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Healthcare Rising: "Safety Net" or Stealth Tax?
Way back in September 2006 BusinessWeek ran a feature story What's Really Propping Up The Economy: Since 2001, the health-care industry has added 1.7 million jobs. The rest of the private sector? None.
For years, everyone from politicians on both sides of the aisle to corporate execs to your Aunt Tilly have justifiably bemoaned American health care -- the out-of-control costs, the vast inefficiencies, the lack of access, and the often inexplicable blunders.
But the very real problems with the health-care system mask a simple fact: Without it the nation's labor market would be in a deep coma. Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.
Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in spending -- half public, half private -- health care is propping up local job markets.
Health care is highly labor intensive, so most of that $2 trillion ends up in the pockets of workers. And at least so far, there's little leakage abroad in terms of patient care. "Health care is all home-produced," says Princeton University economist and health-care expert Uwe Reinhardt.
John Maynard Keynes would nod approvingly if he were alive. Seventy years ago, the elegant British economist proposed that in tough times the government could and should spend large sums of money to create jobs and stimulate growth. His theories are out of fashion, but substitute "health care" for "government," and that's exactly what is happening today.
Make no mistake, though: The U.S. could eventually pay a big economic price for all these jobs. Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured.
Moreover, as the high cost of health care lowers the competitiveness of U.S. corporations, it may accelerate the outflow of jobs in a self-reinforcing cycle. In fact, one explanation for the huge U.S. trade deficit is that the country is borrowing from overseas to fund creation of health-care jobs.
There's another enormous long-term problem: If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care. That sort of lopsided job creation is not the blueprint for a well-functioning economy."
In other words, from the point of view of government-supported employment, healthcare looks like a "safety net," but from the point of view of productive allocation of scarce resources, it looks like a stealth tax on our entire economy.
Healthcare costs are rising at double the official rate of inflation and already make up 16% of the $14 trillion U.S. GDP: from the National Coalition on Health Care website's Health Insurance Costs:
"By several measures, health care spending continues to rise at the fastest rate in our history.
In 2007, total national health expenditures were expected to rise 6.9 percent — two times the rate of inflation.1 Total spending was $2.3 TRILLION in 2007, or $7600 per person. Total health care spending represented 16 percent of the gross domestic product (GDP).
U.S. health care spending is expected to increase at similar levels for the next decade reaching $4.2 TRILLION in 2016, or 20 percent of GDP.
In 2007, employer health insurance premiums increased by 6.1 percent - two times the rate of inflation. The annual premium for an employer health plan covering a family of four averaged nearly $12,100. The annual premium for single coverage averaged over $4,400.
Experts agree that our health care system is riddled with inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste and fraud. These problems significantly increase the cost of medical care and health insurance for employers and workers and affect the security of families."
This is not intended as a slam on everyone working in healthcare. Many nurses and doctors read this site and I know their work is difficult, and often made more difficult by the above-mentioned inefficiencies and excessive administration.
Yet isn't there some similarity between the healthcare complex and the Pentagon, that other famous sinkhole for trillions of dollars wasted in inefficiency, politically mandated pork, and excessive administration? How can we be spending $2.3 trillion a year (and rising) and be getting so little "health" for all that money?
If we're ill, then we all want the finest care; that's understood. But the problem seems to be that much of the "care" isn't making us better; in the case of costly pharmaceuticals, it seems many drugs are giving us new health problems or simply ending our lives. People go into hospitals to get well and instead catch life-threatening bacteria and viruses.
It seems that healthcare has morphed into "the third rail" of American politics: you touch it, you "die." Every effort at reform is stymied by powerful interest groups, and of course there's a positive feedback loop at work: the more people who are employed in the complex, the more powerful their lobbying efforts, and thus there is more resistance to reforms.
Everyone knows the system is hopelessly riddled with corruption, inefficiency and needless procedures, but nobody wants to lose their own piece of the action. This is understandable.
But we as a society have to ask: is this the best place to be spending $2.3 trillion, soon to be $3 trillion, a year? What about energy and food security? How "well" will be be if we run short of food and energy?
It would be nice if we could declare a "peace dividend" so beloved by liberals and slash $100 billion or even $200 billion from Pentagon spending and "solve" the healthcare funding issue "painlessly" (painless unless you're in the military or related industries). But the scale of healthcare spending now dwarfs the Pentagon to such a degree that $200 billion isn't even 10% of what we spend on healthcare; with healthcare costs rising 6% a year, a $200 billion "gift" carved off the Pentagon would only cover about 18 months of the healthcare complex's increased spending.
As I have noted here many times, no program which grows at 6% can be sustained by an economy which grows over the long-term at 2% or 3%. We all know the Baby Boom is starting to retire, putting even more pressure on healthcare spending--but that spending has been growing by leaps and bounds even without the Baby Boom retiring.
Clearly, something has to give.
One alternative is to let healthcare costs spiral out of control until the Federal government becomes insolvent i.e. can no longer pay its expenses with newly printed Treasury bonds (debt/borrowed money) at which point Medicare and everything else freezes up and goes bust. I would say the likelihood of this increases every year, and a 2015-2021 window for such Federal insolvency is already baked in if the various interest groups are able to sustain their deathgrip on serious reforms.
This national bankruptcy won't be pleasant, but it does have the advantage of wiping the slate clean and enabling a fresh start.
Another alternative is to introduce the same global competitive forces which reduced costs in electronics and other industries. This is unpopular with those whose jobs will be at risk, and popular with consumers. This is already happening on the fringes, as people (some even sent by health providers) fly to India or Thailand to have surgeries performed for 20% of the cost of the operation in the U.S.
If energy costs spiral up, then 5,000 mile flights might become prohibitive, at which point alternatives based in Mexico or Central America become attractive from a cost basis. I have covered the emergence of cash-only dental clinics in Mexico designed to serve American customers, so the precedent is already firmly in place.
As Americans, we believe it is our birthright to avoid hard choices; we deserve to "have it all": super-costly medical care, new infrastructure, a new energy complex, the best military forces, etc. without any trade-off required. Our various trading partners have enabled this fantasy by funding our trillions in new debt/ Federal deficit spending. Should that gravy-train ever grind to a halt, and we are unable to borrow another couple trillion a year to fund "everything we want and need and care about," then we will collectively have to start making the difficult trade-offs.
Perhaps we will then finally get serious about demanding some basic efficiencies in these vast, sprawling industries.
It's hard not to look at the Pentagon (which is basically viewed as a jobs/pork program by Congress) and the healthcare complex and speculate that waste and inefficiency is the result of being protected from foreign competition. The same could be said of the entire education complex in the U.S., another "protected" domestic industry with costs that rise 6% or more a year even as the underlying economy grows at about a third of that rate.
If we look at these growth rates in cost structure, we discern unsustainable trends. It is tempting to hope that tinkering with the edges can "fix" the problems--easier student loans, higher co-pays, etc.
But none of these tinkering schemes address the core issue, which is the structural costs cannot be controlled without systemic transformation of the entire models of healthcare, Armed Forces and education. Competition provides the leverage which "consensual political reform" cannot, because no one will allow their sacred cows to be slaughtered for the common good.
There is one final structural dilemma embedded in the healthcare complex. By some measures (for instance, chronic diseases), our collective health has declined even as our spending has skyrocketed, and this forces us to ask why this is so.
Certainly one answer is the combination of lax marketing regulations, profit motive and Madison Avenue persuasion which together have created a toxic brew of questionable drugs being hyped and fear-mongered to a credulous frightened public and an overworked cadre of health providers.
Another is the very ambiguity of so many procedures, tests and drugs. If we spend $1 trillion on new power lines and solar-power arrays, regardless of what choices were made (perhaps not the best systems, perhaps politically influenced decision-making, etc.), at the conclusion we have new, measurable infrastructure in place which we can deploy to generate electrical power.
If we spend $1 trillion on more tests, procedures and drugs, the actual measurable improvement in health is at best ambiguous and at worst near-zero. Via Medicare we pay for drugs which my parents faithfully consume which may or may not even work. For instance, statins appear to be essentially useless; blood-pressure reduction drugs don't seem to lower heart attack rates, and so on.
Toss in needless hospital visits (hey, Medicare is paying, you better follow our orders and consent to being hospitalized at $30K a day) and the resulting infections/ deaths, botched operations, needless procedures, redundant/needless tests and we have to conclude that it is entirely likely we got very little improved health for that $1 trillion investment--much of which is borrowed, and hence once interest is added in, it's actually $1.5 trillion.
This is not to say some lives won't be saved or extended by the $1 trillion, it is only to point out the inherent ambiguity in measuring the results. If the patients didn't consume the 7 drugs a day, didn't go in the hospital, didn't get the 3 extra tests, didn't consent to the operation--would they actually be healthier? There is no way to know.
One obvious idea is to set up a triage which funds those medical procedures and drugs which we know work for specific conditions like infections, injuries, removal of tumors, etc. Beyond that, patients are instructed to first do whatever lifestyle changes may improve their condition; beyond that, whatever cheap generic drugs might help are paid for, and beyond that, it's on the patient's dime.
While we can borrow $1 trillion a year to put off any trade-offs, it's nice to "debate" whether this would "work." But when we can no longer pay for our "must-haves" with borrowed trillions, then we'll have to make the hard choices anyway.
It seems wise to start thinking about the fairest, most efficient forms of financial and healthcare triage now, before insolvency forces our hand.
Thank you, Michael M. ($5) for your much-appreciated donation to this site. I am greatly honored by your support and readership.
Friday, October 31, 2008
Healthcare Rising: "Safety Net" or Stealth Tax?
