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Deflation Can’t Happen?
In response to my recent post suggesting that the forces of deflation are fighting those of inflation (mostly weak housing, growing unemployment, and compulsory reductions in state and local budgets vs. the easy Fed and large federal deficit spending), one reader chastised me for even considering the possibility of deflation. He and many other commentators say “it can’t happen”. They assume we must be entering a period of inflation because that’s the only way the gigantic projected federal deficits that will create mountains of federal debt - both in the U.S. and even more so in Euro-land and Pound-land - can possibly be serviced. Besides, that’s always how it’s comes out, they say. Print a lot of money, you get inflation.
Inflation fears seem to have started to drive the dollar down which is keeping oil high despite ample supply. And gold is looking a little frisky too. If you think inflation is the future, sell anything denominated in dollars - or any fiat currency the value of which will be inflated away. Buy gold, oil, Brazil, China. Even copper. The last thing you want to own is a bond.
The inflation bugs may be right but I still have a hard time squaring that picture with reality. I see prices falling (which is called deflation by economists). Homes for sale and homes for rent. Every store seems to be running sales every day, 24/7. Airline seats are on sale. Cars are on sale. Hell, pretty soon some former Chrysler and G.M. dealers will have to just about pay people to take their inventory away. Basically, this is a buyer’s market for just about anything you can name - except gold and oil.
But what’s even more important than currently falling prices is that the immediate future seems to promise more of the same. Increased unemployment is making more “good” mortgages into bad ones. It’s causing a “third wave” of foreclosures according to Monday’s Times report. As the Financial Times’ Lex column reported (5/20/09).
“That [the 3rd wave], in turn, puts further pressure on house prices, which means more losses for the banks, and greater difficulty when it comes to expanding consumer lending. So consumer spending will continue to suffer at the cost of more jobs. The housing market has moved beyond a cyclical swing from boom to bust into a fundamental cycle of negative feedback that weights on the whole economy. This downturn has not yet run its course.”
Beyond the macro-economic cycle pushing prices down, I think there are two fundamental and gigantic forces combining to keep prices going down - and to keep unemployment in OECD economies going up. They are globalization and technological progress. They get very little notice in the press but I think they are key to understanding our new economic environment.
The Nexus of Globalization and Technology
You see it’s not just that globalization is moving jobs from OECD countries to Chindia. And it’s not just that Moore’s Law and other technology gains are lowering prices of high-tech products constantly and letting more goods be made with fewer workers (adding to employment pressures). If that were the whole picture then the OECD countries could make up the loss of their low-tech production jobs by creating new high-tech jobs making and selling high tech and complex, sophisticated products to Chindia. And for a while things did seem to be working that way. Each trading partner pursuing its “comparative advantage.”
But now we have the two trends combining to change the nature of international trade. Now we see high technology itself moving to Chindia. The OECD is rapidly losing its competitive advantage in high tech while it is still at a huge competitive disadvantage in labor costs. So we read that China is developing next generation high-efficiency cars that they will export to Europe and the U.S. Then we read that if G.M. succeeds in emerging from bankruptcy their plan is to produce the next generation of small efficient “G.M.” cars in China and import them to the U.S. China is starting to make airplane components; it won’t be long before China will produce airplanes in competition with Boeing. India is doing sophisticated medical procedures and luring Americans to save money on dental and other planned surgery by taking a vacation while they solve their medical problems. Much U.S. accounting, legal, and consulting work is now done in India.
So if Chindia produces the high-labor-content cheap goods and the high-technology-complex goods and services- both at lower costs than the OECD can match - where does that leave the OECD worker with any prospect for employment opportunities in such a new world? I wish I knew an answer to that question. Of course the pundits, the Tom Friedmans of the world, and the politicians always say, “We welcome competition because the American worker is the most productive in the world, blah, blah.” Right. Well, some people need to raise the flag and salute just to be politically correct. I wish their talk of American competitiveness comported with any conceivable walk than I can envision for the future.
It seems like the only competitive advantage the American worker retains now is in providing on-site services. The burger flipper’s job is secure. The Walmart job is secure. Become a plumber or electrician - those jobs are secure.
So, deflation or inflation - or stagflation? And how to invest?
