A Tale of Two Recessions: One Excellent, One Tumultuous

Events may show that there are no winners, only survivors and those who failed to adapt.

Some recessions are brief, necessary cleansings in which extremes of leverage and speculation are unwound via painful defaults, reductions of risk and bear markets.

Some are reactions to exogenous shocks such as war or pandemic. The uncertainty triggers a mass reduction of risk which recedes once the worst is known and priced in.

Far less frequently, structural recessions are lengthy, tumultuous upheavals that can set the stage for excellent long-term expansion or unraveling and collapse. In these structural recessions, 10% to 20% of the workforce loses their jobs as entire sectors are obsoleted and jobs that depend on excesses of debt and speculation go away.

In the U.S. economy of today, this would translate into a minimum of 14 million jobs vanishing, never to return in their previous form and compensation.

The old jobs don't come back and new jobs demand different enterprises, training and skills. Unemployment remains elevated, spending is weak and productivity is low for years as enterprises and workers have to adjust to radically different conditions. If the economy and society persevere through this transition, the stage is set for the reworked economy to enjoy an era of renewed prosperity and opportunity.

If an economy and society can't complete this transition, stagnation decays into collapse.

I've annotated a St. Louis Federal Reserve chart of U.S. recessions since 1970 to show the taxonomy described above. The stagflationary 1970s / early 1980s were a lengthy, tumultuous structural upheaval; the 1990-91 recession was triggered by the First Gulf War; the Dot-Com Bust in 2000-2002 was largely the unwinding of speculative excesses in the technology sectors (similar to the radio-technology bubble of the 1920s); the Global Financial Meltdown (aka the Global Financial Crisis) was the structural reckoning of unregulated global financialization excesses, and the 2020 recession was the result of policy responses to the Covid pandemic.

Each of these resulted in a multi-quarter decline in GDP, the classic (though flawed) definition of recession.

Recessions that cleanse the system of financial deadwood are necessary and yield excellent results. Per the Yellowstone Analogy ( The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009) and No Recession Ever Again? The Yellowstone Analogy (November 8, 2019), the deadwood of excessive speculation, leverage, fraud and debt issued to poor credit risks must be burned off lest the deadwood pile up and consume the entire forest in a conflagration of the sort that was narrowly averted in 2008-09 when fraud and risk-taking had reached systemically destructive extremes.

The problem with letting deadwood pile up so it threatens the entire forest is the policy reaction creates its own extremes. The coordinated central bank policies unleashed in 2008 and beyond established new and unhealthy expectations and norms, the equivalent of counting on central bank water tankers to fly over and extinguish every firestorm of excessive risk-taking and fraud.

Those emergency measures create their own deadwood, distortions and risk, and are not a replacement for prudent forest management, i.e. maintaining a transparent market where excessive risk is continually reduced to ashes in semi-controlled burns.

When systemic changes in the economy and society demand structural transitions, the resulting tumult can either creatively rework entire sectors, weeding out what no longer works in favor of new methods and processes, or those benefiting most from the old structure can thwart desperately needed evolution to protect their gravy trains.

If change is stifled as a threat, the entire economy enters a death-spiral to collapse. Some eras present an economy with a stark choice: adapt or die. Adaptation in inherently messy, as new approaches are tried in a trial-and-error fashion and improvements are costly as the learning curve is steep.

Sacrifices must be made to achieve greater goals. as I outlined yesterday in A Most Peculiar Recession, in the 1970s the U.S. economy was forced to adapt to three simultaneous structural changes:

1. The peak of U.S. oil production and the dramatic repricing of oil globally by newly empowered OPEC oil exporters.

2. The pressing need to reconfigure the vast U.S. industrial base to limit pollution and clean up decades of environmental damage and become more efficient in response to higher energy prices.

3. The national security / geopolitical need to encourage the first wave of Globalization in the 1960s and 1970s to support the mercantilist economies of America's European and Asian allies to counter Soviet influence.

Coincidentally, this last goal required the U.S. expand the exorbitant privilege of the U.S. dollar, the primary reserve currency by exporting dollars to fund overseas expansion of U.S. allies like Japan and Germany and running permanent trade deficits to benefit mercantilist allies.

These measures created their own distortions which led to the Plaza Accord in 1985 and other structural adjustments. Ultimately, the U.S. managed to adapt to a knowledge economy (Peter Drucker's phrase) and a more efficient means of production, resulting in a much cleaner environment and a leaner, more adaptable economy.

