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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.

…click on the above link to read the rest…

The Unintended Consequences of Unintended Consequences

November 8, 2022

The Unintended Consequences of Unintended Consequences

Decades of central bank distortions and regulatory / market-share capture by cartels and monopolies have completely gutted “markets,” destroying their self-correcting dynamics.

Unintended consequences introduce unexpected problems that may not have easy solutions. An entirely different set of problems are unleashed as unintended consequences have their own unintended consequences. This is the problem with complex emergent systems such as economies, societies and global supply chains: the system’s feedback, leverage points and phase-change thresholds are not necessarily visible or predictable, yet these dynamics have the potential to cascade small failures into systemic collapse.

The unintended consequences of unintended consequences are called second-order effects: consequences have their own consequences.

So for example, you juice your economy with massive stimulus after a lockdown that upended consumers and global supply chains, crushing both demand and supply, and suddenly you have rip-roaring inflation as demand comes back while supply chains remain tangled.

Shifting critical industrial production to frenemies so corporations could maximize profits while reducing the quality of goods and services seemed like a good idea until the potential costs of that dependence on frenemies become apparent.

Assuming oil and natural gas would always be in abundance made sense when they were abundant, but geopolitical forces kicked that assumption into the gutter. All the reassuring economic stories we told ourselves–energy is only 3.5% of the economy and the household spending budget, so cost really doesn’t matter–fall off the cliff when availability and supply become the paramount issues setting price.

That 3.5% loses meaning when there’s not enough to supply demand and somebody loses the game of musical chairs.

Then there’s the fantasy that monetary policy imposed by central banks control inflation. The inconvenient reality is central bank monetary policy is akin to building sand castles on the beach: when the tide is ebbing, the castles look magnificent. When the tide is rising, the sand castles are quickly washed away.

…click on the above link to read the rest…

The Empire of Uncertainty

October 2, 2020

The Empire of Uncertainty

Anyone claiming they can project the trajectory of the U.S. and global economy is deluding themselves.

Normalcy depends entirely on everyday life being predictable. To be predictable, life must be stable, which means that there is a high level of certainty in every aspect of life.

The world has entered an era of profound uncertainty, an uncertainty that will only increase as self-reinforcing feedbacks strengthen disrupting dynamics and perverse incentives drive unintended consequences.

It may be more accurate to say that we’ve entered the Empire of Uncertainty, an empire of ambiguous borders and treacherous topology.

A key driver of uncertainty is the Covid-19 virus, which is a slippery little beast. Nine months after its emergence on the world stage, discoveries are still being made about its fundamental nature.

Humans crave certainty, as ambiguity and uncertainty create unbearable anxiety. This desire to return to a predictable “normal” drives us to grasp onto whatever is being touted as a certainty: a cure, a vaccine, a fiscal policy to restore the “Old Normal” economy, etc.

But none of these proposed certainties is actually certain, and those touting these certainties are non-experts who latch onto an “expert” opinion that resolves their need for certainty and predictability.

What we want, of course, is a return to old certainties that we’re familiar with. In the context of pandemic, the model most people are working from is a conventional flu pandemic: a certain number of people get the virus and become ill, a certain number of then die, and those who survive resume their old life.

But there is mounting evidence that Covid-19 doesn’t follow this neat pattern of “the dead are gone and everyone else picks up where they left off.” Counting the dead as the key statistic completely ignores the long-term consequences of Covid-19 that include permanent organ damage.

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

The Consequence of Globalism Is World Instability

February 7, 2020

The Consequence of Globalism Is World Instability

If the coronavirus proves to be serious, as it does not appear to be at the present time, many economies could be adversely affected. China is the source of many parts supplied to producers in other countries, and China is the source of the finished products of many US firms such as Apple. If shipments cannot be made, sales and production outside of China are affected. Without revenues, employees cannot be paid. Unlike the financial crisis of 2008, this would be an unemployment crisis and bankruptcy of large manufacturing and marketing corporations.

