Guest Post: Why The Status Quo Is Doomed

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The wheels have come off the endless growth via expanding debt machine.

Progressives and conservatives have long shared a single agenda: growth. Growth increases prosperity and wealth, and this makes for contented voters who will keep voting for incumbents.

This agenda makes three implicit assumptions:

1. Inflation is OK as long as the economy and household wealth expand at a rate that exceeds inflation

2. Increasing debt is OK as long as income and assets both grow faster than debt

3. Wealth/income inequality is OK as long as the wealth/income of the bottom 90% is expanding at the same rate as the top 10%

In other words, if most of the wealth generated by growth flows to the top 10% (who coincidentally fund 99% of political campaigns) that's OK, as long as enough "trickles down" to the lower 90% to boost their wealth/income by an equivalent percentage. (The top 10% actually own 83% of the wealth, and the top 1% own 43%)

It's important to understand the distinction being made here between relative and absolute wealth: if the top 10% own 90% of the wealth, then $90 of every $100 of new wealth flows to them. This is politically acceptable to the status quo as long as the wealth of the bottom 90% expands by the same percentage.

Should the bottom 90%'s share of the new wealth rise at a faster rate than the top 10%'s, that's actually preferable, as over time that shrinks wealth inequality while leaving the wealth already owned by the top 10% untouched.

In other words, the top 10% do not suffer any decline in wealth if they collect $80 of each $100 of new wealth rather than $90. This slight reduction in the rate of growth makes little difference to the top wealth holders but it has a much larger impact on the bottom 90% because they own so little wealth.

Every one of these implicit assumptions has been turned on its head: growth is barely above the rate of inflation; by some measures, it has already fallen below the real rate of inflation.

Debt is increasing much faster than income or wealth.

Virtually all of the recent expansion of wealth/income is flowing to the top 10%.

This is why the status quo is doomed: there is no Plan B or even conceptual alternative to the "more growth forever" agenda.


Here is a chart which shows household debt has outrun income for decades:

Debt can be expanded at a rate that exceeds the rise in real income in only one way: by lowering interest rates so the same income can support a larger debt.

This is of course the reason the Federal Reserve has lowered interest rates to near-zero with the ZIRP (zero-interest rate policy).

Eventually the buyers of newly issued debt at near-zero (or even negative) yields start to fear they will never get their capital back or they will be paid back in depreciated currency, and so they demand a higher yield. Since income has already been stretched to the limit to support a towering mountain of debt, this rise in yield catapults the borrower into insolvency.

The real financial situation is considerably bleaker than the conventional view maintains. Federal debt is only the tip of the iceberg: the killer liabilities are the unfunded liabilities for Medicare and Social Security which are estimated at $87 trillion--a number I suspect understates reality, but which is larger than all U.S. household wealth.

Assets have risen as a result of reflated bubbles in bonds, stocks and housing:

The Federal Reserve has created these bubbles by creating trillions of dollars out of thin air to buy Treasury bonds and mortgages to lower yields to near-zero, pushing investors into risk assets while injecting "free money" into the banking system:


Does this trajectory of Federal debt look sustainable?

Here is total credit market debt:

Here is GDP, the standard metric of growth:

The oft-touted fantasy is that "we're going to grow our way out of this," but it is abundantly clear that debt is rising far faster than growth or incomes. Financialization has widened the wealth inequality canyon to the point that the 95% on one side can no longer see the other side through the haze of propaganda and political fog.

Financialization = Inequality (June 25, 2013)

Those relative few on the other bank can no longer see the 95%, either; and since the political and financial Elites are on this side, they are rapidly losing touch with the 95% and the real (i.e. unfinancialized) economy.

Meanwhile, back in the real world, fulltime jobs--the foundation of household income for the 95%--have stagnated, registering no real growth in 13 years ago while the the working age population has added millions of new entrants:

The wheels have come off the endless growth via expanding debt machine. Rising interest rates are the final blow to this agenda, and the political and financial classes have no Plan B. They are floundering, clueless, bereft of historical context, creativity and courage. Their failure of imagination is total, complete and catastrophic:

We Have No Other Choice (March 15, 2012)

Questioning "Progress" and the Poverty of our Imagination (June 11, 2010)

How Empires Fall (April 17, 2013)

Why The Debt-Dependent Status Quo Is Doomed in One Chart (June 29, 2012)

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LetThemEatRand's picture

The golden geese lay dying, and Atlas Shrugged.  Let Them Eat Rand.

stocktivity's picture

It's all Bullshit!!!  Japan up tonight, holiday next week here in the states so nobody will care about the can be jerked up on light volume. America will be celebrating their freedom by drinking beer, eating burgers and hot dogs, and getting even fatter. Rally on!

are we there yet's picture

Walmart tailgate parties are fun to watch but eventually come to and end when the beer starts fights and the police show up.