Thursday, October 30, 2008
Toward a Re-Definition of Middle Class
We hear a lot these days about the middle-class-- Middle-class tax breaks, etc. But what exactly constitutes "middle-class"? The usual definitions are income-based, as in "between $45,000 and $125,000."
I submit that since income-based definitions do not actually address either asset accumulation or purchasing power, they are a priori of no value. Instead, I propose the following definition of middle-class based on what the income can accomplish/buy:
1. No more than 30% of net income is spent on housing, either to own or rent.
2. 6-8% of net income is saved--not including retirement IRAs or 401K plans.
3. No more than 15% of net income is spent on medical and dental expenses, including insurance.
4. The household can afford to pay tuition, fees and books for two household members living at home and attending a 4-year state university/college.
5. Food (including meals away from home) costs no more than 15% of net income.
6. The household can pay cash for a recent-vintage reliable used vehicle, and can support the one reliable vehicle and a "beater" old vehicle for secondary use; the household carries no auto loans.
7. The household pays off all credit card purchases monthly and carries no consumer credit balance.
8. The household can afford to take a domestic vacation once a year without incurring debt or tapping the 6-8% of income set aside for savings.
9. If the family owns a residence, the equity stands at a minimum of 50% of market value.
10. The household maintains at least 6 months' living expenses in readily accessible savings.
By these standards, how many households in the U.S. are truly "middle-class"? Not very many.
You might say, "You've described a fantasy world."
Interestingly, the "fantasy world" was the U.S.A. circa 1955 - 1975. Yes, a modest income earned by school teachers, sales managers, production workers, etc. could, with modest spending constraints, easily hit each of these points in that 30-year time frame.
In focusing solely on income, the standard perspective leads to this conclusion: to be middle-class, a household would have to earn $100,000 or more and endure draconian spending limits.
Yes, income of the lower 80% of wage earners has stagnated. But more perniciously, the cost structure of our entire economy has skyrocketed past affordability.
Some analysts point to higher taxes as a major culprit, but since 40% of U.S. households pay no Federal taxes whatsoever, then clearly this is simply not an issue except for the top 20% who pay most of the Federal and state income taxes.
One statistical fact is that income distribution has skewed to the upper-income segment, as illustrated in this graphic:
Rather than attempt a value judgment--is this good or bad?--let's simply accept this as an indisputable feature of post-industrial, globalized America. Here's another look at data for the bottom 20% and the top 20%:
While it is certainly a fair question to ask whether taxes have been sufficiently progressive, the answer is rather unequivocally yes, as the upper eschelons pay literally 90% of all Federal income taxes. (I have sourced this in past entries).
Here's a look at asset distribution:
Clearly, most assets are held by the top 20%--not exactly what we'd call "middle-class" as the term seems to imply, well, a middle value, not the top.
And just to remind ourselves that home ownership was not always considered a prerequisite to middle-class membership:
Productivity is inevitably trotted out by "supply-side" tax proponents and various other flavors of ideologues as "the answer" to all economic ills, so let's see how that rising productivity has worked out for the households doing the producing:
Oops! Gee, productivity rose but wages stayed flat. Clearly, rising productivity does not cure all economic ills or imbalances.
But this chart does suggest the real culprit in declining purchasing power: the covert rise in cost structures such as medical expenses. Notice how benefit costs rose handily even as wages stayed flat; employers were paying more labor costs, but the increases weren't flowing to the workers.
Here is the chart which better explains declining purchasing power: a long-term steep climb in the cost structure of everything which cannot be imported from low-cost exporting nations:
Look at what's skyrocketed: the very elements considered the bedrock of middle-class membership: college tuition, medical care, housing, transportation (auto insurance, gasoline taxes, subway fares, toll roads, airfare, etc., not the cost of new autos). Now look at what's plummeted or stayed the same: manufactured goods exposed to non-U.S. competition (electronics, autos, clothing, etc.).
Dramatic increases in the inflation-adjusted cost of education, medical care, government, food and transportation have in effect stealthily gutted the purchasing power of formerly middle-class incomes.
The problem isn't just stagnating wages: it's an economy-wide cost structure which has skyrocketed far beyond affordability. Apologists like to invoke inflation, but these are inflation-adjusted; clearly, costs have risen far faster than inflation.
Other apologists like to claim that medical care is so much better and that's why it costs 10 times as much now. But by any yardstick you select, Americans are not 10 times healthier. In fact by some yardsticks, our health has actually declined despite the stupendous increase in what we spend on medical care.
If an MRI is so bloody rare and costly, then why does it cost 1/20 of the U.S. fee in China when the machine is the exact same? Please don't try to tell me the labor is 1/20--that's simply not true. I happened to visit my doctor at Kaiser Permanente (a non-profit HMO) for a two-year checkup and he mentioned that a friend of his (non-Kaiser member) went into the hospital for some diagnostic work and the bill was $40,000, not counting the doctors' and lab fees which he estimated would double the total.
A routine hospital stay of a few days thus costs two year's pay. Another friend's elderly father went into the hospital for a quick procedure and a few days' observation, and Medicare was billed $120,000-- three year's pay for an average American.
Can anyone claim this is "affordable"? Can anyone claim this has historical precedent in world history? Perhaps this cost structure will only be brought down to affordability by non-U.S. competition, which is the only factor which has constrained other cost structures.
As for the other dominant expense in household budgets--housing--perhaps the current oversupply of housing (18 million vacant dwellings and counting) will eventually bring both market values and thus rents back in line with historical averages: 25% to 30% of net income.
There is no reason the house that sold for $500,000 in 2006 should stop declining in value at $300,000; if there is no demand at $300,000, then it can drop to $100,000. At that cost structure, landlords can lower rents by half and still make a tidy profit.
In other words: perhaps our declining purchasing power stems not so much from flat wages as from a skyrocketing cost structure in everything not exposed to non-U.S. competition. It's difficult to examine the above chart and draw any other conclusion.
Or you can ask folks in their 50s and 60s how much it cost to go to the doctor or dentist in 1965-1970. Ask them what their college tuition totalled. Mine was $89.25 per semester plus $27 in fees, and about $100 for books, or about $420 per year (not including room and board) for the years 1971-1975.
That works out to be about $2,000 in 2008 dollars. How many 4-year state universities cost $2,000 a year for tuition, fees and books?
Maybe we should focus our attention on lowering cost structures rather than worry solely about flat incomes.
Reader Comments on the Mainstream Media:
Good piece on the demise of the lamestream media, Charles.
Another aspect of the deterioration of print journalism from my small window on it (I worked for nine years at a newspaper in California) was watching the publishing staff change from former editors to former sales managers. When I first started working, publishers were traditionally promoted from a pool of experienced editors. But then, fancy marketing experts were hired with their sophisticated techniques for garnering more and more money from the community, which led to more profits and more status. Then, suddenly, sales managers began to be promoted to the publisher position in the local newspapers. Now, whenever there is a judgment call regarding what to emphasize or what to publish, any controversy is settled by the publisher, who now is from a background in sales, not journalism. The text of the newspaper began to be looked at as what you have room to flow around the ads. No ads, no print. And, God help you if a reporter wants to do a story on what might offend the local chamber of commerce, the Realtors, or any other major advertiser. Ain't gonna happen.
Actually, the former sales managers who are now publishers are usually very good people who are trying to do their best. But the real power behind the throne is the Marketing Director. This is a guy, usually relatively young and just out of business school back East somewhere who comes in like gangbusters with his charts and graphs and computer expertise on how to mine the local businesses out of their "advertising dollars." These "dollars" are based on formulas and statistics that are sold for a fortune by marketing software companies and purchased by the newspaper consortium that runs all the sister associated papers. The Marketing Director trains the sales staff and mandates approaches that are simply ruthless to all concerned, customers as well as sales staff. If you don't go along with the program (literally) you are free to pursue a career in used car sales or assorted service industries. After awhile, the whole emphasis and main thrust of the newspaper is dictated by the sales/marketing department. The poor editors and reporters make about half of what the sales staff makes, if they are lucky, and get almost no respect. They are like Peace Corps workers at an ambassadors party.
I used to love the newspaper business. But now, I look to the internet to stand up for truth in journalism. If the newspapers gave a rats ass about presenting the truth they would not continue to employ the same tired and discredited columnists year after year, no matter how wrong they are. They would look at who has been right in their analysis of politics, economics, health, real estate, etc. on the internet and pick them up in the newspapers - and fire the corporate hacks. Have they done so? Hell no.
So, to hell with the lamestream, both print and television. They are all, with few exceptions, corporate stooges who should be shunned. Sad, but true.
Your piece on blah blah MSM strikes to core of our situation in Detroit. I first noticed it when the Free Press and the Detroit News failed to cover KMart's demise (once the country's largest retailer). They wrote story after stoy about recovery plans while the corrupt managers of the company looted it. The end result? 5,000 people lost their jobs at the comany's headquarters in Troy and the land is now being shopped, with weak trumpets, for "new" development.
Of course, the same thing has happened with the coverage of Ford, GM and Chrysler. Year after year our MSM writes mournful articles about loss of market share and the exciting possibilities of production line effeciencies without ever questioning the stupidity of our corporate leaders. As you say, the cause of this abandonment of useful or thoughtful journalism is advertising. I have a friend who manages an advertising department for the Free Press/News who told me that it was/is impossible for any of the writers to penetrate the veil of insipidty as long as KMart/GM/Ford/Chrysler et al are/were the biggest advertisers in the region.
Another fact that he revealed was that since the casino's came here years ago, advertising by furniture and appliance companies has dropped each year. Why? People gamble away their income or credit lines rather than buy hard assets. But has there ever been any writing about the net economic impact of casinos on our region? No. Any writing is relegated to output about Gamblers Anonymous (liberal perspective) or about growth/decline in gambling revenue (business perspective).
