Why the Housing Bubble Bust Is Baked In

Putting this all together, it's clear that the source of the current housing bubble is the explosion of financial speculation fueled by central bank policies.

Those benefiting from speculative bubbles have powerful incentives to deny the bubble can bust. Rationalizations abound as bubbles inflate, and the continued ascent of speculative bets seems to "prove" the rationalizations are correct.

But bubbles arise from speculative excesses, and once these reach extremes and reverse, bubbles burst and all the self-serving rationalizations are revealed as rationalizations.

Let's start with some caveats I've already covered in Is Housing a Bubble That's About to Crash? (May 2, 2022):

1. Housing is local, so there may be locales where prices are still rising due to unquenchable demand and low supply and other places where demand is low and supply ample where prices plummet.

2. The wealthiest 1% on a global scale is a very large number, and wealthy buyers seeking a safe haven in North America come with cash and don't care about mortgage rates. Desirable enclaves could see home prices climb even as the national bubble pops. (World population: 7.8 billion X 1% = 78,000.000 or roughly 30,000,000 households.)

3. Wealthy investors are holding a large number of dwellings off the market as investments. These empty units consequentially reduce the supply in desirable locales, and create an artificial scarcity that would not exist if central banks hadn't inflated the Everything Bubble.

4. The number of homes bought by corporations has soared. This has driven demand in many markets, but if rents dive due to recession, corporate buyers become corporate sellers.

With those caveats out of the way, let's look at the foundation of home ownership for the bottom 95%: income and mortgage rates. As mortgage rates rise, more income must be devoted to the monthly payment. If household income lags the increase in housing prices, price eventually exceed what the bottom 95% can afford once mortgage rates rise.

The first chart below is the national Case-Shiller Index. Note that housing prices have soared 63.6% since the previous housing bubble peak in 2007, outpacing inflation (up 41%) and median household income (up 34%), the second chart.

The third chart shows mortgage rates have broken out of a 37-year downtrend. It is noteworthy that mortgage rates were in the 7% to 8% range in previous economic booms (late 1960s, the 1990s) but now 6% mortgages are considered the end of the world. That suggests a dependence on cheap money / low rates is the primary support of the current bubble rather than an organic economic expansion such as we enjoyed in the 1990s.

Courtesy of my colleague CH at Econimica, the next three charts shed light on housing fundamentals. The first Econimica chart shows the rate of growth in population, employment and housing units. The U.S. population increased by a scant 1.5 million since 2019, the number of employed was flat and the number of housing units increased by 2.8 million.

The second Econimica chart shows the Fed Funds Rate (FFR), the staggering increase of mortgage-backed securities purchased by the Federal Reserve to keep mortgage rates low (from zero to $2.7 trillion), declining rate of population growth year-over-year and the remarkable rise in the number of housing units under construction.

The third Econimica chart shows housing units per capita (per person), which has reached the same level as the previous housing bubble peak in 2007-08.

As CH observed: "Housing units (per capita) against US population should suggest not a shortage of housing units but a surplus of dollars with which to buy them."

Putting this all together, it's clear that the source of the current housing bubble is the explosion of financial speculation fueled by central bank policies. Housing prices that far exceed the growth of household incomes are not sustainable, and neither are housing prices that rose solely on the basis of unprecedentedly low mortgage rates.

It's also clear that those with access to the (temporary) wealth created by central banks' trillions in new credit have poured many of these "free money" trillions into housing globally as a hedge against inflation, a safe-haven investment or for corporations, for rental income. All of these factors exacerbate an artificial demand and equally artificial scarcity.

As I've noted in the past, bubbles typically manifest a symmetry in their ascent and decline. All the gains are eventually reversed, and if the system is destabilized by the bubble bust, then prices drop far below previous lows.

Setting aside rationalizations in favor of fundamentals, the housing bubble's bust is already baked in.

The Most Splendid Housing Bubbles in America, June Update: 'Deceleration' and 'Tipping Point' of the Raging Mania

Cost of Living Is Really All About Housing: Places where the rent really is too damn high.














Recent podcasts/videos:

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

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

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


My recent books:

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

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

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

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

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

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


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The Age of Discord

It's very difficult to find common ground that supports cooperation in the disintegrative stage of scarcities, rising prices, catastrophically centralized power and social discord.

Today's topic echoes Peter Turchin's 2016 book, Ages of Discord, which I have often referenced in blog posts.

I'll also discuss two other books I've often referenced, Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century by Geoffrey Parker and The Great Wave: Price Revolutions and the Rhythm of History by David Hackett Fischer.

Turchin proposes repeating cycles of history of social integration (people finding reasons to cooperate) and disintegration (people finding reasons to not cooperate).

Clearly, we're in a disintegrative stage.

Fischer proposed a repeating cycle of history in which humans expand their numbers and economy to consume all available resources.

Once all the low-hanging fruit has been consumed, scarcities arise, pushing prices above what commoners can afford, and the result is economic stagnation and social/political revolution.

Either humans exploit a new energy source at scale to provide for the larger population and higher consumption per person, or the population and consumption decline to fit available resources.

Parker covers the mutually reinforcing climate, political, social and economic crises of the 17th century. A long cycle of cold, wet summers reduced crop yields, leading to hunger and strife.

Parker also identifies another cause of the tumultuous, war-plagued 1600s: political leaders had consolidated too much power, enabling them to pursue disastrous wars without any restraint from competing domestic social-political interests.

Clearly, we're in Fischer's stage of overshoot and resource scarcity and Parker's extremes of centralized power free to pursue catastrophic wars of choice.

