|
|
Musings Report 2023-33 8-12-23 Lowering Risk as We Enter Forced Frugality
You are receiving this email because you are one of the subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they're a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Thank You, Patrons and Contributors!
Thank you longtime stalwart subscribers and welcome new patrons / subscribers HouTexan, Richmond A., Alain M., David K., Thaliad, Maggysfarm, sjustus4, Roger B., Guns A, and Michael V. -- thank you very much!
Lowering Risk as We Enter Forced Frugality
Last week I sought to describe risks to the economy that are currently obscured or discounted.
I would summarize the dynamics in this way:
2020-21: massive stimulus and pandemic restrictions build up household savings and generate a stock market "meme stock" bubble.
mid-2021-22: "Revenge Spending" splurging generates massive spike in consumption, profiteering and inflation.
2023: Renewed bubbles in housing and stocks, a classic "rebound/echo" bubble. Splurging wanes as savings and credit are tapped out, higher interest rates finally start affecting lending, borrowing and spending decisions.
2024: Forced frugality as jobs are slashed, profits fall, inflation stays sticky, credit dries up, businesses close, Federal Reserve stimulus wanes and soaring government borrowing costs crimps government spending.
I've already discussed that the economy and society are cyclical. Nothing stays on the same trajectory forever.
History shows that when prices rise sharply, they rarely return to their previous levels as participants quickly habituate to the higher spending / costs. Taxes, fees, rents, etc. rarely decline. Owners will keep prices high until they go broke rather than lower prices, as their own costs are also sticky.
So what's the best way to reduce the risks of forced frugality manifesting as recession / depression that affects us?
As those of you who've read my book on Self-Reliance know, my approach to Self-Reliance is to differentiate it from self-sufficiency by focusing on 1) lowering our exposure to the risks created by deglobalization, definancialization, instability and forced frugality and 2) taking control of our resources / assets rather than leaving them exposed to the excesses / errors / over-reach of asset managers, the Federal Reserve, politicians, etc.
These are of course related: by taking control of our resources / assets, we're accepting responsibility for their management and therefore lowering the risks of the assets being impaired by others and events outside our control.
The basics of lowering risk are common-sense:
1. Lower expenses, needs, expectations, obligations: it's easier to get enough of whatever you need if you need very little.
2. Eliminate debt: Uncertainties abound in our net income, but debt payments are certainties. Fewer bad things can happen to us if we're debt-free.
3. Have plans in place to respond to much more severe challenges / crises than the mainstream reckons are possible.
The status quo is optimized to function at a low simmer. There are only a handful of first responders and minimal resources available at any one time, and limited institutional know-how to deal with crises that overwhelm the narrow boundaries of "normal" consumption, supply chains, etc.
The wind-driven firestorm that consumed Lahaina on Maui is a tragic example of how thin resources are spread, and how they're optimized to deal with conventional risks (for example, a single building on fire that's accessible via a paved road).
The immediate overwhelming of response resources is only the first domino. All the follow-on responses are equally ill-equipped for any contingency above the usual low-level simmer.
Consider the limited staff and capabilities of the planning and building permits department. How is this handful of staff and modest system going to issue permits for the 1,900 structures that were destroyed?
Even the capacity of larger regions is quickly overwhelmed by a blip in permit demand. The Malibu fire in 2018 burned 600 residences to the ground, and five years later, only 200 homes have been built or permitted. Bureaucratic inertia and over-regulation are factors that there are few incentives to overcome.
600 homes is a tiny blip of signal noise in the vast megalopolis of LA. Yet even this insignificant number fatally log-jammed the status quo.
Households, businesses, institutions and government agencies are no longer very resilient. The vast majority depend on global supply chains and services performed by others for virtually everything. Once those break down or are overwhelmed, the majority are helpless as they have few real-world skills, few planned responses and few real-world resources.
4. As I have often noted, many locales are highly vulnerable to disruption because they're almost totally dependent on long global supply chains for essentials as they lack local sources. Moving out of such locales to places with at least some local resources (water, energy, food, manufacturing, etc.) and a cultural-social memory (values and connections) of self-reliance, self-help, community and sharing reduces risks and increases our options for influencing what happens to us.
I have long held that the "bug-out cabin" is not a resilient option. Self-reliance is much better served by becoming a useful member of a productive, trustworthy network of productive people and local enterprises.
5. Diversifying our assets is the basic strategy to reducing risk. Much of the investment field is aimed at the top 10% who own most of the financial wealth, so "diversification" means distributing a large nest-egg of wealth into conventional "boxes": some in precious metals, some in income-producing real estate, some in dividend-paying stocks, some in bonds, etc.
The problem with this approach is two-fold:
1. Not every household has a large nest-egg of financial wealth that can be divvied up in passive investments.
2. All of these passive asset classes could be disrupted by authorities responding to financial/economic crises.
Precious metals, stocks and bonds could be restricted, frozen, heavily taxed or expropriated by one means or another, and rental real estate could be restricted by rent control. Authorities have few limits on their responses, and their desperation to keep the status quo glued together by whatever means are at hand will be near-infinite.