This all adds up in my mind to two conclusions that seem inescapable. First, this recession is not going to end in the next few months as a majority of registered economists now predict. It is likely to drag on a good deal longer. Second, when it does end, the new economy will be a good deal weaker than the one we experienced from 2002 - 2007.
That scenario might be okay for stocks if it came along with low interest rates, which usually do accompany low growth. The problem is that we may experience the dreaded “crowding out” phenomenon that deficit hawks have always warned about but which heretofore has never occurred. The gigantic federal deficits may well cause both a decline in confidence in the dollar and a need for higher interest rates in order to attract the capital the government will require. That will make financing private deals harder and the general level of interest rates higher. High interest rates are not a positive backdrop to equity investing, nor is a difficult market for private borrowers.
We are looking at multiple years of trillion dollar federal deficits projecting into the future - throughout the OECD. And that’s only what has been officially projected. There are all sorts of potential land mines out there that could increase federal deficits. Foremost among them is a lower growth rate coming out of the recession than the administration has projected and thus lower federal revenues and high federal welfare spending. There are also potential bankruptcies of the federal pension benefit guarantee entity and various municipal governments. Such crises would require more huge federal outlays.
The potential for inflation exists if future deficits get monetized. But future years’ deficits could be reduced by means of higher tax rates although nobody wants to talk about raising taxes right now. I happen to agree with Paul Krugman that politicians’ fears of higher taxes is both unjustified and a potential impediment to finding a practicable solution to a potentially intractable problem, but we’ll leave that topic for another time.
Pundits are saying that recently higher gold and oil prices and the lower dollar are anticipating the inflation that may come in future years. That seems to me like a dangerous assumption. Anticipating events that may not be realized for a few years at the earliest could lead to great disappointment. I hesitate to buy gold because I do not think we are necessarily going to see inflation. I do think that fundamental supply problems will eventually push oil prices higher (as I discussed last March) so I choose to hedge potential inflation risks with oil futures options. (Incidentally I also think there is a high likelihood that oil prices could drop in the short term so I am keeping a fair amount of cash on hand to buy oil equities if the opportunity does present itself.)
Foreign stocks in countries like China, Australia, Canada, and Brazil seem to merit inclusion in a portfolio these days. Those currencies and economies should all do well in future years regardless of whether the OECD encounter deflation, inflation, or stagflation. Owning stocks in such strong-currency countries rather than companies tied to the U.S. economy and the U.S. dollar seems like a smart approach for now. I do so with ETFs such as EWA (Australia) and CAF (China) along with various Canadian energy plays.
If deflation seems to be taking hold I suspect we’ll see a test of the bear market lows. Will foreign equities do well if the U.S. stock market has another melt-down? I doubt it. On big moves global markets seem to work in synch in the short term. But I suspect strong-currency stocks will outperform U.S. equities short term and bounce back faster longer term. To obtain additional portfolio protection it may not be a bad idea to own some out-of-the-money puts on the U.S. market. I have some and am thinking of adding more.
The U.S. equities I do own relate to oil or alternative energy. It’s clear that the electrification of the car is one of the next big trends. There are a number of battery and battery-related companies with outstanding opportunities to become much bigger and more profitable. I’ve written about some of these companies.
In short, the strongest conviction I have is that we are investing during extremely dangerous times. Being “very careful out there” is the major imperative. If cash offered safety, I’d say that’s where I’d most want to be. But if inflation takes hold cash will not be a great place to be invested either. That’s just one reason why today’s investment environment contains so many challenges.
Tags: peak oil investments
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34 responses so far ↓
1 Jimp // May 27, 2009 at 7:42 pm
Jim Kingsdale,
It’s interesting that you “prefer”
Zenn/Eestor to SQM. To me it seems like Zenn/Eestor is a far bigger gamble versus lithium usage for automobiles. Can you explain why you prefer Zenn to BYD which you have also covered, which uses lithium in a real - live car? This makes me think that I may be overlooking something in regards to Zenn/Eestor.
Any other battery/ alternative energy companies that you like?
Do you have any concerns about the Canadian Tar sands/ canadian energy plays being looked down upon by the Obama administration secondary to there large carbon footprint?