In the 1600s, those launching wars reckoned a clean, decisive victory was within easy reach. In every case, the wars dragged on inconclusively or generated even wider conflicts.

In the end, all the wars were settled diplomatically, not by military victory. The military gains were nil while the destruction was widespread and devastating.

Fischer details how poorly humans respond to scarcity and higher prices, also known as inflation or more. accurately, as the decline in purchasing power of money and labor. As scarcities and higher prices take their toll, society unravels: crime and social disorder accelerate.

What we're seeing in real time is a "circle the wagons" mentality of weeding out everyone but the True Believers in every movement. Litmus tests are handy for this test: answer wrong on any question and you're cast out: heretic!

It's not enough to tick one "progressive" or "conservative" box; you have to tick them all or you're a heretic who cannot be trusted. If you leave one box unticked, you might untick a few more in the days ahead.

This puts pressure on everyone to declare their loyalty to the "party" even if the loyalty is just for show. This dishonesty pleases those demanding every box be ticked but this forced loyalty creates an illusion of solidarity that unravels under pressure.

Officials vie to offer pledges of loyalty to Chinese President Xi Jinping ahead of 20th Party Congress

Exacerbating this is social media, which rewards those promoting the most extreme and divisive positions and deranges the populace by substituting recognition online, which encourages disintegration, for real-world engagement, which encourages moderation and cooperation.

Online, it's easy to be all-or-nothing: there should be no restrictions on social media, or we should just pull the plug and shut the whole mess down.

In the real world, these are knotty, nuanced problems. The Founding Fathers would not have tolerated sedition under the guise of free speech. The social order can only be maintained if every participant adheres to standards of civility and the common good.

When put under stress, humans harden their positions as a defensive measure. They become more argumentative and less tolerant, more strident in insisting that the One True Thing is the answer to our problems.

This leads to magical thinking, for example, that we can replace hydrocarbons with fusion or wind and solar. When the physical and cost limits of minerals are presented as impassable obstacles, people respond with denial: there must be a way to keep everything the same.

Humans have an easy time expanding their population and consumption per person and a hard time consuming less.

It's very difficult to find common ground that supports cooperation in the disintegrative stage of scarcities, rising prices, catastrophically centralized power and social discord.

This requires accepting that we can cooperate with people on one issue even though all the other boxes of our group/party/movement are left unticked.

History suggests the disintegrative stage will run its course and consumption will realign with available resources one way or another, and the best we can do is preserve our own sanity, community and willingness to nurture small patches of common ground that support productive cooperation.




Recent podcasts/videos:

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

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

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


My recent books:

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

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

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

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

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

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


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The Global Power Shift Isn't West to East--It's Not That Simple

The mercantilist dependence on exports for growth, a winner for the past 70 years, has reached diminishing returns. Rather than be a source of growth, it's a source of stagnation.

Conventional wisdom holds that geopolitical power is inevitably shifting from West to East. It isn't quite this simple. The real shift is occurring between three sources of power that are not so neatly geographic:

1. The commodity exporters

2. The mercantilist exporters of products

3. The consumer-importing nations

Gordon Long and I tease apart the many dynamics in this complex power shift in Tectonic Shift of Mercantilism Revalued (42 min). There are three starting points: neocolonialism, mercantilism and importer by choice.

In classic colonialism, the colonial power expropriated commodities by force. The invaders took control of commodity-producing nations via military force and then oversaw the extraction of low-cost raw materials to provide the home markets with cheap materials to feed the colonial power's valued-added manufacturing. The manufactured goods were then sold in the captured markets of the colonial states.

In what I call the Neocolonial Model, the control mechanism isn't military force, it's financialization and globalization. The Neocolonial Power extends cheap credit to the commodity exporting nation, and the state and its citizens gorge on this heretofore unavailable banquet of debt. Soon the state and its enterprises are creaking under unsustainable debt loads, and the Neocolonial Power swaps assets for debt, buying up the most valuable resources on the cheap or extracting the wealth via interest payments and refinancing.

The E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)

The West has been extracting wealth via the Neocolonial Model for decades, and now it has a competitor: China.

As Gordon explains in our program, China has perfected this Neocolonial Model with its Belt and Road Initiative (BRI) which offered low-cost loans to commodity-producing nations which are in effect mortgages on their most valuable assets--harbors, etc. Once the commodity-producing nation gets in financial trouble, China forecloses on the loan' and takes ownership of the resources, ports, etc.

The second dynamic is mercantilism, the optimization of an entire economy for exports of value-added manufactured goods. This is the model adopted by Germany and Japan in the early 1950s: national policies were designed to subsidize and promote exports to other nations as the primary means of achieving high rates of growth.

The priority for U.S. foreign policy was to strengthen the war-torn free-market democracies West and East so they would not fall under Soviet control, and so the U.S. enabled these mercantilist policies to the detriment of domestic producers as one of the costs of the Cold War with the U.S.S.R.

In effect, the U.S. accepted the role of importer by choice, becoming the market where the surplus production of our Cold War allies could be dumped without restriction, all for critically important geopolitical reasons. In the 1950s and 60s, the U.S. market was so large and the exports of the mercantilist economies so modest, this policy of being the dumping ground for allies' exports did not disrupt the domestic economy.

Currencies play a critical role in mercantilism. As long as the US dollar (USD) was strong and the mercantilist currencies were weak, everyone benefited: the exporting nations' goods were cheap in the U.S. and soon carved out a niche in U.S. markets. Since the mercantilist economies sought to limit imports, the strong dollar was not much of a drag on their growth.

