2012 Year in Review

thomas · December 22, 2012, 12:34am

[Every year, friend-of-the-site David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. Moreover, he has graciously selected PeakProsperity.com as the site where it will be published in full. It's quite longer than our usual posts, but worth the time to read in full. A downloadable pdf of the full article is available at the bottom of the post -- cheers, Adam]

Background

I was just trying to figure it all out.

~ Michael Burry, hedge fund manager

Every December, I write a Year in Review that has now found a home at Chris Martenson’s website PeakProsperity.com.^1,2,3 What started as a simple summary intended for a couple dozen people morphed over time into a much more detailed account that accrued over 25,000 clicks last year.⁴ 'Year in Review' is a bit of a misnomer in that it is both a collage of what happened, plus a smattering of issues that are on my radar right now. As to why people care what an organic chemist thinks about investing, economics, monetary policy, and societal moods I can only offer a few thoughts.

For starters, in 33 years of investing with a decidedly undiversified portfolio, I had only one year in which my total wealth decreased in nominal dollars. For the 13 years beginning 01/01/00—the 13 toughest investing years of the new millennium!—I have been able to compound my personal wealth at an 11% annualized rate. This holds up well against the pros. I am also fairly good at distilling complexity down to simplicity and seem to be a congenital contrarian. I also have been a devout follower of Austrian business cycle theory—i.e., free market economics—since the late 1990s.⁴

Each review begins with a highly personalized analysis of my efforts to get through another year of investing followed by a more holistic overview of what is now a 33-year quest for a ramen-soup-free retirement. These details may be instructive for those interested in my approach to investing. The bulk of the review, however, describes thoughts and observations—the year’s events told as a narrative. The links are copious, albeit not comprehensive. Some are flagged with enthusiasm. Everything can be found here.⁵

I have tried to avoid themes covered amply in my previous reviews. There is no silver bullet, however, against global crises, credit bubbles, and feckless central bankers. Debt permeates all levels of society, demanding comment every year. Precious metals and natural resources are a personal favorite. This year was particularly distorted by the elections; I offer my opinions as to why. Sections on Baptists, Bankers, The Federal Reserve, and Bootleggers describe the players in Jack Bogle’s Battle for the Soul of Capitalism.⁶ Special attention is given to a financial crime diaspora fueled by globally overreaching monetary policies. Everything distills down to a relentlessly debated question: What is the role of government? I finish light with the year’s book list that shaped my thinking. I acknowledge individuals who have made pondering capitalism a blast through direct exchanges over the years. They brought wisdom; I brought the chips and dip. You already know who you are. And then there are those characters whose behavior is so erratic, sociopathic, criminal, or just plain inexplicable—you guys are central to the plot. I leapfrog Rome and Titanic metaphors and go straight to the Lusitania.

One last caveat: I subscribe to the Aristotelian notion that one can entertain ideas without necessarily endorsing them, often causing me to color way outside the lines. With trillions of dollars circumnavigating the globe daily, nefarious activities are not only possible but near certainties. If you are prone to denounce conspiracy theories and conspiracy theorists to avoid unpleasant thoughts, you should stop reading now. I’m sure there’s another Black Something sale at Walmart. If you are a bull, you should also bail out or buckle up. This is the bear case. I will remain a permabear until some catharsis knocks me off my stance and they find a cure for my market- and politics-induced PTSD.

As this review was being completed, Lauren Lyster and Demetri Kofinas recently uploaded a companion interview on the Year in Review I did with Capital Accounts on RT_America (to be aired on December 21st and posted on Youtube.)⁷ In this context I offer wisdom from the Master:

If there is ever a medium to display your ignorance, television is it.

~ Jon Stewart

Footnote superscripts appear extensively throughout this review. The actual footnotes and associated hyperlinks can be found here.

Investing

The elevated prices of financial assets have already eaten the future.

~ John Hussman, CEO of Hussman Funds

With rebalancing achieved only by directing my savings, I have changed almost nothing consequentially in my portfolio year over year. The total portfolio as of 12/15/12 is as follows:

Precious Metals et al.: 52%

Energy: 15%

Cash Equiv (short-term): 30%

Other: 3%

Most asset classes lurched off the starting line in January like Lance Armstrong. My portfolio eventually settled down and spent most of the year snorkeling slightly up or slightly underwater. In a relatively rare instance, an overall return on investment (ROI) of 4% was beat handily by both the S&P 500 (13%) and Berkshire Hathaway (17%), although nearly the entire return of the S&P was p/e expansion.⁸ A majority of hedge funds struggled to beat the S&P this year as well.⁹

My precious metals are distributed in approximately three equal portions to the gold-silver holding company Central Fund of Canada (CEF), Fidelity’s precious metal fund (FSAGX), and physical metals (Figure 1). Gains in gold (17%) and silver (8%) were offset by a horrendously lagging performance for the second year in a row by the corresponding precious metal-based equities (-10%). The metal-equity divergence began in January 2011 and continues to baffle the hard-asset crowd (Figure 2). A plot of the ratio of the silver ETF (SLV) versus the world’s largest silver miner, Pan American Silver (PAAS), is striking (Figure 3). In May I emailed a dozen gurus for opinions about arbitraging (swapping) an SLV position for PAAS. Realizing that collectively these folks controlled billions of dollars, I felt I had to move on the idea pronto (my only portfolio change for the year). After a few weeks of an overwhelming sense of superiority, gyrations eventually left the arbitrage at about break-even. I’m guardedly optimistic about the precious-metal equities, but they have been widowmakers for two years.

