Guest Post: The Death Spiral Of Debt, Risk And Jobs

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Death Spiral of Debt, Risk and Jobs

Debt, risk and employment are in a death-spiral of malinvestment and debt-based consumption.

Standard-issue financial pundits (SIFPs) and economists look at debt, risk and the job market as separate issues. No wonder they can't make sense of our "jobless recovery": the three are intimately and causally connected. An entire book could be written about debt, risk and jobs, but let's see if we can't shed some light on a complex dynamic in a few paragraphs.

Risk: As I described in Resistance, Revolution, Liberation: A Model for Positive Change, risk cannot be eliminated, it can only be shifted to others or temporarily masked.

Masking risk simply lets it pile up beneath the surface until it brings down the entire system. Transferring it to others is a neat "solution" but when it blows up then those who took the fall are not pleased.

Risk and gain are causally connected: no risk, no gain. The ideal setup is to keep the gain but transfer the risk to others. This was the financial meltdown in a nutshell: the bankers kept their gains and transferred the losses/risk to the taxpayers via the bankers' toadies and apparatchiks in Congress, the White House and the Federal Reserve.

Risk is like the dog that didn't bark. In the story Silver Blaze, Sherlock Holmes calls the police inspector's attention to the fact that a dog did something curious the night in question: it did not bark when it should have.

When scarce capital is misallocated to unproductive uses such as duplicate tests that can be billed to Medicare, sprawling McMansions in the middle of nowhere, etc., "the dog that didn't bark" is this question: what productive uses for that scarce capital have been passed over to squander the scarce capital on Medicare fraud, McMansions, Homeland Security ("Papers, please! No papers? Take him away"), etc.

Once the capital has been squandered, it's gone, and the opportunity to invest it in productive uses has been irrevocably lost.

Debt: Debt has a funny cost called interest. If you have a corrupt, self-serving central bank (a redundancy) that can lower interest rates by printing money to buy government bonds, then this funny thing called interest can be lowered to, say, 1%.

At 1% interest, the government can borrow $100 and only pay 1% in annual interest. That is almost "free," isn't it? The key word here is "almost." If you borrow enough, then that silly 1% can become rather oppressive.

Let's say the Federal Reserve is willing to loan you $100 billion at zero interest. You have an incredible sum of cash to use for speculation, and it doesn't cost anything! Wow, you must be an investment banker....

Now what happens when the interest rate goes from zero to 1%? Yikes, you suddenly owe $1 billion a year in interest. That is some serious change. You can of course pay the interest out of the borrowed $100 billion, unless you've spent it building bridges to nowhere and supporting crony capitalism.

Yes, we're talking about Japan--and Greece, the U.S., China, and every other nation that piled up staggering debts to fund an unproductive Status Quo. If you play this "borrow at low rates" Keynesian game for 20 years, then you end up with a debt that far exceeds your national output (GDP). That funny cost is now so large all your tax receipts generated by your vast economy only cover the interest and your Social Security tab. That's Japan today: all its tax revenues only cover its gargantuan interest on its unimaginably vast debt and Japan's social security outlays. The rest of its government expenses must be borrowed and added to the already monumental debt.

Interest creates a death spiral when the borrowed money was squandered on unproductive bridges to nowhere and consumption.

Jobs: Jobs have an interesting feature called productivity. If you pay me $1 million for a manicure (OK, you're an investment banker and can afford it), that money funds consumption, interest and taxes (presuming I pay taxes, which I might not if I hire the right Wall Street law firm). Once the money is spent on consumption (housing, energy, entertainment, hookers for the Security Guys, etc.), interest and taxes, then it's gone. It cannot be invested in productive assets.

If I invest the $1 million in software and robotics that produce equipment for the natural gas industry, then I will hire a software person to manage the software and technicians to maintain the machines, a few more to transport the raw materials and finished goods, a few more to oversee the accounts, and so on. The $1 million funds a number of jobs that will be permanent if the products being produced meet a real market demand and can be sold at a profit.

The $1 million spent on consumption pays for some labor, but it doesn't create any value. If we track where it went, it ended up in the government coffers as taxes, in the five "too big to fail" banks as interest, and in various agribusiness, food services and energy corporations. A few bucks were distributed as tips and donations.

