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Instability

Instability

In every century the same thing happens at one point or another. Society loses the plot and gets caught up in a mania, a grandiose exercise in self delusion. It can be political, it can be religious, and yes it can be economic. Sometimes these manias are confined to regions or small groups of people, sometimes they are vast in reach and impact and have global consequences. We can all think of examples. Religious? How about witch burnings? Politics? How about Nazism? Economics? How about all the manias that had fervent believers and adherents that with the hindsight of time were completely insane? The South Sea Bubble, the Tulip mania, the 1929 mania, etc. All of these bringing about vast social instability versus the previous status quo with often disastrous consequences.

And whatever we got going here is now approaching a similar frantic delusion that appears to infect everyone.

All of these manic periods have something in common: Believing in something absolutely even though it is either completely wrong or unrealistic. Seeing reality becoming untethered.

I’ve long argued that central banks aiming to be a stabilizing force are actually bringing about societal instability. Occupy Wall Street, Black Lives Matter, the storming of the Capitol, angry Trump voters, angry Democrat voters and yes even Gamestop reddit buyers may all have different causes and triggers and motivations, but they actually have one thing in common: They are angry, angry at a system that has screwed them over, a sense of deep pervasive injustice and inequality, a fissure that keeps widening with every central bank intervention program.

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Why the Unraveling Will Accelerate

Why the Unraveling Will Accelerate

Sclerotic, hidebound institutions optimized for linear stability and permanent growth are simply not designed to adapt to non-linear change and disruption of permanent growth.

Since the first news of pandemic in late January, I’ve been discussing potential accelerants to the unraveling of our fragile financial system: second-order effects (initial travel restrictions and layoffs were first-order effects, new waves of layoffs are second-order effects) and the shift from linear dynamics (add 1 to inputs, that changes output by 1) to non-linear: (add 1 to inputs, that changes output by 10).

The system appears stable until a catalyst pushes it off the cliff. Catalysts come in a variety of forms, from the apparently modest “straw that breaks the came’s back” to a broad awakening that the status quo simply isn’t capable of adapting successfully to new realities.

Financial catalysts tend to result in sudden, cataclysmic collapses in liquidity, solvency and sentiment. While the Federal Reserve can “fix” liquidity crises by creating currency out of thin air, that doesn’t make bankrupt firms solvent or make employers hire employees. Once complacent confidence slides into cautious fear, massive liquidity injections to keep the system from crashing are understood as last-ditch desperation.

Social-political catalysts are slower but much more difficult to reverse. While the media’s attention has been focused on the protests stemming from long-standing institutional bias, As Mark, Jesse and I discuss in Salon #14: Jobageddon and the Coming Education Revolts, two other social-political catalysts are gathering momentum:

1. The failure of our education complex to provide workable childcare/learning solutions

2. The hope of a V-shaped recovery in employment collapses.

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Gold Outlook 2019: Uncertainty Makes Gold A “Valuable Strategic Asset” – WGC

Gold Outlook 2019: Uncertainty Makes Gold A “Valuable Strategic Asset” – WGC

Gold Outlook 2019 – World Gold Council

As we look ahead, we expect that the interplay between market risk and economic growth in 2019 will drive gold demand. And we explore three key trends that we expect will influence its price performance:

  • financial market instability
  • monetary policy and the US dollar
  • structural economic reforms.

Against this backdrop, we believe that gold has an increasingly relevant role to play in investors’ portfolios.


Gold Outperformed Most Assets In 2018

Why gold why now

Gold’s performance in the near term is heavily influenced by perceptions of risk, the direction of the dollar, and the impact of structural economic reforms. As it stands, we believe that these factors likely will continue to make gold attractive.

In the longer term, gold will be supported by the development of the middle class in emerging markets, its role as an asset of last resort, and the ever-expanding use of gold in technological applications.

In addition, central banks continue to buy gold to diversify their foreign reserves and counterbalance fiat currency risk, particularly as emerging market central banks tend to have high allocations of US treasuries. Central bank demand for gold in 2018 alone was the highest since 2015, as a wider set of countries added gold to their foreign reserves for diversification and safety.

More generally, there are four attributes that make gold a valuable strategic asset by providing investors:

  • a source of return
  • low correlation to major asset classes in both expansionary and recessionary periods
  • a mainstream asset that is as liquid as other financial securities
  • a history of improved portfolio risk-adjusted returns.

