When the "Fix" Increases Systemic Fragility, Things Fall Apart

All the "fixes" have fatally weakened the real economy, and created a dangerous illusion of "wealth," "growth" and solvency.

The "fix" of the last eight years worked, right? This was the status quo's "fix":

1. Massive expansion of debt: sovereign, household and corporate, all in service of a) bringing consumer demand forward b) fiscal stimulus funded by debt c) corporate stock buybacks to boost stock valuations d) asset bubbles in real estate, bonds, stocks, bat guano futures, etc.

2. Monetary stimulus, i.e. creating and distributing money at the top of the wealth/power pyramid so corporations and the super-wealthy could buy more assets with free money for financiers issued by central banks.

3. Gaming statistics such as unemployment and metrics such as stock indices to generate the illusion of "growth," "stability" and "wealth."

4. Saying all the right things: the "recovery" is creating millions of jobs, inflation is low, virtue-signaling is more important than actual increases in inflation-adjusted wages, etc.

As Dave of the X22 Report and I discuss in Central Banks Weakened The Economy To The Point Of No Return, Day Of Reckoning Has Arrived (42 min. podcast), this "fix" has fatally weakened the real economy. The cost of maintaining the illusions of "growth," "stability," "wealth" and solvency is extremely high, and hidden from view: systemic fragility has increased to the point of brittleness.

What is fragility? Fragility is the result of an erosion of resilience, redundancy, adaptability, accountability, honesty, feedback and willingness to sacrifice today's consumption for tomorrow's productivity and systemic stability.

The status quo "fix" has gutted resilience, redundancy, adaptability, accountability, honesty, feedback and willingness to sacrifice today's consumption for tomorrow's productivity. Can anyone who isn't a lackey on the payroll of the Powers That Be provide any credible evidence that the U.S. economy is more resilient after eight years of debt-dependent "recovery"?

Sadly, we suffer from an oversupply of well-paid lackeys, factotums, apparatchiks, flunkies, media mouth-pieces and PR hacks and a severe scarcity of unbaised, unspun data points. What little data we do have tells us that the inflation-adjusted wages for the bottom 95% have declined during the "recovery" that made the wealthy much, much wealthier.

As for redundancy--redundancy reduces profits, as it increases costs, so redundancies have been as ruthlessly eliminated as human labor. The slightest disruption in global supply chains means production and transport of essentials collapses in a heap.

And how have the dominant state-protected cartels improved adaptability? They've stifled it at every turn. Higher education has jacked up prices for its overpriced marginal-utility "product," ditto the healthcare/Big Pharma cartels, the military-industrial cartel (hello overpriced, under-performing F-35 and LCS), the banking cartel (love those $35 fees and .01% interest paid on deposits), and all the other cartels that dominate our pay-to-play "democracy."

State-protected cartels and monopolies are the death of competition, transparency and adaptability--all essential dynamics in real solutions.

Accountability in the public/private-sector "swamp" is near-zero. A mumbled apology for malfeasance, a hand-slap fine for fraud, a bribe passed off as a "speech fee", revolving doors between government contractors and government agencies--accountability is non-existent at the top of the wealth-power pyramid, while a nickel-bag dealer gets a tenner (10-year gulag sentence) and the federal prosecutor gets a gold star. Meanwhile, the real criminals skim millions in ill-gotten embezzlements, frauds and cronyist skims are laughing all the way to their remote havens of wealth.

"Honesty" has lost all meaning in public dialog. Supposedly accurate statistics are rigged, and every public utterance is calculated to signal virtue (the acme of Orwellian doublespeak) or appeal to a constituency attuned to key words: utter the key words, and you're home free. Never mind the economy has been hollowed out: you've signaled your virtue and the moral superiority of the constituency.

Feedback has been reduced to a dollar sign. If you pony up millions in campaign contributions and lobbying, your feedback counts. All other feedback is discounted or ignored. Whistleblowers are prosecuted, any reform that threatens the status quo is watered down to meaninglessness, and anyone going public with truthiness is sent to bureaucratic Siberia.

As I explain in my book Why Our Status Quo Failed and Is Beyond Reform, all these fake-reforms only increase the systemic fragility by weakening all the dynamics that generate adaptability, accountability, feedback, transparency, etc.

The status quo is now like a wafer-thin sheet of ice over a deep lake of killing-cold water. To the naive and inexperienced, the ice looks solid; they believe the tall tales of "recovery," growth," "wealth" and solvency.

