Guest Post: The Global Economic Disease In 8 Points And The Cure In 4 Points

Tyler Durden's picture

Via Charles Hugh-Smith of OfTwoMinds blog,

A mere dozen points describe both the global financial illness and the cure.

The global economy is ill, and everyone who is not mired in denial or a paid shill knows it. Saying it's healthy doesn't make it so.
Is is possible to usefully generalize the illness and outline a cure in a few points?Maybe not, but let's try anyway.
1. Creating and selling credit and leverage became far more profitable than generating goods and services. Financialization--expanding highly profitable credit by leveraging assets and income to the hilt--began in earnest in the early 1980s.
Creating credit is equally easy in fractional reserve systems like the U.S. and command economies like China. Creating leveraged instruments is as easy as writing and selling derivatives, which not coincidentally have risen (in notional value) 700% since the mid-1990s.
We can understand financialization with just two charts: Here is real GDP, up 50%:
Here is total credit market debt owed, up 200%:
Though solid data is hard to come by, financialization is not just more profitable in nominally capitalist America--it is also true in nominally communist China. Real estate speculation is simply the expansion of credit via building phantom assets.
2. The financial sector captured the regulatory and political mechanisms of the Central State. This capture is both direct (buying political relief from regulation, etc.) and indirect: once the market becomes dependent on financial profits, then any threat to those profits threatens the market and thus the wider economy.
Politicians, capitalist, socialist and communist alike, all cave in as soon as economic growth is at risk.
The capture was also ideological. In the West, neoliberal policies (loosening regulatory controls, reducing the size of the State, enabling free flow of capital, etc.) produced huge gains in growth in the initial low-hanging-fruit stage. This gave the ideology real-world credence.
In China, the "to get rich is glorious" slogan embodied an entire ideology of a State-managed market economy that was as dependent on financialization as the West. (In China, financialization is hidden in land deals and loans made by local government and private wealth-management credit/leverage that is off the books.)
3. Financialization incentivized speculative credit bubbles. Speculation reaps huge rewards as the bubble expands, and the economy becomes increasingly dependent on ever-expanding debt for its growth, income, profits and taxes.
When the bubbles burst, they devastate not just the financial sector but the entire economy, which has become heavily dependent on speculative bubbles and continuous expansion of debt and leverage for its growth.
4. The only "cure" that doesn't cause political pain is to lower interest rates and flood the economy with liquidity, i.e. cheap money, to reflate a new credit bubble in another asset class. If there are no other asset classes available, then the Central State and Bank will try to reflate the existing bubble (for example, real estate in China).
5. Speculative credit bubbles (neoliberal or command-economy) led to systemic mal-investment and mis-allocation of capital. Suddenly selling autos for a loss to reap the financing fees made sense, as did building McMansions in the middle of nowhere and building more steel mills in China, even though the sector is already plagued with monumental over-capacity.
6. The Central State and Bank responded to the popped speculative credit bubbles by recapitalizing insolvent banks with taxpayer money (or claims on future taxpayers, i.e. bonds) and legitimizing phantom collateral/assets. It is absolutely critical to understand that the political Status Quo will "buy" growth at any price, and as a result the State is blind to the consequences of massive mis-allocation of scarce real capital in mal-investment.
In other words, the State and Central Bank will continue to do more of what has failed spectacularly until they can no longer do so.
The ultimate counterfeited collateral/asset is a sovereign bond. Here is the basis of the claimed legitimacy: "We can always pay the interest on this bond because we have the unlimited power to tax our citizenry, and we will always return your capital because we have the unlimited power to create money."
Yet if we follow the consequences of these two unlimited powers, we find nations taxed into poverty and currency debauched to a shadow of its former value. How exactly does ruining the economy and currency create legitimate collateral?
The State also legitimizes phantom capital by manipulating stocks and bonds higher and allowing real estate to be marked-to-fantasy or kept off the market.Only a transparent, open market can discover the price of an asset and thus its value as collateral for debt, and destroying or limiting the market's ability to price assets undermines the legitimacy of all assets and collateral.
7. The Central State and Bank attempted to repair the speculative credit bubble machine by diverting income from the productive "real" private economy to the parasitic financial sector and politically powerful but grossly inefficient cartels and State fiefdoms.
8. The demographics of an aging population and shrinking workforce cannot support the promised entitlements and other State spending. This has been covered in depth in many places, including this blog--for just one example of dozens:Demographics and the End of the Savior State (May 17, 2010).
That's the core of the disease in 8 points. Here is the 4-point cure:
1. Re-take the regulatory and political machinery of the State from the control of the financial sector. As long as the State and Central Bank's actions are primarily aimed at sustaining debt bubbles and spreading the losses generated by the financial sector to the rest of the economy, the State and the economy are doomed to implosion: Is the Central State Too Big to Fail or Too Big to Survive? (January 22, 2013)
2. Mark every marketable asset held by every financial institution and corporation to market at the close of each day, including mortgage-backed securities and real estate. This will reveal the "too big to fail" banks around the world as insolvent.
3. Liquidate the insolvent banks in an orderly fashion by auctioning off all of their assets on the open market. This will eliminate the shadow inventory of housing and expose phantom collateral.
4. Relieve the State of all obligations other than being an impartial enforcer of transparent markets, open competition and common-sense regulation to protect the common good and public commons. As I explained in The Grand Tradeoff of Risk/Innovation/Growth and Financial Security (January 21, 2013), the security of State guarantees and promises is illusory: the State can only sustainably spend the surplus generated by the private sector.
As the private sector crumbles under the dead weight of a parasitic financial Aristocracy, the debt-serfdom of financialization and corrupt, inefficient State fiefdoms, the economy can no longer support expanding State obligations and debt.
The citizenry will have to accept that promises issued on the basis of delusional, unrealistic projections of endless growth and debt expansion must be renounced, just as debt based on phantom collateral must be renounced.
Were these four points implemented, the re-set would be difficult but brief, as truth, trust and resilience would be restored to the political and financial systems. Once political and financial resilience has been restored, fixing all the other problems we face enters the realm of the possible. Without these 4 fixes, the system remains brittle, fragile and doomed to implosion.

