Economic Detox

So what is an Economic Detox? Raw green vegetables consumed through a straw is the food equivalent. Think diarrhea. I know what you are thinking, “yuk”. But as Wall Street has learned the hard way, we have no choice in the matter. Our economy is detoxing whether we like it or not; dropping our excess weight in order to regain our balance; flushing our obese corporate and government costs down the toilet in support of the long-term prosperity of the quicker, lighter, faster and more profitable Mom and Pop entrepreneurs.

That doesn’t sound so bad now does it? I can assure you that just like there are certainly benefits to drinking raw green vegetables, an Economic Detox strengthens community, drives innovation, stabilizes trade and employment, provides essential economic education and slows down time, all out of economic necessity. However, a detox also requires discipline and some level of sacrifice in order to come out the other end leaner and meaner than before. 

So what does that mean for the economy? Well, the same virus that has exposed the inefficient nature of our financial sector will soon inflict itself on our obese corporations with a domino like effect. These corporations were built to scale-up while increasing their fixed costs such as lease payments and debt levels every step of the way; without regard to ever having to scale down. Walmart, Monsanto and McKesson, to name a few, all operate on super risky 1-5% profit margins after consuming billions of dollars of revenues. In contrast to their more nimble Mom and Pop competitors, they can not get smaller, make less widgets or afford to take a strategic vacation. 

And for better or for worse, these “so-called” monopolistic communities, symbiotically rise and fall together. For example, the recent failures of Linen N’ Things and Circuit City will negatively impact the buying and manufacturing power as well as the retail foot traffic of their closely tied corporate brethren, and one by one their big box retail neighbors (think struggling regional malls) and related raw produce suppliers (i.e. Dole and Tyson), transporters (i.e. Fedex) and manufacturers (think China) will also suffer losses and eventually fall as well. 

As the deadly combination of lower sale prices and less volume eat their highly sensitive income statements alive, they will collectively lose their ability to buy and operate the only way they know how – on mass production scale. Land and labor prices will continue to deflate, yet the obese corporations will be unable to do anything about their huge fixed costs (that’s why they call them “fixed”); and with it the erosion of their slim profit margins (did I mention they were only 1-5%) will force them to close. In summary, the death of the corporate monopolies and birth of The New Game is coming soon to a small local theater near you (For now, I invite you to read the book).

So what are the politicians to do? Nothing. They will be quick to bow to the dominating powers of the free markets as their hugely inefficient, bureaucratic, and socialistic operations, which have grown to be the largest employer and lender in the U.S., as well as the largest borrower in the world, will also prove too fat for the economy to digest. The deadly combination of falling income taxes (revenues) and rising interest payments (expenses) will erode the “non-profit” income statement of the big business of big government. The smartest politicians will wisely support the mom and pops by being ones themselves. 

On that note, don’t be ashamed to go bankrupt since basically every country in the world that borrowed money internationally while ignoring their asset collateral (i.e. gold standard) will soon be unable to pay their global debts on a current basis (except maybe countries that are exclusively food exporters like some Caribbean Islands which may see the value of their asset collateral rise). 

But don’t worry about credit, because if everyone has bad credit, its like no one has bad credit, right? The dollar as well as other closely related paper currencies will be much less valuable on an international trading level as an over supply of dollars flood the market to create the perfect inflationary storm. China, Russia, and the Middle East among other large holders of U.S. currency reserves will soon be forced to spend their large dollar savings to defend their own buckling economies at the same time that the U.S. is seeking to borrow trillions of dollars of new money to fund our ever growing socialistic activities. In other words, as supply of dollars will be increasing, demand for dollars will be decreasing. The net result is that interest rates will soar to 20%+ as the useless paper currencies will be worth less and less in relation to economic essentials such as food and electricity.

You are probably asking, so where do I put my money during all of this change? Gold should be a stable currency due to its scarce nature; which is in direct contrast to easily manufactured paper currencies. However, this will be a short-term phenomenon as even gold will yield in value to more truly useful currencies such as electricity and food. In terms of prices, such essential items as food and electricity will rise dramatically; and luxury items (i.e. big homes and flat screen TVs) will surely be discounted again and again. 

