Galen's Log

Lady Fingers

Blinder is a moron of the highest order.  At some point adding debt to keep the gravy train in perpetual motion starts having negative return. Eliminating the risk of a quite death while ensuring a slow demise.

Anyone remember the short story "Survivor Type"?  Here's the Wiki summary:

Survivor Type" is written as the diary of a disgraced surgeon, Richard Pine (real name Richard Pinzetti), who, while attempting to smuggle a large amount of heroin on a cruise ship, finds himself marooned on a tiny island in the Pacific with very limited supplies and no food. A self-proclaimed "survivor" type, his diary entries documenting his day to day activities become more and more disjointed and raving (similar to the writing technique used in Flowers for Algernon), revealing his slow mental decay and eventual insanity caused by starvation, isolation, and drug use. Determined to hold out for rescue, he goes to horrifying lengths to survive. After breaking his ankle while attempting to hunt a bird, he amputates his foot, then realizes he has to eat it to survive. He continues to amputate his own limbs to use as a food source, ingesting the heroin for anesthesia during the operations. His last few diary entries, barely comprehensible, indicate he has cut off and eaten everything below his waist, as well as his ears, and drools uncontrollably as he ponders which body part to consume next. The diary entries end when he cuts off his left hand to eat. ("lady fingers they taste like lady fingers"). 

Disturbing, even by Steven King standards.  But endless bailouts are starting to look a lot like self cannibalism to me.  Granted, the 1936 downturn followed Rooselvelt tightening up fiscal policy.  But Blinder misinterprets fiscal stimulus as a cure, not bridging therapy.

An epinephine drip may keep a patient alive who is on death's door, but I'm spinning my wheels if I do nothing to correct the underlying disorder.  The government has been tripping over its self to avoid dealing with systemic problems in our financial system that might help get ourselves back in order, preferring instead to wallpaper it over with mountains of money.  The answer to a deleveraging depression is not endless debt.

Sword of Damocles

I'm now back home after attending a medical conference in San Diego.  Also a self imposed exile from the Internet, as I declined to pay Hyatt's bordering obscene surcharge for wireless access.  This provided a  much needed break from the mildly obsessive monitoring of economic and financial blogs that goes in my free time.  Looking for...something, I'm not sure what.

There's a feeling of apprehension, waiting for the other shoe to drop.  Talk of green shoots and market rallies have done little to calm my fears, as it seems there are too many significant systemic problems (pensions, massive deficit spending, zombie banks, etc.) that have yet to fully manifest themselves.  The imagery of the sword of Damocles seems fitting, though this is an imperfect metaphor, as it typically pertains to a person in power or authority, of which I am not.  Nor does it seem to apply to the country as a whole, as there are many blessed with a lack of interest or awareness of many of our deeper running issues.

Part of my discomfort stems from not committing myself to a course of action.  My financial resources, such that they are, have been kept in a cash position.  I haven't taken part in the bear rally, loaded up on PM's, nor have I purchased the 20 acres of arable land with a bunker of ammunition and canned goods.  Yet inaction poses a risk all of its own.  Perhaps being on the receiving end of a well timed echelon attack might be a more fitting example.

"But it was the point of an echelon attack. You begin on one side. The enemy is pressed and begins to move troops there. At the right moment your attack opens in another place. The enemy does not know where to move troops now, or to move any at all. He delays. He is upset where he is, not quite so definite. With luck, you catch him on the move. He does not realize the attack is en echelon for a while: he thinks perhaps it is a diversion, and he will be hit on another flank. So he waits, and then gradually he is enveloped where he is, and if his line was thin to begin with, you have not allowed him to concentrate, and if he gambled and concentrated, then he is very weak somewhere, and somewhere you break through."                       Michael Shaara, The Killer Angels

Needless to say, I was somewhat relieved a read a kindred spirit guest post at Zero Hedge.  Not relieved at good news, just that there are a growing number people that share my unease at the big picture.  My outlook may be tainted by paranoia and gloom, but at least now I'm in better company.

