeps raising the supposed “safe” level for radiation exposure, as the true level of radiation contamination comes to light.

This story continues to unfold, as the nuclear industry continues to sell us dreams.

Detox

So yeah, Fracking is bad.  But the problem isn’t just fracking. The real battle is for sane sustainable safe energy policies. We can’t allow sociopaths to take the future of the planet and bet it on a roulette table, there are sustainable pathways.

However vested interests will have to get out of the way first – industries that represent billions of dollars of investment and profit.  This profit, however, would come at an exponentially higher cost to the commons, and ensuing environmental destruction. Each of these industries has an extremely well-financed public relations machine, specifically tasked to spin lies into truths—to make the unpalatable appear inevitable.

There is hope, however. More than twice as many Americans now work green jobs in the solar and wind industries, as in the coal industry.  So let’s be inspired by our hope and gain the strength to detox from our hydrocarbon addiction.

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Anyway

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Anyway

People are often unreasonable and self-centered. Forgive them anyway.

If you are kind, people may accuse you of ulterior motives. Be kind anyway.

 If you are honest, people may cheat you. Be honest anyway. 

If you find happiness, people may be jealous. Be happy anyway.

The good you do today may be forgotten tomorrow. Do good anyway.

Give the world the best you have and it may never be enough. Give your best anyway.

For you see, in the end, it is between you and God.  It was never between you and them anyway.

~ Kent M. Keith

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My thanks to Jinan Zeidan for introducing me to this.

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Get a Clue

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If you want to get an idea of what exactly we are up against – give this article a read.

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Learned from the Mafia.   [ ~ Matt Taibbi ]

The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more.

In fact, stripped of all the camouflaging financial verbiage, the crimes the defendants and their co-conspirators committed were virtually indistinguishable from the kind of thuggery practiced for decades by the Mafia.

USA v. Carollo marks the first time we actually got incontrovertible evidence that Wall Street has moved into this cartel-type brand of criminality.

…

Read the full article at Rolling Stone

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Master Narrative

[ Edited.  ~R]

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The Master Narrative Nobody Dares Admit: Centralization Has Failed

~ Charles Hugh Smith.   June 21, 2012

The primary “news” narrative currently may be the failure of the euro, but the master narrative is much, much bigger: centralization has failed. The failure of Europe’s “ultimate centralization project” is but a symptom of a global failure of centralization.  In a cost-benefit analysis, centralization once paid significant dividends. Now it is a drag that only inhibits growth and progress.

The Eurozone is the penultimate attempt to impose an intrinsically inefficient and unproductive centralized authority on disparate economies, and we are witnessing its spectacular implosion.

Gatekeepers and centralized authority are no match for decentralized knowledge and decision-making. Once a people don’t need to rely on a centralized authority to tell them what to do, the centralized authority becomes a costly impediment, a tax on the entire society and economy.

Centralization acts as a self-reinforcing loop that leads to a runaway death spiral.

Centralize the entire banking sector into five corporations and guess what happens? They buy access to the highly centralized power centers of the Federal government.  This feedback between centralized capital and centralized government cannot be controlled by more rules and regulations.  The two partners in domination will subvert or bypass any such feeble attempts.

The forces of centralized authority will not relinquish their power easily.

Centralized authorities move with glacial trepitude because any change, no matter how modest, steps on the exquisitely sensitive toes of some vested interest, protected fiefdom or favored Elite.  But all centralized systems, open and shadow alike, act as heavy taxes on society and the economy.

Centralization is the disease – and devolving power to decentralized nodes based on the transparent power of the Web is the cure.

Access to the Web and the innovation-driven power of decentralized networks of knowledge, collaboration and information will dismantle their power base and wealth, their political and financial control will be eroded away.

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[Part 2 – Edited ~R]

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The Solution to Concentrated Power: the Three Ds

The solution to centralized power can be summarized as the three Ds: 

Diffusion  –  Decentralization  –  Devolution

Why keep squabbling over issues that cannot be resolved within the existing structures?   Decentralize, diffuse and devolve power to the lowest level and the national dead-ends vanish. Natural selection will sort out what works and what doesn’t.

Let me first stipulate that I have consistently held that there is an essential role for a strong but limited Central State: it must have the power to disrupt and dismantle local monopolies, oligarchies and criminal organizations, and it must retain the power to guarantee freedom of faith, exchange, movement, expression, enterprise and association to all individuals. It must also be empowered to defend and protect the nation’s “commons” – its soil, water, air, natural beauty and resources – from despoilation and exploitation by global, national or local Elites.

