Guest Post: The Global Status Quo Strategy: Do More Of What Has Failed Spectacularly

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The global Status Quo--the U.S., the E.U., China, Japan, Cyprus, Greece, Italy, Spain, et al.--has only one choice: do more of what has failed spectacularly.

A key goal of propaganda is to mystify and obscure the Power Elites' real quandary and agenda. For example: we're just trying to help you out here, folks, by inflating another "wealth effect" bubble that will make you feel more prosperous. You're gonna love the warm fuzzy feeling of a return to the good times, even if you own zip-zero-nada in the way of productive assets.

Or: we're raising your taxes and expropriating your money via inflation to stabilize the system that benefits you. (And yes, you may kneel and kiss Janet Yellen's ring.)

The current level of mystification is truly extraordinary. But fortunately, owns a demystification device that scrubs out the mystification, leaving only stark, unforgiving reality:

1. The global Power Elites know reform is necessary, but the risks of reform are unacceptably high. Why are they unacceptably high? The Status Quo players might lose power and perquisites, and that is unacceptable. These include crony capitalists, cartels, quasi-monopolies, public unions, state fiefdoms, the banking sector and assorted other predators and parasites.

In other words, real reform is impossible because that would implode the Status Quo.

2. Doing nothing will also bring down the Status Quo. Now that the global Status Quo is entirely dependent on rising debt to fund state deficits and marginal growth of investment and consumption, the Status Quo has been backed into a corner: expand debt or die.

Since households and companies can decide not to borrow more money even if they qualify to borrow more, it falls on the central states to borrow and blow money to keep their economies from imploding. This stupendous borrowing then falls on the central banks, which must monetize most of the state debt to keep interest rates low and force investors to chase risky assets and savers to squander their precious capital on gew-gaws and trifles, otherwise known as "aggregate demand" to the Keynesian Cargo Cultists dancing around Krugman's campfire.

3. Since the only endgames to ballooning debts and declining household incomes are runaway inflation or renunciation of debt, the Status Quo has only one choice left to preserve its neofeudal arrangement: do more of what has failed spectacularly, i.e. inflate more asset bubbles as a way to mask the system's phantom collateral for a few more months or perhaps years.

Unfortunately for central banks and their politico cronies, serial asset bubbles face the headwinds of diminishing returns. All the Fed and Federal agencies had to do to launch the first housing bubble was lower interest rates and encourage subprime mortgages.

Now it takes the Fed buying trillions of dollars in impaired mortgages, lowering interest rates to zero, guaranteeing FHA loans to anyone with a pulse and a paycheck, etc. just to keep housing from flatlining. See that little blip up that trillions of dollars in subsidies and intervention bought the Status Quo?

The other serial bubble in progress is of course stocks, which recently scored nominal new highs even as the adjusted-for-inflation (consumer price index) market notched a classic diminishing-return lower high:

4. The only metrics that count are debt and the ability to service that debt. Households have this tiny little problem known as declining income that makes it impossible to service more debt unless interest rates fall to near-zero. Presto-magico, real interest rates (adjusted for inflation) are near-zero, and can't fall any lower.

(Note that this is median income, and since only the top 5% have seen an increase in income, the lower 95% have actually experienced a steeper decline than shown here.)

That means the Fed has run out of room to lower rates. From here on, households will only be able to service more debt if their income rises. Alas, with full-time employment (the only measure that counts--sorry, Federal bean-counters, political lackeys and media toadies, 12-hour a week minimum-wage barista jobs and self-employed people with net earnings of $154 a year don't count) back to 1980 levels, that is not even a remote possibility.

That leaves the global Status Quo--the U.S., the E.U., China, Japan, Cyprus, Greece, Italy, Spain, et al.--only one choice: do more of what has failed spectacularly. Yes, it will fail spectacularly again, but until then, the mystification machine is running full tilt.