Figure 1. Precious-metal-based indices (GLD in green, XAU in red, SLV in brown, and XAU in red) versus the S&P 500 (in blue) for 2012.

Figure 2. Relative performance of gold-based equities (XAU in red) vs. gold (GLD in blue).

Figure 3. SLV/PAAS ratio over three years.

A basket of Fidelity-based energy and materials funds afforded 2-16%. They are represented emblematically by the XLE spider (3%) and XNG Amex natural gas index (1%) in Figure 4. I am wildly bullish on natural gas for reasons discussed in detail two years ago.² Unfortunately, Fidelity’s natural gas fund (FSNGX) foisted upon me by Cornell got crushed in 2009 and subsequent years relative to its peers. Making the right calls is hard enough without that kind of headwind. New management as of 2010 seems to be finally tracking the XNG. I keep adding to an already chunky position. Friends deeply embedded in the energy complex suggest that the fracking glut will take 2-3 years to burn off. (It is also claimed that the derivatives traders are whacking out the price discovery; what else is new?)¹⁰ A global shift toward natural gas should reward patience.

Figure 4. Energy-based indices (XLE in red and XNG in green) versus the S&P 500 (in blue) for 2011.

Cash was in a U.S. Treasury-backed money-market bunker returning 0%. I had a $25K money market fund that failed to reach the IRS taxable threshold! I could care less what risky gangplank Bernanke wishes that I walk. Buying ten-year Treasurys returning <2%, with or without your finger quivering over the sell command, is a fool’s game: I’ll take the yield hit. The bond market will eventually become a killing field. Those who are pair trading—long bonds/short brains—will get their organs harvested. This seems like a near certainty.

The most disappointing part of the year was a personal savings equivalent of only 11% of my gross income compared with 29% last year and 20-30% in typical years. Unusual expenses in the form of a year of college education, a serious violin upgrade, and very large landscaping costs don’t excuse the fact that we chose lower savings over lower consumption. This troubles me deeply. Profound austerity is not a cause but an effect, something the Europeans may be just now figuring out.

To understand my lifetime returns, you must understand two unusual premises that have dominated my thoughts and actions. First, you must become wedded to an investment. Did I just say that? Yep. You’ve got to be a true believer to resist being shaken out of good investments or suckered into bad ones. Many say it’s never a bad time to take a profit. Total hooey. Those ten-baggers—the miracles of compounding—will never materialize if you bail after 20%. Just ask the Microsoft investors who exited in 1990 for a handsome profit.

My second premise is that you have to get it right only about once a decade. One of my favorite bloggers and an e-pal, Grant Williams, illustrated how daisy-chaining four secular bull markets—Gold, Nikkei, NASDAQ, and Gold—could have produced a virtual return of 640,000%—a 6400-bagger (Figure 5).¹¹ Admittedly, this kind of luck is only found in Narnia. Statistically, somebody might have done this, although not likely in such a Texas Hold’em all-in fashion.

Figure 5. Sequential investments in secular bull markets starting in 1970.¹¹

My variant of such a sequential trek via imbalanced portfolios changed in decadal rhythms as follows:

1980-88: exclusively bonds (100%)

1988-99: classic 60:40 equities:bonds

1999-2001: cash, precious metals, shorts (minor)

2001-2012: cash, precious metals, energy, tobacco (minor)

My total wealth accumulated through a combination of savings and investment as shown in Figure 6. (I redacted the dollar amounts along the y-axis.) Avoiding 1987 and 2000 equity crashes and capturing the bull market in precious metals proved fortuitous. You can see that 2008 was the only down year. Berkshire has dropped five years since 1991. A 13-year accumulation rate beginning 01/01/00 of 11% annualized compares favorably to an annualized return on the S&P of -0.03% and on Berkshire of 7%.

Figure 6. Total wealth accumulated (ex-housing) versus year of employment. Absolute dollar values have been omitted.

I also monitor overall progress by what I call a salary multiple, which is defined as the total accumulated investable wealth (excluding my house) divided by annual salary (line 22 of the 1099 form excluding capital gains). Over 33 years my salary (actually total income) rose twelve-fold, which I can fairly accurately dissect into a fourfold gain resulting from inflation and a threefold gain (relative to starting salaries of newly minted assistant professors) due to increasing sources of income and merit-based pay raises. My accumulated wealth normalized to the moving benchmark of a rising income is plotted versus time in Figure 7. The fluctuations visible in Figure 7 not apparent in Figure 6 result from income variations.