LetThemEatRand's picture

Remember the "ow my balls" episode when the obese bearded WM lady with the orange tights hovering just over the beave beat the shit out of the skinny guy with no pants?  Good times.

starman's picture

yup this Buds for you cose its made in you guessed it, China!! 

tarsubil's picture

Does rand taste like lamb? I love lamb.

LetThemEatRand's picture

Tastes like skinny chicken.

buzzsaw99's picture

I fail to see how any of this is a problem for the 1%.

The Thunder Child's picture

Agreed, even less so for the 0.1%

buzzsaw99's picture

actually i estimate it at 0.001667%

Miffed Microbiologist's picture

The only possibility of a problem for the 1% would be if the guillotines are rolled out. This happened when the 99% were horrible oppressed and starving. They have learned from their mistake and have dealt with that contingency. Now all they have to do is suppress any rumblings of dissidence with a few drones, keep the sheeple happy with various forms of Soma and slap each other on the back for their deserved brilliance. Fuck them all.


tarsubil's picture

Gold and food aren't digital. They are physical. You can't just create these by clicking a couple keys on a keyboard. The 1% are not prepared for reality. Physical reality, the natural laws will have their day. It didn't have to come to this.

Miffed Microbiologist's picture

This is my hope as well. However I have come to believe it may be unlikely. The wealthy will use their resources to survive. In the economic collapse in Argentina they hired private people for their protection. If a man had to choose between feeding his family or shooting his neighbor to protect an elite, what would be the most likely outcome? The other scenario was the wealthy elites stole the remaining money from the country and fled under armed escort. The only historical time i can remember when the 99% took out the 1% was the French revolution and that quickly descended into a mass murder of many innocent people. I want physical reality and natural law to prevail again one day in this country. I'm tired living in a world of mirrors, deception and fraud. I'm tired working so hard every day for a few worthless dollars and supporting legions of leaches, pampered government workers and the 1% determined to extract all the wealth I have. I want justice.


Seer's picture

"It didn't have to come to this."

There was NO other outcome.  The reason why this is so is because we are NOT questioning the premise- we are incapable of facing up to the BIG Question: is it possible to have perpetual growth on a finite planet?  If one were brave enough to investigate this premise one would see that the answer wouldn't lead to any rosy scenarios.  Religions were created to manage this dilemma: answering the question without bringing it up- "it's God's will" or whatever is what decides one's outcome.  And when religions don't work for people there's the secular: the dilemma is skirted by encouraging people to work harder and be more creative, all prompted by the "select few" who ultimately decide one's outcome.

The central banks may dictate when deflation of money happens.  Nature dictates when deflation in human population happens.  We have spent far too long believing that the top level of control is in the hands of the central banks: perhaps it's intended for self-deception, I don't know (though I'm pretty sure that the perpetual ruling class has the minds that can speak to this and present THE formula [I'd rather not know this evil, as it would most certainly demand action, action to either BECOME that evil or action to fight it and therefore BE evil oneself]).

Bearwagon's picture

I hope to cheer you up a bit, by telling you that there is at least a third way, where you don't have to be or become evil yourself. If all they can get from you would be your cold, dead corpse, but never your obedience, you are doing something right. (And fighting a known evil to defend what's good and true is not an evil deed in and of itself.)

HowardBeale's picture

"Starving" is the inevitable end of this extraction of productive wealth; the element that the elite criminals don't--and can't--perceive is the armed minority of the educated; i.e., there is a group of Edward Snowden-like People who are smarter, far less arrogant, and infinitely more calculating than the ego-centric thieves that Obama has enabled; and it is those People that will begin and end the revoution: an assassination here, there, anywhere. The criminal elite will disappear from the public world--which will make them more accessible to the Assassins...

Seer's picture

There's no doubt that blood will be in the pool, that's in the script.  However, it'll then be "rinse and repeat," as we'll pick up and do the very same stupid-human-tricks all over again (striving to maintain perpetual growth on a finite planet).  Oh, and a few of those 1% genes will STILL be there, they'll eventually bubble up to the top.  Heaven on earth is not possible.

Chuck Walla's picture

The only possibility of a problem for the 1% would be if the guillotines are rolled out. This happened when the 99% were horrible oppressed and starving. They have learned from their mistake and have dealt with that contingency.

Now you know why Obama is so desperate to kill that stupid 2nd Amendment. It is the fly in the ointment of the statist totalitarians.


