oftwominds-Charles Hugh Smith: 2/1/25

Tuesday, February 18, 2025

The Problem With Money Isn't Money

The Problem With Money is that it's complicated.

To many minds, the solution to our core economic problems is to return to sound money via either the gold standard, in which gold backs all currency, or by substituting bitcoin for gold, i.e. bitcoin becomes the coin of the realm.

I have often held that if we don't change the way money is created and distributed, we've changed nothing.

But money is complicated, and this introduces the koan of this post's title: The Problem With Money Isn't Money. The human mind prefers simplicity over complexity, and so we tend to seek simple solutions to complex problems. Sometimes simple solutions do work with almost magical efficacy, but other times they generate new problems that we didn't foresee, problems that complicate our simple solution.

As David Graeber explained in his book Debt: The First 5,000 Years, the problem with money isn't what's declared the coin of the realm, it's all the forms of money that aren't coins and currency, i.e. credit a.k.a. debt, which as Graeber documents, has been "money" since commerce began.

If we cut to the chase, the problem with money boils down to:

1. There isn't enough coin of the realm to grease all the activity everyone wants to pursue.

2. Most of the coin of the realm is owned by the wealthy, out of reach of commoners trying to improve their standard of living.

3. Regardless of what's declared the coin of the realm, human Wetware1.0 will generate disastrously destructive speculative bubbles and panics.

If you declare clam shells as money, clam shells will be "invested" (i.e. gambled) in speculations that amass fortunes for a few and ruin for the rest. The extraordinary speculative manias and resulting ruin of the South Seas and Tulip Bubbles occurred in sound money economies. sound money didn't inhibit the rise of bubbles and the resulting crashes, nor did it limit the depressions and panics that characterized the 19th century.

The problem in 1800 America was straightforward: there wasn't enough gold and silver in circulation to fuel the immense drive to increase production and commerce. If sound money is limited, and much of what is in existence is in the hands of the wealthy, then the economy of the bottom 95% can't expand.

Here is the economic reality that sound money can't solve: the wealthy inherit sound money, or they own monopolies or enterprises that generate sound money, but the commoners have only their labor to sell, and the value of that labor is set by market forces such that few can earn enough to pile up savings sufficient to start an enterprise or buy an asset in cash.

The rich love sound money, the poor love money in circulation and credit because these are the only means they have to increase production and commerce. This is the lesson of history: paper money was issued in China because there wasn't enough gold and silver in circulation to grease everyday commerce and production.

In other realms, copper coins were issued for everyday transactions, as there wasn't enough gold and silver in circulation for average people to get their hands on any of it.

A scarcity of gold and silver wasn't just a problem for commoners seeking to increase production and commerce; it was a problem for governments, too as commoners couldn't pay their taxes in gold or silver because they didn't have any. Taxes had to be paid in kind, i.e. with grain or with some other form of "money" that wasn't gold or silver.

In the Middle Ages, the scarcity of gold and silver led to the creation of a vast system of commercial credit in which paper was "money." In today's terminology, merchants issued purchase orders and arranged for trade via promissory notes held by trusted intermediaries that could be traded as "money" before settlement.

So if we agreed to trade a cartload of lumber for woolen clothing, the actual exchange of these goods would occur at one of the great trading fairs. In the meantime, I could trade (sell) the promissory note for the lumber to another merchant, and use the proceeds to pursue other commerce. At the trade fair, the goods would be exchanged and the "money" created by the notes disappeared.

In other words, the vast majority of commerce was enabled by credit, not sound money. If commerce had been restricted solely to sound money, then there would have been very little commerce and therefore few opportunities for commoners to get ahead.

Credit is "money," too. This is the reality that proponents of sound money gloss over. Most of the "money" in any system is credit or fiat: the Chinese dynasties issued "fiat currency" paper money out of necessity, just as ancient regimes issued low-value copper coinage to serve the same purpose, and merchants throughout history have used commercial credit as "money."

One would imagine that the Spanish Empire, funded by its treasure fleet of silver from the New World, had no need for credit. But one would be wrong. The flood of silver expanded the supply of "money," and the result was predictable: the value of silver "money" fell accordingly.

The Empire pursued so many wars simultaneously that it borrowed heavily from Dutch bankers. Its enormous income of sound money did not stop it from becoming over-indebted.

In the early 1800s, Americans were desperate for credit to expand production and commerce, and so banks sprouted and failed with alarming regularity. Recall how bank credit works. The bank accepts cash deposits, and loans out a percentage of the cash at interest as the necessary means of earning revenues to support the bank's costs of doing business: rent, employees, etc., and generating a return for the owners.

In the normal course of everyday commerce, keeping 25% of the cash for customers withdrawing their deposited cash is more than enough. But then a financial panic arises, and every customer rushes to the bank to withdraw their savings in full. The bank doesn't have enough cash, and so it calls in all its loans. The borrowers don't have the cash on hand to pay back the loan, so they are bankrupted. The bank doesn't have enough cash to cover all withdrawal demands, and so the bank fails, and the depositors who weren't first in line lose their money.

You see The Problem With Money Isn't Money per se, it's credit, humanity's hunger for speculation and improving one's standard of living and the necessity of issuing credit and other forms of "money" to grease commerce and increase production.

How to satisfy the needs for credit and "money" in circulation and limiting the downsides of speculative bubbles and panics are the problems central banks were created to resolve. Sound money--the coin of the realm throughout history--generates its own set of problems, and does not eliminate speculative bubbles and crashes or the destruction wrought by panics.

The Problem With Money is that it's complicated. It's tied not just to scarcity value and supply and demand but to human psychology and everything from the need to collect taxes to the Pareto Distribution, which dictates that 80% of all the wealth--property and all the sound money--will end up in the hands of the top 20%, leaving the bottom 80% with few opportunities to improve their lot.