The deadwood of hyper-financialization and the distortions of hyper-globalization have now piled up so high that they threaten the entire global economy. Those who have feasted most freely on hyper-financialization and hyper-globalization must now pay the heavy price of adjusting to definancialization and deglobalization.

Those who have been living on expanding debt and soaring exports are in for a drawn-out, wrenching structural adjustment to the reversal of these trends and the fires sweeping through the deadwood that's piled up for the past two decades.

There will winners and losers in this global structural upheaval. Mercantilist economies that feasted on 60 years of export expansion will be losers because there is no domestic sector large enough to absorb their excess production, and those who feasted on the expansion of debt to inflate asset bubbles will find their reluctance to conduct controlled burns of their speculative debt-laden deadwood will exact a devastating price when their entire financial system burns down.

Those who didn't rely on exports for growth will find the transition much less traumatic, as will those who maintained a regulated, transparent market for credit that limited excesses of leverage and high-risk debt.

Those who adjust to structurally higher energy costs by becoming more efficient and limiting waste via Degrowth will prosper, all others will sag under the crushing weight of waste is growth Landfill Economies. I explain why this is so in my new book Global Crisis, National Renewal.

Recessions which are allowed to clear the deadwood and encourage adaptation yield excellent results. Those which don't lead to the entire forest burning down. Economies optimized for graft, corruption, opacity and benefiting insiders will burn down, along with those that optimized speculative extremes of debt and those too rigid and rigged to allow any creative destruction of insiders' skims and scams.

Events may show that there are no winners, only survivors and those who failed to adapt and slid into the dustbin of history.

Chart courtesy of St. Louis Federal Reserve Database (FRED)




Recent podcasts/videos:

Save Money On Food, Get Free Gold & Silver, Beat Price Inflation (1:08 hrs)

It's Time To End The Fed & Return To A Decentralized Currency (X22 Report, 38 min)

Charles Hugh Smith On Inequalities And The Distortions Caused By Central Bank Policies (FRA Roundtable, 30 min)

Tectonic Shift of Mercantilism Revalued (Gordon Long, Macro-Analytics, 42 min)


My new book is now available at a 10% discount this month: When You Can't Go On: Burnout, Reckoning and Renewal.

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.


My recent books:

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 Kindle, $10 print, ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 Kindle, $8.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


Become a $1/month patron of my work via patreon.com.

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A Most Peculiar Recession

So what are conventional pundits missing today? I would start with three dynamics.

Only old people experienced real recessions--those in 1973-74 and 1980-82. Recessions since then have been shorter and less systemic.

In the good old days, a recession laid waste to entire industries which never recovered their previous employment. People who were laid off couldn't find another job. Major sectors of the economy dried up and blew away. Jobs were scarce and there was an oversupply of people looking for work.

We're told consumer confidence is in the dumps and everyone expects the worst: recession! Oh Lordy. Interestingly, there isn't much evidence of this near-panic behaviorally. Everyone's tightening their belts and battening down the hatches, but it's not the cliff-dive we see in a real recession.

There's certainly a lot of froth to be scraped off the latte, but what I'm curious about are the armatures of the economy and what I'm seeing is the crowd ignoring key dynamics because they're so busy pushing the Recessionary Play-Doh into the old playboard.

The entire notion that there is a hard and fast line indicating "recession" is not realistic or useful. The economy dropped 1% for two quarters in a row, quick hit the alarm, go to DefCon 1. Uh, OK, right.

The more useful approach is to look at data points as mostly signal noise that fail to reflect or illuminate the core dynamics of the economy. Here's an example: the stagflation of the 1970s is a hot topic as the financial punditry compares then to now, seeking evidence of similarities strong enough to predict a Lost Decade ahead.

One key factor that's rarely (if ever) mentioned was the staggering cost of cleaning up America's industrial sector and polluted skies and waterways at the same time that the Cold War required the U.S. to strengthen its allies by allowing them unfettered access to the U.S. marketplace--exports to the U.S. that had a price advantage due to the dominance of the dollar and the relative weakness of allies' currencies.

1972 exchange rates indicate that the Japanese yen was 302 to $1--an enormous advantage when compared to recent exchange rates of around 110 yen to the USD.