Comrade Lenin has shown us the blueprint. Now we must simply follow it, and the glories of Cuba can be ours!

SAT 800's picture

It can be a big problem for the 1%. It just depends on how it plays out. they're not immune to a world wide depression. Well, in a sense, yeah, they are immune, but they will "suffer", if that's the right word, huge paper losses. Runaway inflation is going to get their attention too; One of these fine days a group of wealthy people may decide to buy all the Silver Bullion that's available. It's a tiny market; this is possible. If serious inflation occurs they won't just sit on their thumbs.

kchrisc's picture

Mobs and guillotines, ropes, masonry walls.

FreedomGuy's picture

The 1% are the political and Fed cronies nearest to the new or inflated money. If you get your hands on inflated money first you get to buy stuff and invest at the noninflated prices until it works it's way through the economy. That's why the middle class and Joe Sixpack get screwed without ever seeing it or being able to put a finger on it. It also makes them good socialist fodder as they neither understand why it happened or what the proper solutions are.

It is wonderful to be managed by the elite geniuses is it not?

Herd Redirection Committee's picture

The first spend is the sweetest!

Aaron Burr's picture

Inflation is a mild 2.1% or some such thing. Where is the sweetest first spend being spent at? How else would you convert cheap monetary medium into good hard assets to profit from the collapse--you buy high end crap--Ferrari had its best year ever--Sothbey's setting records every auction---record amounts for high-end real estate. They're working that huge float of digital cash up our ass one fucking yacht at a time and when it finally tsunamis the real economy it will make wiemar look like a picnic.

I'm sure I'm wrong---I mean Ben has been on the cover of Time Magazine, right? Our Hero ;-)

youngman's picture

but do they long as they can show their buddies their big bonus checks ...they don´t care...

SAT 800's picture

You're thinking about the 10%. The one percent don't get bonus checks. they own mines and railroads and steel producers and farmland.

Harbanger's picture

Are there any politicians or people in power in the 1%, or is the guage simply the amount of money they have?  And if it's about wealth, do they get a pass if they give some away and fall to say the 50% level?  Because the people who created this are not necessarily the 1% rich, they just belong to the right club.

LetThemEatRand's picture

Literally all of the people "in power" are in the .1%.  The rest is noise.  You haven't figured that out yet.

Harbanger's picture

So it's about the power had and the damage they've done to the republic right?  Just asking cause there may be a lot of people you like in that 1%.

LetThemEatRand's picture

It's not the 1%.  It's the .1% I'm worried about.  Or if we really must get down to brass tacks, the .01%.   Most of the people in the 1% are okay.  The large majority of that group earned it.  The .01% inherited it and extract it from the rest of us.  And they control the levers.  The 1% go along because they think they're the chosen ones too. They are not.

FreedomGuy's picture

I would put a finer point on it. It is the 0.1% with the proper political connections which probably does go hand in hand. It is not purely money but power or powerful connections. We are not invited into this club.

Winston Churchill's picture

Money is power.

The quantity is just its measure.

Harbanger's picture

I gave you a -1, respond to me so I can educate you about power and money.

Bearwagon's picture

Money will always lead you to where the power is - but it's not the power itself.

Harbanger's picture

You choose to "worry" about those who inherited wealth and you want to determine whether or not they deserve it, I focus on the deceivers who propagate selfishness, jealosy and greed.  We're brothers of a different father.

BalanceOrBust's picture

The US recovery is supposedly now well underway. So here is a puzzle that I can't figure out. The Fed has been buying up bonds at a rate of $85 billion a month. I know that Bernanke has hinted that this may come to an end, but not immediately. Now $85 billion a month times 12 months is over $1 trillion. The US GDP is about $16 trillion.

Now, if the Fed had decided to stimulate the economy by using the Treasury Department's freshly printed cash to buy new cars or pencils or houses or televisions or farmland or anything really other than bonds, I figure that this would have made a contribution to US GDP of $1 trillion. On a GDP of $16 trillion, this would have increased GDP by 6.25%. Not bad growth.

Now I know that the Fed can't hold cars or pencils or houses or television or farmland on its balance sheet. So it holds bonds. My point is.... all that money printing could have otherwise generated 6.25% growth -- and all the US has is a paltry 1.8%.

Am I misunderstanding something, or is this US recovery that bad. I mean, even though the Fed bought bonds, in an ideal world those who sold those bonds would now have an extra $1 trillion to spend on cars and pencils and ... (you get the idea).

So all this stimulus and I figure we are still more than 4% behind where we should be in growth.