‘Outlook 2019: Global economic trends and their impact on gold’ – Full report from World Gold Council here

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Weekly Commentary: Instability

Weekly Commentary: Instability

With the Turkish lira down another 6.6% in Monday trading, global “Risk Off” market Instability was turning acute. The U.S. dollar index jumped to an almost 14-month high Monday, as the Turkish lira, Argentine peso, Indian rupee and others traded to record lows versus the greenback. The South African rand “flash crashed” 10%, before recovering to a 2.3% decline. Brazil’s sovereign CDS jumped 14 bps Monday to a six-week high 252. Italian 10-year yields jumped 11 bps to 3.10%, near the high going back to June 2014, as the euro declined to one-year lows.
The Turkish lira surged 8.4% Tuesday, jumped another 6.8% Wednesday and then gained an additional 1.9% Thursday. Wild Instability then saw the Turkish lira drop 3.1% during Friday’s session, ending the week up 6.9%. Qatar’s $15 billion pledge, along with central bank measures, supported the tenuous lira recovery.

August 17 – Wall Street Journal (Lingling Wei and Bob Davis): “Chinese and U.S. negotiators are mapping out talks to try to end their trade impasse ahead of planned meetings between President Trump and Chinese leader Xi Jinping at multilateral summits in November, said officials in both nations. The planning represents an effort on both sides to keep a spiraling trade dispute-which already has involved billions of dollars in tariffs and comes with the threat of hundreds of billions more-from torpedoing the U.S.-China relationship and shaking global markets. Scheduled midlevel talks in Washington next week, which both sides announced on Thursday, will pave the way for November. A nine-member delegation from Beijing, led by Vice Commerce Minister Wang Shouwen, will meet with U.S. officials led by the Treasury undersecretary, David Malpass, on Aug. 22-23. The negotiations are aimed at finding a way for both sides to address the trade disputes, the officials said, and could lead to more rounds of talks.”

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When Long-Brewing Instability Finally Reaches Crisis

When Long-Brewing Instability Finally Reaches Crisis

Keep an eye on the system’s buffers. They look fine until they suddenly collapse.
The doom-and-gloomers among us who have been predicting the unraveling of an inherently unstable financial system appear to have been disproved by the reflation of yet another credit-asset bubble. But inherently unstable / imbalanced systems can stumble onward for years or even decades, making fools of all who warn of an eventual reset.
Destabilizing systems can cling on for decades, as the inevitable crisis doesn’t necessarily resolve the instability. History shows that when systems had enough inherent wealth to draw upon, they could survive for centuries, thinning their resources, adaptability and buffers until their reservoirs were finally drained. Until then, they simply did more of what’s failed to maintain the sclerotic, self-serving elites at the top of the Imperial food chain.
If we want to trace back the systemic instabilities and imbalances that culminated in China’s revolution in 1949, we can start in 1900 with the Boxer Rebellion, which was itself a reaction to the Opium Wars of the 1840s that established Western influence and control in China.
But is this far enough back in time to understand the Communist Revolution in the 1940s? If we want a comprehensive understanding, we must go back to 1644 and the demise of the Ming Empire, and perhaps even farther back to the Mongol victory over the Song dynasties in the late 1200s.
In the same fashion, we can trace the current crisis of global-finance Capitalism back to the expansion of globalization, affordable fossil fuels and credit in the early 1900s. Affordable fossil fuels enabled rapid industrialization and the growth of transportation and communication networks. Add the expansionary effects of globalization and credit, and the consumer-finance economy took off like a rocket until the inevitable consequences of providing leverage and credit to marginal producers, buyers and speculators led to the Great Depression.

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The Three Crises That Will Synchronize a Global Meltdown by 2025

The Three Crises That Will Synchronize a Global Meltdown by 2025

We’re going to get a synchronized global dynamic, but it won’t be “growth” and stability, it will be DeGrowth and instability.

To understand the synchronized global meltdown that is on tap for the 2021-2025 period, we must first stipulate the relationship of “money” to energy:“money” is nothing more than a claim on future energy. If there’s no energy available to fuel the global economy, “money” will have little value.

The conventional economists assure us that energy is now a small part of the overall economy, so fluctuations in energy prices will have a limited effect on global prosperity. But what’s left of global prosperity when energy is unable to meet current demand at any price that consumers can afford?

The current “economic understanding” of energy and “money” is an artifact of a unique period of cheap, abundant fossil fuels. It is an article of faith in economics that energy will always become cheaper and more abundant as the pixie-dust of technology is irreversible. By the time fossil fuels become scarce many decades hence, we’ll all have cold-fusion generators, or micro-nuclear power plants or nearly free electricity from solar panels, and so on.

This is of course complete rubbish. To scale up any energy source to replace fossil fuels will require decades and tens of trillions of dollars in capital investment. In other words, energy development is a financial dynamic. Technology is only the first small piece of a much larger puzzle.

This becomes clear when we ponder the unwelcome reality that the fracking miracle has resulted in $250 billion in losses. You mean all those companies lost money exploiting the miracle technologies of fracking?