In terms of expanding their tourist industries, the strong dollar was a rocket-booster: American tourists flocked to Europe, as the dollar went far in both Europe and Japan.

To enable its vast industrial production, Japan became a major importer of necessity: lacking oil / natural gas and minerals / ores, Japan imported raw materials and turned these commodities into higher-value goods.

All three dynamics changed dramatically in the 1970s and 1980s. The OPEC nations took control of pricing their hydrocarbon commodities at the critical point when U.S. oil production had peaked and was declining. This sent a shockwave of repricing energy through the global economy that helped generate a stagflationary decade of adjustment to higher input prices.

At the same time, the external costs of industrialization (pollution, environmental damage) had to be priced in as well via regulations mandating higher efficiencies and the clean-up of industrialized nations' water, air and soil.

In this same juncture, the stream of allies' goods being imported into the U.S. became a flood, creating a permanently large negative balance of trade (i.e. trade deficit) and undercutting domestic manufacturers as a result of the strong dollar / weak currencies of Europe and Japan.

The permanent trade deficits were the result of 1) issuing the world's core reserve currency and 2) being the importer of choice who accepted virtually unlimited exports from allies.

This led to the political revaluation of currencies in the 1985 Plaza Accord which weakened the dollar and strengthened the currencies of Japan and the European Union (EU). Japan also agreed to limits on auto exports to the U.S., a move that led to Japanese auto manufacturers establishing assembly plants in North America.

The enormous success of Japan's mercantilist policies generated me-too Asian Tiger mercantilist economies in South Korea, Taiwan, Singapore and Hong Kong, later joined by Thailand, Indonesia, Malaysia and other nations.

The dynamics changed again with the collapse of the Soviet Union in 1991 and the emergence of China as "the workshop of the world." Just as the geopolitical reason to remain the importer by choice disappeared, the immense opportunities to boost corporate profits by offshoring production to China beckoned, eventually widening America's trade deficit to new extremes as its corporate profits soared to unprecedented heights.

As the mercantilist economy par excellence, China managed its currency with a direct, centrally-controlled currency peg to the U.S. dollar. This kept China's currency (RMB) set at levels that supported its hyper-mercantilist exports to the U.S. and other developed nations.

One often under-appreciated reason why the Soviet Union collapsed was low oil prices in the late 1980s. The Soviets' primary source of export revenues was oil and natural gas, and once the revenues fell below a critical level, the Soviet Union ceased to be financially viable.

China's fast-growing economy was soon sucking in unprecedented amounts of commodities: oil, copper, soy, etc. In other words, China became a vast importer of necessity like Japan. Even though China has large coal reserves, much of its highest-grade coal has already been depleted. Its modest oil reserves have also largely been drained.

What happens to mercantilist economies? They become importers of necessity, totally dependent on neocolonial sources of cheap commodities and import markets open enough and large enough to absorb their stupendous flood of exports.

The commodity-producing nations have finally wearied of being stripmined by West and East, and are starting a long-delayed unified effort to take control of the resources being plundered by the developed / mercantilist economies. This is now being fueled by scarcities in commodities, scarcities fueled by many sources: depletion, supply chain disruptions, geopolitical blackmail, etc.

As financialization and globalization have reached the point of diminishing returns, they are now in the decline phase. These drivers of global growth are unraveling at the same time that commodity prices are rising in a secular trend and the global economy is entering stagflation.

These conditions are squeezing the mercantilist economies as their costs of materials rise while the markets for their exports contract. Another problem with the mercantilist strategy of depending on exports for growth is there's always a cheaper competitor on the rise. So Vietnam and other rising exporters are siphoning production from China and other mercantilist nations.

Meanwhile, back on the currency front, the U.S. dollar is gaining purchasing power at the expense of other currencies. This is adding a secondary "tax" on higher commodity prices, as the majority of commodities are priced in USD. A stronger USD moderates commodity inflation for the U.S. and exacerbates it for everyone using other currencies.

A stronger USD is also making China's currency less competitive, as it rises along with the USD due to its peg to the dollar.

The power shift is complicated: from mercantilist and importing nations to commodity exporters, and from mercantilist exporters to the issuer of the strengthening currency, the U.S. dollar.

The mercantilist dependence on exports for growth, a winner for the past 70 years, has reached diminishing returns. Rather than be a source of growth, it's a source of stagnation.

There is much more in our slides and discussion: Tectonic Shift of Mercantilism Revalued






Recent podcasts/videos:

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

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

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


My recent books:

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

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

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

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

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

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


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Our No-Win "Kobayashi Maru" Economy

It's time to reprogram the conditions of the economy to serve the many rather than the few.

Star Trek's Kobayashi Maru training exercise tests officer candidates' response to a no-win scenario: any attempt to rescue the crippled ship's crew results in the destruction of the candidate's ship, while standing by and taking no action results in the loss of the Kobayashi Maru's crew.

Captain Kirk famously defeated this no-win scenario by reprogramming the simulation to "change the conditions of the test." This can be viewed as either cheating or as creative problem-solving via "thinking outside the box."

The Kobayashi Maru is a very apt description of both the U.S. and the global economies, which are currently running a real-world no-win scenario called "Profits, Infinite Growth, Low Inflation, Full Employment." (PIGLIFE). To win in the PIGLIFE scenario, you need permanent expansion of GDP, consumption, profits and employment and a permanently low limit on inflation. Anything less and you lose.

