We've Decoupled, Alright--From Reality (July 19, 2012)
Forget decoupling from Europe--we've been decoupled from reality since 2008.
Have we decoupled from the global slowdown? Doubtful. Have we decoupled from reality? Undoubtedly--and have been since 2008. One key attribute of reality is feedback: actions have consequences, and various forces reinforce or resist each other in a dynamic interplay of positive and negative feedback.
Another key attribute of reality is risk. Risk is as ever-present as gravity, and it cannot be eliminated; it can only be shared or transferred.
When you overwhelm feedback with massive interventions that mask risk, you decouple from reality. With feedback suppressed and risk hidden, the system's resilience and resourcefulness both atrophy. Participants start making decisions not on risk assessment and feedback from reality but on the results of the intervention.
Pharmaceutical intervention offers an apt medical analogy. Various risk factors such as high blood pressure and high levels of LDL cholesterol have been correlated with increased risk of heart disease. Medications can lower these metrics, and so these interventions are now ubiquitous.
Sometimes these result from genetic propensities, but other times they are consequences (feedback) of an unhealthy lifestyle: obesity, poor diet, lack of fitness, etc. If we suppress a single feedback from a spectrum of health-related feedbacks and consequences, have we restored health or simply masked the risk of an unhealthy lifestyle?
Clearly, complex systems do respond to critical thresholds or "pivot points" that trigger cascading responses. It is wise to identify key metrics and manage the risks they present or elevate. But it is unwise to assume that manipulating one metric will necessarily restore a system that is wobbling out of equilibrium to a dynamic equilibrium.
Slamming down one metric or another does not necessarily reduce the systemic risk. Just as someone who eats junk food, smokes cigarettes and drinks sodas all day while slumped on a sofa will not become "healthy" just because statins have slammed down his LDL cholesterol levels, an unhealthy economy cannot be restored to health by manipulating a handful of inputs such as money supply or key metrics such as unemployment.
All these interventions accomplish is to mask risk by transferring it to the system itself, where it builds up behind the apparent "fix" and eventually explodes.
All sustainable systems must be resilient and transparent. Intervening to suppress key inputs and manipulating data points makes the system appear less at risk, but reducing apparent risk is not the same as encouraging resourcefulness and resiliency.
What we have as a consequence of four years of intervention, suppression and manipulation of data is a stock market that is now totally dependent on one input: quantitative easing intervention by the Federal Reserve. An unmanipulated market is based on multiple transparent inputs, including corporate earnings, revenues, currency valuations and so on.
Once inputs are gamed or manipulated, transparency is lost and feedback is distorted or suppressed.
Four years of intervention, suppression and manipulation of data have left the U.S. economy dependent on monetary interventions and massive fiscal deficit spending. Imagine a sickly patient in bed who has become totally dependent on several driplines (interventions). To keep the patient alive, the meds are steadily increased.
Are these interventions restoring health, or simply keeping the patient going until some unknown magic restores health?
In the U.S. economy, the driplines are debt-based spending and leverage. Thanks to endless intervention and manipulation, the economy is now totally dependent on massive debt-based spending and increased leverage for its "growth."
The person or business that becomes dependent on welfare loses resiliency and resourcefulness. To the degree that economies become dependent on debt and leverage just like individuals and companies become dependent on welfare, entire economies lose their resilience and resourcefulness.
A healthy forest offers another apt analogy. A healthy temperate-region forest depends on occasional forest fires to clear out deadwood and refertilize the depleted soil with ashes. In suppressing all fires--what we might call "stress" and feedback-- management virtually guaranteed that when the forest was eventually set ablaze by a random lightning strike, the resulting fire would be catastrophic because the deadwood had been allowed to pile far higher than Nature would have allowed.
The "managers" of the economy have let a couple hundred billion dollars in bad debt burn, and they think the $15 trillion economy is now restored to health. Writing off a couple hundred billion is like letting a few acres of grassland around the parking lot burn and reckoning you've cleared the entire forest of deadwood.
The buildup of deadwood--fraud, impaired debt, leverage, bogus accounting, malinvestments, promises that cannot possibly be met and the multiple pathologies of crony capitalism--continues apace, untouched by Federal Reserve intervention.
Masking risk and suppressing feedback do not restore resiliency or vitality; they cripple the system's ability to respond to reality.
The greater the system's dependence on intervention for its stability, the greater the probability of instability and systemic collapse.
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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.
If this recession strikes you as different from previous downturns, you might
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