The La-La-Land Fairy Tale of a "Soft Landing"

When everyone finally leaves the La-La-Land casino and abandons the fairy tale, household wealth held in stocks is a fraction of what it was in the heady days of hot hands rotating into the next hot sector.

The reason why a "soft landing" is a fairy tale straight out of La-La-Land is all bubbles pop, and a "soft landing" is based on bubbles remaining unpopped. In the "soft landing" scenarios, mind-boggling bubbles remain at "permanently high plateaus" as gamblers rotate out of one soaring sector into another soaring sector, in an endless rotation that keeps the entire speculative bubble fully inflated forever--or close to forever, which in today's world is a few years.

In the fairy tale, the economy is "strong" for all the right reasons: people are investing in new companies, spending lots of money, hiring more employees, and so on. In this fairy tale version of economics, the occasional spot of bother-- a "weakening economy"--is deftly resolved by the central bank lowering interest rates, which magically encourages everyone to return to their happy speculative, consumerist ways.

In La-La-Land, there are no bubbles, just enthusiasm for new technologies with limitless potential to reap billions in new profits. It's not a bubble, we're assured, it's simply strong fundamentals: sales are soaring, profit margins are fattening, and there's no end in sight.

In March, 2002, two years after the dot-com bubble had topped out, Scott McNealy, co-founder and CEO of dot-com darling Sun Microsystems, wrote a now-famous encapsulation of the difference between strong fundamentals and a bubble:

"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes which is very hard. And that assumes you pay no taxes on your dividends which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?"

The chart of the dot-com bubble's euphoric ascent and eventual collapse is instructive: note how strong fundamentals eventually returned to the pre-La-La-Land level, wiping out all the wealth created by the bubble.



In response to the "weakening economy," a.k.a. the bubble popping, the Federal Reserve duly slashed rates, and talked up the "soft landing" fairy tale. Nothing stopped the bubble popping, something the leadership in China is discovering the hard way as their decades-long real estate bubble is popping despite a slew of subsidies, incentives, rate cuts and other forms of stimulus: even a Command Economy can't stop a bubble from deflating.

Which leads to this question: if the "soft landing" fairy tale is, well, a fairy tale, then what happens to the current Everything Bubble? If history is any guide, this chart of bubble symmetry will play out in the years ahead: strong fundamentals eventually return to the pre-La-La-Land level, wiping out all the wealth created by the bubble.



In the La-La-Land fairy tale, the solution is to play one's hot hand in speculation in a new sector, rotating seamlessly from one hot sector to the next, continuing to build wealth at each turn of the wheel. History tells a different story: all the punters and players keep playing until they run out of money or enthusiasm, and they exit the casino. This is reflected in this chart of household wealth held in stocks in the choppy stagflationary era of the 1970s:



When everyone finally leaves the La-La-Land casino and abandons the fairy tale, household wealth held in stocks is a fraction of what it was in the heady days of hot hands rotating into the next hot sector. It's OK to love fairy tales, for they appeal to our deepest emotions, our desires and our fears. But it's problematic when we let the fairy tale seep into reality.

New podcast: The Great Unwinding. (33 min)

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My recent books:

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When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 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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Success Is a Trap

Rather than glory in success, we are better served by being extremely wary of success.

If success is a trap, isn't that where we all want to be, trapped in success? Maybe not. In response to my recent essay for subscribers, China Adrift: Now Is the Winter of Our Discontent, several readers asked why China couldn't just continue its astounding boost phase of growth without pause.

The short answer is success is a trap: the policies that generated the amazing growth of the boost phase are naturally viewed as the keys to everyone's dream, permanent high growth. But those policies only worked like magic in a particular set of circumstances in a particular moment of history, and while no one is noticing, the great success changes the circumstances and the moment in history passes.

As a result of the great success of the policies, circumstances change such that the policies no longer work. It's ironic, isn't it? The policies that optimized the harvest of the all the low-hanging fruit generated rapid, sustained growth. But the very success of the policies changes the circumstances that enabled rapid growth by stripping the tree of fruit.

Now that circumstances have changed, the policies no longer generate growth, they generate systemic risk, risks that are ignored in the belief that the policies will restart growth if only we do more of what worked in the past.

In the exuberant boost phase, the low-hanging fruit seem endless, but nothing is limitless, and once the low-hanging fruit has been plucked, diminishing returns set in: all the easy windfalls have been exploited, and what's left is barren soil that requires investing more capital and taking on more risk--risk that goes unrecognized, because everyone has become accustomed to assured gains.

Thanks to recency bias, we assume what worked in the recent past will keep working. As a result, there is no incentive to look for alternative policies. Rather, there are powerful financial and emotional incentives to paper over signs of diminishing returns as threats to an emboldened status quo that has boosted everyone's prospects and hopes.