…click on the above link to read the rest of the article…

Don’t listen to the ruling elite: the world economy is in real trouble

Andy Xie says those attending the G20, Davos and other wasteful meetings are wrong to try to pin the blame for the turmoil on people’s psychology; all signs point to a prolonged period of global stagnation and instability

The G20 working group meeting in Shanghai didn’t come up with any constructive proposals for reviving the global economy and, instead, complained that the recent market turmoil didn’t reflect the “underlying fundamentals of the global economy”. The oil price has declined by 70 per cent since June 2014, while the Brazilian real has halved, and the Russian rouble is down by 60 per cent. The global economy is on the cusp of another recession, and these important people blamed it all on some sort of psychological problem of the people.

One major complaint that people have is that the system is rigged – that is, the rising income concentration is not due to free market competition, but a rigged system that favours the politically powerful. This is largely true. The new billionaires over the past two decades have come mostly from finance and property. Few made it the way Steve Jobs or Bill Gates did, creating something that makes people more productive.
…click on the above link to read the rest of the article…

The Lesson of Empires: Once Privilege Limits Social Mobility, Collapse Is Inevitable

The Lesson of Empires: Once Privilege Limits Social Mobility, Collapse Is Inevitable

The next few years will strip away the illusions of “growth” and reveal which dominates our society and economy: privilege or social mobility.

Among the many lessons of empires is one shared by virtually every empire:once the privileged few limit the rise of those from humble origins (i.e. social mobility), the empire is doomed to rising instability and collapse.

Just as a reminder of how wealth and income are increasingly concentrated in the top of the wealth/power pyramid:

The greater the concentration of wealth and power, the lower the social mobility; the lower the social mobility, the greater the odds that the system will collapse when faced with a crisis that it would have easily handled in more egalitarian times.

When the economy is expanding faster than the population and the tide is lifting all ships large and small, the majority of people feel their chances of getting ahead are positive (even if the actual chances remain low).

But when the economy is stagnating, and they see those at the apex of the pyramid still amassing monumental gains, the majority realizes their chances of securing a better life are declining.

The natural result is frustration, anger and a disavowal of the corrupt status quo: in other words, precisely what the U.S. is experiencing in this election cycle.

People are waking up the reality that the status quo exists to protect the privileged, period. When the serfs do all the right things–get a university degree, work hard, serve their masters well, etc.–they find that “getting ahead” has been redefined as “running in place to keep from falling behind” (i.e. the Red Queen’s Race).

…click on the above link to read the rest of the article…

Economics in a Time of Political Instability

Economics in a Time of Political Instability

MILAN/STANFORD – Over the last 35 years, Western democracies have seen a rapid rise in political instability, characterized by frequent shifts in governing parties and their programs and philosophies, driven at least partly by economic transformation and hardship. The question now is how to improve economic performance at a time when political instability is impeding effective policymaking.

In a recent article, one of us (David Brady) shows the correlation between rising political instability and declining economic performance, pointing out that countries with below-average economic performance have experienced the most electoral volatility. More specifically, such instability corresponds with a decline in the share of industrial or manufacturing employment in advanced countries. Though the extent of the decline varies somewhat across countries – it has been less sharp in Germany than in the United States, for example – the pattern is fairly ubiquitous.

Over the last 15 years, in particular, increasingly powerful digital technologies enabled the automation and disintermediation of “routine” white- and blue-collar jobs. With advances in robotics, materials, 3D printing, and artificial intelligence, one can reasonably expect the scope of “routine” jobs that can be automated to continue expanding.

The rise of digital technologies also boosted companies’ ability to manage complex multi-source global supply chains efficiently, and thus take advantage of global economic integration. As services became increasingly tradable, manufacturing declined steadily as a share of employment, from 40% in 1960 to about 20% today. But, in most advanced countries, the tradable sector did not generate much employment, at least not enough to offset declines in manufacturing. In the United States, for example, net employment generation in the third of the economy that produces tradable goods and services was essentially zero over the last two decades.

…click on the above link to read the rest of the article…

Stability begets instability: The challenges of the post-2008 world

Stability begets instability: The challenges of the post-2008 world

Most people value stability in their lives. And, this makes perfect sense. Stability usually means an adequate, secure income; an established group of friends and family members with whom we are close; an identity in our communities based on our jobs, community involvement, and personal networks; physical safety in our daily lives, that is, no war or extreme violence where we live; and relative psychological calm that reflects that stability.

But humans value other things such as variety and novelty. In short, we can get bored. And, in order to address our boredom, we must actually seek out instability in our lives. We proceed to upset the very stability which we believe makes us comfortable and safe by engaging in activities that subject us to physical, financial and emotional risk such as sports, gambling or new relationships.

There is, of course, the disruption of our routine that comes from external events, from things that we do not necessarily choose: the loss of a job, a divorce, the death of a loved one, or injury due to accident. External events can also be positive: an unsolicited job offer, an unexpected romance, or the miraculous recovery of a loved one.