It's all phony public relations. As a strange as it may sound, PR doesn't make thin ice thick enough to stand on.

All the "fixes" have fatally weakened the real economy, and created a dangerous illusion of "wealth," "growth" and solvency.

Soaring debt and declining earnings = brittle thin ice.

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High-Touch, Low-Touch and the Relentless Automation of Jobs

The existing platforms of for-profit cartels/monopolies and the central state are no longer able to provide enough paid work and high-touch services for everyone.

We all know that automation is eating its way up the human-labor food chain at an increasing clip. Yet there is remarkably little insight into this process.

Let's see if we can't connect two insightful essays on this topic, one from musician-essayist David Byrne and the second on the business model of Amazon.com:

Eliminating the Human (via GFB). Here is an excerpt:

"We’re a social species--we benefit from passing discoveries on, and we benefit from our tendency to cooperate to achieve what we cannot alone. In his book, Sapiens, Yuval Harari claims this is what allowed us to be so successful. He also claims that this cooperation was often facilitated by a possibility to believe in 'fictions' such as nations, money, religions and legal institutions.

Machines don’t believe in fictions, or not yet anyway. That’s not to say they won’t surpass us, but if machines are designed to be mainly self-interested, they may hit a roadblock. If less human interaction enables us to forget how to cooperate, then we lose our advantage.

I’m wondering what we’re left with when there are fewer and fewer human interactions. Remove humans from the equation and we are less complete as people or as a society. 'We' do not exist as isolated individuals--we as individuals are inhabitants of networks, we are relationships. That is how we prosper and thrive."

Why Amazon is eating the world. Here is an excerpt:

"I believe that Amazon is the most defensible company on earth, and we haven’t even begun to grasp the scale of its dominance over competitors. Amazon’s lead will only grow over the coming decade, and I don’t think there is much that any other retailer can do to stop it.

...each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition."

There is much more of interest in each piece, but these short excerpts offer a taste of each.

Byrne is commenting on our built-in need for human connection and cooperation, not just for emotional-social reasons but as a competitive, adaptive advantage.

Zack Kanter (author of the essay on Amazon) explains how Amazon's model avoids the flaws of vertical integration (i.e. each division becoming bloated, inefficient and ineffective due to lack of outside competition).

Correspondent GFB observed that Kanter did not describe a major component of Amazon's success: the consumer's willingness to buy commodity-goods without actually seeing the product on the shelves, trying it on, etc.

The unifying thread here is high-touch, low-touch, a concept I covered in my book Get a Job, Build a Real Career and Defy a Bewildering Economy. I was endeavoring to explain why certain kinds of labor are easily automated and other kinds are more immune to automation.

Low-touch transactions / interactions don't offer much value, connectedness or cooperation. A common example is ordering a fast-food meal or checking out at a market. Our interaction with the human being behind the counter is brief and not something valuable enough that the company can charge extra for being served by a human rather than a machine.

The vast majority of consumers would be OK with (or actually prefer) having a low-touch transaction served by a robot or automated system. Rather than wait in line, many of us prefer to use the self-checkout or airport ticket kiosk. Most of us would be delighted to bypass the entire time-wasting hassle of renewing our licenses at the Dept. of Motor Vehicles and many other low-touch interactions.

In effect, Amazon is automating many ordinary low-touch transactions, and few consumers miss what's been lost in the move to home/office delivery of commodity (i.e. basically interchangeable) goods and services.

The kinds of connections Byrne is referencing are high-touch: transactions and connections that require communication, sharing, cooperation, and all the other bonds of human relationships.

If ordering a fast-food meal is low-touch, dining at a swank bistro is high-touch. Most people would hesitate to pay a lot of money for food delivered by a robot to a bland sound-proof booth. In other words, we're paying not just for the food but for a high-touch environment: a knowledgeable wait-person, a sommelier, an atmosphere of conversation, people-watching, etc.

As goods and services become commoditized, the cost of low-touch interactions declines and the cost of high-touch interactions rises.

For example, it's easy to order a commodity set of house plans for $150 off the Internet. Hiring an architect with whom you establish a professional relationship will cost 10 times more for some consulting and 100 times more for a customized set of architectural plans and specs.

There are many other examples of the difference. Consider the future of medical care. Many observers expect robots to perform many routine care tasks such as visiting patients and making sure they are taking their prescribed medications. This is a low-touch interaction.