Central banks and political leaders have managed to "win" the PIGLIFE scenario for decades, but at a cost that can no longer be cloaked by happy-happy statistics. The economy has been fatally hollowed out into a fragile shell of monopolies and cartels profiting from hyper-financialization and hyper-globalization, a system in which the only possible outcome is hyper-inequality and hyper-self-exploitation as the immense profits enable the purchase / capture of political and regulatory power.

Now that the PIGLIFE economy has stripmined all the easy-to-exploit resources and workforces, scarcities are pushing inflation far above the "winning" low level. Oops, you lose. Now the real teeth in the Kobayashi Maru scenario are bared: if Central banks and political leaders close the spigots of "free money" that's been expanding GDP, consumption, profits and employment for decades, then all those slide from expansion into contraction.

But if they keep the spigots of "free money" wide open, inflation threatens to feed back in a self-reinforcing loop of expectations of higher inflation that push inflation higher, which then justifies the expectations which then push prices, wages, etc. higher.

Meanwhile, the two engines of the PIGLIFE expansion, hyper-financialization and hyper-globalization, have dived off the cliff of diminishing returns. Boosting debt, leverage and globalized supply chains aren't generating expansion, they're actively undermining whatever "growth" is still sluicing through the PIGLIFE economy.

So sorry, Central banks and political leaders, you lose. The way you've rigged the system, it goes into self-reinforcing contraction if you close the spigots of "free money" even modestly. But if you don't, the Klingon ships of inflation destroy you. The more you push hyper-financialization and hyper-globalization as "solutions," the greater the destruction.

Clearly, we need a new set of conditions for prosperity and well-being that do not rely solely on expanding GDP, profits, consumption and employment. Many economists, for example, Joseph Stiglitz, have proposed retiring GDP as a measure of prosperity and well-being and using more accurate and sustainable measures of well-being to inform policies.

If we've learned anything, we've learned that enriching the already super-rich so they have even greater means to distort democracy to serve their private interests undermines the prosperity of the many rather than increases it. It's time to reprogram the conditions of the economy to serve the many rather than the few, and enable a truly winnable scenario of sustainable prosperity and well-being by tossing the "waste is growth / Landfill Economy" PIGLIFE model into the toxic waste dump of failed, no-win scenarios.






Recent podcasts/videos:

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

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

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


My recent books:

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

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

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

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

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

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


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

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The Difference Between a Forecast and a Guess

Every forecast or guess has one refreshing quality: one will be right and the rest will be wrong.

What's the difference between a forecast and a guess? On one level, the answer is "none": the future is unknown and even the most informed forecast is still a guess. The evidence for this is the remarkable number of informed forecasts that prove to be as completely off-base as the wildest guesses.

On another level, there is a big difference between an informed forecast and a guess--if the informed forecast has the consequential system dynamics right. The world is complicated and discerning the consequential dynamics in the tangle of complexity is difficult.

Context and perspective matter. So do incentives. To take one example of many, war planners in the Vietnam era looked at war from the perspective of "scientific metrics" that focused on collecting data on the efficacy of sorties and combat missions. This resulted in the infamous "body counts."

The larger context was that war could be productively distilled down to metrics, costs and attrition: the enemy was presumed to be a rational player who will give up when the pain and cost become too high.

Planners slouching in comfortable offices have many incentives to "go along to get along": and veering off into dynamics that can't be conveniently measured and questioning the entire foundation of the war's planning and execution will get you sent to bureaucratic Siberia. "Getting with the program" will get you kudos and promotion.

Hmm, which will most people choose? The Pentagon Papers circulated among hundreds of senior officials, and parts of the report circulated among thousands of lower-ranking employees. Only one person took the risks of sharing the report with the American public.

When it's important, you have to lie. Indeed. There is a difference between forecasts issued for public consumption and forecasts so unsettling that they're state / corporate secrets.

Forecasts that end up being right can be wrong for years. An analogy is the erosion of soil beneath a house perched on a bluff. Those with experience who look at the source of erosion and project the eventual consequence-- the house breaks into pieces that slide down the hill--raise the alarm, but the cost and difficulty of repair is inconvenient and unwelcome, so the forecast is rejected as overly dire. Surely there is a quick-fix--of course there is, if the right incentives are present.

It's easy to find people who will issue a rosier forecast for a fee, or shore up the most visible damage for cosmetic purposes. See, all the doom-and-gloomers were wrong. This house is rock-solid.

If the erosion is hidden from view, the apparent stability of the house offers "proof" that skeptics are wrong. This is what happened in 2004-2008, as those of us who detected the sources of future instability in the housing market were ignored or mocked. Year after year, the destabilizing dynamics expanded, eventually undermining the entire global financial system. But the incentives to ignore securities designed to fail, liar loans, HELOCs, bubble over-valuations, etc., were just too powerful: we're booking insane profits, so keep doing what you're doing.

And so rationalizations, wishful thinking and clinging to illusions of institutional stability ("markets are self-correcting," "liquidity will smooth out any bumps," "the mortgage-backed securities are rated AAA," etc.) reigned supreme until the house suddenly crumbled and slid down the cliff.

I find two kinds of forecasts persuasive: 1) those based on the fact that humans are still running Wetware V1.0 and so history not only rhymes, the harmonies repeat, too, and 2) a systems-level understanding in which inputs and processes can be identified and compared to outputs has a much higher chance of being on the right track than other approaches.

