Why Inflation Is a Runaway Freight Train

The value of these super-abundant follies will trend rapidly to zero once margin calls and other bits of reality drastically reduce demand.

Inflation, deflation, stagflation--they've all got proponents. But who's going to be right? The difficulty here is that supply and demand are dynamic and so there are always things going up in price that haven't changed materially (and are therefore not worth the higher cost) and other things dropping in price even though they haven't changed materially.

So proponents of inflation and deflation can always offer examples supporting their case. The stagflationist camp is delighted to offer a compromise case: yes, there are both deflationary and inflationary dynamics, and what we have is the worst of both worlds: stagnant growth and declining purchasing power.

What's missing in most of these debates is a comparison of scale: deflationists point to things like big-screen TV prices dropping. OK, fine: we save $300 on a TV that we might buy once every two or three years. So we save $100 a year thanks to this deflation.

Meanwhile, on the inflationary side, healthcare insurance went up $3,000 a year, childcare went up $3,000 a year, rent (or property taxes) went up $3,000 a year and care for an elderly parent went up $3,000 a year: that's $12,000. Now how many big-screen TVs, shoddy jeans, etc. that dropped a bit in price will we have to buy to offset $12,000 in higher costs?

This is the problem with abstractions like statistics: TVs dropped 20% in cost, while healthcare, childcare, assisted living and rent all went up 20%--so these all balance out, right?

There are two glaring omissions in all the back-and-forth on inflation and deflation:

1. Price is set on the margins.

2. Enterprises cannot lose money for very long and so they close down.

Let's start with an observation about the dynamics of price/cost: supply and demand. As a general rule, things that are scarce and in high demand will go up in price, and things that are abundant and in low demand will drop in price.

Whatever is chronically scarce and necessary for life will have a ceaseless pressure to cost more, whatever is abundant and no longer desirable will have a ceaseless pressure to cost less.

Now we come to the overlooked mechanism #1: Price is set on the margins. Housing offers an example: take a neighborhood of 100 homes. The five sales last year were all around $600,000, and so appraisers set the value of the other 95 homes at $600,000.

Things change and the next sale is at $450,000. This is dismissed as an outlier, but then the next two sales are also well below $500,000. By the fifth sale at $450,000, the value of each of the 95 homes that did not change hands has been reset to $450,000. The five houses that traded hands set the price of the 95 houses that didn't change hands. Price is set on the margins.

The biggest expense in many enterprises and agencies is labor. Those who own enterprises know that it's not just the wage being paid that matters, it's the labor overhead: the benefits, insurance and taxes paid on every employee. These are often 50% or more of the wages being paid. These labor overhead expenses have skyrocketed for many enterprises and agencies, increasing their labor costs in ways that are hidden from the employees and public.

It's important to recall that roughly 3/4 of all local government expenses are for labor and labor overhead--healthcare, pensions, etc. Where do you think local taxes are heading as labor and labor-overhead costs rise? What happens to pension funds when all the speculative bubbles all pop?

The cost of labor is also set on the margins. The wage of the 100-person workforce is set by the five most recent hires, and if wages went up 20% to secure those employees, the cost of the labor of the other 95 workers also went up 20%. (Employers can hide a mismatch but not for long, and such deception will alienate the 95% who are getting paid less for doing the same work.)

Labor is scarce for fundamental reasons that aren't going away:

1. Demographics: large generation is retiring, replacements are not guaranteed.

2. Catch-up: labor's share of the economy has declined for 45 years. Now it's catch-up time.

3. Cultural shift in values: Antiwork, slow living, FIRE--all are manifestations of a profound cultural shift away from working for decades to pay debts and enrich billionaires to downshifting expenses and expectations in favor of leisure and agency (control of one's work and life).

4. Long Covid and other chronic health issues: whether anyone cares to admit it or not, Long Covid is real and poorly tracked. A host of other chronic health issues resulting from overwork, stress and unhealthy lifestyles are also poorly tracked. All these reduce the supply of labor.

5. Competing demands of family and work. Work has won for 45 years, now family is pushing back.

Put these together--diminishing supply of labor and labor being priced on the margins--and you get a runaway freight train of higher labor costs. Add in runaway increases in labor overhead and you've got a runaway freight train with the throttle jammed to 11.

Deflationists make one fatally unrealistic assumption: that enterprises facing sharply higher costs for labor, components, shipping, taxes, etc. will continue making big-screen TVs, shoddy jeans, etc. even as the price the products and services fetch plummets below the costs of producing them.

The wholesale price of the TV can't drop below production and shipping costs for very long. Then the manufacturers close down production and the over-abundance of TVs, etc. goes away. Nation-states can subsidize production of some things for a time, but selling at a loss is not a long-term winning strategy: subsidizing failing enterprises and money-losing state-owned companies is a form of malinvestment that bleeds the economy dry.

The only thing that will still be super-abundant as demand plummets is phantom-wealth "investments", i.e. skims, scams, bubbles and frauds. The value of these super-abundant follies will trend rapidly to zero once margin calls and other bits of reality drastically reduce demand.