Concentrating centralized political power inevitably spawns State/Private cartels that stripmine taxpayer/citizens. This cannot be avoided or staved off with 1,000-page legislative bills and 30,000 pages of regulations, all of which serve to consolidate the power of co-mingled centralized government, and private capital.

Devolve power ever lower down the ecosystem.   All power should be diffused and decentralized to the lowest possible units of local political power,

There is a decidedly favorable element of natural selection to this process of letting local communities choose their own machinery of governance. With no Savior State to skim money from one community to give to another out of political favoritism, local communities will have to tax themselves for whatever services they desire.  Each community will be an experiment on what works and doesn’t work, and it is likely there will be a spectrum of successful models.

Those counties which allow concentrations of power to infect and control their social and financial ecosystems will likely stagnate; those which incentivize freeloading will be overwhelmed with freeloaders, and so on.

Risk and consequence will be reunited, as they are in Nature.

Is local control of the way of life “efficient”?

Perhaps efficiency’s elevation to godlike status is as misplaced as confusing convenience with meaning.

What “works” for some communities is not just what’s cheapest in terms of consumerism.

“Efficiency” is often Corporate-Speak for a second-order tyranny.

(CHS).

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Tiresome

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Extracts lifted from:

The Tiresome Eurozone Soap Opera Has Entered Re-Runs

~ Charles Hugh Smith.     [Of Two Minds]

Is anyone else tired of the entire cast and threadbare plotlines? The “crisis” drama could be dispensed with in short order:

A. The bickering couple(s): get a divorce and quit blaming the other.

B. Insolvent banks: fire the management and liquidate the banks in an orderly fashion, following the well-established model: clear the books of impaired assets, and let the market price those assets. Any losses are passed through to the shareholders and bondholders. Once the losses have been taken, recapitalize the banks with new bonds and/or shares, and establish prudent lending guidelines. Prohibit backstopping or bailouts by central banks or Central States.

C. Unsustainable pensions, budgets, deficits, etc.: only spend what is collected in tax revenues, period. Stop living in the past and borrowing from future taxpayers.

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What we are all living through today is the failed experiment of trying to run a capitalist economy on no REAL capital. This not only crimps wealth and the overall standard of living, but also elevates the perverse over the rational.

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Competitive

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Just found this interesting graphic at http://globaleconomicanalysis.blogspot.co.nz/.

So, apparently New Zealand doesn’t really need to dramatically improve its international competitiveness.

If we have problems with our economics, they lay elsewhere.

I wonder where…  /sarc

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The Wolf

(Relocated from “Pages” to a “Post”)

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An elder Cherokee American was teaching his grandchildren about life. He said to them, “A fight is going on inside me…It is a terrible fight, and it is between two wolves. One wolf represents fear, anger, envy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, pride and superiority.

The other wolf stands for joy, peace, love, hope, sharing, serenity, humility, kindness, benevolence, friendship, empathy, generosity, truth, compassion, and faith.

This same fight is going on inside of you and every other person too.”

They thought about it for a minute and then one child asked his grandfather, “Which wolf will win?”

The old Cherokee simply replied… “The one I feed”

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Will Fall

(Relocated from “Pages” to a “Post”)

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(article ripped from somewhere – which I cant remember now)

Oversupply and Compression:

How the Median House Price Will Fall from $215K to $70K

July 30, 2008

I am constantly amazed (yes, I know I shouldn’t be) by how many otherwise intelligent people expect housing to “recover” next year. I shouldn’t be surprised, of course, because fantasy and hope are the key traits of all post-bubble busts.

Thus we had analyst after analyst in 2001 and 2002 calling “the bottom” in the Nasdaq, even as it fell from 5,000 to 3,000 to 2,000 and then finally to 1,000.

In a similar fashion, we now have a nearly universal belief that oil and commodities have “topped out” and the recent decline is a new trend. Happy days are here again, oil is heading back to $75/barrel, hoo-ha!

(NOTE: Before you jump on the “oil will just get cheaper and cheaper now” bandwagon, I heartily recommend the new Readers Journal essay by Portugal-based correspondent José de Freitas: Why the Trend in Oil Is Up.)

In a similar fashion, we should not be fooled that a brief market reaction is the start of a new trend, i.e. “housing will soon bottom.” On the contrary, I predict the median price of a house in the U.S. will fall from $215,000 all the way down to $70,000.