The other benefit of this approach is that the base assumptions are discernable. For example, if a forecast is based solely on financial metrics, we can readily discern its core flaw: the global economy has shifted from an abundance of cheap resources to real-world scarcities, and finance is slowly but surely losing its dominance. Other inputs are becoming more consequential.

A meteor strike changes everything in one stroke. Erosion is slow and tedious until the consequences pile up and trigger the dramatic collapse of the house, a collapse that the mainstream said was "impossible" due to all the jury-rigged repairs.

The skeptics were derided as doom and gloomers and mocked for being wrong for years. When their forecast finally manifests, those who were caught off guard are resentful of those who were right.

Every forecast or guess has one refreshing quality: one will be right and the rest will be wrong. The decay is brushed off until the conflagration has consumed all that was presumed to be permanently stable due to "self-correcting mechanisms." Too bad gravity isn't self-correcting.




Recent podcasts/videos:

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

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

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


My recent books:

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

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

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

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

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

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


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

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

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

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Read more...

Our Economy In a Nutshell

The economy has reached an inflection point where everything that is unsustainable finally starts unraveling.

Our economy is in a crisis that's been brewing for decades. The Chinese characters for the English word crisis are famously--and incorrectly--translated as danger and opportunity. The more accurate translation is precarious plus critical juncture or inflection point.

Beneath its surface stability, our economy is precarious because the foundation of the global economy-- cheap energy--has reached an inflection point: from now on, energy will become more expensive.

The cost will be too low for energy producers to make enough money to invest in future energy production, and too high for consumers to have enough money left after paying for the essentials of energy, food, shelter, etc., to spend freely.

For the hundred years that resources were cheap and abundant, we could waste everything and call it growth: when an appliance went to the landfill because it was designed to fail (planned obsolescence) so a new one would have to be purchased, that waste was called growth because the Gross Domestic Product (GDP) went up when the replacement was purchased.

A million vehicles idling in a traffic jam was also called growth because more gasoline was consumed, even though the gasoline was wasted.

This is why the global economy is a "waste is growth" Landfill Economy. The faster something ends up in the landfill, the higher the growth.

Now that we've consumed all the easy-to-get resources, all that's left is hard to get and expensive. For example, minerals buried in mountains hundreds of miles from paved roads and harbors require enormous investments in infrastructure just to reach the deposits, extract, process and ship them to distant mills and refineries. Oil deposits that are deep beneath the ocean floor are not cheap to get.

Does it really make sense to expect that the human population can triple and our consumption of energy increase ten-fold and there will always be enough resources to keep supplies abundant and prices low? No, it doesn't.

Many people believe that nuclear power (fusion, thorium reactors, mini-reactors, etc.) will provide cheap, safe electricity that will replace hydrocarbons (oil and natural gas). But nuclear power is inherently costly, and there are presently no full-scale fusion or thorium reactors providing cheap electricity to thousands of households.

Reactors take many years to construct and are costly to build and maintain. Cost over-runs are common. A new reactor in Finland, for example, is nine years behind schedule and costs have tripled.

The U.S. has built only two new reactors in the past 25 years.

The world's 440 reactors supply about 10% of global electricity. There are currently 55 new reactors under construction in 19 countries, but it will take many years before they produce electricity. We would have to build a new reactor a week for many years to replace hydrocarbon-generated electricity. This scale of construction simply isn't practical.

Supplying all energy consumption globally--for all transportation, heating of buildings, etc.) would require over 10,000 reactors by some estimates--over 20 times the current number of reactors in service.

Many believe so-called renewable energy such as solar and wind will replace hydrocarbons. But as analysts Nate Hagens has explained, these sources are not truly renewable, they are replaceable; all solar panels and wind turbines must be replaced at great expense every 20 to 25 years. These sources are less than 5% of all energy we consume, and it will take many decades of expansion to replace even half of the hydrocarbon fuels we currently consume.

To double the energy generated by wind/solar in 25 years, we’ll need to build three for each one in service today: one to replace the existing one and two more to double the energy being produced.

All these replacements for hydrocarbons require vast amounts of resources: diesel fuel for transport, materials for fabricating turbines, panels, concrete foundations, and so on.

Humans are wired to want to believe that whatever we have now will still be ours in the future. We don't like being told we'll have less of anything in the future.

The current solution is to create more money out of thin air in the belief that if we create more money, then more oil, copper, iron, etc. will be found and extracted.

But this isn't really a solution. What happens if we add a zero to all our currency? If we add a zero to a $10 bill so it becomes $100, do we suddenly get ten times more food, gasoline, etc. with the new bill? No.

Prices quickly rise ten-fold so the new $100 bill buys the same amount as the old $10.

Adding zeroes to our money (hyper-financialization) doesn’t make everything that's scarce, expensive and hard to get suddenly cheap. It's still scarce, expensive and hard to get no matter how many zeroes we add to our money.

Many people feel good about recycling a small part of what we consume. But recycling is not cost-free, and the majority of what we consume is not recycled.

The percentage of lithium batteries that are recycled, for example, is very low, less than 5%. We have to mine vast quantities of lithium because we dump 95% of lithium-ion batteries in the landfill. There are many reasons for this, one being that the batteries aren't designed to be recycled because this would cost more money.

The majority of all manufactured goods--goods that required immense amounts of hydrocarbons to make--are tossed in the landfill.

Goods and services are commoditized and sourced from all over the world in long dependency chains (hyper-globalization): if one link breaks, the entire supply chain breaks.