2 barry bernstein // May 27, 2009 at 9:55 pm
You make a good case for the market going up in one letter and then make a good case for the market going down in the next letter.Same with oil,inflation or deflation.You can listen to five well known economists and you will get five different opinions and they are all looking at the same data.Bernake has publicly stated he will drop money from helicopters to prevent deflation.Take him at his word.I repeat again that stocks of oil and natural resource s are the best place to be for the next ten years.If you have a conviction about that,why drive yourself crazy trying to decern what will happen in the next year or two.The economy we live in is so complex that no one has a lock on whats going to happen in the next year or two.If all these economists and gurus really knew what was going to happen,they would all be rich and could retire to the south of France.
3 Simon // May 28, 2009 at 1:25 am
Having said he will print money and throw it from helicopters should he deem it necessary Ben Bernanki has clearly indicated that paper money is not to be relied upon. There are not that many alternatives..
4 robert essian // May 28, 2009 at 3:31 am
Professor, you are right to constantly point out that there is the this,… then there’s… the that.
Again not too long ago everyone suspected that inflation would rule and oil wouldn’t go below $80.00 a barrel. Impossible some said. Then the deflationist said we would go to $20.00 a barrel so beware, and everyone jeered them. The point is pay attention because some serious money is at stake.
Depressions would never happen again…OK…Thank you.
You have always maintained to look at both sides, expressed your thoughts then qualified by saying you reserved the right to change your mind when situations changed. Perfectly logical.
For me this is the more practical way of looking at the market. For me buy and hold in this environment could be a huge mistake.
Something else has stayed with me since I first read it while doing my reading. At one point last fall a ship carrying coal to China costs more in fuel than the cargo aboard was worth!!! That’s another reason I pay attention because that makes no sense to me.
The first player who invents a cheap battery that can store energy in large quantities, that is light, and can power a car, store solar, and wind power, etc… WINS…BIG TIME… Thanks Jim…Peace
5 Karol // May 28, 2009 at 3:55 am
Jim,
Thanks for refreshing me on oil and gold as a hedge in this market. I lately been thinking that the rise in oil was due to speculation only. I have taken some profit but I am now going to buy back in meaning I missed some upward movement in oil. The main thought I have is not that oil may drop in the near term but it’s that as oil climbs today it may not test recent lows if some day in the future it fall again. I’d rather not get flushed out. As oil climbs it is doing so as supply is being used and sooner rather then later the surplus will fall.
6 Karol // May 28, 2009 at 6:26 am
Moore’s thinking. Moores law.
No oil cut by those guys in the Middle East. Today!
They didn’t meet their goals in cuts.
What?
Well, that means to me that they are not worried about tenants paying rent. Every oil blooded Middle Eastern Culture person I’ve ever met always displayed a worry about collecting the rent.
Well, this seems to be a new take on playing Cowboys and Indians.
That’s to say:
The U.S. verses the world.
Now who has a better chance of keeping world peace?
China?
India?
Chindia?
The U.S.?
Do you want to know my bet?
It’s Mexico right!
They have no limit to family size. And, they expand to the north. Going north keeps them cooler in this earth warming green planet. Those in China lost the oil at the pole to the Russians. Just like the Russians lost it to Alaska. Those in the Middle East are just going to bake. And the U.S. is going to Zim- ba -way!
As in: them was the was ways!
We will find a way to do things twice as good in a few days!
7 Isaac // May 28, 2009 at 8:36 am
Hey Barry,
I have a stock for you that fits your 10 yr natural resource plan- NAK. Read there website, its an impressive holding.
Regards.
8 Patrick // May 28, 2009 at 8:47 am
Excellent article. I very much appreciate how you articulate your views and translate them into actionable investments.
Greg could learn something from this article. Funny how he has no response.
9 Jim Kingsdale // May 28, 2009 at 9:10 am
The FT today report that German consumer prices fell last month vs. the prior year for the first time in over 20 years. That’s called deflation.
It will be interesting to see how the European central bank reacts.
10 KV // May 28, 2009 at 11:10 am
Jim,
It is correction first before deflation/inflation. We are in recession and demand has been significantly reduced compared to what was expected, and prices are correcting to the new reality from the bubbles in oil, copper, steel, everything.