What few current pundits seem to grasp is the dominant dynamic of the entire era of 1945-1992 was the Cold War with the Soviet Union and its client states and allies. Strengthening allies' economies was a core goal and so the costs to the domestic economy had to be absorbed: there was no choice.

The costs of cleaning up the nation and its vast industrial base was an enormous drag on the economy. The value of the trillions of dollars (in current dollars) invested was not in boosting profits, it was in restoring what had been heedlessly destroyed and damaged by rampant dumping of waste and pollutants and improving the health and well-being of the citizenry.

Check out the smog in early 1970s TV series filmed in Los Angeles for a taste of what was cleaned up.

But in a mind-boggling failure of conventional economics, our financial punditry is blind to the impact of the most consequential economic realities of the 1970s--the Cold War and the lengthy, painful, costly clean-up of the nation and its industrial base--on stagflation.

One reason for this abject failure is these dynamics were difficult to measure, so they weren't measured. We only manage what we measure and so if we don't measure it, it doesn't exist. If we measure things in a no-longer-relevant manner, for example GDP, we continue to act as if this misguided measure is of supreme importance when the reality is it's dangerously misleading.

So what are conventional pundits missing today? I would start with three dynamics:

1. For the first time in multiple generations, there is a structural scarcity of labor. For a variety of reasons, there are fewer people willing to do the work at the offered wage than there are jobs. This is not temporary, it is demographic and social, not simply economic. All the supposedly easy fixes-- automate everything, etc.--are not that easy.

2. The strength of the U.S. dollar is exporting inflation, to the benefit of the domestic economy. After offshoring critical supply chains--a disaster that will take years to reverse--now the U.S. is offshoring inflation and the resulting demand destruction.

3. Global capital flows are reversing. capital flowed from the Core to the Periphery to reap the gains of globalization. Now the flow is reversing and capital is flowing from the Periphery to the Core to preserve capital and lock in lower-risk returns. What looks expensive to those earning U.S. dollars may look cheap and secure to those fleeing depreciating currencies and assets.

In my analysis, these are consequential dynamics that merit little attention in conventional financial analysis.

There is much more to say but glance at these two charts: real (i.e. adjusted for official inflation) median household income and real Broad U.S. Dollar Index.

If we're not measuring or pondering the core structural dynamics of the economy, we're not going to make sense of no-longer-relevant data. This is a most peculiar recession, and few seem to be asking if the reason is we're missing what's changed structurally.

Charts courtesy of St. Louis Federal Reserve Database (FRED))






Recent podcasts/videos:

Save Money On Food, Get Free Gold & Silver, Beat Price Inflation (1:08 hrs)

It's Time To End The Fed & Return To A Decentralized Currency (X22 Report, 38 min)

Charles Hugh Smith On Inequalities And The Distortions Caused By Central Bank Policies (FRA Roundtable, 30 min)

Tectonic Shift of Mercantilism Revalued (Gordon Long, Macro-Analytics, 42 min)


My new book is now available at a 10% discount this month: When You Can't Go On: Burnout, Reckoning and Renewal.

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.


My recent books:

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 Kindle, $10 print, ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 Kindle, $8.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


Become a $1/month patron of my work via patreon.com.

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Are Older Workers Propping Up the U.S. Economy?

Are 55 and older workers propping up the U.S. economy? The data is rather persuasive that the answer is yes.

The chart of U.S. employment ages 25 to 54 years of age and 55 and older reveals a startling change.

There are now 20 million more 55+ employed than there were in 2000, an equivalent of the entire workforce of Spain. This unprecedented demographic / employment transition is worth a closer look.

As the second chart shows, some of this increase is due to the rising population of Americans over 55 years of age--an increase of 42 million. In 2000, 30% of those 55 and older were employed. Today, over 37% are employed--a significant increase in the percentage of 55+ people who are working.

An increase of 20 million employees age 55 and older is so large that it's difficult to grasp. An increase equivalent to an entire nation's workforce is one way to make sense of it. Another is to look at the increase of America's total population from 2000 to 2022, which is about 48 million people (282 million in 2000, 330 million today).

The total U.S. population increased by 17%. The 55+ population increased by 42 million (from 57 million in 2000 to 99 million today), a 74% increase. Total employment in the 55+ cohort increased by 113%.