But below the obvious business drivers, I think there is a deeper cause: the shift of our culture in Michigan from a logical left brain culture to an intuitive right brain culture. I can't prove it, but I do know that every recovery plan features a strategy for revitalizing Detroit with creative millenials, a prospect about as likely as GM escaping its final and deserved fate.
Thank you, Charles B. ($50) for your stupendously generous donation to this site. I am greatly honored by your support and readership.
Wednesday, October 29, 2008
Mainstream Media: Masters of the Obvious, Clueless Commentary
The mainstream media (specifically newspapers, but also radio, TV and magazines) are flailing and failing. The usual reason given is declining readership and ad revenue, but perhaps the real decline is in their relevancy, insight and truthfulness.
I submit that the entire edifice of MSM (mainstream media) from your daily newspaper (supposedly loaded with "liberal bias") to high-gloss Vanity Fair to propaganda-TV (CNBC and Fox) all suffer a fatal flaw: they are inherently reactive rather than forward-looking. They are all Masters of the Obvious, irrelevant to all outside their ideological tribe/audience.
Many moons ago I wrote here that when the bogus unemployment statistic (and its absurd "birth-death" model for boosting employment by hundreds of thousands of phantom jobs) is issued, an accurate newspaper headline would have to read, "Government invents jobs out of thin air; lies offered as facts."
Instead, the media in all its various flavors robotically ran the phony numbers as if they were fact. Any (rare) disclaimer or skepticism was placed dismissively in the last graph (paragraph in journalism-speak).
This inability or reluctance to state the truth boldly has rendered the MSM increasingly toothless and thus irrelevant. Where were the hard-hitting exposes of the "shadow banking system" three years ago, or even a year ago? Where were the editorials, not just one wimpy call but one after the other, pounding a "bought and paid for" Congress for decimating oversight of Fannie Mae and Freddie Mac?
The list of critical issues which were painfully obvious years ago but completely ignored by the MSM is nearly endless. And since so little editorial skepticism, analysis and commentary was available in the MSM, then we turned to the blogosphere for what was missing in the corporate MSM.
As a consumer of vast quantities of the MSM for decades, I can state as an informed opinion that the quality of MSM commentary (as measured by insights and cogent contextualizing offered) has sunk to nearly insight-free levels.
When parodies published in The Onion ("America's finest news source") consistently trump supposedly "fine journalism" for content, wit and insight, then the pathetic nature of the MSM is starkly revealed.
The inane rush of the MSM to cover "the new frugality" is so abject, so clueless, so reactive that it beggars parody, for it is an unintended parody of responsible journalism.
Here is the MSM's standard operating procedure distilled: studiously avoid covering or contextualizing any issue until it blows up in our faces; then cover it mawkishly, obsessively, and without any mention of the MSM's own failure to pursue what was so obviously a time bomb waiting to go off.
Even the occasional "deep insight" articles which do make it into the MSM are like Hail Mary passes tossed up with 10 seconds left in the fourth quarter (shameless football analogy). For instance, Harpers did run an insightful piece on the housing bubble and debt-serfs by Michael Hudson--but they ran it in mid-2006, as the bubble had peaked and the downside was already visible.
The new road to serfdom: An illustrated guide to the coming real estate collapse.
But by this late date the damage was already done, as millions of buyers had already swallowed the bubble euphoria whole by summer of 2006. Truly forward-looking journalism would have required the piece run in 2003 or 2004, when it could have made a difference. By summer 2006, it was like shouting "there's about to be a crash!" as the vehicle's wheels leave the curb and hurtle out over the cliff. A little late to save the occupants.
FWIW, my own skeptical commentary was published in 2003: Bay Area Real Estate: All Signs Point To A Top.
Which raises the question: what is the point of journalism? The easy answer is "report the news," but this superficial answer just raises further questions. What constitutes "the news"? "If it bleeds, it leads"? And how can sense be made of various "facts" without context? How can context be provided by journalists who either lack the knowledge required to frame that context or who are constrained by the commercial goals of the corporate entity which owns the media, i.e. to make profits off the sale of "the news" (whatever that is).
Like politicians who have learned that bluntly stating the truth loses elections, owners of media have learned that pablum and distraction ("bread and circuses") sells ads and garners eyeballs while hard-hitting skeptical journalism alienates advertisers and angers ideologue readers/viewers who want their own beliefs confirmed rather than questioned.
And so we have the usual ideological camps served by MSM which pander to their pre-conceived views (conservatives read The National Review and The Wall Street Journal, liberals read The New Yorker, Vanity Fair, The Atlantic, etc.) and a milquetoast "middlebrow" array of newspapers and other broadcast media which make a claim to represent "both sides."
But these "opposing voices" are so predictable and so bland and so insight-free that they are also parodies of independent thought. The liberal colummnists will trash Ms. Palin and deride the failing war in Afghanistan, the conservatives will trash Obama and talk up the surge in Iraq, blah blah blah. It's all utterly worthless because a simple algorithm could generate the text for any of these "commentators." No thinking required, either to generate the piece or read it.
Why is this so?
One subtle reason was proposed by my longtime friend G.F.B. who pointed to the need of journalists to keep their jobs in uncertain times. They've got bills to pay and that weight inevitably seeps into how hard they will fight and what they will risk (like getting laid off/fired) to get a story covered.
Another reason is that the supposedly impregnable "firewall" between advertising and editorial is actually quite porous, but always indirectly so. As a peon free-lance writer I have worked on the fringes of the MSM for almost two decades, and so I have a sense of what will "sell" and what won't.
A story on construction defects in a newspaper which depends heavily on real estate advertising and new home adverts will be a tough sell--not impossible, but you better have a legion of academic studies and experts, court records and the like to support any contention. And guess what: city officials will be loathe to discuss the liability issues with you, such as city inspectors' role in not catching the construction flaws. Their heads can roll, too, if the whole seamy story gets out.
So what's a "responsible" editor to do? If the whole construction defects story seems to be getting some national airplay, then the editor plays it safe by running a wire story off AP (Associated Press) or another service which safely locates "the problem" in some distant locale out of the local circulation area.
If the issue ever comes up in an editorial meeting, the editor can defend the paper's coverage by noting that the article ran.
A TV station might come across an irate new home buyer and decide to work it into the old "consumer protection" angle; their coverage will generally be limited to a superficial "little guy homeowner versus big bad homebuilder company" without really touching on the core issues of lax oversight and shoddy workmanship caused by inexperienced laborers.
In other words, in real life, journalists and editors can't afford to alienate advertisers too blatantly. Better to run a little story somewhere (public service interview at 4 a.m. or a brief article buried on page C-9) which provides a fig-leaf of "responsible journalism;" meanwhile, the front page or lead story is on the local feel-good parade or celebrity scandal or crime/shootings.
Even the most prestigious journals are suspect due to idelogical bias. The National Review is not going to run a long piece questioning the surge in Iraq, any more than The Atlantic would run a long piece supporting the surge. The "journalism" even at this level is of the "find evidence to support our ideologically derived views" type.
Some of the best remaining journalism is found in professional journals which cannot afford to have their relevance and credibility tarnished with "feel-good" fluff or slam-dunk ideological bias. For instance, the value of the Proceedings of the U.S. Naval Institute (on my stepfather's recommendation-- he was a career Air Force officer--I have subscribed for decades) lies explicitly in the magazine's publishing of critiques and clarion calls for various reforms within the Navy and the shipbuilding/Pentagon complex.
If the magazine ran fluff pieces about how hunky-dory everything was in the Navy, it would quickly forfeit its credibility within the Navy.
But in general, if you want to get a skeptical, cogently contextualized view of an issue, you have to go online and read blogs like Drug News and Health Blog by Dr. Douglas Bremner, an exceedingly rare voice of skepticism arrayed against the advertising and lobbying might of the multi-billion dollar pharmaceutical industry.
There is one other critical weakness in MSM journalism: the notion that the journalist/writer must sublimate his/her own voice and insights. Whatever the issue, the "responsible" editor requires the journalist to go get 3-5 quotes from industry or academic experts and another handful of quotes from "man/woman in the street" sources.
The journalistic obsession is not proper context or gutsy insight but confirming the accuracy of the quotes and sources. Sloppy journalism is indeed a bad thing, but the focus on accuracy of facts and quotes to the exclusion of the insight and synthesis which is unique to the journalist is a key failure in the MSM.
Why do you read Mish, or The Big Picture, or Calculated Risk or indeed, this very blog? Because the authority of the writer(s) is based on their distinctively skeptical, analytic voice. Each voice makes sense of what is presented in the MSM as "accurate facts" but which is painfully devoid of forward-looking thinking, experiential knowledge or appropriate context.
Virtually every article, story, clip or segment presented by the corporate MSM is "safe"-- safely conservative/liberal, safely limited to the "facts" (no matter how bogus the statistics might be, they are safely presented as fact), safely devoid of any troubling contextualizing or skepticism, safely free of any editorial "voice," outrage, demands, etc. and most importantly, safely free of any recognition of the limits of the MSM pablum passed off as "journalism".
Like union members, the MSM is not going to take down one of their own except as scripted theater for the consumption of the audience.
Good journalism is not limited to routine quotes and calling up the "usual suspects" of academic experts, but in asking "cui bono"--who benefits? and seeking to present a context which enables real insight rather than canning the same old tired ideological cliches for slumbering, apathetic audiences.
Lastly, the line between entertainment and journalism has blurred to stupification. Radio propagandist Rush Limbaugh explicitly identifies himself as an entertainer, and in this he is being entirely accurate. To some degree the same can be said of Michael Moore: he chooses an ideological stance and then goes out and finds sources which back that view, and then presents them (and himself) in an entertaining form.