This is the danger to which globalism makes us vulnerable. If US corporations produced in the US the products that they market in the US and the world, an epidemic in China would affect only their Chinese sales, not threaten the companies’ revenues.

The thoughtless people who constructed “globalism” overlooked that interdependence is dangerous and can have massive unintended consequences. With or without an epidemic, supplies can be cut off for a number of reasons. For example, strikes, political instability, natural catastrophes, sanctions and other hostilities such as wars, and so forth. Clearly, these dangers to the system are not justified by the lower labor cost and consequent capital gains to shareholders and bonuses to corporate executives. Only the one percent benefits from globalism.

Globalism was constructed by people motivated by short-term greed. None of the promises of globalism have been delivered. Globalism is a massive mistake. Yet, almost everywhere political leaders and economists are protective of globalism. So much for human intelligence.

At this point of time, it is difficult to understand the hysteria over coronavirus and predictions of global pandemic. In China there are about 24,000 infections and 500 deaths in a population of 1.3 billion people. This is an inconsequential illness.

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

BIll Blain: “The Unintended Consequences Are Finally Coming Back To Bite Us”

February 12, 2018

BIll Blain: “The Unintended Consequences Are Finally Coming Back To Bite Us”

Fundamentals ok, Technicals corrected, so why we should still be nervous on what comes next for markets…

“If the apocalypse comes, tweet me..”

That was an interesting week that was…. but what a hangover we face! What happened to the global bull stock market? Just as the party was looking likely to carry on forever, the music stopped… Reading through market the scribblers this morning, the consensus seems to be it was just a correction, and we should be buying the dips. I’m always a big supporter of buying dips…. I’m not so keen on buying into a more secular decline.

Thing is, it feels there is nothing particular we can put the finger on as responsible for last week’s stock market ructions. Bond yields rose a bit, inflation has gathered a bit of momentum, and economic fundamentals remain generally positive and are expected to improve in line with rising growth estimates. There is little threat of an oil-shock. Folk have pointed out that with so much money likely to be invested in share-buybacks and special dividends by US companies repatriating cash, the stock fundamentals look positive.

Central banks remain hawkish re normalisation and higher interest rates – but modestly so. A world with moderate on-trend inflation, still low interest rates, and solid growth prospects should be positive. A screaming buy signal.

Others say last week’s pain was technically driven – on the back of a massive sudden and shocking unwind of “short-vol” trades. Others say if was due to AI driven algorithmic traders, while the FT carries a story about insurance companies dumping massive amounts of stocks, triggered by rising volatility, linked to “managed volatility” variable annuities.

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

Minimum Wage Fallout Is Caused by Government, Not Businesses

January 23, 2018

Minimum Wage Fallout Is Caused by Government, Not Businesses

Employees don’t magically become more productive because businesses have to pay them more, so they need to make up the losses elsewhere.

Both in Canada and in the U.S., many jurisdictions have “listened” to the people and enacted feel-good legislation like increasing the minimum wage, sometimes up to $15 an hour. Now that the consequences of such actions are being felt, people naturally blame… private corporations.

In Ontario, famous doughnut chain Tim Hortons sent a letter to all their employees saying that many of their benefits, such as paid breaks and dental benefits, will be scaled down or canceled altogether. Meanwhile, the Great Canadian Bagel chain has announced a price increase to pay for the newly imposed wages.

Unhappy with these changes, an Ottawa-based labor council set up a “bully hotline” so that employees can anonymously denounce employers who “violate the spirit of the new law.” Many “Timmies” regulars are even calling on a boycott of the chain to show their discontent.

In the U.S., a recent picture from a Subway restaurant in Seattle, Washington, shows the franchise owner stating that, because of all the costs incurred (including high minimum wage), he cannot accept one-dollar coupons for the footlong of the day.

It is almost a miracle that the chain hasn’t cut back on employees altogether.