Why Expansionist Central States Inevitably Implode (January 15, 2013)

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Say What Again's picture

Bernanke:  OK, we've hit 1500 on the S&P.  Our work is done.

Jamie: So can I start selling with size?

LLLLLoyd: Not so fast!  I need to buy more puts.

Cohen:  Hey you guys...  I just bought a beautiful chalet in Davos.  I'm gonna stay here for a while.

metastar's picture

The cure is embodied in the first point. If cure 1 is implemented, all other aspects of the recovery fall into place.

It is doomed to fail unless the American people wake from their deep slumber

new game's picture

Charles in charge;

1) as said by I - all said above would be lost to most  americans, hence just complicated enough so i t would be very difficult to have a meaningfull debate - very sad reality. conversation would be hijacked by current power brokers of their failed policies-the bully pulpit...

so, one must quote Thomas Jefferson

"Whenever the people are well-informed, they can be trusted with their own governement."

he could not of comprehended a nation become so fucking stupid, numb and dumber, glorified by junk and dumbed down to the point of a media trans.

we are so far from this trust, i have no idea how we could get back short of ________________.

call it a corzined nation of distrust led by 530 pathelogical liars! maybe six i could trust.

Thanks, Charles, for the wish/think and hopium for a better day....

Cognitive Dissonance's picture

"The citizenry will have to accept that promises issued on the basis of delusional, unrealistic projections of endless growth and debt expansion must be renounced, just as debt based on phantom collateral must be renounced."

The debit addicts (that's "we the people") are not yet ready to give up Charles so the beatings will continue until morale improves.

PUD's picture

All true but until the fractional reserve money as debt lending system is ended nothing will change except the rate of decline

Super Broccoli's picture

what when you're at the end of it ? what when you're full in and can't create more ? i think that's where we are and that's the reason of that credit crunch !!!

Skateboarder's picture

As long as people think that what the MSM, politicians, banksters, and special (read wicked) interest groups are saying is true, there will be no change, and there will be no progress.

Progress begins with you admitting that things are fucked up and correctly identifying the fucked up things, and as long as the people are distracted, there's nothing fucked up (though the sky is falling).

Action won't come until it's too late. Terminal myopia, as one of our ZH friends said... terminal fucken myopia.

lunaticfringe's picture

Well said. 

Our masters, the bankers, cannot continue to pillage us if their plans are exposed.

So we live in zombieland stricken with terminal fucking myopia.

Pairadimes's picture

The 'illness' in question is cancer, and the prognosis is terminal.

fonzannoon's picture

speaking of which, I have decided that my black swan for 2013 is the Bernak resigns abruptly before year end due to health concerns or some bs.

tooriskytoinvest's picture

Warning To All Investors: Bundesbank's Weber, JPMorgan's Dimon, Roubini Warn About Global Easing. BofA Warns Of 1987 And 1994 Scenarios. Yale's Shiller Sees Housing Market Have Further to Drop. Bill Gross Is Scaling Back On Derivatives On Incoming Inflation. US GDP "Growth" Since The "Recovery" Is Now The Worst In US History!!

steve from virginia's picture



The problem is energy (shortage of it) not finance, the so-called 'productive' economy is actually reductive.


