Saturday, May 30, 2020

This Is How Systems Collapse

Flooding the financial system with "free money" only restores the illusion of stability
I updated my How Systems Collapse graphic from 2018 with a "we are here" line to indicate our current precarious position just before the waterfall:
For those who would argue we're nowhere near collapse, consider that over 20% of the Federal Reserve's $2 trillion spew of free money went directly into the pockets of America's billionaires: $434 billion by the latest estimates, while most of the rest went into the pockets of the top 10% who own all the assets that the Fed is goosing higher while millions of households are worried about feeding themselves: (American billionaires got $434 billion richer during the pandemic).
In America's system, the solution to soaring, destabilizing inequality is... to goose inequality to new heights. No wonder there's no middle ground left politically, socially or financially, and social disorder is so easily ignited. There are few feedback loops left in our fragile system; the rich get richer, and rather than restore some balance, our political system further empowers the parasitic and predatory financial elites. The rich and politically powerful are one group, sharing control of public and private institutions.
One way to understand "middle ground" is that the middle ground acts as a buffer between systemic extremes. The key concepts here are stability and buffers. Though complex systems are never static, but they can be stable: that is, they ebb and flow within relatively stable states supported by buffers.
America's social, political and economic buffers have been thinned by extremes and excesses, but nobody noticed or cared: America's reigning credo is: anything goes, winners take all.
In systems, this ebb and flow of low-level volatility generates stability and adaptation. In natural systems, feedback loops between the weather, environment and plant/animal species keep the ecosystem in a state of dynamic equilibrium. Ideal weather conditions may spark a rise in an insect population, for example, which then enables an increase in insect-predator populations (fish, birds, frogs, etc.) which then increases the consumption of the insects and reduces the impact of the higher insect population.
If the river runs low, the human populace relies on wells for reserves of water. In good harvests, grain is set aside for lean harvests; the wells and grain stores are buffers which can be drawn down to restore stability to a stressed system.
Buffers are largely invisible and of little common interest in times of abundance. When water and grain are well-supplied, who cares if the stores have spoiled and the well water tastes bad?
A system with thin buffers and few feedback loops looks robust on the surface but is highly vulnerable to collapse. In our example, the first lean harvest and low water flow completely drain the reserves, and the second year of drought triggers a collapse of the system.
In our complex socio-economic system, the buffers are largely invisible. As a general rule, "money" (currency created by central banks and private banks when a loan is issued) is our all-purpose buffer: if something becomes scarce and threatens the system, we print/ borrow into existence more "money" which is distributed to buy whatever is needed.
But "money" is an illusory buffer. If the well has run dry, no amount of money will restore ground water. If the fisheries have collapsed due to overfishing, no amount of currency issued by the Federal Reserve will restore the fisheries. In other words, the natural world provides hard limits that money can only fix if buffers are available for purchase.
"Money" is itself a system, a system with financial buffers, buffers that have been consumed by the speculative excesses of the private sector and the financial repression of central banks. These buffers are largely invisible; few know what's going on in global liquidity markets, for example. Yet when liquidity dries up, for whatever reason, markets go bidless and asset prices go into freefall.
Flooding the financial system with "free money" only restores the illusion of stability. As noted in my diagram, restoring and maintaining an apparent stability thins buffers to the point of dangerous fragility.
When buffers are paper-thin, a crisis that would have been overcome with ease in the past triggers the collapse of the entire system. Everyone who based their faith in the system on its surface stability is stunned by the rapidity of the collapse, for how could such a vast, apparently robust system implode with so little warning?
The financial system's buffers have been thinning for 20 long years, but nobody seems to care. The quality of risk, debt, borrowers and speculative gambles have all declined, but faith in the "Fed put"--that the Federal Reserve can fix anything and everything by printing endless trillions-- is quasi-religious: few doubt the limitless power of the Fed's currency-printing machinery to quickly overcome any crisis.
This is how systems collapse: misplaced faith in the visible surface of abundance generates fatal complacency and confidence, and the fragility of the buffers goes unnoticed.
Just before the collapse, central bank currency is super-abundant, but systemic stability is near-zero and all the buffers are paper-thin: the Fed's trillions create an illusion of safety, as if all we need to do to restore the lost middle ground and buffers is to hand America's most parasitic and predatory clique another $434 billion in stock market wealth.
Doing more of what has destabilized the system in the belief that new extremes will somehow restore equilibrium is simply rowing faster as we speed toward the waterfall of systemic collapse.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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.
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, Daniel B. ($50), for your monumentally generous contribution to this site -- I am greatly honored by your support and readership.
 
Thank you, Michael G. ($5/month), for your marvelously generous pledge to this site -- I am greatly honored by your support and readership.

