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What Happens When There’s Nobody Left to Save Us?

What Happens When There’s Nobody Left to Save Us?

Passively waiting for centralized powers to “save us” from their own excesses is not a solution.

It’s no exaggeration to say that our way of life depends on somebody somewhere saving us from the excesses that are the bedrock of our way of life. What excesses, you ask? There are none. This is true in one sense: all the excesses have been normalized by previous “saves”: whenever the bedrock excesses threaten to collapse under their own weight, the Federal Reserve or the Federal government rush in to save us from the excesses they’ve created.

Stripped of artifice, the bedrock excess that has been completely normalized is to goose consumption by borrowing from future earnings and resources. As long as growth is eternal, this works great: we can always pay more interest on ever-expanding debt with future earnings because those will be inevitably be even larger than the interest due.

Creating money out of thin air is another mechanism that achieves the same goal: goosing consumption via boosting the value of assets to generate a “wealth effect” that lifts all boats. This is also predicated on the eternal expansion of earnings, so wage earners can afford to consume as new money ceaselessly devalues the purchasing power of existing money (what we call inflation).

The problem is these “saves” only work if the interest rate is eternally near-zero and the costs of production are eternally declining: as long as it costs almost nothing to borrow more money into existence and production costs continue to drop, enabling consumers to afford more goodies even as the purchasing power of their wages declines, then all is well.
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How We Fail: Framing the Problem to be Fixable with an Existing Solution

How We Fail: Framing the Problem to be Fixable with an Existing Solution

We say we want solutions, but we actually want a specific subset of solutions: those that already meet with our approval. 

The possibility that none of these pre-approved solutions will actually resolve the problem is rejected because we are wedded to the solutions that we want to work.

The sources of our resistance to admitting that our solution is now the problem are self-evident: holding fast to an ideological certainty gives us inner security, as it provides a simplified, easy-to-grasp frame of reference, an explanation of how the world works and a wellspring of our identity.

Our ideological certainties also serve as our moral compass: we believe what we believe because it is correct and therefore the best guide to solving all problems faced by humanity.

If we frame all problems ideologically (i.e. politically), then there is always an ideological “solution” to every problem.

If we frame all problems as solvable with technology, then there is always a technological “solution” to every problem.

If we frame all problems as solvable with finance, then there is always a financial “solution” to every problem.

In each of these cases, we’re starting with the solution and then framing the problem so it aligns with our solution.  This is not actually problem-solving, and so the solutions–all blunt instruments–fail to actually resolve the complex, knotty problems generated by dynamic open systems with interconnected feedback loops.

Self-interest also plays a role, of course, as self-interest is core to human nature, along with an innate desire to serve the best interests of our family, group, tribe, neighborhood, community enterprise, class and nation. That we prefer solutions that maintain or enhance our current financial and social position in the status quo is no surprise.

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Irony Alert: “Outlawing” Recession Has Made a Monster Recession Inevitable

Irony Alert: “Outlawing” Recession Has Made a Monster Recession Inevitable

Those who came of age after 1982 have never experienced a real recession, and so they’re unprepared for anything other than guarantees of rescue and permanent expansion.

The mainstream view is that recession is caused by economic-financial factors. The mainstream view is wrong, for recession is ultimately caused by Wetware1.0–human nature. Human nature–our innate attraction to windfalls and something-for-nothing, our ability to habituate to extremes and normalize counterproductive dynamics–manifest as economic-financial factors, but these are effects, not causes.

The mainstream view is that recessions are bad, so let’s make sure they never happen. In other words, let’s outlaw them by flooding the economy and financial system with Federal Reserve monetary stimulus and federal stimulus via increased deficit spending.

The history of the past 40 years “proves” these policies effectively eliminate recession: all recessions since 1981-82 have been shallow and brief, basically a spot of bother that lasts one quarter.

Our Wetware1.0 has responded to this “no recession guarantee” in ways that count as unintended consequences. Massive “emergency” stimulus that became permanent policy has created a bubble economy in which low interest rates and unlimited credit for those who are more equal than others has sparked demand for income-producing assets, which then sparked a speculative mania.

We’ve habituated to both the bubble economy and the speculative mania so that these are now considered normal. But behind the comfortable normalization, something counterproductive has taken hold: we’re now addicted to the bubble economy and its crazed twin, speculative mania. If the bubbles pop and speculators go broke, the economy and financial system will both implode.

Without ZIRP (zero-interest rate policy), capital actually has a cost, and the bubble economy cannot survive if capital has a cost. Once capital has a cost, then speculation becomes risky, and speculation cannot survive if risk actually has a cost.

