The Forgotten Skill of Frugality
Charles Hugh Smith, in his blog OfTwoMinds, discusses the importance of frugality as a skill in the future. He warns of systemic dynamics that are resistant to technological or financial manipulation, and predicts that a hard rain is about to fall.
Understanding the Credit-Business Cycle
Smith explains that the credit-business cycle has been postponed for the last 15 to 24 years. The last real recession, a natural contraction of credit and risk-taking that drains the economy and financial system's excesses over several years, happened 43 years ago in 1981-82.
The method used to delay this necessary purging is moral hazard, where risk is disconnected from consequence due to unprecedented central bank monetary stimulus and central state fiscal stimulus. The result is that risk and debt excesses are rewarded and expand to even more precarious heights, ensuring a more destructive downturn than if the system had been allowed to fully reset in 2000-02 and again in 2008-09.
The Reversal of Financialization and the Collapse of the Everything Bubble
The commoditization of credit, leverage, and speculation is beneficial when first introduced to a credit-starved economy. However, once the productive investments have been made, financialization continues expanding into extremes of debt, leverage, and speculation.
Central banks have kept the expansion going by dropping interest rates to zero, allowing borrowers and speculators to borrow more with the same income. This credit expansion boosted asset values to extreme valuations as all this new "money" chased a limited quantity of assets. The credit-asset bubble increases the value of the collateral, which then supports additional borrowing.
The resulting extreme of wealth-income inequality has social repercussions that are not yet fully realized, but the pressure on those left behind is increasing.
The Reversal of Globalization
Central banks were given the one-time luxury of lowering interest rates to zero by one dynamic: the emergence of China as the global exporter of deflation and a new "credit impulse." As developed economies shifted production to China, costs declined and profits soared, fueling the stock market bubble and offsetting the inflationary pressures generated by expanding credit and fiscal stimulus.
However, China has now matured to the point that it no longer exports either deflation or the credit impulse. Now the inflationary pressures of expanding credit and fiscal stimulus are not being offset, so they're finally manifesting globally. There is no replacement for China's one-time gift of deflation and credit expansion, and so inflation and interest rates will rise.
The Limits of Scale
The latest technological advance on the lab bench rarely scales up. Even when a new technology may make financial and practical sense, the time and money required to scale it up to useful levels are significant.
The Downsides of Centralization
Profit optimization has relentlessly driven centralization on every scale. A handful of corporations dominate every sector, and facilities are geographically centralized, inherently increasing the risk of "normal accidents" triggering catastrophic losses.
Climate Extremes
Setting aside the debate about causal factors, the increasing number and intensity of weather extremes globally are placing agriculture and infrastructure at greater risk of cascading, non-linear avalanches of consequences. Centralization adds to these risks.
The Bottom Line
Adding all these factors together, we have a recipe for a global recession in which inflation and interest rates rise, The Everything Bubble pops, possibly violently, the wealth effect vanishes into thin air, consumption plummets and job losses soar.
Our hubristic faith in the god-like powers of technology and central banks creates an illusion that the credit cycle turning is the result of a "policy error," when in fact it's just the way systems function. We've created extremely fragile, centralized systems optimized for profit, and operated on the false premise that all systems are infinitely controllable given the right technology or policy.
The result of our hubris is that the turning of systemic cycles will be more disruptive and painful than was necessary, as a direct result of our attempt to manipulate the system to suit our expedient, short-term desires.
A hard rain is going to fall, and we serve our best interests by preparing for the coming storm. The core skill going forward--frugality--is largely a forgotten skillset. It's time to get busy while we still have time.
What are your thoughts on this matter? Share this article with your friends and let's start a conversation. Don't forget to sign up for the Daily Briefing, every day at 6pm.
The Forgotten Skill of Frugality
Charles Hugh Smith, in his blog OfTwoMinds, discusses the importance of frugality as a skill in the future. He warns of systemic dynamics that are resistant to technological or financial manipulation, and predicts that a hard rain is about to fall.
Understanding the Credit-Business Cycle
Smith explains that the credit-business cycle has been postponed for the last 15 to 24 years. The last real recession, a natural contraction of credit and risk-taking that drains the economy and financial system's excesses over several years, happened 43 years ago in 1981-82.
The method used to delay this necessary purging is moral hazard, where risk is disconnected from consequence due to unprecedented central bank monetary stimulus and central state fiscal stimulus. The result is that risk and debt excesses are rewarded and expand to even more precarious heights, ensuring a more destructive downturn than if the system had been allowed to fully reset in 2000-02 and again in 2008-09.
The Reversal of Financialization and the Collapse of the Everything Bubble
The commoditization of credit, leverage, and speculation is beneficial when first introduced to a credit-starved economy. However, once the productive investments have been made, financialization continues expanding into extremes of debt, leverage, and speculation.
Central banks have kept the expansion going by dropping interest rates to zero, allowing borrowers and speculators to borrow more with the same income. This credit expansion boosted asset values to extreme valuations as all this new "money" chased a limited quantity of assets. The credit-asset bubble increases the value of the collateral, which then supports additional borrowing.
The resulting extreme of wealth-income inequality has social repercussions that are not yet fully realized, but the pressure on those left behind is increasing.
The Reversal of Globalization
Central banks were given the one-time luxury of lowering interest rates to zero by one dynamic: the emergence of China as the global exporter of deflation and a new "credit impulse." As developed economies shifted production to China, costs declined and profits soared, fueling the stock market bubble and offsetting the inflationary pressures generated by expanding credit and fiscal stimulus.
However, China has now matured to the point that it no longer exports either deflation or the credit impulse. Now the inflationary pressures of expanding credit and fiscal stimulus are not being offset, so they're finally manifesting globally. There is no replacement for China's one-time gift of deflation and credit expansion, and so inflation and interest rates will rise.
The Limits of Scale
The latest technological advance on the lab bench rarely scales up. Even when a new technology may make financial and practical sense, the time and money required to scale it up to useful levels are significant.
The Downsides of Centralization
Profit optimization has relentlessly driven centralization on every scale. A handful of corporations dominate every sector, and facilities are geographically centralized, inherently increasing the risk of "normal accidents" triggering catastrophic losses.
Climate Extremes
Setting aside the debate about causal factors, the increasing number and intensity of weather extremes globally are placing agriculture and infrastructure at greater risk of cascading, non-linear avalanches of consequences. Centralization adds to these risks.
The Bottom Line
Adding all these factors together, we have a recipe for a global recession in which inflation and interest rates rise, The Everything Bubble pops, possibly violently, the wealth effect vanishes into thin air, consumption plummets and job losses soar.
Our hubristic faith in the god-like powers of technology and central banks creates an illusion that the credit cycle turning is the result of a "policy error," when in fact it's just the way systems function. We've created extremely fragile, centralized systems optimized for profit, and operated on the false premise that all systems are infinitely controllable given the right technology or policy.
The result of our hubris is that the turning of systemic cycles will be more disruptive and painful than was necessary, as a direct result of our attempt to manipulate the system to suit our expedient, short-term desires.
A hard rain is going to fall, and we serve our best interests by preparing for the coming storm. The core skill going forward--frugality--is largely a forgotten skillset. It's time to get busy while we still have time.
What are your thoughts on this matter? Share this article with your friends and let's start a conversation. Don't forget to sign up for the Daily Briefing, every day at 6pm.