The MSM has discovered that entertainment sells better than journalism, so it has enfeebled the voices of raw, skeptical independence for a smoothed-down pablum of "safe" "facts," "safe" (pre-packaged ideologically approved) ideas and ersatz (insight-free) commentary.
The dichotomies and paradoxes can be mind-bending and/or amusing. In the front section of a recent San Francisco Chronicle, one of the nation's top 12 major newspapers, the lead stories were: gay marriage, Sarah Palin's "army" of supporters, Yahoo cuts 10% of its payroll and a huge banner on the sports section's coverage of the S.F. 49er football team's latest coach change.
Would you detect the global financial system and the U.S. consumer are both in trouble from this coverage? Hmm, let's look at the adverts: a two-page center spread for Macys (shop until you drop, then get up and do it again!) and a backpage ad for Macys, a full-page ad for a real estate seminar (make millions as the housing bubble bursts) and another full-page ad for a stock market seminar which will teach you to make millions as global markets fall.
Is there any possible friction between these ads and coverage on the collapse of consumer spending, global stock markets and housing?
I propose this theorem of media relevancy: the safer the faux "journalism" being presented, the less relevant the contents will be to the real world and those of us struggling to make sense of it.
If any pundit or academic seeks the causal conditions behind the decline in newspaper readership and the decline of the MSM's credibility as a "news" source, they might start with this correlation.
Are blogs free of ideological bias? Of course not; you can select to read what confirms your beliefs quite easily. But if an honest attempt is being made to present a view which runs counter to the MSM or mainstream perspective, it's generally pretty obvious. That is precisely what's lacking in the MSM--any self-awareness of its many limitations and biases.
Reader Comments:
Don E.
Good expo on commercial credit/paper and its usually venerable history. i did feel you left us with the idea that personal credit was something new, perhaps an invention of the 20th century, but it seems to me that personal credit has roots as old as commercial credit.
consider the viking system of thrall, the feudal serf, the sharecropper and the company store system. were not all a form of personal credit inasmuch as the high lord/owner issued the means of subsistence to a commoner in return for a hefty cut of his future production. whereas this was in earlier times probably limited to basic subsistence items, seed and livestock, the range of goods available was certainly expanded by the company store system. if the 20th century offered anything to the idea of perpetual debt-slavery it was simply a huge expansion of how the commoner might more easily achieve this end, and finally to achieve it without even quite realizing that visa and mastercard had endchained as surely as the lord in the manor. nothing is new.
Jon H.
Your article on two types of credit made lots of sense. However, you seemed to miss another type: bank lending for non-productive trades.
When a merchant needs credit to buy goods or deal with international trade, he uses credit productively. In a sense, so does a consumer when he buys a house or car. A tangible asset is acquired and supposedly paid for over time with interest.
Both types help the movement of goods and services and are part of the commerce that is the mainstay of the economy.
However, when banks lend to anyone for the purpose of making bets on movement of interest rates, etc., it serves no commercial purpose. It is not the same as a commodity transaction where the investor is helping the farmer and the baker hedge against the cost of wheat. The world would function just fine (and right now considerably better) if there were none of this non-productive financing of intangibles.
So, boo-hoo if the banks won't lend to each other because they cannot trust each other. The point of lending is to benefit economic endeavors. Derivatives, CDOs and other paper junk are not commerce nor economic endeavors, only gambling. What bank would knowingly lend me money to go on a gambling junket to Vegas?
One other non-productive area of credit that fits the bank's lending to one another is the carry trade. What sense does it make to borrow money in one country to invest in another and make a profit from the difference in currency values? It only gives jobs to currency traders and hedge fund operators. Speculating and gambling are not fundamental economic necessities and should not be financed by taxpayer bailouts!
Subuddh P.
I am a regular reader (will contribute soon) and love your articles. However I did want to gently point out that the internet is not free. . Just think of the amount of power is required to keep the internet on 24/7. Also how many physical resources are required (with need for constant update and renewal) to keep it running? How much highly toxic trash is created? The internet sits on top of the industrial revolution, it could not exist without it. It is perhaps the most costliest invention of the scientific revolution. And even speaking of things that are available for free, say google search, how is google is able to provide this free service? By advertisement for all the products made to meet those manufactured needs you talk about.
The local life you suggest, with local communities, thrift and self reliance that has minimal impact to the environment is possible but it cannot be with the internet. Your life would truly be local. Communities like the Amish and the Mennonites or say the Indians before the Europeans came would be good examples. It could be argued that this is better, but thats what it would be.
Thank you, Todd S. ($25) for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.
Tuesday, October 28, 2008
Capitalism's Two Kinds of Credit
Virtually everyone agrees the global economy is in the grip of a credit crisis. Now might be a good time to draw a distinction between the two kinds of credit within capitalism.
One is essential, the other is dispensible. It's best not to confuse the two.
The indispensible credit is commercial credit, in which entrepreneurs and traders establish letters of credit, borrow capital or sell stakes to fund voyages, purchase tradable commodities, fund new ventures, etc.
This has been so for at least a thousand years, stretching back into the pre-capitalist middle ages. There is really no way to fully comprehend this without reading this astonishing trilogy by French historian Fernand Braudel, Civilization and Capitalism, 15th to 18th Centuries. Longtime readers have been hectored on numerous occasions to check out at least one of the volumes:
The Structures of Everyday Life (Volume 1)
The Wheels of Commerce (Volume 2)
The Perspective of the World (Volume 3)
Here is but one brief example from Volume 3 of the centrality of commercial credit to the system of commerce we call Capitalism, as it operated in Venice in the 15th century:
But the commercial loan was another matter. This was an indispensable instrument of trade, and its interest rates, though high, were not regarded as usurious since they were more or less the same as those charged by bankers. Nine times out of ten, this kind of loan was associated with a partnership. These made their first appearance in at least 1072-1073 and were soon found in two versions.
At the end of the (trading) voyage when the accounts were settled, the traveller, after repaying the sum originally advanced, kept one quarter of the profits, the rest going to the 'capitalist.'
Alternatively there was the bilateral agreement whereby the lender put up 3/4 of the sum required and the trader/traveller contributed not only his work but 1/4 of the capital. In this case profits were split 50-50. This but one example of a hugely complex web of credit which extended from Lyon in France to Antwerp in the north and south to Venice, to name but three of many cities with far-reaching credit and trade arrangements.
It is impossible to summarize these sprawling networks of credit, settlement, stock shares, loans and partnerships in early capitalism, but three conditions required such arrangements: time, distance and the paucity of gold available for currency.
Prior to the Spanish discovery and conquest of the New World and its vast wealth of silver and gold, there simply wasn't enough gold in Europe to "grease" the immense trade which stretched through the Muslim world all the way to China and southeast Asia. The Chinese and Indians only accepted gold or silver, and so Europe was always "short" of specie/precious metals to act as currency.
As a result, lines of credit which could be settled at the end of the huge trade fairs in Lyon and elsewhere were essential.
Long trading voyages to India, Indonesia (Dutch East Indies or Spice Islands) and China took several years, and the initial capital required was large. Shares of the voyage were thus split amongst investors and lenders, and the great dangers of the sea (i.e. if the ship sank the investors/owners lost their stake) brought about insurance and stock markets where shares of the voyage could be traded "marked to market," so an overdue vessel's shares would depreciate as everyone feared it was lost and the shares rendered worthless.
But if the vessel came through with its rich cargo, the investors and owners stood to reap stupendous profits. Big risks were taken to gain big profits, and money was loaned and partnerships formed to spread the risk.
Without commercial credit, trade grinds to a halt--whether the date is 1706 or 2008.
Now as commercial credit has been severely impaired, global trade and production are indeed threatened on many fronts. Frequent contributor Harun I. sent in this Bloomberg story about agricultural production being at risk of declines due to the tightening of credit to farmers:
Farm-Credit Squeeze May Cut Crops, Spur Food Crisis:
The credit crunch is compounding a profit squeeze for farmers that may curb global harvests and worsen a food crisis for developing countries.
Global production of wheat, the most-consumed food crop, may drop 4.4 percent next year, said Dan Basse, president of AgResource Co. in Chicago, who has advised farmers, food companies and investors for 29 years. Harvests of corn and soybeans also are likely to fall, Basse said. Here we see "unintended consequences" of the credit crisis. Commercial credit is the lifeblood of capitalism, be it the Version1.0 of 1072 or V1.3 in 1381 or V1.9 in 1706 or V2.11 in 2008. The freezing-up of commercial credit and settlement is truly a crisis with long-term negative consequences.
The second form of credit in modern capitalism was never an essential feature of classic capitalism: lending to consumers to buy end-products. If you wanted to buy Chinese silks or pottery at the Lyon Fair in 1593, you paid in silver, baby, or with "commercial paper" which settled out after the fair against debts owed to you by other traders.
Demand was based on cash, not loans; supply was based on loans and credit, but those lines of credit were always settled at the end of the Fair or the voyage.
In the Great Depression (of the 1930s, not the current one), retailers extended credit to customer directly. Both of my parents report that bicycles were purchased on a $1-per-week plan that was paid to the retailer, not a bank; the retailer extended this credit because otherwise he/she might not sell enough bicycles for cash to stay in business.
We have now arrived at a bizarre, unsustainable version of capitalism in which only the most trivial purchases are paid in cash; everything of substance is paid with credit which may or may not be "settled" in any time frame.
Once this credit is pulled/constricted, all "demand" which was based not on cash but on debt/credit dries up and blows away in the lightest breeze. That is our situation today in a vulnerable economy dependent on debt-fueled consumer "demand" for fully 70% of all economic activity.
In other nations, even houses are bought with cash or perhaps 50% in cash and 50% mortgages. Autos are purchased for cash, and home mortgages are for perhaps 10 or 15 years--that is, they are intended to be paid off, not carried forever without a settlement date.