The US debt will reduce the value of dollar compared to other currencies, so imports will cost more, while we are adjusting to lower wages or lower paying jobs by cutting back ande can’t keep up because things keeps costing more and more. This is stagflation: prices going up in a stagnant economy. Believe it or not, this brings about domestic economic growth, but slowly. It also drives the US worker to world parity and that is where the pains really are. Everything is becoming cheaper until the inventory is reduced. If you sell one million bananas, the fixed cost is spread out and price of banana can be lower, but if you only sell 100,000 bananas, fixed cost basically drives the prices up, not profit. So banana growers will stop growing, and supply will come in balance in two or three years. Many banana growers will go bananas, and many kids will share a banana with a brother, but slowly a new equilibrium will be established, and with that demand will begin to grow from the depressed level and new cycle will begin. We will become rich and we will have pols who will come out and say that we do not need regs and will take them off the books or will not enforce and casinos will open. But by then, most of us would have aged to a point that it don’t matter if it rains in Louisiana and not in Alabama.
11 Karol // May 29, 2009 at 3:19 am
Ya Jim!
I don’t like that report. That is to say I don’t like reading it. I had traveled in Europe when the dollar was high and then again when the Euro was high. It seemed to me that life was the same for the people living there during both trips. I just paid more the second time during the high Euro. I am thinking the French will led the way by not doing much. Perhaps a riot or two is all.
12 Karol // May 29, 2009 at 3:22 am
Now if I can just get the led out of my pants. Or is that the lead out of my gas.
13 KV // May 29, 2009 at 4:27 am
Karol - Hawaii! Must be all in the air! Water! or Soil! May be even the fire under the island!
14 KV // May 29, 2009 at 4:32 am
Jim,
Here is an extract from NYT article on organic milk:
Hood and the two other big processors, Horizon Organic and Organic Valley, say cutting contracts, pay and production are necessary to absorb overproduction and offset softening demand. Organic Valley, a nationwide cooperative, told Maine organic dairy farmers last month that its sales growth had dropped to near zero from about 20 percent six months ago.
“Our inventory is overstocked,” said John B. Cleary, the cooperative’s New England regional pool coordinator.
For many farmers, the changes coincide with crushing debt resulting from the cost of turning organic, which can run hundreds of thousands of dollars. In addition, the price of organic feed has doubled in the last year. Credit has dried up for some, and others say it is nearly impossible to sell cows and so thin their herds.
It is the demand destruction that is driving the price and production. Correction - the first phase. In time, new equillibrium through stagflation… and as economy begins growing, higher rates, higher prices too!
15 Diane M. Grassi // May 29, 2009 at 11:15 pm
James:
Thanks for your sober assessment on the economy which basically outlines the facts. And the overriding conclusion is that unlike all past recessions and even the Great Depression this is a horse of a different color.
For the U.S. government to further complicate a now stuttering global economy by getting into the car business (GM) and insurance business (AIG) is scarier than hell.
Most of us don’t know whether to laugh or cry. Even us rational optimists are out of answers!
16 Karol // May 31, 2009 at 4:19 am
Jim,
A clue to the deflation-inflation:
There are some products in stores such as Lowe’s and the Home Depot, and Wal-Mart too, which are marked upwards of five times the cost to put on the shelves. This includes the cost to stores to buy and have employees work/sell. These stores are having sales on items that bring in the consumer. These stores are doing things to get the consumer to buy. Things such as empowering sales people to give markdowns.
Well, if a markdown is ten to twenty percent off of listed price let’s look at what happens.
Say a towel bar cost to the store is; three dollars to buy, and two dollars to get through the cash register. This towel bar cost five dollars to the store. The store lists it for thirty dollars and sell it for twenty-five. The store just gave a whopping ten percent plus!!! off to the consumer.
Is that inflation or deflation?
Well let’s see.
The store up’s the price for middle range moving items. Hence no inflation/deflation.
The store let’s go employees. No inflation there either. But we see a deflation of the employed.
The store doesn’t makes sales plan. No bonuses for Management. The sales plans where to high. The profit margin was not there. Stock Investors can not move.
I think deflation wins. Here that is.
So what about homes? The same happens here. A house that cost $50k to build and sold for $250k being marked down to say $200k is not inflation but it is deflation in that some people are being put out because management is not getting it’s perceived bonuses.
Now, just what management is not getting it’s perceived bonuses? Can you guess? Did you guess? Have you guessed yet? Or do you know the answer already?
Well?
It’s the taxing government.
Also!
It’s the gas that was burned up into thin air.