Figure 7. Total wealth accumulated measured as a multiple of annual salary versus years of investing.

To clarify the origins of a 13-year return of 11% per year I offer Figure 8. By plunging into the precious-metal and energy sector early and avoiding all other forms of investments (S&P in particular), I was able to capture the entire hard-asset bull market. According to Money magazine’s calculator,¹² I can spike the ball in the endzone and dance. They are wrong. My ultimate target—a valid target—is to accumulate 20 salary equivalents over the next 12 years (age 70). This will require an inflation-adjusted (real) annual growth of 4-5%. Some of that will come from savings. As you can tell by the Hussman quote and discussions below, however, such gains are not assured.

Figure 8. Plot of Central Fund of Canada (CEF; 1:1 gold:silver by value), XLE, and S&P.

Thinking About Capitalism

When the blind lead the blind get out of the way.

~ First grader

I realize that is what I do—I think about capitalism. It’s not deep stuff; more like taking a weed whacker to a hay field of information. This year, however, there was something askew—something corrupting the information flow. It was the presidential elections. This is a good starting point.

Election Year

No serious person would question the integrity of the Bureau of Labor Statistics. These numbers are put together by career employees.

~ Alan Krueger, White House Council of Economic Advisers

To a news and economic data junkie, presidential elections are profoundly distorting. The news feeds are inundated by election analyses that are mundane at best and nauseating on a bad day. It’s a variant of Gresham’s Law—bad information pushes out good. The pundits are either talking about the elections explicitly or couching potentially credible news stories in the context of the election. Terrorist attacks in Benghazi mutate into Obama’s Big Screw Up. The news feeds are further corrupted by billions of campaign dollars spent to deceive us. Frank Rich, award-winning New York Times journalist, estimates that George Bush had 120 “journalists” on payroll. They get overtime and hazard pay during elections. The shenanigans go deeper.

There have been numerous accusations of voter fraud. From my recollection, it was mostly the left accusing the right (the CEO of Diebold in particular). A window opened when the mischievous computer hackers, Anonymous, did a smash-and-grab on Stratfor’s server, obtaining over 5 million emails. Stratfor provides confidential intelligence services to large corporations and government agencies, including the U.S. Department of Homeland Security, U.S. Marines, and U.S. Defense Intelligence Agency. From 971 emails released to date (by Wikileaks), we find that Democrats stuffed the ballot boxes in Pennsylvania in 2008 that went unchallenged by McCain. Jesse Jackson shook down Obama for a six-digit payoff.¹³ Emails detailing the Bin Laden capture are worth a peek.

The most insidious election year distortion may be the tainting of economic data feeds that the marketplace relies on. Data coming from career statisticians in the federal government are always suspect. The inflation numbers, for example, are widely believed to be cooked beyond recognition using corrections recommended by the Boskin Commission.^14,15 This year, however, the data massaging morphed into an all-out rub ‘n’ tug to ensure a happy ending for the Democrats.

The data from the Bureau of Labor Statistics (BLS) are especially susceptible to corruption. The Birth-Death Model, for example, estimates new jobs being created that nobody can detect.¹⁶ Apparently, the absence of data demands that some get fabricated. These embryonic jobs have reached epidemic proportions—hundreds of thousands per month—oftentimes overwhelming the detectable jobs. Curiously, no administration ever fabricates undetectable job losses.

Another trick is a very simple iterative process for reporting statistics: Step 1—Announce inflated economic statistics as good news; Step 2—correct the inflated statistics at some later date to a very deflated number, hope nobody notices, and call it “old news anyway”; Step 3—Report new inflated numbers that are spectacular improvements relative to the recently deflated statistics. Rinse, lather, repeat.¹⁷

The fibbing gets serious during an election year. When pre-election unemployment numbers plummeted by 0.4%—a monumental drop—the response was immediate, visceral, and seemingly uncontestable disbelief. David Rosenberg expressed it well:

I don't believe in conspiracy theories, but I don't believe in today's jobs report either.

~ David Rosenberg, Gluskin Sheff and ex-Merrill Lynch

Well, Rosie, apparently you do believe in conspiracy theories. Within minutes of the report Jack Welch, no neophyte to creative bookkeeping, released his now-infamous Tweet:

Unbelievable jobs numbers...these Chicago guys will do anything... can't debate so change numbers.

~ Jack Welch, former CEO of General Electric

It was an election year, however, so the goofy employment numbers morphed into a hot-button issue. Right-wing pundits accused the Obama administration of cooking the books. Left-wing pundits fired back with the shrill accusation, “Conspiracy theorists!” Few remembered that the GOP accused the Democrats of cooking the same numbers back in 2003.¹⁸

The whole sordid affair took a strange turn when Zero Hedge noted an odd mathematical relationship between the two carefully measured employment statistics:

Measured employment numbers:

fully employed/partially employed = 873,000/582,000 = 1.5000…

Gosh. What are the odds that those numbers were actually measured? I would say about 2.000…%.¹⁹