This is how the status quo ends up doing more of what's now failing. If loosening credit greased the remarkable expansion, then the solution to a slowdown is to loosen credit even more. If subsidies and stimulus boosted growth, then the solution is to expand subsidies and stimulus.

The problem is that once the mighty machine has reaped all the easy gains, throwing gasoline on the embers no longer creates growth, it generates systemic risks, as loose credit and subsidies encourage the moral hazard of high-risk investments gushing into marginal projects that soon become tottering dominoes in the financial system.

Success is a trap is scale-invariant, meaning that it is true for individuals, households, small enterprises, global corporations, central banks and governments alike. The day trader who has booked astonishing gains by riding a meme stock higher with high-risk options bets will soon acquire a belief that they've discovered the Holy Grail of Trading, a system or approach that enables them to book immense gains like clockwork.

But circumstances change, and the meme stock rally fades, and attempting to replicate the grand success of the system that can't lose ends up losing all the gains of the heady days of limitless success.

This is how former Intel CEO Andy Grove described the trap of success: "Success breeds complacency. Complacency breeds failure. Only the paranoid survive." But there is another dynamic operating beneath the emotional appeal of success and doing more of what worked in the past, and that is the inherent difficulty of adapting to changing circumstances.

This is why the S-Curve tops out and declines: adaptation is not easy or assured, and decay leads to collapse more easily than it leads to successful adaptation



Successful adaptation requires experimentation and a series of failures as not all experiments yield productive adaptations. In Nature, this process of responding to the selective pressure of rapidly changing circumstances is automated: individuals in the species generate random mutations--experiments seeking improved performance in changing circumstances--or epigenetic changes that improve the individual's chances for surviving the new conditions.

In the human experience, individuals and organizations must undertake this grueling adaptive process of experimentation and constant failure consciously. It is not automatic, nor is a positive result guaranteed. The odds favor decay and collapse, which is what we observe in human history.

Rather than glory in success, we are better served by being extremely wary of success. The ascent of the boost phase seems so effortless and forever, while the slide down the backside of the S-Curve is well-greased by our hubris and complacent confidence that doing more of what worked so well in the past will work its magic again.

Oh, right, there's a Federal Reserve meeting coming up. How apropos.

New podcast: The Great Unwinding. (33 min)

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My recent books:

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When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

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We've Left the Bottom 60% in the Dust, but Never Mind: S&P500 to 6000!

So here we are, with a handful of winners declaring the system is working great and high-fiving each other, too busy congratulating themselves to see the tsunami of karma racing toward shore.

It's a toss-up which is wider: the widening gap between the top 10% and the bottom 60%, or the gap between the complacency of the top 10% and the reckoning that's overdue. Call it karma, just desserts or the wheel of history, the unfairness and inequality of a rigged system generates blowback, and the longer it is suppressed, the greater the eventual swing of the pendulum to the opposite extreme.

But really, who cares about the bottom 60% being left in the dust by a system rigged to benefit the top 10% because hey, the S&P 500 is going to 6,000--yippee! More free money for everyone who bought assets years or decades ago before the Federal Reserve decided the best way to "boost growth" was to inflate assets to generate "the wealth effect" among those who already owned the assets being inflated.

And once the fortunate few were awarded the vast majority of the Fed's unearned largesse--the top 10% own 93% of stocks--they have the wiggle room to ignore inflation. The bottom 60% living on wages--well, not so much.



Readers remind me that many of Americans' financial ills are self-inflicted: poor money management, instant gratification over making sacrifices for long-term gains, getting into credit card debt with 22% interest rates, buying vehicles they can't afford, paying $100 for an oil change instead of learning how to change the oil themselves, and so on--all of which indeed make modest financial circumstances much more difficult.

Having been in the bottom 60% in terms of earnings most of life, I constantly preach the virtues of frugality and anti-consumerism, learning how to do things for ourselves so we don't have to pay for them, and building networks of reciprocity--I help you, you help me--that make all the difference between financial security and insecurity. These are the fundamentals of Self-Reliance.

But better money management doesn't erase the rigged system that has sluiced the lion's share of the nation's gains to the top 10% and left the bottom 60% in the dust. If the rising tide raises all ships, then how is it the bottom 50% own a rounding-error share of the nation's financial wealth-- 2.6%:



The bottom 50% own 11% of the nation's real estate value--a mere fourth of the 44% owned by the top 10%.



The top 10% excel at a few things they rarely receive full credit for: one is choosing their parents wisely, another is believing that since they're doing great, everyone is doing great-- a self-serving delusion that doesn't reflect reality: those who don't own a share of the $45 trillion in stock market wealth weren't issued rose-colored glasses:



The 10% below the top 10% reckon they're "middle class," but how can the top 20% be "middle class"? The reality that the "middle class" has eroded into the top 20% haves and the top layer of the have-nots who still harbor illusions is conveniently obscured by economic cheerleaders lumping the fantastic gains reaped by the top 10% in with the bottom 90% and declaring the entire population is reaping splendid gains. But statistical trickery can't obscure the systemic unfairness of a rigged game.