You and I can pay at the pump good money and just burn it as we drive just like having a fire at the beach. We can also pay good money for a house and walk away with what we can get back. Why hell? If I buy a tank of gas and burned it up in a week is not that like buying a house and selling it back to the market after I have a spin with it?
Nobody I know will give me cash for a tank that’s empty.
17 Larry // May 31, 2009 at 7:33 am
Jim,
Sorry to jump to another topic, but you have been critical of U.S. healthcare in the past, so I thought you might be interested in this from John Mauldin at
http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2009/05/29/this-way-there-be-dragons.aspx
Here is the passage:
“I want to pass on this quick note from Dennis Gartman’s eponymous letter. It should give all of those who favor a nationalized healthcare system pause, before they jump right in. Quoting Dennis:
“Canada is a wonderful place to have a nasty gash on one’s forehead stitched, or to break one’s nose in a game of pick-up baseball; but have cancer, or need eye surgery, or want an MRI, and the business of medicine in Canada and/or the UK breaks down badly in favour of medical care here in the US. For example… and we wish to thank The Investor’s Business Daily for the data noted here this morning…
“… here in the US men and women survived cancer at an average of just a bit better than 65%. In England only 46% survive. In the US, 93% of those diagnosed with diabetes receive treatment within six months; in Canada only 43% do, and in the UK only 15% do! For those seniors needing a hip replacement and getting one within six months, 15% get it done in the UK; 43% get it done in Canada … and in the US 90% do! For those waiting to see a medical specialist, 23% of those in the US get in within four weeks, while 57% in Canada have not yet done so, and in the UK 60% are still waiting after four weeks.
“When it comes to proper medical equipment, in the US there are 71 MRI or CT scanners available per million people. In Canada there are but 18, and in the UK there are only 14! Ah, but the best figure of all is this: 11.7% of those ’seniors’ in the US with ‘low incomes’ say they are in excellent health, which in and of itself sounds rather low … rather disconcerting … and an indictment of the system itself, doesn’t it? But in Canada only 5.8% do!
“Yessiree bob, ya’ jus’ gotta’ luv that collectivized, socialized medical care! Let’s all go break a collective arm and enjoy the benefits of socialized medicine in the Commonwealth! (Canada) … but heaven help you if you’ve got something really, really wrong. If that’s the case, you’ll be running south to the border faster than you can reach a specialist anywhere in Canada; of that we are certain.”"
Of course, I don’t know where Gartman got his numbers from, but he usually seems to know his facts, in my opinion. I just think we should be very careful how we change our health care system without finding out all of the facts.
18 KV // May 31, 2009 at 1:26 pm
UK has most obese people, so diabetes rate would be high. If only 15% get treatment, the streets of UK would be flooded with people in diabetic coma.
Larry, you have opinions about opinions of others without verifying anything. How are these statistics compiled? Do they only include people with insurance? Do they include people who are uninsured? Mauldin is pushing nonsense for a long time and so are you now.
19 Karol // May 31, 2009 at 2:47 pm
KV,
Please be nice.
The cost of “proper medical ” is something that is, …, well it’s something that’s just not going to happen.
20 KV // May 31, 2009 at 3:04 pm
Karol - Hawaii! Must be all in the air! Water! or Soil! May be even the fire under the island!
21 KV // May 31, 2009 at 3:24 pm
Karol - There were 40+ million uninsured in the US, and increasing. Most of them do not go to a doctor until there is a crisis, because a doctor charges three times to ten times more to uninsured. WE insured pay through our higher premiums to subsidize the emergency room visits - the most expensive way to take care of anybody. Of course, we can slowly eliminate these epople through neglect…
By the way, I do not see any Canadians dragging their behinds and moving south…
The US has been funding cancer research the most and longest, and it is high time that we see some returns on more than 30 years of investment. Further, on average, we measure cancer survival as a couple of years of life over what would have been.
Finally, cancer occurance is extremely low compared to nasty gash or flu, and many chronic diseases that could have been manged by simple generic medicines and coaching, then energency visits through blaring sirens.
22 Larry // May 31, 2009 at 4:48 pm
KV,
We actually already have government-run medical care, and it is called Medicaire. In just a few years it will be broke, and we will either have to bail it out or limit the care that it provides to seniors. That will be the story of our future medical care, if we get the government further involved in health care. The U.S. will not be able to afford to bail out Medicare and provide “free” health care for all, so it will have to be rationed. If you like the health care you have right now, and surveys show that 80% of Americans do, you should be very careful about letting the government get further involved in it.