Counting those who no longer receive unemployment benefits as no longer unemployed, an accounting gimmick that became chronic once the crisis began, by no means was invented by Team Obama. None of this is new. LBJ was rumored to send economic statistics back to the kitchen for more cooking. The U-6 unemployment numbers account for that mechanical engineer who is now a part-time “deposit bottle recycling engineer and firewood procurement officer.” U-6 is a more accurate measure of the employment stress and is staying persistently above 14%.²⁰

Election year pandering may contribute to a very odd stock cycle.^21,22 If you break the 20th and 21st century into 27 four-year fragments corresponding to the election cycle—2009-2012 being the most recent—and average the returns, you get what is called the Presidential Election Cycle (Figure 9). What causes this cycle? One cannot exclude the role of friendly central bankers (sado-monetarists) juicing the markets. Mitt Romney, when he promised to fire Bernanke, may have sealed his fate.

Figure 9. Four-year election stock cycle throughout the 20th century.²¹

Maybe the four-year cycle in Figure 9 is a statistical anomaly and, even if real, we may not have a clue why it occurs. Nevertheless, it suggests that “Sell in May and go away” has a longer wavelength variant: “Buy the midterm and sell the Presidential.” Urban legend or not, 2013 is looking dangerous.

Events

Dan, quit embarrassing yourself.

~ Caroline Baum of Bloomberg Tweeting to a money guru who claimed that Hurricane Sandy will be stimulative

Acts of God—force majeure—tantalize market watchers and sophists alike but seem to have little effect on even the intermediate term: Economies and markets just keep marching forward. Katrina took its toll and irreparably altered lives, but it primarily illustrated government doing a heckuva job. Hurricane Sandy also exacted revenge against the civilized world (and New Jersey). It may portend things to come, should global warming live up to its billing. There is no doubt that corporations will use Sandy as an excuse for anything and everything. Q4 and year-end reports will have more Sandy-derived debris (including kitchen sinks) than dumpsters along the Jersey shore. Sandy also ushered in like clockwork the absurd claims that Frédéric Bastiat was wrong and that smashing windows and destroying infrastructure is good for the economy. Sandy will increase the GDP, but that is not economic gain. Sandy will be a bump in the road for the nation at large.

As I write this paragraph, cremnophobia—fear of cliffs—is sweeping the land. I submit that base-jumping the Fiscal Cliff may be exciting but doubt it will be some proximate trigger that causes cascading failure. The move to substantially greater austerity seems inevitable and likely to be painfully protracted—think Japan. The Fiscal Cliff would be a fumble on our own ten-yard line. It is just one down in a very, very long game. Regardless of outcome, this will be a topic for my 2013 Year in Review.

Broken Markets

A strange game. The only winning move is to not play.

~ The W.O.P.R. computer on “Wargames”

Since Cro-Magnon Man began trading flint, furs, and women, there have been nefarious activities in the marketplace. Painting the tape—moving markets at the end of a quarter to dupe customers—is tolerated. The pop icon Jim Cramer spilled his guts describing how players of even modest means can push prices around.²³ I bet Jim would like a do-over on that video. Options expiration week is always exciting, as the options dealers purportedly move the equities to minimize payouts on the heavily leveraged options to maximize pain on the plebeians. Insider trading is a death sentence for a nobody, but is a misdemeanor for the big bankers. When caught, the going rate on the punishment of investment banks is a 3-5% surcharge on the profit from the illicit trade. One can only imagine how much it would cost us in punitive rebates if the criminal behavior caused a loss.

In general, however, blaming markets for your losses is a fool's game. Nonetheless, something has changed. The Federal Reserve—the Fed—has explicitly stated a vested interest in both the magnitude and direction that markets move, abandoning all willingness to let markets determine prices. These guys are playing God, taking full possession of our hopes and dreams. In analogy to global warming, their loose monetary policy jacks up prices with markedly increased volatility and enormous social costs. Kevin Phillips’ 2005 American Theocracy

This is a companion discussion topic for the original entry at https://peakprosperity.com/2012-year-in-review/

debu · December 22, 2012, 5:33am

Thank you for this, David Collum, it is, this year too, a real tour de force.
I do have one small quibble with footnote no. 255 which does not seem to substantiate the point it is meant to.

mobius · December 22, 2012, 6:08am

Great read David. A great way to start my vacation (not shocked by the content but I was looking for an upside somewhere. My oh my, I have to keep reminding myself to…♫…Keep on Smiling…♪♫.
Best wishes this holiday season,

Joanne.

