Guest Post: The Fatal Disease Of The Status Quo: Diminishing Returns

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The costs of maintaining a sclerotic, cartel-state Status Quo infected with incurable diminishing returns eventually exceed the carrying capacity of the real economy and the Status Quo collapses in a heap.

On the surface, the Status Quo appears stable, if not quite healthy. This stability is illusory, however, for the Status Quo has a fatal disease: diminishing return.
The basic idea of diminishing return is closely related to marginal utility and marginal return: the more capital, energy and labor committed to a project, the lower the return/yield/output.
Diminishing return works in two ways:
1. Output (yield) remains stable, but it requires an ever-increasing input of capital, energy and labor to maintain that output.
2. Input remains stable but output (yield) constantly declines.
To survive, the Status Quo must maintain the same output: the stock market must be held aloft at current levels, entitlements must be paid, the National Security State must either expand or maintain its current global reach, and so on.
What's hidden from view is the rising input costs to maintain this illusion of stability. Consider the Federal Reserve's campaign to elevate the housing and stock markets. First the Fed need only threaten to buy mortgages and Treasury bonds to trigger a market rally. But soon this is not enough to keep the market aloft, so the Fed unleashes a campaign of quantitative easing (QE1) with an eventual end date.
This pushes the market higher, but once the artificial stimulus ends, the market feels gravity once again and rolls over. To maintain the necessary output--a rising stock market--the Fed must increase each dose of QE.
But the return on this ever-increasing input diminishes. Like an organism fed a stimulant, markets habituate to the artificial stimulus and quickly become dependent on ever-increasing doses to maintain the output (i.e. the "high").
In 2012, the Fed announced essentially unlimited QE to infinity. There can no longer be any hint of an end to the quantitative easing, or the output (the market) will fall off a cliff.
That's the problem with diminishing return: eventually the input is so costly the system implodes. The Fed has already injected the patient (the economy) with massive doses of financial crystal meth to maintain the stock market's "high." Unfortunately for the Fed, the market demands a bigger dose to keep the high going, but the larger dose will prove fatal.
Illustrating the other mechanism of diminishing return is the Higher Education Cartel, one of the monopolistic rentier arrangements that dominate our economy (banks, the mortgage industry, national security, healthcare/sickcare, etc.).
Even as the cost of attending college have skyrocketed by 600% (adjusted for inflation), the output--the value of that education--has declined. A recent major study, Academically Adrift: Limited Learning on College Campuses, concluded that "American higher education is characterized by limited or no learning for a large proportion of students."
'Academically Adrift': The News Gets Worse and Worse (The Chronicle of Higher Education)
Meanwhile, student loans exceed $1 trillion, only 37% of freshmen at four-year colleges graduate in four years (58% finally graduate in six years), and 53% of recent college graduates under the age of 25 are unemployed or doing work they could have done without going to college--retail clerks, waiting tables, etc.
The Educrat Industry blames the economy for its own abysmal failure to actually provide a measurable yield on the immense sums spent on higher education, of course, but the reality is that higher education fails to prepare students for work in the real economy.
What higher education excels at is maintaining an ever-increasing input of cash while its output/yield declines. the same is true of all the other fiefdoms and rentier arrangements that dominate our economy.
The input needed to keep the Status Quo stable must be taken from other potentially more productive investments. Taxes notch higher as the state scoops ever greater sums into its maw to fund its failing fiefdoms and diminishing-return cartels, and it borrows trillions of dollars to fill the gap between tax revenues and ever-rising input costs.
All that borrowed money has a cost, too, of course--interest. The costs of maintaining a sclerotic, cartel-state Status Quo infected with incurable diminishing returns eventually exceed the carrying capacity of the real economy and the Status Quo collapses in a heap.

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I think I need to buy a gun's picture

this is going very s-l-o-w-l-y

Alpo for Granny's picture

Old lady warning that we need a war to straighten the US out and how gold and silver are vital for survival during and after. This is real shit right here.

CURWAR2012's picture

Smith is Brilliant. Has he made any money in the market???

Kirk2NCC1701's picture

You mean the 'regular' market or the gloom, doom and boom segment?