Now imagine if that $1 million was borrowed. If the $1 million was squandered on consumption, interest and taxes, then it's gone in a short period of time--but the interest remains to be paid forever. If you're an investment banker and the Fed loves you (and of course it does), then you can roll that $1 million into a new $2 million loan. You use some of the $1 million in fresh debt to pay the interest, and then you blow the rest on unproductive consumption.

The causal connection between debt, risk and jobs is now visible. Debt is intrinsically risky because the interest accrues until the debt is paid in full. If the debt will never be paid--for instance, the $14 trillion in Federal debt--then the interest is eternal, or at least until the system implodes and all the debt is renounced.

If the money has been squandered on consumption (marginalized college degrees, medical procedures with minimal or even negative results, $300 million a piece F-35 fighter jets, etc.) then there are two risks: the interest that piles up must be paid, meaning potentially productive investments must be passed over to pay the interest, and productive uses that could have been funded by the borrowed capital have been passed over.

Consumption funds temporary labor, but there is no wealth created or sustainable employment created. When you borrow $100K for a marginal MBA, the money paid some staffers at the Status Quo educrat edifice and some overhead/profit, but when it's gone, the debt remains and the staffers need another debt-serf to fund their pay next semester.

If the borrowed money were actually invested in a marketable product (in our example, equipment for natural gas production), then jobs and wealth are created by the increase in productivity and output created by the enterprise.

What we have instead is a Central State and an economy that has borrowed and squandered trillions of dollars on consumption and malinvestment in unproductive "stranded" assets. The debt and risk pile up, while the labor that results from consumption is temporary and does not create wealth or permanent employment.

Figuratively speaking, we're stranded in a McMansion in the middle of nowhere, a showy malinvestment that produces no wealth or value, and we're wondering how we're going to pay the gargantuan mortgage and student loans.

Debt and the risk generated by rising debt create a death-spiral when the money is squandered on consumption, phantom assets, speculation and malinvestments. Sadly, that systemic misallocation of capital puts the job market in a death spiral, too.

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Sandmann's picture

The West has done exactly what it accuses Africa of having done. Taking huge injections of Capital and siphoning it off into sterile offshore bank accounts or into politically driven projects with no real return.


The West has turned into the Third World with its Rotten Elites and corrupt Bankers

Jack Burton's picture

PPT team has been busy the last couple days. They have made more saves than an NHL goalie!

Spastica Rex's picture

+1 nothing more needs to be said

All Risk No Reward's picture

Except that the whole monetary system is a fraud created by money supply rentiers that essentially perched themselves atop the national "roost" and charge everyone else "rent" for living in the country. The flow chart looks like this...

(Note: Keep And Share is a PDF Hosting site - it is just a PDF file containging the flow of "fraud" inherent within our "monetary system")

But it doesn't stop there.  The Trojan Horse enforcer of this monetary con game in America, the Federal Reserve System (the system is almost worldwide, though... give them time to bomb everyone who isn't under it already), is also a black letter law criminal.

PLEASE stop reinforcing the "dual mandate" lie everyone.  THERE IS NO DUAL MANDATE.  Their mandate is singular.  The expected results of following that singular mandate have been, in Orwellian fashion, pawned off as the mandate itself so the Trojan Horse could break its mandate and blow the world's largest credit bubble...  which will always lead to the worlds largest credit bust...  think of it as an "operation."

Federal Reserve Act Section 2A. Monetary Policy Objectives

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]

The mandate is in bold and underlined.  It IS NOT dual, it is singular.

The reason they lie about the mandate is so they can break it without most people figuring out that they've broken their own law...

BTW, is it even a law if there is no penalty for breaking it?  Denninger said he read FinReg and there wasn't one, single, solitary "or else" penalty in the whole thing.  I can't verify - but if you don't trust Denninger, you can verify it.

It's all a con gam, an Alladin's lamp of fraud.

There is no way out until we kick out the criminals and change the system.

LawsofPhysics's picture

What is this "rule of law" that you speak of? - John Corzine

Bastiat's picture

I am Justice!   - Eric Holder

All Risk No Reward's picture

SR, No problem - the chit runs so thick it is very, very difficult to keep it all straight.  ;-)


I didn't even get into the bankster / government duopoly drug running out of Afghansitan - #1 world producer in heroine and marijuana.