gillbilly · December 22, 2012, 4:27pm

Great article/book/blog. I'm about half-way through this. It may take me the rest of 2013 to finish it;-) So much of it seems right on the mark and jibes with what I see, but I don't take the conservative anti-government stance since it is one of the only mechanisms the "little people" have to balance the extreme concentrated power in the private sector, at least in theory. Corruption permeates both the public and private sector and the system is reliant on this corruption. The government's move to nationalize the banks in 08 is akin to the same move that Durant, Liverpool, etc. did to try and save the markets in 1929. The Fed's monetizing the debt is again a follow up to this. How long this will last? Who knows. It really does looks like 1920s again, but on a global scale, and with a longer trajectory.
I'm glad you brought up the issue of the Boskin Commission. This is one of the reasons why I've argued we can't rely on the GDP as a barometer. We have a fair number of engineers that visit this website, and I would like the issue of planned obsolences discussed in a meaningful way. Efficiency in regard to revenue streams and profits has been the direction of product engineering for so long that it, like everything else we find disturbing, is a structural component of our way of life and economic models. The paradox as I see it is that for a company to actually produce long-term sustainable products would most likely render the company obsolete within the current model of market competition. How do we move to new models that actually make sense within a world where all "systems," eco or ortherwise, are in a state of decline and our finite resources are reaching or have reached their financial limits?.. Not sure, nor do I think anyone else has the answers.

Thank You

rje · December 22, 2012, 4:48pm

…for me to say what I need to say. Besides I have burned out my left eye recently that was injured some time ago, and have been ordered some rest. No big deal Folks, it is what it is. More intrusive tests will be after the Holidays.
Merry Christmas Folks.

It is strange for me to write this in such a personal manner that I am surprised that I will attempt some personal reflections.

PP has been a terrific and wonderful place for me as a student to come and learn. I can honestly say that the world around me is so much more meaningful for what I have learned as a student here. Not all information gathered has come from this site but it has led me to so many places for truly inspiring and gifted teachings.

Jim H. and Arthur, Wendy and Jan and so many others with their special gifts have been a learning I could get nowhere else.

Arthur is a thrill for me, he takes me on an adventure every time I read him. He on his Yacht (insert Noah's Ark if you like), and these are my visuals of Arthur.

Jim H. has taught me more about Gold than I cared to learn but learn I did. Owning Gold because it makes perfect sense seemed enough for me but the value of Gold was learned, and is why I understand keeping the physical is paramount. Jim finally pounded this into me.

Wendy and Jan and other wonderful and intelligent Girls here at PP have been inspirational and valid in so many of their thoughts. I truly appreciate the angles they bring. I have one of them Lady's in my home. I know this I am blessed and we as a group are blessed to have these Lady's writing here.

Chris (Professor, Teacher) and Adam, you provide a format that is like no others. anywhere. Where else could I get a truly diverse group of intellectuals to learn from than here.

Mark Cochrane is a blessing and he chose this site to express himself. Of all the people I want to meet some day it is this gentlemen. He is my current day Jules Verne, an adventurer, a walk the walk, talk the talk my kind of Man. He is amazing to me. He's Admiral Perry, Charles Darwin, Captain Ahem to me, he allows me to go and dream. This dude is solid, so very smart, and I really hope to meet him some day.

There are others, and fact is all of you who post your thoughts are teachers to me. Not everyone do I agree with but that is the point of learning and maturing so all are valid to me. I read everything everyone writes and that is the point right, to be respectful enough to hear others points of view. I may not agree as I have said but someone does and that makes your voice important.

Again, the most important value that Chris and Adam should be very proud of, that they have given any of us a voice with very few restrictions, and these restrictions are not a hinderance as the only control they want is that we proceed as Lady's and Gentleman. I am in full agreement with that.

So, I wish you all a Very Merry Christmas, and thank you all for the time spent here for the last years.

My only regret is I wasn't able to get Bill Freehan's signature so that I could complete my list of (humble) items to send to a fellow Detroiter in Jim H. Jim, you will have to wait as I will succeed in getting his signature. So, this is one of those "good things come to those who wait" type messages.

Dr. Martenson (Chris), like it or not but your vision happen to coincide with my desires to learn, and you are an amazing teacher. I must get on your nerves sometimes but as my grandson's would tell me if I was hurt or complaining, "suck it up Lucy". They learned this from their Dad, and he learned it from me, and I learned it from my Dad. I wish I wasn't such an influence myself sometimes because some phrases you don't want coming back at you sometimes. Bottom line, it is my intentions to learn everything, and I see no reason not to follow you. The gift to teach is not processed by many, and you my friend walk in rarefied air, you really do.

Adam, I just dig you my Brother. It really is as complete as that. You remind me of my little Brother Tony (51 years old), intelligent, giving and I suspect a little mischievous. He is my favorite. I mess with and bother him too. We laugh all the time, hard and with such strength that the room booms when we get going. Just so solid are my thoughts of you.

Christmas Menu Folks:

Leg of Lamb Armenian Stew

Kowalski Ham that exist no where on Earth

Scallop potatoes with mushroom and cream of celery sauce

Green Beans in mushroom sauce

Sausage in a blanket

Spinach in a blanket

Artichoke dip that makes a great sauce over ham or anything

The absolute best Chicken Wings made with Mad Dog 20-20 (to die for, seriously)

Apple, Cherry and Pumpkin pies made from Michigan fruits

What are you having?

After we finish dinner then it will be time to pass the gifts around that Santa has left under the tree. Admittedly Grandma Angel went a little silly for her granson's but we believe that the kids today have to much pressure placed on them, and to gift them useful things are our perogative. They will be happy NO MATTER WHAT and it isn't gifts that are the most meaningful part of their lives either. It's the love they receive and they have this in spades.