Au Shucks's picture

When??  We all know the collapse is inevitable, but the money line on this bet is WHEN

Kina's picture

The when will be much longer than we imagine....when TPTB control everything they can then try everything and walk on air much longer. They will stand on stacks of bodies before crashing.



espirit's picture

I don't believe their standing army will stick around for that.

max2205's picture

The old new normal. Get used to it

Take your morning after pill everyday

espirit's picture

It's the sunk costs fallacy.  Technological advances have run the course and can no longer mitigate the eventual downfall of an advanced society.

Finite resources. Time to move on. Endgame near.

Species8472's picture

Hey, what's going on here, no mention of the "Central State"!!


evernewecon's picture





It was Ravi Batra who first correlated

a concentration of wealth threshold with

depressions just as R/R did with

sovereign debt scuttling growth,

more or less, but actually mostly


Krugman Admires Rogoff 


Krugman Says

Garbage In Garbage Out


See The 2.2 Not -.1% With

Debt To GDP Over 90%


The Result Of The Totality Of

The R/R Study Is Close To The

Result Of Its Critics', However.

But No One Mentions The Cost

Of Shafting That Comes From

Monopoly, Risk Filtering,

Gatekeeping And Pay To Play.

And Then The Privatizers

Have A Free Hand.   Omits

Loss Sharing, Free Reserves

For Years, Liquidity Trap, The

"Static," "Fragile" Monopolistic

Effects Not Just In Banking

But Other Major Sectors, With

Privatizations  Symptomatic

Concomitant And Additive

To That, Sustaining Wars, Etc.

This Understates The Case.

Who Knows How Much Left

The Country.  The Fed/

Congress Are Desparately

Reflating The Last Bubble

That Created The Mess.

TBTF Still Prevails.  

Rinse And Repeat.

But, back to Ravi Batra.

So the ultra rich ran out of non ultra

rich to lend to for juiced returns in the

late ‘20s but kept lending anyway.

This time round was a repeat but with

the ability to securitize, hedge, and even

bet against the debt risk.

The more the non ultra rich is harvested

the more it is only adversity offers a quick

way to make lots of money.

The Easter Islanders ate their trees.

The ultra rich, because of monopoly and

control, have incentivized it for themselves.

Of course, some think mortgage backed securities

were sometimes purposely welcomed with unqualified

mortgagors as their basis for sale to one’s customers

while shorting same for oneself.

Otherwise hedging and risk management would

be perfectly “market progressive--” anti-fragile

(in a non-social darwinist sense for me.)   Pure

S/D --perfect info/entry implies -0- profit.

A mathematical absurdity.   The opposite is

consummate monopoly.   Markets are fine,

presenting no need to jump off terraces, but

they do need process rationally informed,

but still fair, but then again with compassion

no impinged by discipline and efficiency where

such things, as in health care, as patients and

doctors are central to the system rather than

companies enjoying immunity from anti-trust,

repeal of which was expressly rejected in open


As to process and markets, health care’s a

great place for explaining.

Epidemiology and clinical realities shape the market,

with germs, disease processes and accidents

persistently disinterested in price motivations.

There the inability to move between states, often,

for a job or r.e. op owing to exclusions, and/or the

eventual reality, for many, of the choice: “go naked”

or “premium death spiral” was replaced with

an elaborate profit box-based scheme with classes

of coverage matched to abilities to pay, but

remarkably with incremental patient risk advancing

patients toward eligibility for subsidy by virtue of

those risks increasingly impoverishing them.

So what was supposed to be affordable care becomes

what are you good for care.

The opposite is risk equalization, unitizing, so as to

enable fair distribution in the manner of this

Monopoly historically in the U.S. is

1)  blanket the market with it

2) only then exact what the market’s worth for you, fully.

evernewecon's picture




This is from an org. more generally thought

of as sort of centrist/ centrist-right, and though

I’m “market progressive” (read centrist-left)

I’m happy to oppose monopolistic structures

with them.


The greatest sign of a protected profit box

existing is this: 

So what’s supposed to be a fee going from

the carriers to the government is really a

back door tax on the patients to help finance

the plan.

But by its own self description it takes us to 21% of

GNP by 2019 (I’d be amazed seeing it that “low,”)

but it’s mostly from hiring more gatekeepers aiding

monopoly, risk filtering and pay to play, and because

of the cartel itself.   How do we know that?

Simply because most unreimbursed care had all

along been passed through by “cost shifting.”

This turns that into a profit center.

