Guest Post: The Grand Tradeoff Of Risk/Innovation/Growth And Financial Security

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The very promise of permanent security dooms the economy to stagnation as complicity, avoidance of risk and passivity are incentivized.

Focusing on econometric data to make sense of our economic ills blinds us to deeper dynamics, for example, the Grand Tradeoff of risk and financial security.
We can visualize this as a seesaw: if financial security is the priority, then risk is avoided. If risk and innovation are rewarded, then security is off the agenda.
Contrast this ontological tradeoff with what Central States around the world have promised their populaces: rock-solid, permanent financial security via guaranteed mortgages, bank deposits, pensions, education and healthcare, and high growth to pay for it all based on ever-expanding innovation.
Sorry, developed-world people; you cannot have it both ways. If everyone is promised financial security, a premium is placed on risk avoidance and complicity with the Status Quo. Why risk failure and disorder for an unpredictable pay-off when "going along to get along" will reap guaranteed pensions, healthcare and an assortment of other entitlement goodies?
If you want growth, you must reward risk and innovation and foster a culture that accepts failure and low-intensity disorder as the norm. Promising financial security in this environment is promising the impossible.
That leads us to the deliciously perverse Grand Irony of the Grand Tradeoff: by fostering expectations of guaranteed financial security, you incentivize risk avoidance, which fosters a low-risk, low-innovation, low-growth economy that is incapable of expanding fast enough to fund all the grandiose promises of rock-solid security made to citizens.
The very act of promising financial security guarantees the promised security is illusory.
If you want a high-innovation, high-growth economy, you must reward risk and accept constant disorder and failure--the very antithesis of guaranteed financial security.
Risk cannot be eliminated, it can only be suppressed or transferred to others. This is the foundation of all three of my recent books: An Unconventional Guide to Investing in Troubled TimesResistance, Revolution, Liberation: A Model for Positive Change and Why Things Are Falling Apart and What We Can Do About It.
In promising financial security to hundreds of millions of citizens, Central States have in effect claimed that risk--that the promises cannot be kept--has been eliminated. This is an ontological impossibility. Risk cannot be eliminated, it can only be pushed beneath the surface or transferred to others.
If it is suppressed by financial repression and intervention, it doesn't vanish; it slowly builds up like tectonic pressures that are suddenly released in the financial equivalent of a massive, unpredictable earthquake.
If the risk is transferred to the system itself, then it will eventually bring down the system.
Promising financial security is also promising that risk has been systemically eliminated. This is the fundamental dynamic of the "social contract" that underpins societies and economies from Europe to Japan. It is a social contract constructed on an ontological illusion.
If risk is avoided, suppressed and unrewarded, the economy will stagnate and the costs of the promised financial security will crush it. If risk is embraced and rewarded, the resulting expansion is based on a high rate of disorder and failure. Security cannot be promised, because security is illusory.
The very promise of permanent security dooms the economy to stagnation as complicity, gaming the system, avoidance of risk and passivity are incentivized.
"There is no security on this earth; there is only opportunity." 
(Douglas MacArthur)

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Sudden Debt's picture

don't worry, my grandkids will pick up the tab

rocker's picture

Sadly, nothing new. The Game remains the same as it has for 80 years.

Seer's picture

Did the words "go forth and multiply" appear only 80 years ago?

tickhound's picture

Chuck says 'no-growth' from socialized risk... a 'no-duh' highlighting the dilemma while attempting to justify one choice as 'better.'  The piece reads political.

We have all these 'professionals' dedicating man hours towards HOW BEST to balance the see-saw, yet all are too pussy to ever question the ride itself... No matter how wasteful and ultimately inefficient it proves to be.

"Be fruitful and multiply" is the foundation model.  One could argue it worked out well, I suppose.  But like exponential models, it has ballooned to become "profit through growth at ANY COST."

Apparently things MUST be this way.  Nature be damned.  

"Be fruitful and multiply" is as obsolete as "You earn a living by the sweat of your brow." 

Economics today is a religion, based on faith in a lie. 

Fuck these economic 'analysts.'  Better alternatives are coming from technicians, scientists, engineers and philosophers these days anyways.  Politicians, bureaucrats and economists won't solve shit. 

Snakeeyes's picture

Gov't spends and borrows trillions increasing risk.

The Fed does the same.

With little or no payoff.

The economy still sucks.

glenlloyd's picture

that might be a risky bet...

Sudden Debt's picture

I guess they'll land on a good job in the gold mines on mars so they're good for it.

Seer's picture

Can we PLEASE start acting like adults and acknowledge that it is NOT possible to have perpetual growth on a finite planet?

The problems we're facing is because we spent too much (future) growth.  To say that the solution to our problem of borrowing future growth is to borrow more growth is insane.

