Posted on 05/30/2021 4:25:11 PM PDT by blam
That the era of stability has ended and a new era of increasingly chaotic volatility has begun is not on anyone's radar as a possibility.
The standard debate about the future of the economy is: which will we get, high inflation or a deflationary collapse of defaults and asset bubbles popping?
The debate goes round and round in widening circles of complexity as analysts delve into every nuance of the debate.
A recent conversation with my friend A.T. raised a third possibility few seem to consider: increasingly chaotic volatility will be the new normal, as wild swings between inflation and deflation will increase in amplitude and ferocity as the system destabilizes.
Increasingly chaotic volatility is a classic sign of a system that has lost equilibrium and is attempting to regain its dynamic stability by going into overdrive.
The amplitude and violence of these fluctuations increase as each attempt to restore stability fails.
This loss of stability is not what people expect. The experience of the past 60 years has been that any hiccup in financial stability--a recession or market crash--is temporary, as the system responds with monetary and fiscal stimulus which quickly restores the system's stability.
That the era of stability has ended and a new era of increasingly chaotic volatility has begun is not on anyone's radar as a possibility.
Human physiology offers a useful analogy: blood glucose homeostasis, which is the system of insulin production and sensitivity that maintains the dynamic stability of glucose in our bloodstream for use as energy.
Insulin is produced as needed after a meal to regulate the level of glucose within the ideal bandwidth of homeostasis, i.e. the range of dynamic stability that optimizes insulin production and glucose levels. (3.5 to 5.5 mmol/L or 70 to 130 mg/dL)
In metabolic disorders, the body's sensitivity to insulin declines, and in response the body increases the production of insulin to compensate for the decline in sensitivity.
As the disease progresses, sensitivity drops further, forcing the production of insulin into overdrive. Eventually this overdrive degrades the body's ability to produce insulin and the regulatory system managing glucose levels crashes.
In the economic analogy, the system is responding to the decline of surpluses and efficiencies by pumping ever larger sums of new money into the system as quantitative easing (financial stimulus) and fiscal stimulus (more federal spending funded by borrowing).
Lower interest rates are intended to stimulate more private borrowing, another form of stimulus.
The initial massive dose of financial insulin has created enormous asset bubbles and a frenzied rush to restock inventories depleted during the pandemic.
The conventional media is echoing the Federal Reserve and other authorities who claim the resulting spike of inflation is temporary and will soon fade. Other analysts fear the scarcities are not transitory, as they reflect depletion of real-world resources that cannot be overcome by injecting more insulin (money) into the system.
Meanwhile, other analysts are looking at the skyrocketing leverage in the system, where million-dollar speculative bets are leveraged into billion-dollar bets that cascade into crashes and defaults when the bets go bad.
Leverage is difficult to assess as much of it is in the shadow / off-balance-sheet banking system, where exotic financial instruments are buried deep in footnotes and even experts have trouble unraveling the complex bets embedded in CDOs and various multi-party swaps.
So we have all the necessary ingredient for both inflation and asset-debt deflation, and this is the backdrop for the binary debate of inflation or deflation.
But perhaps the future is not one or the other, but a rapidly destabilizing system that will become increasingly prone to semi-chaotic swings of ever greater amplitude as regulatory agencies (central banks and Treasuries) attempt to flood the system with enough insulin to restabilize debt / leverage / asset prices that are increasingly desensitized to conventional stimulus.
As each new flood of stimulus pushes debt, leverage and assets higher, it further desensitizes the system, setting the stage for yet another collapse of speculative leverage, which then prompts an even larger flood of monetary insulin, which then triggers an even more dramatic crash when then causes an even large dose of monetary insulin, and so on until the system crashes.
Eventually the monetary insulin has none of the desired effects, and the mechanisms for producing more insulin (money) break down as well.
In other words, both critical mechanisms break down: the economy no longer responds to new injections of stimulus and the issuance of money no longer functions as desired.
As the financial system loses stability, injecting more monetary insulin only pushes the system further into chaotic volatility.
For three generations, the Warren Buffett investment strategy worked wonderfully: just buy Coca-Cola etc. and never sell. We see this same mindset in the never sell crypto, diamond hands of the current speculative mania.
(snip)
I’ll admit, I am, and have been for some years damned fearful of this, but beginning in January 2020 and culminating in the stolen election, I am in no way sanguine about any future.
I cannot see how not having fair elections and spending $6 Trillion dollars we don’t have isn’t going to completely and totally wipe out my life’s savings and plunge the entire world into anarchy when we fail.
But the vast majority of people think tomorrow is going to be just like today, and that disconnect fills me with dread.