Our economy is precarious because it's in a lose-lose dilemma: resource prices can't stay high enough for producers to make a profit without impoverishing consumers. Prices can't stay low enough to allow consumers to spend freely without producers losing money and shutting down, depriving the economy of essential resources.

Playing hyper-financialized games--creating money out of thin air, borrowing from tomorrow to spend more today and inflating speculative bubbles in stocks, housing, etc.--won't actually create more of what's scarce. All these games make wealth inequality worse (hyper-inequality), undermining social stability.

The economy has reached an inflection point where everything that is unsustainable finally starts unraveling. Each of these systems is dependent on all the other systems (what we call a tightly bound system), so when one critical system unravels, the crisis quickly spreads to the entire economic system: one domino falling knocks down all the dominoes snaking through the global economy.

Those who understand how tightly interconnected, unsustainable systems are basically designed to unravel can prepare themselves by becoming antifragile: flexible, adaptable and open to the opportunities that arise when things are disorderly and unpredictable.




Recent podcasts/videos:

The Big Problems And Crash Dynamics Of The Spring/Summer 2022 Housing Market Crisis, Simplified (1:08 hr)

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

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


My recent books:

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

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

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

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

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

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


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

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

Thank you, Williz ($20), for your exceedingly generous contribution to this site -- I am greatly honored by your support and readership.

Thank you, Michael M. ($1/month), for your very generous pledge to this site -- I am greatly honored by your support and readership.

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Could Retail "Bagholders" Spark a Rally "Smart Money" Will Be Forced to Chase?

There would be some deliciously karmic justice in the "dumb money" driving a rally that forced the "smart money" to cover their shorts and chase the rally that shouldn't even be happening.

Being cursed with contrarianism, as soon as a trade gets crowded and the consensus is one way, I start looking for whatever is considered so unlikely that it's essentially "impossible." Sorry, I can't help myself.

The crowded trades are 1) long the Commodity Super-Cycle and 2) long hurricane-force recession for all the persuasive reasons we all know: global scarcities, geopolitical tensions, soaring US dollar and interest rates, de-risking, crazy-stupid levels of debt and speculation, etc.

The consensus holds that "Smart Money" rotated out of tech stocks and other over-valued equities into oil and commodities. That was a smart move, indeed, and the earlier one rotated out of equities and into commodities, the smarter the trade.

In this scenario, retail owners of equities are the "Bagholders," those who continue owning the losers all the way to the bottom (Been there and done that). It's a market truism that Bull cycles only end when retail drinks the speculative Kool-Aid of the moment and buys into the final gasp of the rally, allowing "Smart Money" to distribute their shares to the retail chumps, who go down with the ship when the market finally rolls over.

2022 has followed that script closely: as markets have been crushed, down 20% to 35%, and Wall Street sentiment is extremely bearish, retail owners haven't followed hedge funds in liquidating equities.

In the Bagholder / Smart Money script, the market can now descend into a Bear Market as liquidity dries up and buyers vanish, leaving the Bagholders to absorb the mounting losses.

Maybe this script plays out, maybe not. The contrarian has these observations:

1. Institutions haven't liquidated their positions in Apple and other Big Tech stalwarts just yet. There's been trimming around the edges and that's why these stocks have been pounded by selling. But liquidation? Not yet. These companies are still quasi-monopolies and still immensely profitable.

2. The mood on Wall Street might be extremely bearish ( The Mood On Wall Street Has Never Been More Apocalyptic), but the top 10% of households who own roughly 90% of financial assets may not be as close to panic as many seem to think. (Note that the majority of this wealth is held by the top 5%--the segment between 6% and 10% owns a relatively small slice of household wealth.)

A. Many of these households are old enough to have experienced the 2000-2003 Bear Market / dot-com collapse and the 2008-09 Global Financial Meltdown, a.k.a. Global Financial Crisis. They survived, and the take-away for many is that basic investment strategies weather downturns: avoid highly speculative fads (meme stocks, NFTs, iffy crypto schemes, etc.), diversify and patiently ride out the storm.

B. These households by and large did not speculate in meme stocks, NFTs, etc., so the staggering losses did not fall on them, or they limited their exposure to the degree that the losses were more painful to their self-image as savvy investors than to their total wealth.

C. Most of these households have multiple sources of income and stores of wealth. Even major drawdowns in equities don't threaten their financial security. Right or wrong, their experience is that even the gloomiest crises don't last.

D. Their gains are so stupendous even a 30% drawdown in every asset--real estate, stocks, bonds, precious metals-- still leaves much of their gains intact. For example, if the home you bought in the late 1990s for $200,000 is now worth in excess of $1 million, a 30% decline to $700,000 still leaves you up by $500,000.

E. Due to their earnings and range of assets, these households can add to investment positions in ways the bottom 90% cannot.

3. Commodities are priced on the margin, and a sharp decline in demand combined with a modest increase in supply could cascade into price declines that everyone who bought into the Commodity Super-Cycle do not believe are even possible, much less likely. But if supply drops 5% and demand plummets 10%, prices crash once the speculative hot air deflates the leveraged hot-money premium.

All this sets up the potential for "Bagholders" to "buy the dip" in stocks aggressively enough that "Smart Money" will be forced to cover their short positions and chase the rally. This will be frustrating to the "Smart Money:" don't those fools know we're heading into recession and they should panic-sell?

This will be frustrating for another reason: the entire point of distributing to Bagholders is to book profits and then wait for the Bagholders to sell at the bottom, in either panic or despair. Then the Smart Money scoops up the assets at bargain prices and awaits the re-entry of the burned-but- ever-greedy Bagholders.