Real-world costs: much higher. Speculative gambles: much lower. As in zero.





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We Don't Talk About Collapse To Revel In It, We Talk About Collapse to Prevent It

If one possible result of the current system is collapse, realizing the system itself must be changed isn't doom-and-gloom, it's problem-solving.

Those of us who discuss collapse are generally dismissed as doom-and-gloomers, the equivalent of people who watch dash-cam videos of vehicle crashes all day, reveling in disaster. Why would we spend so much effort discussing collapse if we didn't long for it?

Those dismissing us all as doom-and-gloomers hoping for collapse have it backward: yes, some long for collapse as a real-life disaster movie, but those discussing collapse in systems terms are trying to avoid it, not revel in it.

If the system is vulnerable beneath a surface stability, then the only way to avoid negative consequences is to understand those vulnerabilities / fragilities and work out systemic changes that reduce those risks.

It's not the analysis of vulnerabilities that causes collapse, it's refusing to look at vulnerabilities because to do so is considered negative. Why not be optimistic and just go with the consensus that the status quo is impervious to serious disruption? Can-do optimism is all that's needed to overcome any spot of bother.

The problem is humanity's propensity to confuse optimism with magical thinking. This confusion is particularly visible in any discussion of energy. The status quo holds that every problem has a technological solution, and doubting this optimism is dismissed as naysaying: "why can't you be positive?"

I consider myself an optimist in the sense that I see solutions that are within reach if we change our definition of the problem so we can enable new solutions. I consider myself a practical, pragmatic optimist because I understand from life experience that systemic solutions generally require arduous transformations that will demand great effort and sacrifice. In many cases, this process is mostly a series of failures and disappointments that are the essential parts of a steep learning curve.

But little of this basic awareness is visible in media descriptions of "solutions."

Thus every advance in a lab somewhere is immediately touted as the globally scalable solution: algae-based fuel, modular nuclear reactors, new battery designs, etc., in an endless profusion of technologies which are 1) not even to the prototype stage 2) cannot be scaled 3) limited to specific uses 4) require the construction of new infrastructure 5) consume vast resources to be built, including hydrocarbons 6) are not renewable as they must be replaced every 10-15 years 7) are not cost-effective once externalities are included 8) are intrinsically impractical due to complexity, dependency on rare minerals, etc.

All this "optimism" is actually 95% magical thinking, as the practical, real-world realities are dismissed or glossed over: "oh, they'll figure all that out."

In other words, throw enough money and talent at a problem ("we went to the moon, so anything is possible!") and it will always be solved in a way that's bigger and better. This is not optimism, this is magical thinking being passed off as optimism. Real optimism is cautious and contingent, hyper-aware that solutions are a dependency chain that only reach cost-effective scalability if an entire chain of circumstances and advances line up just right.

There's another source of confusing optimism and magical thinking: being too successful for too long. Former Intel CEO Andy Grove discussed this in his book Only the Paranoid Survive: once an organization reckons it has succeeded and has everything necessary to continue achieving success without making any systemic changes, then it's doomed to decay and eventual collapse.

When success becomes the default then all the hard parts of success--sacrifices made, failures mopped up, gambles that didn't pay off and gambles that did--melt away and all that's left is a sunny confidence that somebody somewhere will work out a solution that scales up to solve the problem for all of us: "we have top people working on it--top people!"

Meanwhile, back in the real world, it takes 20 years to get a new bridge approved and built in the U.S., 20 years for a new subway line approved and built and 20 years to get a new landfill approved.

We're supposed to make the leap to a renewable zero-net-carbon future in 20 years and we can't even build one new-design nuclear reactor prototype in 20 years, even as we'd need hundreds of new reactors to replace a significant slice of hydrocarbon consumption.

But if you dare to point out this painfully visible discrepancy between the real-world difficulties in getting a single prototype built in less than 20 years and the claim that we're going to transition away from hydrocarbons in 20 years, then you're a doom-and-gloomer, a naysayer who derives some bitter pleasure from shooting down optimists working on painless, sacrifice-free techno-solutions.

The essence of magical thinking is the belief that the long dependency chain between the idea/lab experiment and a solution that's cost-effective and scales up to serve everyone will always fall into place because it's always fallen into place in the past, and so there's no reason to doubt that all the pieces will fall into place going forward.

This is magical thinking because it has zero interest in the real-world constraints embedded in each link in the long chain. If you bring up any of these constraints, the magical thinking "optimist" is immediately annoyed and accuses you of being a bitter naysayer. The idea that there might be real-world constraints that "top people" can't overcome is rejected as naysaying.

The possibility that there might be systemic constraints is rejected out of hand because "anything's possible if we throw enough money and talent at it." There will always be a solution / substitute which will be affordable and sacrifice-free.

That all the previous examples of this were enabled by our exploitation of the easiest-to-extract hydrocarbon wealth is overlooked as a footnote.