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The Era of Easy Money Ruined Us

The Era of Easy Money Ruined Us

The rot caused by easy money will only become fully visible when the hollowed out institutions start collapsing under the weight of incompetence, debt and hubris.

We have yet to reach a full reckoning of the consequences of the era of easy money, but it’s abundantly clear that it ruined us. The damage was incremental at first, but the perverse incentives and distortions of easy money–zero-interest rate policy (ZIRP), credit available without limits to those who are more equal than others–accelerated the institutionalization of these toxic dynamics throughout the economy and society.

Fifteen long years later, the damage cannot be undone because the entire status quo is now dependent on the easy-money bubble for its survival. Should the bubbles inflated by easy money pop, the financial system and the economy will collapse into a putrid heap, undone by the perversions and distortions of endless easy money.

Easy money created destructive, mutually reinforcing distortions on multiple fronts. Let’s examine the primary ways easy money led to ruin.

1. The near-zero rate credit was distributed asymmetrically; only the wealthiest few had access to the open spigot of “free money.” The rest of us saw mortgage rates decline, but we were still paying much higher rates of interest than corporations, banks and financiers.

If we’d all been given the opportunity to borrow a couple million dollars at 1% and put the easy money into bonds yielding 2.5%, skimming a low-risk 1.5% for producing nothing, we’d have jumped on it. But that opportunity was only available to banks, the super-wealthy, corporations and financiers.

The charts below show the perverse consequences of offering the wealthiest few limitless money at near-zero rates while the rest of us paid much higher interest. The wealthiest few could buy income-producing assets on the cheap at carrying costs no ordinary investor could match…

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Rome Was Eternal, Until It Wasn’t: Imperial Analogs of Decay

Rome Was Eternal, Until It Wasn’t: Imperial Analogs of Decay

The tricky part is distinguishing the critical dependencies–those resources the empire literally cannot do without–from longer-term sources of decay and decline.

In response to my recent post What If There Are No Analogs for 2024?, an astute reader nominated the Roman Empire as a fitting analog. Longtime readers know I’ve often discussed the complex history of Western Rome’s decay and collapse, for example, Why Rome Collapsed: Lessons For the Present (August 11, 2023).

Dozens of other posts on the topic stretch back to 2009: Complacency and The Will To Radical Reform (February 12, 2009)

What conclusions can we draw from recent research and the voluminous work done by previous generations of historians? Our first conclusion is simply to state the obvious: it’s complicated. There was no one cause of Western Rome’s decay and collapse. A multitude of factors generated feedback loops and responses over hundreds of years, some more successful than others.

Indeed, we cannot help but be struck by how many times impending collapse was staved off by brilliant leadership and policy adjustments.

Our second conclusion is to distinguish between the erosive forces of decay and critical vulnerabilities that can trigger collapse. Many authors have pointed to moral decay and fiscal over-reach as sources of Rome’s eventual fall, but there were far more pressing dependencies that created potentially fatal vulnerabilities.

In the case of Western Rome, these included:

1. The depletion of the silver mines in Spain (and the eventual loss of Spain to the Visigoths). Once you run out of hard currency, your free-spending days are over. This dependence on large quantities of hard currency to fund your armed forces is a trigger for collapse.

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Everyone Loves a Generous Government Until They Have to Pay For It

Everyone Loves a Generous Government Until They Have to Pay For It

Not only does everyone love getting “free money” from the state, they also love hearing the fantasy repeated endlessly that debts are no problem.

Governments, like individuals, can spend liberally with great generosity, or they can be frugal. Everyone receiving government money loves the state’s free-spending generosity, as it is “free money” to the recipients.

But there is no such thing as truly “free money,” a reality discussed by Niccolo Machiavelli in his classic work on leadership and statecraft, The Prince, published in 1516. In Machiavelli’s terminology, leaders could either pursue the positive reputation of being liberal in their spending (not “liberal” in a political sense) or suffer the negative reputation of being mean, i.e. miserly, tight-fisted and frugal.

Machiavelli pointed out that the spending demanded to maintain the reputation for free-spending liberality soon exhausted the funds of the state and required the leader to levy increasingly heavy taxes on the citizenry to pay for the state’s largesse.

Once we examine this necessary consequence of liberal spending, it turns out the generous government is anything but generous, as it is eventually forced to impoverish its people to support its spending.

It is the miserly leader and state that is actually generous, for it is the miserly leader / state that places a light burden on the earnings and livelihoods of the citizenry.

