Heightened Expectations and the Collapse of Credibility
  (August 14, 2012)

As the Status Quo manages perceptions to maintain the illusion that lofty expectations can still be met, it widens the gap between reality and those expectations. The inevitable snapback to reality will destroy institutional credibility and fatally undermine the Status Quo.

Yesterday we outlined the interwined dynamics of credibility and expectations ( The Keys To Understanding the Collapse of the Status Quo: Credibility and Expectations). To grasp the inevitability of this collapse, we need to explore the heights expectations have reached globally.

Let's begin with yesterday's observation that expectations are like debt-money claims on the real world: the claims can expand to near-infinity, but the real world remains stubbornly limited. In other words, expectations are inner states constructed by media and Central State imagery, propaganda and promises, both implicit and explicit. As such, these expectations are claims on the real world.

If the claims exceed the resources of the real world, the expectations will be crushed, and the credibility of the institutions that issued the promises will also be crushed. Once the credibility of key institutions has been lost, the Status Quo is fatally impaired.

Let's take two American examples: housing and higher education. For at least three generations (roughly 60 years), the Federal government has subsidized home mortgages via guarantees issued by the Veterans Administration (VA), The Federal Housing Administration (FHA) and other agencies, and by offering an enormous tax deduction for mortgage interest--the single largest tax deduction for most households.

The expectation fostered by the real estate industry and this government policy was that buying a house and dutifully paying vast sums of interest for 30 years would yield the foundation of middle class wealth: home equity that could be passed on to future generations.

Before the real estate bubble transformed housing into a speculative pursuit of "easy money," buying a house was a form of forced savings incentivized by government subsidies. During the bubble, building home equity via decades of payments was fuddy-duddy: wealth could be acquired in a matter of months by leveraging modest incomes into multiple home purchases and "flipping" of properties.

When the debt/leverage bubble popped, this broke the back not just of the speculative expectation of easy, quick wealth but the old model of forced savings. Anyone who buys a house now will still get a tax deduction for mortgage interest, but there is no longer an implicit expectation that the house will retain its value or be worth more than the payments made.

The housing market is in a trap of its own making. Were prices to fall to levels that were comparable to the cost of rent and the opportunity cost lost by making an illiquid and risky investment in housing, lenders and owners who lent/bought in the bubble years will be wiped out once the market "discovers" their mortgages are backed by phantom assets.

If prices are manipulated to remain at today's high levels by massive government subsidies and the artificial reduction of distressed inventory, the banks, government mortgage agencies and buyers all remain at risk of the market overcoming the manipulation and "discovering" the value is far below the one set by Central Planning.

Once the market breaks through the dam of manipulation, the real estate Status Quo will lose all credibility. How many times do we have to read that "housing is recovering" before we catch on it's all self-serving artifice?

Interest rates can't drop any more, so that manipulation has run its course. As incomes continue declining and the number of full-time jobs drops, the number of people who truly qualify for mortgages also declines. As Baby Boomers seek to cash out home equity to live on, downsize or simply surrender their underwater homes, housing inventory will swell, never mind the millions of distressed properties being held off the market by lenders hoping for a reinflation of values.

The demographics and economy simply don't support rising demand, regardless of how many mortgage guarantees the now-impaired FHA issues and how many times the real estate industry issues "now is the time to buy" bulletins.

The expectation that buying a house is a low-risk pathway to middle class wealth has been fatally undermined, and the credibility of everyone who claims otherwise is increasingly at risk. Too many players depend on this expectation being kept alive for their own income, and so the self-serving calls of "turnaround" by vested interests will continue until their credibility has been reduced to zero.

Another implicit promise was that obtaining a college degree would guarantee a good-paying secure job. Once again, a vast self-serving industry depends on this claim being accepted by the citizenry as truth. And once again, global realities are undermining this expectation.

As I noted in Money Down a Rathole: College, Healthcare, Housing, the problem isn't higher education per se, it's the model of higher education that costs as much as a house for a degree with marginal returns in the real-world job market.

Newly minted college graduates are discovering that their lofty expectations of secure, high-paying jobs are completely unrealistic, and their reaction is naturally dismay and anger: the expectation was encouraged by every level of the Status Quo, and it turned out to be a self-serving fraud.

Around the globe, expectations in the era of manic financialization have been raised. In China, the same expectations that a college degree would lead to a good job were instilled and are now being broken; hundreds of millions of workers expected steady employment, an expectation that is now under pressure.

In Europe, millions of residents expect a generous retirement and full healthcare benefits for life, explicit promises that cannot be met as the surpluses generated by the E.U. economies decline. The demographics and financial realities cannot possibly meet these long-standing expectations.

The same collision of financial reality and lofty expectations is occurring in the U.S., where State promises made on the absurd projection that financialization-fueled booms would never end are being undermined: you can issue as many claims on the national surplus as you want, but that won't increase the surplus.

If expectations, promises and guarantees had aligned with unfinancialized reality, the disconnect between inner states and financial realities would not be so great. This is the consequence of issuing promises and guarantees based on permanent exponential growth of debt and leverage and the speculative bubbles they inflate.

The Status Quo around the globe is trying to manage perceptions to foster the illusion that all the high expectations can be met; but the reassurances are increasingly hollow, and the promises increasingly threadbare. People are waking up, one at a time, to the reality that all the promises and guarantees are fantasy, and their emotional response is deeply negative: they feel betrayed by the Status Quo and its institutions, and they feel a volatile mixture of rage, distrust and resignation.

Studies have found that people (usually those in the lower social and financial tiers) with low expectations tend to be happier than those with high (and unmet) expectations. The Status Quo bought the support of the masses by raising expectations of permanently rising prosperity and security for all. Now that these near-infinite claims cannot be fulfilled, the Status Quo has no institutional ability to lower expectations to more realistic levels. It only knows how to spin artifice and fantasy, in the vain hope that managing perceptions will substitute for managing reality.

This is how credibility is lost. Managing perceptions is a dangerous game, as the perceptions are pushed ever-farther from reality, increasing the shockwave when the two snap together: it won't be reality rising to meet lofty perceptions, it will be perceptions and expectations plummeting to meet reality. This is how the Status Quo will collapse: it will lose the faith of its people, and become the target of their wrath.

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.

We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.

The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.

Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

If this recession strikes you as different from previous downturns, you might be interested in my book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

Readers forum: DailyJava.net.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

NOTE: gifts/contributions 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, Allen C. ($100), for your magnificently generous contribution to this site-- I am greatly honored by your support and readership.  

Or send him coins, stamps or quatloos via mail--please request P.O. Box address.

Subscribers ($5/mo) and contributors of $50 or more this year will receive a weekly email of exclusive (though not necessarily coherent) musings and amusings.

At readers' request, there is also a $10/month option.

What subscribers are saying about the Musings (Musings samples here):

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Your readership is greatly appreciated with or without a donation.
For more on this subject and a wide array of other topics, please visit my weblog.


All content, HTML coding, format design, design elements and images copyright © 2012 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.

I would be honored if you linked this essay to your site, or printed a copy for your own use.

Terms of Service:
All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.



Making your Amazon purchases
through this Search Box helps
support oftwominds.com
at no cost to you:

Add oftwominds.com to your reader:


My Big Island Girl
Thrill the players to bits:
buy it via CD Baby or
amazon.com (99 cents)

Instrumentals by my friend
and mentor Coconut Charlie:

Crash Course
Secret Asian Man
Third Stone
Tonic Float

Survival+   blog  fiction/novels   articles  my hidden history   books/films   what's for dinner   home   email me