Market Forces Affect EverythingWho is to blame for those changes on both sides of the border? Unfettered-capitalist-neoliberal-puppy-eating-Koch-brother greed? Heartless managers who just want to exploit their workers?

No, the cutting back of hours, benefits, and discounts is a working of the markets, i.e. of every customer’s decisions. Since franchises like McDonald’s have, on average, a profit margin of 2.4 percent, the slightest sudden increase in costs will eat that margin away. It’s a highly competitive and difficult world; as much as 30 percent of Quiznos franchises default on their government-backed loans.

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

Lacy Hunt on the Unintended Consequences of Federal Reserve Policies

December 27, 2017

Lacy Hunt on the Unintended Consequences of Federal Reserve Policies

The Financial Repression Authority interviewed Lacy Hunt, Chief Economist at Hoisington Management on Fed policies.

The interview below first appeared on the FRA website along with a video. The emphasis in italics is mine.

FRA: Hi, welcome to FRA’s Roundtable Insight. Today, we have Dr. Lacy Hunt. He’s an internationally recognized economist and the Executive V.P. and Chief Economist of Hoisington Investment Management Company, a firm that manages over $4.5 billion USD and specializing in the management of fixed income accounts for large institutional clients. He also served in the past as Senior Economist for the Federal Reserve Bank of Dallas, where he was a member of the Federal Reserve System Committee on Financial Analysis. Welcome. Dr. Hunt.

Dr. Lacy Hunt: Nice to be with you, Richard.

FRA: Great. I thought we’d have a discussion on a variety of topics relating to the economy and the financial markets. You recently mentioned that you thought this was the worst economic expansion recovery in U.S. history since 1790. Wow. Can you elaborate?

Dr. Lacy Hunt: If you calculate the average growth rate in the expansions since 1790, this is a long-running expansion, but it’s the slowest and in the last 10 years the household sector lagged very, very badly. The rate of growth in real disposable household income per capita is only 0.9 percent per year. And in the last 12 months, we’re up only 0.6 percent per year. So it’s a long-running expansion, but it’s been a poor expansion. There are certainly problems with some of the earlier data, but this appears to be the slowest expansion since the turn of the 18th Century and our households are the main problem for the growth rate lag.

FRA: And do you point a finger for this cause as primarily on the Federal Reserve or do you see structural changes happening to the economy?

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

Should we try to fix global warming with fake volcanic eruptions? TBD.

November 18, 2017

Should we try to fix global warming with fake volcanic eruptions? TBD.

There could be unintended consequences.

The eruption of Mount Pinatubo in 1991 sent planet-cooling aerosols into the atmosphere. Photo by Arlan Naeg/AFP/Getty Images.

By Mary Beth Griggs

With heat-trapping carbon emissions on the rise again, researchers are looking for ways to turn down the thermostat while humanity gets itself under control. One potential solution? Try to copy volcanic eruptions. But in addition to adjusting the temperature, such practices could change the frequency of hurricanes, or the location of droughts.

When explosive volcanic eruptions occur — like the one at Mount Pinatubo in 1991 — they send small particles of ash and gas high into the atmosphere. These so-called aerosols block and reflect sunlight, providing a temporary cold compress to the Earth’s rising temperatures.

After years of watching volcanos go through the motions, some researchers are looking into whether they can use that same method to help cool down the planet — an idea known as solar geoengineering. But a set of studies published this month show just how complicated a proposition that might be.

“Sulfur dioxide is emitted by volcanic eruptions. It’s also relatively cheap and relatively common, so it’s the natural candidate for solar geoengineering,” says Anthony Jones, author of a recent Nature Communications study on the subject. “It’s basically copying a volcanic eruption, and then extending the injection of the aerosols into the atmosphere.”

Sulfur dioxide is a common occupant of the dramatic cloud that follows an Earthly eruption, and when it gets into the atmosphere it expands and reacts with other chemicals — including water — to form aerosol particles, which can reflect sunlight back into space and cool the Earth below.