According to the National Association of Realtors, the median home price was $215,100 in June 2008. These data sources suggest the median is around $230,00 and the average around $300,000: US: Median Price of Houses Sold including Land Price and US: Average Price of Houses Actually Sold.

Whatever number you pick, I predict a 2/3 decline from here, based on these long-term trends and historical patterns:

1. A further 30% decline is required to bring rents and the cost of ownership back into the long-term historical range/ratio. The only reason to buy a house/dwelling which costs far more than renting the equivalent residence is the investment belief that appreciation of the property will exceed (after all the tax benefits are calculated in, etc.) the appreciation of other asset classes. (Note: the ratio varies depending on locale, but in general it is still out of whack from the mean.)

In other words, it’s an investment decision, not a decision about owning a place to live. If real estate proves to be a poor investment which only depreciates year after year, this belief (currently a near-religious belief of stupendous power in the U.S., based on the past 25 years of debt-fueled speculative frenzy), then housing will decline back to the historical ratio.

Now if rents are set to rise 30% above inflation, then the argument could be made that housing will not decline; but with wages in a long-term decline and the economy souring, what rise in income is foreseeable which would fuel a rise in rents? It is more likely that rents will decline in most markets as well, further pressuring the decline in housing values.

There are other reasons to believe buying will become ever more unattractive compared to renting:

2. The cost of money will rise for a generation. The two keys to appreciation in real estate are: cheap, easily available money/mortgages, and a highly liquid market in which any property can be quickly bought/sold.

Guess what’s disappeared and won’t be coming back: cheap, easy money and a liquid market. If you are fearful that you can’t sell the house you’re about to buy, then it’s a Capital Trap you will want to avoid.

And if money becomes tight again, then a 20% down will be standard once again–and in a recession which has strangled credit, asset values and the economy, how many people will have saved up that much cash? How many will be willing to sink all that cash into a Capital Trap? Relatively few compared to the hordes who “qualified” in the era of liar-loans, no-down, interest-only loans, etc.)

3. Oversupply and vast overbuilding render the market illiquid. With almost 20 million empty dwellings (of which perhaps 4-5 million are true “vacation/second homes”) and huge numbers of empty rooms in existing housing, the number of homes for sale will exceed the number of qualified buyers for a long time to come.

PIMCO’s Bill Gross went on record recently suggesting 1 million homes should be dynamited; good idea, Bill, but that still leaves 15 million empty dwellings.

Please don’t tell me about population growth: Immigration is already slowing because jobs are drying up, and household size in the U.S. can easily rise, enabling more people to live in the same number of dwellings.

The overbuilding was not the result of meeting demand for housing, it was all about meeting the demand for speculative vehicles. Once the speculators are slowly roasted year after year by declining prices, then eventually nobody will be thinking that housing is a “great investment.” Once that belief system has been eradicated via everyone who acted on it being destroyed financially, then housing will once again be viewed as shelter rather than a speculative vehicle for investment or “get rich quick” deals.

I am continually astonished by the number of people who believe a house which tripled in price and has now fallen a mere 20% is “cheap.”As I have written before, there are only two valid reasons for buying a dwelling, and appreciation is not one of them:

A. It’s cheaper to buy than rent

B. You can make money on Day One by buying the dwelling and renting it out at local market rate rents.

Both carry this important caveat: you can afford to let your Capital be Trapped in an illiquid market for years. If you might have other uses for the cash, then it would unwise in the extreme to trap it in illiquid real estate.

4. Price-Earnings Compression occurs when risk re-enters a market.This is a well-known element in the stock market: in good times, a company earning a dollar per share will be valued at $25/share–a PE (price-earnings ratio) of 25. That is called PE expansion, and it results from euphoric belief that the economy will forever enable ever higher profits.

In recessions, losses reinject risk back into speculative and investment calculations, and PEs contract/compress. Thus the company may still be earning $1/share, but in a real recessionary trough it will be valued at a mere $8/share–a third of its euphoria-“real estate/tech/China/etc. only goes up” valuation.

Real estate is not immune to price-earnings compression. If a property keeps declining in value, then the ratio of its net income (from rents) to its value will shrink. Thus in a rising market a property might well be valued at $500,000 based on its rental income, but in a declining market its value may be compressed to $300,000 even if rents haven’t dropped a dime. All the risks get priced in–risk that rents might drop, that vacancies may rise, etc.–and buyers turn wary and cautious.