This leaves us all frustrated. Those of us grounded in the real world are frustrated that if we bring up any real-world constraints--for example, those wondrous untapped ore deposits that are going to make all these new techno-wonders cheap and quick and easy are far from paved highways, far from major river or bluewater ports, far from processing plants, and far from sources of the millions of liters of diesel fuel that will be needed onsite to extract the ores--then we're bitter naysayers who can't bear optimism and easy success, while the magical thinking "optimists" are frustrated that we're not accepting the technocratic religion that "top people" and a tsunami of money will solve any problem.

One thing I've noticed is "top people" (actual experts with long experience) are never the ones hyping some new technology as the pain-free affordable solution unless they're paid shills of special interests. Then they hype nuclear reactors as the solution without mentioning the problem of what to do with the waste, to name one constraint "optimists" inevitably ignore.

In the real world, the hard part is getting every link of the long dependency chain to work reliably and at a cost that's sustainable/affordable. Success comes not from blithely dismissing constraints as naysaying but from accepting most potential solutions will fail due to issues for which there is no cost-effective, practical, scalable fix.

On a systemic level, this requires questioning whether the system itself has to change if we want a different result. If one possible result of the current system is collapse, realizing the system itself must be changed isn't doom-and-gloom, it's problem-solving.



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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)

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Two Things to be Thankful For

Now on to the good things to eat--yowzah!

Giving thanks for bits of beauty and good things to eat. Wishing you a multitude of both. As you'll see from this selection of recent photos, I find good things to eat beautiful. But let's start with a fiery sort of beauty:



And a Pacific sort of beauty:



Now on to the good things to eat--yowzah!











First the sweetbread dough has to rise...





Don't let the dessert cart on the Titanic go by....





Colors most amazing....





And whatever else happens, if we don't have Paris, we'll always have the shady spot behind the beach. (No fee, no crowds, just walk a few klicks over sun-baked fields of lava.)



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Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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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)

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When Risk and Opportunity Become Personal

The opportunity to lower our exposure to risk is always present in some fashion, but embracing this opportunity becomes critical when precarity and change-points rise like restless seas.

The Chinese characters that comprise the equivalent of "crisis" are famously--and incorrectly-- translated as "danger" and "opportunity." This mis-translation has reached the peculiar prominence of being repeated often enough to be taken as accurate, but according to Wikipedia and other sources, the more accurate translation is "precarious" plus "change point." (Chinese speakers may be able to shed even more light on the characters' shades of meaning.)

The American attachment to "crisis" equaling "danger" and "opportunity" is easy to understand: the American "can do" culture is fond of optimistic calls to action ("when life hands you lemons, make lemonade," etc.) and so crisis presenting opportunity fits this perfectly.

As for the danger: that's the necessary impetus to grab the opportunity.

Lost in this cheerleading of great opportunities just waiting beneath an oil slick of danger is the possibility that the precariousness of imminent change offering sure-fire opportunities might be wishful thinking.

There is no guarantee that "crisis" is only 10% danger/precarity and 90% unalloyed opportunity; it might just as well be 90% precarity and 10% extremely risky opportunity where the odds of failure exceed those of success.

My preferred portmanteau of crisis is risk and opportunity because risk is the essential yin to opportunity's yang: every opportunity to succeed is equally an opportunity to fail.

America's "can do" culture processes this potential for failure in two ways:

1. Since "He who will not risk cannot win" (John Paul Jones), and winning is the goal, then risk is just part of the package.

2. Glorify failure as the essential stepping stone to success: "Fail often, fail fast" (or as coined by John C. Maxwell, "Fail early, fail often, but always fail forward").

While overcoming repeated failures is indeed the path of progress, it is not teleological, meaning that failing often and failing fast does not necessarily end in success; it may end in a failure so complete that there are no longer the resources available to recover. Nobody talks about this possibility, of course, as it runs counter to "can do" optimism.

Combining precariousness and an unstable point of profound change gets us closer to a realistic assessment of the present moment, for it captures the reality that doing nothing isn't a guarantee of safety. Hoping that doing nothing is the way to avoid risk is to misunderstand precarity and instability: doing nothing may the quickest pathway to collapse.

In my analysis, the large-scale structures of globalized supply chains, financialization, debt-funded speculation and the destabilizing consequences of extreme inequality are all perched on the precarious edge of fundamental change.

We don't control these large-scale forces, of course, but we do control our response to their phase-shift / decay / collapse. This makes risk and opportunity personal.

If we grasp that doing nothing might be disastrous as taking bold action, we get close to the nature of risk and the inherent uncertainty of the outcome, no matter what course of action we choose. Doing nothing can lead to collapse, but so can bold action.

That said, the lower one's dependency on precarious systems, the lower one's exposure to risks we can't control. The lower one's consumption, the lower one's dependency. The lower one's debt (with zero debt being the lowest risk position), the lower one's exposure to the risk of bad things happening financially.

The lower the population density, the lower the risk of herd mentality running amok. The greater the quantity of food grown within walking distance, the lower the risk of starvation.