Read more...
Posted by Charles Hugh Smith at 4:55 PM

Friday, May 29, 2020

First the Deflationary Deluge of Assets Crashing, Then the Tsunami of Inflation

Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats.
The conventional view is the Federal Reserve creating trillions of dollars out of thin air will trigger inflation. Not so fast. Yes, creating trillions of dollars out of thin air will eventually devalue the purchasing power of each dollar--what we call inflation--but first all the unprecedented asset bubbles will pop and valuations will crash.
Let's call this a deflationary deluge as unsustainable asset prices are eroded by a hard rain of reality. To understand the enormity of the current bubbles, please glance at the charts below. The first chart depicts recent stock market bubbles; note the extreme height of the current bubble.
The next chart shows the S&P 500, and the extraordinary amplification of the bubble that reached its apex in February 2020. Note that each ramp higher takes less time to reach its peak. The most recent snapback rally gained about 870 points in a mere two months--a move that took roughly 5 years in the early 2000s.
Real estate and other assets have also soared in unprecedented bubbles. Old bungalows that sold for $150,000 less than 20 years ago are now supposedly worth over $1 million.
What made this possible? An equivalent bubble in debt. Every sector--household, corporate and government--has borrowed astronomical sums of money to keep the bubble economy glued together. In this rising tide of currency and capital, whatever had scarcity value--real estate, art, stocks--was purchased with the borrowed money as a store of value and / or as a source of income in a world starved of low-risk yields by central banks that dropped interest rates to near zero.
Assets don't have to rise, but the interest and principal on debt has to be paid. That's the rub with buying assets with borrowed money.
The price of assets is set on the margins. In a neighborhood of 100 houses, the price of all the houses is set by the most recent handful of sales. If each house was valued at $1 million, and three houses sell for $800,000, the value of the other 97 houses falls to $800,000 each.
All bubbles rely on a greater fool willing to pay a higher price than the previous somewhat lesser fool. The problem is the supply of greater fools quickly drops to zero when euphoria is replaced by fear and the marginal buyers are no longer willing to pay outlandish sums for houses, stocks, boats, etc.
Every greater fool who abandons a market sticks a pin in the bubble. As prices start eroding, those who bought the over-valued assets with borrowed money start realizing they have to make the interest payments even if the asset is losing value. The only rational choice is to run to the exit and sell the asset.
But since so many recent buyers bought with borrowed money, the exit is quickly jammed with desperate sellers. This triggers market crashes as marginal buyers desperate to sell will drop their price, while the delusional herd still believes the bubble valuations are not just fair but "under-valued."
This is why the majority refuses to sell until it's too late. They believed the fairy tales that "real estate never drops," Apple is a bargain at $300 (see chart below), etc., and are unwilling to suspend those beliefs even as the deflationary deluge washes away their wealth.
By the time they realize the impossibility of getting their wealth back, it's too late to do anything other than salvage what's left by selling now rather than later.
Bubbles tend to rise and drop in rough symmetry, meaning they tend to retrace the entire bubble, though the descent is often much faster than the ascent.
The greatest fairy tale of them all is the Fed has our back. The belief here is that all the dollars created out of thin air by the Fed will flow into stocks. But there is no actual causal mechanism in this belief; the Fed can create dollars out of thin air but they don't have to flow into the stock market; they can go elsewhere. They only flow into stocks because the financiers, banks and other parasites and predators are counting on greater fools to pay ever higher prices for stocks based on their erroneous faith that the Fed's new money magically goes straight into stocks.
Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats, up to the point that the Fed is given the legal go-ahead to buy stocks directly. That's when the inflation everyone anticipates will begin. But inflation is just as unruly a beast as an asset bubble, and control is never quite as complete as the Fed claims.
First the deflationary deluge, then the tsunami of inflation. Both destroy the wealth of believers in fairy tales.
My COVID-19 Pandemic Posts


My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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.
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, Robert C. ($10/month), for your outrageously generous subscription to this site -- I am greatly honored by your steadfast support and readership.
Thank you, Terence S. ($5/month), for your marvelously generous pledge to this site -- I am greatly honored by your support and readership.

