"We're Stuck In An Escher Economy Until The Existing Structure Collapses And Is Rebuilt On Stronger Principles"

Tyler Durden's picture

Submitted by F.F. Wiley of Cyniconomics

M.C. Escher And The Impossibility Of The Establishment Economic View

It’s easy to show that public institutions such as the Federal Reserve and Congressional Budget Office (CBO) are routinely blindsided by economic developments. You only need to compare their past predictions to real events to see these organizations’ deficiencies.

More importantly, we can demonstrate that their struggles are all but certain to continue. This may sound like a difficult task, but we’ll argue that it’s easier than you think. Using historical data and basic economic concepts, we’ll explain not only why the establishment view is wrong but that the underlying principles are fundamentally flawed. The implication is that existing policies are destined to fail.

To make our case, we’ll start with the CBO’s current forecasts for real per capita GDP (economic growth net of inflation and population growth):

Our regular readers already know that the CBO is abnormally bullish on near-term growth, based on its long-standing assumption that the gap between actual and potential output will swiftly close. But this won’t be our focus here. In fact, we’ll assume the CBO gets this part of its outlook right. We’ll be shocked if it does, but let’s pretend.

We’ll then examine the forecasted path for interest rates:

The interest rate outlook is an offshoot of the policy establishment’s overall approach. Monetary stimulus is expected to be removed as it guides the labor market toward full employment, allowing interest rates to return to normal levels.  At that point, natural economic forces are believed to be strong enough to preserve a normal, healthy economy. Establishment economists have near complete faith that this is a sound and reliable process.

But closer examination reveals a few cracks. Consider that the chart above shows quite a jump in interest rates, which begs the question: How will the economy weather such a development?

We’ll look to history for possible answers. We calculated the change in rates on three month Treasury bills for every eight quarter period since 1953, which breaks down like this:

We then reviewed past economic outcomes conditioned on the rate buckets above. Note that the forecasted 2015 to 2017 rate change of 3.2% (the leap from 0.2% to 3.4% in Chart 2) falls in the final bucket. Therefore, this bucket is especially relevant to the economy’s likely performance in the next rate cycle. We circled it in the charts below:

While the results speak for themselves, I’d be remiss if I didn’t add qualifiers. For one, the sample sizes fall as you move from left to right across the charts. Moreover, history doesn’t always foretell the future; this time could be different.

But the thing is: the data makes perfect sense. Higher interest rates have obvious effects on risk taking and debt service costs. It stands to reason that the economy won’t just sail through the large rate hikes needed to restore historic norms.

If anything, the charts likely understate the future effects of rising rates, because today’s debt levels are far higher than average historic levels. Any normalization must also include a wind-down of unconventional measures such as quantitative easing, which presents additional challenges.

Yet, the official outlook calls for steady improvement both through and beyond the rate jump. As shown in Chart 1, the CBO predicts that per capita GDP growth will accelerate to over 3% before settling back to a trend rate of 1.2%.  Forecasts for 2018 and 2019 average a healthy 1.5%, despite the figures in Chart 5 showing virtually no growth after large interest rate increases in the past.

Here’s the corresponding outlook for employment, followed by two more reasons to expect forecasts to fail:


(See here for background on the corporate leverage multiples and here for more on the stock valuation figures.)

In a word, the CBO’s projections are preposterous. They ignore effects that are clear in the data and obvious in real life. But the charts reveal more than just forecasting flaws at a single governmental institution. More broadly, the assumption of a smooth and lasting return to normality is standard practice for mainstream economists, particularly those at the Fed.

Essentially, economists are hardwired to focus on the near-term effects of policy stimulus, while dismissing long-term effects that are often far more important. Standard models fail to account for either natural cyclicality or the payback seen in Charts 4 to 6. Although establishment economists often speak about sustainable growth, they really mean any growth that restores GDP to where they believe it should be. They don’t seriously contemplate the unsustainable growth that occurs when the economy is over-stimulated through credit and financial asset channels. And the charts above demonstrate these deficiencies.