These observations are not cheerleading the embrace of risk and failure as the sure-fire pathway to success; the goal here is to lower the risk of failure by reducing exposure to vulnerabilities, dependencies and fragile points of precarity over which we have no control.

Even if we can't reduce our exposure to risk in this moment, we can brainstorm Plan B and Plan C--potential responses to risks rising and opportunities diminishing.

The opportunity to lower our exposure to risk is always present in some fashion, but embracing this opportunity becomes critical when precarity and change-points rise like restless seas.





Thank you, everyone who dropped a hard-earned coin in my begging bowl this week--you bolster my hope and refuel my spirits.

This essay was first published as a weekly Musings Report sent exclusively to subscribers and patrons at the $5/month ($54/year) and higher level. Thank you, patrons and subscribers, for supporting my work and free website.


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

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When Everything Is Artifice and PR, Collapse Beckons

The notion that consequence can be as easily managed as PR is the ultimate artifice and the ultimate delusion.

The consequences of the drip-drip-drip of moral decay is difficult to discern in day-to-day life. It's easy to dismiss the ubiquity of artifice, PR, spin, corruption, racketeering, fraud, collusion and narrative manipulation (a.k.a. propaganda) as nothing more than human nature, but this dismissal of moral decay is nothing more than rationalizing the rot to protect insiders from the sobering reality that the entire system is unraveling and heading for its final reckoning: collapse.

We've become so accustomed to the excesses of marketing that we've lost the ability to recognize the difference between "science" that's been carefully designed to reach a pre-planned conclusion and science that accepts the outcome, even if it harms well-funded interests.

The vast expanses of ignorance greatly aid this artifice. Even though high school physics, chemistry and biology are sufficient to tease apart the vast majority of rigged experiments, trials and studies, few Americans have the interest or fortitude to read Phase III trial results, etc. critically, and so the corporate media can trumpet bogus results without fear of exposure: all the statistical tricks and gimmicks are passed off as "science" to the distracted and gullible.

And if someone dares to examine the results critically, then those benefiting from the ignorance make the results "secret" until the year 2929. And that's the entire game in a nutshell: maximizing private gain from artifice, PR, spin, corruption, racketeering, fraud, collusion and narrative manipulation, all masked by an putrid spew of virtue-signaling and PR.

Every institution that was once trustworthy has been debauched to maximize private gain: higher education, science, medicine, national defense--the list includes virtually every sector and industry in America. Nothing can be trusted because somebody behind the scenes is spinning the story and data to mask their self-interest, their immense gains and the carefully contrived structure of diverting investigation and eliminating transparency, competition and accountability.

Our technocratic obsession denies the existence of the moral universe, reducing the world to techno-gimmicks (electric air taxis for everyone!), techno-fantasies (fusion reactors on every corner!) and techno-distractions (which billionaire will be the first on Mars?), as if a nation and society hurtling toward moral, social, civic and economic collapse can be saved by some "innovation" that beneath the surface is nothing more than another profiteering monopoly or cartel.

Many people fear collapse, but quality, service and reliability have already collapsed. The washing machine that two generations ago was designed and built to last 25 years now breaks down after a few years--so sorry, the motherboard failed. That will cost you almost as much as new washer, and so the manufacturer, bank and retailer win because the weary, clueless consumer will do the easy thing and buy a new, expensive appliance on credit. The "old" appliance (brand-new by previous standards) is hauled off to the landfill, the ultimate destination of everything in our Landfill Economy of poorly made junk.

Service would be hauled to the landfill as well if it was tangible. Alas, it is simply maddening, as nothing works and Kafkaesque bureaucracies have so much power that they are immune to transparency, competition and accountability. their websites don't work, they botch the most basic transactions and they perpetuate incorrect information, but too bad--there is no recourse.

Big Tech is equally impervious to transparency, competition and accountability. Your "crime" is never explained, and there is no recourse, for the Machine has no judiciary or human contact: you query the Machine knowing full well that you will never extract anything remotely fair or just from its algorithmic monstrosity.

Technology doesn't extinguish moral decay or eliminate the stench of self-serving artifice, PR, spin, corruption, racketeering, fraud, collusion and narrative manipulation. Technology only enhances the potential for profiteering under the tissue-thin guise of "innovation," "technological advance" and the threadbare delusions of a populace that has watched too many contrived narratives in which technology saves the day.

The moral buffers have already thinned; there is nothing left to tap. There is nothing left in what actually matters: social cohesion, moral legitimacy, civic virtue--all stripped, depleted, gone.

Drones and robots won't save us from collapse. Neither will fusion reactors, electric air taxis, billionaires in space, missions to Mars, algae-based meat or any of the other thousand "innovations" those profiting from moral rot promote in the hopes that the banquet of consequences being served can be swept away by more gimmicks, more artifice, more delusions, more fantasies, more PR, more spin and more narrative control.

Collapse can't be gimmicked away. The notion that consequence can be as easily managed as PR is the ultimate artifice and the ultimate delusion.



Thank you, everyone who dropped a hard-earned coin in my begging bowl this weekend--you bolster my hope and refuel my spirits.


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.