Links 4/27

The awaited response to Mankiw's modest proposal on negative interest rates.

Google's real time swine flu map.  No overwhelming wave in the local ER yet.

New York Times: Shortage of doctors an obstacle to Obama's goals.  Maybe we can find ways to make it cheaper than a million bucks a pop to train physicians.  (h/t Coyote Blog)

Helmets and the law of unintended consequences.

Time off

 
This past week we took some time off to see the sights around home.  Any guesses on the location of the top two pictures?

Back at work tomorrow.  I've been watching the swine flu outbreak with interest... we'll probably see a lot of nervous people in the ER with regular URI's.

Government feels the squeeze

from Bloomberg:

“Tax receipts are just collapsing,” said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt “is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause.”

The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS. From October through December, the Treasury sold a record $569 billion, up from $82 billion in the same period a year earlier, and auctioned another $493 billion in the last quarter, up from $156 billion. That helps to make up for the drop in tax receipts, pay for the rise in spending and refinance maturing debt. Along with the principal, the sales add additional interest costs to the deficit for years to come.

Who's going to buy these, I wonder?

Stress test results leaked?

We'll see if this pans out, but it seems more probable than all nineteen banks passing.

Update:  commentary at Zero Hedge, lots of questions about the reliability of the source.  Deninger on Hal Turner:  has a reputation that is best described as heavily-adorned with Reynolds Wrap.   CNBC picks up the story,treasury denies. 

The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent. (Based upon the “alternative more adverse” scenario which had a 3.3 percent contraction of the U.S. Economy in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth of the U.S. Economy but a 10.3 percent jobless in 2010.)2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans. (Without further government injections of cash)

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital! (HSBC is NOT in the top 19 banks undergoing a stress test, but is mentioned in the report as an aside because of its risk capital exposure to derivatives)

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

Put bluntly, the entire US Banking System is in complete and total collapse.

From the "von Mises spinning in grave" department

Greg Mankiw proposes having the Fed lower interest rate into negative territory:

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

The idea of making money earn a negative return is not entirely new. In the late 19th century, the German economist Silvio Gesell argued for a tax on holding money. He was concerned that during times of financial stress, people hoard money rather than lend it. John Maynard Keynesapprovingly cited the idea of a carrying tax on money. With banks now holding substantial excess reserves, Gesell’s concern about cash hoarding suddenly seems very modern.

If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.

Much like giving an alcoholic a stiff drink to ease his withdrawal symptoms...  Why is it that everyone seems to think the best way out of this mess is to re inflate the bubble of consumer spending?  Loose monetary policy by the Fed is what helped inflate the real estate bubble in the first place.  Maybe solving a debt problem by allowing people time to deleverage is a little too simple minded.  A bit of the hair of the dog, anyone?

Update...More on the topic from Mish:

Both Mankiw and Krugman have their economic models and they stick with them no matter how silly those models look in the real world.

On the other hand, I prefer common sense over economic models any day of the week. And common sense dictates that loose lending practices and a cheaper dollar got us into this mess so loose lending standards and a cheaper dollar cannot possibly get us out of this mess. Logically it is as simple as that.

Moreover, even if the Fed could orchestrate inflation, there is no guarantee jobs would come with it or wages would rise with those jobs even IF the jobs came. Both Mankiw and Krugman are ignoring the macro picture, including but not limited to global wage arbitrage.

Home prices and asset prices in general rose much faster than wages during Greenspan's great experiment. Cash out refinancing, and rising consumer credit supported consumption during this experiment as real wages shrunk. Now consumers are cash strapped and Mankiw proposes a method to force consumers to spend more. Any eighth grader would immediately see that such a policy cannot possibly work.

Marc Seigel almost gets it

Marc Seigel misses something big (h/t Instapundit).  Let's see if you can find it...