Finance simply makes a non-working system pretend to function: finance is fine, what fails is everything else.


Analysis that does not center around energy and our waste-based economy is irrelevant.

lunaticfringe's picture

Steve, with all due respect, wtf are you talking about?

Dewey Cheatum Howe's picture

No the problem with energy is regulation of said industries that can extract the energy sources locally. There is no shortage of supply and onerous demands on doing business to get at the supply. Just having a plan to convert running everything over to natural gas would kickstart the whole economy and push it into overdrive for the next 5 or so years between extraction, building and re-purposing the existing supply and transport infrastructure. You also have all the support businesses and jobs that pop up around the switch over from oil to gas. 

Local energy resource production is the major solution to kickstart the economy independent of the financial industry problems.

Joshua_D's picture

Ummm yes, wtf are you talking about? Seeing as how cars are still being driven and food is still being put on the table?

pods's picture

I would say energy (or lack of exponential expansion of it) is the symptom.

Debt backed money issued with interest is the problem.


thedrickster's picture

I agree, perpetual growth is only required because the system can only continue with perpetual credit expansion.

new game's picture

the petro dollar? waste of resources? misallocated capitol? on and on.

Charles sugests a starting point.  The process would sus out many other misallocations.

ah fuckit; wish/think never gonna happen wasted thoughts bullshit.

WE ALL KNOW ONE THING - they fucked it up real good this time...

natronic's picture

We can build 100 nuclear plants or drill more gas but it's not going to stop Gov't spending or them pumping money into the economy.  The big bankers are all drunk on free money and are going in on the market.  So then the "low information investors" are either going in now because they don't want to miss out, or are going in more because they are doing so well.  The big bankers will pull out the market will collapse and little people will be left holding the bag.  then they will request more regulation on an already over regulated finance industry.  And no amount of energy will fix that situation.

q99x2's picture

I'd like to see them tax a fucking Robot Dude.

lunaticfringe's picture

In other news, I am calling the top right here.

CNBC just said the "smart money" is buying housing and airlines stocks. Bwhahahahahahahahhah.

koncaswatch's picture

Airlines, really?! +1 for the laugh, especially about airlines.

glenlloyd's picture

Fixing the problem requires a lot of harsh medicine and significant pain. At this point neither TPTB nor the bulk of the population see the benefit of the fix. They would prefer to look the other way while their liberties and finances are eroded slowly over time. Perhaps some even wish to push these problems onto the next this case it would be multiple future generations, as long as they get their govt promises. Like govt most of the people in this country would rather pretend that they're solvent rather than meet the problem head on and deal with it.

The problem with not taking control is that the skies are darkening above but people are just looking the other way and pretending that all is well. Many just want it to go back to the way it was before 2008...which was nothing more than illusion.

You can show / tell them the problem all day but when it comes down to it they haven't the fortitude to 1) deal with the mess they've brought on themselves or 2) deal with the politicians who continue to lie to them about it.

Joshua_D's picture

Charles' solutions are pretty much correct, but I see no way that the people could accomplish them without violence or compliance of some states. Americans try to change re-take the regulatory and political machinery of the State every two to four years with no success. New politicians are corrupted faster than you can say "I swear to uphold the Constitution ...".

koncaswatch's picture

Corrupted politicians are cultivated... the Chicago bunch. Many Americans are not participating in the irrelevant vote process. The inauguration was a complete farce.

Dewey Cheatum Howe's picture

Agreed. The system is fubared as it stands right now. The justice system is broken, the regulatory agencies are nothing more than gestapo agencies to chokehold competition and punish dissenters. Just look at the SEC who banned Egan-Jones from doing credit ratings for 18 months while Lanny boy admits the Justice Department won't prosecute too big to fail. Is it even possible to do a large enough clean sweep to right the ship at this point? I don't know how it plays out but the fireworks show is going to be something spectacular when the SHTF finally not like that OWS stuff.

IamtheREALmario's picture

I understand how the 4 steps get us back from being a parasitic financialized economy, but I do not see how it creates an environment of proper asset allocation and value creation.

In the 4 steps much of the phantom fiat wealth will be destroyed and those whose livelihoods depend on phantom fiat dispersal and manipulation will have no means of support. Rich people will become less rich or poor. Poor people will remain poor and the middle class will lose their safety net. Call this level one of understanding.