People, 7,700 tons of heroine isn't being exported to Europe on mules under U.S. military radar.

I could go on and on...  arming Sinaloa, allowing Sinaloa to bring in tons of cocaine for "information."  All the while grandma is being strip searched for "national security" when the government sanctioned drug runners don't get checked.

You knew the banks were involved in this evil...

How a big US bank laundered billions from Mexico's murderous drug gangs

No criminal charges filed and only the whistle blower was forced out.

There's no mention the money was ever recovered, either.  The bankster/black ops/CIA cartel isn't giving up their hard earned cash, PROLES!

dwdollar's picture

At this point, the only thing which distinguishes the West from Africa is the crumbling infrastructure built by better men long since gone.

GeneMarchbanks's picture

Um, the roads in Windhoek and Cape Town are better than anything the East Coast or MidWest have.

disabledvet's picture

The New York State Thruway is pretty nice. And I highly doubt there exists anywhere on the planet Interstate 80.

mickeyman's picture

The New York State Thruway has a different problem. On a recent drive along there, I stopped at a rest stop to answer an urgent call, but there was a herd of enormous, slow-moving animals waddling between me and the washroom. It was my closest brush with death yet!

mickeyman's picture

Also in West Africa there is lots of crumbling infrastructure from times long gone. 

I stayed at a grand old hotel in Axim in 1997 (western region of Ghana), up on the fourth floor, with flush toilets--but there was no water. The girl had to walk over 400 m to collect water and carry it up the stairs to fill the toilet. But at one time, there was hot and cold running water at that hotel.

I saw much the same more recently in Sierra Leone, especially in the country. A nice highway, which has been resurfaced for 100 km or so, but past the end of the repaving, you are down to horse-and-buggy speeds.

Hero Protagonist's picture

Agreed, but the question is one of timing.  When does the inefficiency of expended (borrowed) capital manifest into a reaction from Joe/Jill Six Pack of the world?  Is it possible we're seeing the beginning of it in Greece, Spain, et al?  That is the rejection of "austerity" is just another way of saying to the Central Bank higherarchy, why do we have to pay for it, you spent it too.

If the average person realizes that they are paying back debt of another country that spent it, watch out.

SheepDog-One's picture

Yea Charles its all screwed. 

LetThemEatRand's picture

"If you pay me $1 million for a manicure (OK, you're an investment banker and can afford it), that money funds consumption, interest and taxes (presuming I pay taxes, which I might not if I hire the right Wall Street law firm). Once the money is spent on consumption (housing, energy, entertainment, hookers for the Security Guys, etc.), interest and taxes, then it's gone. It cannot be invested in productive assets."

Has anyone else noticed that CEO pay has skyrocketed the last few decades while worker pay has remained flat?  And for some reason our economy is going down the tubes despite the rich rewards being given to the "productive" class.  Yet here on ZH and in other places we hear over and over that the problem is that the productive class is being squeezed.  Too many taxes, regulations, etc.  It all comes down to the fact that trickle down does not work, as explained so well in this article.  

Seize Mars's picture

I don't think anyone has said that the productive people are getting paid well. Quite the opposite. There is a complete clusterfuck of mispriced assets and malinvested capital. Otherwise productive people can't be productive. Not even if you wanted to be.

Saying that trickle-down doesn't work is silly. Or rather it depends on what you mean by "works." It works great for banks.

LetThemEatRand's picture

Trickle down doesn't work.   I guess I'm silly, but it seems to me like we've tried it for the last 40 years and.....  Or did you miss the fact that the 400 people in the United States now control more of the nation's wealth than the bottom 50% of the entire country.  They are not using it to build factories and create jobs.  The bottom 50% of this country is consuming solely through debt, not through wages. That can't last.  Trickle down doesn't work.

Dr. Engali's picture

Time for some Obamenomics  trickle up poverty.

LetThemEatRand's picture

Nicely thought out substantive response.  Obama is a trickle down economics guy.  Prove me wrong.  How much money has gone to the bankers and CEO's under his presidency?