Recent Videos/Podcasts:

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My recent books:

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 (PDF).


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I'm Looking for Ten Readers Willing to Pony Up $1 for the Crazy-Valuable Content Here

I only rattle the begging bowl once a calendar year, and this is it.

Beneath the Photoshopped complacency, the level of uncertainty about the future is pegged to 11 (recall that 10 is the conventional max on the guitar amp volume knob).

It's times like this when the crazy-valuable content on Of Two Minds becomes even more crazy-valuable. Yes, many people reckon it's simply crazy, but look how many times what was dismissed as crazy by the mainstream turns out to be right.

For example, What If All the Cheap Stuff Goes Away? (March 30, 2018).

I try to turn a pragmatic, independent eye on the world, avoiding conventional or ideological pathways, for example, Virus Z: A Thought Experiment (July 1, 2021).

I can't help being frugal (see photos below) in both the tangible world and the world of ideas, where I try to identify the core systems dynamics in play, for example, The Fed's Moral Hazard Monster Is About to Lay Waste to "Wealth" (November 19, 2021).

I tend to focus on what one reader described in this way: "money richness and wealth are vastly different animals."

Let's not overlook the entertainment/amusement value of crazy. Crazy has its own unique value, and if there's one thing that everyone can agree on, it's that Of Two Minds is unique (ahem, in a good way).

I tend to keep expectations low, as that fits my experience, which tracks Churchill's definition of success: going from failure to failure without loss of enthusiasm.

So in the spirit of maintaining low expectations, I'm looking for ten of you tens of thousands of readers who reckon the crazy-valuable (or just plain crazy) content here is worth a dollar. Heck, let's call it a dollar a month, or 12 Washingtons a year.

Those ponying up a Lincoln ($5) every month get the weekly Musings Reports, an incredible bargain given what you get. I've spent the past year writing a book that lays out big-picture solutions to our nation's fundamental challenges, and subscribers / patrons will not only get discounts should they wish to buy the book, they'll receive what I consider the keys to managing crises in both large-scale systems and in our own lives, with the goal being to not just scrape through crises but emerge with greater skills, adaptability and real wealth--the kind that can't be taxed, stolen or expropriated because it's social and experiential capital.

Alas, I'm never going to mint a million on TikTok or YouTube. I confess this is a pure-writing site. Yes, I understand the value of video and podcasts, but this site is focused on readin, writin' and 'rithmetic, as in data-driven analysis and plenty of marked-up Federal Reserve charts. (I fear my photos of garden veggies are not going to mint me a million on OnlyFans, either.)

I only rattle the begging bowl once a calendar year, and I set aside doing so until now due to my obsessive year-long focus on my new book. So here's my question to you: are you one of the few, the daring, the foolhardy, the insanely generous readers willing to pony up a dollar a month to extend life-sustaining encouragement to the one-person content factory here at Of Two Minds?

If you are one of those rare and precious souls, please accept my sincere gratitude:

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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.


Recent Videos/Podcasts:

Keiser Report | The Tragedy of the Treadmill (25:30)


My recent books:

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 (PDF).


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The Fed's Moral Hazard Monster Is About to Lay Waste to "Wealth"

If the Fed set out to destroy the financial system, they're very close to finishing the job.

If you set out to destroy markets and the financial system, your most important weapon is moral hazard, the disconnection of risk and consequence. You disconnect risk from consequence by rewarding those making the riskiest bets and bailing out gamblers whose bets went bad.

You reward those making the riskiest bets by pushing markets higher regardless of any other factors. Nothing matters except your support of ever higher markets.

This implicit guarantee that any bet on markets lofting higher will be a winning gamble rewards those making the riskiest bets. The punters who played small with cash made a few bucks, but the punters who borrowed heavily and then leveraged those bets to the hilt made a killing.

In other words, moral hazard incentivizes maximizing debt and leverage to increase the risk and size of bets because every bet is a can't-lose proposition. The hesitant, the cautious, the prudent, those who hedge their riskiest bets, are all left in the dust. Anyone who doesn't max out borrowing and leverage is a loser.

By pushing markets ever higher, you bail out every participant. To make up any losses, all the punters have to do is increase the size and risk of their next bet.

To make sure everyone is properly incentivized and assured, you bail out the biggest gamblers should they somehow lose. You do this by offering them unlimited lines of credit (so they can leverage up their next bet and and win back their losses), you eliminate transparency in market pricing to mask their losses (eliminate mark-to-market requirements, etc.) and you overlook fraud, racketeering, price-fixing, collusion and embezzlement because all these activities serve to increase risk-taking and delegitimize markets.

The biggest gamblers know they can literally do anything and get away with it, and so they do literally everything that undermines markets and trust: there's no limits on fraud, racketeering, price-fixing, collusion and embezzlement, those conjuring up the most creative frauds and scams are the most richly rewarded.

