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Guest Post: Artificial Abundance, Moral Hazard And The Fed's Doomsday Machine

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

A loss of faith in key institutions cannot be fixed with more cheap credit or subsidized mortgages.

Today's topic is important but a bit tricky; you may want to refill your beverage container before buckling in.
Moral hazard is the separation of risk from consequence. A person who knows they won't suffer the consequences of a risky bet gone bad will behave quite differently from a person who knows the full consequences of a risky bet gone bad will fall on them.
 
A person who is insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by someone else--for example, the Federal Reserve or taxpayers.
 
Correspondent Jeff N. recently alerted me to the equivalence of the perception of abundance and moral hazard. Jeff was responding to An Abundance of Bad Decisions(June 13, 2013), which noted that decisions made in the euphoria of abundance were generally bad because they were based on 1) projecting the good times would last for the indefinite future and 2) the Status Quo, having delivered abundance, was working fine and should not be challenged or changed.
 
As a result, both critical thinking and innovation atrophy, as neither are needed in times of abundance. Indeed, they pose an active threat to the Status Quo and are thus marginalized or suppressed.
 
In eras of extended abundance, the populace slowly loses the ability to think critically and develop concepts outside the narrow confines of the Status Quo.
 
When the abundance/prosperity ends, as it always does, the populace has lost the ability to make difficult choices and realistically assess cost-benefit. Magical thinking and nostalgic references to past glories dominate the conventional mindset.
 
In How Empires Fall (April 17, 2013), I noted that two of the key characteristics of an empire in terminal decline are complacency and intellectual sclerosis, what I have termed a failure of imagination.
 
Michael Grant described these causes of decline in his excellent account The Fall of the Roman Empire, a short book I have been recommending since 2009:
 

There was no room at all, in these ways of thinking, for the novel, apocalyptic situation which had now arisen, a situation which needed solutions as radical as itself. (The Status Quo) attitude is a complacent acceptance of things as they are, without a single new idea.This acceptance was accompanied by greatly excessive optimism about the present and future. Even when the end was only sixty years away, and the Empire was already crumbling fast, Rutilius continued to address the spirit of Rome with the same supreme assurance. 

This blind adherence to the ideas of the past ranks high among the principal causes of the downfall of Rome. If you were sufficiently lulled by these traditional fictions, there was no call to take any practical first-aid measures at all.

In other words, if our idea of intellectual rigor and honesty is Paul Krugman dancing around the Neo-Keynesian Cargo Cult campfire mumbling nonsensical claims of grand success, we are well and truly doomed.
 
I went on to suggest that central banks and deficit-spending political Elites have created an artificial sense of abundance by printing or borrowing trillions of dollars and flooding their economies with this false abundance.
 
This bogus prosperity has led to a continuation of bad decision-making, as it has nurtured a magical-thinking faith that abundance can be conjured with monetary tricks. This is the essential feature of cargo cults, the magical-thinking belief in the return of abundance without having to chart a new path of authentic reforms.
 
What Jeff N. pointed out is The Federal Reserve's Cargo Cult Magic of artificial abundance acts just like systemic moral hazard. In Jeff's phrase, "reducing the perception of the cost of the action’s consequences" induces the same cost-risk-benefit mindset as moral hazard.
 
In other words, the Bernanke Put--the implicit promise that the Federal Reserve will never let the stock market significantly decline--is the exact equivalent of giving someone $100,000 in a casino and telling them they can't lose because the casino has their back. How prudent do you reckon the gambler's bets will be? His perception of the costs and consequences of his betting have been fatally distorted, and once everyone in the casino has been given the same assurance, the systemic risks skyrocket as every player starts making risky bets in the confidence that they can't lose.
 
The Fed has created a Doomsday Machine. The Fed has nurtured moral hazard in every sector of the economy by unleashing an abundance of cheap credit and low interest mortgages; the implicit promise of "you can't lose because we have your back" has been extended from stocks to bonds (i.e. the explicit promise the Fed will keep rates near-zero forever) and real estate.
 
An abundance based on the central bank spewing trillions of dollars of cheap credit and free money (quantitative easing) is artificial, and it has generated systemic moral hazard.
 
This is a Doomsday Machine because the Fed cannot possibly backstop tens of trillions of dollars of bad bets on stocks, bonds and real estate. Its power is as illusory as the abundance it conjured.
 