Jack Burton's picture

"Prove me wrong". Of course they can not do that, because Obama is a Ronald Reagan conservative. Sure Obama talks different than old RR did, but the policies are the same. And aren't the policies what really matter, not the chatter.

Dr. Engali's picture

I guess I should have put my sarc disclosure in there for you Rand...

So here you go.. This is sarcasm by the way for those of you who can't figure it out... You know who you are.

Now for the truth ... Obama and his counterpart Romney are both New world order tools, nothing more. They are both one in the same.

ATM's picture

The bottom 50% are bankrupt because they live a lifestyle that is beyond their means, made easy by TPTB who wish them to be debt slaves (peons) and neither seem to have any issues with the arrangement - yet.

Bastiat's picture

The bottom 50% are bankrupt because they live a lifestyle that is beyond their means

Kind of like the TBTF banks?  Except their "lifestyle" includes racketeering which apparently is what qualifies them for infinite bailout money.

Everybodys All American's picture

Free market capitalism works. What has been employed as of late is centralized socialism. If that's what you mean by trickle down I agree. The US has created the most innovation in the history of the world in the last 100 yrs or more. When the government and governemnt social programs are down sized to a much much smaller size again we'll see that same innovation create many more jobs and new discoveries. If not we'll continue to flounder.

Ben Burnyankme's picture

Capitalism is a phrase coined by Marx.  Let's just call it the free market.  Then, please tell me where in the hell a free market has existed on the globe in the last 80 years?  USA, USA, USA.  Now I have a bridged I'd like to sell you.  Don't get me wrong as I believe in free markets and would love to see and participate in one but we have not enjoyed anything close since Wilson came along. 

blunderdog's picture

Capitalism is much more than a free market, see, that's why the word exists.

There are free markets all over the world, but they're just a necessary component.  You also need contract enforcement mechanisms, even-handed adjudication of disputes, and a clearing-system for virtual/synthetic commodities.

AnAnonymous's picture

And where are those free markets?

blunderdog's picture

Back alleys and online games, mostly.

All Risk No Reward's picture

...and that ain't rain water doing the tricklin', either, no matter what they say.

In theory (assuming the kleptocracy crime syndicate didn't have the nation by the throat with their fraudulent societal asset stripping monetaary "torture rack" system), "trickle down" works when demand is high and supply is low.  "Trickle up" would work when supply is high and demand is low.

The reason you only heard about "trickle down" is because those "above" you and I simply wanted to control the money that is necessary for society to pay back its debts.

When they control the money, they can then bankrupt the nation and take it into receivorship - which is the plan.  The feudal lords...




They don't want to serf guff, either.  Just shut up and know your place or else you will get some re-education in this here Banker Federalist State of America.

Debt Money Tyranny

Yes, The Re-Education Camp Manual Does Apply Domestically to U.S. Citizens

Re-Education Camp Manual Includes Rules On Isolating Political Prisoners

Spastica Rex's picture

You're being a pussy, gay, communist, fascist joo.


/fucking sarcasm off 

GeneMarchbanks's picture

Laissez-faire and egalitarianism are not contradictions you silly.

A Nanny Moose's picture

Are you operating under the premise that only CEO's can comprise said "productive class?"

LetThemEatRand's picture

Quite the opposite, but in practice the CEOs get all the money don't they.  In my view, the productive class is the middle class.   But that makes me a Commie or worse, I think.

tmosley's picture

LetThemEatRand read half of Atlas Shrugged, and didn't understand the difference between the characters of Dagney Taggart and James Taggart.  Or Dagney and Wesley Mouch, for that matter.

As such, he totally fails to understand that the vast majority of CEOs of large, government favored companies got their due to their influence and pull, not because of their ability to produce.  They are not the productive class.  The productive class is largely gone.  His continuing failure to understand this has lead to intense bitterness regarding economic freedom.

LetThemEatRand's picture

Do you have an altar of Rand at your home?  Do you really believe that all of the complexities of our economy and what is wrong with it can be defined by her simplistic thinking?  How do you explain that every single Rand offspring such as Alan Greespan becomes completely corrupt in practice?  Never mind, it's like trying to convince any religious zealot that they are wrong.   

blunderdog's picture

     How do you explain that every single Rand offspring such as Alan Greespan becomes completely corrupt in practice?