While ill people won't mind interacting with a helpful robot, what they really want is a human being to stop in and express some interest and concern for their condition. This is the high-touch connection we all want as a human birthright.

A great many of the current jobs in our economies are low-touch, and these will relentlessly be automated, as the value of the human interaction is not worth enough to consumers to pay extra for. If consumers will pay significantly extra for a human taxi driver rather than an automated taxi, then human-driven taxis will be available. But if consumers aren't willing to shoulder the higher costs of humans performing low-touch tasks, human labor in low-touch environments will disappear as a financial necessity.

One of my concerns is that high-touch interactions and connections may well become too costly for many people to afford.

This may not matter much, as most high-touch connections are not monetary--we communicate, share, and cooperate with friends, family members, neighbors, etc., and there is no direct financial facet to these transactions.

It seems obvious to me that we need a new organizational structure to enable high-touch transactions and connections that aren't necessarily for-profit or personal (friends/family). This is the foundation of my proposed CLIME system: community labor integrated money economy-- that I outline in my book A Radically Beneficial World: Automation, Technology & Creating Jobs for All.

CLIME is a non-corporate, non-state platform for a high-touch, high-value-creating community economy.

Within the high-low-touch spectrum, clearly there is much middle ground between for-profit commoditized home delivery of goods (low-touch) and personal relationships (high-touch). This middle is what appears to be at risk of disappearing as automation eats up all the low-touch human labor.

This is not a recent trend. Labor's share of the nation's output (GDP) has been declining for decades:

The existing platforms of for-profit cartels/monopolies and the central state (government) are no longer able to provide enough paid work and high-touch services for everyone. We need a Third Economy-- what I call The Community Economy, with its own platform, network and non-state, non-central-bank-controlled currency.

This essay is drawn from Musings Report 20. The Musings Reports are emailed exclusively to major contributors, subscribers and patrons ($5/month or $50+ annually).


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How Debt-Asset Bubbles Implode: The Supernova Model of Financial Collapse

Gravity eventually overpowers financial fakery.

When debt-asset bubbles expand at rates far above the expansion of earnings and real-world productive wealth, their collapse is inevitable. The Supernova model of financial collapse is one way to understand this.

As I noted yesterday in Will the Crazy Global Debt Bubble Ever End?, I've used the Supernova analogy for years, but didn't properly explain why it illuminates the dynamics of financial bubbles imploding.

According to Wikipedia, "A supernova is an astronomical event that occurs during the last stellar evolutionary stages of a massive star's life, whose dramatic and catastrophic destruction is marked by one final titanic explosion."

A key feature of a pre-supernova super-massive star is its rapid expansion. As the star consumes its available fuel via nuclear fusion, the star's outer layer expands. Once there is no longer enough fuel/fusion to resist the force of gravity, the star implodes as gravity takes over.

This collapse ejects much of the outer layers of the star in an event of unprecedented violence.

The financial analogy is easy to see: when rapidly expanding debt consumes a critical threshold of earnings (fuel), the equivalent of gravity (default, inability to service the enormous debt) triggers the collapse of the entire debt/leverage-dependent financial system.

As I explained yesterday, if earnings stagnate or decline while debt races higher, eventually earnings are insufficient to service the debt and default is inevitable. The other problem that arises as more and more of earned income goes to debt service is that there is less and less disposable income left to support consumer spending--the lifeblood of economies worldwide.

Once debt service absorbs a significant chunk of household earnings, recession is the inevitable result as spending collapses once more debt cannot be loaded on households. In other words, debt is limited by earnings. If earnings decline, or fall far behind the expansion of debt, eventually borrowers can no longer borrow more, or refuse to borrow more.

At that point, consumer spending falls and recession generates a self-reinforcing cycle of declining sales, profits, employment and wages. Recession further reduces the ability and appetite for more debt, and this acts as "gravity" in the super-massive debt-star.

Financial supernova collapse has two pathways which we call deflationary and inflationary. But the key point here is these are simply different pathways to the same result: the collapse of the financial system.

In a deflationary supernova, defaults--and the avoidance of additional debt--are the gravity that overwhelms the forces of expanding debt. Once the losses and risk are visible to all participants, the herd psychology changes, and participants no longer believe that central banks "are now the ultimate power in the Universe."

Central banks can create currency and credit, but they can't create earnings or productive real-world wealth. These are the limiting dynamics of any debt-dependent system.