23 KV // May 31, 2009 at 8:00 pm
Larry – Govt. can bail out AIG, banks, Fannie & Freddie, and automakers, the so called private capitalists free-marketers or the socio-capitalists, the believers in socialism for the capitalists. Just about every company is dumping pension plans and medical coverage plans for the retirees. What do you think GM management of gone-by era was so stupid to enter into “bad union contracts”? Under the voodoo accounting rules, GM was able to defer the liabilities without funding by making unrealized gains “real”.
By the way, we have been paying into Medicare through payroll taxes. Further, you might want to check out the personal medical insurance rate after 65, when companies will force you to retire and stop covering your medical. Why do you think companies want to dump people over 50 of their payroll? It is medically expensive. I have no idea how old are you, but it might pay to go on some of the website and find out how much insurance premium you would pay if you were on your own. And, if you are over 50, 60, and 65, and also check if you are in poor health.
Here is the real clincher: why is it that we have shortages of doctors and medical facilities? Why is it that so called “free market” does not work in medical business? Why is it that medical care can cost tenth of what it cost here as soon as we cross border into Mexico, India or China? Why is it that we can import shirts for a dollar, but can’t import any medicine at all? Why is it that the same medicine made by the same drug company cost peanuts outside of the US? Why don’t we grant H-1B to doctors? Nurses? Why don’t we build new medical colleges?
Why is it that a single aspirin at a hospital cost $10?
You may think your company provided medical insurance is “private” but that is baloney, because the company deducts each and every penny of premium as cost of doing business. In other words, for each dollar spent on your medical insurance, the US Govt. loses 35 cents in tax revenue. You already are on Govt subsidy for your medical coverage.
My only hope is that Jim’s patience is not overly taxed.
Larry, you seem to be a smart man. Check the facts, analyze the data, and stop feeding on the dittoness of loud mouths.
24 Larry // May 31, 2009 at 9:17 pm
KV,
You actually surprise me with your prior post, because you waited until the very end to insult me, and then it was only a mild, indirect insult! Now I will surprise you - I actually agree with much of what you say. If we really wanted to decrease the cost of medical care, we would take, say, $50 billion a year and open 50 additional medical schools (I assume $1 billion per school per year would do it). But so far I don’t hear anyone proposing that.
We would also allow drugs too be imported here - but of course that will squelch drug research, because the pharma companies won’t be able to make enough money any more to fund it. To be honest, though, I am tired of subsidizing the rest of the world on drug research, so this is okay with me.
I wouldn’t mind doing away with the exclusion for employer-provided medical expenses, except that the tax revenue would just go to finance runaway Democratic spending.
And if we were serious about reducing the cost of medical care, we would make it harder to sue doctors. Many of them overprescribe just to protect themselves, and many hate their jobs because they have to worry about getting sued by everyone they treat. But you will never see the Democrats do anything against the tort bar, so you can forget about reducing lawsuits against doctors.
Instead of these things, you will probably see government subsidized health insurance, which will undercut private insurance, but will have caps on the price of care - the Medicare model. In the end that will lead to rationing. I am just asking that you consider that before you get too gung-ho about further government involvement in health care.
25 KV // May 31, 2009 at 10:06 pm
Larry - I did not want to insult you, for that matter anybody. but, when you write - tax revenue would just go to finance runaway Democratic spending - it is “dittoness”.
Why? Because, Dems are barely in power, with the worst monetary crisis ever, and have barely done anything but to contain the crash of our civilization. I don’t know whether they will be successful.
I do not have any preference for or against Medicare. I would like to see a competitive medical industry and healthy people in our country so we can work without worry.
Here is your another “dittoness” - suing the doctors, and torts, and scraping regs etc. These are defunct concepts, they failed miserably in financial world. We live in a world marching toward 10 Billion people, and we simply can not live with “small number thinking”.
You can not wish away your Govt. subsidy provided by the taxbreak to your employer.
You are naive about how so called private insurance works. It rations! It refuses services, denies benefits for cancers. It swamps sick people with constant refusal of claims and service providers threaten to send bill collectors.