People keep bashing their heads against the wall as though there's some sort of solution that can be applied to the existing system.  No one can figure it out because there is no "solution," the system is constructed on a fault line and mother nature is moving the tectonic plates on us (yeah, let's work to stop continental drift!).

PUD's picture

Bravo. The real problem however lies in the stats quo definition of 'growth" In the financialized universe "growth" is a very raw number equivalent to tons and units which does not count quality of life, happiness, satisfaction etc. So long as the metric of more is the defining characteristic of "growth" you are correct...we are fucking doomed

ebworthen's picture

Central Banks have guaranteed security for the banks and bankers on the backs of individuals.

Governments have guaranteed the plantation owners that they can sell their cotton and other "crops" at the prices they demand, and that their slaves will remain oppressed.

rocker's picture

That is the game most lose sight of by those infuences who want them to evade this simple truth. 

Rule one in all money matters. Follow the Money. The Bankster's Cartel controls and manipulates the money.

JR's picture

Yes, and this banker-controlled government by artificially keeping alive dead beats with taxpayer monies such as Morgan Stanley, Goldman Sachs, Merrill Lynch et al. who were hoisted by their own petard, has meant a lower average living standard for most Americans.

Not only are people who had nothing to do with this high risk taking suffering from loss of homes and/or home equity, inflation ravaged savings, discontinued pensions, eliminated jobs, inflated tuitions born by college loans, but their average real wages are lower. At the same time, the financial sector is in full rebound as to its 40+% share of domestic corporate profits.

Economist Henry Hazlitt’s words on the results of the lobbied Congress saving particular industries such as Freddie and Fannie apply as well, in part, to its saving of the insolvent investment banks.

“Any attempt,” writes Hazlitt, “to save the X industry by a direct subsidy [taxpayer bailouts and interest on free money from the Fed plus outright deposits in the accounts and selected stocks of TBTFs] is “nothing more than a transfer of wealth or income to the X industry. The taxpayers would lose precisely as much as the people in the X industry gained…"

And for those institutions and credit unions in direct competition with these Leviathan banks, ”It should be clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And customers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger…

“Capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.”

I am in agreement with Hugh-Smith who uses permanent financial security here as clarification for a socialized economy. Citizens, say, whose savings for future purchases have been stripped by Fed policy should not be classified with people who want the failures of their risk taking guaranteed by bailouts, socialized care from cradle to grave, and home mortgages for which they do not qualify. You can’t have the latter and growth.

On the other hand, savers and responsible homeowners, say, are not requesting security; they simply oppose having someone else (government) take their money and use it to cover someone else’s high risk failures.

de3de8's picture

Well,for one thing if there is a solution (innovation) we will never attain it under a rigged system.

blindman's picture

! . !
Alan Watts: This Is IT: Become What You Are

Eally Ucked's picture

hurrah! High risk = high rates of innovation and growth! Thats what we see everyday now!

Hohum's picture

CHS, news flash, growth (GDP/total credit market debt) ended in 1970.  Looks like everyone is on "totter" and not "teeter."

Omen IV's picture


unchecked asymetrical risk / reward  - in the absence of truth  - results in rents not growth or innovation


falak pema's picture

I don't know what CHS wants in the real world; as the dichotomy is with us and we need to prioritise. We cannot have innovation without first cleaning out the power of the corrupt financial world.

On the one hand he chastises corpofascism and says we have to clean out the financial mess.

On the other he is against government action to reign in the corpofascists. If it isn't government who is it that does this?

There is no other legal entity that can legislate and turn this thing around; other than a military coup and dictatorship. And we know that has always proven worse.

We need priorities and real solutions, or else the Oligarchy status quo continues and they burn the remaining wealth of first world. The people have to get their act together to elect honest government. Other than that its gonna go from bad to worse bigtime. 

secret_sam's picture

   On the one hand he chastises corpofascism and says we have to clean out the financial mess.

   On the other he is against government action to reign in the corpofascists.

It's a common syndrome.  Everyone is convinced all we have to do is go back to what we were doing when things were still running OK.

It's really silly when you realize the idea is something like this: "everything would be fixed if we could just go back to doing whatever we were doing that got us to this point."

The "creative destruction" of capitalistic enterprise might actually *work,* but you'd have to give all the capital to the people who don't have any.  That's not acceptable.

falak pema's picture

lol, the Oligarchs don't know how to return the check, turn the other cheek...

2espressos_2separateCups's picture

That there is a trade-off between risk and reward should be sufficiently clear to everyone trained in economics and is nothing new.  The author misses the point that most advanced societies are busy trying to find the right balance on the seesaw, NOT denying that the trade-off doesn't exist at all.