Worse still, this analysis doesn’t tell the whole story. We could have easily tripled the chart sequence with other indicators of Fed-fueled credit and asset market froth – from record margin debt to lax loan covenants to soaring public debt – that also show heightened risks of another bust.

We suggest giving some thought to the data shown above and considering its message for the future. Send it to the smartest people you know and get their opinions. In the meantime, here are our conclusions:

  1. Even if the economy returns to full employment under existing policies, it won’t remain there after (and if) interest rates normalize.
  2. Based on today’s debt and valuation levels (charts 8-9, for example), rising interest rates will have an even harsher effect than suggested by the 60 year history (charts 4-6).
  3. Contrary to the establishment’s “sustainable recovery” narrative, the most plausible outcomes are: 1) interest rates normalize but this triggers another bust, or 2) interest rates remain abnormally low until we eventually experience the mother of all debt/currency crises.

Conclusion 3 restated: We’re stuck in an Escher economy (see below), thanks to the impossibility of the establishment economic view, and this will remain the case until the existing structure collapses and is rebuilt on stronger policy principles.

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Headbanger's picture

What's the old saying?  "Perception is Reality"

Even if it makes no sense at all!

nope-1004's picture

In a debt based economy, "growth" is only achieved by increasing debt levels.

Last 25 years or so have been driven by decreasing lending standards and interest rates, both of which have a natural limit.  We're at that limit.  Now it's just musical chairs with employment figures, inflation figures, and bank balance sheets.

Collapse has to happen for this pig to turn around.


falak pema's picture

debt based economy for the 99%...

Nuance; it is a huge profit based economy for the 1%.

This is inverted totalitarianism and stage managed elected congress and controlled democracy in regulatory capture.

What global neo feudalism is to nation state is what Caesar was to Republic. 

Don't let the farce acted on the stage fool you about the cold and calculated mindset behind the curtain. 

spine001's picture

Wiley, redo your charts with real present value us dollars using the old cpi. And create a scenario were most of the 4% GDP per capita growth comes fromnthe CPI and not real growth. You will see then why the FED zis doing this. They want to dilute or monetiz3 current CDOs.

Abi Normal's picture

When you have a foundation built on sand what happens?  The last 100 years of progressive policy and legislation is our sand!!!

The Fed is in a box, no way out without a lot of pain or much pain, that is the endgame now!

Will it be loss of confidence, no more loans to Uncle Sam and a deep depression, or will it be out of control Stagflation? 

Only time will tell, but the mother of all bubbles is about to pop.

Prepare accordingly!

MeMadMax's picture

Anyone else notice interest rates will be "allowed to rise" after the end of the obamanation?

Wanna bet a 100 bones that if the shillary or some other demnut gets elected into the house of white that interest rates will stay low?

Chris Jusset's picture

Original statement: "interest rates remain abnormally low until we eventually experience the mother of all debt/currency crises."

Rephrase: "interest rates remain abnormally low until we eventually experience THE MOTHER OF ALL BUBBLES."


The Fed is doing everything possible to keep interest rates artificially low for as long as possible ... IOW, the Fed is intentionally trying to blow the mother of all bubbles. 

OutLookingIn's picture



Nine. (9) Meals from ANARCHY.

SRSrocco's picture


While I agree that the whole system is a Ponzi Scheme, I don't see a NEW & HEALTHIER ECONOMY in the future as there won't be the energy to so do:

MUST READ: The Bursting of the Shale Gas Bubble
prains's picture

100% AGREE


the future is really being planned out on a global scale towards a dwindling energy supply. It's gonna be a real small club and easily 5 billion won't be in it. Lot's of protein is gonna rot in the sun, the question is......will it be YOU

fxrxexexdxoxmx's picture

The FED, a privately owned for profit group, is using its power to enrich and remove all debt from these owners friends and family.