Finally, please enjoy your families and feel great pride in your works as all of you understand in various degrees what our future holds and from my point of view you are all right to be more Prepared and become more Resilient.

God Bless and have a safe and Happy Holidays

Ho! Ho! Ho! Merry Chrismas

BOB

mark_bc · December 22, 2012, 9:05pm

gillbilly said:

I don't take the conservative anti-government stance since it is one of the only mechanisms the "little people" have to balance the extreme concentrated power in the private sector

I agree. I find myself increasingly frustrated by the polarized left versus right debates that end up going nowhere, they just divert our attention away from discussing the real problems. I find that there are good things to be learned from each side of the political spectrum (which is why there are true believers on both sides), and for that matter from every single belief system in the world, whether it's religion, politics, or whatever. That's why this site has provided insight, but ultimately its ability to analyze the economy is limited by its libertarian bias. It seems that the analysis of "the economy" from a technical and ecological standpoint (ie, energy) here goes as far as can be gone up until the point where that analysis might start to run contrary to some aspect of Austrian Economics. Then the analysis stops. For example, supposedly everything comes back to energy (hear hear!), so how about analyzing how energy actually works (a discussion of the laws of thermodynamics would seem to be not only appropriate, but essential), how it moves through ecosystems and then ultimately our economies? The problem is that when one does such an analysis, Austrian Economics loses much of its glamour (I'll admit, I too was once captivated by Austrian Economics, for a few short months before I came to my senses!) So, while this site recognizes that everything should be seen through the lens of energy, the most indepth discussion of energy I've seen here (maybe I haven't looked enough) is that "we burn stuff and get energy". Well, there's a lot more to energy than that! And the irony wrt David Collum's article is that energy actually moves through the economy mostly via the vector of complex carbon molecules, so when seen from this perspective, it becomes apparent that Libertarianism is not consistent with organic chemistry! (to be clear, I thought it was a great article; I just don't subscribe to the libertarian perspective) I can somewhat empathize, however, since doing such an analysis, relating thermodynamics to economics, would require moving beyond the obvious libertarian roots here. To be fair, maybe it's easier for me to separate politics from science as I'm not American and I haven't been brought up with many of these ideals being imprinted from an early age. One of the most popular rallying cries you'll hear from the right is this assertion that government spending is out of control. I find it strange that I hear this on this site because one one hand, in the Crash Course it is explained that the monetary system is debt based and by design must grow exponentially; that's just the way it is. Therefore so must debts. But then at the same time, on this site you'll hear endless wailing about how government spending is out of control. Well, I'm wondering what other option is available? Since we're all enslaved by this private-sector monopoly monetary system, including the government, then I'd like to hear some feasible suggestions of what we'd do otherwise (beyond a revolution and a completely new monetary system, which I'm hoping for of course)! Debt and spending have to increase exponentially! Actually, when you do as this site says, and subtract out real inflation via Shadowstats, it becomes apparent that government spending has been decreasing for over 20 years. And in proportion to GDP, it's barely gone up at all. It maintained 35% of GDP for the 30 years leading up to the 2008 crash, and then it increased to 43% in response, to prevent a total implosion of the private sector. Now, one could argue about whether that last jump to 43% was justified, but the economy was well on the road to ruin before 2008. I recently wrote a piece about how government spending is not really increasing, and cannot possibly be blamed for the problems we're seeing in the economy. Since you seem to be keen on hearing what engineers have to say, you may find it to be of some value: Is the US Government Really Spending Its Way to Oblivion? How many times do we have to hear about how we can't fund pensions, that the unfunded liabilities committed by government could not possibly be honoured in the future? When one does an analysis based on dollars, it's obvious it's not going to work. But the monetary system has totally detached itself from reality and therefore has no longer has relevance. So I'm wondering why we should even be bothering with such an analysis? The monetary system's going to implode so let's move on. Let's instead analyze through the lens of energy. From this perspective, it becomes apparent that there's more than enough wealth available in the US to allow the Baby Boomer demographic bulge to retire with reasonably comfortable government-funded pensions. The problem we're seeing is, as gillbilly says, the emergence of extreme concentrated power. And this entails extreme wealth concentration. Since America's real wealth basically boils down to its farmland and energy resources, the problem is that the 99% don't have access to ownership of America's resources anymore. How many of you own a significant piece of America's farm belt? Who actually owns it? What percentage of the American population owns 80% of America's farmland? How has that changed since 1900? Those stats would be very revealing. The economic system has become broken in how it distributes wealth (ecological productivity) to the 350 million people living in North America. It is based on an old model (40 hour work week and perpetual economic growth) that no longer has relevance to the real world because of 1) technological automation and free-trade outsourcing throwing people out of work, and 2) stagnation and reversal of economic growth due to Peak Resources, again throwing people out of work. In this case, wealth concentration becomes extreme because no new wealth can be generated for the middle class. This assertion that we can't provide pensions to the elderly or medicine to the sick is all nonsense. Certainly, there's not enough oil left for seniors to be out driving their cars everywhere, but they generally don't do that anyways... Because per-hour productivity in the agricultural sector has gone up many multiples since the Green Revolution, this provides ample opportunity for people be working less hours and eating the same amount of food. America's farmland is going to remain productive for a fairly long time, so therefore there are enough resources to enable the government to provide pensions to the elderly so they can continue eating well. And America still has lots of natural gas and coal, so there is enough wealth left available to provide pensions to the elderly so they can continue heating their homes and using electricity, for at least the next 50 years. Any suggestion to the contrary is not looking at things through the lens of energy. If the economy can't currently provide these basic social services, then there's something wrong with how the economy is structured. The problem is that the economy has morphed into two sectors now. It used to be, back in the early 20th century, that wealth was reasonably equitably distributed. That's why pensions could be funded by corporations or government taxes. Now, due to extreme wealth concentration, we are seeing the emergence of the same type of scenario that our ancestors centuries ago fought bloody revolutions to escape from as wealth concentrates -- the productive assets become owned by a select few, and the rest of society exists hand to mouth as serfs to the owners. The reason the economy can't currently support the elderly or the sick is because the 99% have no wealth. The real wealth is owned by the 0.1%. Increasingly now, serfs serve serfs. And serfs serve the elites too. And because tax rates to the wealthy are so ridiculously low, 300 million serfs are now supporting the economy. Since serfs own no wealth, then how can the economy retain any value? And somehow libertarians manage to argue that decreasing taxes to the wealthy is going to somehow help alleviate this wealth concentration?!? It's truly baffling.