There would be some deliciously karmic justice in the "dumb money" driving a rally that forced the "smart money" to cover their shorts and chase the rally that shouldn't even be happening, dang it. Stranger things have happened.




Recent podcasts/videos:

The Big Problems And Crash Dynamics Of The Spring/Summer 2022 Housing Market Crisis, Simplified (1:08 hr)

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

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

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

Thank you, Stephen R. ($10), for your maost generous contribution to this site -- I am greatly honored by your support and readership.

Thank you, John M.-G. ($50), for your magnificently generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

What Happens When the Workforce No Longer Wants to Work?

Workers are voting with their feet, and that's difficult to control. When values and expectations change, everything else eventually changes, too.

What happens when the workforce no longer wants to work? We're about to find out. As with all cultural sea changes, macro statistics don't tell the full story. The sea change is better illuminated by anecdotal evidence: workers constantly quitting to take better jobs; zero loyalty to corporate employers; workers cutting hours from full-time to part-time; workers going out for lunch and never coming back; workers giving up on selling sugar-water for the rest of their lives (echoing Steve Jobs' famous challenge to John Scully: "Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?") and giving up on owning an insanely over-valued house.

Workers may sell sugar-water but their hearts are no longer in it. Some are interested in changing the world, and others are interested in changing their own lives as the means to change the world.

Numerous articles have been published describing these cultural changes in values and expectations: here are three:

From the Great Resignation to Lying Flat, Workers Are Opting Out: In China, the U.S., Japan, and Germany, younger generations are rethinking the pursuit of wealth.

'We are the last generation': China's youth rallied around a now-censored social media hashtag to rage about their disillusionment with life and disdain at draconian lockdowns

The rise of 'bai lan': why China's frustrated youth are ready to 'let it rot'

Note that this cultural shift is global. The dynamics of the global economy are similar the world over: capital has garnered most of the gains of the past generation, leaving shards for labor; the "good things in life" such as owning a house and nice vehicle have soared out of reach of all but the top 10% of households; youth were implicitly promised "good paying jobs and fulfilling careers" if they went to university, and then they graduate into a global economy of dead-end jobs and cut-throat competition for the few slots at the top of the constantly eroding sand pile.

The global lockdown revealed several great truths to many idled workers: 1) I'm wasting my life slaving away for an employer to whom I am disposable; 2) trying to own the upper-middle class lifestyle is not worth the sacrifices required, and 3) there are ways to work less and still get by, and live a better life doing so.

Once the rats are no longer interested in the rewards because they're out of reach, they jump off the wheel. Once the tax donkeys flop down in exhaustion and ask why they're working so hard to pay outrageous taxes and fees, they lose interest in carrying their heavy load ever again. When debt-serfs stop and calculate their chances to pay off their debt and reach upper-middle class Nirvana, they bail on the entire project.

People found they could get by on much less than they previously reckoned. Some found niches in the informal or gig economies, others secured a quasi-pension in the social-welfare system, others decided that net-net of expenses, they were better off quitting and staying home to care for the kids rather than pay thousands of dollars in higher taxes and childcare fees for the privilege of busting their derrieres on an endless treadmill.

People realized they wanted a career and worklife they defined and controlled rather than one defined and controlled by an employer. I outline accrediting yourself and other aspects of this in my book Get A Job, Build a Real Career and Defy a Bewildering Economy. (sample chapter here)

Some people awakened to the practicality of micro-homes and small home-based enterprises. They realized they didn't have to sign on to a lifetime of labor as tax donkeys and debt-serfs.

Employers are struggling to adapt to this cultural transition. Those demanding employees go back to the good old days are like dinosaurs expecting the meteor-strike's effects to dissipate in a few days.

The fantasies of fully automated whatever have been revealed as unrealistic. As with all such techno-fantasies, the proponents are never experts in the field being touted as the solution. Automation has limits. Robots break down, need to be reprogrammed, and need human co-workers (so-called cobots). Enthusiasts naively believed that because something is technically possible, that it automatically becomes financially viable. This is an entirely different proposition.

How this all plays out is an open question. The Powers That Be don't approve, for obvious reasons: who's going to do all the work to enable our lavish lifestyles and gargantuan gains?

Workers are voting with their feet, and that's difficult to control. When values and expectations change, everything else eventually changes, too.








Recent podcasts/videos:

The Big Problems And Crash Dynamics Of The Spring/Summer 2022 Housing Market Crisis, Simplified (1:08 hr)

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

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


My recent books:

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

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

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

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

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

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


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

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

Thank you, Mary ($1/month), for your maost generous pledge to this site -- I am greatly honored by your support and readership.

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

Read more...

Hunter's Hooker: A Teachable Insight into American Capitalism

Every individual and entity seeking to maximize their private gain by prostituting themselves to the government is, well, prostituting themselves to the government.

The free-money PPP "loan" obtained by a prostitute frequented by Hunter Biden offers a vividly teachable insight into American capitalism: you don't maximize your private gains by offering a product or service that's faster, better, cheaper, you maximize your private gains by securing a government-gimme. Hunter's Hooker Scored $20,000 PPP Loan As Joe Biden Entered White House.

