Guest Post: The Price Of Stability Is Pathology

Tyler Durden's picture

Submitted by JM

The Price of Stability Is Pathology (pdf)

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prophet's picture

A default by any other name: bailout, haircut, etc.

Accidents waiting to happen keep reaching new all time highs.  A series of low probability events occurring in sequence will bring uncontrollable consequences.  Unpredictable results are a certainty from broken systems.  Unprecedented market activity continues to grow.  Rock on. 

People are reverting to being mean.


Herd Redirection Committee's picture

No one has to save the world, because the world in its current state isn't worth saving.

Prepare for the worst, and hope for the best.

Go long lead, gated communities, security services, essentials, and precious metals.  Look out for number one, and make sure you and yours are looked after.

PsychoNews: Exposing the Oligarchy, one Psycho at a time.


snowball777's picture

You think a dufus who couldn't make it at the academy will take a bullet for you at $12/hr or that 'gated-communities' are anything but a lame affectation of exclusivity?


At least you'll be easy to spot all huddled together with your hummers circled like a wagon train.

Lucius Cornelius Sulla's picture

lol - you're spot on!

Its all about urban camouflage and financial privacy.

Oh regional Indian's picture

Actually a better argument to be made or better yet, a more apropos headline for this paper should have been:

The Price of Perceived Stability is The Logarithmically Increasing Pathology of Shameless PR

Any stability we have perceived in the past century (or even three actually) has been a pause, an intake of breath, the "re-building" from the last mess, allowing the human herd to re-grow for it's next culling, etc.

Sheep for the shearing need a breather, grow time too!


ebworthen's picture

Aye, well done.

I must keep this short for the underlings,

Span attention - sans dimension things.

Oh regional Indian's picture

Thnks eb.

Shrt ltl cmnt, eh?


delacroix's picture

don't mean to be a nitpicker     did you mean causal empiricism?  good read, I understood more than half of it.

jm's picture

I said casual because it seemed kinda impressionistic as opposed to "rigorous". 

Dr_Dazed's picture

Understood more than half?  Perhaps because it was half sensical and you followed in part.  Which part, the "sense" or the "non" is the question.

>/sarc off

In my experience if you can't make your point without resorting to quasi-academic mumbo-jumbo you probably don't have a point to make.  OTOH, maybe I need more coffee this morning.

jm's picture

Hate the phrase "quasi-academic".  Most academics act like  jackasses and don't know a derivative from a differential term... or frankly their pompous ass from a hole in the ground.

You would be surprised at how many mathematicians work in finance.  Some people talk about technicals and resistance.  These are the tools that quants use when thinking about valuation or lack thereof.

Understanding ergodicity certainly isn't necessary to be good at trading.  This just provides a logical framework for understanding a common intuition.

Merry Christmas.

palmereldritch's picture

The Price of Instability is Sociopathology

f(ux)d -> u x globally

... 'Order from Chaos' from your friends TPTB

From the graph: "Default Free Zone" or Unbearable Lightness of Stability Zone*

[*translation: Period of distribution of USD as global reserve currency necessitating stability so as to serve as a mechanism for infiltration of said USD debt product for effective world reliance and later detonation of massive instability and volatility to produce a period (not unlike the graph prior to this stability period) of global consolidation and control of resources in the hands of certain sociopathic elites in a recurring and familiar form that can only be viewed as being the same but on a larger, planetary scale.]

fallst's picture

My ? last week was: How did this happen?

How did the banks, rating agencies, mortgage companies, and accountants get to this point? No ethics, honesty, integrity?

These organizations are psychopathic entities.

Non-psychopath employees adopt this twisted value system because they have 2 choices. Victim or Join.

No empathy, guilt, or remorse. Cannot change or reform, voluntarily.

Seems to be spreading like a virus into some government entities as well.

Then create factions for kaos. Then fear and tyranny.

Fun eh?

AnAnonymous's picture

The ideologies that condone unloading fiscal costs onto future taxpayers and savers clearly suppress default rates and default vol.


What ideologies? We are unloading no fiscal costs onto future taxpayers.

I dont understand why people postulate a change in the US mindset. US citizens have constantly behaved the same since the inception of the US. If US citizens wanted freedom, they would not have maintained slavery.

So what? We know that US citizens are not responsible enough to shoulder the burden of the past. They are all ok with claiming the positives of their past and fall into denial tactics when it comes to negatives. "It is not me, it was my father. Victims are all dead, dont matter to me if descendents of victims inherit the shit, me, I only inherit the good." etc

So why not postulate on the same ground?

In a near future, US citizens will act the same. "The debt was taken by my ancestors. They are all dead. I wont foot the bill"


No unloading on future US generations.

What is happening is that the present levels of resources allow a certain level in consumption and therefore standard of life. Debt is used to increase consumption. Through debt, a same person can always more than without debt.

In the future, there will countries that consumed in the past and countries that did not. Simple as that. No unloading on debt or stuff like that.

jm's picture

Not really disagreeing.  However, I think all roads lead to taxpayers at some poijnt fotting the bill.  If inflation gets too high, no one will fund the US debt.  Monetization can occur some some period of time, but ultimately, high inlfation just makes the funding proeblem worse.  Whether citizens like it or not, the situation will have to be faced head on, either through default and market-imposed austerity or by rational and deliberate austerity that gets the US fiscal house in order before default.

AnAnonymous's picture

High inflation will hit.

But who is the most vulnerable to it?


People who will have everything to build (and therefore to buy) or people who will inherit everything?

Once again, the difference will be between people who consumed and people who did not consume.

You dont need to buy much when you already have all.

jm's picture

No doubt that the Fed is going for inflation.  They can't do anything else.  My point is that after inflation, then what?

You can have high inflation which makes funding costs go up for the government forcing them to cut spending.


The government can press for full-on monetization to the point where funding costs don't matter.  At this point the issue becomes no one lending will contract for repayment in dollars.

I don't think it will go that far, because if it happens, then the wealth destruction involved will be so epic that there's no reference for it.

gwar5's picture

I think we're already funding the debt even as we sleep, and the policies accelerate. Looks like Uncle Bamm has looked around to see where the money is and it turns out the baby boomers have more than they need!

Inflation has already robbed us of 15% in the last two years while we slept.

Debasement is a surcharge that targets those who were prudent enough to save and/or live off of dividend income.

The healthcare bill will make you die earlier, and the estate tax is a surefire incentive for them to make it so.  They can pull the plug on you with one hand and lift your wallet with the other. New rules prevent you from spending your own money on treatments to live -- The doctor goes to jail if he doesn't get permission from the government to treat you  --  private pay or no. 

And 401Ks and SEPs are sitting there like wet dreams to politicians when they discuss what to do about Social Security.

Government is making sure we can't take it with us by packing our bags for us.


Founders Keeper's picture

[If US citizens wanted freedom, they would not have maintained slavery.]---AnAnonymous

As a point of fact: In the North, nearly all whites abhorred slavery. In the South, the majority of whites abhorred slavery.

The South felt their Constitutional right to self determination was being violated by the North. States rights back then were far more protected than today. The Southern states believed it was up to each of the states, South or North, to determine their own futures.  Anyone outside their state, any state, was an outsider.

Sadly, racism was common in the North and South.

But, slavery---the abomination it was---contradicted every principle of freedom on which our nation was founded.  However, if you add up the numbers, North and South, the majority of white Americans deplored slavery. Unfortunately, the power brokers (political and commercial) in the South, a numerical minority, maintained slavery.

That's my read on history.

gwar5's picture

That was a good slog, I think my synapses grew hair after reading that. Thanks a lot, TD, now I have to shave my brain.  

Thoughts: randomness can't be suppressed forever in a closed system. A lot of energy has been expended to maintain the current system. No more. All systems are part of larger systems which impose their own entropy. When a closed system encounters reality, the delta entropy is going to be greater than it would have been if the closed system had been more random in the first place. In other words, there is going to be quantum hell to pay.

Holographic Principle: "the entire universe is a two dimension informational structure painted on our cosmological horizon. The three dimensions that we observe are merely low energy projections on a macroscopic scale which expand with the universe. Indeed, the universe has been measured and it's flat like a sheet of paper."

Which is to say that everything, rock and observer alike, is really just a hologram. Rocks just lay there. But, as observers, we can validate ourselves through even the most casual observation that, yes, we have no fucking bananas. 







Cardinal Fang's picture

Wave superposition and wave function collapse

jm's picture

Wave function collapse = bang.

Diffusion (heat) equation = whimper.

Urban Roman's picture


Simultaneous superimposed whimperbang.

Cardinal Fang's picture

Gambler's Ruin, I also like Kolmogorov.

HungrySeagull's picture

Freedom will be defined in one of two ways.

Those who have money flowing to them from the masses.

A few of those who shrugged off traditional trappings of consumerism, home ownership, property mainatince and so on until they live in a paid for condo and have one car to get around in. No other bills other than food, ammo and vices if any.


The Children?

They will find a way, they always have.

But in the mean time the entire present system of investing for a rate of return in the world is kaput. Keep the money for yourself, get out of debt and unload as much liabilites as possible until you can say you owe no one a damn thing except what the government demands of you in taxes.


Eventually we would all be Gypsies living in camper trailers paying nothing but a bit of sales tax when we buy fuel and food.


Or realize that you have been a fool trying to be good. You can go ahead and take in a fist ful of 30% interest rate credit cards and max em all out on Gold or Silver and resell it all at a huge profit and go from there. As far as the cards, you dont have a physical location, phone or mail anymore. How can they go after you to collect the tens or hundreds of thousands of dollars of unsecured debt.


Who is the fool. Not you. But actually the banks that give you the card to use against them.


It will be the Banker elite that realize that they will have to close the collections contractors and hire those willing to search under bridges and tent cities until they find you physically and break your legs. Sort of the way old Casinos used to do for cheats who tried to work the system long ago.


Take care those of you who follow Zero Hedge. Don't be like me. In the beginning learning about how things really work and then in the end not giving a flying damn and using the system against itself.

ivolatility's picture

Thank you Zero Hedge for a superb contribution that places these important questions in a historical perspective. Much like Rogoff and Reinhart the authors have highlighted how much we overlook by not respecting history.


“A spark can start a forest fire, one event has the potential to make other events more likely, which make other events more likely, and so on until a cascade spreads through a whole system, the difficulty with complex systems is that they are constructed of many components where individual action is well understood and follows a logical path (incentives, rewards, rationality), but collective behavior can be random…. orderly or chaotic, or confusing, or destructive.

Ants, bees, termites and other insects have evolved into smart swarms and have refined and adapted specific behaviors to avoid such cascades, these cascades are the Achilles heel of highly connected networks. In an ant colony, or a beehive many individuals can fail to function and the system is unaffected…because many other insects are highly sensitive to changes in their environment, and adjust their behavior accordingly, such a system is self-healing”

Smart Swarm, Peter Miller



We have a great deal to learn from the lowly termite; despite its elemental nature it always knows what is urgent and important.

Unlike the sensible termite, policy makers continually promote the propaganda that; Insurance is free. There are just too many examples of this hallucination to list here. And as rational economic agents observe free insurance, Jevons’s paradox takes hold (William Stanley Jevons) whereby: risk is mispriced; demand emerges in new far more expansive unforeseen ways….. this finally overwhelms existing structures.

By relentlessly pushing the insurance is free fiction: an infantile spasm, an insisting that we deserve a smorgasbord of instruments that enjoy robust upside but are forevermore insulated from any downside.

For Example the artifice of FDIC insurance

Limits magically raised from $100,000 to $250,000; no reserve was taken...or even considered. The distortion this represents is beyond grotesque, as whole new schemes to game this one way street are being conjured up in all the alleyways (Ally Bank CD) of finance.

The irony here is that in the quest to sterilize the system from ever producing any loss whatsoever (in the FDIC case provide insurance for virtually all deposits) we have made finance vastly more prone to many fantasies that end badly, therefore guarantee future cascading panics.

We all know that insuring bank deposits- at such elevated levels- is ludicrous. No one wishes to see a bank run, but at what level does this arrangement foster the kind of complacency that inevitably ends catastrophically? If some depositor protection is good, is more better?

Ask yourself….. if banking risks (within the existing ill-considered system that suffers from simultaneously being: heavily yet poorly regulated) were in fact adequately reserved against…  how much capital, how much skilled macro-prudential oversight would be required?

Once you start calculating the drag associated with the commensurate “ballast” against current risk..what would such a system look like? Would it even be feasible to construct?  The key fallacy that drives this deception, is in the simple act of; simply ignoring the laws of physics.

“Something finite but with unknown upper bounds is equivalent to the infinite

Nassim Taleb

Not only did policy makers unilaterally insure bank deposits with no more effort that the stroke of a pen, but they also invited the commercial paper market into the big tent.  When reaching for yield, such a stretch may never prompt a haircut or re-structuring, additionally you are also forbidden from letting the shareholders know they face any loss whatsoever, because they would certainly trigger a new unacceptable panic.

How is it we can have a commercial paper market that never produces any losses whatsoever to the holders of money market accounts? (Even a minimal 1 or 2 percent “break-the-buck” loss). In 2008 the government intervened into the commercial paper to insure no risk taker got hurt. The stakes have been continually raised, if a life line was extended to: fill-in-the-blank, then obviously Muni’s will undoubtedly be saved too.

The net result is a new incentivized phony panic, just as a child throwing a temper tantrum performance in front of the sugary candies aisle earns the child a sweet palliative, so too spoiled markets have acquired new learned behaviors, playing policy makers like a doting Grandma. Markets have an insatiable craving for the favor of cheap money, liquidity is their fix. Their strategy: take the existing system very near the brink, and drink in the honey when the mandarins blink.

Moral hazard escalates geometrically, players set aside any rational skittishness and continually watch and learn, all the while being consistently rewarded by doing things they know they shouldn’t do. Leverage becomes irresistible, front- running becomes irresistible:  gains are private, and any potential future losses are public.

Prices are not based on model implied cash flows, as much as a herd mentality based on hitting the bid someone else just did

"Just like a ketchup bottle you bang on with nothing coming out. And what can happen, is you keep banging on the ketchup bottle and it all comes out. All over the fries, the table, and everywhere. This is the problem with non-linearity." 

Nassim Taleb


The problem becomes more akin to what we observe in quantum mechanics, or astrophysics, exhibited by the lifecycles of celestial bodies. After the core of an aging star ceases generating energy from nuclear fusion, it undergoes a gravitational collapse into a neutron star, or a black hole.






ebworthen's picture

"Leverage becomes irresistible, front- running becomes irresistible:  gains are private, and any potential future losses are public."

Ahh Nassim, well said all, and you involatility, thank you, I agree.

jm's picture

Capitalism is boom and bust.  Stability policies just make longer fuses that delay the boom.

Pope Clement's picture

"The problem becomes more akin to what we observe in quantum mechanics, or astrophysics, exhibited by the lifecycles of celestial bodies. After the core of an aging star ceases generating energy from nuclear fusion, it undergoes a gravitational collapse into a neutron star, or a black hole."

Excellent points and analogies until the examples from the priestly disciplines of astronomy. Seems that gravity is not the organizing principle of the the universe and Newton's G is not a universal constant; our sun and other stars are not powered by nuclear furnaces at their cores but are anodes on galactic & super galactic Birkeland circuits and of course black holes and dark matter are hallucinatory figments to allow the ferkakte gravitational equations to work - a Ponzi scheme in Astronomy ? See the Electric Universe Theorists Wallace Thornhill, Don Scott, Anthony Perratt

AUD's picture

I sort of understood this, I think this quote from Martin Hutchinson is in a similar vein:

the Modern Finance models of markets, assuming smooth trading and moderate price movements, are hugely in error. In reality markets move moderately only when they are between crises. In a crisis, the change in market behavior is analogous to that between the fluid dynamics of “streamlined flow” and “turbulent flow.

jm's picture

This is about putting some support under the folk wisdom coined by some anonymous guy years ago:  "the market can stay irrational longer than you can remain solvent."

I'm critical of the concept of mean reversion here.  Things really do change.  Consider communications technology, manufacturing, nanotech.   Sometimes the change is incremental like the difference between a coal fired plant and a nuclear power plant.  They both do the same things in comparable quantity, so it's hard to see how nuke power constitutes something that alters reversion to some "mean", excepting a China syndrome.

Consider the alternatives to buying bonds that impact default rates... leveraged loans, synthetics, etc.  Do these things really change the game fundamentally?  That's a million dollar question.

Consider also the advent of deficit financed fiscal policy and activist monetary ideologies.  What cannot be denied is that these innovations can suppress any possible mean reversion longer than anyone can remain solvent.


snowball777's picture

Keynes was anonymous? ;)

jm's picture

I didn't know Keynes said that!  I always thought it was some anonymous proto-Steinhardt who said it.

My preconceptions are showing. 

snowball777's picture

Hmmm....still holding to "you can't walk in the same river twice"; there are too many external factors to reliably use historical data as an "apples to apples" comparison. While it is possible that the same external scenarios play out again (e.g. war spending and deficit growth), you can't reliably depend on when they'll occur with any precision (and we're not playing horseshoes or hand-grenades).

I also think that you'll see this data differently if you look at the inflation-adjusted total sizes of the defaults rather than the rates of default alone. That 'quiet period' after WWII will look a bit different.


jm's picture

Thanks for the insight. 

Any ideas where I can find historical inflation time series?

I think loss rates are superior to default rates, but they don't exist going back that far, and I think bankruptcy laws were so different so to make recovery prospects slim.  

jm's picture


After thinking about this, the effects of inflation are somewhat unclear to me.  We had continued stable low inflation from 1999 to 2009 but default rates are demonstrably higher in this 10 year period than in 1946 to 1999. 

Little help here regarding your intuition...  

blindman's picture

if the price of stability is pathology

what is the price of pathology?  simplicity

leads to complexity and complexity leads to

simplicity.  around and around, up and down.

socialize the losses and export the gains in this

un stable global casino ....?  it seems the price of

stability is just murder on some "less stable" people.

you know, it is just stealing,  systemic and institutional,

that needs support.   it is self sustaining only due to

political and regulatory capture and no math or theory

can justify it...  and people will tire of tolerating it.


Rachel Maddow- Dr. Doom lives up to his name


speaking of misallocation of human resources.  this is severly

evident in the wake of bailing out the insane financial sector

and qe^***.  it is like paying your rapist.  it seems we are

getting into some really sick stuff coming up.  but i suppose it

is the price of stability......but what is the price of pathology?

i know !! ......