The point is simply this: we need to distinquish between commercial credit which is an essential feature of Capitalism and thus must be restored in both availability and "settlement," and consumer credit which can and should be allowed to wither away to its "natural" state: rare, costly, and settled by a date measured in months, not decades.
Capitalism with a capital C does not require consumers/end-users have access to unlimited credit with no settlement date, but it does require commercial credit which enables trade across both time and distance.
For an alternative to a debt-driven consumer, please consider The Richest Man in Babylon which was recommended to me by correspondent Alberto R.
Hopefully you can find the Braudel series and this book at your local library; if not, owning a used copy will offer much insight, even on re-reading.
NOTE: Thank you, readers, for your many wonderful comments on yesterday's entry. I will try to answer each email as time permits.
Thank you, Charles U. ($20), (oh ye of fab first name :-) for your exceedingly gracious donation to this site. I am greatly honored by your support and readership.
Capitalism's Two Kinds of Credit
Virtually everyone agrees the global economy is in the grip of a credit crisis. Now might be a good time to draw a distinction between the two kinds of credit within capitalism.
One is essential, the other is dispensible. It's best not to confuse the two.
The indispensible credit is commercial credit, in which entrepreneurs and traders establish letters of credit, borrow capital or sell stakes to fund voyages, purchase tradable commodities, fund new ventures, etc.
This has been so for at least a thousand years, stretching back into the pre-capitalist middle ages. There is really no way to fully comprehend this without reading this astonishing trilogy by French historian Fernand Braudel, Civilization and Capitalism, 15th to 18th Centuries. Longtime readers have been hectored on numerous occasions to check out at least one of the volumes:
The Structures of Everyday Life (Volume 1)
The Wheels of Commerce (Volume 2)
The Perspective of the World (Volume 3)
Here is but one brief example from Volume 3 of the centrality of commercial credit to the system of commerce we call Capitalism, as it operated in Venice in the 15th century:
But the commercial loan was another matter. This was an indispensable instrument of trade, and its interest rates, though high, were not regarded as usurious since they were more or less the same as those charged by bankers. Nine times out of ten, this kind of loan was associated with a partnership. These made their first appearance in at least 1072-1073 and were soon found in two versions.
At the end of the (trading) voyage when the accounts were settled, the traveller, after repaying the sum originally advanced, kept one quarter of the profits, the rest going to the 'capitalist.'
Alternatively there was the bilateral agreement whereby the lender put up 3/4 of the sum required and the trader/traveller contributed not only his work but 1/4 of the capital. In this case profits were split 50-50. This but one example of a hugely complex web of credit which extended from Lyon in France to Antwerp in the north and south to Venice, to name but three of many cities with far-reaching credit and trade arrangements.
It is impossible to summarize these sprawling networks of credit, settlement, stock shares, loans and partnerships in early capitalism, but three conditions required such arrangements: time, distance and the paucity of gold available for currency.
Prior to the Spanish discovery and conquest of the New World and its vast wealth of silver and gold, there simply wasn't enough gold in Europe to "grease" the immense trade which stretched through the Muslim world all the way to China and southeast Asia. The Chinese and Indians only accepted gold or silver, and so Europe was always "short" of specie/precious metals to act as currency.
As a result, lines of credit which could be settled at the end of the huge trade fairs in Lyon and elsewhere were essential.
Long trading voyages to India, Indonesia (Dutch East Indies or Spice Islands) and China took several years, and the initial capital required was large. Shares of the voyage were thus split amongst investors and lenders, and the great dangers of the sea (i.e. if the ship sank the investors/owners lost their stake) brought about insurance and stock markets where shares of the voyage could be traded "marked to market," so an overdue vessel's shares would depreciate as everyone feared it was lost and the shares rendered worthless.
But if the vessel came through with its rich cargo, the investors and owners stood to reap stupendous profits. Big risks were taken to gain big profits, and money was loaned and partnerships formed to spread the risk.
Without commercial credit, trade grinds to a halt--whether the date is 1706 or 2008.
Now as commercial credit has been severely impaired, global trade and production are indeed threatened on many fronts. Frequent contributor Harun I. sent in this Bloomberg story about agricultural production being at risk of declines due to the tightening of credit to farmers:
Farm-Credit Squeeze May Cut Crops, Spur Food Crisis:
The credit crunch is compounding a profit squeeze for farmers that may curb global harvests and worsen a food crisis for developing countries.
Global production of wheat, the most-consumed food crop, may drop 4.4 percent next year, said Dan Basse, president of AgResource Co. in Chicago, who has advised farmers, food companies and investors for 29 years. Harvests of corn and soybeans also are likely to fall, Basse said. Here we see "unintended consequences" of the credit crisis. Commercial credit is the lifeblood of capitalism, be it the Version1.0 of 1072 or V1.3 in 1381 or V1.9 in 1706 or V2.11 in 2008. The freezing-up of commercial credit and settlement is truly a crisis with long-term negative consequences.
The second form of credit in modern capitalism was never an essential feature of classic capitalism: lending to consumers to buy end-products. If you wanted to buy Chinese silks or pottery at the Lyon Fair in 1593, you paid in silver, baby, or with "commercial paper" which settled out after the fair against debts owed to you by other traders.
Demand was based on cash, not loans; supply was based on loans and credit, but those lines of credit were always settled at the end of the Fair or the voyage.
In the Great Depression (of the 1930s, not the current one), retailers extended credit to customer directly. Both of my parents report that bicycles were purchased on a $1-per-week plan that was paid to the retailer, not a bank; the retailer extended this credit because otherwise he/she might not sell enough bicycles for cash to stay in business.
We have now arrived at a bizarre, unsustainable version of capitalism in which only the most trivial purchases are paid in cash; everything of substance is paid with credit which may or may not be "settled" in any time frame.
Once this credit is pulled/constricted, all "demand" which was based not on cash but on debt/credit dries up and blows away in the lightest breeze. That is our situation today in a vulnerable economy dependent on debt-fueled consumer "demand" for fully 70% of all economic activity.
In other nations, even houses are bought with cash or perhaps 50% in cash and 50% mortgages. Autos are purchased for cash, and home mortgages are for perhaps 10 or 15 years--that is, they are intended to be paid off, not carried forever without a settlement date.
The point is simply this: we need to distinquish between commercial credit which is an essential feature of Capitalism and thus must be restored in both availability and "settlement," and consumer credit which can and should be allowed to wither away to its "natural" state: rare, costly, and settled by a date measured in months, not decades.
Capitalism with a capital C does not require consumers/end-users have access to unlimited credit with no settlement date, but it does require commercial credit which enables trade across both time and distance.
For an alternative to a debt-driven consumer, please consider The Richest Man in Babylon which was recommended to me by correspondent Alberto R.
Hopefully you can find the Braudel series and this book at your local library; if not, owning a used copy will offer much insight, even on re-reading.
NOTE: Thank you, readers, for your many wonderful comments on yesterday's entry. I will try to answer each email as time permits.
Thank you, Charles U. ($20), (oh ye of fab first name :-) for your exceedingly gracious donation to this site. I am greatly honored by your support and readership.
Monday, October 27, 2008
Empty Dreams, Manufactured Aspirations, Marketing Poverty: the Positives of Poor
By standard American middle-class measures I am poor. This is due to several reasons, including stupidity, contrariness and choices like wanting to write stuff which has no market/can't be sold. I stipulate this because I'm going to peer into some very uncomfortable niches of American culture, and I don't want you to think I have escaped the Matrix of Manufactured Aspirations. I chose "writer," which includes, as a matter of both pride and necessity, a vow of poverty.
That way, we get to look down on those writers who somehow manage to make millions of dollars--ha, they sold out. Meanwhile, of course, beneath our coarse envy, we wish with all our little creative heart that we too could bag that fat film deal and buy a house cash like those few undeserving scribblers who have "made it."
One key tenet of Manufactured Aspirations is that being poor is a fate worse than death, a shameful failure which you should cloak at all costs with the simulacrum of wealth.
The second key tenet is that to escape this shame you need only enter the golden gates of the Empire of Debt.
The third key tenet is that your identity is constructed entirely out of your physical possessions, your appearance and your status within one of the Manufactured Aspirations/Empty Dreams tribes. You might aspire to be an "artist" in which case you are drawn to wearing black clothing and getting tattoos; or you might aspire to "superior knowledge" and have multiple degrees; or you might aspire to plain-vanilla "Corporate America elitism" with fripperies like expense accounts and a title which includes the magic words "vice-president." (Second vice-president is OK; it just has to include those magic words somewhere.)
If you were foolish enough to be mesmerized by the romance and allure of "writer," then you need to amass bylines and eventually, a book contract with a legitimate publisher. Then you are a "real writer." (Heh.) But through some magic which was hidden when you signed on to the Manufactured Aspiration, you reach the Dream only to find it is empty.
You discover you have accepted penury within a teeming mass of aspirants, the vast majority of whom work for cruelly low wages in what is essentially a vast, diffused sweatshop for dreamy over-educated types who rejected Corporate America, the Nannie State and even the Black-Clothed Artist tribes.
Lest you think this exaggeration, please read my semi-tragic, semi-humorous account Dear Aspiring Writer: The Worst Advice You'll Ever Read.
We now come to the fourth and most pernicious tenet: that even as you surrender your identity to a Manufactured Aspiration, you will stoutly believe you are an Individual (capital "I") making a decision in your own self-interest via Free Will (trademark held by the estate of I. Kant).
This illusion finds all sorts of refuges within our own self-conceptions. I once asked a self-described "ecologically minded" baby-boomer foot soldier in Corporate America why she drove a Bronco instead of a compact and she blurted, "But I was one of the first."