Once the losses mount, the punters who believed the Fed had their back will realize it was all a con. They will lose faith in the Fed and its promises of permanent abundance, low rates and rising asset prices.
 
This loss of faith will trigger what I call the delegitimization of both the markets and the institutions which have essentially promised a permanent upward bias in assets, i.e. the Federal Reserve and the other central banks that have conjured the same illusion.
 

This loss of faith in key institutions cannot be fixed with more cheap credit or subsidized mortgages; delegitimization triggers a fatal decoherence in the entire Status Quo.

 

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Thu, 06/20/2013 - 17:25 | 3676904 wee-weed up
wee-weed up's picture

Loss of faith???...

Some of us never had any!

Thu, 06/20/2013 - 17:38 | 3676933 ZerOhead
ZerOhead's picture
The Fed's Doomsday Machine...

Proudly made in the USA (from foreign components)...

Thu, 06/20/2013 - 17:26 | 3676907 syntaxterror
syntaxterror's picture

Don't Fight the FED Luke!

Thu, 06/20/2013 - 17:28 | 3676910 MillionDollarBogus_
MillionDollarBogus_'s picture

"...This is a Doomsday Machine because the Fed cannot possibly backstop tens of trillions of dollars of bad bets on stocks, bonds and real estate. Its power is as illusory as the abundance it conjured..."

Who can stop them..??  They create money with a few mouse clicks.. 

 

Thu, 06/20/2013 - 17:31 | 3676919 IridiumRebel
IridiumRebel's picture

Print the Force!

Thu, 06/20/2013 - 17:35 | 3676927 Shell Game
Shell Game's picture

"Who can stop them..??" 

 

LOL.  Empires are never "stopped", they ALWAYS create their own graveyards..

 

Thu, 06/20/2013 - 18:40 | 3677132 Poor Grogman
Poor Grogman's picture

"They create money with a few mouse clicks.. "

That is the illusion...

It is not money that they print, bwahahahahaha

Thu, 06/20/2013 - 17:28 | 3676912 LongSilverJohn
LongSilverJohn's picture

I'm in the middle of reading, "When Money Dies." If you can get past the introduction, it's a fascinating story about Weimar hyperinflation... very well written and full of insight into how authorities got the cause of inflation exactly backwards.

In other good news, I was able to find a box of .45 ACP this week.... harder to get than gold.

Thu, 06/20/2013 - 17:35 | 3676932 kridkrid
kridkrid's picture

Here's the book for those who are interested... http://thirdparadigm.org/doc/45060880-When-Money-Dies.pdf

Thu, 06/20/2013 - 19:44 | 3677283 nightshiftsucks
nightshiftsucks's picture

I buy my ammo at Palmetto state armory or bulkammo.com,I can find anything but .22 and the prices are coming down.

Thu, 06/20/2013 - 17:30 | 3676915 IridiumRebel
IridiumRebel's picture

"In transgressing the law of nature, the offender declares himself to live by another rule than that of reason and common equity, which is that measure God has set to the actions of men, for their mutual security; and so he becomes dangerous to mankind, the tye, which is to secure them from injury and violence, being slighted and broken by him."

-Locke

Thu, 06/20/2013 - 17:38 | 3676940 wisehiney
wisehiney's picture

In the end, they discover that it is that simple.

Thu, 06/20/2013 - 17:30 | 3676916 Dr. Engali
Dr. Engali's picture

The only back the fed has is the bankers. Once they are positioned correctly the fed will respond accordingly and screw everybody else.

Thu, 06/20/2013 - 17:32 | 3676923 john39
john39's picture

all very simple really...  but until enough people figure it out, they will go on raping and pillaging...  and when enough people do figure out... the police state, filled with dumb  but cruel functionaries (the brutalizing class) will protect the theives even to their own detriment...   the 'communist' revolution in Russia was just (one of many) test runs...  now they try to take the system global.

Thu, 06/20/2013 - 18:08 | 3677054 Vince Clortho
Vince Clortho's picture

On a tangent of what Dr. Engali said ...  the insiders know in advance what the Fed is going to do before they announce it.   They position themselves accordingly.

They profit both ways.

