Musings Report #51 12-21-13 Austerity Isn't Bad--It's Essential

You are receiving this email because you are one of the 400+ subscribers/major contributors to www.oftwominds.com.

For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.

Austerity Isn't Bad--It's Essential

Unsurprisingly, the status quo position on austerity (real or imagined)--that it's terrible, horrible and bad--is precisely backwards: austerity is one of the two essential motivators of strategic planning, prioritization and decision-making. (The other is crisis.)

By austerity, I mean a broad-based definition: when resources are not up to the demands of the status quo. In other words, austerity is a relative term; for the household accustomed to a lifestyle that requires $15,000 a month, a cut to $10,000 a month is a drastic austerity budget.

Resources include non-financial assets such as a functioning political system, a values system that rewards initiative, social capital, and so on.

For a military machine accustomed to expanding budgets and a $700+ billion annual budget, a cut of $50 billion is viewed as extreme austerity--even though it wasn't that long ago that the Pentagon budget was well under $500 billion.

An insightful article in the latest issue of Foreign Affairs describes how austerity has forced the U.S. military to realign resources with goals via strategic thinking: How Budget Crises Have Improved U.S. Strategy.

When there is plenty of money for every program and every response to every potential threat, money is thrown around without regard to strategic planning, which is the process of assessing and ranking risks and threats and formulating a strategy that prioritizes resources and goals: in other words, smart planning.

the author of the essay neatly summarizes this process:

"In World War II, the paucity of the resources on hand actually forced U.S. policymakers to make tough but smart choices. A combination of austerity and crisis helped forge a core strategic concept, a new threat assessment, an appreciation of the indissoluble links between interests and values, and a calibration of priorities."

In my view, the dynamic of austerity coupled with crisis being the key driver of smart planning is scale-invariant, meaning that it works equally well on individuals, households, communities, organizations, enterprises and nations. All need strategic thinking to avoid squandering resources on impractical, low-yield distractions that have been jumbled up with key priorities by muddled, ideologically tainted thinking.

Simply put, when you have enough borrowing power to fund everything that every constituency wants, you are ill-prepared for crisis. Muddled strategic planning leads to a mass of competing priorities, none of which are integrated in a grand strategy with clear goals, priorities and planning.

In a previous Musings, I discussed Japan's muddled plan for the Midway campaign in the Pacific theater of World War II, which was a convoluted political marriage of competing Army and Navy plans. Rather than clarify the goal and prioritize the means to accomplish it, the Japanese high command attempted to please major constituencies by combining their ideas and goals into a complicated tactical plan.

The end result was a military catastrophe that essentially ended Japan's hope of prevailing: four aircraft carriers sunk, the cream of the Navy's carrier pilot cadre lost, and a retreat from expansion to defense.

This failure to force clear strategic thinking was the direct result of Japan's string of victories and the hubris of believing available resources could magically accomplish any goal conjured by central command.

That is a precise analogy to the U.S., not just militarily, but in every aspect of its society and economy: "no limits" on borrowing and money-creation mean no strategy, no priorities, no planning and ultimately, no clear thinking.

This perfectly captures the essence of the Affordable Care Act (ObamaCare) monstrosity: a program intended to be all things to all constituencies is a muddled, complicated mess doomed to catastrophic failure on multiple levels.

Austerity and crisis are not bad--they are the essential dynamics that force smart thinking and the re-alignment of resources and strategic goals. Trying to do everything for every politically powerful constituency ends up failing everyone in catastrophic fashion.

Summary of the Blog This Past Week

A Note of Gratitude to Readers and Correspondents

The Case for a Crash in 2014/2015

Do We Even Need a Banking Sector? Not Any More

A Quick Guide to What's Fake: Everything That's Officially Sanctioned

What's Real? What's Fake?

I think my series on what's fake and what's real is one of my better efforts this year. It goes right to the heart of what's wrong with substituting perception (everything's great!) for reality.