Here's something that has gotten lost in the drive to institute universal health insurance: Health insurance doesn't automatically lead to health care. And with more and more doctors dropping out of one insurance plan or another, especially government plans, there is no guarantee that you will be able to see a physician no matter what coverage you have...

...More and more of my fellow doctors are turning away Medicare patients because of the diminished reimbursements and the growing delay in payments. I've had several new Medicare patients come to my office in the last few months with multiple diseases and long lists of medications simply because their longtime provider -- who they liked -- abruptly stopped taking Medicare. One of the top mammographers in New York City works in my office building, but she no longer accepts Medicare and charges patients more than $300 cash for each procedure. I continue to send my elderly women patients downstairs for the test because she is so good, but no one is happy about paying.

Right now Seigel is correct, a physician could limit access to Medicare or Medicaid patients, as there's probably enough private payer business to keep them going.  In fact, our old group closed to Medicare patients for a extended period for exactly the reasons above.  But the pool of potential patients would shrink rapidly once the government takes over.  In a universal care system, how would we opt out of a government monopoly short of quitting medicine? 

A universal care system paid for by taxes would undermine the private insurance industry, much like the public school system limits private schools.  Unless you have a lot of money, things would have to get pretty bad before people will opt out of something they've already paid for. 

Q:  Wouldn't the government provide private vouchers for taxpayers who might be unhappy with their care?  That might expand the market for doctors who want to work outside the system...

A:  snicker..snicker....chortle...cough.cough..COUGH...ahem.  Excuse me.

Q:  Sure the government controls licensing, and now a big market share of health care dollars.  You don't think they would parlay that to passing EMTALA like rules to force doctors to care for all under a government health plan, would you?

A:  cough..cough..COUGH..COUGH..wheeze..gasp........thump

First they came for the smokers...

Commenter Steve Lucas had mentioned an interesting statistic, namely that smokers actually save the system money by their early demise.

The smoker's habit has been taxed an astronomical amount.  State and Federal taxes reach a combined value of $3.76 per pack of cigarettes in New York state.  The rationale is that smoking induced health problems cost the state large amounts of money, but as Steve points out, that may not necessarily be true. 

I'm sure when the state of New York jumps to doing independent research which confirms the finding of the Dutch study, they'll be very apologetic, and offer to refund smokers' unfair tax burden....

....

...No?

Well then, maybe the state of New York will cheer the public health victory when no one purchases cigarettes anymore due to massive taxation, despite the loss of tax revenue.  Certainly the warm glow of satisfaction will be reward enough, and the state won't seek to replace its lost taxes by finding another politically ostracized group to shake down (fast food perhaps)?

...

...No again?

Wait.  It almost seems that the state doesn't really care about the welfare of smokers at all, and the public health concern in merely a rationale for levying additional taxes against a narrow group of people without raising public alarm.  I'm sure the government would not overreach, and use this highly successful model of raising fungible tax revenue to single out other victims would they?

...

....Hello?

For the record, I am not condoning smoking, nor is this a defense of the tobacco industry.  I would be perfectly happy to never see another lit cigarette as long as I live.  In our zeal for public good, it becomes a slippery slope for us to ignore minor abuses by the government just because they happen to coincide with our personal goals.  Minor abuses turn in to major abuses, the government can become emboldened by their success.  However noble our intentions, us turning to the government jackboot to fulfill our wishes says more about ourselves than those we wish to change.

Politicization of the health care system

Some good stuff from Coyote Blog today:

We can spend the money you may have better than you can.  We can also spend the money you don't have better than you can.

And this bit on the politicization of health care in a universal system:

...But Kaus is correct that if some high-powered and well-funded interest group gets behind a certain procedure, cost-effective or not, the government overlords of the program will likely approve it.   As a result, for example, no potential treatment for breast cancer will ever be denied given the proven strength of women’s groups lobbying for breast cancer treatment (already, breast cancer research is hugely over-funded vs. other diseases given its mortality, due in large part to this powerful lobbying).