 

Thu, 06/20/2013 - 17:31 | 3676920 Sabibaby
Sabibaby's picture

Moral Hazard + Contagion = Doom

Thu, 06/20/2013 - 17:34 | 3676928 stinkhammer
stinkhammer's picture

choombaca

Thu, 06/20/2013 - 17:35 | 3676930 NipponMarketBlog
NipponMarketBlog's picture

 

 

Moral hazard has now become the order of the day in Japan:

 

http://nipponmarketblog.wordpress.com/2013/04/18/qe-moral-hazard-bubbles...

Thu, 06/20/2013 - 17:36 | 3676934 q99x2
q99x2's picture

Rally in the Hamptons and then to the overthrow of the Rothchilds.

We've got 7 billion to your 50 thousand bankster M'Fers.

Thu, 06/20/2013 - 18:53 | 3677156 Things that go bump
Things that go bump's picture

Clif High's Asymmetric Linguistic Trend Analysis reports have mentioned starving remnants storming the Vatican as well as digging the last of the Windors (House of Saxe-Coberg and Gotha) out of their bolt hole, but that is kind of cold comfort.

Thu, 06/20/2013 - 22:17 | 3677695 A. Magnus
A. Magnus's picture

+1 for the Web Bot savvy; unfortunately Clif himself thinks his PM price calls are becoming contrarian. According to his data runs gold should double by mid July, but I can only see that happening if the shitfuck banker tards lose control of their market rigging. He noted that he's been on the wrong side of interpreting the PM data for a few months in a recent Wujo, so I hate to say it but we're all flying blind on this one...

Thu, 06/20/2013 - 17:39 | 3676944 Zola
Zola's picture

Well the Fed can create the trillions you are talking about... That's exactly the point. If they want to they could. It's all a scam to "progressively" drain your purchasing power, drain the productivity gain, suck on the economy until it becomes a hollow shelf and then still keep printing until hyperinflation...

Thu, 06/20/2013 - 17:38 | 3676945 Shell Game
Shell Game's picture

The Fed's reckless, arrogant and power-hungry behavior has create and equal and opposite 'Doomsday machine'.....

 

An uncompromising, decentralized, asymmetric 3%.  Molon Labe, Mother Fuckers.

Thu, 06/20/2013 - 17:39 | 3676948 ebworthen
ebworthen's picture

Time for the FED to build a real Death Star!

Employment!

Production!

Thu, 06/20/2013 - 17:44 | 3676965 falak pema
falak pema's picture

its in the Sixtine chapel and its on the wall behind the alter and its called the LAst Judgement.

Thu, 06/20/2013 - 17:45 | 3676971 Solon the Destroyer
Solon the Destroyer's picture

Okay, Nerd-arinos, Epic Fail!  Lol.  The Doomsday Machine was Star Trek, not Star Wars or The Matrix...

http://www.albinokraken.com/wp-content/uploads/2009/01/iphone_doomsday_machine.jpg

Thu, 06/20/2013 - 18:30 | 3677109 bank guy in Brussels
bank guy in Brussels's picture

Stanley Kubrick's Dr Strangelove had its Doomsday Machine well before the Kirk - Spock version

Thu, 06/20/2013 - 17:49 | 3676979 RSloane
RSloane's picture

The public at large is not yet in danger of losing their faith in the Fed, nor its belief that there this little causality between making bad decisions and realistic consequences. In the land of ever-increasing abundance there is no shortage of 'perceived' value based on mark to magical thinking. The fantasy will be preserved until there is true market discovery and people learn that their portfolio now valued at 450,000$ is really worth 245,000$ or less. There's nothing like an entire society hell bent on learning the hard way but that is exactly the path we are on.

Fri, 06/21/2013 - 08:42 | 3678679 BigJim
BigJim's picture

No, their portfolios will still be 'worth' $450,000... it's just that that amount will barely buy a Happy Meal.

Thu, 06/20/2013 - 17:56 | 3676985 conspicio
conspicio's picture

General Biden: What of the Rebellion? If the Rebels have obtained a complete technical reading of the Fed, it is possible, however unlikely, they might find a weakness and exploit it.

Darth Soetero: The plans you refer to will soon be back in our hands.

Admiral Bernanke: Any attack made by the Rebels against the Fed would be a useless gesture, no matter what technical data they have obtained. The Fed is now the ultimate power in the universe! I suggest we use it!

Darth Soetero: Don't be too proud of this technological terror you've constructed. The ability to destroy a global market is insignificant next to the power of the Jihad.

Admiral Bernanke: Don't try to frighten us with your sorcerer's ways, Lord Soetero. Your sad devotion to that ancient Muslim religion has not helped you conjure up the stolen data tapes, or given you enough clairvoyance to find the rebels' hidden fortress...