In 2000, only 17.6% of the 55 and older populace had a job. Now the percentage is 37.5% A 20% increase in the percentage of 55+ who are employed in a 20-year span is unprecedented.

If the percentage of employed 55+ had stayed the same, there would only be 17 million 55+ workers today. Instead, there are over 37 million. This raises a question: why are so many older workers continuing to work longer than they did in 1990 and 2000?

I doubt there is one cause or answer. We can attribute this dramatic shift to a number of causes: older households that never recovered from the financial damage wrought by the 2008-09 Global Financial Meltdown; older workers (like me) who only have Social Security for retirement income who can't get by on just their SSA check; those who enjoy their work and see no reason to stop; people who retired and became bored out of their minds so they returned to the workforce; parents who keep working to help their offspring and/or elderly parents; people who keep working to maintain healthcare coverage until they qualify for Medicare; older entrepreneurs who can dial back their workload but who still love their work, and so on.

All of these reflect structural changes in the U.S. economy: a steady decline in the purchasing power of wages and financial security, systemic exposure to the risks of financial bubbles bursting, etc. The bottom line is that nest-eggs that were deemed adequate are no longer adequate, and the only way to fill the gap is to keep earning money.

These changes are reflected in the decline in the percentage of employed 55+ people from 28% in 1970 to 18% in 1990 and 2000, and the subsequent rise to 37%. In an economy with an expanding workforce of young employees and rising productivity, more older workers could retire early. This is no longer the case.

In many cases, there is no nest-egg due to bankruptcy via huge medical bills, the heavy burdens of student loans, or the costs of helping children and grandchildren or very elderly parents. (Many of us aged 65-70 are taking care of parents 90+ years of age and helping out with active 3-year olds. Retirement? You're joking.)

As a result, expenses have risen rather than dropped for the 55+ cohort, requiring an income to stabilize household finances. (Have you looked at childcare (grandchildren) and elderly care (parents) costs recently?)

Another important structural change is the demand for workers of any age who are reliable and able to do the work. People who are accustomed to the structures of work by virtue of 40 or 50 years of employment are generally reliable workers and thus valued by employers beset by a scarcity of reliable, productive employees. (My first formal paycheck was issued by Dole Pineapple in 1970. That's 52 years of getting accustomed to the demands of employment. I'm pretty well broken in now.)

There are also demographic and cultural dynamics in play: the continuing satisfactions of work and the loss of purpose many feel in retirement, the decline in age discrimination, longer lifespans, etc.

Whatever the causes, 37 million workers 55 and older are earning money that's flowing into the economy and providing stable productivity--20 million more 55+ workers than 20 years ago. These 20 million jobs generate income that isn't just funding cruises and RVs. In many cases, it's supporting several generations on either side of the 55+ cohort.

Are 55 and older workers propping up the U.S. economy? The data is rather persuasive that the answer is yes.

Charts courtesy of CH @Econimica)






Recent podcasts/videos:

Save Money On Food, Get Free Gold & Silver, Beat Price Inflation (1:08 hrs)

It's Time To End The Fed & Return To A Decentralized Currency (X22 Report, 38 min)

Charles Hugh Smith On Inequalities And The Distortions Caused By Central Bank Policies (FRA Roundtable, 30 min)

Tectonic Shift of Mercantilism Revalued (Gordon Long, Macro-Analytics, 42 min)


My new book is now available at a 10% discount this month: When You Can't Go On: Burnout, Reckoning and Renewal.

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.


My recent books:

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 Kindle, $10 print, ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 Kindle, $8.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


Become a $1/month patron of my work via patreon.com.

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NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

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Rather Than Focus on What You Don't Control ("The News"), Focus on What You Do Control: What You Grow, Eat and Own

Now that globalization and financialization are finally unraveling, people are slowly awakening to the national security foundations of localizing production.

What exactly is "the news" other than an inducement to passivity, despair and derangement? Since we exert zero control over what happens in distant lands and global economies, why waste time passively consuming "if it bleeds it leads" offal designed to addict us to a steady stream of despair and derangement?

Why not ditch "the news" in favor of focusing on what we do control: what we grow, eat and own? It's almost a binary choice: either focus on screens of addictive offal for hours every day or act on our own behalf in the real world.

Food inflation is highlighting the financial value of home gardens. Paul of the Silver Doctors and I discuss turning gardening savings into more ownership of something we control (for example, precious metals) in Save Money On Food, Get Free Gold & Silver, Beat Price Inflation (1:08 hrs).