The Moral Hazard Monster will now completely destroy markets and the financial system, just as you intended. Every participant will continue pyramiding debt, leverage and risk because they know you'll keep markets lofting higher regardless of any other condition: they will follow "flows" (i.e., what other punters are buying at the moment) and ride those flows higher, fully confident that you will never ever let markets decline by more than signal-noise dips that offer punters a fresh opportunity to leverage up another bet on higher markets next week and next month.

Your plan is clever because the punters are all so focused on maximizing their own gains they don't notice that the debt, leverage and risk now dwarf everything else. Having guaranteed that the riskiest, most leveraged bets will be the biggest winners, debt and leverage have exploded higher. The entire financial system is now dependent on the riskiest, most leveraged bets continuing to pay out even as they dwarf the rest of the financial system.

Your plan depends on the mispricing of risk: by implicitly guaranteeing every punter betting on a higher market next week or month will be a winner, you've reduced apparent risk to near-zero. What's the risk if everyone knows markets will loft higher regardless? There is no risk, so forget about it; hedging risk just reduces your net profits.

But since risk isn't extinguished, it's only transferred, the question becomes: where did all the risk end up? Answer: in the financial system itself. All the risks piling up as trillions of dollars are leveraged into ever larger can't-lose bets have not evaporated, they've been transferred to the financial system. So when risk exceeds the carrying capacity of the system, it will be the system which implodes, not just punters' riskiest, most highly leveraged bets.

Here is a chart of household net worth over the past 70+ years. (Yes, it included nonprofit organizations, which make up a modest percentage of the total.) Note the three bubbles inflated by Federal Reserve policies: the dot-com bubble in 2000, the housing bubble in 2007 and now the Everything Bubble in 2021.

If net worth had tracked GDP growth since the peak of the dot-com bubble in 2000, it would be about $107 trillion--$53 trillion below current bubblicious levels. This can be understood as $53 trillion in phantom wealth generated by leveraging up the Federal Reserve's $8 trillion expansion of its balance sheet since 2008 seven-fold.

This highly leveraged phantom wealth will evaporate once the system can no longer contain all the risk that's been piled up by the Fed's Moral Hazard Monster.

Once $50+ trillion of phantom collateral evaporates, the entire pyramid of debt and leverage will collapse, destroying the entire financial system.

One broad measure of the leverage that's been piled up in the Fed's moral hazard free-for-all is net worth relative to disposable personal income which is the ultimate collateral for the financial system, as all debt service and consumption is paid out of income.

Note the vast expansion of leverage in each bubble. Leverage in the Everything Bubble has blown past every previous extreme.

If the Fed set out to destroy the financial system, they're very close to finishing the job. Their Moral Hazard Monster is about to lay waste to phantom collateral and everything that's been borrowed and leveraged against that phantom collateral. Thanks to the Fed's Moral Hazard Monster, debt, leverage and risk now far exceed what the system can support.

Predicting the bottom is difficult when the system collapses. Historically, a return to 400% of disposable personal income would be a reasonable guess. If disposable income craters, net worth will adjust accordingly.










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 new book is available! A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet 20% and 15% discounts (Kindle $7, print $17, audiobook now available $17.46)

Read excerpts of the book for free (PDF).

The Story Behind the Book and the Introduction.


Recent Videos/Podcasts:

Keiser Report | The Tragedy of the Treadmill (25:30)

My COVID-19 Pandemic Posts


My recent books:

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 (PDF).


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

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Top 1% Gains More Wealth Than the Combined GDPs of Japan, Germany, UK, France, India and Italy, Bottom 50%--You Get Nothing

Given that political power in America is a pay-to-play auction in which the highest bidder wins, how this incomprehensibly lopsided ownership of wealth plays out is an open question.

Wealth inequality easily falls into an abstraction unless we contextualize it in meaningful ways. I've annotated two St. Louis Federal Reserve (FRED) charts--the net worth of America's top 1% and the net worth of America's bottom 50% of households, roughly 66 million households--to show their net worth and their share of all household net worth, and put this in the context of inflation and GDP (gross domestic product) of the U.S. and other nations.

These charts may look complicated but the idea is actually pretty simple: I've noted how each group (the top 1% and the bottom 50%) did at the top and bottom of each bubble: the dot-com bubble in 2000, the stock/housing bubble that topped in 2007, and the current bubble, noting the pre-pandemic data at the end of 2019 and the most recent totals (2nd quarter 2021).

Next, I pose a simple question: if the net worth of each group had tracked the growth of America's GDP (i.e. its real economy), where would its net worth be now? All else being equal, the assumption that net worth would rise more or less in lockstep with the expansion of the entire economy makes sense.

I note both the dollar amount of each group's net worth and their share of total household wealth to track their slice of wealth relative to the entire pie of wealth and to each other's slice. In other words, as the net worth pie expands, does each group expand its share of the pie or not?

What we find is a stunning asymmetry: if the top 1%'s net worth has risen along with GDP since 2000, it would now be about $21 trillion. Instead, it's now over $43 trillion, a $22 trillion gain above where it would be had it tracked GDP growth.