As Machiavelli explained, taxes and the inflation that comes with free spending both rob everyone, while the state’s generosity is a political process that necessarily distributes the largesse asymmetrically:

If he is wise he ought not to fear the reputation of being mean, for in time he will come to be more considered than if liberal, seeing that with his economy his revenues are enough…

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The Fed’s Empire of Speculation and the Echoes of 1929

The Fed’s Empire of Speculation and the Echoes of 1929

Speculation has its own expiration dynamics, and they don’t depend on us recognizing speculative excess for what it is. They will unravel the excesses regardless of what we think, hope or deny.

The Federal Reserve has so completely normalized speculative excess that these extremes are no longer even recognized as extremes. Rather, they are simply “the way the world works.” This Empire of Speculation is complex and plays out on multiple levels.

The primary mechanism is obvious to all: whenever the equity market falters, the Fed unleashes a flood tide of liquidity, i.e. fresh currency, that rushes into the market at the top–corporations, banks and financiers–because the Fed distributes the fresh liquidity solely into the top tier of market players.

The Fed’s ability to conjure up liquidity in a variety of ways appears limitless: expand its balance sheet (QE), use the reverse repo market and bank reserves, launch new lending mechanisms, and so on.

The Fed has long relied on useful fictions to mask its agenda. One useful fiction is that the Fed is independent and apolitical. Despite being risibly shopworn, this mirth-inducing fiction is still dutifully trotted out by every Fed chairperson.

Another useful fiction is that the Fed’s mandate focuses on promoting stable expansion of the economy, not the equity market. This masks the reality everyone knows and acts on, which is the market isn’t a reflection of the economy, it is the economy.

This is why the Fed will pursue ever greater policy extremes to rescue the market from any decline and keep equity markets lofting higher: should the market falter, the economy will quickly follow, as the animal spirits of the market are now the primary engine of expansion.

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The Polycrisis

The Polycrisis

Back in 2017 when I composed this graphic of overlapping crises, the word polycrisis was not yet in common use. Polycrisis has various definitions, for example: “the simultaneous occurrence of several catastrophic events.”

 

image 1

But this doesn’t explain the truly dangerous dynamic in polycrisis, which is the nonlinear, mutually reinforcing potential of disparate crises to generate effects much larger than the initial causes. This definition is closer to the mark: “Many different problems happening at the same time so that they together have a very big effect.”

Put another way: 1 + 1 + 1 doesn’t generate an effect of 3, it generates an effect of 9.

You’ll notice the crises on my graphic are internal socioeconomic dynamics: state-cartel centralization, demographics, soaring debts, Imperial overreach, technological disruption, disunity in elites and diminishing returns on financial predation.

Many don’t see these as crises; they’re seen as factors, not as potentially catastrophic dynamics. This is the linear analysis: None of these dynamics is actually threatening to the stability of the U.S.

The nonlinear analysis is: Considering each one as a discrete dynamic, that’s true. But these are mutually reinforcing crises because the status quo “solutions” to each one become mutually reinforcing problems which generate much larger effects than most believe possible.

Note that external factors such as war and climate change are not shown. These conditions are not entirely controllable by U.S. policy decisions. They affect the entire world, not just one nation-state. That said, external crises add additional nonlinear influences to the polycrisis.

Polycrisis and Supply and Demand

The human mind is not particularly well-adapted to polycrisis: We struggle to adapt to the drought, then the earthquake knocks down the village walls, then the tsunami pounds what was left, followed by the epic flooding, then the hurricane batters the survivors, who witness the volcano erupting and wonder what they did to anger the gods and goddesses so mightily.

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I Have a Very Bad Feeling About This

I Have a Very Bad Feeling About This

Unexpected things tend to happen when the real source of problems are papered over and then suddenly reality intrudes.

What an interesting juncture we’ve reached. We’re constantly assured all is well with what matters–the economy–as the all-powerful Federal Reserve has managed not just the hoped-for “soft landing” but a resurgence of growth: yowza, no recession.

The list of good things is striking: unemployment is low, wages are rising, the wealth effect from explosive increases in housing prices has fattened the home equity of households and the soaring stock market has pushed the economy to giddy heights of wealth and confidence.

The spot of bother with inflation has receded and everyone anticipates interest rates will soon follow inflation back towards zero. China has entered a rough patch but it won’t affect us. And so on.

Despite all this uniformly good news, something about the situation is setting off alarms: I have a very bad feeling about this.

Perhaps the root of the feeling that danger is far closer than we discern is the universal confidence that finance can always fix any and all real-world problems. Whatever the problem, central banks can solve it by lowering interest rates and flooding the financial / banking system with liquidity, i.e. monetary easing, making it easier and cheaper for enterprises and households to borrow more money.