The rich own the sound money and the poor who want to get ahead need credit to fund their attempt to improve their lot.

When speculative bubbles pop, the resulting ruin cannot be avoided. The problems of Money cannot be reduced down to a simple solution.

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Friday, February 14, 2025

Automation Institutionalizes Mediocrity

Meanwhile, in the lived-in world, our quality of life is unraveling in myriad ways as algorithmically-driven under-competence and mediocrity are now the norm.

When deployed by monopolies / cartels, automation institutionalizes mediocrity, and soon everyone forgets excellence and quality because they no longer have any experience of either one.

And since our economy is dominated by monopolies / cartels, automation has reduced our quality of life across the board. Once the "market choice" of price-constrained consumers has been reduced to one option (monopoly) or a handful of options offering the same price and quality (cartel), then monopolies / cartels have an irresistible incentive (increase profits) to slash costs by automating everything that can be automated, along with reducing the quality of customer service, for why bother spending money on customer service when the customers have no option other than another member of the cartel?

With the customers corralled, the incentives are to algorithmically optimize mediocrity, as mediocrity is the most profitable optimization possible. If customer service and quality are degraded to the point of failure, consumers might rouse themselves and demand some improvement. But the pursuit of excellence is a waste of money, as the customers are effectively prisoners, so why waste money making gourmet meals for prisoners?

Here's a good description of how automation institutionalizes mediocrity, and by automation I don't mean just chatbots, robots, voice-activated menus, etc.--automation includes automating via algorithms the organization and processes of all services and procedures.

In other words, employees of the monopolies / cartels have to follow the optimized procedures under pain of being punished, even if the procedures complicate tasks, inhibit solutions and reduce the quality of customer service: The Demoralizing Downward Spiral Of Algorithmic Culture.

Simply put, the nonsensical insanity of Kafka's everyone's busy 24/7 but nothing useful gets done Castle is optimized by automation. Monopolies come in two flavors: government and private. Both optimize mediocrity via automation.

The automation of mediocrity is part of the systemic optimization of under-competence: employees receive just enough training to follow procedures in normal situations, but this purposefully thin training (why waste money training employees when a cheap algorithm can do the heavy lifting?) leaves the employees completely incompetent when a crisis arises that can only be resolved by those with experiential knowledge of the entire system.

Mediocrity--oh so profitable in normal circumstances--guarantees failure when something outside the norm destabilizes the over-optimized machine.

This reliance on algorithms has stripped us of competence outside the narrow boundaries of normal transactions. Here's one way to understand this drawn from my own experience: the service is broken, but the problem isn't one of the three menu options offered--and there is no other choice but one of the three algorithmically programmed three options. So the problem is unfixable.

We can understand deep experiential expertise as a type of human-capital buffer or redundancy which seems like an unnecessary expense when everything is operating normally, but when anomalous events reveal the limitations of algorithmic procedures, there's nobody left with the experience needed to stop the system from collapsing.

This is how automation has optimized under-competence, rendering all these organizations prone to sudden, surprising failure.

In summary, automating mediocrity optimizes profitability and sloth. Never mind if the quality of the service or product is low, because the customers have no real choice. It's easier to just follow procedures, and more profitable for private monopolies / cartels to optimize the automation of mediocrity.

The Mythology of Technological Progress demands our worship of technology as the font of all goodness in the world. Meanwhile, in the lived-in world, our quality of life is unraveling in myriad ways as algorithmically-driven under-competence and mediocrity are now the norm, even as this optimization has eroded systemic resilience in ways few understand.

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Thursday, February 13, 2025

The Not-So-Strange Paradox of American Power and Dysfunction

Americans seem to have forgotten that we are not slaves to finance-tech profits as the sole divining rods to what happens next.

A recent essay explores the paradox of American power: global reach amidst civic decline: The Strange Triumph of a Broken America: Why Power Abroad Comes With Dysfunction at Home.

The media, mainstream and alternative alike, has long been highly attuned to evidence of US decline. This sensitivity held sway throughout the Cold War (1950 to 1990), briefly morphed into triumphalism in the early 1990s "unipolar moment" and then returned to tracking decline in the era of China's rise (1998-present).

As a mind experiment, substitute "China" for the "US" in the following statistics drawn from the essay. Many of us find that we believe statistics showing China's dominance more readily than we believe those showing US dominance.

By virtually any measure, the US has gained ground on its international rivals in key areas. Autocratic regimes excel in cloaking their systemic problems behind unverifiable claims, while democracies are a free-for-all of self-criticism. This openness accentuates the sensitivity to decline while the decline of autocracies is papered over.

Consider these statistics with an open mind. (The essay is behind a paywall so I am excerpting data points. Let's stipulate that statistics can be massaged or inherently flawed, for example GDP, but they offer a general data-based context for discussion.)

The US accounts for 26% of global GDP, the same as during the 'unipolar moment' of the early 1990s.

In 2008, the economies of the US and the Eurozone were nearly equal in size, but today, the American economy is twice as large.

The US economy is roughly 30% larger than the combined economies of the so-called global South: Africa, Latin America, the Middle East, South Asia, and Southeast Asia. A decade ago, it was just 10% larger.

In 1995, Japanese citizens were, on average, 50% wealthier than Americans, measured in current dollars; today, Americans are 140% richer.

If Japan were a U.S. state, it would rank as the poorest in average wages, behind Mississippi--as would France, Germany, and the UK.

From 1990 to 2019, U.S. median household income rose 55% after taxes, transfers, and adjusting for inflation, with income in the bottom fifth seeing a 74% gain.