Here is how the system works: HMOs give doctors a budget and number of patients, and no more than 15 minutes per patient… So, a doctor is really an assembly line worker processing sick like chickens in a packing house. Find a few doctors and ask them how the system really works, and why nobody wants to talk about it. Look up HealthSouth history and you might learn the reality.
26 Jim Kingsdale // Jun 1, 2009 at 7:55 am
I don’t love the idea that this thread has been hi-jacked from the original topic to a discussion of medical economics, but so be it.
For what it’s worth, I tend to be a Democrat and I’ve come to conclude that we will have to contain tort lawsuits if we want to have reasonable medical costs. I’m convinced that docs do and must practice defensive medicine with suits in mind and thus vastly over- test.
But another reform must be the prohibition of any financial remuneration to a doc for prescribing a test. Docs must be prohibited from owning an interest in testing facilites to which they send patients or from getting kickbacks from them for sending patients. It’s immoral and should be illegal.
Also, anyone interested in this should read last week’s New Yorker piece on comparative medical costs. Costs per patient can vary by up to 300% from one community to another - all depending on how the local docs choose to practice medicine: for profit or for patients. Big difference.
27 Isaac // Jun 1, 2009 at 8:08 am
I totally agree with Jim. I am a radiologist- interprept medical imaging. I own no interest in equipment and I don’t “order” exams. I just read what the care-taking docs decide the patient needs. I have seen the # of MRI’s ordered by a large (100) clinic of docs triple after the clinic purchased their own MRI. I know the #’s because we read the MRI’s.
Secondly, defensive medicine is practiced because of the real fear of lawsuits permeates medical decision making to a very high degree. It would probably take 10-20 years to readjust the pattern of thinking- if the rules changes.
Lastly, I would encourage people to acknowlegde that some system of deep rationing will need to be imposed if we are to contain medical spending. When you hear “universal care” you are hearing “universal rationing”. Lets just hope it is done thoughtfully and with compassion. I’m not too optimistic regarding the governments ability to pull that off.
28 Robert Essian // Jun 1, 2009 at 9:23 am
Professor, I too lean Democratic, always keeping an open mind.
I had rehab not long ago (back), I have Blue Cross/Shield. After going through one rehab visit I received a bill of $465.00 plus or minus, and my co pay would be $165.00. Shocked at the price I called the rehab center and asked what it would cost if I came in off the street and paid cash what my cost would be. They told me $165.00, and if I claimed hardship I could get a 20% discount and a payment plan. Needless to say I called the billing company and told them I would be paying cash, and not to pay that bill. I got the discount anyways, and saved the system $300.00.
Believe me there is a lot of room to lower our insurance costs.
Now that this posting has taken some twist and turns I would like to (again) point out that the paths Chryler and GM ended up taking could have been taken from your opinions in previous postings. I point this out so that anyone wanting to know if this site isn’t the best on the internet they just need to go back and research your opinions on a vast amount of other topics.
Obama is the most sincere, and most sensible President I can recall. I believe him.
In addition he takes his Lady out to a play, fine dining, and probably had a great evening. I like that…Classy…Peace
29 KV // Jun 1, 2009 at 10:04 am
Jim,
There is no realistic way to “control” the ownership interest by doctors into testing facilities or pharmaceuticals, nor there is a way to stop the “commissions” from drug companies to doctors. Each and every prescription filled has doctor’s ID number and which pharmacy fills the prescription does not matter. The ID number is credited for prescription by the drug company for the commission… It is a racket, similar to mutual funds where managers get their cut of the flesh without regard…
Most doctors have to follow the “protocol” established by the medical insurance companies. As a patient, we are happy that our doctor’s practice is accepted by our insurer, however, we are not told that the practice is under a contract to the insurer and has agreed to follow the protocol. Again, like HMO, the doctor’s practice has a leeway in how it statistically averages to the contract terms. So, a preferred patients will get the service, while some others will not. It is not just rationing, it is discrimination.
I wish we could have a competitive medical industry and readily available medical services, but the system today is so convoluted that it may have to go the way of GM before it can reinvent itself. I bet every nine out of ten dollars spent by the patient is wasted in nonsensical stuff.
Isaac,
A recent arterial ultrasound was billed at $700+, which could have been had at a life screening company for $135 with three other tests thrown in, and with much more modern equipment. The $700+ test was inconclusive because of poor quality, and was recommended to do MRI. There is no competition nor quality control, and the doctors’ responsibilities are diffused.