The real cost to transmit electricity over long distances will veer its ugly head as the central power plants (i.e coal) will also lose their ability to operate on scale and thus their costs per unit (i.e. kilowatt of electricity) will rise perpetually. We are already witnessing this. For as electricity demand is starting to falter, the utilities are being forced to raise rates to cover their huge fixed costs such as long distance transmission and maintenance thereof; which again were built to scale up, without regard to ever having to scale down.

So now we come to the raw green vegetable part of the Economic Detox. For there must be something we can do to gain our economic balance back, right?

First, Mom and Pop entrepreneurs must keep their heads down to weather the storm. For as the monopolies get taken out at the knees, the Mom and Pops should flourish (assuming they have minimum debts and relatively low rent in energy efficient locations) from less and less global competition and more and more local symbiotic competition. Yes, the local hardware store, suburban dairy farm and local fruit and vegetable stands are back; and with it a bit of pricing power over their landlords as well as their customers; and true sustainable communities built together from the bottom-up will emerge once again.

But there must be another silver lining in the death of the monopoly. You know, a way for investors to ride the coat tails of the rising entrepreneurial communities, recent technological innovations, and most current economic education. Well, the combination of increases in electricity prices (numerator) and lower prices for renewable energy technology (denominator) make investing in renewable energy technology and its labor force the greatest returns for the lowest risk in The New Game.  

“Decentralized Power” or “Distributed Generation” of renewable energy feeds our most competitive Mom and Pop entrepreneurs. And in return for the renewable energy utilities, these entrepreneurs provide stable and secure dividend payments to our starving retirement and pension funds, which naturally gravitate the majority of their investments towards the most conservative and “hottest” risk-free rate of the local sun. 

Such an investment in renewable energy would not only be seeking relatively high returns, but also to lower our cost of living by stabilizing our future cost of energy; a strategy that our current economic system is so obviously missing. For what is a financial return without attacking the other half of the equation: the future cost of living? Our retirement funds are unfortunately finding out the answer: irrelevant.

No longer are such branded terms like “Treasury” or “Money Market” enough to convince the new generation of savers to invest their hard earned money with people (i.e. banks) they never met in exchange for an “IOU” and no collateral. Due to our most recent hard financial lessons, we are now seasoned and experienced economists that are aware that the true risk-free rate of our new economic system, by definition, must be renewable (i.e. The Sun), and must be locally asset secured (i.e. solar panel), with a proven and trustworthy yield (i.e. 4 hours of sunshine a day). Yes, whatever the cost, which is decreasing, and whatever the yield, which is increasing, renewable energy is the the only true risk-free rate of any economy. 

That being said, the auto industry must make a 90 degree turn towards the energy efficient consumer of tomorrow. Trains and renewable energy technology will be what’s popular in the future, not cars. I really hope I didn’t have to tell you that. With estimates of 1.2 cars per U.S. licensed driver and unused car inventories increasing every day, why in the world would we want to make any more cars? So if Detroit and other want-to-be manufacturing cities of tomorrow have any chance for survival, they will jump into these industries head first. The same goes for Wall Street, as renewable energy mortgages will be sure to revive Wall Street and what’s left of their ailing mortgage industry. The construction and steel industries among others must also follow suit; and we can all thank Silicon Valley for already being there ready to innovate. With skyrocketing electricity prices and lower renewable energy technology prices upon us, I am as psyched as you should be to be alive during what promises to be a renewable energy revolution (is there any other kind?).

I don’t think I need to scare you, but just in case you think this economic crisis is going to just go away, realize that in a consumption driven economy, which ours’ certainly is, unemployment is contagious. To explain it, every time our number of unemployed increases, which is now happening, our consumption in turn decreases, which in turn forces a further increase in unemployment. And there is no monetary or fiscal “stimulus” to stop such a vicious cycle. 

So are we finished with our Economic Detox? Can we flush the toilet now? Honestly, you can never be sure with such a bad case of diarrhea. And I can assure you that this diarrhea will continue unless we truly acknowledge what is good for us and act on it. For every time we think we are finished or at a “bottom”, we will soon be sprinting back to the toilet preying to make it in time, hoping the seat is down and worrying if there is enough toilet paper. 

In short, let’s be sure to eat our raw green vegetables.

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