Best Thing That Happened To Me This Week

Made it back to Hawaii in one piece.

Market Musings

A longtime correspondent emailed me last week about the apparent contradiction between a Federal Reserve that has had the power for 5 years to counteract any decline and my call for a market decline in 2014: why would the Fed allow a market it has pushed higher for 5 years to ever fall?

It's an excellent question, as it summarizes the key question: is there any limit on "don't fight the Fed?" Can the Fed push assets higher essentially forever? And if so, why did it fail to do so in 2008?

Alan Greenspan's recent bleatings in Foreign Affairs, Why I didn't see the crisis coming, offered one primary reason: the Fed's models failed to accurately account for "tail risk," otherwise known as things that supposedly happen only rarely but when they do happen, they're a doozy, and guess what--they happen more often than statistical models predict.

I would add that tail risk is a fancy name for unintended consequences of opaque central planning. Greenspan had more in common with failed Soviet planners than he would ever admit.

Greenspan also confessed that the Fed overcame the meltdown by creating and lending unlimited sums of money--yes, unlimited. Various accountings after the fact identified $16 trillion in direct Fed backstops and loans to global banks, but implied or indirect subsidies, backstops and lines of credit added tens of trillions of dollars to the total ledger.

This money spigot has remained open for 5 years, and a tiny reduction ($10 billion a month) is all the Fed dares to do lest the global markets melt down again.

So are there no "tail risks" or unintended consequences to leaving the money spigot fully open for 5 years running? Those who believe the Fed's record of 5 years of rising asset prices speaks for its ability to drive prices higher for another 5 years. I tend to think there are tail risks present of the same sort that Greenspan et al. failed to identify (or grossly under-estimated) in 2008.

I tend to see the financial markets as a Fed-farmed monoculture that is sustained solely by massive quantities of financial poisons and fertilizers. The Fed claims this monoculture is as resilient as a market-based ecosystem, but this is simply not true: monocultures are exquisitely vulnerable to tail risks such as bacteria or fungi that are impervious to the poisons intended to kill all risks.

Monocultures may be productive, but they remain fragile and dependent on massive applications of poisons and fertilizers. It seems to me the likelihood of some tail risk rising out of nowhere is rising. Indeed, the very confidence in central planners, i.e. that the Fed is now the ultimate power in the Universe, is a prerequisite for collapse.

From Left Field

How did nuclear submarine Captain David Marquet take over the worst performing ship with the lowest moral in the US Navy and turn it into the highest graded ship ever? (via G.F.B.) an excellent primer on leadership...

The surprising truth about what motivates us (10 min. video, via G.F.B.) extremely important program on autonomy, mastery and purpose... when the profit motive becomes unmoored from purpose, things fall apart.

The Agony of Instagram -- Instagram Envy - somebody has posted a photo of something "perfect" that we want--arggh.

you know you’ve lived in China too long when... funny if you've ever been to China for an extended trip.... (via Maoxian)

Investment Fads and Themes - recent history lesson

The Atomic States of America -- documentary (via Chad D.)

W Eugene Smith (no relation), Country Doctor - Life Magazine 1948 (via G.F.B.)

Solving the Shortage in Primary Care Doctors (via Joel M.)
Congress and the hospitals have established a residency system that doesn’t train the doctors Americans need most.

Why Are Americans Staying Put? (via Joel M.) "As with so many cases of inertia, the Internet may be partly to blame...."

How could America initially make the transition to single payer national healthcare funding? what would it initially look like? Here is the proposal from the Physician's working Group for Single-Payer National Health Insurance. (via John D.)

How Slavery Led to Modern Capitalism -- a provocative title for a challenging essay...

The Last Symphony: Today’s elite lacks the patience and culture for classical music (I am not so sure about this blanket statement; Asian-American Elites appear to be highly engaged in classical music)

Thanks for reading--

charles