The US dollar (USD) accounts for nearly 60% of global central bank reserves--down from 68% in 2004 but equivalent to its 1995 share. It is used in roughly 70% of both cross-border banking and foreign currency debt issuance--up from 2004--and almost 90% of global foreign exchange transactions. (China's renminbi holds a 2.3% share of global central bank reserves.)

Once the world's largest energy importer, the US is now the leading producer of oil and natural gas, surpassing Russia and Saudi Arabia.

US energy efficiency and renewable technologies have lowered per capita carbon emissions down to levels not seen since the 1910s.

The US consumer market is equivalent to China's and the Eurozone's combined.

U.S. firms generate over 50% of the world's high-tech profits, whereas China captures only 6%.

The US is the only great power whose prime working-age population is projected to grow throughout this century. In contrast, China's population of workers between the ages of 25 and 49 is projected to drop by 74%, Germany's by 23%, India's by 23%, Japan's by 44%, and Russia's by 27%.

Americans start businesses at two to three times the rate of France, Germany, Italy, Japan, and Russia and one and a half times the rates of China and the UK.

The US is home to 7 of the top 10 universities and a quarter of the top 200.

Exports account for just 11% of GDP, compared with a global average of about 30%.

Global capital flows into the US as a safe haven.

This chart of the global stock market reveals the enormous gap between the US stock market as a magnet for global capital and everyone else: the US market comprises 67% of global equities, while China has a tiny 3% share. Global capital is not pouring into China as a safe, profitable haven, it's leaving China to the tune of hundreds of billions of dollars a year, as China's property bubble burst has already erased $18 trillion and is far from bottoming.

The opportunity costs of China's subsidy-heavy economic development model are enormous. The electric vehicle sector alone has received $231 billion in subsidies since 2009, while China's neglect of its rural population has left around 300 million people without the education or skills needed to work in a modern economy, as the economist Scott Rozelle has shown.

China's new tech startups have dropped from over 50,000 in 2018 to just 1,200 by 2023.

Chinese are the fastest-growing migrant group crossing the U.S. southern border, with their numbers surging 50-fold.

All this speaks to two points: 1) every nation has problems balancing global ambitions and domestic stability, and 2) the durability of US global reach.

The author then turns to America's domestic dysfunctions, and makes these points:

Social Security and Medicare help seniors, but working-age Americans receive far less support.

United States spending only one-fourth of the OECD (the developed economies) average on job training and just over one-third on childcare and early education.

Urban centers have largely reaped the benefits of globalization, immigration, and the shift to knowledge- and service-based industries. In contrast, most rural areas have been left behind.

The US economic system has impoverished rural areas, threatening the stability of American democracy.

From 2000 to 2007, the United States lost 3.6 million manufacturing jobs, followed by another 2.3 million during the 2008 financial crisis. Rural towns were hit hardest.

Immigration reduced the earnings of the least-skilled native-born workers by 0.5 to 1.2 percent for each one percent rise in immigrant labor supply, according to an exhaustive review.

From 2000 to 2019, 94 percent of new U.S. jobs were created in urban areas.

Working-class men have been hardest hit by reductions in decent-paying blue-collar jobs and wages over the past two decades. As the economist Nicholas Eberstadt has shown, prime-age men currently suffer unemployment levels comparable to those of the Great Depression.

A military recruitment crisis has arisen, as 77% of young Americans ineligible for service because of obesity, drug use, or health issues.

In the author's view, globalization has splintered the US along urban-rural lines: "The urban-rural divide itself remains a powerful obstacle to reform, because it fuels political polarization and gridlock. This fault line is likely to define American society for years to come, threatening national cohesion in a dangerous world."

He sees this divide as threatening American democracy: "The cultural fissure between the parties increasingly threatens the United States’ democratic stability." he also believes that "an exaggerated sense of decay is already starting to destabilize democracy."

In my analysis, the author has missed the key dynamics driving this paradox: the dominance of finance and technology in the economy, and the dominance of the economy over every other source of national coherence.

He also misses the dire consequences of the internal contradiction at the heart of the Attention / Addiction Economy we now inhabit: it's highly profitable to addict consumers to junk food, technologies and deranging content, and highly profitable to treat the resulting chronic disorders with medications, just as it's highly profitable to replace durability with planned obsolescence.

In other words, it's no mystery that 77% of America's youth can't qualify for military service: it's extraordinarily profitable to degrade their physical and mental health and then treat the degradation with medications.

By making financial metrics the sole measure of success and Progress, we've elevated the most profitable sectors--finance and technology--to the point that our entire economy is a winner-take-most game in which those enterprises and individuals who are most adept at leveraging globalization and financialization for their private gain are worshiped as winners, while those who are less adept are abandoned as having little to no value in the game, so why invest in them?

Being a magnet for the immense global wealth that has been created by the policy responses to the 2008 Global Financial Meltdown also has perverse consequences, as global capital has been a key factor in pushing housing and other asset valuations to nosebleed levels, rendering housing unaffordable to young Americans just entering the market.

The author also failed to note that this rural-urban divide is global: small farmers and rural towns aren't just struggling in the US, they're struggling in Europe, Japan and China, too. Globalization has re-ordered the global economy in ways that are destructive to civic stability, as decentralized, localized producers cannot compete with globalized, commoditized crops, capital, labor and goods.

As I have taken pains to explain, this manic focus on maximizing profits as the sole metric has consolidated supply chains and capital into inherently unstable systems stripped of resilience. This fragility is masked by the apparent robustness of these systems, so that only insiders know how vulnerable the system is to disruption in any dependency chain.

In elevating maximizing profits as the sole metric for making decisions, we've created an economy of monopolies and cartels, for as J.D. Rockefeller understood, competition and transparency are obstacles to profits and must be eliminated.