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

Unintended Consequences, Part 2: Easy Money = Overcapacity = Trade Wars

May 29, 2016

Unintended Consequences, Part 2: Easy Money = Overcapacity = Trade Wars

It’s unclear what China was thinking when it was borrowed all those trillions to quadruple its capacity to make steel, cement and other basic industrial products. There’s no record of it checking in with the other countries that have such industries to see if a sudden surge of cheap imports was okay with them.

Turns out that it’s not. The US in particular seems to lack a sense of humor where the death of its steel industry is involved:

US hits China and others with more steep steel duties

(CNBC) – The U.S. Department of Commerce has imposed more duties on corrosion-resistant steel imports from China and elsewhere in an effort to protect its industry from a glut of steel imports from around the world.On Wednesday, the department’s International Trade Administration, which has conducted an investigation into the “dumping” of steel products into U.S. markets, said it had found the “dumping of imports of corrosive-resistant steel (CORE) products from China, India, Italy, Korea and Taiwan” by various steel producers that it named within those countries.

As a result, the department said that Chinese corrosion-resistant steel would be subject to a final anti-dumping duty of 210 percent and anti-subsidy duty of between 39 percent and up to 241 percent.

China’s low-cost metal producers have been widely cited as the main culprit for a glut in global steel production that has pushed down prices. Last week, the U.S. slapped tariffs of more than 500 percent on Chinese cold-rolled steel, which is used mainly in car production and appliances.

China has been accused by the U.S. and leading figures in the steel industry of “dumping” that cheap steel on to global markets due to a slowdown in domestic demand and a bid to gain global market share at any cost.

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

The Paradox of Risk: Central Planning Is Linear, Reality Is Non-Linear

October 14, 2015

The Paradox of Risk: Central Planning Is Linear, Reality Is Non-Linear

You thought it was safe to drive 90 miles an hour on a rain-slicked narrow road while you were tipsy because the airbag would save you, but it still hurts when you crash.

I first discussed the Paradox of Risk in August, 2008, just before the stock market melted down: The Unintended (Risky) Consequences of “Backstopping” Risk(August 12, 2008)

This is the Paradox of Risk: the more risk is apparently lowered, the higher the risk we are willing to accept.

I recently covered a related topic, The Dangerous Illusion That Risk Can Be Offloaded Onto Others (October 2, 2015).

The paradox is that believing risk has been eliminated leads us to take on insane levels of risk–levels that we would never have accepted before, levels that essentially guarantee our financial destruction.

I recently had the opportunity to discuss these topics with Max Keiser: Keiser Report: Global Paradox of Risk (25:40 — I join Max and Stacy in the 2nd half)

There are a variety of sources of the belief that risk has been lessened or eliminated:

1. The Fed Put, the belief that the Federal Reserve will never let stocks decline by more than a few percentage points before it steps in and saves the market from any further decline.

2. The belief that hedges dependent on counterparties paying off when the market craters have effectively transferred risk to others.

3. The belief in Modern Portfolio Management, i.e. that risk can be hedged or reduced to near-zero by diversifying one’s portfolio, investing in assets with low correlation, etc.

All of this is nice, but fatally flawed. Max and I discuss the reality that markets are not linear, they are fractal.

Central planning is linear, but reality is non-linear. The net result is the Fed can do whatever it wants, whenever it wants, and markets will still crash from time to time.

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

Why is it So Hard for the West to See Everything is Connected?

August 14, 2015

Why is it So Hard for the West to See Everything is Connected?

QUESTION: Marty, you have written many times how everything is connected and how in Asian culture that is the foundation of all understanding. Why is it so hard in the West to comprehend this fundamental concept?