While many finger the abandonment of the gold standard as the Original Sin, this ignores an economic change of equal consequence: the collapse of all societal values other than increasing shareholder value, which optimized hyper-financialization (stripmining the real economy to enrich financiers and corporations) and hyper-globalization, which stripmined the nation to enrich the top 10% who own 93% of all corporate shares.

These forces drastically eroded the purchasing power of wages to the benefit of the owners of assets, who skimmed the vast majority of the immense financial gains of hyper-financialization and hyper-globalization. Those who depend on wages lost out, those who owned assets enjoyed ten-baggers not from genius but from mere luck.



So here we are, with a handful of winners declaring the system is working great and high-fiving each other, too busy congratulating themselves to see the tsunami of karma racing toward shore.



Those of us who did nothing more than buy a house and invest in index funds--the same common-sense steps taken by previous generations to earn modest returns--and who through no special effort reaped enormous gains thanks to the Fed's "wealth effect"--might benefit from a bit of humility by admitting our gains are the result of a system rigged to benefit all who bought assets before "the wealth effect" rocket-launched the value of our assets. The word few dare utter is "unearned."

In the end, it won't matter what we think, like, believe or hope, for reversal is the movement of Tao. Put colloquially, the pendulum of inequality driven by a rigged system will swing to the other extreme, and claiming that payback is somehow "unfair" won't change the trajectory or the volatility.

New podcast: The Great Unwinding. (33 min)

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My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 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 Social Recession Is Accelerating

Did wages rise 10-fold to match the 10-fold rise in the cost of a modest house? No. That is social recession in a nutshell.

A reader asked about the term social recession which he'd noted in my book Get a Job, Build a Real Career and Defy a Bewildering Economy. Here is the paragraph:

"Stagnation in opportunities to work and earn (i.e. a financial recession) leads to social recession, a loss of opportunities for adulthood: a rewarding career, family, and a home of one's own. In a social recession, unemployed young people may be mired in adolescent narcissism, eschewing ambitions not just in work but in romance and marriage."

The reader asked if I could recommend any further reading on social recession and I replied that I could not, as the topic is not well-recognized or studied.

In my analysis, social recession refers to the narrowing of opportunities to marry and raise a family, own a home and have a secure livelihood from the vast majority of the populace to an elite selected by fierce competition--a competition few have the means to win, as the winners tend to win by choosing their parents wisely.

In the purely financial / economic terms of growth of GDP, household income, corporate profits and the value of assets, the US has only been in an economic recession for a few months in 2008-09 and at the start of the pandemic lockdown. But when measured by the ability of just about anyone willing to work hard and practice basic frugality to buy a house and start a family, the US has been in a social recession since 2009.

Demographics / economics analyst Chris H., who tweets as CH @economica, recently posted charts which reflect this social recession, most strikingly in the collapse of the US birthrate that started in 2009. He asked: "The largest childbearing population in US history has gone on strike...maybe we should know why?"



Some might argue that this decline in births is coincidental to the Global Financial Crisis , but since social recession has its roots firmly in the economic opportunities available to the average worker, that argument is specious.



The social recession began as a direct result of policy responses to the Global Financial Meltdown in 2008-09, policies that favored capital and those who already owned assets, at the expense of everyone who did not inherit wealth/assets or was too young to buy assets such as houses when they were still affordable to average workers.

As a result, those who bought assets a generation or two ago now own most of the nation's wealth:



As I have often discussed in blog posts, aggregate measures of financial expansion (GDP and household net worth) mask the perverse consequence of favoring capital and the already-wealthy: an unprecedented widening of the gap between the top 10% and the bottom 90%, and the concentration of assets in the top 10%.



The spectrum of wealth and income asymmetry has become increasingly asymmetric: the top 01% have pulled away from the top 0.1%, the top 0.1% have pulled away from the top 1%, who have pulled away from the next 9%, and so on. By any measure, the top 20% have left the bottom 80% in the dust, and the bottom 60%'s share of the nation's wealth is negligible.



As many readers point out to me, education was the key for the post World War II generation on the GI Bill, and it continued to be a critical ladder to higher, more secure incomes from the 1960s to the 1990s. But the premium granted those with any 4-year college diploma has decayed in an inverse relationship with the skyrocketing cost of that diploma.

The diploma by itself has little value outside STEM / medical / legal professions and bureaucracies that use the diploma as a screening mechanism to limit the pool of applicants. Many professions such as law are oversupplied with applicants holding law degrees, and so entry wages outside elite firms are lower than those offered to experienced welders. As the premium on a diploma has eroded, the demands on workers have risen sharply across the entire spectrum of paid work.