In other words, if you are an "Early Adopter" (tm) then all ecological "sins" are excused. The patent ludicrousness of such self-delusion is epitomized by the academic household's two Volvos which are left unwashed (and neatly labeled with liberal bumper stickers) to express their disdain for "corporate" artifice and superficiality. Meanwhile, we wonder: why not own an American sedan, then? No way, Baby. The Manufactured Aspiration of "Academic" requires ownership of carefully selected trophies. A Mercedes is too crass and corporate, an American car too declasse, a Lexus too social-climbing; no, it's a Prius/Volvo in the driveway because "we care about our dear child's safety and ecology."
(Meanwhile, the vast majority of "Japanese" cars are manufactured by Americans in the U.S., using parts made by U.S. suppliers. So what constitutes an "American car?" Corporate ownership, or how many Americans are drawing a wage from its manufacture?)
Never mind a used Crown Victoria is about as safe as a Volvo and much more ecological because it's already here and doesn't require thousands of gallons of petroleum to be burned in its manufacture; they bought the script when they bought into the Manufactured Aspiration of Academia and they're following it to perfection.
The blue-collar equivalent is the American-made SUV and pickup with a gunrack. Regardless of which tribe of Manufactured Aspiration you bought into, somebody is selling what you need to "arrive."
In the real world, arrival is always enigmatic; but in the world of Manufactured Aspiration, arrival is always clearly marked with objects, signs and services which must be purchased.
We all hate realizing we blindly bought into carefully cultivated/marketed tribes of Manufactured Aspiration. As I describe in my new little book (cue the shameless self-promotion) Weblogs & New Media: Marketing in Crisis , the central illusion of mass marketing (what I call the Standard Model of Marketing) is that buying mass-produced goods somehow defines an individual's identity. In other words, we're special--just like the other million people who bought the exact same shoes, auto, black T-shirt, etc.
Every tribe of Manufactured Aspiration shares one key characteristic: an entire ecology of marketers and businesses are making money off your membership. How many tattoo parlors would exist if teens weren't sold on the necessity of looking "edgy" and "urban" and "grunge" via tats? A tattoo is costly and has the simulacrum of being "unique," and thus it feeds directly into the primary Aspiration: that we're Special and Unique--just like everybody else.
Manufactured Aspirations lead to all sorts of paradoxes. "You've arrived" in certain tribes when you pay for "exotic" cruises and travel "adventures" to places and peoples which would be better left unvisited. But that doesn't make anyone money, so the bar for "exotic" is raised ever higher; the pinnacle used to be Mount Everest, where death stalks hardy aspirants as a key tenet of "real adventure", but space is now the ultimate Final Frontier in "adventure travel;" you need a cool $20 million or so to be a space tourist, though various entrepreneurs are rushing to lower the cost down an "affordable" $1 million or so per visit.
If you find yourself short of cash needed to acquire the essential "membership" belongings/experiences/services for your chosen Manufactured Aspiration, then the Empire of Debt beckons. Just charge it, baby, buy it on time, re-fi that sucker, one way or another we'll get you the cash you need now. Why be "poor" when we can get you the money you need for the externals you gotta have?
So pernicious is this marketing that we as a nation have succumbed on a national scale. Rather than save or sacrifice, we now run staggering Federal deficits as standard operating procedure, lest we be denied anything we "need": MRI tests for every headache (as long as Medicare is paying), a world-class Armed Forces, entitlements galore for everyone, etc.
The surest way to lose an election is to issue a call for sacrifice. Only a self-destructive politico would be insane enough to suggest that guaranteeing poverty for our children is a poor choice compared to "borrow and spend lavishly now."
Politicos, like everyday citizens, deploy a host of self-deceptions: this isn't debt, it's an "investment in our future." Just how devilishly Doublespeak is this, when we're actually burdening future generations with massive debt because we're too spoiled, lazy and morally shiftless to make any sacrifices in the present?
But the Empire of Debt is integral to standard marketing and Manufactured Aspirations; saving up means you will appear "poor" and that is a fate no one would tolerate if there was any possible way to acquire the "look and feel" of "wealth" and "membership."
You see the terrible irony, don't you? That we have impoverished ourselves to purchase the simulacrum of wealth. There is one way to cleanse ourselves of Manufactured Aspirations: choose poverty, choose self-reliance, choose real wealth (i.e. sustainable incomes, control of capital) over the bogus simulacrums of wealth (luxury vehicles, maid service, golden retriever or other "name brand" dog, season tickets to the local "sport dynasty," title of second vice-president of global penury, etc.)
To reject the ideology that poverty is fundamentally a judgment of your self-worth-- i.e. if you are poor you are worthless--is to free yourself of both Manufactured Aspirations and the Empire of Debt.
It is a sad thing, really, to see an entire people, if not an entire species, fall for the scam that personal transformation can be had as cheaply as a fake Rolex, or that succumbing to a lifetime of poverty via crushing debts to acquire "the real thing," whatever that may be for membership in your selected Manufactured Aspirations tribe, is actual "wealth" or "self-worth."
In my own tribe, here's what it takes to be a "real writer:" write every day. That's it. There is nothing else.
As for self-worth: aspire to the inner wealth of charity, forgiveness, empathy, self-acceptance, self-reliance, humor and a healthy humility about wisdom and how much remains to be learned in life. Regrettably for the Standard Model of Marketing, all of these are hopelessly and irrevocably free.
Some have no choice in being poor but the lifestyle is the same whether it's chosen or not. I know it runs counter to everything we are supposed to cherish about the "American Lifestyle," but it seems to me that being poor/living poor has all sorts of advantages. To list but a few:
1. Smaller cars are easier to park and cheaper to own/drive. A Toyota or Honda will last for 15 or 20 years with routine maintenance, while the luxury brands are rusting in the junkyard or requring thousands of dollars in repairs.
2. Cooking real food is cheaper, tastes better and is healthier for you by far.
3. Teaching kids self-reliance and thriftiness (basically the same thing) cures dysfunctional dependence; cancel the maid service, stop buying sports drinks as everyday treats, etc.
4. Having a cellphone glued to your ear does not make you a bigshot. 80% of all "communication" is distraction. Creativity and innovation are not nourished by being overwired and distracted.
5. Being a renter is much easier than owning a house. When something breaks, you call the landlord or porperty management company. Once you buy a house with a mortgage, it's costly to align the mortgage to market forces; it's fixed unless rates fall and even then you have to pay thousands in refinancing fees. Rents are open to market forces so you can negotiate lower rents or move to a cheaper place without losing 10% of your capital (selling a house costs 6% realtor fees plus closing costs).
6. Second-hand stuff is treated as tainted by a "buy new" middle-class, but used is smarter. The first owner took a 90% loss, or a 50% loss for a recent auto. The second owner gets all the benefits with very little loss of intrinsic value.
7. Not buying anything new is best for the planet. Even a "green" Prius uses hundreds of gallons of oil to manufacture, extract the iron, make the steel and plastic, etc. It takes more oil to manufacture a Prius than the vehicle will ever consume. If you want a Prius, buy a used one.
8. The Web is mostly free (this site included). That makes it the greatest bargain of all time. Yes, a monthly access fee is required but these are less than cellphone plans. Or you can log onto free public wi-fi networks.
9. The real world trumps electronic simulacrums, which inevitably leave users with a strange inner hollowness and ennui. It's free to go outside, free to learn new things off the Web, free to do situps on your own floor, etc. etc.
10. "New" is oversold. We seek novelty but novelty does not have to be purchased.
11. Drawing identity from Consumerism (in any guise) is true inner poverty. Focusing on being a better parent, smarter investor, mentoring younger colleagues, etc. are all free; they build an authentic identity that has no need for superficial externals for verification.
12. What you consciously give up as not in your own best self-interest you no longer miss: sodas, chips, ridiculously overpriced football games, ice cream, fast food, cable TV, etc. etc.
Thank you, Steven H. ($113.13), for your staggeringly outrageous (and numerologically significant) donation to this site. I am greatly honored by your support and readership.
Saturday, October 25, 2008
A Contrarian's Call for a Major Rally
Now that virtually the entire world is panicky and many are expecting a real crash in the stock market, I am forced to predict a major rally is about to start.
First, please read (or re-read) the HUGE GIANT BIG FAT DISCLAIMER below; this is not investment advice, it is simply the ramblings of one amateur observer.
Why forced? By many things, starting with the charts. Chart reading 101 teaches us that the charts are about the only objective source of information we have, and also to look for divergences between price and various indicators, as divergences tend to hint at future price movements.
Other tools are Elliott Wave Theory and fibonacci projections. Mish provided an excellent snapshot of Elliott Wave analysis, which calls for a (weaker than Wave 3) up Wave 4: S&P 500 Crash Count, eventually followed by a much larger Wave 5 down.
That makes sense to me, and I am not disputing the extreme likelihood of further declines in the stock market. I am simply predicting a huge rally is about to begin which will blow away the Bears for two months--very likely through the last week of the year.
As for fibonacci projections, respected observers such as Enrico Orlandini have spotted key levels at 10,725, 9.913, 9,063, 8,146, 7,470 and 5,890 while the astute technical analyst Rick Ackerman recently set a downside target of 6,195. I have posted charts courtesy of frequent contributor Harun I. which identified approximately 10,700, 9,880, 9,100, 7,200 and 6,000 as key levels.
Interestingly, the DJIA dipped down to 8,187 on Friday, a mere 41 points from a key level of support at 8,146. I would say that's close enough to count as a test of support.
Let's look at the multiple divergences in this chart of the Dow Jones Industrial Average:
Please go to www.oftwominds.com/blog.html for the charts.