It is no more complicated than that.

It is a bitch that this process steals wealth from every single person and entity which uses their medium of exchange but that is what happens when finacially ignorant society allow a few individuals to control  nation(s) currency.

End the FED or else it never ends.

daveO's picture

Right! Rates normalize only after bad loans disappear.

zhandax's picture

Agreed, but it is entirely possible that just as US inflation is diffused throughout the world due to the reserve status of the dollar, that collapse can also be diffused throughout the world.  Not inevitable, mind you, but possible.

StychoKiller's picture

Hmm, $1Trillion in sutdent loans, moar ninja car loans -- I don't think "disappear" means what you think it means.

GMadScientist's picture

Progressives...like Ronald Reagan? So funny that the dipshit hoards still can't admit that this end-game was started in the 80s BY THEM.

disabledvet's picture

"them" would be "everybody" martini man. we all had to go back to work back then to pay for the 70's. I know I sure did. this is a bailout "of New York City, by New York City, For New York City." they're more than ready to handle the collapse that they've created with blowhorns of CNBC sounding out "no bubble" and "you're a loser if you're not long." the rest of us out in "flyover country" here have to find factories to work in, products to make, services to render, etc. wages have collapsed, you get what you get where you get it. welfare is for the rich now...

Abi Normal's picture

LOL, coming from a proggy, I expect no less!

You mean 1880's don't you ROFLMAO!!!  Progressives, err, Fabian Socialists took over a LONG time ago my friend.  You can't see it now, but you will see the full retard of their beliefs soon my loony tunes liberal friend.

The Wolf in Sheeps clothing, will be exposed to the masses, and people like you will have been caught with your 'collective' pants around your ankles, what are ya gonna do then?  Twist in the wind, bubba!

The red pill, blue pill thing doesn't work with me, just so you know.

Harbanger's picture

"still can't admit that this end-game was started in the 80s BY THEM."

Are you kidding me? started in the 80's.

Can you name me one single Keynesian Economist who is not a liberal progressive socialist?
Democrats, Liberals, Progressives, and all Socialists follow Keynesian Economic Principals.
The principle that the government can spend tax payer money
and borrow from Bankers increasing our debt (ie, The Fed spending our future tax payer money) to redistribute and prioritize the needs of their centrally planned society/economy.
The result of 100 years of progressivism is massive bureaucracy with thousands of middle men, cronyism and incompetence. 
The FED, which was given to us by Progressive Woodrow Wilson, was unconstitutional and an act of treason.  Ironically, like our modern progressive in chief, he said he was "sorry" after the fact.   Fck You!, to Wilson, Barry, Ben and all the other socialists who bankrupted our republic.

falak pema's picture

economists dont run the country; they work for the politicians who work for big business; thats been the pecking order in the US.

Economists are like the Bishops and Shamans of old, they spin the holy word that the King wants to hear as New Mantra.

Its all about POWER and power in the US is in the hands of the big Industrialists since the US went continental and industrial in an empty continent with huge resources. These guys have been the capitalists of monopoly markets at the mines and the wells where the RM were and they allowed a semblance of markets in front of the consumer. Their Competitive Advantage lay in vertical integration and economies of scale which ONLY the big boys could achieve. Thats the history of US capitalism.

Don't blame the spin doctor, blame the king.

smartstrike's picture

Yes , it's a very quick jump to collapse economics:


  • Nixon takes US off the gold standard
  • Reagan raises Social Security taxes on labor
  • Reagan uses huge Social Security surpluses to cut taxes on the rich from 70% to 39%
  • Regan begins massive deficit spending and pays huge interest rate income to former taxpayers
  • Bush cuts taxes further citing data which includes Payroll taxes collections as proof that US Budget is nearly balanced
  • Bush expands deficit spending and starts two wars
  • Private Business runs up Debt in excess of $45 Trillion

Modern era: saving the economy for the rich

Abi Normal's picture

You are a fruitloop, go back to your hole, please!

uncle.bigs's picture

GDP Growth can accelerate on flat debt levels if money velocity picks up.  0% interest rates are creating a strong incentive to spend and a disincentive to save.  This economy is just starting to pick up steam and the top is nowhere in sight.

moneybots's picture

"0% interest rates are creating a strong incentive to spend and a disincentive to save."