I've been posting about the value of gardening for over a decade, describing the financial and health benefits. I Dig Dirt: The Remedy for Derealization (July 23, 2011)         The Hidden Value of Gardens (September 13, 2014)

Food inflation simply increases the gains: One Solution to Soaring Food Prices: Start Your 2022 Garden Now (November 6, 2021).

Municipalities can either encourage or hinder local food production. Cities once grew between a third and a half of their own food within city limits: Could Urban Gardens Supply 1/3 of a City's Food? Yes. (March 13, 2010).

If we're not allowed to grow food, that's a problem that can be solved by local lobbying or moving to a place where there are fewer restrictions on growing our own food. Local authorities can either lead (by encouraging community gardens for apartment dwellers, for example) or get out of the way.

Which makes more sense--air freighting tomatoes thousands of miles or growing your own? Globalization and financialization have so distorted our economy that if it's cheaper to fly in tomatoes then that's the "most profitable choice."

But is maximizing profit really the only "value" we should be calculating? Thanks to an obsessive focus on maximizing profits, our economy has been stripmined of essential production because it's always cheaper to produce stuff somewhere else where labor and bribes are cheap and environmental controls non-existent.

Now that globalization and financialization are finally unraveling, people are slowly awakening to the national security foundations of localizing production. Home gardens were called Victory Gardens in World War II for a reason. Reducing dependency and increasing local production is national security in a nutshell.

Gardening is the antidote to the toxic tsunami of despair and derangement sweeping the land and one expression of self-reliance and ownership of what we can control.

There are health benefits, too: the nutritional value of the food we consume has plummeted by a third as the soils are depleted of micro-nutrients. By boosting the health of the soil in your own garden, you are supplying your household with higher quality food than you can buy at the store.

If we consider the tragic decline in the health of the American public since the 1980s, the decline in the nutritional value of food and the consumption of real food (as opposed to processed "food", much of which is inedible) are factors that we can control in our own lives: grow healthy food, eat what you grow.

The money saved by a home garden can be invested in assets we control: new skills, new tools, and assets that we control such as gold and silver.

The food we grow tastes better, too. Local chefs prefer locally raised food for many reasons, and taste is one. We recently turned a batch of our heirloom tomatoes into an amazing tomato soup (served with fresh basil leaves, croutons and grated Romano cheese) that was nothing like the over-salted canned variety. Our inspiration was Marcella Hazan's Oven-Browned Tomatoes (page 527 from her cookbook Essentials of Classic Italian Cooking) and this recipe: The Best Homemade Tomato Soup.

This isn't a difficult recipe. Even a beginner can chop up veggies, roast them and pulp them in a blender or food processor. Cuisine that's just as good as that produced in a fancy restaurant is within reach of home gardeners. Truly refined cuisine is simple. It doesn't take celebrity chefs with a half-dozen assistants to make. Preparing your own healthy home-cooked meals saves a bundle, too.

As I've been saying for years: "A healthy homecooked family meal and a home garden are revolutionary acts." If these don't seem revolutionary yet, just wait a few years: their revolutionary nature will become self-evident.

Gardening is a process of experiments and failures. Like any enterprise, it's not a commercial, it's real life.

Please join Paul and I for an enthusiastic look at taking control of what we can control and the joys of growing food and saving money: Save Money On Food, Get Free Gold & Silver, Beat Price Inflation (1:08 hrs).








Recent podcasts/videos:

Save Money On Food, Get Free Gold & Silver, Beat Price Inflation (1:08 hrs)

It's Time To End The Fed & Return To A Decentralized Currency (X22 Report, 38 min)

Charles Hugh Smith On Inequalities And The Distortions Caused By Central Bank Policies (FRA Roundtable, 30 min)

Tectonic Shift of Mercantilism Revalued (Gordon Long, Macro-Analytics, 42 min)


My new book is now available at a 10% discount this month: When You Can't Go On: Burnout, Reckoning and Renewal.

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.


My recent books:

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 Kindle, $10 print, ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 Kindle, $8.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


Become a $1/month patron of my work via patreon.com.

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NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Frank E. ($100), for your outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Thank you, Guy T. ($50), for your monumentally generous contribution to this site -- I am greatly honored by your steadfast support and readership.