I want to hear this, too. 

It can't be difficult to explain where it goes wrong.  The average high-school kid is able to read and understand the books.

LetThemEatRand's picture

By the way, have you ever considered that Rand is actually a demonic figure?  I'm not a very religious person, but the coincidences are striking.  Let's compare the philosophies of the traditional Satan character with Rand:

1) selfishness is good.  Check.

2) the poor can go fuck themselves.  Check.

3) wealth accumulation is an end onto itself and a worthy goal of one's entire life.  Check.

4) helping others is not only unnecessary, but actually a bad thing.  Check.

5) altruism is a bad thing.  Check

6) the higher good is the happiness of the individual, even at the expense of other individuals.  Check.




akak's picture

In your idiotic and rabid mischaracterization of the philosophy of Ayn Rand (which you evidently learned from skimming a letter to the editor of The Nation), you demonstrate not only a gross dishonesty and a hysterically irrational hatred, but actual "Rand Derangement Syndrome".

Get help.

malek's picture

Ok, lets turn this around:

1) the slightest bit of selfishness is the worst crime possible and has to be punished harshly

2) the rich are to be fucked by everybone else

3) wealth destruction is an end onto itself and a worthy goal of one's entire life

4) helping others without limits is absolutely necessary, and nothing bad will come out of it

5) any amount of altruism is a good thing

6) the higher good is the happiness of society, even at the expense of single individuals

So you want to live in such a place, LTER?

LetThemEatRand's picture

You do realize that "Malek" is the Arabic guardian angel of hell, don't you?   Maybe I'm on to something....

malek's picture

Actually it is the Na'vi translation of my name - according to some now defunct online translator.

Shall I also start trying to find out what LETR means, for example, in Suaheli?

AnAnonymous's picture

As such, he totally fails to understand that the vast majority of CEOs of large, government favored companies got their due to their influence and pull, not because of their ability to produce. They are not the productive class.


Made me laugh. But influence and pull have to be produced. You have to work for this kind of things.

Extorting the weak, farming the poor is work. It is production.

akak's picture

It would appear that a great many things make you laugh.

Too bad there evidently isn't anything that can make you make any sense, or that can stifle your virulently anti-American bigotry and blind and sweeping collectivist hatred of EVERY American for the crimes of a few at the top.

AnAnonymous's picture


What is that? You cant answer to this question.

'Americanism' being what it is, please explain how collectivistic it is to develop the required actions as guided by 'Americanism'

Is it collectivistic to tell that Christians believe in one god?

If yes, how?

As to the austitic point, while you have proven so far unable to deal with any argument provided,I am pretty aware of the surroundings.

Projection is such a US citizen thing.

akak's picture



What is that? You cant answer to this question.

I have in fact addressed that exact point over and over in my many challenges to the evil bigoted bile that you spew against EVERY American, and for which you explicitly deride each and every resident of the USA for the crimes of a tiny sociopathic elite (just as your nation of China is controlled by a tiny sociopathic elite), but you adamantly refuse, in your cowardice and blind prejudice, to ever acknowledge it.

Your simplistic and childishly hate-filled thinking is yes, collectivist, by the simple act of condemning EVERY American for the actions of a small minority, our rulers.  Does it not even impinge to the slightest degree on your woefully limited intellect that millions of us "US citizens" are fighting AGAINST that sociopathic ruling elite in almost every way we can, and that millions of us similarly deny and mock the self-serving nationalistic propaganda of "American exceptionalism" and all the rest of that kind of bullshit?  But you glibly lump the victims in with the criminals as all equally guilty --- THAT is being collectivist.


EDIT: As expected, nothing but a chorus of Chinese crickets in response to a direct challenge to this maliciously prejudiced troll.

TheFourthStooge-ing's picture

Chinese citizenism offuscationism subterfuge and treachery have predictability like the sunrise.

Denial being the primary characteristic of Chinese citizenism, and is always the step one of Chinese citizenism offuscationism.

Very can kicking, which is the path pointed to follow by all Chinese citizenism road signs.

Running dog ignoration is always the step two of Chinese citizenism offuscationism. Again, following the Chinese citizenism traditional path of can kicking.