On your read of MRI, I would get a paper report, that my doctor will read it back to me. Most of the time, I do not even get a chance to see the MRI. For that, I have to fill out papers. God forbid, if I want a second opinion. If this is not complicated, because of HIPPA rules, only the sick must ask for all these! At the last place, they wanted me to pay for processing the HIPPA form!
I have read a few MRIs from various places. Why do they all sound the same? Are there boiler plate reports that are filled out? I am not questioning your integrity, I am only trying to understand the process or flow of activities as there was a company which was taking digital MRIs and sending them for reading in Eastern Europe, India and many other countries.
I hope you see where I am going. We need to commoditize all the esoteric medical stuff, that also means, make it dirt cheap. And, before you jump out of the chair, we have always done that: just look at the space business. In sixties, it was NASA and Air Force who can launch a satellite. Now there are so many companies and countries do this at cheaper and cheaper prices.
Simply, inject competition in the medical business. Wouldn’t it be great if I get an ad suppliment for this week’s specials, just like my grocery and hardware stores do!
30 Robert Essian // Jun 1, 2009 at 10:42 am
KV, I am not a suck up by any stretch, just see things the way I see them. You, my friend are engaged, and important to any relevant sight. You make me want to know more…Like the Professor…Peace
31 KV // Jun 1, 2009 at 11:34 am
RE – Thanks for your thoughts.
I only follow two equations:
Equity = Assets – Liabilities
Retained Earnings (in my pocket) = Revenues – Expenses
Every time, when somebody offers me something for free, and especially in future, for my hard earned money of today, I run from them as fast as I can. It is sad that most accountants do not understand this, and they are all in amore by the new fangled interpretation of the same old scams. By the way, have you ever met a financial advisor who would defer his cut until your investments are doubled, so that you can sell a small portion to pay his fees for good advice and service?
If we keep these equations in open - in the sunshine - for all our activities, including medical business, we would not have the quagmire we are in.
Finally: Larry not believing his so called private insurance is subsidized by the government, or, bail us out so we can bonus ourselves for our business acumen in making you give up your hard earned money.
32 Isaac // Jun 1, 2009 at 3:47 pm
KV- a couple points to clarify
1- ownership interest of medical care by docs has been curtailed big-time by the Stark anti-trust laws, but there are still several significant loopholes remaining. Also, I’m not sure if there would be a “good” owner who wouldn’t put destructive pressure on the providers. Surely not hospitals, insurers, the government, or investor pools. They all have “agendas” that work against the patient.
Secondly, when it comes to quality (and I think we all want quality when it comes to ourselves), those life screening companies are the biggest scam this side of Madoff, so buyer beware. I’m speaking from the viewpoint of one whoes seen tens of thousands of cases.
Third, in order to help prevent fraud, sham credentials, aka Nigerian schemes, in medicine, someone in those countries you mentioned cannot be licensed to practice medicine in the USA, or other countries for that matter, without going through our countries and states licensing, and invidual hospital credentialing. So its a bit more complicated than the lay press may have told you.
Anyway, the best way to play this is to be healthy, and learn to read between the lines.
33 Isaac // Jun 1, 2009 at 3:48 pm
On a different topic- energy and investing- I’m reading athought provoking book that I recommend. “Why your world is about to get a whole lot smaller” by Jeff Rubin.
34 KV // Jun 1, 2009 at 9:14 pm
Isaac - I agree that some of the screening companies are likely to be scams. However, one can ask for credentials, and one can check with local authorities. I learned about them from a reputable insurance provider which seem to be getting tired of excessive billings on simple tests mostly performed by a technician and data analyzed by software.
Sham credentials is a fact of life as there are many cases of people becoming doctors without any training. Identity theft is now so common that unqualified can easily dupe the trusting.
We do not have to go to Nigeria, they are local too. Heck, didn’t we get sham credentials from our secretary of state about the stuff we were made afraid off?
My problem with medical stuff is that I can not hedge my bets at a small cost like I do in my investments. I am stuck and must trust. Many insurance providers make you pay in full for second opinions.
I fully agree with you on staying healthy and learning to read between the lines, provided that I have lines to read between. Most of the time, we are told, no questions are allowed!
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