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China at the Crossroads

Watch where capital is flowing. That's pretty much all you need to know to predict the future.

The word "China" evokes strong emotions, so let's set it aside in favor of a simple syllogism:

1. Certain things matter in all economies.

2. China is an economy.

3. Therefore these certain things matter in China.

Four things matter to all economies:

1. The flow of capital and talent in or out of an economy.

2. The productivity of that capital and talent.

3. The availability and cost of energy.

4. The stability of the primary foundation of the majority's wealth.

Capital and talent flowing into an economy and being productively invested generates prosperity. Capital and talent squandered on unproductive speculation generates bubbles of phantom wealth that eventually pop, destroying the illusion of wealth.

Capital and talent fleeing an economy generates stagnation and collapse. Capital and talent are democratic in the most basic form: both vote with their feet. Dictators can strut around ordering everyone to wear their underwear on the outside of their clothing, but if people can vote with their feet, he soon finds he's talking to himself and a handful of clueless cronies.

The cliche is that capital goes where it's well-treated. What does that actually mean? It turns out capital and talent both want what the average citizen / participant in the economy wants: stability and predictability. Every participant wants the rules to be visible and predictable, so they can make decisions about where to invest their capital and talent with some confidence that the rules won't change tomorrow.

If everything you've worked for can be taken from you or you're no longer able to sell and deploy your capital and talent elsewhere, then why gamble your capital and talent in such an unstable, unpredictable economy at all?

The more restrictions that are applied to keep capital and talent from fleeing, the greater the incentives for capital and talent to flee. Those that can't flee just give up and lay down, doing the minimum to survive.

Capital and talent invested in unproductive bridges to nowhere and speculative bubbles generate a brief explosion of illusory wealth. The workers and enterprises building the bridges to nowhere spend their earnings, boosting consumption, and the incoming tide of capital chasing speculative gains boosts the value of the assets being chased.

But bridges to nowhere and speculative frenzies don't actually boost the productivity of capital or labor; they are mal-investments that bleed the economy dry behind a flimsy facade of phantom wealth, a facade generated by the enormous tide of capital gushing into the economy.

Once the tide recedes as capital votes with its feet, the facade of phantom wealth collapses.

When energy is cheap and abundant, all sorts of things become possible. When energy becomes scarce and costly, all sorts of things are no longer financially viable.

Economies that only function if energy is cheap and abundant unravel when energy becomes scarce and costly.

People want to become wealthier, and they will follow whatever trails are open to them to do so. If the economy is structured to funnel most of the majority's wealth into one asset class, that economy becomes highly dependent on the stability of that asset class for its financial, social and political stability.

If, for example, the people's wealth is channeled into real estate to the degree that owning empty flats is considered a form of secure savings as well as a stake in an investment bubble that will never pop, then that economy is extremely vulnerable to the resulting speculative excess collapsing under its own weight.

When an asset class owned solely by the super-wealthy collapses under its own weight--for example, fine art--the damage to the economy is limited. But when an asset class that is the primary foundation of the majority's wealth collapses, that is extremely consequential because too much of the economy's capital has been sunk in an unproductive speculative bubble.

As strategist Edward Luttwak observed, the funny thing about force is how limited it is in actual efficacy. Forcing capital and talent to stay put doesn't make people productive. It simply forces a choice: find a way to flee or just give up and stop working hard. After all, what's the point?

Every economy in which capital and talent can no longer count on predictability is an economy at the crossroads. As Luttwak explained, force is not the same as power, though many confuse the two. Power attracts capital and talent because they're being offered stability and predictability. Force tries to shove instability and unpredictability down everyone's throat and compels then to declare their undying loyalty for instability and unpredictability.

But capital and talent vote with their feet. If they can't vote with their feet, they just give up. Any economy in which capital and talent either flee or give up has only one possible end-point: stagnation and collapse.

In other words, watch where capital is flowing. That's pretty much all you need to know to predict the future.

China Is Pariah for Global Investors as Xi's Policies Backfire (Bloomberg)




Recent podcasts/videos:

It's Time To End The Fed & Return To A Decentralized Currency (X22 Report, 38 min)

Charles Hugh Smith On Inequalities And The Distortions Caused By Central Bank Policies (FRA Roundtable, 30 min)

Tectonic Shift of Mercantilism Revalued (Gordon Long, Macro-Analytics, 42 min)


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