The fantasy is that free money--limitless credit to corporations and Universal Basic Income to debt-serfs--will magically create earnings and expand productivity. But this FantasyLand exists only in overheated self-serving imagination: in the real world, free credit is used to buy back stocks and indulge in other financialization trickery, not invest in higher productivity.

And the debt-serfs scraping by on Universal Basic Income have no ability to borrow more and few means to generate meaningful productivity gains.

The other pathway to implosion is to print currency with sufficient abandon that debtors have enough money to service their debts. Emitting sufficient new free money to re-set all the unpayable debt destroys the purchasing power of the currency--a supernova implosion that is little different than the deflationary implosion. The inflationary pathway results in the destruction of the currency, impoverishing everyone holding the currency.

While the idea of debt jubilee is appealing to everyone who doesn't own debt-based assets (mortgages, auto loans, student loans,etc.), it is anathema to those who do own most of the debt-based assets--who just happen to be the wealthy and powerful who run our pay-to-play "democracy."

If history is any guide, the wealthy and powerful who run our pay-to-play "democracy" will never relinquish their wealth. Only a financial collapse can re-set the system.

The financial implosion triggers social and political upheavals. Recall that one person's debt is another entity's asset. When debt is blown off in either a deflationary or inflationary implosion, all the "wealth" represented by debt is also blown off.

So what survives a financial supernova? There are three classes of things that are still functioning after a debt/fiat-currency supernova: real-world tools/productive assets that were owned free and clear, and non-fiat-currency financial assets that are difficult for failed states and central banks to steal/expropriate.

The third class is human/social capital, i.e. the knowledge and experience in your head. Not only will my Skil 77 power saw still be around, so will my knowledge of how to be productive with this tool.

Proponents of precious metals and cryptocurrencies both see their favored assets as survivable assets that are difficult to steal/expropriate. It's difficult to predict just how desperate failing Status Quo institutions will get as their debt-fiat-currency dependent "wealth" and "power" implodes, but we are probably safe in assuming they will get fanatically zealous about stealing/expropriating everything they can get their self-serving hands on before the tides of History wash them away.

If they take my Skil 77 power saw, what are they going to do with it? Sell it for pennies to a crony of the central state? How will removing my ability to be productive help sustain their imploding regime? Removing productive capacity and suppressing my willingness to be productive will only hasten the collapse of their failed regime.

The Venezuelan Bolivar is the model of currency collapse: this is not some long-ago history--this is the present:

And how much did expanding debt boost productivity? Oops! Rapidly expanding financialized (i.e. unproductive) debt is Kryptonite to productivity.

Expanding credit has fixed everything! That's precisely what the Imperial managers think just before the debt supernova implodes.

Federal debt has tripled--no problem, let's triple it again, and then triple that.There is no upper limit on how much currency the Empire can borrow or print, right? "We are the ultimate power in the Universe now," etc.

Gravity eventually overpowers financial fakery. Central banks can add zeroes to currency and the super-wealthy can use their unlimited lines of credit to buy up everything in sight, but when the Empire collapses, the debt-assets of the super-wealthy are blown off in the supernova along with all the other artificial constructs of our corrupt, corrupting, rapacious, exploitive system.


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.

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Will the Crazy Global Debt Bubble Ever End?

There are multiple sources of friction in the Perpetual Motion Money Machine.

We've been playing two games to mask insolvency: one is to pay the costs of rampant debt today by borrowing even more from future earnings, and the second is to create wealth out of thin air via asset bubbles.

The two games are connected: asset bubbles require leverage and credit. Prices for homes, stocks, bonds, bat guano futures, etc. can only be pushed to the stratosphere if buyers have access to credit and can borrow to buy more of the bubbling assets.

If credit dries up, asset bubbles pop: no expansion of debt, no asset bubble.

The problem with these games is the debt-asset bubbles don't actually expand the collateral (real-world productive value) supporting all the debt. Collateral can be a physical asset like a house, but it can also be the ability to earn money to service debt.

Credit card debt, student loan debt, corporate debt, sovereign debt--all these loans are backed not by physical assets but by the ability to service the debt: earnings or tax revenues.

If a company earns $1 million annually, what's its stock worth? Whether the market values the company at $1 million or $1 billion, the company's earnings remain the same.

If a government collects $1 trillion in tax revenues, whether it borrows $1 trillion or $100 trillion, the tax revenues remain the same.