For context, this is larger than the GDP of the U.S. ($21 trillion) and the combined GDPs of the six largest economies behind the U.S. and China: Japan, Germany, UK, France, India and Italy which total about $20 trillion. It's more than the nominal GDPs of China and Japan.

In other words, the $22 trillion gained by America's top 1% as a result of Federal Reserve bubble-blowing is literally beyond comprehension: s sum larger than entire economies, a sum totally disconnected from America's real-world economic expansion.

Note that the top 1%'s share of total wealth has increased with every bubble: even as the pie of wealth expanded, the top 1%'s share has increased to roughly one-third of all wealth, which includes vehicles, homes, financial assets, etc. (The top 1% owns the majority of all financial assets.)

In comparison, the bottom 50%, despite recent gains resulting from the housing bubble, has only tracked GDP: where the top 1% more than doubled its wealth above where it would have been had it risen along with GDP, the bottom 50% have barely kept up with GDP's expansion. If it wasn't for the current housing bubble, the bottom 50%'s wealth wouldn't even have kept up with GDP.

The bottom 50% has lost ground in terms of its share of total household net worth: its already-marginal 3.3% of total wealth in 2000 has slipped to an inconsequential (i.e. signal-noise) 2.3%.

If the bottom 50% had maintained its meager 3.3% share, its net worth would be higher by $1.6 trillion--1% of the total net worth of U.S. households ($160 trillion). That's 50% higher than its current net worth of $3 trillion.

Note how the housing bubble bursting in 2008-09 basically destroyed the wealth of the bottom 50% whose primary asset (if any) is a home. Net worth of the bottom 50%--over 60 million households-- fell to a near-zero $185 billion in 2011 at the nadir of the housing market.

The top 1%'s fortunes have climbed in a series of higher lows and much higher highs: each spot of bother (collapse of the bubble du jour) dented the net worth of the top 1%, but their wealth never even declined to previous troughs. At the bottom of the oh-so horrendous market drop in 2020, the top 1%'s wealth was still double what it had been at the trough in 2009, $30 trillion vs. $15 trillion.

All of this upward shift of wealth accelerates as we approach the apex of wealth-power: a handful of billionaires own more than the bottom 50% (by some measures, the asymmetry is even worse than depicted by FRED data.)

Given that political power in America is a pay-to-play auction in which the highest bidder wins, how this incomprehensibly lopsided ownership of wealth plays out is an open question. The pendulum of wealth-power concentration has reached an extreme, and when it swings back, it will reach an equally extreme position at the other end of the spectrum.










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 new book is available! A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet 20% and 15% discounts (Kindle $7, print $17, audiobook now available $17.46)

Read excerpts of the book for free (PDF).

The Story Behind the Book and the Introduction.


Recent Videos/Podcasts:

Keiser Report | The Tragedy of the Treadmill (25:30)

My COVID-19 Pandemic Posts


My recent books:

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 (PDF).


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

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Paging Isaac Newton: Time to Buy the Top of This Bubble

Despite Newton's tremendous intelligence and experience, he fell victim to the bubble along with the vast herd of credulous greedy punters.

One of the most famous examples of smart people being sucked into a bubble and losing a packet as a result is Isaac Newton's forays in and out of the 1720 South Seas Bubble that is estimated to have sucked in between 80% and 90% of the entire pool of investors in England.

Some have claimed that Newton did not buy early in 1711, sell in April 1720 for a nice profit, then sink the majority of his substantial fortune in the bubble as it peaked in summer, and then suffering heavy losses as the bubble popped in September, but evidence supports this chain of events: Isaac Newton and the perils of the financial South Sea (Physics Today).

The chart below indicates the dates of Newton's purchases in his own account and the Hall estate of which he was a trustee.

I have added a "we are here" indicating where we are in the current bubble expansion and collapse: this secondary peak after a bout of initial selling is the classic "last chance to exit." Note that Newton "bought the dip" on the way up and then added to his position as the mania rolled over, making his final fatal purchase as a "buy the dip" just before the "last chance to exit" spike--which is precisely the point the current bubble has finally reached, when everyone is all in and "buying the dip" to increase the profits which everyone agrees are essentially guaranteed because the Fed.

The problem is, alas, smart people are still humans, and humans run with the herd when the herd is minting money. Absurdly farfetched claims are gussied up with "mathiness" and narratives that are powerfully simplistic, with just enough common-sense credibility to enliven the excessive greed that lies dormant but ready in every human heart.

Newton was not just smart and wealthy, he was financially sophisticated and a very successful investor who favored financial instruments such as bonds over land. He was the ultimate experienced, savvy investor who would not be bamboozled by specious math. Despite Newton's tremendous intelligence and experience, he fell victim to the bubble along with the vast herd of credulous greedy punters.

Newton died a wealthy man in 1727, so his bubble misadventure did not ruin him, though it did lop a huge chunk off his net worth. Many in the herd, then and now, won't be as fortunate.






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 new book is available! A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet 20% and 15% discounts (Kindle $7, print $17, audiobook now available $17.46)

Read excerpts of the book for free (PDF).

The Story Behind the Book and the Introduction.