5. Other investments will outshine real estate and money will continue to flow away from housing. If you could earn 10% on your cash, why sink it into a risky illiquid market in housing? Recall that real estate is based on leverage; if you put 20% down to buy a property and it drops 10% in value, if you have to sell you will lose 75% of your initial cash: 50% due to the decline in value and another 25% in transaction costs (realtors fees, closing costs, transaction taxes, etc.)

A mere 10% decline in a $500,000 house wipes out half the value of a $100,000 (20%) down payment. Leverage really destroys wealth quickly on the way down.

As interest rates rise globally, just parking your money in cash earning a nice return will look better than risking it in depreciating illiquid real estate.

Risk cannot be eradicated, it can only be obscured.

6. The inexorable rise in interest rates (i.e. the cost of money) will compress property values by as much as 50%. The reason is simple: if the average buyer can only afford (say) $1,500 a month for a mortgage and property taxes, then the value of the house will rise or fall in direct correlation with mortgage rates, i.e. what the buyer can afford.

If rates plummet, as they did in the past decade, then the buyer can afford (say) a $300,000 home for that $1,500/month at 5%. Magically, valuations rise to these levels. Conversely, when rates rise to 10%, the $1,500/month only enables the purchase of a $150,000 home–and so prices decline to what buyers can afford to pay.

This is simple supply and demand correlated to the cost of money, which is correlated to its own supply and demand and the level of risk.

Put another way: if you’re lending money, and real estate has been declining for years, how much risk premium do you need to bury your bank’s capital in a capital trap? As the recognition of risk rises, so do mortgage rates. And as risk rises, long-term fixed-rate mortgages vanish, effectively saddling the buyer with the risks that money will continue rising in cost. That adds another reason for buyers to hold off on sinking their capital and income into an illiquid property.

7. Residences near core jobs, transit and walkable neighborhoods will decline less than housing far from jobs and transit. Those houses will fall to zero value. Thus for median (and average) prices to fall to $70,000, we don’t need a market overwhelmingly priced below $100,000–we only need millions of houses valued at near zero.

As readers of Jim Kunstler know, the suburban/exurban environment was based entirely on the presumption of endless cheap oil for transportation and commuting. Now that Peak Oil is cutting away at supply even as global growth catapults demand, then that presumption is no longer valid. There may well be oil available for decades, but it will no longer be cheap.

Demographically, there are many reasons for people to migrate from exurbs and suburbs to city cores. Cost of commuting is only one; another is health care. As hospitals and urgent care facilities close, aging Baby Boomers who want access to care must move back into cities and large towns.

Cities will remain comparatively job rich environments, and so staying close enough to get to work is another reason for migration to urban cores. Towns with a good hospital, clean water and some core of jobs (a college, a hydro-electric plant, farming, etc.) will attract residents who don’t want to be stranded in an exurb graced with an abandoned strip mall and little else.

The poorer you are, the less money you have for cars, gasoline, etc., and so lower-income people have excellent motivations not to be warehoused in outlying worthless communities which are not served by rail or any public transit and which offer little or no social services (free clinics, libraries, parks, etc.).

These are all reasons to expect increasing numbers of residents per household and a reversal of the trend toward one-person households.As I have tirelessly proven in the case of the 2001 dot-bomb exodus from San Francisco and the Bay Area, cities can expand or contract in population by huge margins while their housing stock remains more or less constant. People move back home, people rent out an empty room, and so on. A 100,000 people can move in or out of a city without adding or subtracting a single dwelling.

Thus we can foresee housing and rents actually stabilizing in urban zones and towns with ready access to water, nearby cropland/food, jobs, transit, walkable neighborhoods, energy (think Oklahoma, Texas, locales with coal, large hydro-electric dams or huge solar or wind arrays, etc.) and some medical care (even the rationed sort will be welcome if the alternative is none at all). Areas with few to none of these assets will see their housing stock sink to near-zero in value.

Supply and demand will eventually rule, regardless of government bailouts, backstops, interventions, etc. There are at least 15 million surplus dwellings in the U.S., an overhang which will not disappear in a few quarters or years. Millions will lose value as they were built in an undesirable locale, while the rest will re-set according to the demand/supply/risk calculations based on the cost of money, demographics, Peak Oil and a number of other trends (scarcity of jobs and healthcare, reduction in government services, etc.)

Real estate, bonds and stocks rose during the generation-long trend of ever-lower interest rates from 1982-2005. Now that trend has reversed and cash will outperform all three assets which depend on ever-lower rates and ever-easier money to appreciate in value.

It’s a shocking conclusion, I know: a house will return to being shelter, not an investment vehicle for staggering wealth generation. 


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