Can you explain?
Signed, Dumbfounded

Cognitive Dissonance's picture

The addict does not wish to withdraw and regain his or her health. The addict only wants MOAR.

After all that is the root dysfunction of addiction and the source of the addict's insanity.

Aaron Burr's picture

Hey CD, a question for you have a moment. With fractional banking do primary dealers "loan" themselves the money to buy the treasuries from the fed in the first place? You know, the ten-to-one levered type loan? Then turn around and sell them back to said fed at full face value in return for hot cash? Turn that trick a few times and you've made a buttload of loochey. Is this the primary way the "printing" is being done or am I missing a piece?

Colonel Klink's picture

Because they're LYING!!!  They only have 1 tool in their tool chest, and it's no longer working.

Does that help? ;)

g'kar's picture

"The Fed has been buying up bonds at a rate of $85 billion a month"


Most of this in one way or another is transfered to that 1%, one sneaky or overt way or another.

JustObserving's picture

 and all the US has is a paltry 1.8%.

US official CPI is 3 to 4% lower than real CPI.  So US growth is 3 to 4% lower than official figures.  So real US GDP growth is -1.2% to -2.2%.

SAT 800's picture

Exactly. And everytime you fail to remember to apply the dis-inflator to the GDP, you commit a grave error. In a similar manner, both interest rate and stock market returns are negative. the growth machine has stopped. I think it's a good article.

Acet's picture

Going back to BoB's original question: official GDP growth is real GDP growth - i.e. without the effects of inflation. Real GDP is calculated from nominal (dollar amount) GDP by using the official inflation figures to adjust it (the so called GDP deflator). The more the inflation figures, the lower real GDP is compared to nominal GDP.

Money printing should generate an equal and offsetting amount of inflation resulting in 0% direct real GDP growth since it doesn't create any real wealth, it simply reduces how much each dollar represents of that wealth.

In practice, not only is the inflation resulting from money printing delayed (meaning that after a bout of money printing GDP growth will be overstated at first and understated later), but also the actual inflation numbers are under huge political pressure to be made smaller so as to get a higher official (real) GDP growth value.

The results is that the official GDP growth figures that you are seeing in all likellyhood do have a large amount of leakage from money printing, though not the full amount as you were expecting.

game theory's picture

Actually, the Fed can actually buy any assets it wants...including pencils.  The US gov't has been a big beneficiary of artificially cheap lending...allowing for IRS bonuses, a huge housing bubble in VA/DC, and some NSA domestic well as gov't contracts to the politically connected. You should ask the politicians why their investments lead to so little growth.

FireBrander's picture

The $85 billion in buying was not to increase GDP; it was to recaptilize the banks.


That "missing" 4% went into the hole in banks balance sheet; it was a bank bailout.

indigoboy's picture

FireBrander :

Your post is spot on in explaining the QE shell game. QE was never intended to assist the economy in a direct sense, it was there to fill the (minus) balance sheet that had the banks teetering on the brink.

When Bernanke prints a  +(plus)$1 and gives it to the bank, they put it alongside their -(minus)$1 balance sheet, and poof!! they have a zero. So that would be one bad dollar neutralised then, and only about 44 trillion more bad (minus), dollars to go !

It's easier to understand it if you consider it as Quantum Easing.  (think matter and anti-matter).


zorba THE GREEK's picture

This just means TPTB are getting desperate, so

we should prepare for desperate measures on their part. Hide your assets, they are coming for them. 

Bear's picture

The Status Quo is doomed because our leaders are morons who think they are f****** geniuses.

nc551's picture

I think you mean rulers instead of leaders.  A leader is someone you follow of your own free will.   A ruler is the guy in the back with a gun pushing you forward.

Cognitive Dissonance's picture

While I fully agree that the system is doomed to self destruction please do not underestimate two things. Human beings have an amazing ability to adapt to horrific conditions and denial will often convince people to experience horribly debilitating long term pain in return for short term relief.

The control system does not kick the can down the road. The control system is ALLOWED to kick the can down the road by those who perceive themselves as benefiting from the system. In many ways we are all addicted to the crack laced Kool-Aid. Inflict enough pain and the vast majority of us will scream for relief, thus agreeing to another can kicking. 

Of one thing I am fairly certain. When the rules no longer "work" the rules WILL be changed. And if enough pain comes with the rule changes they will be applauded by those most harmed as needed and necessary. They will be told and will believe that 70% of something (meaning a 30% haircut) is better than a total collapse. And soon after that when that is not enough they will be told and will believe that a 50% haircut of their remaining 70% will be better than nothing. And so on and so on and so on........