All the best

ANSWER: I think it is all part of the idea that we can alter society forcing it to do as we desire. Politics is based upon this. Socialism is all about robbing one class to benefit the other. There is no comprehension that everything is connected and this permeates analysis as well. This is not my personal discovery for many have seen these connections in Eastern Philosophies. I think in economics, politicians are not interested in such realizations for it means they are not the masters of the universe.

You take Obama’s policy against Russia. He has effectively been disrupting everything around Europe and the consequences are pouring in refugees to Europe and his sanctions have hurt European farmers and the economy. It is not deliberate, but it is reckless for there is no recognition of how everything is connected.

Every action has a consequence. We have the Fed lowered rates to help the banks. But that crisis is over and the consequence has been to create the next crisis – the defaults of pensions and insurance companies that required high interest rates. So many regulations required pension funds to own government bonds. The regulations have set the stage for the next crisis.

We cannot escape this connectivity. Whatever action we take has a consequence. It is impossible to manipulate markets and the economy for there will always be unintended collateral damage. We are living in the era that will bring about a collapse of socialism precisely as took place in communism. Government is incapable of ever managing society for they cannot escape the inter-connectivity.

Collaboration, Adaptation and Risk: Innovate or Die

May 5, 2015

Collaboration, Adaptation and Risk: Innovate or Die

Collaboration, innovation and risk are all intrinsic to adaptation. Without adaptation, every system eventually perishes once conditions change.

One feature of capitalism that is rarely discussed is the premium placed on cooperation and collaboration. The Darwinian aspect of competition is widely accepted (and rued) as capitalism’s dominant force, but cooperation and collaboration are just as intrinsic to capitalism as competition. Subcontractors must cooperate to assemble a product, suppliers must cooperate to deliver the various components, distributors must cooperate to get the products to retail outlets, employees and managers must cooperate to reach the goals of the organization, and local governments and communities must cooperate with enterprises to maintain the local economy.

Ideas, techniques and processes which are better and more productive than previous versions will spread quickly; those who refuse to adapt them will be overtaken by those who do. These new ideas, techniques and processes trigger changes in society and the economy that are often difficult to predict.Darwin’s understanding of natural selection is often misapplied. In its basic form, natural selection simply means that the world is constantly changing, and organisms must adapt or they will expire. The same is true of individuals, enterprises, governments, cultures and economies. Darwin wrote: “It is not the strongest of the species that survives, or the most intelligent, but the ones most adaptable to change.”

This creates a dilemma: we want more prosperity and wider opportunities for self-cultivation (personal fulfillment), yet we don’t want our security and culture to be disrupted. But we cannot have it both ways. Those who attempt to preserve their power over the social order while reaping the gains of free markets find their power dissolving before their eyes as unintended consequences of technological and social innovations disrupt their mechanisms of control.

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

We Ignore Unintended Consequences At Our Peril

January 30, 2015

We Ignore Unintended Consequences At Our Peril

They’ll likely define our future more than the intended ones

Early in my business career, I was faced with a challenge that gave me an appreciation for a critical lesson about life and business. It’s that oftentimes, even with the best of intentions, our actions create consequences completely different from what we intend.

It’s that insight that makes me so concerned about the grand central banking experiment being conducted around the globe right now. With little more than a lever to ham-fistedly move interest rates, the central planners are trying to keep the world’s debt-addiction well-fed while simultaneously kick-starting economic growth and managing the price levels of everything from stocks to housing to fine art.

As with an earlier article I wrote focusing on the Bullwhip Effect phenomenon: the complexity of the system, the questionable credentials of the decision-makers, and the universe’s proclivity towards unintended consequences all combine to give great confidence that things will NOT play out in the way the Fed and its brethren are counting on.

A Puzzle To Solve

Two years after graduating business school, I joined the team at Yahoo! Finance as its Marketing lead. It was a crazy time there; the tech bubble was in mid-burst and advertiser dollars — the main source of revenue for the business unit — were fast drying up. We went through several general managers within my first year there as the leadership scrambled for a sound course to chart.

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

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