As I often note, average wages have stagnated for the past 45 years. This stagnation was tolerable as long as the cost of a house, childcare and healthcare insurance remained somewhat affordable to average workers, but once the engines of financialization transformed the US economy into a Bubble Economy of soaring real estate / stock valuations that then inevitably crash, triggering an even larger bailout / stimulus response that inflates an even greater bubble, the costs of home ownership, childcare and healthcare soared out of reach of all but the top 20% unless family wealth and connections gave younger workers a boost.



Another aspect of social recession is the decay of pensions and the resulting rise of insecurity. Government and government-funded sectors such as healthcare are the only employers that still offer a pension that isn't the responsibility of the worker to partially or totally fund and manage.

Japan is held up as an example of social and economic stability, but those who know a wide spectrum of Japanese people (i.e. not just academics and corporate leaders) know that Japan has been in a social recession since its bubble burst in 1989-90. The decay is visible but since it's embarrassing, it's not covered in the media: abandoned vehicles littering the countryside, Hikikomori (extreme voluntary social isolation), falling rates of marriage and births, the estrangement of family members, pensioners openly shoplifting to get arrested so they can get the full meals and healthcare offered the imprisoned, to name a few manifestations of social recession.

The fact that none of this is visible in the bustling districts of Tokyo and Kyoto doesn't mean the social recession isn't real. Japan has managed its decline well, but that doesn't mean it's not in social recession.

One aspect of social recession I have discussed is social defeat: when people give up on dreams and goals that are unreachable and so they give up trying.

Many readers share their own experiences of pursuing extreme frugality and hard work back in the day, as evidence that similar efforts will result in the same stability and security they now enjoy. I have recounted my own story of working my way through university, building our own house with our own hands, etc., but when I do a statistical analysis of costs today, I see an unbridgeable chasm between what I could earn 25 years ago and what I could buy with my earnings / savings 25 years ago, and what I can earn and buy today.



I say this as someone who never earned a lot of money; more often than not, I earned far less than the average annual pay of average workers. Having been self-employed most of my working life, I have financial records and clear memories of wages, prices and costs over the past 50 years.

I can state as a fact that two part-time city librarians could still buy a modest home in the San Francisco Bay Area in the late 1990s, and afford to have two children. This is no longer the case--not even close. No amount of frugality can close the gap when the house they bought for $135,000 now costs $1.35 million, and childcare and healthcare have become equally unaffordable.

Did wages rise 10-fold to match the 10-fold rise in the cost of a modest house? No. That is social recession in a nutshell. When this fact is raised in conversation, those in the top 10% protest, but their protest rings hollow, for what they're really saying is: since I'm doing great and all my friends are doing great, everyone's doing great. There's a word for this: denial. Denial cannot solve problems, it can only make them worse.



New podcast: The Great Unwinding. (33 min)

---

My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 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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Subscribe to my Substack for free

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Who Wins and Who Loses When the Housing Bubble Pops?

This time around, the Fed may not be able to "save" the bubble from a complete round-trip deflation, which history suggests might decline by 50%.

Let's start by stipulating that my interest in housing bubbles is purely abstract. I'm not rooting for any set of participants or betting on housing going up or down. My approach is to simply look at the dynamics in play and consider what history offers up as potential trajectories. Rick Blaine summed up this perspective in the film Casablanca: "I understand the point of view of the hound, too."

With that said, all bubbles pop, and every bubble is declared "the new normal" that will only continue inflating to new heights just before it pops. Housing only goes up, there's a permanent shortage of housing, and so on.

The bias in reporting bubbles bursting is on the losers, those whose fortunes deflated along with the bubble. But there are also winners when bubbles burst, as what was unaffordable becomes affordable again, and capital that was chasing speculative gains is mangled, and duly chastened, seeks safer returns. Both of these dynamics offer rewards to those who avoided the speculative bubbles.

For context, let's start with the wellspring of the housing bubble, credit. Asset bubbles can arise without credit expanding--the South Seas Bubble, etc.--but in the modern era, gargantuan increases in credit (a.k.a. debt) pump up asset bubbles. Absent a vast expansion of credit, it's hard to inflate a massive speculative bubble.

Here is total credit in the U.S. Even the casual observer will note that the parabolic rise in credit has outstripped the real economy (GDP). As bubbles rise in assets such as stocks, the phantom wealth leaks out of the first bubble and seeks more fertile speculative ground in another asset class, which then bubbles up in a speculative frenzy.



When credit bubbles pop, asset bubbles pop, too as the constant pressure of new money is what kept the bubbles inflated.

The consensus holds that housing is bubbling higher because there are enormous scarcities in housing: demand exceeds supply, and so prices skyrocket. While this is undoubtedly true in specific locales, the nation as a whole has more housing units per capita than ever before.