adam-taggart-2 · December 22, 2012, 9:06pm

You can watch Dave summarize the key points of this Year In Review in his interview with Lauren Lyster on RT.com's Capital Account:

rje · December 22, 2012, 10:04pm

You commented and said something that I do agree with:"The problem is that the economy has morphed into two sectors now. It used to be, back in the early 20th century, that wealth was reasonably equitably distributed. That's why pensions could be funded by corporations or government taxes. Now, due to extreme wealth concentration, we are seeing the emergence of the same type of scenario that our ancestors centuries ago fought bloody revolutions to escape from as wealth concentrates – the productive assets become owned by a select few, and the rest of society exists hand to mouth as serfs to the owners."
What is so unbelievable is they saved their collective asses by stealing from the Middle Class, the Old and Savers, and this was preceded by selling the Middle Class with every form of enticement to Buy, Buy, Buy! Look, we are all responsible for our actions, and I accept that we should continue to accept responsibility. That would mean however that so many Rich and Elite would have had to jump from tall buildings, and that was the only tragedy in this story. They didn't have to but the Middle Class may have to, and those who were responsible to boot. That isn't right Folks, it isn't.
This BONUS structure that is in place must die on the vine and quick. I say recapture every dime since this system went into place because it was punishing to our economy, a rip off for a fact. So much we should do that just getting started on anything is what is so hard right now. My gosh, we are trying to cut just 1.2 Trillion from our economy and this represents a very small fraction of what will be needed. We can't get it done, and I dare say we haven't even begun serious dialogue yet. I hope we reset and go through whatever pain and is necessary.
It is written that the Rich have it all now as a Deflationary event will allow them to buy everything on the cheap because they have all the cash, and with Inflation they get everything because they hold the Gold so the people will have no choice but make their feelings felt and I believe history shows that another document was eventually signed called the Magna Carta/ Constitution, and history may not repeat but it will rhyme are my thoughts.
Thank you Adam for the interview at Capital Accounts.
BOB

rje · December 23, 2012, 1:17am

…I thought of you when I seen this as well as my Pops as James Brown had NOTHING on what my Pops could do on the dance floor. From the "Song and Dance Man", (that's me) check this out:Merry Christmas Too and to all you hold Dear.
BOB
http://www.youtube.com/watch?v=XgDrJ5Z2rKw

ao1 · December 23, 2012, 7:16pm

I sent this article out to everyone I know. Here's what I said about it:

"Title: the best article I've read this year

This article is simply superb. If you read nothing else this year to understand the economic, financial, and political state of the country and, indeed, the world, this is the article you should read. It's long but densely packed with cogent information and a touch of wry humor. Its author is David Collum, an organic chemistry professor at Cornell who, to paraphrase him, began studying this entire area to ensure his retirement didn't consist of subsisting on ramen noodles. I can so identify with that motivation since I've charted a parallel course. As I mentioned last year when I read his 2011 Year in Review, I feel that we are philosophically, identical twins, separated at birth. The 2012 Year in Review is even better."

Thank you David for sharing this information with us and keep up the excellent work.

cmartenson · December 23, 2012, 10:34pm

…then this one should be it!
It is simply distressing to see all of the various law breaking and rule bending that the centralized power brokers engage in and/or extend to themselves. One set of rules for them and a very different and much more exacting set for everyone else.