On the government-spending side, the central state can fix any and all problems by borrowing and spending however many trillions are needed–fiscal stimulus.

In other words, we don’t need to suffer any inconvenient sacrifices or systemic changes, we simply need to borrow more and spend more. This is certainly a tidy solution to all problems: borrow more and spend more. Everything in the real world can be fixed with monetary and fiscal easing and stimulus.

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Lessons from the Unraveling of the Roman Empire: Simplification, Localization

Lessons from the Unraveling of the Roman Empire: Simplification, Localization

The fragmentation, simplification and localization of the post-Imperial era offers us lessons we ignore at our peril.

There is an entire industry devoted to “why the Roman Empire collapsed,” but the post-collapse era may be offer us higher value lessons. The post-collapse era, long written off as The Dark Ages, is better understood as a period of adaptation to changing conditions, specifically, the relocalization and simplification of the economy and governance.

As historian Chris Wickham has explained in his books Medieval Europe and The Inheritance of Rome: Illuminating the Dark Ages 400-1000the medieval era is best understood as a complex process of social, political and economic natural selection: while the Western Roman Empire unraveled, the Eastern Roman Empire (Byzantium) continued on for almost 1,000 years after the fall of the Western Roman Empire, and the social and political structures of the Western Roman Empire influenced Europe for hundreds of years.

In broad-brush, the Roman Empire was a highly centralized, tightly bound system that was remarkably adaptive despite its enormous size and the slow pace of transport and communication. Roman society was both highly hierarchical–the elites claimed superiority and worked hard to master the necessary tools of authority– slaves were integral to the building and maintenance of Rome’s vast infrastructure–and open to meritocracy, as the Roman Army and other classes were open to advancement by anyone in the sprawling empire: every free person became a Roman Citizen once their territory was absorbed into the Empire.

When the Empire fell apart, the model of centralized control/power continued on in the reigns of the so-called Barbarian kingdoms (Goths, Vandals, etc.) and Charlemagne (768-814), over 300 years after the fall of Rome. (When the Ottomans finally conquered Constantinople in 1453, they also adopted many of the bureaucratic structures of the Byzantine Empire.)

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Global Bankruptcy Already Baked In

Global Bankruptcy Already Baked In

Scrape away the complexity and every economic crisis and crash boils down to the precarious asymmetry between collateral and the debt secured by that collateral collapsing.

It’s really that simple.

In eras of easy credit, both creditworthy and marginal borrowers are suddenly able to borrow more. This flood of new cash seeking a return fuels red-hot demand for conventional assets considered “safe investments” (real estate, blue chip stocks and bonds), demand of which given the limited supply of “safe” assets pushes valuations of these assets to the moon.

In the euphoric atmosphere generated by easy credit and a soaring asset valuations, some of the easy credit sloshes into marginal investments (farmland that is only briefly productive if it rains enough, for example), high-risk speculative ventures based on sizzle rather than actual steak and outright frauds passed off as legitimate “sure-fire opportunities.”

The price people are willing to pay for all these assets soars as the demand created by easy credit increases. And why does credit continue increasing? The assets rising in value create more collateral, which then supports more credit.

This self-reinforcing feedback appears highly virtuous in the expansion phase: The grazing land bought to put under the plow just doubled in value, so the owners can borrow more and use the cash to expand their purchase of more grazing land.

The same mechanism is at work in every asset: homes, commercial real estate, stocks and bonds. The more the asset gains in value, the more collateral becomes available to support more credit.

The Illusion of Safety

Since there’s plenty of collateral to back up the new loans, both borrowers and lenders see the profitable expansion of credit as “safe.”

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What If There Are No Solutions?

What If There Are No Solutions?

The unencumbered realist concludes that there are no solutions within a status quo structure that is itself the problem.

Realists who question received wisdom and conclude the status quo is untenable are quickly labeled pessimists because the zeitgeist expects a solution is always at hand–preferably a technocratic one that requires zero sacrifice and doesn’t upset the status quo apple cart.

Realists ask “what if” without selecting the “solution” first. The conventional approach is to select the “answer/solution” first and then design the question and cherry-pick the evidence to support the pre-selected “solution.”

What if all the status quo “solutions” don’t actually address the real problems? This line of inquiry is strictly verboten, for there must be a solution that solves everything in one fell swoop.

Examples of this approach abound: a one-size fits all solution that resolves all the systemic problems by itself. All we have to do is implement it.

Replacing fiat currencies is one example that I have explored:

You Want Truly “Sound Money”? A Thought Experiment

Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies

I’ve also explored how real change works: it takes many years (or even decades) of sacrifices and high costs with none of the immediate payoff we now expect as a birthright. Real change pits those benefiting from the status quo against those finally grasp that the status quo is the problem, not the solution, and these political/social battles are endless and brutal because any gains come at somebody else’s expense.