We have had ZERO rates for 5 years, yet i don't see any spending binge.

47 million people are on food stamps.  40% earn less than the inflation adjusted minimum wage of 1968.  Almost half of the jobs created last month were low wage.

0% interest rates are making the rich, richer.

uncle.bigs's picture

Have you looked at the revenue growth for some of the major retailers and consumer companies?  Strong.  Polaris, Ulta, Buffalo Wild Turds...many others.  Come on Bro.  Don't buy into the doom and gloom BS because revenues and profits are very strong.  Read the financial statements.

Abi Normal's picture

LOL, where is your GDP growth now? 1.5%? That is laughable my friend.  Velocity of money picking up?  You must be joking right?  Where is this locomotive you call steam to this economy?  Just scraping by is all.

The only thing holding up the Casino Market is Fed Stimulus and bond buying, keeping interest rates artificially low and swelling a huge balance sheet of $4 trillion?

You mean the Oligarchy, mandating our every move, removing freedom for some security, mandating statists all?

When you see the folly and complete breakdown due to what Obamacare is going to do alone, you will not feel so euphoric?

Please open your eyes to the reality before you!  

spine001's picture

Dear F.F. Wliey , account for real past and future inflation and you will see why the FED is doing this.

kito's picture

@nope-- collapse will only be the next leg down for this country. This country grew and "prospered" due to an old paradigm that is now dying.

nope-1004's picture

Agree, but change doesn't appear to be too attractive to TPTB.  So IMO change will be forced by nature as this drags on, and when you force someone to do something they dont want to do, they do so kicking and screaming.


CH1's picture

World's largest outdoor insane asylum.

Abi Normal's picture

Look into their eye's, it is a dead giveaway tell.  The inmates are running the asylum and we are going to pay a heavy price for their actions.


DeadFred's picture

It doesn't matter if it makes sense as long as it has CHARTS!

CrashisOptimistic's picture

Let's revisit reality.

1) Money and economics are invented concepts.  They don't exist in nature.  They are largely bullshit.

2) The world has never before seen itself dependent on automation to the extent that it's required to keep 7 billion people alive.  Automation has destroyed the jobs of the less intelligent (sub 100 IQ).  Now, and forever (the F word), that FULL 1/2 of the population will be a burden to the other half.  This remains so until walking behind an oxen plow returns to society as a vital job.

3) 7 billion are fed by oil and that is not going to change.  For tractors to get the necessary acreage harvested or planted by the end of harvest or planting season you have to have hundreds of horsepower.  1 horsepower is 745 watts.  Electrics will NEVER do this, certainly not before oil gets short.  It is oil and always will be oil, until oil is short and that 100,000 acre farm doesn't get planted.

4) And so 3) is why all these "reset" musings are silliness.  The downward trajectory of society is sourced in these two relentless forces (automation and net oil joules scarcity) that say FOREVER.  Money and economics are a joke confronted by these two forces.  There will be no Reset.  There will be a sudden, smashing event, and the resultant lower level of civilization will be permenent.  There is no reset and recovery.  There is reset and remain down.

moneybots's picture

"Automation has destroyed the jobs of the less intelligent (sub 100 IQ). Now, and forever (the F word), that FULL 1/2 of the population will be a burden to the other half.  This remains so until walking behind an oxen plow returns to society as a vital job."

Artificial intelligence will come after the other half.




akak's picture


Artificial intelligence will come after the other half.

Terminator 4: Victory of the Keynesians

Carl Popper's picture

Re arrange the economy so that the bottom 20 percent works as servants to the top 50 percent.