[Darth makes a pinching motion and Bernanke starts choking]

Darth Soetero: I find your lack of faith disturbing.

Governor Napolitano: Enough of this! Soetero, release him!

Fri, 06/21/2013 - 08:45 | 3678688 BigJim
BigJim's picture

replace 'the Jihad' with 'socialism', and you'd have nailed it.

Thu, 06/20/2013 - 18:03 | 3677039 A Lunatic
A Lunatic's picture

I've got my Unicorn so fuck everyone else.  -Most of America-

Thu, 06/20/2013 - 18:20 | 3677082 skank
skank's picture

priced in dollars?... BWA HA HA... oops

Thu, 06/20/2013 - 18:30 | 3677108 Flammonde
Flammonde's picture

http://hoodedutilitarian.com/2011/12/la-chinoise-and-marxist-sheep/  We are returning to the good old days of '68.  “In revolution there are two types of people: 

those who make it and those who profit from it.” 
(Napoleon)

Thu, 06/20/2013 - 18:50 | 3677163 involuntarilybirthed
involuntarilybirthed's picture

Not the Fed nor Congress nor White House nor Treasury can/will fix this.  Then whom? Must we ride it to the bottom because of these few, less than 600, fools? We are a nation of 300+ million for christ sake.

Fri, 06/21/2013 - 00:01 | 3678085 newworldorder
newworldorder's picture

True - But the 300+ million are willing to be led by the 600.

Thu, 06/20/2013 - 20:00 | 3677318 shovelhead
shovelhead's picture

Spears and blue asses.

Worked for Wm. Wallace.

Thu, 06/20/2013 - 20:30 | 3677400 Sizzurp
Sizzurp's picture

RP was right all along. End the Fed, before they end us all. 

Thu, 06/20/2013 - 20:30 | 3677402 lynnybee
lynnybee's picture

WHEN ???!   I'm growing ever older waiting for this day when it all goes up in a puff of smoke;  all my toothpaste has reached expiration.   my canned raviolis expire soon & now that silver & gold have cratered I am now the LAUGHING STOCK of my friends & family!    I'M THE ONE WHO'S LOSING CREDIBILITY, NOT BERNANKE !!   

Thu, 06/20/2013 - 21:22 | 3677532 A Lunatic
A Lunatic's picture

Take heart. While it is possible the Evil of this world may not be prosecuted in our lifetimes, there is a simple joy in finding creative ways to exist outside the system. Color outside the lines, tell a child or grandchild a story, share your raviolis with a friend, help a stranger to see the light of truth. Do not seek validation from a toxic, hateful world. Sadly, most of our friends and family are irretrievably lost to the darkness; let the dead bury their dead, and let us move forward with passion.......

Thu, 06/20/2013 - 21:48 | 3677610 Ghostdog
Ghostdog's picture

I like it but my Schadenfreude for these frauds may be to strong to be set free

Fri, 06/21/2013 - 05:40 | 3678407 falak pema
falak pema's picture

for those who believe in the Ron Paul meme of "gold to infinity" that ZH has supported since inception, I can understand Lynnbee's frustration if she has put it into practice, post 2010 the advice of PM buying...its not looking good and those who bought silver @ 20+ or gold @ 1400...

Thu, 06/20/2013 - 21:52 | 3677625 Nimby
Nimby's picture

Relax.  Eat your ravolis, brush your teeth, and rotate your stock.  Then buy more silver and gold.

Fri, 06/21/2013 - 08:47 | 3678698 BigJim
BigJim's picture

Yeah. I mean, whoever told her to stop brushing her teeth?

Fri, 06/21/2013 - 09:19 | 3678828 odatruf
odatruf's picture

BigJim, you are on a roll today...

Thu, 06/20/2013 - 22:19 | 3677705 A. Magnus
A. Magnus's picture

Hate to beat a dead horse, but,

"The market can stay irrational longer than you can stay solvent."

Fri, 06/21/2013 - 10:34 | 3679042 dizzyfingers
dizzyfingers's picture

"Not the Fed nor Congress nor White House nor Treasury can/will fix this.  Then whom? Must we ride it to the bottom because of these few, less than 600, fools? We are a nation of 300+ million for christ sake."

No leadership, no plan. The sheep need to know what is the plan.

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