Read more...
Posted by Charles Hugh Smith at 9:05 AM

Thursday, May 28, 2020

Social Media's Plantation of the Mind

The Company Store is open, buy whatever you want on easy credit, and don't forget to take an approved narrative with you.
I've been discussing the neocolonial-plantation structure of the U.S. economy since 2008, and now this model has reached perfection in social media's Plantation of the Mind. Once you're firmly enmeshed in this social media Plantation, you lose sight of the fact that there's a larger world outside the plantation: social media platforms aren't exploitive plantations in the World Wide Web/Internet, they are the Internet as far as their users are concerned.
Since I spent some of my youth in a classic Plantation town (and worked on the plantation as a laborer in summer), the concept of a Plantation Economy is not an abstraction to me, but a living analogy of the way our economy works.
In the classic Plantation, everything is managed by those in charge to benefit the owners. Workers are forced to buy their necessities at The Company Store, and since the entire town and plantation is owned by the corporation, there's no private ownership of land or housing; everyone is a serf, beholden to the owners, and since costs are artificially high at The Company Store (due to the lack of competition), the serfs have to go into debt to survive: they become debt-serfs.
In the Plantation Economy, the Company suppresses any innovation that threatens its monopoly and the state enforces whatever means the Corporation deploys: buying up patents and small companies, predatory pricing to bankrupt competitors, etc.
The Plantation Economy is a mono-culture of large corporations and their partner in rentier skimming, the state. Our economy is a state-cartel finance-debt system; it's only capitalist on the margins, that is, in the fringes that aren't profitable enough for corporations to control.
The core feature of this Plantation Economy is the privileges of accumulating capital are all in the hands of the state-cartel elites. The foundation of classical capitalism is the accumulation of capital, which in our era is not just cash, factories, mines, etc.--financial and industrial capital-- but knowledge capital: intellectual property, knowledge of processes, creation and control of content, research and development, control of information streams (that is, maintaining information asymmetry) and so on.
One of the key concepts in the Survival+ critique is the politics of experience. This is an elusive concept because what we take for granted is invisible to us, and we have to go back in time, so to speak, to rediscover a history in which the experience of daily life was quite different from the present.
Today, we accept it as "normal" that marketing worms into every once-private area of our lives. Not that long ago, adverts and marketing were limited to print media (newspapers and magazines) and TV--fundamentally passive media that you could opt out of by setting the paper aside or turning off the TV.
The key concept in all marketing now is supremely pernicious: any advert or campaign which reaches deep into the last refuges of privacy is considered highly valuable. This is of course the raison d'etre of social media: to weave highly profitable marketing into every process we consider essential.
To perfect this colonization of the mind, social media has persuaded users that they no longer need unfettered access to the entire World Wide Web/Internet: we'll give you everything you want right here on our Plantation of the Mind.
Including, of course, what you should think, feel and buy. Since Google dominates "search," and since Google has complete control over what is "found" in searches and what is buried and rendered invisible, i.e. whatever is "not found," then our access to the entire Web is limited in ways we cannot see or understand, because the process and filters are invisible to us.
Once you control the politics of experience, the user isn't even aware that what they now consider "obvious" has been molded by the plantation owners to maximize their private profits. In social media's Plantation of the Mind, users are assured they have complete access to everything that is "fact" and "safe," when in reality everything they see has been filtered to the benefit of the Plantation owners and their political allies in the state hierarchy.
In a democracy, voters must be trusted to make assessments and judgments on their own, i.e. as adults. They must be trusted to realize that marketers are everywhere, attempting to sell something or other, not just goods and services but narratives, which benefit those in power or threaten those in power.
They must be trusted to understand the difference between their own private stake in political decisions and the broader public good.
Alas, the voters are no longer trusted by the elites. They are chattel on the plantation, and have to be managed and coerced for their own good. Enter the perfect tool to do so, social media's Plantation of the Mind.
The entire purpose of social media's Plantation of the Mind is to maximize profits by limiting user's experience and awareness to what is unthreatening to the corporate-state elites. Rather than the old model in which the Web was a free-for-all which included all sorts of content which required users to sort the wheat from the chaff, social media's Plantation of the Mind seeks to sanitize all that chaos into "approved content" which users aren't even aware has been carefully selected for their consumption by hidden processes and filters.
The intent of those filters are also hidden, as is the selection process of those filters.
Who gets to decide what's filtered out "for our own good"? Who gets to decide what is "our own good"?
Welcome to social media's Plantation of the Mind. The Company Store is open, buy whatever you want on easy credit, and don't forget to take an approved narrative with you. Don't worry, we've planted that in your mind without you even realizing it--for your own good, of course.
My COVID-19 Pandemic Posts


My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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.
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, Marcie M.-F. ($25), for your splendidly generous contribution to this site -- I am greatly honored by your support and readership.
Thank you, Robert S. ($5/month), for your marvelously generous subscription to this site -- I am greatly honored by your support and readership.