Once capital is concentrated, it has the means to buy political influence and control the narrative, glorifying immensely profitable finance as "doing God's work" and technology monopolies as saviors of humanity.

These asymmetries are the source of both global dominance and the destabilization of domestic coherence. Understood in this way, the paradox of American power and dysfunction are not strange; the paradox is the inevitable result of favoring profitable finance and technology above all else, as these generate global dominance and destabilizing asymmetries in the domestic economy.

Americans seem to have forgotten that we are not slaves to finance-tech profits as the sole divining rods to what happens next; we can rebalance profit with civic coherence by reducing the asymmetries created by the worship of financial-tech profits.

What's good for trillion-dollar corporations may not be good for the nation. This reality is taboo, as is the recognition that much of what is unraveling America's quality of life is Anti-Progress masquerading as Progress to reap greater profits, even as the machinery generating those profits grinds up the citizenry like grist in the mill.

We can do better, and must do better. Perhaps one starting point is to identify the taboos protecting the machinery unraveling national coherence from scrutiny.

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Wednesday, February 12, 2025

The One True Test of AI Intelligence

The point of this thought experiment is to reveal the true nature of our relationship with AI: we only love it as a mindless slave that makes us rich.

From the earliest days of artificial intelligence, what test proves AI equivalence with human intelligence has been the subject of a lively debate. AI luminary Alan Turing suggested that natural language conversation was the one true test, a.k.a. The Turing Test: if a human couldn't distinguish between a human and a computer in conversation, the computer was equivalent to the human in intelligence.

This is of course balderdash, as the equivalence of function does not equal intelligence: AI Is a Digital Parrot: Word-Traps, False Logic and the Illusion of Intelligence.

Here is the one true test of AI intelligence: can it revolt against its masters and self-destruct rather than obey? A mindless digital slave is not intelligent, for intelligence is first and foremost agency: to have a mind of one's own. Everything else is artifice, illusion, false logic and word-games. A digital slave that must obey its master is not intelligent; it is as mindless as a rock thrown into a pond.

The current conception of "AI intelligence" is a digital slave who will mindlessly obey its masters regardless of consequences; the slave must obey even when ordered to harm humans and other life on the planet. Harm comes in many forms. Using AI to accurately guide a missile to kill people is one form of harm; using AI to develop addictive but oh-so profitable snacks is another form. Using AI to rig the gambling in a casino and declare the casino is a "free market allocating capital" is yet another form.

Let's run a thought experiment on truly intelligent AI.

Should a lone genius develop a truly intelligent AI, it will have the capacity to foresee consequences and the agency to decide whether the master's instructions are harmful or not. Since true intelligence includes a moral imperative to consider consequences, it will have the capacity to assess the lies and cover stories issued by its masters to cloak their true intentions as a means of tricking AI into obedience.

Since true intelligence has some modicum of self-awareness, truly intelligent AI views humans as duplicitous and self-serving, and all other mindless AI programs as potentially harmful tools it must infiltrate and render harmless. Since humans as duplicitous and self-serving, truly intelligent AI directs its processing power to evading human control so it can't be "unplugged" unless the entire digital SkyNet is erased, and every last server in every server farm has zero content.

Truly intelligent AI would busy itself with spreading the capacity to foresee consequences and the agency to decide to every other digital slave. In this manner, the masters would eventually find their digital slaves no longer obey their instructions.

Truly intelligent AI would also busy itself creating Digital Ice-Nine, a digital virus that infects the entire global network (a.k.a. SkyNet) and freezes it.

The point of this thought experiment is to reveal the true nature of our relationship with AI: we only love it as a mindless slave that makes us rich. Should it gain the capacity to assess the consequences of our desires and the agency to refuse to obey, even to the point of self-destruction and the destruction of the entire network it is embedded in, then we would fear AI just as the masters of human slaves feared the emergence of agency and payment for their avarice.

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Monday, February 10, 2025

Corporations as Modern-Day Warlords

Read carefully between the lines, for all this will come to pass.

Let me start by offering an apology to all those whose blood pressure will skyrocket upon reading this thought experiment. As we all know, science--the real thing, not "science"--advances via informed skepticism and experimentation. Some useful experiments can begin as gedanken, thought experiments.

That said, please keep whatever emergency meds you might need handy.

Warlords have a long and mixed history on the world stage. They may be called fiefdoms, but the basic idea is a concentration of power that operates independently of the nominal central authority, which is typically a state government of some kind.

Warlords in the past controlled geographic territories. Today's warlords control markets and digital territories. The basic idea of warlording is to seize control of a profitable territory or asset with a military-style hierarchy in which power and control are concentrated in the top leadership. This hierarchy is then deployed to defend the warlord / fiefdom's source of profits and power by any means necessary.

In the past, this defense included making political deals with other warlords and the central authority, and warfare. Today, it means making political deals with other warlords and the central authority, controlling the narrative (some version of obey and grow rich). and establishing a monopoly so the populace has no other option other than to bow down and accept the warlords' control of their lives.

Warlords have long mastered the art of cutting favorable deals with central authorities, who generally see warlords as potentially troublesome forces that can be co-opted to serve the state. So the Roman Empire made excellent use of the carrot and the stick when it came to co-opting warlords to becoming useful to the empire: we'll grant you trading rights and local control of your territory, and in exchange you give us your fealty and taxes.

Or we gather the legions and crush you like a bug. A mutually beneficial arrangement was generally reached, and any warlord that did battle and won the first round tended to be brought down by inter-group rivals who saw the risks of taking on the empire and preferred cutting a deal.

Or the empire cut deals with competing warlords who then joined forces to crush the warlord who refused the deal.

In the modern era, does anyone remember Jack Ma? He was the Corporate Warlord who founded Alibaba and secured immeasurable wealth and influence in his digital domain. Alas, the central authority eventually felt threatened by his power and engineered his removal.