Let us see...The Democrats wanted everyone to live in a house. The situation fell apart. Mr. Obama became President. All sorts of money was printed. Inflation was a serious fear. Democrat insanity is the new normal. Yes, you heard it here. Insanity is now the method of operation. With regards to the stock market. Sell at a peak. Wait for the lower prices. Buy in at 10 or 20 percent lower and wait for another peak. Sell at another peak. The Democrats are giving us birthday party food. Get jazzed up with cake and ice cream and be up. Then crash and be down. Just get accustomed to the roller coaster and keep the day job.
I keep my day job. I put my head down and work. But I am becoming increasingly disengaged from things outside work and home.
I am a student of history, and I know how this story of weakness (inviting aggression) corruption, and hyper-spending of paper money ends.
I can’t brainwash myself and take solace in the fiction that...oh, this is going to work this time.
I know what food comes out like when it is cooked with this recipe.
“I cannot see how not having fair elections and spending $6 Trillion dollars we don’t have isn’t going to completely and totally wipe out my life’s savings and plunge the entire world into anarchy when we fail.”
Just remember that ultimately, there are a lot of liberals who will be hurt enormously if inflation etc. starts erasing assets. When they start to hurt, the leftists in power will acquiesce to them - because they need their votes and their money.
Good post. I completely concur.
The insane thing is...
The policies we as conservatives espouse such as the 1st and 2nd Amendments, focus on law and enforcement, school choice, lower taxes, etc. benefit everyone including those who oppose us tooth and nail.
Their policies hurt EVERYONE including the supporters of such policies except perhaps the “upper party members”.
Perhaps I make a poor analogy, but the situation reminds of the wars in Europe. The Napoleonic wars were devastating for almost 20 years as empires fell and national boundaries changes and casualties were high. But Napoleon was defeated at Waterloo in 1815. After that, Europe had some wars but they tended to be quick, small affairs, sometimes in distant places (Crimea). There was period known as the Long Peace and Europe was quieter than it had been in a long time.
WWI broke out in 1914 and it changed everything. Millions died and Europe was never the same. The current topic is financial, but financial problems sometimes bleed over into military problems. This thing is going to snowball.
When our current system collapses, things will be bad beyond imagining.
I am a student of history, and I know how this story of weakness (inviting aggression) corruption, and hyper-spending of paper money ends.
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Then you are familiar with the decline of Rome. We are, in many instances, going down that same road. In fact, the parallels are strikingly similar.
When complex systems break down its usually in spectacular fashion. Just sayin.
The current topic is financial, but financial problems sometimes bleed over into military problems. This thing is going to snowball.
When our current system collapses, things will be bad beyond imagining.
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Our national social fabric is on tatters. We don’t seem to have any standards, national purpose, trust in our political system, or unity anymore, none of which bodes well for our future. I tend to agree that the path we’re on is one of national descent.
Some say we might end up WROL (without rule of law). There will be laws, but not ones we like.
The U.S. Debt clock is being manipulated. Wasn’t but a few weeks ago, total unfunded liabilities reached $162.8 Trillion...today, the debt clock records it as $148 Trillion.
National debt has been ticking below $28.5 Trillion for quite some...and appears to reset, keeping it below the $28 Trillion mark.
We are never going back to the old normal. What is happening here and around the world is the process of the reawakening which we are in the middle of now. Going from dark to light. Donald Trump knows that the best is yet to come but we are going to suffer a near death experience first because that’s what it will take to wake some folks up.
and yet to take money out and have to pay taxes on it....yikes.....
There are a lot of parallels.
I have read Edward Gibbon’s classic “The Decline and Fall of The Roman Empire”, and it is discouraging to make that comparison.
I certainly would like to think we are going to go from Dark to Light in my lifetime, but I am guessing I have a relatively short time left on this earth.
I would definitely rather see a transition from Dark to Light, but I suspect that a Dark to Darker period is oncoming.
And boy, would I ever like to be wrong.
About a year ago I started watching lots of documentaries on the rise and fall of the Roman empire. It is appearing that our decline may be much faster than Rome’s was.
In this age of ours, one certainty is that everything is going to happen faster.
I sometimes cannot believe the changes I have seen in my lifetime.
Some good.
Some bad.
And it is the bad ones that really shake me up.
We’re in for some rough times. Find a safe and sane place to live, get rid of your debt and in general simplify your life. Its going to get ugly fast because we have weak, corrupt, and unprincipled leaders. That kind of thing won’t end well.
Our national dysfunction will lead to increasing societal unrest, economic instability, and certain dangers from foreign threats. A storm is brewing.
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