2015: A World Ruled by Hubris, Willful Blindness and Desperation

January 5, 2015

Issuing lies and pursuing willful blindness is not leadership: it's failure on a grand scale.

Rather than issue predictions for 2015, this week I'll cover themes that I believe will be consequential in the year ahead.

The first theme is the dominant psychological dynamic of global leadership, which can be distilled down to a toxic brew of Hubris, Willful Blindness and Desperation.

Examples of leadership hubris abound, and they all arise from the false confidence that the same playbook and tools that rescued the Status Quo from well-deserved oblivion for the past six years will continue working splendidly in the years ahead.

Prime examples include the Federal Reserve, which clearly believes its own PR (we are omnipotent and the markets rise at our command) and China's leadership, which clearly believes that the strategies and tools that rescued China from implosion in 2008-09 can be applied to the entirely different problem of deflating the world's greatest quadruple-bubble in shadow banking, real estate, commodities and state-owned enterprises (SEOs).

The two problem-states could not be more different, and hence the Chinese leadership's bravado is classic hubris.

The legal definition of willful blindness is when someone attempts to evade responsibility by claiming ignorance of conditions that they should have known. One classic example is the drug mule who claims "I didn't know there was cocaine in this diaper bag, officer." The courts take a dim view of this bogus defense, and the public should take an equally dim view of leadership's claims that they couldn't possibly have foreseen the coming crisis in pensions and unfunded liabilities.

Our leaders' claims of ignorance are even more absurd than those of a drug mule, for leadership means grasping the nettle of what is obvious to everyone who glances at the basic facts. I have chosen pensions and unfunded liabilities as a prime example, but there are many other equally visible examples of our leadership's willful blindness.

Exhibit One in willful blindness: the political leadership of the state of California: Four shadows fall across California’s budget (S.F. Chronicle)

Though it may feel as if the budget is fixed, that’s a mirage created by a stock market that’s up more than 60 percent since Gov. Jerry Brown took office. A market drop of any meaningful size would crush California’s budget.

The reality is that California’s budget will not be fixed until four fundamental problems are addressed: a capital-gains-dependent tax system, unfunded pension obligations, unfunded state retiree health care obligations and explosive growth in Medi-Cal spending.

In other words, citizens are paying more but getting less, and because of the growth in retirement and health care obligations, they will get even less going forward — and all that is true even if the market keeps going up. When the stock market declines and the state reports deficits, Californians will feel as if they are on a roller coaster without a seat belt.

Even extension of the temporary tax increases won’t help because — you guessed it — more money will go to additional spending on pensions, retiree health benefits and Medi-Cal. That’s simply the unavoidable outcome when elected officials choose to make enormous unfunded retirement promises to government employees and to provide health care for one-third of the state’s citizens.

To repeat, California’s budget cannot be fixed until the Fundamental Four are fixed.

The state's political leadership claims to be ready for any future collapse in tax revenues via a new "rainy day fund." But not only is the rainy day fund woefully meager, it is designed to be stripmined long before any real funding crisis takes hold of the state's throat.

This playbook of phony "solutions" and public-relations "fixes" is part and parcel of our leadership's Willful Ignorance. Garsh, we're stunned our fixes didn't actually fix the real problem. But the phony fixes were designed specifically to avoid solving the real problem, as that would require stepping on the toes of vested interests, and that is politically verboten.

Last but certainly not least, we have desperation, perhaps best expressed in the classic leadership phrase, When it becomes serious, you have to lie. Jean-Claude Juncker simply gave voice to what the world's leaders practice on a daily basis, because it's always serious.

Euroland's leadership has a special flair for desperation. Whatever it takes, spoken out of pure desperation, backed by nothing but the pressing need to project a plan and a power that did not exist, is a classic. Now we have reassurances (equally backed by the need to lie and desperation) that the exit of Greece from the euro and the complete repudiation of all the billions of euros in loans extended to Greece will have no effect on Euroland. Uh, right.

Japan is in a class of its own in terms of pursuing policies of pure desperation. Abenomics is nothing but desperation writ large on Keynesian parchment.

The Federal Reserve's days of desperation lie just ahead. When interest rates can't be pushed any lower, when risk assets can't be pushed any higher, when the U.S. dollar's ascent cannot be stopped, then we'll see the Fed issue the same sort of painfully desperate statements as their central banker compatriots spew on a near-daily basis.

Issuing lies and pursuing willful blindness is not leadership: it's failure on a grand scale.

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