In the end it is about power and power allocation where fiat money, for most of recent history has been the weapon that substitutes for the whip. Those who create fiat have the most power. Those who execute the will of those who create it benefit proportionately and those who are in the role of being forced to take what the above two catagories grudgingly give them have no power whatsoever. Call this level 2 of understanding.

Ultimately for society to go forward as a whole it is not money that must be re-allocated, but power must be balanced in some way and I am not talking about a "workers of the world unite" false dogma. Unfortunately this is very difficult in a situation where you delve one level beyond money creation you have an underculture of the powerful who have, not only a coordinated network (and I am not talking about Bilderberg) but access to knowledge that the general populace has no clue exists. Call this level 3 of understanding.

There is most likely a level 4 of understanding as well, but I do not want to take freakish guesses at it. The above levels are supported with documentation.

nicxios's picture

Even those 4 points won't cure anything since technology is making billions of people obsolete. 

michael_engineer's picture

The below two paras indicate where this author CHS seems to go off the rails. The first para is insightful and there is much merit in stating in a way that growth is over. But the second para almost seems to be in direct opposition to the first. "Fixing" all the rest of the problems implies going back to BAU but without growth it just isn't BAU anymore.

"The citizenry will have to accept that promises issued on the basis of delusional, unrealistic projections of endless growth and debt expansion must be renounced, just as debt based on phantom collateral must be renounced.

Were these four points implemented, the re-set would be difficult but brief, as truth, trust and resilience would be restored to the political and financial systems. Once political and financial resilience has been restored, fixing all the other problems we face enters the realm of the possible. Without these 4 fixes, the system remains brittle, fragile and doomed to implosion."

Laser Shark's picture


There's no tomorrow

In my view, there is no "cure". The world-wide economic, financial, banking, and monetary systems are a terminal cancer patient.

It is being shot full of morphine to dull the pain and amphetamines to get it up out of bed and moving around, but that just creates an illusion of it being "okay". It will eventually die, and the markets as we know them will cease to function/exist.

It won't be like the crash of 1929 or 1987 or the DOT.COM crash. There will be no return to anything that would be considered "normal" based on the past century. So, given that, I think they should just prop it up as long as they can. Keep shooting it up with morphine and amphetamines. Just buy time at this point.

At the very least, there's no way to make a solar-powered Boeing 747.  They're having a hard enough time with the 787, and it still burns jet fuel.

koncaswatch's picture

IMHO Charles is at least visulaizing a path to correction. The most important of which is the exposing of insolvent banks and their liquidation. Real capital can then crawl out from the rocks of misallocation and be put to good use and not just circle the drain with all the other printed bogus "capital" flooding the financial system.

aerojet's picture

The remedies were on the table in 2008/2009 and nothing meaningful has taken place.  I'm guessing that means implosion is the only outcome, then.  Excuse me, I'm off to purchase various supplies in order to sustain my family for a few minutes longer than everyone else.

dscott8186's picture

Hmmm, I'm tempted to buy into the Financialization premise. That is we are too busy making paper profits rather than profits from making and selling stuff.  But I'm not convinced.  

The first two charts illustrate the growth of the financial industry except that those profits on chart #1 were paid out to investors, i.e. the stock holders, who in turn reinvested that money.  But where did they reinvest it?  You give no conclusive proof that ALL of it was back into the financial services industry.

It may be true that making a profit is less risky and greater in the financial services sector than that of manufacturing.  That being the case, what you are really describing is the starvation of the manufacturing sector of investment dollars.  That would be shown by a greater cost basis in bonds issued by manufacturers raising capital to finance plant and equipment.  Is it?  Given the very low rates of interest elsewhere, everybody and his brother would be racing to buy up their bonds to capture the best possible domestic interest rate. 

Your case would be made or broke by showing the manufacturing sector GDP. But I rather suspect that our current situation is more of a different parasite sucking the life blood out of the economy - Government via taxes and regulations.  

pragmatic hobo's picture

"The global economy is ill ..."

I guess it all depends on who you are ... if you are the member of top 0.001% class, then the economy have never been better.

Kreditanstalt's picture

When the entire "stock market" revolves not around miners, industrials or agriculturals but around Netflix, Herbalife, Great Canadian Gaming, banks and retailers, I KNOW something is wrong...

roadhazard's picture

I always love economic mumbo jumbo charts and talking point flights of fancy. The economy, world or US is going nowhere on high dollar oil. Gas in the US now is $3.20(avg) a gal. and that in an economy that fucking sucks. Every time someone even hints things are getting better oil has a price ejaculation and kills the rumor like RAID killz bugs. No one EVER explains to me How an economy recovers with Low wages and $150/$200+ a barrel of oil. It can not be done.