Removing the Safety Valves

Pressure Cooker

Something big has recently changed in our culture.

We no longer accept any unpleasant reality, no matter the costs of denying it, nor the benefits it might return in the long run.

For example, parents who do not permit their children to play unsupervised for fear of a scuff. And school teachers who no longer fail anyone and mark all students as above average. And high schools that fly their students to Europe rather than make them sweat on the West Coast trail. And universities that have dumbed-down their curriculums. And citizens who refuse to accept election results and blame fictional demons rather than questioning their own beliefs. And environmentalists who promote green growth rather than austerity and population reduction.

Recessions function like the safety valves on a pressure cooker that prevent a dangerous explosion. Recessions used to be viewed as a normal event that purged malinvestments and poor performers thus allowing healthy re-growth in the next cycle.

Today we are unwilling to accept any downturn. As soon as the markets start to drop the central banks step in to prop them up. Extraordinary measures have become ordinary. The absurd has become normal.

We’ve removed most of the safety valves and the pressure is building. Soon the pressure will be so high that we’ll be forced to remove the last safety valve and start handing out printed money to citizens, thus risking a repeat of the Weimar event and its terrible consequences.

It’s not like we need to abandon capitalism and free markets. To the contrary, all we need to do is let markets function the way we pretend they function.

I understand all the thermodynamic reasons that we might not want to let a recession take root, but I ask you, how is delaying the inevitable going to make things better? It’s not. It’s going to make things much worse.

Our only choices are do we want to fall from a higher elevation later, or climb down from a lower elevation sooner?

Where are the adults?

The Fed Stops Pretending by Peter D. Schiff

The elephant in the room that no one wants to acknowledge is that the “unconventional” policies that were introduced to fight a “once in a century” crisis are now the conventional policies of choice to combat the normal fluctuations of the business cycle. But zero percent interest rates and quantitative easing only worked a decade ago because people thought they were temporary. If they knew that the policies were permanent, the dollar may have plummeted and the resulting inflation may well have overwhelmed any benefits the stimulation delivered. But the naïve belief that the Fed could reverse course, unwind its bloated balance sheet and normalize interest rates, kept the game going and kept the dollar strong. Now that the illusion may about to be shattered, the dollar may not survive the next round of enhanced QE and ZIRP.

QE4 will have to be larger than the three earlier rounds combined, as the annual Federal budget deficits could exceed 3 trillion. However, while China, Russia, and many emerging market nations were eager buyers of Treasuries during those initial rounds, they may likely be sellers of Treasuries during the next round. That means none of the inflation created to finance QE would be exported. So the big price increases next time may take place in the supermarket rather than the stock market. Americans would finally be forced to deal with the adverse effects of inflation that we have been spared for the past 10 years. It’s not going to be pretty.

Hat tip to Panopticon for his excellent daily posts on the economy and climate.

16 thoughts on “Removing the Safety Valves”

  1. Thanks Rob.

    Austerity is a hard sell & doubly so when the taxpayer has to continually bail out the gambling overlord class while reading reports of their tax dodging – Panama & Paradise papers, etc. Bullets, nooses & guillotines – revolution is the only thing that the plebs have ever done that’s stopped them. They are fucking parasitic vampires……… because they can. I’ll wager if you swapped out 1%ers with random plebs, the plebs would become neo parasitic vampires.

    The Only Thing, Historically, That’s Curbed Inequality: Catastrophe

    Plagues, revolutions, massive wars, collapsed states—these are what reliably reduce economic disparities.

    The Great Leveler Violence and the History of Inequality from the Stone Age to the Twenty-First Century

    “How only violence and catastrophes have consistently reduced inequality throughout world history

    Are mass violence and catastrophes the only forces that can seriously decrease economic inequality? To judge by thousands of years of history, the answer is yes. Tracing the global history of inequality from the Stone Age to today, Walter Scheidel shows that inequality never dies peacefully. Inequality declines when carnage and disaster strike and increases when peace and stability return. The Great Leveler is the first book to chart the crucial role of violent shocks in reducing inequality over the full sweep of human history around the world.”

    “Scheidel identifies and examines these processes, from the crises of the earliest civilizations to the cataclysmic world wars and communist revolutions of the twentieth century. Today, the violence that reduced inequality in the past seems to have diminished, and that is a good thing. But it casts serious doubt on the prospects for a more equal future.”

    Perhaps, for a brief time, the new radically altered biosphere will reduce some pressure by wiping out great swaths of cancer monkeys? If they shut down the WHO and other aid that would start the dieback. Some say yabut 1 N American has an eco foot print of 500 villagers. So? Most never cared about villagers in our peak decades of material riches, so what will be the response as the pie shrinks? Fuck em, will be the response. No immigration & no aid. We’ll turn boat loads away like we did with the Jews 75 years ago.


    1. The fact that Trump was elected despite the elites and deep state not wanting him tells me the democratic system is still working. Americans wanting real change have had many 3rd party choices that they could have elected but they don’t. I guess everyone hopes to be a billionaire as soon as their luck changes.


  2. Repeating some comments I made on another blog some time past.

    A few years back I saw Dennis Meadows (Limits of Growth study leader) say – paraphrasing here from memory – that the greater the pressures on a system to fall apart, the harder that system works to maintain its current state/structure.

    Surfing a bit along this line of thought, I have thought that one of the mechanisms that maintains our current system is interest rates. As growth prospects slow due to first order effects like Net Energy decline, and second order effects like slowing population growth and aging populations, interest rates decrease in anticipation of that slowing growth. Those lower interest rates then spur additional investments. If you run are in business and running discounted cash flow models to evaluate the viability of a project, the projected project benefits based on lower interest rates become clear.