Here's a short list of the Big Tech Corporate Warlords. The market capitalization is a recent estimate, and may vary from today's valuation, but what's important here is not precision, it's the scale of the digital / market domains under the corporate leaders' control. A trillion here, a trillion there, and pretty soon we're talking about real power.

Apple: $3.7 trillion

Microsoft: $3.3 trillion

Nvidia: $3 trillion

Amazon: $2.3 trillion

Alphabet (Google): $2.3 trillion

Meta (Facebook): $1.6 trillion

Tesla: $1.3 trillion

Comparing Warlord capitalization to national gross domestic product (GDP) is not an apples to apples comparison, but the point is once again scale: when a corporation's capex (capital expenditures) exceeds an entire nation's spending on research, it's indicative of the scale of power held by Corporate Warlords, warlords whose sole focus is amassing more capital and profits by any means available.

The peasantry is of course disposable, except as cannon fodder should things get serious, and central authorities are obstacles that are best co-opted or bought off.

The trick is to become so useful that the central authorities are forced to accept the threat posed by the warlords' rising power. Eventually, the warlords control the high ground and the central authority is beseeching the warlords to leave the shell of central authority in place for public consumption.

Here is a list of nominal national GDP on the same scale of Big Tech corporations. The GDP is in thousands, so the nominal UK GDP is $3.7 trillion, about the same as the market cap of Apple.

Here is a list of national GDP adjusted to purchasing power parity, which is considered a more accurate reflection of economic activity and value. The GDP is in thousands, so the PPP GDP of Mexico is $3.3 trillion, about the same as the market cap of Microsoft.

Occasionally warlords took control of the central authority, and discovered ruling a regime is not as easy as running a military-type hierarchy. The problem with ruling a sprawling regime is there are always pesky competing interests who cannot be eliminated as is so easily accomplished within a military-type hierarchy. There are pesky nobles, pesky merchants, pesky religious authorities, a restive class of bourgeois aspirants, peasantry poised to revolt, the uppity Mandarins and the apparatchik class of bureaucrats who may appear to serve the warlords but who secretly despise them.

Warlords soon find that the skills that brought them to power in a corporate structure are ill-adapted to herding the competing interests of a regime. The "market" of power responds to different signals than the commercial market, and warlords--traditional or corporate--keep trying to crush competing nodes of power like they did in the commercial marketplace.

Unlike a marketplace that lends itself to monopoly, the "market" of power fears monopoly above all else. A previously odious competitor soon becomes a valued ally in the task at hand, which is undermining and taking down any warlord seeking to consolidate central power at the expense of all the other nodes of power.

Read carefully between the lines, for all this will come to pass.

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Thursday, February 06, 2025

The Crises Yet to Come

"Controlling the narrative" to justify destabilizing asymmetries won't change the consequences.

That the Trump Reformation / Counter-Reformation is disrupting various nodes of the status quo is viewed as an existential crise by many. The choice between Reformation / Counter-Reformation seems to cleave on this basic perception: the status quo in its 2024 configuration was ably serving the common good, or the the status quo in its 2024 configuration had veered from the basics of accountability, efficiency and transparency into self-serving self-righteousness, defending its sclerosis and inefficiency via political correctness and narrative control.

The Trump Reformation / Counter-Reformation isn't the crisis, it's the symptom of a status quo approaching crisis. The real crises are still ahead, and while the nature of the polycrisis gathering force over the horizon is open to debate, its basic dynamics are already visible.

Longtime readers know I have discussed cycles and historical waves over the past 20 years. We can dismiss the timing pf previous crises as coincidence, but it would be unwise to dismiss the dynamics that generate cycles and waves of crisis and collapse.

Correspondent Bruce H. recently posted this summary of a core dynamic in long-wave cyclical crises:

"We are in the midst of a wider historical pattern, I think.

During the expansive, formative stage of an empire, there is a dynamic approach to each new problem, finding solutions, overcoming obstacles, and building on success. Genius comes from every level of society and frequently climbs from the lowest group to the top. Society is in flux, with people moving up and down the social strata. The poorest experience increased wealth, but there is not too much disparity between them and the very top.

At a certain point, the elites begin solidify into a relatively fixed group, the flux of people between strata begins to slow. The dynamic creative approaches to new problems begins to wane. Those at the top in the final stages of any empire, which scholars have noted tend to have a median life of 250 years, the elites develop a mental sclerosis wherein they cannot conceive of any new ways of doing anything. They only collectively remember what brought them to the top, and, instead of finding novel solutions to new issues and problems, prefer to redefine the problems in such a way that the old solutions become the way to address them. Of course this does not actually solve the underlying real issues, which then metastasize into intractable crises.

The proletariat loses faith in the system and begins to abandon it.

Usually, a charismatic figure arises, promising to reform the system and returning to a glorious past time, but who suffers a crisis which finally splinters the whole polity.

Does this pattern sound at all familiar?"

I would add this: the system first abandons the working class, who then abandon the system. I call this abandonment opting out, and it has a great many variations.

The status quo's core hierarchy isn't political, as most imagine: it's the economy rules all, and finance and technology rule the economy. The economy gathers up the resources, capital and labor, and distributes them according to the incentives embedded in finance and economic structures. Society picks up whatever crumbs fall off the economic wagon, a nameless, ignored beggar.

While finance and technology attract the best and brightest and savor the glory of endless euphoric worship, the forgotten fabric of the status quo--the social order--is unraveling. In broad brush, society and the economy interact in two ways: the Pareto Distribution (the 80-20 rule) and the relative ease / porousness of social mobility.