The cornucopia of government-gimmes is vast. There are "loans" which are forgiven, i.e. free money such as the PPP "loans;" government subsidies and tax breaks designed to serve the interests of a single enterprise or cartel; low-interest loans unavailable to tax donkeys; sweetheart contracts where the private cartel/monopoly can overbill the government without consequence; toothless anti-trust agencies allow monopolies to scoop up dozens or even hundreds of potential competitors, and skims/scams funded by government largess: Medicare / Medicaid fraud, the student-loan racket, and so on, in an endless profusion of ways to maximize private gains via investing capital in capitol, i.e. bribing politicians and bureaucrats to use the government's vast powers to enrich the few at the expense of the many.

Government-funded skims and scams are always covered by a thin veneer of serving the public interest. Skimmers and scammers quickly discern an opportunity to maximize their private gain with a government-gimme as the floodgates of government funding open.

Do you think the $1.6 trillion sinkhole of profiteering and corruption known as "student loans" would exist if the government didn't enable and enforce the loans? Of course not.

How about the 40% of Medicare/Medicaid that's bled off by outright fraud, needless meds and procedures and profiteering? All government funded. There is no way a racket could reach trillion-dollar proportions without government taxation, borrowing and enforcement.

Speaking of trillion-dollar rackets, the Federal Reserve's power to benefit the few at the expense of the many is granted by the federal government. Give me the power over the money and I'll take the rest in due course, thank you very much.

A prostitute obtaining a government-gimme offers a very keen insight into the core of American capitalism, which is investing capital in capitol: every individual and entity seeking to maximize their private gain by prostituting themselves to the government is, well, prostituting themselves to the government.

That's a rather inconveniently salacious description of American capitalism. Too bad it's true.




Recent podcasts/videos:

The Big Problems And Crash Dynamics Of The Spring/Summer 2022 Housing Market Crisis, Simplified (1:08 hr)

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

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


My recent books:

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

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

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

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

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

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


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

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

Thank you, Robert S. ($3/month), for your marvelously generous pledge to this site -- I am greatly honored by your steadfast support and readership.

Thank you, Monica C. ($10.80), for your most generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

There's No Stopping a Recessionary Reckoning

If there was only one causal factor nudging the economy into recession, it might be a mild, brief recession. But with all five conditions in confluence, this recession will be unlike any other.

Recessions reliably arise from the confluence of these conditions. Note that any one condition can trigger a recession, but no one condition guarantees a recession. Severe, long-lasting recessions occur when multiple conditions arise at the same time.

1. The business cycle. The business cycle reflects human nature interacting with finance: as credit loosens, people borrow more to spend and invest, and this generates a self-reinforcing virtuous cycle of expansion.

Profits expand, speculation is rewarded and the positive vibes notch up to euphoric confidence in future expansion. Enterprises over-order to maintain inventories, hire more staff to expand production and go on a shopping spree, snapping up other companies by issuing more stock or borrowing via the bond market.

In this confluence of greed and euphoria, people over-borrow and put the money into marginal investments and speculations that unravel. Defaults rise, credit tightens, the mood sours and profits tank. Speculations crash, layoffs boost unemployment, consumers trim debt and enterprises work off excess inventory.

This is a conventional business-cycle recession: excesses are worked off and the dead wood consumed by write-offs and defaults. This a healthy process that is required to set the stage for the next cycle of expansion.

2. High energy prices. Higher energy costs don't necessarily trigger recessions but they can push an overleveraged economy into recession. The basic dynamic is simple: energy costs can rise sharply, while wages rise over time. As consumers pay more for energy, they have less to spend on other goods and services. Discretionary spending falls, triggering a slowdown that dampens borrowing, speculation and the general mood. The virtuous cycle reverses and the slowdown become self-reinforcing.

3. Inflationary pressures other than energy. Central bank stimulus (opening the floodgates of low-cost credit) and federal stimulus (free money) both tend to generate inflationary pressure as a flood of new money chases the existing supply of goods and services.

Wages that lagged speculative gains and corporate profits may finally start catching up, pushing costs higher. Monopolies and cartels tend to raise prices regardless of other conditions, for example, healthcare, higher education, local government fees and taxes, etc.

4. Excessive debt-funded speculation. Loose credit tends to invite excessive speculation which fuels a wealth effect as speculative gains make us feel we can afford to spend more now that we're richer. But speculative excesses inevitably reverse and losses generate a reverse wealth effect, dampening both speculation and spending.

5. Secular shifts in the economy. There are many potential sources for secular shifts that play out over years or even decades. Examples include: new global competition (1970s); currency devaluations; costs of cleaning up decades of pollution (1970s); financialization (1980s to the present), geopolitical shifts in alliances, social disorder, demographics (aging of the workforce, mass retirement) and sea changes in the distribution of income and power to labor and capital.

Are any of these conditions present in today's economy? End of business cycle, check. High energy costs, check. Other inflationary pressures, check. Excessive speculation unwinding, check. Secular shifts in the geopolitical landscape, currencies, demographics and labor/capital, check.

Just to state the obvious: since stimulus generated the inflation weighing on the economy, stimulus can't be used to stave off a business-cycle recession. The pendulum has swung to extremes and the banquet of consequences has been set. There are no Hollywood super-heroes who can put off the recessionary reckoning that is long overdue.

If there was only one causal factor nudging the economy into recession, it might be a mild, brief recession. But with all five conditions in confluence, this recession will be unlike any other.




Recent podcasts/videos:

The Big Problems And Crash Dynamics Of The Spring/Summer 2022 Housing Market Crisis, Simplified (1:08 hr)

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

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


My recent books:

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

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

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

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

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

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


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

---

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, Karen K. ($50), for your splendidly generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Thank you, MPA ($10), for your most generous contribution to this site -- I am greatly honored by your support and readership.

Read more...