This suggests housing hoarding by the wealthy as a factor: corporations have snapped up tens of thousands of homes as rentals, a double play of steady income from rising rents and a speculative bet on gains from additional appreciation. Wealthy households have snapped up hundreds of thousands of homes as short-term vacation rentals (STVRs) for the same reason: income and appreciation.

Millions of homes are empty or lightly used as wealthy families have no pressing need to sell vacation homes, homes left empty when the parents passed or moved to assisted living, etc. Riding the bubble higher is an obvious motivation to hang on to empty houses.

The top 10% who collect roughly half the income and own over 90% of all stocks own 44% of the nation's real estate wealth. The bottom 50% who own a meagre 2.6% of the nation's financial wealth own 11% of the real estate wealth. The middle class--the 40% between 50% and 90%--own about the same percentage (45%) as the top 10%.



How do we explain this concentration of real estate wealth in the top 10%? Of course the wealthy own more expensive homes, but this alone cannot account for the outsized share of real estate wealth held by the top 10%: the top 10% own the lion's share of second homes, STVRs, privately owned rentals and "land-banked" homes that are empty or lightly used.

Unsurprisingly, real estate wealth is concentrated in the older generations, with Boomers and older holding over half and Gen X (ages 44 to 60) with 30%--all together, a massive 82% of the nation's real estate wealth.



The winners and losers when the housing bubble pops are clear: the younger generations win, the older generations lose, and those who counted on the phantom wealth of bubbles lasting forever will lose while those who didn't enter the speculative bubble will win.

All bubbles pop, and assets fall to levels that everyone at the top of the bubble agrees are "impossible." The Federal Reserve socialized the housing market starting in 2010 to arrest the deflation of the 2006-07 housing bubble by buying trillions of dollars of mortgage backed securities (MBS). This is visible in the chart of the Case-Shiller National Home Price Index:



This time around, the Fed may not be able to "save" the bubble from a complete round-trip deflation, which history suggests might decline by 50%. Yes, yes, we're millions of housing units short of demand, etc., but speculation has driven hoarding to levels that are not easy to measure. Once the credit bubble pops, all assets driven higher by speculative credit will pop, including housing.

Yes, a 50% decline is "impossible." But let's check back around 2032 to see what's possible and impossible then. As I often note, if we own a house free and clear and have no interest in using it as a speculative gamble or collateral for extracting phantom wealth via a home equity line of credit (HELOC), then the market value is of no concern. Whether the house is worth $10,000 or $10 million doesn't matter; what matters is its utility value as shelter we own and control.

New podcast: The Great Unwinding. (33 min)

---

My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 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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You Say You Want a Revolution

Owning nothing isn't happiness. Owning control of one's life and purpose is happiness.

In The Super-Wealthy Have a Problem, I discussed how systemic unfairness can reach a pressure point in which regime change is the only option left to reverse a system rigged to benefit the few at the expense of the many.

(My definition of the super-wealthy: entities and families that lobby the government for favors as a standard business practice.)

But political regime change doesn't exhaust the possibilities for revolutionary transformation, which can take social, cultural and spiritual forms. Correspondent Charles C.W. recently asked for my views on these non-political, non-financial wellsprings of transformative change:

"Thank you very much for your comments about the The Great Unwinding. Your comments are focused on the financial side of this unwinding. Also important are the cultural, social, spiritual, and interpersonal aspects of this unwinding. For example, we will learn that many of our government institutions are utterly corrupt and untrustworthy, if we don't know that already. We will learn that the government is not going to save us, and that they are utterly incompetent when it comes to disaster relief, if we don't know that already. We will learn self-reliance and neighbor-trust instead of expecting a handout from the government, if we don't know that already. If you have comments about the cultural, social, spiritual and interpersonal aspects of this process, that would make for a most interesting post."

Let's start with a mass movement of opting out of the status quo hamster wheel. I have discussed opting out as a solution many times, often in the context of historical examples, for example, tenant farmers escaped onerous taxes in the final stages of the Western Roman Empire by abandoning their land and joining the workforces of an elite's vast estate or a monastery. Or they simply vanished into the countryside.

In the pre-collapse phase of the Soviet Union, opting out often took the form of taking the lowest level job available that offered opportunities to catch up on reading and other interests while at work, and joining Party activities that offered opportunities for socializing, visiting museums, field trips, etc.--in effect, milking the system by doing the minimum to display the requisite compliance with the status quo.

I've recently covered the current version of this doing-the-minimum form of opting out: The Anti-Consumers.

Living Well on Less Than $30,000 a Year--One American Family's Story.

In today's America, opting out often takes the form of homesteading, a phrase that encompasses a wide range of personal decisions and lifestyle options. A recent article on the remarkable level of interest in homesteading profiles one homesteader who's assembled an impressive 1 million followers on YouTube:

Off the Grid, Extremely Online: In corners of the internet-- and in wooded, undeveloped parts of the country --young men are documenting their efforts to live off the land.