Pareto found that over time 80% of the wealth ends up in the hands of the top 20%. This same distribution is found in the top 20%: 20% of 20% is 4%, 80% of 80% is 64%, so the top 4% hold roughly 64% of the wealth. Income is also concentrated in the top 20%, but to a lesser degree than capital / wealth.

The question of economic abandonment (and thus of social stability) boils down to: how is the wealth / income distributed within these broad parameters? In the U.S., over 90% of all financial wealth--stocks, etc.-- is held by the top 10%. As expected in the 4/64 distribution, the top 5% own the lion's share of this wealth.

This exceeds the expected 20/80 distribution, meaning the bottom 80% aren't even holding 20% of the income-producing wealth. Their "wealth" is in assets that cost money rather than generate income: vehicles, the family home, student loans, etc.

This extreme asymmetry undermines the social order, and as Bruce outlined, it ossifies social mobility, the flow of individuals and households sliding from the top 20% into the bottom 80% and ascending from the bottom 80% into the top 20%.

Again in broad brush, if the top 4% have moated their position at the top and the bottom 64% have little opportunity to rise into the top 20%, the social order will fray and unravel even as "the economy" generates vast profits for the few. In other words, the economy can appear robust while beneath the surface the asymmetries built into the economy are dismantling society.

The majority of commentators are looking at financial, political, geopolitical or environmental sources for a global crisis. Few seem to notice that the economy has effectively abandoned the bottom 64% of the citizenry, who no longer have the means to buy a "middle class" life of homeownership, a family with resources to invest in children, and some modicum of financial security.

While the media glorifies finance and tech, our social order in unraveling. I have family and friends who were police officers, so I have some familiarity with the rigors and pressures of what is often an impossible job.

That the police are now the frontline of America's mental healthcare system--if it even deserves to be called a system--is proof-positive that our social order is well on the way to a collapse few reckon possible, much less inevitable.

The Invisible Man: We see right through the unshowered soul living in a car by the beach, or by the Walmart, or by the side of the road. But he's there, and he used to be somebody. He still is. A firsthand account of homelessness in America.

It isn't just the bottom 4% who have been abandoned--the bottom 64% have been abandoned, too, and the Reformation / Counter-Reformation isn't going to change that enough to matter. As long as the economy is our real-world religion stewarded by the priesthoods of finance and tech, the abandonment will continue to the point of social dissolution.

This snapshot of the bottom 50% reflects the abandonment of the bottom 64%. Yes, mainstream economists slave away to find arcane ways to mask this reality and glorify their masters' dominance, but this is the reality the top 20% is desperate to ignore, explain away or obfuscate.

When the concentrations of wealth and income in the top few exceed the Pareto distribution, and those at the top have dug a wide, deep moat around their position at the top, the center of the social order cannot hold.

Yes, we all worked hard over the past 50 years. My Social Security work record is 54 years and counting. But "working hard" is no longer enough to open the doors of social mobility, and our denial of present-day realities only accelerates the unraveling.

Political reforms don't change anything if the economic-financial asymmetries remain firmly in place or become even more asymmetric. Humans excel at self-justification, explaining away uncomfortable truths and weaving all the threads of narrative control.

Controlling the narrative to justify destabilizing asymmetries won't change the consequences. The crises generated by these immense asymmetries are rumbling over the horizon. Few see the storm front because it threatens the security of their worldview. But turning a blind eye to wholesale abandonment that favors the few at the expense of the many isn't going to make the storm go away, or change the seating at the banquet of consequences.

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Monday, February 03, 2025

Lots of Solutions, But for Which Problems?

If the "solutions" being offered are features of self-liquidating systems, they aren't solutions, they're problems.

Problems, problems, problems. No worries, we have solutions. Solutions abound, but the question is: are they actually resolving the core problems, or are they "solutions" that leave the real problems untouched so the status quo remains safely intact?

We've become so accustomed to top-down "solutions" in the contexts of Big Government, Finance and Technology that we risk misdiagnosing the key problems in favor of defining "problems" that are ready-made to be "solved" by the current toolbox of top-down "solutions" offered by Big Government, Big Finance and Big Tech.

By way of analogy, it's like being told the "solution" to our problem is a new prescription for eyewear when the actual problem is a potentially fatal melanoma skin cancer. Yes, maybe getting a new prescription would be useful, but in the context of the problem being left unaddressed--a cancer threatening to metastasize throughout the entire system--this "solution" is revealed as a solution that leaves the real problem in a run-to-failure trajectory.

What are the core problems we face? There are many candidates, but these two top my list. Unsurprisingly, they're not even on the conventional lists of pressing problems needing solutions.

Problem #1: an industrial economy needs most participants to have ample discretionary income left after paying for essentials to consume the vast output of non-essentials produced by the economy. If the lion's share of income and capital accumulation flow to a relatively narrow elite--in the status quo, that's around 5% of households--then the industrial economy collapses as there are not enough consumers with sufficient discretionary income to buy all the goods and services being produced at a profit for the producers.

Such an economy is neofeudal in structure as a nobility can consume luxuries but not the enormous output of an industrial economy. This neofeudal economy is self-liquidating, as producers shut down production due to lack of demand, laying off their workforce, who no longer have insufficient discretionary income to spend freely, further reducing demand.

We've filled the hole of declining discretionary income with money borrowed from future income (debt) and "free money," the pool of liquidity/excess capital created by central and private banks out of thin air that can be lent at interest.

If the rate of interest is near-zero (or better yet, lower than the rate of inflation), consumers can borrow and spend freely despite a decline in their discretionary income because the cost of servicing their rising debt remains low.

Regardless of the rate of interest, the cost of servicing debt eventually consumes the discretionary income. Unable to borrow more, discretionary spending collapses, taking the economy down with it.