But it is not one dynamic or the other.  Both will exist.  There will be huge pressures to cut back somewhere, as costs skyrocket.  And there will be huge pressure from certain interest groups to fund treatment for certain diseases in unlimited amounts.  The result will not be, as Kaus posits,  that everything will be funded more than it is today — the result will be that certain procedures and conditions with strong lobbying and political muscle will get funded more, with the difference being made up from cutting funding for conditions and procedures without a well-organized lobby.

Access to longer be determined by money, but by political pull. 

The obvious downside will be further distortion and inefficiency of the health care system, and as I commented on Warren's blog, it is even worse than it appears.  Other specialtieswill have to compete in the realm of lobbying to prevent losing their piece of the pie to a more vocal group, essentially wasting vast sums of money on infighting.  Politicians will gain even more power by playing gatekeeper of resources to the highest bidder.   We've already seen political contributions give an outstanding return on investment in all other areas, and health care will be no different.

More here.

More on Wells Fargo profits

Weil has a follow up of Wells Fargo's record profits, which was discussed on a previous post.

One bit caught my eye:

...One week before Wells’s earnings news, the FASB caved to pressure by the banking industry and passed new rules that let companies ignore large, long-term losses on the debt securities they own when reporting net income.

Wells didn’t say what its first-quarter earnings would have been without the rule change, which companies can apply to their latest quarterly results. As of Dec. 31, though, Wells had $12.2 billion of gross losses on securities held for sale that weren’t included in earnings. Of those, $4.2 billion were on securities that had been worth less than their cost for more than a year.

 

Deja vu

Panda Bear's post gives me a profound sense of deja vu.  The kind I get several times a week.

...The admitting physician adamantly refused to admit and suggested, not unreasonably, that I transfer her to The Big Academic Medical Center Sixty Miles Away as they were the last to lay hands on her and were most familiar with her condition.   The Big Academic Medical Center Sixty Miles Away agreed, without hesitation, to accept her and I even spoke to the Leading Specialist in the Field of Herchronicmedicalproblemology who happened to be on call.  Oh how the heavens sometimes align and, just when you think you are heading for a knock-down, drag out patient transfer brawl you see the triumphal field just ahead and prepare to eat the cheeses and hams of victory!

Unfortunately, despite having no insurance, no ability, and no intention of ever paying a thin dime for the hundreds of thousands of dollars of free medical care that she has received and will receive until that tragic day when the treasure we spend will only bore the Reaper, the patient refused transfer to The Big Academic Medical Center Sixty Miles Away citing a litany of complaints against them from rude nurses to bad food, perhaps most damning being her observation that the Leading Specialist in the Field of Herchronicmedicalproblemology didn’t know what she was doing and, “Didn’t do nothing for me.”

Read the whole thing.

Recession hits health care

The anticipated slow down in health care is starting to hit.


More interesting than the WSJ article, however, are some of the comments:

...I work in the health care field as a hospital financial consultant. Our firm's hospital clients range from large academic medical centers to small rural hospitals. This economic downturn is affecting all hospitals equally regardless of geography or size. Some have had to take more drastic action than others, but that is being dictated by how they were performing prior to the downturn. Hospitals are no different than other organizations (or households) in that they all had some level of excessive costs they were carrying, failing to operate as efficiently as possible because investment income was driving a decent bottom line. So to some degree this slowdown in employment is a reflection of "right-sizing", however the other side of the coin is the uncertainty of future volumes, which is a new phenomenon. Most hospital executives are "hunkering down" and waiting to see what is going to happen to their patient volume over the next 3-6 months. They are also waiting to see how much the Medicaid stimulus funds will impact their bottom lines...

...I too work for a hospital system. Hospitals are very concerned over the immediate future as the Obama administration attempts to cut way back on what it spends on the Medicare program. There is a lot of talk out there (by the administration) about how a large percent (up to 1/3) of health care dollars are wasted, and how online medical records (which most of us already have) will save much, etc. There is a misperception of a lot of waste and outright fraud out there among providers. Unfortunately, there just isn't that much to be saved on the "unnecessary services" front.