"Mr. Petroski's property, known as NarroWay Homestead, is one of the most sophisticated and most-watched operations in a burgeoning niche of online creators who document their off-grid or sustainable living projects across the country, often promoting a way of life that seems diametrically opposed to the mediums they use to share it.

'Almost everything I own is a hybrid of ancient knowledge and modern technology,' Mr. Petroski said.

'If you're going to homestead, find a place where people are living the way you want to be living,' Mr. Petroski said. 'I live among people who accept this lifestyle.'

Modern homesteading is not a monolithic, doctrinal pursuit. The scope of what could be considered 'homesteading' is a spectrum.

'The modern homesteading movement's big idea is that, rather than trying to change the world collectively and publicly, people are trying to reshape their private sphere -- their worlds, their homes, their own tiny network,; said Jordan Travis Radke, a sociologist who has studied the movement. 'They're changing their lives, but they want other people to see it, because they want others to follow suit.'

Dr. Radke said that adherents of the homesteading movement come from a variety of backgrounds and political positions, but are often united by a shared sense that though 'the societal systems and structures in which they were embedded could not be changed anymore,' their individual lifestyles could be.

Like many full-time content creators, Mr. Petroski has multiple sources of income: He runs a line of coffee blends, beard care products and other merchandise on top of his sponsored partnerships with brands and the share of ad revenue he receives from YouTube and TikTok. He said it all added up to an annual salary in the six figures.

On the wheel well of a small trailer at Mr. Uhlhorn's campsite is a silver plaque, sent to him by YouTube when he reached 100,000 subscribers on the service. (He now has 732,000.) Mr. Uhlhorn said he used it as a mirror to shave."

Granted, much of the homesteading viewership might be indulging in fantasy, but clearly, there is widespread interest in jumping off the hamster wheel of debt-serfdom / rent-serfdom. Neofeudalism has distinct benefits for the rentier class and a host of servitudes for the rest of us. Life is much more demanding for those opting out, but there's always tradeoffs in life: at the end of each day, the homesteader owns whatever progress was made, while the debt-serf still owns nothing and owes much. And despite the PR of the rentier class, this isn't a recipe for human happiness. (You'll own nothing and be happy. And so the few who own the most will be wallowing in misery?)

As the article explains, if it's impossible to change the economy-society at large, then change your own life. This is the core idea of Self-Reliance, an American ideal espoused by Ralph Waldo Emerson in the 1840s.

The consumerist lifestyle is all about presenting a fake, phony avatar to the world. Change-your-own-life is based on reciprocity, friendships, sharing knowledge and real-world accomplishments. The consumerist lifestyle--the epitome of inauthenticity--is intimately connected to debt-serfdom / rent-serfdom, which is the epitome of an inauthentic economy based on cons, exploitation and addiction. In becoming an anti-consumer, one becomes pro-control-of-one's-life, what we call agency.

These cultural shifts in values manifest in many ways. One is walking away from the hamster wheel. Another is downsizing to a much simpler, lower cost, debt-free, more authentic life grounded in relationships rather than in soulless transactions. In this cultural awakening, impoverishment isn't measured in money, it's measured in a poverty of meaning, purpose and authentic relationships.

To say that a spiritual transformation is even possible in America seems risible. Given the central role of getting and monetizing our attention in reaping vast profits, every video clip, sound bite and headline is screaming for attention in the most destructive ways possible, all with a single purpose: to collect data on our restless consumption of content and monetize it by selling our derangement to the highest bidder.

The Great Awakening--historians count four in U.S. history--may offer a model for the way in which a non-political, non-financial awareness takes hold of the populace, an awareness that is non-denominational and open to the non-religious who sense the emptiness at the center of consumerism and the financial mania that drives it.

As I explained in my book Resistance, Revolution, Liberation, these social-cultural shifts have political consequences, but these are second-order effects of a transformation in values. If the problem isn't political or financial, then tinkering with politics and finance won't fix what's broken.

Owning nothing isn't happiness. Owning control of one's life and purpose is happiness. Equating finance with happiness is a path to a dark place, a place where the magic of technology is offered up as a false god for us to worship. One can own all the tech gadgets in the world and have millions stashed away and have the emptiest life on the planet.

You say you want a revolution. It starts with changing our own lives. Authenticity is infectious. Maybe it will spread and change things in ways few can imagine.



Author's endnote: we built a micro-home with hand tools--no power--in 1978, long before micro-homes became fashionable. I get it. Nothing worthy is easy. As Emerson counseled, "Do the thing and you shall have the power."

New podcast: The Great Unwinding. (33 min)

---

My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 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 Super-Wealthy Have a Problem

The less self-congratulatory camp of the super-wealthy understand the pressure cooker of inequality and unfairness is going to blow unless they relinquish some of their unearned gains generated by Fed policies.