1. Despite a near-collapse in Asian markets--Japan's Nikkei was down almost 10%-- the DJIA didn't even hit its previous low, nor did volume get close to recent highs. It sure looks like sellers are exhausted, as the index notches a higher low and couldn't even punch below the lower Bollinger band.
2. ADX is well below the extremes reached in July, meaning the trend is less extreme than it was then.
3. DMI- is declining, and DMI+ is rising, suggesting the selling trend is lessening and the buying trend is rising, albeit marginally.
4. MACD is at an extreme, yet divergence has risen to neutral.
5. The natural target is the old support at 10,700, which happens to converge with the 50-day moving average.
There are a number of other forces at work which act as feedback loops for a rally.
1. If the Plunge Protection Team and the Powers That Be want McCain to have any chance at all of winning the Presidency, they have one week left to launch a rally.
2. This New York Times graphic How This Bear Market Compares (thank you, Dr. R. Kent for the link) reveals that this decline has dropped further and faster than virtually all other Bear markets in the past 100 years. That alone speaks to the notion that "nothing goes up or down in a straight line" and hence no matter how horrible the global economy might be, the market is due for a sharp rally.
3. The market has discounted virtually all government actions and bailouts as useless or ineffective. Yet the wheels of these feedback loops are still grinding, and to dismiss them because they didn't magically "fix" the markets so far does not mean they will have zero positive effect. Were they wise, and will they have long-term positive effects? I would say no, but nonetheless to dismiss them all as having no potential positive short-term effects seems rather myopic.
4. There is $6 trillion sitting on the sidelines in the U.S. alone, and trillions more in non-U.S. accounts ready to jump in once a "bottom" has been "officially" recognized. Not everyone has been wiped out in the past 6-week decline.
5. The U.S. is widely perceived as having led the rest of the world in the meltdown of its financial and housing sectors. This perception might well lead potential investors to look for the "recovery" to start first in the U.S. The rising U.S. dollar is another reason for non-U.S. investors to buy U.S. shares, as this is a "double bet" on both the dollar and the U.S. economy's relative strengths.
6. Fund managers are looking at zero bonuses and plentiful pink slips unless they can close out 2008 with some sort of recovery/rally which cuts their current losses. That gives those who actually control much of the liquid wealth of the nation an extreme incentive to launch a momentum rally, regardless of fundamental economic issues.
7. As I have repeatedly stated, the market is not in the habit of giving gifts; any Bull rally will take along the fewest possible participants. Many potential Bulls are looking for a "capitulation" such as a one-day 1,000-point decline in the DJIA.
That would be nice, because then we could all jump in at a clearly marked "bottom." But because everyone is looking for such a neatly-lit (in neon) bottom, I doubt it will happen. That would make catching the bottom far too easy, and the market is not going to take 90% of investors along for the rally. It will rally against all reason and against all odds, leaving skeptics and fundamental-analysis types watching from the sidelines for the "capitulation" which is too widely anticipated to ever happen.
If it was so easy to catch the bottom, we'd all be millionaires.
What will happen instead is the market will begin rallying as skeptics and pundits are still asking, "Where is the bottom?" By the time the market has risen 20%, then it will be clear the bottom of this leg is already in.
8. Seasonally, November and December are typically rally-mode months.
9. Mutual funds close their fiscal-year books in October, so redemptions and portfolio rebalancing has required massive selling in October. Once October is history, the rally can begin in earnest.
10. The market hates uncertainty, and once the U.S. presidential election has been decided one way or the other, the market will have yet another reason to rally.
11. Large traders are net long, and commercial traders are basically neutral. Betting against "the house" is occasionally successful but I wouldn't make a habit of it.
12. The put-call ratio (the number of bets that the markets and stocks will decline versus bets that they will rise) are astoundingly bearish; for instance, based on the put-call ratio, perhaps 10% of traders expect oil to rise and about 90% are expecting it to fall further.
The market never rewards 90% of the players, period. Sorry. Been there and been burned. I'll take the 10% bet, thank you very much, and thank you for the cheap calls. But be my guest and bet on future declines; you have nearly the entire world alongside you. I'll take the contrarian bet against the consensus for the simple reason the market never rewards 90% of the punters, and there is almost universal fear and loathing and panic right now--in other words, for those going long via calls and futures, it doesn't get any better than this.
I have recently made the case here that oil and oil stocks are due for a bounce. Based on the punditry and the put-call ratio, most observers are looking for oil to drop to $50/barrel or even $10/brl. Maybe it will eventually, but right now I am seeing evidence that a near-term bottom is in and a rally in petroleum and natural gas is about to begin.
Note the double bottom and plentiful divergences in this chart of Anadarko Petroleum. Maybe oil is heading for $50/barrel, but again, if "nothing moves in a straight line" then these divergences suggest a strong counter-rally is poised to begin.
At least that's my amateur read. I may have missed something huge and vital and thus I could be horribly, catastrophically wrong. It wouldn't be the first or last time.
Essayist Zeus Y. has graciously answered reader's followup questions regarding his series of essays on credit default swaps, and provided yet more answers to "to whose benefit?"
Toxic Liabilities Are Not Assets:
Sooner or later we have to recognize a massive fraud has been perpetrated. It needs to be revealed that major companies have trillions of dollars of junk on their books and are likely not solvent according to traditional notions of solvency. So we have a Catch-22, but not one that will be solved by hiding: expose the fraud and risk likely short-term collapse and re-scaling of economic confidence and systems, or cover the symptoms, hide the toxins, and allow them to fester and rot out the economy in a prolonged sickness that may spread and gain momentum beyond attempts to assuage the problems."
I highly recommend reading the entire essay, as Zeus lists seven excellent propositions for fixing the fundamental issues.
And for your listening pleasure/amusement: Patriot Express (in disguise) sings Sarah Palin, Queen of the Red party. The lyrics helpfully pop up for your reading pleasure.
Thank you, Derek S. ($20), for your much-appreciated donation to this site. I am greatly honored by your support and readership.
Friday, October 24, 2008
The Company Store, Debt and Serfdom
October 24, 2008
Way back in May 2006 I wrote about Michael Hudson's work on The New Road to Serfdom: A Negative-Equity Mortgage.
I am now thinking there's another analog to our entire economy: the company store. I actually lived in one of the last plantation "company towns" in Hawaii, and though Dole Pineapple didn't operate a "company store" in 1969, earlier plantations (and coal mining towns, etc.) did--and the set-up was sweet indeed.
Much like a serf renting/sharecropping land owned by a manor-house or nobility, the plantation worker needed to borrow money to buy food and other necessities at the company store, which just happened to operate as a monopoly and just happened to charge skyhigh prices. (The serf needed to borrow seed for the next planting, and money to buy food for the family in between harvests.) The rate of interest paid by the serf/worker was always much higher than market rates--another monopoly capital (and highly profitable) feature of the set-up.
The system's most pernicious feature: the worker/serf never escaped debt. Indeed, the system was constructed to increase the debt to the point it could never be paid off, insuring a lifetime of profitable servitude to the nobility/corporation.
Now the Powers That Be, as embodied in this Republican Administration and its lackeys/minions in both parties, have perfected an entire economy based on this "Company Store"/manor-house model.
As Jesse over at Jesse's Cafe Americain noted in The Safety and Immediacy of Liquid Assets in a Deleveraging Panic:
"This is a critical point, and little debated or understood as it is emotionally charged with words like 'socialism.' Most do not understand the fractional reserve banking system, but it seems more official, more palatable, to give them billions, enormous sums, and to give the public as little as possible for fear of debasing the value of work and the currency.
Paulson and Bernanke both view the economy as an adjunct to the financial system so from their perspective the choice is obvious."
The power of the serf/company store model is only truly revealed by examining not just negative-equity home mortgages but negative-equity auto loans, credit card debt, etc. How about the serf who bought an SUV with no money/low money down? How much is his auto loan, and how much is the gashog SUV worth now? Far less than what he owes; he has hugely negative equity in not just his house but in his vehicles and indeed, in everything he "owns" which was purchased on credit.
And how about the clothing and TVs and other toys purchased on a zero-interest "teaser rate" credit card? How much is all that used stuff worth? Ten cents on the dollar? And what happens when the debt serf--who bless his naive little heart, actually believes the illusion that he is "middle class"--har har har--is late one payment? Bam! That zero-interest balance is suddenly being charged 23% interest.
Oh, and the late fee is $50. And one other thing--all the other credit cards he "owns" will also pop to 23% interest because, well, they can raise the rates whenever they want--but the official excuse is he's now a "credit risk."
As if he was ever not a credit risk?
Just like the worker and the company store, the credit card debt actually rises regardless of how much the worker pays. It's a beautiful lifetime system for serfdom/poverty and endless rentier profits for banks. Thus we read story after story in which a credit card balance of $1,500 balloons toover $5,000 as interest rates are jacked to 24% and huge late fees and overdraft fees are levied.
As Merle Travis wrote about the company store:
You load sixteen tons . . . what do you get?Another day older and deeper in debtSaint Peter don't you call me 'cause I can't goI owe my soul to the company store
Exactly what is the difference between the serf or the plantation/mine worker and today's debt-enslaved "middle-class" peasant?
A key con of the Company Store model circa 2001-2007 was that extracting money from your home equity was essentially identical to withdrawing savings. This conceit was enabled by absurdly low interest rates and essentially qualification-free money; if equity is like savings, then withdrawing it--at almost no extra increase in monthly mortgage payments!--was just like taking money out of a savings account.
Except for one little tiny feature of the equity extraction--it was debt, not savings.
Another key con was the illusion that this debt was essentially risk-free. With house prices rising, and loans getting ever cheaper, then only a fool would forego the chance to extract and spend the "savings" of rising equity.