Hospitals, doctors, and other health care providers are in for a rough ride in the next 3-4 years while naive policy is implemented...

...The downturn in health care is only going to be temporary. By the time the layoffs hit, the economy will be turned around by the summer.
I wouldn't worry too much about this. Anyone who thinks that there will be less people in our society needing health care and prescription drugs is not looking at the big picture.
Even if they wanted to cut the number of workers down, they will still need the manpower...

Please Join this Group to participate in Discussion.

...one in eight workers on U.S. payrolls -- work in health care today, up from just 1% of the work force 50 years ago. "
No wonder it is so expensive. That alone should tell you health care needs a recession.
What is a more proper ratio of health care workers to population?

Most people are still thinking of health care in the same paradigm. Demand will never be the problem; that is next to infinite in absence of proper pricing.  Nor is the principle problem "inefficiency" or "overhead". If it were that easy to cut costs, it would have been down already.  Likely, much of what the government considers waste is in place to comply with the labyrinthine maze of regulations the government helped create in the first place.  Attempts at micromanagement will only make the problem worse.

An ironclad rule in economics is you will get more of whatever you subsidize.  And medicine is subsidized one hell of a lot.  Medicare, Medicaid, employer insurance (think tax incentives), tax dollars directly given to health organizations...is it any wonder health care has grown to its current size?  Or what will happen to the field when that subsidization is significantly curtailed...

Please Join this Group to participate in Discussion.

Health care econ links 4/13

The end of private health insurance...  WSJ

NNT-  a rationale for rationing? (Dr. T)

Misguided quest for universal coverage ...NYT (ht QandO)

A tiger by the tail

Jonathan Weil at Bloomberg wonders why the Obama administration has continued Bush's policy of continuing to subsidize insolvent banks.

...When publicly owned companies change management, often the smartest thing a new chief executive officer can do is clear the decks and take a “big bath” charge to earnings. In other words, the company writes off all its worthless assets and reports huge losses, pushing every conceivable drop of red ink into the past. The new CEO gets to blame his predecessor’s dumb mistakes. The company gets a fresh start with the investing public...

...He could have ordered all U.S. financial institutions to immediately confess whatever losses they hadn’t yet recognized. And he could have backed that up by vowing to prosecute every officer, director and auditor the Justice Department could find who had approved numbers they knew to be wrong.

Obama didn’t do that. And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.

The Obama administration’s “strategy,” for lack of a better word, is to keep plying broken financial institutions with as much taxpayer money as the government can print. And so the government will keep subsidizing failed mega-banks indefinitely, rather than placing any into receivership or liquidating them...

I haven't read any opinion that supports Obama's plan to continue to prop up banks with a bottomless well of taxpayer money.  As the Japanese example of the 1990's shows us, this is a losing proposition.  So why continue?  A former community organizer should recognize a groundswell movement against a political loser when he sees one.

It may be that taking decisive action would be taking ownership, and Obama may be content continuing to get mileage from blaming the previous administration.  Weil lists a number of potential factors, including his advisors' ties to the banking industry, and a lack of sufficient manpower to handle failed banks.  His first explanation is probably the most correct one, which is that it may lead to a large scale panic and meltdown if the extent of the banking problem were fully visible.

This would suggest that the banking problem is far worse than what we've led to believe, particularly in light of recent news and accompanying bear market rally.  I've been highly skeptical of recent claims of bank profitability, and I'm not alone.  Captious Nut on Wells Fargo's Sunshine Numbers:

Today Wells Fargo claimed to have made $3 billion in the current quarter. How'd they do that?

They just reserved $3 billion less for loan losses than they did last quarter. Easy enough, right?