The cultural consensus holds that the super-wealthy always manage to come out ahead in any spot of bother. Due to their grip on the levers of financial and political power, whatever lays waste to the bottom 90% of the populace is either 1) an opportunity to increase their wealth or 2) a minor bump in the road to ever-expanding wealth.

History offers an abundance of examples. A favorite of mine is the guest books of the French chateaus owned by the super-wealthy, which logged visits from the Usual Suspects (political and financial bigshots) until 1940, when the names of Nazi bigshots began filling the ledgers, and then in 1945, the visitor list reverted to the Usual Suspects: a seamless transition from one set of political overlords to the next that the chateau owners rode without difficulty.

But there are counter-examples as well. Consider the family estate of famed architect I.M. Pei in Suzhou, China. I visited the impressive Pei residence, which is now a government-owned property open to the public. The Pei family was wealthy enough to be comfortably in the top tier of Chinese society. Life was good for China's elite, right up to 1949. These elites did not glide though the revolution intact; their wealth was confiscated.

They were replaced with a new elite, who now holds vast troves of wealth secreted away in the West, and just as I.M. Pei attended prestigious American Ivy League universities, so too do the sons and daughters of China's party elites, under assumed names, of course, to allow them a private experience outside the limelight.

So the super-wealthy don't always skate through tumultuous times, emerging richer than ever. We all understand how vast wealth inequality influences the political and social responses to crises. What is less well understood is the role of fairness in the social and political realms: if the inequality is understood to be the result of extremes of unfairness, the public mood darkens considerably, as humans are innately sensitive to unfairness.

The porousness of the border between the wealthy and the poor matters greatly in assessing fairness. If the financial-social membrane between the two classes is relatively porous, enabling the most ambitious and brightest of the poor to enter the ranks of the wealthy (or the ranks of the the top 10% who serve them), then the society maintains a minimum level of fairness that alleviates the pressure to overthrow the regime.

The remedial actions of the state also matter greatly. If the government acts decisively to raise estate taxes, taxes on unearned (i.e. rentier) income and on the higher reaches of earned income, and devotes some minimal attention to the basic needs of the bottom 90%, these policies also alleviate the pressure to overthrow the regime.

The book The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century addresses these dynamics in admirable detail.

In other words, extremes of wealth/power inequality set the stage, but the closing act is decided by our responses to soaring inequality. If the response is PR artifice, i.e. the rich keep getting richer as the suffering of the bottom 90% increases, regime change starts looking like the only solution available.

If, on the other hand, policy makers and the public push back against the dominance of the super-wealthy, then the status quo can avoid fragmentation and dissolution.

The super-wealthy play a key role in this choice of response, and this fragments the elites into warring camps, a dynamic I've addressed many times over the years, including in my chart of some of the overlapping crises that will demand more than duct-tape responses:



The backdrop is the policies that have handed the super-wealthy immense gains in wealth and power via policy-driven asset appreciation and the gradual diminishment of the purchasing power of wages. Over the past 45 years, the value of earnings has declined $149 trillion to the benefit of unearned gains reaped by the already-wealthy:



This chart shows how wealth inequality has risen from the late 1970s, and how it was rocket-boosted by the Federal Reserve's "wealth effect" policies of quantitative easing (QE):



The bottom 80% own a mere fraction of the wealth owned by the top 1% and top 10%



While the wealthy cling to the self-serving narcissistic view that since we're doing fine, everyone's doing fine, the reality is the bottom 80% are awakening to the reality that they're not doing fine, a divide that will only widen as recession tightens its grip on the throats of the bottom 80%:



This is the vision of the "our wealth is rightly all ours" camp of the super-wealthy: the rest of us will own nothing and we'll be gloriously happy. Uh, sure. Since we're so happy, why don't we switch places?



The less self-congratulatory camp of the super-wealthy understand the pressure cooker of inequality and unfairness is going to blow unless they relinquish some of their unearned gains generated by Fed policies. While they naturally intend on keeping the vast majority of their gains, they realize the dividends of limitless greed might just be the overthrow of the regime they control to serve their own interests.

The rest of us play a part, too, of course, and our choice boils down to this: "And you want me to join this?"



The super-wealthy have a problem: if they refuse to release the pressure building in a grossly unfair, rigged system that's enriched them beyond measure, then the pendulum may swing to the other extreme and they'll be visiting their former estates as tourists in a few years.

But if they agree to relinquish some part of their gains, they fear the tides of history may erode their sand castles. Aiya, what a dilemma.

New podcast: The Great Unwinding. (33 min)

---

My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 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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It Became Necessary to Destroy the Global Economy to Save It

As the high generated by the previous iteration of financial repression wears off, the dose increases, as do the stakes when that high wears off.

You've no doubt heard "We had to destroy the village in order to save it." The original quote noted by reporter Peter Arnett in 1968 was "It became necessary to destroy the town to save it." The phrase (whether an exact transcript or not) became emblematic of America's war in Vietnam, encapsulating the impossibility of fighting an unconventional war without front lines for "the hearts and minds" of the citizens with massive firepower.