The Forgotten History of the 1970s

The 1970s: From Rotting Carcasses Floating in the River to Kayak Races

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Here’s How “Prosperity” Ends: Global Bubbles Are Popping

Here’s How “Prosperity” Ends: Global Bubbles Are Popping

So here we are: the global credit-asset bubbles are popping, and the illusory “prosperity” generated by the bubbles is about to tumble off a cliff.

There are two kinds of prosperity, one fake, one real. Bogus “prosperity” depends on credit-asset bubbles inflating, magically creating “wealth” not from labor, production or improving productivity, but from the value of assets soaring as bubbles inflate.

This bubble-generated “wealth” then fuels a vast expansion of credit and consumption as assets soaring in value increases the collateral available to borrow against, and the occasional sale of soaring assets generate capital gains, stock options, etc. which then fund sharply higher consumption.

When the value of a modest home skyrockets from $200,000 to $1,000,000 in a few years, that $800,000 in gain was not the result of any improvement in utility. The house provides the same shelter it did when it was worth 20% of its current value. The $800,000 is gain is the result of the abundance of low-cost credit and the global search for a yield above zero.

Eventually, this vast expansion of “money” chasing yields and seeking places to park all the excess cash trickles into the real economy and the result is inflationary. Consider how soaring home prices affect rents.

When an investor bought the modest home for $200,000, the costs of ownership were low due to the costs being linked to the value: the property tax, insurance and mortgage were all based on the valuation. (The costs of maintenance were unrelated to valuation, of course, being based on the age and quality of construction.) Let’s say the modest house rents for $1,500 per month.

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The Race to the Bottom Accelerates

The Race to the Bottom Accelerates

When competence, transparency and accountability are all punished, the Race to the Bottom accelerates.

Race to the Bottom describes the process of competitive devaluation, where value is gutted to remain competitive with those who are grabbing market share by stripping out quality, value, durability, transparency, accountability and competence.

We see the global Race to the Bottom in everyday products: the quality of goods has plummeted as manufacturers compete to reduce costs to maintain high profit margins by stripping out the quality and durability of components. We see it in shrinkflation, where the cereal box contains less cereal while the price ratchets higher.

We see it when cereals that once contained no sugar are now sickly-sweet because the manufacturer is losing market share to less healthy sugar-bomb cereals.

We see it in healthcare where costs have been so ruthlessly stripped out to boost profits that it takes months to get an appointment and overworked caregivers no longer have the “luxury” of providing the care they were trained to provide. Routine procedures and hospital stays now carry pricetags equal to four years college tuition or a modest house.

The Race to the Bottom isn’t limited to goods and services. Consider the bedrock of the social order, civility. Civility in discourse is now rarer than sightings of UFOs / UAPs.

In politics, scoring cheap points while ignoring the nation’s social decay and unsustainable bubble economy is another example of the Race to the Bottom. Is getting to the bottom of the Taylor Swift ticketing “fiasco” really the most pressing issue that politicians need to address? It would seem so.

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Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies

Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies

Rather than cheer the concept of a new currency, we’re better served to look at the velocity of that currency and the cycles of investing that currency in assets denominated in that currency for a low-risk return.

Longtime readers know not to expect me to rubber-stamp anything, be it the status quo or proposed alternatives. Our interests are best served by screening everything through the mesh of independent analysis, a.k.a. contrarianism. Which brings us to the two sources of alt-media excitement in the currency space, the petro-yuan and another wave of proposed <i<>gold-backed currencies.

I’m all for competing currencies. The more transparent and open the market for currencies, the better. In my view, everyone should be able to buy and trade whatever currencies they feel best suits their goals and purposes.

In all the excitement over de-dollarization, some basics tend to get overlooked.

1. The yuan remains pegged to the US dollar, so it remains a proxy for the USD. It will only become a true reserve currency when China lets the yuan float freely on the global FX market and yuan-denominated bonds also float freely on global bond markets. In other words, a currency can only be a reserve currency rather than a proxy if the price and risk of the currency is discovered by global markets, not centralized monetary/state authorities.

2. Most commentators stop on first base of the oil-currency cycle: China buys oil from exporting nations by exchanging yuan for oil. So far so good. But what can the oil exporters do with the yuan? That’s the tricky part: the petro-yuan has to work not just for China but for the oil exporters who will be accumulating billions of yuan.

…click on the above link to read the rest…

Olduvai IV: Courage
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Olduvai II: Exodus
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