Flashback to last July, as Wells was getting its butt handed to it, in a show of false bravado they decided to raise their dividend. The stock rallied from the low 20s to eventually 44.00 in part on that BS lying. Then of course, only a month ago, they reduced their dividend essentially to zero - from 38 cents to a mere 5 cents per quarter....and the stock fell below $8.00 per share.

I also read that Wells actually made half of this alleged $3 billion on a Rohm & Haas stock position. That may be real money, but it's also a one-time charge. I'll need verification on this point.

Wells also lied about loan loss provisions and got caught in the fall. See - Wells Fargo Number Fudging.

Are Q1 profits an accounting trick, a temporary reprieve, or indicative of a larger recovery?  The back routing of AIG bailout funds to various banks has probably been a short term boost, as have the recent wave of mortgage refinances.  It also appears the foreclosures have slowed temporarily.  On the other hand, unemployment looks dismal, real estate is still falling,  credit card defaults are rising, and one can't help but wonder if a significant portion of the bad assets are simply kept off the books.  It's hard to believe good news when there are still so many negative persistent economic indicators.  Deninger thinks that if the banks really are that healthy, then they're going to have some explaining to do.

Then there's the issue of the recent bank stress tests, or more to the point, the issue with delaying the release until Q1 earnings are reported.  If any of it were good news, it would probably have been reported already.  Mish's take:

It's earnings season and banks are going to pretend they are making money (or losing less than they are), and the Treasury does not want to interrupt those lies with stress test results.

Furthermore, the one thing we know for sure is the longer the Treasury delays reporting and the less detailed information the Treasury provides, the worse the actual results, regardless of what is actually reported.

Even more important is what's up ahead.  The full extent of banking losses won't be realized until the housing market and unemployment hit bottom.  Mr. Mortgage sees a wave of defaults and foreclosures hitting in the next few months:

But coming down the pipe is a massive wave of mortgage Notice-of-Defaults (NOD) that dwarfs the highs we saw when things began to get really out of control in Q1 2008. In the month of March new CA loan defaults hit a record high of over 50k for the very first time. This translates into approximately 150k defaults nationally. Actual foreclosures lag NOD’s by 4-5 months so it is no guess that there is a massive foreclosure wave bearing down with the first part of the lip from the Dec NOD surge hitting in April/May.

What's the end game?  Let's assume for a second that the banks have been lying through their teeth about their continued solvency, and the treasury department is aware of this and continue to provide cash infusions and run interference for them until...what?  Catastrophic losses can't be covered up forever, and even the Obama administration has to know that we'll eventually run out of money trying to fill up a bottomless pit.  Assuming the mobs don't show up with torches and pitchforks before that happens. 

Can you let go when you have a tiger by the tail?

Update: Wells Fargo may need 50 billion.

US health care may be the next bubble

Everyone is now intimately familiar with the concept of an economic bubble.  Current finanical markets, housing prices, and the Dot-com bubble easily spring to mind.  But bubbles don't necessarily need to be limited to stocks or real estate.  Wikipedia defines an economic bubble as "trade in high prices that are considerably at variance with intrinsic values." 

Health care doesn't fit the traditional mold.  While companies in the industry have been profitable, we haven't seen the speculative wave of investment typically thought of in most bubble scenarios.  After all, it was pretty difficult to miss the housing boom.  Health care has sucked up an ever increasing amount of resources, which people realize intellectually, but unless you've recently received a hospital tab that's not getting picked up by the government or your health insurer, it's difficult to have a real appreciation for.

Health care spending in the US last year was well over 2 trillion dollars, providing 14 plus million jobs and accounting for about 15.2% of our GDP.  Debates have raged over how much value were getting for our money.

The US systems does some things very well.  It leads the world in technology and innovation.  Cancer treatment is without equal.  It also gets hammered in WHO and Commonwealth Fund rankings.  While there is much to take issue with in these rankings (things like their interpretation of infant mortality statistics defies belief), no one would argue that there is probably a diminishing return with increased health care spending in terms of outcomes.