It would be very different in a non-monopolistic,

doctor/patient-centric, risk equalized system,

especially with corp’s required to answer to

doctor/patient material management input

committees, having to show a public benefit

annually, having a vibrant insurer-doctor

risk adjusted market (batting averages make

no sense in med--if I  treat my own boo boo

my batting avg is 1000,) and with clinical

rationalization allowing patient and doctor

satisfaction to naturally coincide with economic


There’s  bound to be a cost surplus.   It’s the nature

of the field (full tilt science and all?)

Physicians need then to form cross-organizational

last mile practice rationalization committees, including

informing precisely what methodologies can be made

simultaneously more practice-effective/economically


Dominated by “accountable care,” combined with

carrier-doctor market enhancement, fee for service

can still thrive but find itself often unmarketable

where the odd focus of inefficiency, for whatever the

reason, may exist.

The statutory profit boxes (set by Tiers: brown’s

is apx. 40% after a 60% medical loss ratio, the

narrowest profit box being 15%, until one’s own

tax dollars, to the extent they’re still available

after monopoly this and monopoly that, underwrite

one’s subsidy owing to now being financially

eligible for it, though that’s figured on a you/not

your family’s cost flim flam and using modified

adjusted gross income, which adds income, making

it harder for you to qualify.   It’s also calculated by

an army of new persons hired for that purpose, who

will do it “presently” based on guesses consisting

mostly on your prior year’s tax return; but, it you fail

to quality, and if it’s a bad guess, and if you need help,

you’re really in a tough spot.

We all will be anyway cause the industry’s using just

go away deductibles and control of doctors to

enable the structure and the profit.


I very nearly never do this, ZH, but this time there’s

just so much original above.

evernewecon's picture




On that accountable care vs. fee for service thing.

It really needs some balance lest underutilization

becomes problematic.   Most new reformers think

that’s a red herring, when in fact, it’s a real issue

relating to many complaints.


The idea is the mix of accountable care dominance,

repeal of immunity from anti-trust, lack of

hostility toward fee for service so that outcomes

can be compared meaningfully, risk adjusted,

showing of public benefit, and material physician’

committee and patient committee and physician

cross-organizational committee involvement

keeps the focus on patient-doctor centrality and

and ties that process very tightly with the

bed-to-lab, lab-to-bed process.


Practice rationalization as reflected in coverage

design throughout the system would be efficient

economically cause it would be efficient in terms

of doctor and patient satisfaction and outcomes.


Accountable care more or less means skin in the

game.   TBTF means absence of skin in the game.

Where it’s virtually unavoidable buying

market controlled insecticide related fructose

foundational GMO’s, then, there also, for instance,

it hardly matters what’s going on economically

in the aisle at Acme or Ralph’s or Wegman’s, or,

for that matter, at the tractor store.   

That market control means the ability to extract

what people are good for.

Cable’s the natural monopoly ostensibly.

So it should have a profit box like health care’s.

(It has no restriction currently.)

Health care shouldn’t have a profit box.

That is, if you’re going to have an anything-centric

system, a health cartel becomes like the paid

software that ate open source.   You can have it

state centric, union centric, doctor centric, hospital

centric (the old Blue Crosses--still better than

carrier cartel centric,) or market-progressive


I go with that one.

Market-progressive patient-doctor-centric.

akak's picture

Evernewecon, you are an asshole!

If you want to post something of that length, first, learn how to format a post here you moron, and second, POST A FUCKING LINK INSTEAD!


sitenine's picture

Thank you. My biggest peeve was that he quoted Krugman to start off that epic troll, and your points are equally valid. What happened to quality trolling? I never thought I'd say I miss Robo, but seriously, I miss Robo.

DaddyO's picture

I love the handle, he obviously has fallen for the fallacy of new economics.

The death spiral of the Keynesian quagmire has disproved this theory over the last half century or so.

Moar Debt is the cry of all the new economists, even in the face of the slow grind to the bottom, they continue their chant, MOAR, MOAR, MOAR.

Just think, what was once wrong is now right and vice versa.


hootowl's picture

This post is nihilistic nonsense.  Get back on your meds.



22winmag's picture

Yeah... like how the same amount of Federal Reserve Notes get me less bullets and less sardines month after month.

Kirk2NCC1701's picture

"Don't run away, we are your friends!" - Martian leader, 'Mars Attacks'

[shoots people, mayhem everywhere]