    The above assumes the idea that central banks do not normally have full control over control longer term interest rates, they instead front run market forces and play a bit of Wizard the Oz with their pronouncements about rates. The central banks can directly influence longer term interest rates with extraordinary measures such those used in Quantitative easing. But even then for QE to be successful they must have an willing audience who believes in the Wizard and is willing to deny a bit of reality.

    Which seems to be the case now. Even as we approach the peak of energy use and complexity, there is no risk premium added to interest rates by the market because “we” collectively cannot see over the peak to the down side of the curve. Or collectively we deny that such a downturn will come because that would in fact start the downward cycle in a self-reinforcing spiral. In fact, the “system” censures those who would name the boogeyman that awaits us.

    I would surf further with these ideas and conjecture that we are locked into the current economic and financial system until it breaks catastrophically downward into another lower state. Central banks will take all measures to avoid any recession. Powell seems to have figured that out now. There can be no standard “market-clearing” recession now….the risk to the downside is too great. Anyone’s guess as to what triggers the break but a reduction in the flow rate of oil would be a good bet. Or a shortage of diesel fuel, even as oil production inches up a bit on an annual basis.

    In the meantime, most of us (in the U.S. at least) will all scurry about in our cars shopping and eating on credit, with little collective memory of how difficult life can be, and how quickly the turn can happen.

    There you have my pop psychology and system conjectures for the evening. 🙂

    Liked by 1 person

    1. Who and what controls interest rates is a very interesting question. I’ve thought about it a lot and I’m still not sure, but I lean towards your assumptions. Nevertheless, people who lend capital tend to be sharp and self-interested so it remains a mystery why anyone would lend money at near 0% given the pressure that is building in a variety of risks. This is, in part, why I’m such a fan of Varki’s theory on reality denial. It’s the only thing that allows me to make sense of the insanity.


  3. Rob,
    Can you explain to me how hypothetical “free markets” would solve the problem of overshoot, or even how capitalism can be reformed. Can capitalism in any form function in a no-growth or de-growth environment?


    1. The thermodynamics that drive our economy have wanted it to contract for several decades. We’re defying nature by growing our debt much faster than the real economy which means we’re living beyond our means.

      In 2008 most of the excess debt went into real estate. Rather than permitting the economy to reset to a lower level governments chose to bail out banks and others that made bad debt decisions. In essence they moved the bad debts from the private sector into the public sector. Then they stepped up deficit spending to stimulate the economy. Nothing was solved. All we did was delay the day of reckoning and increase the eventual pain we’ll experience. Worryingly, in the next financial crisis it will be the governments and central banks that are in trouble.

      If central banks were to stop their manipulations and let markets decide credit availability and rates, governments (and businesses and citizens) would be forced to curtail borrowing and the economy would shrink. Everyone would be forced to consume less, which is a good thing.

      Except now, because no one was or is willing to accept reality, we risk a full on crash which is a bad thing because people will burn the last tree standing to keep warm.

      Capitalism is the most effective “ism” for growing an economy, but capitalism does not require growth.

      It’s the debt backed fractional reserve monetary system that every country in the world uses today that requires growth.

      If we were to switch to a full reserve asset backed monetary system where the asset was energy, then we would be forced to live within our means and contract in lock step with the depletion of our resources. We could keep capitalism if we wanted to.

      It’s too late to switch monetary systems and no one is interested in reality so doing anything intelligent to engineer a softer landing seems out of the question.


  4. Finally, an essay by Tim Morgan that captures the insanity of today’s economy. Our fiscal and monetary policies are so insane and dangerous that it’s difficult to see the truth through the fog of reality denial that our culture promotes.

    “The global financial system has come to rest on a single complacent assumption, one which is seldom put explicitly into words, but is remarkably implicit in actions.

    This assumption is that the authorities have, and are willing to deploy, a monetary ‘fix’ for all ills.

    Accordingly, the system has come to be seen as a bizarre casino, in which winning punters keep their gains, but losers are sure that they’ll be reimbursed at the exit-door.

    So ingrained has this assumption become that it’s almost heresy to denounce it for the falsity that it is.”

    “One of the analytically adverse side-effects of monetary manipulation is that it inflates apparent activity. Globally, and expressed in constant 2018 PPP dollars, the $34tn increase in recorded GDP since 2008 cannot be unrelated to the $110tn escalation in debt over the same period. According to SEEDS, most (67%) of the “growth” recorded over that period was nothing more than the simple effect of spending borrowed money.

    This matters, first because a cessation in credit injection would undermine supposed rates of “growth” and, second, because a reversal would put much prior “growth” into reverse.

    By falsifying GDP, this ‘credit effect’ also falsifies any relationships based on it – so the ‘comfortable’ 218% global ratio of debt-to-GDP masks a real ratio which is nearer to 340%, and higher by more than 100% than it was ten years ago (236%).”

    “…markets and policymakers alike are failing to recognize the risks implicit in the widening gap between a stumbling economy and escalating financial exposure. As well as borrowing an additional $110tn since 2008, we’ve blown a not-dissimilar-sized hole in pension provision, because the same low cost of capital which has incentivized borrowing has also crippled the rates of return on which pension accrual depends.”


  5. Per Capita World Debt Has Surged To More Than $200,000

    Global debt is officially $184 trillion, which is 225% of global GDP. This is $86,000 for every person in the world, which is 2.5 times annual income.

    We estimate that official figures are understated by a factor of 2.5, so debt is actually $460 trillion, which is 560% of GDP and $215,000 per person.

    These numbers are astronomical, raising the risk of economic blowback once interest rates and inflation rise, as they eventually will.

    Central banks around the world are fighting the debt fire with gasoline.

    h/t Panopticon


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