I will take some pretty strong disagreement wiht Mark_BC's assertion that this site is somehow promoting one political party over another. There's no Libertarian bias here that I am promoting, or Democratic, or Green, or Republican. None of the above, please.

I will agree that there are plenty of resources ot do plenty of very clever and humane things with, such as supporting ourselves en masse into retirement or building out the next energy infrastructure. However, the door is closing slowly as we squander our slowly ebbing net energy allotment on attempting to preserve the status quo.

For a very complex set of reasons the status quo is being preserved at all costs and those include regulatory and political capture by the monied interests, intertia, a simple lack of strong and effective leaders with good morals, and some really excellent propaganda/messaging brought to you by some very clever and self-interested parties.

However, at a higher level if you run any compounding interest money system long enough the end result is that one person or entity ends up owning everything. Concetration of wealth is a feature of the system, not an aberration, and very active wealth dispersal mechanisms are needed to keep that spread out some. But I don't really endorse that either because I am not interested in figuring out ways to extend this money system.

It is badly out of phase with reality and it is very destructive…it may have served us reasonably well up to this point, but it's not a workable model for a world of limited and limiting resources.

denny-johnson · December 24, 2012, 12:49am

[quote=cmartenson]For a very complex set of reasons the status quo is being preserved at all costs and those include regulatory and political capture by the monied interests, intertia, a simple lack of strong and effective leaders with good morals, and some really excellent propaganda/messaging brought to you by some very clever and self-interested parties.
[/quote]
Jesse had some comments on this:

A credibility trap is when the regulatory, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform or even honestly address the situation without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves. The status quo tolerates the corruption and the fraud because they have profited at least indirectly from it, and would like to continue to do so. Even relatively honest reformers within the power structure are susceptible to various forms of soft blackmail and coercion. And so a failed policy and its support system are almost self-sustaining, long after it is seen by the people to have failed. In its failure it becomes counterproductive, and an impediment to recovery in the real economy. Admitting failure is not an option for those who receive their power from that system. The continuity of the structural hierarchy must therefore be maintained at all costs, even to the point of becoming a painfully obvious hypocrisy.

gillbilly · December 24, 2012, 4:17am

I gave your post a thumbs up MarkBC because your article on your blog is very good in dismantling some of the main polarized positions! I really appreciate your statements about the gap that lies between engineers and financiers. I would go further to say that many more people from other backgrounds could give engineers and financiers perspective to help bridge this gap. I also understand your feelings about the libertarian slant, what with some of the homage to Ron Paul by posters. But I also agree with Chris that although the website may attract all political leanings, he goes to extraordinary lengths to not push any political agenda. I think because of the nature of the site it may attract a more libertarian mindset, but from what I've read in Chris's writing I think he's pretty balanced in seeing the trade-offs between the liberty of the individual and the rights of a mass-society, not to mention the contradictions that exist within this dichotomy. The site also offers so much more than the state of the global economy.
In the end you both come to the same conclusion that the monetary system by its inherent structure will fail. What I also appreciate is that you both also realize, as you write is "that the whole system is falling apart, from all sides." This is why I continue to run into paradoxes (seems to be my new favorite word) and/or contradictions in whatever direction I turn. It's not just economics and politics, but environment, society and culture, philosophy, etc., at least from my experience within the modern technological world…I am only one person with limited perspective, but we seem to be bumping into walls of constraint no matter which way we turn. How can one talk of individual human rights without discussing the environment and the rights of other species? How can we talk of the freedom of the indivdual without acknowledging the contradiction of economic and societal models that are based on mass collected data (a process of standardizing the individual - or subtracting the individualness out). Are we not reduced to data in these models? Even the language itself changes in economics and business, we are "capital" not humans. It's similar to military language, a language used to psychologically distance themselves from the devastation of their actions. I can't help but feel that the system has "taken over" and that even those at the highest level would acquiesce that they have very little power in changing things. Laws and policy have been written…so let it be written so let it be done… if you get my drift. It will change, either a slow decline, or heaven forbid, a quick and devastating turn.

So I continue day to day doing what I can do to bring awareness, participate in whatever way I can, build personal resilience, and "think globally and act locally." (a phrase coined by Ellul) I also try to remain optimistic and put my faith in things that lie outside the system.

Speaking of local (and the system)…Chris, interesting to note, FERC is beginning the 5 year relicensing process of 5 dams throughout the Mass/VT/NH (Turners Falls, Northfield Mt. Project/Pump Storage, Holyoke, Vernon, and Bellows Falls), all controlled by either GDF Suez or Hydro Quebec. I went to the first meeting that the CT Rivershed council held back in September. Ironically, I was the only person at the meeting that wasn't representing a non-profit river related association. This is a chance for local citizens to make their voices a part of the relicensing and participate in shaping energy policy for the entire northeast. I'm pressing for local towns to become interveners in the process so that concerns (environmental, political, economic, or otherwise) can be brought to the table. Please spread the word.

Bob, thanks for the James Brown. I guess we see where Michael Jackson learned his moves. What is that crisco on the floor? You are the song and dance man!