That is better than putting them all on government transfer payments. We can have workers comp for servants so that the person who hires them doesnt lose his house due to a worker's slip and fall.

Have a 5 dollar per hour minimum wage but subsidize their healthcare and housing.

Carl Popper's picture

So the guy who downvoted me wants free money from the government and not have to work for it lol

There was a reason for the property requirement to vote, so selfish lazy people could not vote themselves free money from others.

I am at least willing to subsidize your healthcare and housing, dude, but you gotta give something back otherwise you are just a complete parasite.

trader1's picture

i actually greened you, but...


the best thing is people has money enough to do what they really want to be creative, to develop what they can do for other people or need for theirself. And so we start this thing, basic income.


And basic income means enough money to live without need. And in Switzerland it's only a number to say 2,500 francs. I don't know how many it is in the States. It's not to be rich. It's simply to say, today we are rich enough and there are goods enough that we can say everybody needs an income to live. And why shall we--why have we to bound it to conditions?


And it's an idea, for example, of the '60s in the United States. Milton Friedman tried such things. It was a negative income tax, called so.


And we can say it's a moment in the world, it's a new century, a new vision, a social vision to say, set the people free by living, and then they do their things. And they are paid for their work, but the basic has to be sure for everybody.


And so we go with this in Switzerland. And the thing in Switzerland is that you have this direct democracy. And that means you can go with such wishes, such an idea. What really changed many things and let you look to all this facts new and to--yeah, it's a bit of philosophical thing, but it's a moral thing. [source]


A basic income is an income unconditionally granted to all on an individual basis, without means test or work requirement. It is a form of minimum income guarantee that differs from those that now exist in various European countries in three important ways:

  • it is being paid to individuals rather than households;
  • it is paid irrespective of any income from other sources;
  • it is paid without requiring the performance of any work or the willingness to accept a job if offered.

Liberty and equality, efficiency and community, common ownership of the Earth and equal sharing in the benefits of technical progress, the flexibility of the labour market and the dignity of the poor, the fight against inhumane working conditions, against the desertification of the countryside and against interregional inequalities, the viability of cooperatives and the promotion of adult education, autonomy from bosses, husbands and bureaucrats, have all been invoked in its favour.

But it is the inability to tackle unemployment with conventional means that has led in the last decade or so to the idea being taken seriously throughout Europe by a growing number of scholars and organizations. Social policy and economic policy can no longer be conceived separately, and basic income is increasingly viewed as the only viable way of reconciling two of their respective central objectives: poverty relief and full employment.

There is a wide variety of proposals around. They differ according to the amounts involved, the source of funding, the nature and size of the reductions in other transfers, and along many other dimensions. As far as short-term proposals are concerned, however, the current discussion is focusing increasingly on so-called partial basic income schemes which would not be full substitutes for present guaranteed income schemes but would provide a low - and slowly increasing - basis to which other incomes, including the remaining social security benefits and means-tested guaranteed income supplements, could be added.

Many prominent European social scientists have now come out in favour of basic income - among them two Nobel laureates in economics. In a few countries some major politicians, including from parties in government, are also beginning to stick their necks out in support of it. At the same time, the relevant literature - on the economic, ethical, political and legal aspects - is gradually expanding and those promoting the idea, or just interested in it, in various European countries and across the world have started organizing into an active network. [source]



Skateboarder's picture

Thanks for summarizing my gut instinct into four easy points.

If Japan is any indication of how long can kicking can continue, we have a long, long way to go, and a lot more freedom to lose, i.e "may I go to the bafroom, massa?"

ChaosEquilibrium's picture

Japan should NOT be used as the indicator of the future US model...it would be a mistake:


Japan has had the benefit of ALL major economies maintaining some sort of balanced growth during that time---1980-present.


Japan finances the debt internally.  The only saving grace to Japan and its downfall WAS the technological 'export economy'!