If the collateral supporting the debt doesn't expand with the debt, the borrower's ability to service debt becomes increasingly fragile. Consider a household that earns $100,000 annually. If it has $100,000 in debt to service, that is a 1-to-1 ratio of earnings and debt. What happens to the risk of default if the household borrows $1 million? If earnings remain the same, the risk of default rises, as the household has to devote an enormous percentage of its income to debt service. Any reduction in income will trigger default of the $1 million in debt.

If a household earns $100,000 annually, how much can it borrow? The answer depends on the terms of the debt: the rate of interest and the percentage of principal that must be repaid monthly.

If the interest rate is 0% and the monthly payment is fixed at $1, the household can borrow billions of dollars. This is how the game is played: there is no upper limit on debt if the interest rate is effectively zero, or adjusted for inflation, less than zero.

Would you lend the household your savings, knowing you'll never get any interest and the principal will never be repaid? Of course not. Nobody in a functioning market for capital would throw their hard-earned savings away on a debtor who can't pay any interest or principal.

The only institutions that can play this game are central banks, which create money out of thin air at zero cost. As for risk--the way to manage defaults is to print more money.

But once again--printing money doesn't create collateral or income needed to service debt. As I have explained, printing money is akin to adding a zero to currency. Every $1 bill is now a $10 bill. Are you ten times wealthier once the central bank adds a zero to every bill? No, because the $5 loaf of bread is re-set to $50.

The other problem with this game is interest keeps ticking higher while earnings remain flat. Even at very low rates of interest, interest payments keep rising. This is not an issue if income rises along with interest payments, but if income is flat, paying higher interest costs eventually pushes the borrower into default.

The household that borrowed $1 billion at 0% paid no interest. But let's say the lender now demands 1/10th of 1% interest--nearly zero interest. The household now owes $1 million in annual interest. Oops! Even near-zero interest can generate crushing interest payments once the debt reaches the stratosphere.

The whole game is a bet that future income will rise faster than debt service.Unfortunately, we've already lost that bet: household income has been stagnant or declining for years (or for the bottom 90%, for decades), and tax revenues have a nasty habit of falling sharply in recessions and stagnating along with private-sector earnings.

Which leads to the second game: blowing asset bubbles. If the household's earnings are flat or declining, one magical fix is to inflate the household home's value from $100,000 to $300,000 in a few years.

Now the household has $200,000 in new wealth it can tap. Wow, was that easy or what? That's the easiest $200,000 we ever made!

Of course the house didn't actually gain any additional functional or utility value; it still has the same number of rooms, etc. It still only provides shelter for the same number of residents. The $200,000 in "wealth" that can now be borrowed or accessed via selling the house does not reflect an increase in the collateral's utility value--it's all financial magic leveraged off an unchanging utility value and household income.

These games look like a Perpetual Motion Money Machine. There is no cost, it seems, to expanding debt and assets bubbles; if future income doesn't rise enough to service the growing mountain of debt, we either print more money, lower the interest rate or create "wealth" with even grander asset bubbles.

But there is eventually a problem. At some point, even 0.1% interest becomes unaffordable, and adding zeroes to the currency devalues the currency faster than incomes rise. Asset bubbles run out of greater fools to buy at elevated prices.

Borrowers default, asset prices crash and everyone holding the currency is impoverished.

There are multiple sources of friction in the Perpetual Motion Money Machine.State-cartel inflation eats  away at stagnating incomes, rising interest payments eat away at stagnant incomes and tax revenues, and printing money eats away at the purchasing power of the currency. Eventually these sources of friction cause the Perpetual Motion Money Machine to grind to a halt and then shatter.

Put another way, the debt-asset bubble supernova consumes all the available fuel and implodes. I've employed the supernova analogy for many years, as it captures the expansion of debt and asset valuations and the resulting collapse once all the fuel in the system (i.e. earnings and real collateral) has been consumed.

When Escape from a Previously Successful Model Is Impossible (November 29, 2012)

State-protected cartels jack up prices with abandon, slashing disposable incomes. Get rid of competition and enforce a monopoly, and this is what you get:

Real earnings for the bottom 90% have gone nowhere but down for decades:borrowing from the future doesn't work if future earnings are lower.

While incomes stagnated, housing has ballooned into Real Estate Bubble #2.

Central banks have printed currency with abandon. Everybody loves free money--especially bankers and financiers.

Federal debt has tripled--no problem, let's triple it again, and then triple that.There is no upper limit on how much the Empire can borrow, right? "We are the ultimate power in the Universe now," etc.

All the games end badly. Tomorrow we'll examine the paths to impoverishment we can choose from.


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.

Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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