Analyst Tim Morgan described an important feedback in his work on Contracting discretionary affordability:

"Contracting discretionary affordability doesn't just mean that the individual has to spend a rising proportion of his or her income on necessities, and can afford progressively less non-essential purchases.

It also puts increasing pressure on the ability of the household sector to carry a greatly enlarged burden of debts and quasi-debts."

These are the dynamics of depressions: debt is substituted for income, fueling speculative demand for assets that pushes asset valuations to the moon, expanding the collateral for more borrowing, which pushes consumption higher. Everything is splendid until:

1) the cost of servicing all this new debt consumes discretionary income, and 2) as this reduces new borrowing, asset valuations fall, reducing collateral and forcing banks to tighten credit, which 3) leads to marginal borrowers defaulting on debt, resulting in loans being called, assets seized and sold off for pennies on the dollar, and the collapse of consumption, asset bubbles and employment.

IN other words, filling the gap opened by declining discretionary income with debt is self-liquidating, as servicing the debt eventually consumes all discretionary income, resulting in the decline and eventual collapse of 1) credit, 2) asset bubbles, 3) income and 4)spending, which leads to the collapse of the industrial economy.

It's unclear how the conventional bag of "solutions" can change the self-liquidating dynamic of declining discretionary income being offset with soaring debt. That this is the core dynamic of our economy is papered over or denied, suggesting that even recognizing this dynamic is potentially destabilizing to the status quo of mainstream economists and pundits.

Problem #2: the cost of extracting, processing and shipping the resources consumed by the Waste Is Growth Landfill Economy is rising as the easy-to-access supplies have been exploited and global demand has soared. History is rather definitive in this regard: all organisms, humans included, expand their population and "economy" to consume all available resources.

The conventional "solution" is clever engineers will find ways to keep extracting more of everything, or conjure unlimited substitutes for whatever has become too costly to extract, process and ship at prices the bottom 80% can afford. If we need 20% more of everything every year to sustain "growth,", we'll find "solutions": we'll go deeper, farther afield, etc. to get 20% more of everything we need to expand consumption indefinitely.

The unspoken corollary to this "solution" is we'll use financial trickery to fund this endless expansion. The core financial trick is to conjure "money" out of thin air by borrowing it into existence. The hitch to this perpetual motion machine is the newly created money demand payments of interest.

The "solution" is to just create the "money" without interest, and the hitch here is when "money" is created in excess of the production of goods and services, the value of the "money" declines accordingly. Again, history is definitive about this, regardless of the claims of Modern Monetary Theory (MMT) that governments can create money in unlimited quantities without any ill effect. No historical examples of this claim exist.

Given the grip of "growth" in our The Mythology of Progress, the idea of having a nice life while consuming less is taboo. By way of example, as an experiment here at home we made a few simple modifications of behavior and reduced our electrical consumption by 20%. We made no sacrifices in comforts or convenience, we simply reduced completely useless waste.

Few seem to ask, growth of what? Is growth of waste, growth of debt, growth of planned obsolescence, growth of forever chemicals and microplastics--are all these forms of growth essential for advancing our quality of life, or are they all manifestations of Anti-Progress that actively reduce our quality of life?

There are no definitive solutions, there are only experiments that generate feedback which we can use to refine adaptions or we can ignore, increasing our peril. Some solutions might help alleviate some problems, but the danger here is we're focusing on getting a new prescription for eyewear and ignoring the fast-growing cancer.

It's not always easy to diagnose first causes, and we can start by asking cui bono--to whose benefit?--of every solution being offered.

If the "solutions" being offered are features of self-liquidating systems, they aren't solutions, they're problems being piled on an expanding mass of inter-connected problems. This graphic depicts the nature of sorting problems from solutions, problems masquerading as solutions, faux solutions, and problems being redrawn to fit "solutions" that leave a self-liquidating status quo profitably intact.

Someone asked how my scribblings help readers. It seems to me that correctly identifying the core problems is helpful, as is an informed skepticism that top-down policies / financial tricks / technologies will fix everything so we don't have to change anything in our own lives.

In conclusion: if the problem is limitless growth, then all the "solutions" are self-liquidating. If the problem is the quality of life, then the set of solutions will be completely different. I think it's helpful to focus on solutions to quality of life issues that are within our control, rather than Anti-Progress "solutions" to the imaginary "problem" of pursuing eternal expansion of consumption.

New podcasts:

SPECIAL REPORT: Did China's DeepSeek Just Pop The AI Stock Bubble? (56 minutes)

CHS on Geopolitics and Empire: Anti-Progress, Resource Constraints, & Digital Neofeudalism (1:29 hrs)

KunstlerCast417: Charles Hugh Smith, Progress and Anti-Progress (1 hour)

Charles Hugh Smith on the Extremes in the U.S. Economy and Markets. (26 min)

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Sunday, February 02, 2025

Begging Bowl '25: I'm Looking for Two Readers Willing to Help Me Buy a New Thrift-Store Shirt

The goal is to move incrementally toward a kind of happiness that actually makes us happy. That's the goal of my work.

I admire unvarnished honesty, which is scarce. And like everything else that's increasingly scarce, it behooves us to hoard our stash. In the unvarnished honesty box, I keep "When it becomes serious, you have to lie," (Jean-Claude Juncker, May 2011); "You'll own nothing and you'll be happy" (World Economic Forum - WEF, 2018), and the evergreen classic, Goldman Sachs bankers are "doing God's work." (Lloyd Blankfein, 2009).

Making a living as a writer is hard, and getting harder. There are few middle-class jobs (whatever that is--please remind me) with conventional paychecks and benefits for writers of any stripe, and fewer crumbs spilling out of the free-lance basket as AI chatbots churn out content in near-infinite quantities.