Recent Videos/Podcasts:

Keiser Report | The Tragedy of the Treadmill (25:30)

My COVID-19 Pandemic Posts


My recent books:

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 (PDF).


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

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Look Out Below: Why a Rug-Pull Flash Crash Makes Perfect Sense

It makes perfect financial sense to crash the market and no sense to reward the retail options marks by pushing it higher.

An extraordinary opportunity to scoop up mega-millions in profits has arisen, and grabbing all this free money makes perfect financial sense. Now the question is: will those who have the means to grab the dough have the guts to do so?

Here's the opportunity: retail punters have gone wild for call options, churning $2.6 trillion in mostly short-term calls--bets on gains now, not later. This expansion of retail options exposure is unprecedented not just in its volume but in its concentration in short-term bets (options that expire in a few days) and in mega-cap tech companies that are commanding rich premiums for options.

Goldman Stunned By The Record $2.6 Trillion In Option Notional Traded Last Friday

The options market is like every other market only more so. The price of an option--a bet that a stock, ETF or index will go up or down before the option expires--is sensitive to the volatility of the underlying equity, the demand of other punters for options and the premium being demanded for time: the farther out the expiration date, the higher the cost of the option.

Recall that anyone with 100 shares of the underlying equity can write/originate an option. Each option controls 100 shares, so a call option that is listed at $1 costs the buyer of the call $100.

This is very sweet leverage if the market goes your way. You get all the gains of the 100 shares for a cost considerably less than buying the 100 shares outright. No wonder retail punters are going crazy for this cheap leverage to maximize gains in "can't lose" trades.

Options have one funny trait: they can expire worthless and the punter loses the entire bet. Each option has an expiration date and a strike price--the price of the underlying equity that's the pivot point for the bet: calls gain value if the equity's price moves above the strike price and puts gain value if the equity's price falls below the strike price.

The entity that sold the option gets to keep the money if it expires without any value. If you have 100 shares of Engulf & Devour and you sell me a call for $500 at a strike price of $100, if Engulf & Devour closes below $100 at expiration, you keep the $500 as pure profit and I lose the entire bet.

It would be extraordinarily profitable to sell a huge number of calls--bets on a move higher-- and then pull the rug out by crashing the market just as all those options expire. It would criminally foolish not to crash the market and scoop up all that free money.

Here's what makes the opportunity so extraordinary: the options universe is extremely lopsided. Bearish bets have dried up as the market has melted higher month after month; short bets are at record lows and the put-call ratio reflects the same capitulation of Bears and Bulls' supreme confidence in near-term gains.

This means a crash will cost very little in terms of puts gaining value because there are so few puts out there and reap enormous gains as the vast majority of call options will expire worthless, leaving those who wrote the calls immensely wealthier.

In previous eras with lower retail option volume and a less lopsided options market, it wouldn't be worth the trouble to flash-crash the market to scoop up retail calls. But a trillion here and a trillion there, and pretty soon you're talking real money.

Buyers of "can't lose" calls may be unaware that the tail can wag the dog. Mega-cap tech companies appear invulnerable to declines, but they are now the 800-pound gorillas in all the indices (Dow-30, S&P500, Nasdaq) and a boatload of ETFs. So triggering a mass sell-off in an index play such as SPY will trigger a sell-off in all the components of that index, including the invulnerable mega-cap tech names.

The opportunity here is amplified by the dominance of computer trading algorithms. Once a crash begins, the algos will trend-follow and liquidate exposure to lower risk. This sets up a self-reinforcing chain of selling as every drop triggers more sell programs.

Volumes are so low that it won't take that big of a leveraged sell order to start the rug-pull.

Add up the extraordinary size of retail options bets, the lopsided Bullish bias in calls and the short-duration of the calls and you have an unprecedented opportunity to scoop mega-millions of dollars by doing a rug-pull of the market via selling leveraged indices instruments.

Retail call buyers are basically begging the big players to take their money via a flash-crash, and the players would be insanely incompetent not to take the money laying on the table. It has all the moving parts of a perfect con: convince the retail punters that they can't lose by buying calls, jack up the premium they're paying to own that beautiful leverage for a few days or weeks, lead them on with little rallies, "proving" they can't lose and encouraging them to buy more high-priced calls, crush volatility to show the futility of buying puts and persuade the punters they have no need for any hedge, as the market can only loft higher because the Fed, etc.

Then bang, pull the rug out and crash the market limit down for a few days. It's a gorgeous set-up, literally picture-perfect. It makes perfect financial sense to crash the market and no sense to reward the retail options marks by pushing it higher. Let's see who gets to be the Roadrunner and who ends up as Wile E. Coyote.




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 new book is available! A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet 20% and 15% discounts (Kindle $7, print $17, audiobook now available $17.46)

Read excerpts of the book for free (PDF).

The Story Behind the Book and the Introduction.


Recent Videos/Podcasts:

Keiser Report | The Tragedy of the Treadmill (25:30)

My COVID-19 Pandemic Posts


My recent books:

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 (PDF).


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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