Above is a chart measures productivity life expectancy improvement per dollars spent.  That may be a poor surrogate...a number of other contributing factors such as worsening diets and diminished exercise.  On the other hand, I could give you a list a mile long of high priced interventions that marginally improve outcomes and few people would pay for if they were picking up the entire tab.

I think health care has avoided the knife thus far, largely because a majority of payment for health care services has been hidden from view.  Employers and the government pick up a large portion of the cost, which are seen as payroll deductions, but aren't as noticeable as copay's or annual deductibles.

As of now, we've been able to have our cake and eat it too.  Tech advancement coupled with economic prosperity have set high standards of care in the mind of the population.  Lack of access to the latest cancer treatments, MRI's for back pain, elective orthopedic surgeries for elderly arthritics is unacceptable in the mind of most people.  As significant as these advances are, the modest improvement in outcomes may not be enough to justify their high cost and widespread use.

Perhaps a proper analogy of our system is that of a luxury car.  It has a lot of bells and whistles, but you can still probably get from point A to B without them.  The difficult truth is economics and demographic dictate our current level of resources will not be available for much longer.  Americans may decide that they are no longing able or willing to continue current levels of spending.  Heath care certainly has the government's attention, though it is still unclear what their exact strategy of dealing with it is.

What ever happens, be it government rationing or more efficient free market choice of services, the industry as a whole should be prepared to shed some weight.  The vision of job security in health care may be about to be shattered.

Intervention?

Europe has always seemed to enjoy a little schadenfreude at American expense.  There was no small amount of gloating when the financial crisis hit, but this ended quickly as the crisis spread world wide, and it was found that bank insolvency was hardly limited to the US.  Now they're offering us some tough love advice.  Commenter Steve Lucas on the previous post:

Statements at the recent G20 meeting highlighted the concern over the large deficits the US was incurring in an effort to make over our economy. The EU, France being a leader, reminded the US that their requirements dictate no more than a 3% deficit relative to GDP.

Sound advice, certainly, but hardly stemming from pure altruism.  An economic downturn is less amusing when it hits someone who buys lots of your exports.

 

Trade numbers from Jan  2009 show a 40% reduction seasonally adjusted from the previous year. 

While I might hesitate to take economic advice from the Europeans, they've got a point about deficit spending.  Given their demographics, I certain they're much more conscientious about it than we are.

Ignoring the HELOC fueled over consumption of the past decade, a healthy American economy isn't just beneficial to the US.  As the Europeans are finding out.

Social Insecurity

  The US receives a surplus from social security taxes every year.  This was originally intended to be held in a reserve fund until the government figured out it could raid the extra revenue without many people complaining.  So instead of a piggy bank full of cash, we have one full of worthless IOU's.  In theory, SS should be able to pay benefits through 2041 if the treasury pays its debts.  In other news, if I had ham, I could have ham and eggs, if I had some eggs.

While infuriating in principle, it really should suprise no one, and doesn't make much difference in the long run.  Even the best Ponzi scheme comes to an end eventually, and the governments behavior merely sped up the day of reconning.  Which is coming sooner than most people would like.

The government's ability to raid SS surplus is vanishing, simply because the drop in employment has cut payroll tax revenue.  This chart from Mish caught my eye:

The surplus will be next to nothing next year, and even with a rosy recovery scenario, looks to become a substantial drain on the budget in 10 years.  Spending continues unabated.  Again, tie this in to the projected Medicare numbers we've been discussing. 

The entitlement tsunami was once a distant wave, and from our vantage point on the beach it now appears that the ocean has withdrawn, leaving bare sand and flopping fish in its stead.  Perhaps there is still time to get to higher ground.

Switching gears for a moment, take a look at your last pay stub.  You'll see a number of various taxes deducted (federal, state, payroll tax), but the the most important is the diminishing number on the bottom, your net income.  It makes little difference what Box A and Box B ratios are compared to the sum of A and B.