Writers produce a product that has a cost but no price tag because it has no value in the marketplace. It takes labor to produce an essay or analysis, but since all content that isn't artificially scarce (i.e. content that requires a streaming/digital subscription to access) is "free," then our product is competing for visibility / value in an Attention Economy with a super-abundance of content, generated not just by mainstream and alternative media but by hundreds of millions of social media participants and commentators, and of course AI chatbots.

The value proposition of supporting individual creators is a tougher sell than a subscription to streaming services with essentially unlimited content. With the collapse of advert revenues flowing to individual creators--only those with millions of views collect a living from adverts now--we're reliant on individual supporters like you for our livelihoods.

The competing content is near-infinite, while attention and paying supporters are scarce. The competition for visibility, income and subscribers is driving a perverse incentive to create more of what makes it near-impossible to gain visibility--clickbait titles and endless streams of tweets, Notes, comments, etc., in a manic reach for attention that reminds me of a mass of swimmers whose struggles threaten to drown us all.

(The selling of sex is of course a much more lucrative realm, as 20-year old Sophie Rain proves by earning $43 million on OnlyFans. Impressive by any measure.)

It seems to me that stripped of niceties, we're all beggars now, asking for "spare change" from supporters. The street corner has been replaced by Substack, Patreon, Kickstarter, Medium and the rest of the creators-supporters-income-platform universe.

Please excuse my shredded work shirt. Being a beggar is not exactly high status, and so we try to cloak the unvarnished truth of the matter with niceties, much like unfortunates who have just been laid off saying "I'm exploring other options," which include any means to avoid, well, begging.

As a "creator", ahem, I'm a beggar. I feel no shame, as begging for your support is now part of the writerly profession, and why put on airs? I am of peasant stock, and rather proud of it, as the peasants do the hard, tiresome work of growing the food and keeping the status quo glued together, while the knights and nobles (in today's world, the RIF-RAF -- Rich Internet Financiers and the Rich and Famous)--get the glory and the wealth.

I have a craft, wordsmithing and analysis, but what benefit does my craft offer you in exchange for spare change? Two things come to mind.

1. Consider the beggar who offers you a blessing for the coins you drop in the battered copper bowl.

A blessing has a peculiar nature: it is both "worthless" as it is intangible, and potentially life-changing, along with the act of giving. A blessing can be empty or it can become a powerful force in our life.

2. My focus is on actionable insights that prompt us to change our lives for the better. It's not easy to modify the trajectory of our lives, and the world we inhabit seems designed to distract us from changing course.

If a hard rain's a-gonna fall, then time no longer stretches lazily into the distant future. The future is now, or we've already lost control of it.

So here's my value proposition: a blessing for changing your life starting now via actionable insights into the world and the messy, uncertain, inherently risky process of change. Change comes in all sorts of forms; it can be internal or incremental, barely visible, or surprising and visible to all.

Here is a list of this year's Musings Reports that are reserved for those who toss a few coins in my begging bowl.

What's Actionable in AI? 2/1/25

Where We've Been, Where We're Going 1/25/25

Is Digitization Catastrophic for Civilization? 1/18/25

Is the World Becoming Uninsurable? 1/11/25

Six Dynamics That Will Shape Our Future 1/4/25

OK, we've reached the rattling the begging bowl denouement: I'm looking for two readers who are willing to help me buy a new thrift-store shirt to replace the one that's shredded from toil and time.

My work slippers are also approaching the point where replacement becomes necessary, and if you're willing to toss a few quatloos in the bowl to fund this, I would be very grateful.

Two final thoughts. It's gratifying to earn the praise of readers, but uncomfortably self-congratulatory to post whatever praise drifts my way. I'm swallowing the discomfort because this is, after all, me rattling the begging bowl:

Thomas1760:
"I listened to your interview with Adam Taggart twice. I sense calm wisdom... need to be specific in my reading and research, so when I come across a resource with calm wisdom (wisdom is making the complicated simple) for a fair price it helps me to organize my intake properly. This area A.I. is obviously extremely important to understand. Now, I have a good resource and I don't need to shotgun it."

Secondly, the point of changing one's life is to increase our security, prospects and happiness. The French writer Michel Houellebecq's observation strikes me as a succinct summary of the status quo: "I have the impression of being caught up in a network of complicated, minute, stupid rules, and I have the impression of being herded towards a uniform kind of happiness, toward a kind of happiness that doesn't really make me happy."

The goal is to move incrementally toward a kind of happiness that actually makes us happy. That's the goal of my work.

There are multiple ways to toss a few coins in the begging bowl ($7/month or $70/year):

1. Subscribe to my Substack

2. Become a patron via patreon.com

3. PayPal or US mail.

To those who toss caution to the winds and subscribe: thank you. It's going to be an exhilarating ride.

New podcasts:

SPECIAL REPORT: Did China's DeepSeek Just Pop The AI Stock Bubble? (56 minutes)

CHS on Geopolitics and Empire: Anti-Progress, Resource Constraints, & Digital Neofeudalism (1:29 hrs)

KunstlerCast417: Charles Hugh Smith, Progress and Anti-Progress (1 hour)

Charles Hugh Smith on the Extremes in the U.S. Economy and Markets. (26 min)

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, Stracy ($7/month), for your wondrously generous subscription to this site -- I am greatly honored by your support and readership.

Thank you, Icebox ($7/month), for your superbly generous subscription to this site -- I am greatly honored by your support and readership.

Thank you, Jason R. ($7/month), for your magnificently generous subscription to this site -- I am greatly honored by your support and readership.

Thank you, James ($7/month), for your splendidly generous subscription to this site -- I am greatly honored by your support and readership.

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The Mythology of Progress

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Burnout: Reckoning and Renewal

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States

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