As it is with individuals, so it is with nations and complex social systems such as corporations and markets which reflect these same seemingly contradictory desires for stability, but also variety and novelty. It seems the social mood cannot go long without experiencing some interesting disruption: a war, an economic boom or a bust, a change of political parties, a change in fashion, a disruptive technology.

As moderns we are taught that constant change is good and a sign of progress. It should not seem strange that all this change can undermine our personal stability.

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The Class War Has Already Started

The Class War Has Already Started

Here’s what’s obvious, but unacceptable: we need a new system.

Pundits and apologists are quick to chastise anyone who even speaks of class war, as if the words alone might spark what the pundits and apologists fear.

The pundits and apologists dread the words because they know the Class War has already started. The mainstream media’s hope is that denial will somehow suppress the broader recognition that the fault lines in American society are cracking wide open.

Last week’s entries explained why increasing wealth/income inequality is the only possible output of the current social- political -economic order. All the proposed “fixes”–more regulations, more taxes, more bureaucracies, etc.– will fail because they are merely extensions of a failed system that optimizes inequality, monopoly, cronyism, stagnation, low social mobility and systemic instability.

Here is my delineation of America’s nine socio-economic classes:

The Changing World of Work I: America’s Nine ClassesEight of the nine classes are hidebound by backward-looking conventions, neofeudal arrangements and a spectrum of perverse incentives and false choices.

A few commentators see the fault lines and understand the Class War is already rumbling. Correspondent Mark G. submitted these two articles as examples of the widening divides between various classes in the U.S.:

Are We Heading for an Economic Civil War?

How the widening urban-rural divide threatens America

In the first piece, Joel Kotkin describes the political capture of the Status Quo Imperial Democrats by the Left Coast media and tech culture of Silicon Valley and Hollywood, both of which have thrived in our hyper-financialized economy of 95% losers and 5% winners, and the Right Coast financiers, lobbyists, government bureaucrats and Wall Streeters who have benefited so handsomely from the hyper-financialization of the U.S. economy, politics, media and zeitgeist.

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The Boundaries and Future of Solution Space – Part 2

The Boundaries and Future of Solution Space – Part 2

The Psychological Driver of Deflation and the Collapse of the Trust Horizon

The collective mood shifts rapidly from optimism and greed to pessimism and fear as the bubble bursts, and as it does so, the financial system moves from expansion to contraction. Financial contraction involves the breaking of promises right left and centre, with credit instruments drastically revalued downwards in the process. As the promises that back them cease to be credible, value disappears extremely rapidly. This is deflation and the elimination of excess claims to underlying real wealth.

Instruments once regarded as money equivalents will lose that status through the loss of confidence in them, causing the supply of what retains sufficient confidence to still be regarded as money to collapse. The more instruments lose the confidence that confers value upon them, the smaller the effective money supply will be, and the more confidence will become a rare ‘commodity’. Being grounded in psychology is the primary reason that deflation cannot be overcome through policy adaptations which are inherently too little and too late. Nothing moves as quickly as a collective loss of confidence in human promises, and nothing destroys value as comprehensively.

The same abrupt change in collective mood will also drive contraction in the real economy, but more slowly, since the time constant for change in the real world is much slower than in the virtual world of finance. This process will also result in broken promises as structural dependencies fracture when there is no longer enough to go around. There will be wage and benefit cuts, layoffs, strikes, strike-breaking, breaches of contract, business failures and more on a huge scale, and these will fuel further fear, anger and the destruction of trust.

 

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QE Breeds Instability

QE Breeds Instability

Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.

What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.

Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.

That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.

Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.

Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.

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charles hugh smith-Globalization = Permanent Instability

charles hugh smith-Globalization = Permanent Instability.

Globalization continually creates imbalances that fuel a perpetual instability that gradually impoverishes every sector other than global capital.

Globalization has two guaranteed consequences: permanent instability and endless boom-and-bust cycles. As noted in Forget “Free Trade”–Focus on Capital Flows, the key engine of globalization is mobile capital: capital that can borrow money for next to nothing in one nation and then move that capital to other nations where yields are higher and opportunities for exploitation riper.

This mobility of capital is an enormous benefit to the owners of the capital, but it creates extraordinary instability for those who are not as mobile. When mobile capital encounters anything that reduces profits–higher taxes and rising labor costs, competition or restrictive regulations–it closes factories and fires its workers in that locale and shifts to another locale with greater opportunities for high returns.

The workers left behind have limited means to replace the lost wages, and the local government often has few resources to repair any damage left by the exploitation of resources. The advantage of mobility is reserved for capital, and to the relatively limited cohort of workers who can immigrate to other nations to find work.

…click on the above link to read the rest of the article…

 

 

Olduvai IV: Courage
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Olduvai II: Exodus
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