Sunday, December 06, 2020

Covid Is Toppling America's "Points of Failure" Dominoes

Sorry Fed, it's too late. The dominoes are already toppling, and every point of failure is being exploited by the catalyzing effects of Covid.

America's many points of failure--leverage points where a break brings down the entire system--are falling like dominoes, a process catalyzed by Covid. These systemic points of failure have been masked for the past 20 years by the widespread distribution of trillions of dollars, either printed or borrowed.

There's no point of failure that can't be glued together or covered up a bit longer with fountains of cash. That's the American way of solving problems: just throw more money at it.

Unfortunately for America, substituting borrowed trillions for real problem-solving generates its own set of problems, problems that increase the system's vulnerability to collapse. Healthcare / sickcare is a leading example of this: as the corruption, pay-to-play and profiteering deepened, the federal government's endless borrowed trillions boosted healthcare / sickcare from 5% of the nation's economy to roughly 20% today.

Covid Is Revealing the Cancerous Underbelly of U.S. Healthcare.

As I've noted for a decade, this has created an enormous fragility: healthcare is now so immense that it will bankrupt the nation all by itself. (see charts below) Once the corrupt, pay-to-play, profiteering sectors such as healthcare and banking become "too big to fail," then the Federal Reserve and Treasury are obliged to bail them out or continue funding their spiraling-out-of-control demands.

Speaking of "too big to fail," look at the voracious monster the Fed's endless monetary goosing has incentivized--a financial system addicted to Fed "free money," soaring debt, accelerating leverage and near-infinite speculation.

Given that the Fed has effectively promised to backstop all of Wall Street's bets, bail out every major player and never let the stock market falter for longer than three weeks, the Fed has created this incentive structure: there is no risk at all in borrowing billions, leveraging it into tens of billions and then dumping these multiplying billions into the most speculative bets available.

And so that's what every fund manager, hedge funder, punter, gambler and guru has done, and been richly rewarded for doing so.

There's just one tiny little second-order consequence of the Fed's incentivizing debt, leverage and speculation: wealth and income inequality have reached such extremes that they've unraveled the social order. Social cohesion: gone. The social contract: shredded. Social disorder: in the first inning of a very long game.

Now the Fed is backtracking while it laughingly claims its policies didn't have anything to do with America's skyrocketing wealth/income inequality. That the Fed is well aware of the destructive consequences of its endless quantitative easing is evidenced by their recent proposals (FedNow) to start sending "free money" directly to households via a new system of household accounts at the Fed. (Look for an initial rollout by 2022.)

Sorry Fed, it's too late. The dominoes are already toppling, and every point of failure is being exploited by the catalyzing effects of Covid, either first-order or second-order effects. Every weak point--corruption, incompetence, bureaucratic sclerosis, self-serving insiders, counterproductive complexity, regulatory thickets, clinging to the past, and most especially doing more of what's failed spectacularly--will give way, bringing down existing systems with a momentum that will surprise all those who thought every system in America was rock-solid and forever.

Two words will define 2021: acceleration and amplitude. The catalyzing effects will accelerate throughout all the interconnected systems like wildfire and the consequences will move rapidly from linear (predictable) to non-linear (geometric, unpredictable) as each weakness is amplified by the self-reinforcing dynamics unleashed as every point of failure triggers another failure in a connected system.

If you still believe that America's systemic points of failure are endlessly sustainable, please study these four charts and extend the trendlines.









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