As often noted here, real wages (as measured by purchasing power or adjusted for inflation) has been stagnant since the mid-1970s. Like the indentured serf, the average "middle class" (sounds so much better than debt-serf, doesn't it?) wage earner saw a seemingly golden path out of stagnating purchasing power: borrow more for a lower monthly payment.
But alas, the teaser rates on the adjustable-rate mortgage and the credit cards expired, and now the real costs are being levied.
Many readers write to remind me that "nobody forced anyone to take out the loan," and that is true. We all have so-called free will. But it is naive to focus on free will (which does not operate in a vacuum but in a cultural and historical context) and ignore the incredibly concentrated power of the Ministry of Propaganda. I have illustrated the rough inter-connected structure of the Ministry in this helpful little diagram:
Please go to www.oftwominds.com/blog.html to view the charts.
Most astonishingly, the Ministry has succeeded in diverting the nation's attention from the Company store/debt-serf realities to a bogus "debate" over "socialism" and "capitalism." As Michael Hudson has pointed out, the rentier class which owns the mortgages, loans and credit card debt is not capitalist at all; it is essentially medieval in structure. It takes no risks, creates no innovations, invests no capital in new enterprises or indeed, performs any classical capitalist functions at all.
It simply indebts the serfs, convinces them via doublespeak, propagands and phony statistics that they are still gloriously "middle class" (that is, obscuring or reifying their true nature as mere miserable debt serfs) and then sits back and collects the interest and profits which the debt serfs will be struggling to pay until their last breath.
Nice set-up. No criminal extortion scheme could be more effective or venal.
We should note that the Democratic members of the Powers That Be all voted for the banker-bailout, knowing full well that the bankers/company store could have been allowed to go bankrupt and the $700 billion could have spent--if it was to be spent at all--on education, rebuilding bridges, transmission lines, and other desperately needed infrastructure projects.
But this could not be allowed to happen. Why? Because money spent on infrastructure flows directly into workers' pockets, removing the intermediary debt which is the entire key to the Company Store model. The Paulson bailout's key feature is that it does not put a single dollar in the pocket of a mere serf/worker--every dollar goes to save the current system, which is based on the serf borrowing money constantly at ever higher interest rates.
Correspondents Craig M. and Cheryl A. sent me this link to the inimitable Jesse, whose comments here provide a near-perfect wrapup to the company store/debt-serf model I have described: The New Deal for the Banking System as the Storm Gathers Strength:
We are seeing an enormous parody of Roosevelt's New Deal being rolled out in a hurried fashion for the bankers and the wealthy under the cloak of dire necessity prior to the likely change in political Administrations.
If we follow the political pattern of the 1930s, we will see a minority of Republicans and a sympathetic majority at the Supreme Court attempt to maintain the disbursal of liquidity largely to the corporations and banks, and to fight any progressive tax increases and social programs designed to push that liquidity directly to the public without passing through the tollgates of the financial system.
If this happens, we may see a powerful polarization in the country between a minority that will attempt to embrace state control to halt those programs and the encroachment on 'true American principles' and a suffering public, with a middle class pinned between them.
The corporatist appeal will be made to social conservatives, small businessmen, the banks and the corporations that spring up around them, and the lowest elements in the hatreds and prejudices and fears in the public, particularly the older middle class, to retrieve our national honor.
And if against all safeguards and probability this succeeds in gaining power, and burning the Constitution to preserve our freedom becomes a popular slogan, and a slyly articulate but otherwise inexperienced, almost mediocre, leader arises, and the corporate powers support this person in order to achieve their ends, then it will be time to leave, without looking back, before the storm breaks, and madness is unleashed, and a darkness falls over the land. I would add only this: the middle class is an illusion, a false construct created by the Ministry of Propaganda to provide self-delusional cover for the serfs whose pride might be pricked by a realistic self-assessment of their true servitude.
The only people who can claim to be middle class are those few with virtually no debt and an income independent of the corporations who view employees as expenses to be slashed and burned as needed and the soon-to-be-bankrupt welfare state. I would estimate that by this more realistic and rigorous definition, no more than 4% of the nation's households are truly middle class: independent professionals, small landlords, small business owners with no debt and agile, recession-resistant enterprises, etc.
I suggest the 4% number based partly on the Pareto Principle of 80/20 which can be further distilled down to 4/64: thus 1% of the populace owns 2/3 of the assets, a thin sliver of 4% are independent of the welfare/corporate state, 64% labor under the illusion they are somehow "middle class" and the balance are mired in undeniable poverty, which in this nation can be defined as no access to credit.
Here is a google search of the oftwominds.com archives for "Pareto Principle":
oftwominds.com entries on Pareto Principle.
I have also documented this vast divide in wealth/asset-ownership many times. for example:
The U.S.A.: The Third World's First Superpower (April 16, 2008)
Housing Wealth Effect Shifts Into Reverse (May 2, 2006)
As one last example of the pernicious genius of the company store/debt-serf model, consider the bogus "elite status" offered to those with enough income to funnel through the system to make the owners even more money. Banks make money off the velocity of money, and the more you funnel through your checking account, the more money they can make off you. So if you have a large income and spend virtually all of it, they love you, they love you, they love you, and to express their gratitude for your servitude they award you various "elite" status gimmicks which are parodies of true elites.
Feel puffed up when you get to stand in your frequent flyer/"elite" line? Sorry to burst your balloon of pride, but the real elites are boarding their private jets out on the tarmac of Kona Airport.
There is one slight advantage to banks' "elite" accounts--which as we noted, are awarded based on you giving them large sums of money to leverage for virtually no interest paid--and that is you don't get nailed with the outrageous overdraft and late fees which are routinely levied on "middle class" accounts.
Indeed, these $50 lates fees and overdraft fees are a major source of banks' standard profits. That, and all the money provided by the "elites" free of charge.
There is no shame in being poor in this system; I am poor by "middle class" standards of income and "ownership" of stuff, and I consider it if not noble them certainly respectable.
Essayist Zeus Y. has graciously answered reader's followup questions regarding his series of essays on credit default swaps, and provided yet more answers to "to whose benefit?"
Toxic Liabilities Are Not Assets:
Sooner or later we have to recognize a massive fraud has been perpetrated. It needs to be revealed that major companies have trillions of dollars of junk on their books and are likely not solvent according to traditional notions of solvency. So we have a Catch-22, but not one that will be solved by hiding: expose the fraud and risk likely short-term collapse and re-scaling of economic confidence and systems, or cover the symptoms, hide the toxins, and allow them to fester and rot out the economy in a prolonged sickness that may spread and gain momentum beyond attempts to assuage the problems. I highly recommend reading the entire essay, as Zeus lists seven excellent propositions for fixing the fundamental issues.
And for your listening pleasure/amusement: Patriot Express (in disguise) sings Sarah Palin, Queen of the Red party. The lyrics helpfully pop up for your reading pleasure.
Thank you, Elaine D.($20), for your generous donation via mail to this site. I am greatly honored by your support and readership.
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text:
, Feb 18, 2013 / 04:01 pm (CNA).- A priest who was conceived in rape when his mother was only 13 years old is sharing the story of how he met, forgave and heard the confession of his father, who is now living a life of faith.
"I could have ended up in a trash can, but I was allowed to live," said Father Luis Alfredo Leon Armijos of Loja, Ecuador.
In a Feb. 6 telephone interview with CNA, Fr. Leon, who is pastor of St. Joseph Parish in Loja, said his mother, Maria Eugenia Armijos Romero, was working as a maid to help her parents support their eight children.
"The owner of the home took advantage of her working alone, raped her and left her pregnant," he said.
His mother always defended his life, even though she was young and alone, without the support of her family members, who tried to cause an abortion by giving her concoctions to drink and punching her stomach.
"She prayed and felt that the Lord was saying to her in her heart: defend that child that is in you," Fr. Leon recalled.
The young girl ran away to the city of Cuenca, where she managed to survive on her own. On Oct. 10, 1961, she gave birth to Luis Alfredo.
A short time later, with the help of the baby's father, she returned to Loja to begin a life as a single mother.
"She ended up under the care of her rapist - my father - who acknowledged I was his and said he would take care of me," Fr. Leon said, "but that doesn't mean that things between them were healthy."
He went on to recount how his father "always visited our home and fulfilled his duty to us. They had three more children, and my relationship with him was distant but pleasant. I respected him a lot, he instilled a sense of authority in me, he was tough with me and he took me to work."
Fr. Leon encountered Christ through an invitation to the Charismatic Renewal at age 16 and began preaching and teaching catechism "wherever God put me," whether on the bus or with young people in juvenile detention.
At 18, he felt a call to the priesthood and entered the seminary despite the opposition of his father. He was ordained at the age of 23 with special permission from the bishop.
Two years later, he joined the Neocatechumenal Way, and his mother revealed to him how his birth came about. She had ended her relationship with his father, and this marked the beginning of a journey of reconciliation for them both. Fr. Leon helped his mother understand that she could not hate his father and dealt with his own need to forgive as well.
"God allowed me to be a priest not to judge but to forgive, to be an instrument of his mercy, and I had judged my father a lot," he said.
Years later, he received a call from his father, who was about to undergo surgery and was afraid. He asked his son to hear his confession and returned to his faith after 30 years of being away from the Eucharist.
"I told him: Dad, you deserve heaven, eternal life," Fr. Leon said, and "at that moment my father broke down in tears."
When Fr. Leon preaches to pregnant women undergoing difficulties, he reminds them that just like Jeremiah, God formed their children in the womb as well.
He encourages children to learn how "to see things from the perspective of God's love" as they come to know their own life story.
"If you are a child or a single mother, you should see how God our Father has cared for you in your life," he added.
Tags: Abortion, Forgiveness, Conceived in rape
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