We find ourselves in a similar situation today as all the immense firepower of central bank stimulus and intervention will be unwound in a chaotically destructive fashion in what I term The Great Unwinding of all the excesses of leverage, debt, stimulus and feverish speculation that now dominate the global financial system and economy.

As in Vietnam, the policies were launched with good intentions: Saving South Vietnam from Communism, the Domino Theory, etc. were the stated goals at the start, just as the goal of all the "emergency measures" pursued by central banks and Treasury departments in 2008-09 was "saving the system from collapse," a possibility succinctly expressed by President Bush at the time: "This sucker's going down."

Just as America's intervention in Vietnam was an "emergency measure" that started out limited and then ballooned into all-out war, the Federal Reserve and other central banks unleashed the financial equivalent of Operation Rolling Thunder while governments cranked up deficit spending, i.e. borrowing and spending trillions to prop up the economy.

The policies that were announced as "emergency measures" quickly became permanent and were expanded as ending the programs would have torpedoed the fragile debt-based asset bubbles being inflated to boost the wealth effect, a metric eerily similar to the Vietnam War's infamous body count, where "winning" morphed into counting the casualties of the "emergency measures."

That the bottom 90% lost ground as the Fed boosted the wealth of the top 10% was another case of destroying the town to save it. Collateral damage is the antiseptic phrase of choice in such cases, and so as the Fed's bubble inflation enriched the already-wealthy--the wealth effect sounds so bubbly and positive, doesn't it?--the real economy became addicted to near-zero-interest debt, extreme leverage and gaming the Fed's expanding interventions: buy the dip, because the Fed will always leap into action to "save" the market.

The problem with interventions and addictions is that it takes ever larger doses to maintain the high. There is no consequence-free intervention or addiction, and so with each new round of stimulus, the economy's dependence on Fed / central bank manipulation--oops, I meant intervention--also expanded.

How the housing sector survived without trillions of dollars in Fed manipulation is a mystery, as the Fed buying trillions of dollars of mortgage-backed securities (MBS) is now the permanent policy, and reversing that "support" would unleash frighteningly uncontrollable market forces.

That's where all this has taken us: the unmanipulated market is now Nemesis. Should the Fed and Treasury loosen their grip and the market wrenches free, then the global financial system and the global economy that now depends on it will both unwind in non-linear, unpredictable ways that will wipe out much of the debt, leverage and phantom wealth of The Everything Bubble.

Lost in all the speculative babble of how to game the Fed's next round of Rolling Thunder is the catastrophic unfairness of the Fed's 15 years of propping up zombies and enriching the already-rich. The bottom 90% who live off their labor have seen their earnings lose purchasing power and assets such as houses soar out of reach, while the Fed and the other central banks have institutionalized moral hazard for the super-wealthy, who can count on the Fed bailing them out while the not-wealthy pay 22% interest on credit cards.

Equally catastrophic is the incentivizing of speculation over productive investment of capital. Yes, we're all fans of reusable rockets and battery factories, but the $100 trillion in "wealth" added since 2009 isn't the result of incredible leaps in productivity; the vast majority of that "wealth" is the result of credit-asset bubbles inflated by the Fed and other central banks.

Meanwhile, the noose of financial repression keeps tightening, as depicted on this chart, courtesy of Richard Bonugli, with whom I discussed The Great Unwinding in a new podcast. (33 min)


(open chart in a new browser tab for larger image)

As the high generated by the previous iterations of financial repression wears off, the dose increases, as do the stakes when that high wears off. This is how we get to the body count phase, where statistics are issued to "prove we're winning," when in fact the financial sector is increasingly fragile and the economy is increasingly dependent on the next dose of Fed fentanyl.

We're now so high on Fed fentanyl--rate cuts incoming!--that we don't even notice that speculation has replaced productivity growth as the source of "wealth":



Financial Repression is generous with collateral damage. Trillions in Fed fentanyl and federal deficits, and the bottom 50% received a staggeringly large 0.2% boost in their signal-noise share of the nation's financial wealth, all the way up to 2.6%, yowza.



We got your wealth effect right here: lucky you don't actually need wages to live, right? Oh, you do? Well, sorry about that...



Too bad you weren't already wealthy, then the Fed would have made you a lot wealthier.



The unwinding will be uneven, of course, with a great many towns destroyed to save them, and eventually the dominoes falling will reach us, wherever we are. The financial system is tightly bound globally, so as it unwinds it will take down the equally tightly bound global economy.

And so here we are: it became necessary to destroy the global economy to save it. We hope you enjoy the fireworks.

New podcast: The Great Unwinding. (33 min)

---

My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 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 $3/month patron of my work via patreon.com.

Subscribe to my Substack for free

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Read more...