Those two reasons are why JAPAN is different and unique in regards to other large Developed economies.

Skateboarder's picture

CE, I find myself echoing both of our sentiments at different points of time. When other folks say we don't have much time, I echo the sentiment of my previous post. When other folks say we have lots of time, I echo the sentiment of your post. The reality about to traspire? Somewhere between these two extremes, because no one wants the party to end just yet.

The real battle is between automation and oil scarcity as CiO put. However, the battle of the fiats and the derivatives giving birth to a hopeful return to a gold standard, in conjunction with slow radiation poisioning giving everyone cancer, will either inspire the human species to seek enlightenment as a whole, or perish.

HardAssets's picture

The 'scarcity' meme rears its ugly head

What if there really is enough for everyone and scarcity is an illusion ?

A way to control people.

Is this idea  'un thinkable' ?

How well is the thinkable approach working ?

Skateboarder's picture

If oil wasn't scarce, why the hell would you go through the effort of putting giant rigs in the oceans?

The dinos and the ecosystems that carried them were huge man, and they left behind a lot of carbon. Megarainforests of aeons past... And a bunch of stone stackers show up a few hundred million years later burning it all with a magical expectation that this supply replenish itself eternally.

I'm sure this place looks fun from outer space.

CrashisOptimistic's picture

"What if there really is enough for everyone and scarcity is an illusion ?"

Without talking about things discussed by another (30 story tall oil rigs at sea vs 20 ft wooden platforms of 1920s vintage, both of which drill(ed) holes that flow(ed) the same 20,000 barrels/day), I'll just note a different point.

Your question was asked . . . when?  In what year?  Maybe there was enough in 1950 for 4 billion people.  If that was "enough" then (presuming "just sufficient" defines "enough"), how can that be enough at 7 billion?

Or is the presumption there is enough for 12 billion?  Or 20 billion?  You do have to pick a number. 

And then after you do, the conclusion is there is not enough for that number + 1.

CultiVader's picture

John Michael Greer's "The Long Descent" is a fairly reasonable description of "what's next"


El Vaquero's picture

It's nice to see people who understand that it is oil that is important.  Either we have an economic collapse that hastens the collapse that dwindling oil supplies would bring about anyway, or we wait and dwindling oil supplies will cause the collapse anyway.  We haven't just made oil an integral part of our society, we have also squandered a lot of it.  I've had a couple of people ask me why I don't use product XYZ in my garden.  My response:  I want to be able to grow my own food without being reliant on heavy industry or oil.


Long nixtamalization with wood ash

El Vaquero's picture

Oh, and one thing to expand upon:


3) 7 billion are fed by oil and that is not going to change.  For tractors to get the necessary acreage harvested or planted by the end of harvest or planting season you have to have hundreds of horsepower.  1 horsepower is 745 watts.  Electrics will NEVER do this, certainly not before oil gets short.  It is oil and always will be oil, until oil is short and that 100,000 acre farm doesn't get planted.

It's more than just the tractor that uses oil when it comes to food.  Petrochemicals are used in pesticides/herbicides.  Oil derived plastics are used in packaging.  Oil derivatives are used in shipping and running refridgeration units during that shiping.  I'm sure you'd find petrochemicals being used as preservatives too, and I bet even the ink used in the labeling is often oil based.  I'm sure you could go through and find other oil uses as well.  I've read that just running the tractors is something like 15% or 20% of the total usage with our food system.  I don't know if that's true, but I do know that tractors are only one component of the whole picture. 

macbone's picture

^^^ laughing at the assumptions of the oil wizards above^^^
The Malthusian foolishness will bewitch the human race from now till doomsday. Special credit for the rocket scientist who asked why we are now drilling from the surface of the ocean. Doesn't have anything to do with the fact that 7\8's of the earths surface is covered by the ocean does it????

We will have destroyed our current system lonnnnnnggg before we hit peak oil. God bless us all, even the fools.