Many such options are time-tested and legal. A "windfall tax" on profits and capital gains is legal, for example, and there are no upper limits on such "special levies." Local authorities can forcibly acquire property via imminent domain, and should real estate valuations plummet, the "fair value" paid for the property might be minimal.
The wealthy will have targets on their back, as the bottom 90% will support "wealth taxes" because they won't have to pay them. The authorities will leave assets the majority own (the family house) alone to avoid the risk of political blowback / disorder. The top 10% are the natural target as they 1) own 90% of the income-producing wealth 2) are a minority and 3) politically vulnerable to charges of rigging the system to their own benefit.
Not all assets are of equal utility. A house will continue to have utility as shelter regardless of its market value. It doesn't matter of the house is worth $1,000 or $1 million if it's owned debt-free and provides shelter. Healthy soil has a value in food production that remains valuable regardless of the market price of the plot of land.
Not all assets generate income we can actually control. Renting out a studio or room in our house is unlikely to face much regulatory risk, and we control who we rent to and under what conditions.
This is not something most of us have the ability or interest to pursue, but the core concept presented in this short video is sound: if you have few resources or assets, invest them in an enterprise you own and control that has the potential to generate more income than passive investments such as gold or stocks.
WHY I USED SHEEP (not silver) TO AVOID INFLATION (6 min) (via Ryan K.)
In this example, the capital gains / income potential of $11,000 invested passively in precious metals, bonds or stocks is negligible. But this modest sum could go a long way in setting up an enterprise based on skills, networking, etc., i.e. an enterprise whose value is generated not by the sum invested but by the skills and social capital leveraged by the modest investment.
One of the points of my book on self-reliance is to highlight the lack of basic life skills in today's populace when compared to the populace in Emerson's time (1840s). I admit to being stunned by how many people do not know how to change the oil in their car, make minimal mechanical repairs, nurture plants / trees, do basic home repairs, prepare simple, super-healthy meals from scratch, etc. Many people don't even know how to put air in the tires of their vehicle. Then there are basic digital skills few seem to know: running chkdsk.exe /f on Windows PCs (from the command line), how FTP works, how to prepare your own taxes, and so on.
In an economy optimized for efficiency and profitability, tasks are segmented and specialized. Jobs where we're paid for having a spectrum of broad-based skills are rare. We're paid to be specialists, and encouraged to have other specialists do everything for us.
Many people are finding it difficult to find a handyperson who can do a variety of small repairs. Those who are available are often overbooked and pricey. I've heard some online sources claiming a handyperson can make $1,000 a day. Even if that overstates reality, the trajectory is clear: the number of people with a broad range of skills is narrow, and further narrowed to those willing to put up with all the hassles of running an enterprise and dealing with customers.
In an era where risks are multiplying and hard to assess, optimizing our lives for broad-based life skills, zero-debt, direct control of our assets, and becoming valued contributing members of networks of productive, trustworthy people will lower our exposure to risk and increase our security.
If the status quo manages to continue on its present course, none of these strategies reduce our enjoyment. Reducing risk by adding skills and enterprise works just as well in good times. If things unravel, these risk-reduction strategies quickly shift from "nice to have" to "essential." But by then, it will be too late to put them in place. As the Chinese saying put it: when you're thirsty, it's too late to dig a well.
Highlights of the Blog
I'm Not Really Enjoying the Show 8/9/23
Zero Hedge retitled this "In A World Stripped Of Authenticity, 'Let's Dispense With Human Presidential Candidates"
Fooled by What We Measure, Enlightened by What We Don't Measure 8/7/23 I retitled this "No, the Economy Is Not Wonderful"
Best Thing That Happened To Me This Week
We distributed 100+ pounds of breadfruit and lychee to family, friends and neighbors this week. I don't weigh it all, so it's probably much more. We can only eat a small fraction of our harvest, so sharing is the way to go. It's our way of reciprocating for everything that's shared with us.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
Urban goats for organic raw milk in a San Francisco backyard (8 min) (via Ryan K.)
Wealth: The Toxic Byproduct
Japan's female recluses
Zombie Economy
Li Ziqi’s Online Pastoral Poetics: Millions of people subscribed to her vision of an idyllic rural existence. Who was she, and why did she disappear?
On Social Power -- Peter Turchin (via BrandonRox)
‘It happens again and again’: why Americans are obsessed with secret societies-- new book 'Under the Eye of Power'
Vermont was already experiencing a housing crunch. Then came the summer floods. (via Suzanne S.)
How Wolves Change Rivers - George Monbiot ( 4 min) (via Ryan K.)
'Venice of Detroit’: climate costs imperil historic neighborhood: Diverse neighborhood of Jefferson Chalmers faces ‘climate gentrification’ as home prices and flood defense costs rise
9 Signs That The US Consumer Is About To Break
Down the Rabbit Hole of Climate Change / ESG Investing & Disruption of Hydrocarbons. (2020)(via Cheryl A.)
"You have power over your mind — not outside events. Realize this, and you will find strength." Marcus Aurelius
Thanks for reading--
charles |
|
|
|
|
|