It's important that we stop compartmentalizing taxes.  Given the fungible nature of tax revenue, the source of money and semantic allocation of it becomes irrelevant...it simply goes into the pool of available (or unavailable) funds to be used however the government wishes.  Anyone who still thinks their lottery ticket purchase as "funding education" may stop reading and feel free to smack themselves up side the head at any time.  Compartmentalization is a slight of hand to government uses to trick you into accepting a higher tax burden, and makes it more difficult to reign in overspending.

The government will try to tell you that entitlements are a Box A or Box B problem.  They're not.  They're a global spending problem.

 

Notice which way the graph is trending?  Entitlement spending is a problem because it pushes global spending up to unsustainable levels.  Substantial government spending has been enabled by a strong economy, not the other way around.  At some point, all the oxygen gets sucked out of the room, leaving no prospect of economic growth. 

In the summer of 1995, a friend and I were backpacking in Rocky Mountain National Park.  This almost came to an untimely end after getting stuck well above the tree line during an afternoon thunderstorm.  The mistake was not made during the thunderstorm.  The mistake was ascending the mountain on a picturesque, crystal clear midmorning.  By the time lightning starts to strike, it's far too late to do anything but duck and hope for the best.

Better minds than mine can answer at what point government spending (as % of GDP) results in irreversible decline.  I would prefer not to find out.  A look at the above graph shows that outside of a world war, it has been impossible to prevent further growth, let alone reduce spending.  I hope we have not already passed the event horizon.

Hedging against inflation

A timely post from Coyote Blog, as this is a question I've been mulling over for the past couple of weeks.  I'm not really a gold bug, and stocks are still to volatile for my taste.  I've given some thought to purchase some non developed land for future use or sale. 

The myth of economy of scale in outpatient medicine

Bigger is not always better.  Many large medical groups have failed following expansion for reasons that may not obviously be apparent.  After all,larger organizations should benefit in many important areas such as more efficient marketing, lower borrowing cost, and lower purchasing costs for bulk medical supplies.  Consolidated medical groups may also hold varying degrees of a monopoly in certain services, allowing them to charge above market rates (to a small extent) for certain services.

Not all large medical organizations are doomed to fail, but groups that undergo expansion may lose sight of the fact that financial viability is dependent on physician productivity, which under our current system has a definite ceiling.  MOM commenter Allan remarks:

...Everyone else (except the drug companies -- hmm) has the same capacity limit as your barber. While your doctor is paid about an order of magnitude more than your barber, he can only service one client at a time and there are only so many hours in a day. So don't look for doctors to be cruising the halls of Congress lobbying to protect their rent seeking value transfer...

This means that I can only see so many patients during office hours.  Given our very rigid fee for service system, there is a maximal amount of income that I can bring in, regardless of my efforts.  Quality improvement is largely wasted in generating extra revenue, as I can only charge the same as my mediocre competitors.  More so the opposite, given that extra quality will likely translate into extra time, reducing my revenue further.

Really, this is a prescription for substandard medical care, though that is a topic for another post.

Relating to expansion, as the numbers of physicians in a group goes up, the ratio of employee to physicians will increase at a greater rate.  The number of patients seen remains the same, given that many fields (especially primary care) have an under supply of physicians and there are enough patients for them to remain full even without the added value of one stop multispecialty care.  Your least expensive employee will cost a minimum of 40k per year in salary and benefits.  Larger groups will need administrators, mid-level managers, vice president, etc. who are typically reimbursed in much greater figures.  Soon the administrative burden becomes enough to offset the competitive advantages above.  Physicians seeking jobs will often notice that the largest organizations are rarely the best paying ones.

Outpatient groups will often rely on ancillary services (phlebotomy/lab work, radiology) with a captive audience so to speak, but staffing and cost of support may turn that into a double edged sword.  Especially when Medicare changes it's mind on short notice on how those services should be reimbursed.