Read more...
Posted by Charles Hugh Smith at 10:42 AM

Tuesday, May 26, 2020

Re-Opening the Economy Won't Fix What's Broken

Re-opening a fragile, brittle, bankrupt, hopelessly perverse and corrupt "normal" won't fix what's broken.
The stock market is in a frenzy of euphoria at the re-opening of the economy. Too bad the re-opening won't fix what's broken. As I've been noting recently, the real problem is the systemic fragility of the U.S. economy, which has lurched from one new extreme to the next to maintain a thin, brittle veneer of normalcy.
Fragile economies cannot survive any impact with reality that disrupts the distortions that are keeping the illusion of "growth" from shattering. For the past two decades, every collision with reality cracked the illusion, and the "fix" was to duct-tape the pieces together with new extremes of money-creation, debt, risk and speculative excess.
While the stock market has soared, the real world falls apart. If your region needs a new bridge built, count on about 20 years to get all the "stakeholders" to agree and get the thing actually built. Count on the cost quintupling from $500 million to $2.5 billion. Count on corners being cut as costs skyrocket, so those cheap steel bolts from China that are already rusting before the bridge is even finished? Oops. Replacing them will add millions to the already bloated budget.
Want to add a passenger stop on an existing railroad line? Count on 20 years to get it done. The complexity thicket of every regulatory agency with the power to say "no" basically guarantees the project will never get approved, because every one of these bureaucracies justifies its existence by saying "no." Sorry, you need another study, another environmental review, and so on.
Need a new landfill? I hope you started the process 15 years ago, so you'll get approval in only five more years. Every agency with the power to say "no" will stretch out the approval, so they have guaranteed "work" for another decade or two.
Did your subway fares double? Was the excuse repairing a crumbling system? Did the work get done on budget and on time? You must be joking, right? All the fare increase did was cover the costs of skyrocketing salaries, pensions and administrative costs. Repairs to the tracks and cars-- that's extra. Let's float a $1 billion bond so nobody have to tighten their belts, and have riders pay for it indirectly, through higher taxes to pay the exorbitant costs of 20 years of interest on the bond.
Have you been thrown off your bicycle by the giant potholes in the city's "bike lanes"? The city reluctantly admits that these streets that haven't been maintained for decades--yes, decades. The city once paid for street maintenance out of its general budget, but alas, that's been eaten up by skyrocketing salaries, pensions and administrative costs, so now we need to float $100 million bond to fund filling potholes. If all goes according to plan (ha-ha), we should be able to re-pave the streets that have been crumbling for 20 years in... the next 20 years.
These real-world examples are just four of thousands of manifestations of a broken system. Rather than make tough choices that drain power and wealth from vested interests, we simply borrow more money, in ever increasing amounts, to keep the entrenched interests and elites happy.
There are two "solutions" in the status quo: dump the debt on taxpayers or on powerless debt-serfs--for example, college students. (See chart below of the $1.6 trillion that's stripmining student debt-serfs.) Who benefits from selling all the municipal bonds, bundled student loans, etc. to investors starving for a yield above 0.1%? Wall Street, of course.
The problem is that while debt has soared, productivity and earned income have stagnated. The statistical narrative has been ruthlessly gamed to hide the erosion of living standards, but even with the bogus "low inflation" of official statistics, wages for the bottom 95% have stagnated for decades.
Measures of productivity have also been gamed to mask the ugly reality that the vast majority of the U.S. economy is stagnating under the weight of interest payments on debt, mal-investments in speculative gambles, higher junk fees and taxes, crushing regulatory compliance, high costs imposed by monopolies and cartels and a well-cloaked decline in the quality of just about everything the bottom 95% uses or owns.
What little productivity gains have been made have been skimmed by the top 5%. Coupled with the Federal Reserve's single-minded goosing of the one signaling device it controls, the stock market, the top 0.1% in America own more wealth than the bottom 80%.
If productivity stagnates and winners take all, the wages of the bottom 95% cannot rise. Real wealth is only created by increases in the productivity of labor and capital; everything else is phantom wealth.
The only way stagnant incomes can support more debt is if interest rates decline. Presto, the Fed dropped interest rates to near-zero a decade ago. Of course you and I can't actually borrow millions for 0.1%; that privilege is reserved for financiers and other financial parasites and predators.
Debt-serfs were able to refinance their crushing mortgages to save a few bucks, and so they can afford to 1) take on more debt and 2) pay higher taxes to fund the ballooning public debt.
Every one of these extremes has increased the systemic fragility of the American economy. This fragility is reflected in the impoverishment of the bottom 95%, the thin line between solvency and bankruptcy, the decay of public trust in institutions run for the benefit of entrenched interests, and the quickening erosion of America's social contract.
Re-opening a fragile, brittle, bankrupt, hopelessly perverse and corrupt "normal" won't fix what's broken.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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.
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, Tim B. ($100), for your outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.
 
Thank you, Benjamin M. ($50), for your marvelously generous contribution to this site -- I am greatly honored by your support and readership.

Read more...
Posted by Charles Hugh Smith at 8:50 PM
Subscribe to: Posts (Atom)

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


 This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act
This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Limit the Use of My Sensitive Personal Information.


Regarding Cookies:


 This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP