Guest Post: Why Austerity Is Triggering a Crisis

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

We have created an economy with an extremely high cost-basis, and as a result it is brittle, fragile and vulnerable to cuts as modest as 4%.

In economies dependent on ever-rising consumption, austerity had a negative connotation even before its politically charged meaning commandeered the public debate. When the entire Status Quo depends on discretionary consumption not just for "growth" but for its survival, austerity is welcomed with approximately the same enthusiasm Superman reserves for Kryptonite.
This is of course a contradiction: an economy based not just on consumption of all net income but debt-based consumption is an economy devoid of savings, i.e. capital to invest in productive assets.
An economy without capital is lacking a key component of classic capitalism.
"Austerity" also suggests a preference for simplicity and productive work, another contradiction sociologist Daniel Bell explored in his 1988 book, The Cultural Contradictions of Capitalism: the narcissistic consumption promoted by Neoliberal Capitalism erodes not just the work ethic that powers productive capitalism but also the ethic to save and invest that is the foundation (along with credit and transparent markets) of capitalism.
(I have explored narcissism and the cultural contradictions of capitalism in Narcissism, Consumerism and the End of Growth (October 19, 2012) which also mentions Christopher Lasch's 1979 book The Culture of Narcissism: American Life in an Age of Diminishing Expectations.)
No wonder austerity is the equivalent of Kryptonite to the global consumption-dependent Status Quo. But there is another dynamic behind the panic and fear austerity has provoked, a dynamic I have characterized as The Rising Wedge Model of Breakdown, which builds on the well-known Ratchet Effect:
The Ratchet Effect is visible in organizations of all scales, from households to sprawling bureaucracies. The core of the Ratchet Effect is the ease with which the cost basis of an organization rises and the extreme resistance to any reduction in funding.
The psychology of this resistance is easy to understand: everyone hired in the expansion will fight to keep their job, regardless of the needs of the organization or the larger society. Every individual, department and division will fight with the fierceness of a cornered animal to retain their share of the budget, for their self-interest trumps the interests of the larger organization or society.
Since each "ratchet" will fight with desperate energy to resist being cut while those attempting to do the cutting are simply following directives, the group that has pulled out all the stops to resist cuts will typically win bureaucratic battles.
Broad-based cuts trigger Internecine Warfare Between Protected Fiefdoms as entrenched vested interests battle to shift the cuts to some politically less favored fiefdom. Bureaucracies facing cuts quickly shift resources to protecting their budget, leaving their mission on auto-control. (The Lifecycle of Bureaucracy December 2, 2010)
These dynamics create a rising wedge in which "minimum" costs continue to rise over time even if modest cuts are imposed from time to time. The eventual consequence is a cost basis that is so high that even a modest reduction collapses the organization.
In other words, incremental reductions and reforms have become impossible. The organization has become so brittle that any structural reform triggers a breakdown.
I have characterized this mechanism as The Seductive Illusion of Incremental Change (May 13, 2008)
We can use a household example to illustrate The Rising Wedge Model of Breakdown. Like many households, the Wedge Household responded to rising income and home equity in the bubble years by moving up to a larger home. Now the monthly payment on the Wedge McMansion is $4,000, as property taxes have soared. Healthcare costs have also skyrocketed, consuming over $1,000 a month of the family budget.
In response to declining real wages, the Wedge Household cut travel and dining out and cancelled cable/satellite TV channels. Unfortunately, these represent a relatively tiny percentage of the annual household budget, and the family's savings have been drained maintaining their high cost-basis lifestyle.
When the primary wage earner takes a 10% pay cut, the household's minimum cost basis is so high that the family has no choice but to cut one or another essential of middle class life: either the Wedges lose their health insurance or they default on their mortgage.
Their financial health has lost all resiliency; it is now fragile and brittle. (Brittleness January 29, 2007)
This is a direct analogy for the nation's budget; a 10% reduction will trigger breakdown in the nation's brittle systems. Indeed, as I suggested in Can 4% of Homeowners Sink the Entire Market? (February 21, 2007), even a 4% reduction could have an outsized impact on 64% of the economy. This is the Pareto Distribution in action: just as the vital 20% wields outsized influence over the 80%, the 20% of the 20% (4%) exerts outsized influence over 80% of the 80% (64%).
The loss of resilience and cost sensitivity has consequences. We have created an economy with an extremely high cost-basis, and as a result it is brittle, fragile and vulnerable to even modest "austerity." 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
IridiumRebel's picture

Collapse if you do and collapse if you don't.

Manthong's picture

Well, here’s an option..

I need a drink and it’s not even noon.

Why Paul Krugman should be President Obama's pick for US treasury secretary
Not only is he the world's best-known economist, Krugman has the intellect and integrity to resist Wall Street's calls for austerity  
Mark Weisbrot ,

Leopold B. Scotch's picture

The only thing that's going to solve my funk is some more junk.  I ain't going without my junk.  Uncle Ben got's the junk.

Snakeeyes's picture

This is such BS. It assumes that the government is the only investor and private enterprise is dead (or dying). Which may be true. But spending is out of control in US and Europe and entitlements keep escalating.

KABOOM either way.

AssFire's picture

* U.S. Tax revenue: $2,170,000,000,000 ...

* Fed budget: $3,820,000,000,000

* New debt: $ 1,650,000,000,000

* National debt: $14,271,000,000,000

* Recent budget cuts: $ 38,500,000,000


Let's now remove 8 zeros and pretend it's a household budget:

*Annual family income: $21,700

*Money the family spent: $38,200

*New debt on the credit card: $16,500

*Outstanding balance on the credit card: $142,710

* Total budget cuts so far: $38.50

This country has not seen shit as far as austerity goes.


HardlyZero's picture

(edit) * Total budget cuts so far: $385.00

But the lack of awareness of zeros is very informative shows how 10x the problem is = the problem...its a problem of magnitudes.  and the numbers are so large we don't even keep track of the zeroes any more !!!

Leopold B. Scotch's picture

You forgot the "progressive fix" line items. 

Here, fixed:

Total U.S. Revenue     $2,170,000,000,000
Federal Budget     $3,820,000,000,000
New Debt     $1,650,000,000,000
National Debt     $14,271,000,000,000
Recent Budget Cuts     $38,500,000,000
U.S. GDP     $15,000,000,000,000
Annual Family Income     $21,700
Money Family Spent     $38,200
New Debt on Credit Card     $16,500
Oustanding Balance on Card     $142,710
Cuts in Spending for 2013     $385
Total "Fair Share of GDP"      $150,000
Allocated "Fair Share" annual amt      $15,000
Any shortfals?    Tax existing capital.

There.  Austerity?  Austerity for what?

smlbizman's picture

are we talking actual budget cuts? or are these, thee ole' was gonna spend 100mil, but now i am only going to spend 70mil?...see i can cut spending

Anusocracy's picture

Government growing as a percentage of the economy equates to a growing morbidity of the economy.

If government applies austerity mainly to the private sector, the economy will be damaged even more, with less possibility of recovery.

If government shrinks itself meaningfully, the private sector will respond positively.

Of course government is not going to sacrifice itself for you.

CPL's picture

Get the funk outta here!


Cue bassline.

stocktivity's picture

" debt-based consumption is an economy devoid of savings, i.e. capital to invest in productive assets."


Bullshit Charles! That's the old the money is printed out of thin air to invest. Get out of your cave.

Winston Churchill's picture

Best choice as Bernie Maddoff is currently unavailable for some reason.

SilverMoneyBags's picture

Krugman, the guy who advocated for 91% tax rates, is the world's best economist? Did they start selling THC Kool-aid in Colorado yet?

HardlyZero's picture

Not "best"..."best-known".   They take no resposibility in the article for showing intelligence...just the "fax" /sarc.

They probably copied and faxed the article from some blog too.

Meatballs's picture

Stiglitz would be a far better choice than Krugman. Neither will happen, yet another Wall St. goon in the wings I have no doubt.

Mr Lennon Hendrix's picture

Give a junkyard dog a Nobel and he would be more qualified than both.

Freddie's picture

The Guardian is a leftist retard trade unionist paper.   Evil idiot Krugman is really pushing the $1 trillion platinum coin to Obama. 

donsluck's picture

Your comment is 90% insults and 10% innuendo. Worthless.

Banjo's picture

@Freddie you are the epitomie of "Tabula rasa"

Not many neurons firing up there are there :)

Zap Powerz's picture

We had some good times while it lasted!

Salon's picture

Wow! We sure did!

Thats why governments will always push credit expansions beyond the ability of the underlying economy to support it. The bad effects from the contraction can be blamed on the last guy in office.

The Axe's picture

E-TRADE crash   system hacked

CPL's picture

It's worse actually.  They canned their IT staff.  So...No not a hack.  


The inevidible machine breaking and taking down one system after another in a middle tier shit storm.  Plus all the techs they laid off are telling managers to FUCK OFF while the business is burning to the ground.


So if you are with eTrade.  There is no longer an "E" watching your money or your backs.  Amazing how stupid it's become.  A CEO is more important than the service provided now.

pavman's picture

A CEO is more important than the service provided now.

And things have changed how since when?  In my experience, no one in upper management gets info from the foot soldiers because middle management screens out good and bad information.  Personally, I think the best thing a corp can do is axe as many middle management layers as possible to streamline an organization.  But there's some sort of political pressure to axe the foot soldiers instead.  Like a manager can do the job of a foot soldier.  Sha.  Oh well, they get what they pay for and they stew in their own stupid decisions.  I know that if that happened to me, I'd want a premium if they wanted my skillset back.  A large premium.  Say... 150%.  Glad I don't have an E-Trade account today.

Cursive's picture


When I was a child, I spake as a child, I understood as a child, I thought as a child: but when I became a man, I put away childish things.


The world has a shortage of modesty and maturity.  We are, collectively, a pack of spoiled children, looking for the next instant of gratification.

BlueCollaredOne's picture

Yea, well, you know, that's just like, your opinion man.  

Leopold B. Scotch's picture

I just tweeted that and upped it to my facebook.

So Close's picture

Billy Joel... Glass houses anyone?

Chupacabra-322's picture

Why?  Because the Banksters have hijacked the world's Goverments and Criminal Politicians through blackmail, racketering, murder, drugs, espionage, human trafficing, PsyOp, Flase Flags and funding/arming of terror organizations which they claim to be protecting us from. 

And that's just for starters. 

Cognitive Dissonance's picture

Because they hate our freedom.

The real question is always a basic question. Who really is "our" enemy. Most often it is our own government.

Mr Lennon Hendrix's picture

Our enemy is our culture - this god forsaken culture.

Cognitive Dissonance's picture

This seems to be a horse and cart question. Does our culture produce the government or vice versa? I suspect neither, that instead it is a symbiotic relationship, a closed loop positive feedback mass insanity.

Anusocracy's picture

The enemy is a belief system in someone else's head.

HardlyZero's picture

Rick Santelli says "all children left behind" and that rings true.  The destruction of the future can occur in so many ways, fiat being one.

Pegasus Muse's picture

CULTURAL MARXISM: The Corruption of America  (1hr 39min)

A James Jaeger Film featuring RON PAUL, Congressman/Presidential Candidate; PAT BUCHANAN, Author/Political Analyst; G. EDWARD GRIFFIN, Author/Producer; EDWIN VIEIRA, Author/Constitutional Attorney and TED BAEHR, Founder of MovieGuide and Christian Film & TV Commission --

CULTURAL MARXISM explores the love affair with collectivist ideologies that has lead to ever bigger government and the welfare-warfare state. Find out how the Frankfurt School, a Marxist splinter group, established itself at Columbia University and began "the long march through the institutions." The idea was, and still is, to infiltrate every corner of Western culture and pervert traditional Christian values with "political correctness" and Marxist ideologies. The ultimate goal is to destroy American free-enterprise capitalism by undermining its economic engine, the Middle Class, and the basic building block of society: the Family Unit 

Dr. Engali's picture

Is there some austerity going on some place that I am unaware of? It seems to me that they are spending what they can as fast as they can. Shit Obama says..raises for all federal workers deserve student loans for everybody....don't like your mortgage payment? Stop paying it. Free phones health "food" ...Don't worry uncle sugar will take care of go back to sleep little sheep.

Zap Powerz's picture

Austerity:  A nearly unmeasureable, insignificant decrease in the size of the increase in spending.

hapless's picture

Or, a formerly exponential growth in spending that has temporarily been made linear.


CrimsonAvenger's picture

Austerity: a slightly lower rate of increase than the balls-out growth that both parties want.

Spastica Rex's picture

You and the Mrs. Dr. are inivted to our house for dinner any time!

socalbeach's picture

Am I the only one who thinks one Charles Hugh Smith article per week is more than enough? (edit: guess not, just saw the Steve in G. post below.)

buzzsaw99's picture

...i.e. capital to invest in productive assets.

Productive assets, that's a laugher! Name one.