Guest Post: The Perils Of Underestimating Complexity And Mispricing Risk

Tyler Durden's picture

Submitted by Keith Fitz-Gerald of Peak Prosperity,

"If you’re rich you get a bailout. If you’re poor you get a handout. And if you’re middle class you get left out." That's not a sustainable way to run the system, exclaims investment strategist Keith Fitz-Gerald.

A cancer at the core of our current economy is the magical thinking, "no pain, all gain" philosophy, pursued by those running it. They are doing all they can to remove the consequences of failure from the system -- blind to failure's essential 'waste-clearing' function in a healthy free market.

Without the discipline of Darwinism, the individual actors in the system make all sorts of malinvestments that would never make sense in an efficient marketplace. But since the losses from these inane pursuits are socialized, there's no incentive to stop making them. At least, up until the point where the class whose back is burdened with paying for the socialized messes finally breaks.

This is the thing: let some of these things fail because when failure occurs you have an asset redistribution. The faulty assets are, in fact, bled out of the system. The quality assets are assumed by responsible parties. That is the law of capitalism. That’s the way it works.


So if we think back to the credit crisis and we think back to what happened in 2007 – 2008 they went screaming and yelling to congress, "Oh my goodness, we’re going to have to do this or the sky’s going to fall!" Well, the sky fell anyway. They pumped $700 billion into this, then a couple $ Trillion. Well, if the government multiplier that all these conventional economists talk about actually worked our economy should be screaming along at six or eight percent right now, but it's not.


And the reason it's not is because it's a complex system and despite all the pushing and pulling they’ve done on one end, they didn’t understand that all these other things would happen at the other end. Too big to fail? It's not too big to fail; it's too big to survive.


We have monopoly laws that we should have been using along the way but our regulators were asleep at the switch. They’re out manned, outdone, outclassed, at every turn of the road. Wall Street does not want to do anything that remotely resembles reigning itself in and it has no incentive to do so.


It sure as hell is not the free market that everybody likes to think it is. And that, to me, is extremely disturbing because they have removed the hand of risk from the marketplace and these businesses now have every incentive to screw up because they know that a) they won’t be held accountable for it and b) they’re going to get bailed out.


They have put so much debt onto this that our unborn great, great, great, great, great, grandchildren could not possibly pay this off. The only way they’re going to get out of this is to deleverage it and remove it from the system.

As an expert on Japan with deep personal ties there as well, Keith and Chris also discuss why that country is a great "black swan" candidate for the back half of 2012.

Click the play button below to listen to Chris' interview with Keith Fitz-Gerald (44m:22s):


Or click here to read the transcript

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
kito's picture

i will be posting this periodically leading up to elections....its that important!

Michael's picture

We could have more prosperity even if a loaf of bread cost ten cents under a gold standard.

Captain Kurtz's picture

There can be inflation under the gold standard also.  Remember its a standard and ultimately there is a peg or ratio to determine price in dollars.  Additionally fractional reserve lending can stil exist under a gold standard.  It's quite the non sequitor distraction if you ask me.

Hobbleknee's picture

That's why a rigged standard is not the answer either. Gold should be used as money, and instead of fiat dollars in our pockets, we would have warehouse receipts, which are of course 100% reserved (not fractional).  You could still use plastic too, but all the digits would represent a physical gold deposit somewhere.  In a free society, there would be all kinds of choices.  You could choose a bank that lends out your gold for higher interest, or you could choose banks that just keep it safe for you.  It would be up to the consumer to decide what is best, not the government.

Hober Mallow's picture

These guys speak like super-sales assholes

Ying-Yang's picture


Really great youtube video........ thanks!

Sadly I see only 1,064 views. This video needs to be seen by millions! Judge Napolitano nails the "What ifs"

Muppet of the Universe's picture

As long as we are living in fairy tale land...   Why don't we just use fiat money and set a strict limit of dollars per capita?  & make the crime of printing money punishable by death and torture...  & while we're at it, why not just abolish the debt based monetary system?  As well as ALL centralized authority?  LOL cus there are too many muppets.

Super easy.  Then we don't need the Gold all the Illuminati already own... and we don't have to worry about the death of an economy by means of wage stagflation and currency hyperinflation.  Simple brAH.


BTW everyone already knows risk is mispriced.  Remember CDOs, CDSs, NINA LOANs?  & in future past tense.  Will you remember Government Bonds being senior risk (secure risk) assets?  LOL!  T-minus 10 to Derivitives Thermo-nuclear destruction of the world. 


& btw anyone noticing that the U.S. nuclear regulatory agencies are closing nuke plants when the come up for review?  LOL wah teh fuhk brew?  Is someone planning for total collapse besides me?  XD

BigJim's picture

 ...That's why a rigged standard is not the answer either. Gold should be used as money, and instead of fiat dollars in our pockets, we would have warehouse receipts, which are of course 100% reserved (not fractional).  You could still use plastic too, but all the digits would represent a physical gold deposit somewhere.  In a free society, there would be all kinds of choices.

Exactly. Who's to say fractional reserve banking is wrong... as long as everyone knows the score, and banks are not issuing legal tender, but their own, discountable currencies, that aren't getting the implicit subsidy of government deposit insurance? Without that subsidy, risk-averse lenders would only lend to banks that kept 100% reserves, thus pushing up the rates fractional reserve lenders would have to pay to less risk-averse depositors who would know there was a chance they'd lose some or all of their money if the market turned against their bank.

Interestingly, even before the Fed, the US government frequently allowed banks to suspend exchanging their notes for specie (while being able to demand specie from the debtors) during banking crises - so the current pro-bankster attitude by our elected 'representatives' is nothing new.

As long as the bulk of the electorate are cluelss on this subject, nothing will change. It's just too enabling of wealth extraction by our elites for them to forego it voluntarily.

Pure Evil's picture

I hate to say it, but there's nothing, "that important" in the universe, except, um, well.......maybe the need to find an open stall when you've got a bad case of explosive diarrhea.

LouisDega's picture

Don't forget your family, friends and your wife and kids. For everything else there's a bottle of merlot.

Pure Evil's picture

Or at least a good doobie.

slewie the pi-rat's picture

demons have the best weed!

that looks like an intergalactic ballistic bomber, BiCheZ!

who the fuk didn't ante this time?

Boxed Merlot's picture

I'll settle for the boxed variety until and unless frns are replaced with dollars.

Good point about depositing your gold in trust with a reputable institution. On deposit is in "trust" while available to be lent out would be equivalent to owning stock in the institution. In other words, segregated vs. non-segregated accounts. With the sorry state of affairs, i.e. non prosecuted thefts of depositor's assets, seems a return to old fashioned virtuous conduct on the part of individuals should be making a comeback and would hopefully put a well needed end to the too big to do right institutions and their criminal leaderships. Lying, cheating, contributing and printing their way out of hypothecated madness will continue to be the chosen solution for the foreseeable future though as long as people continue to believe the frn=dollar paradigm.

One asset I find particularly interesting in the US are deeded mineral rights with proven reserves.  I heard there are liabilities to owning them, but I can’t figure out what they would be.



slewie the pi-rat's picture

well, what are lawyers for?

unaccustomed as i am to being asked for legal advice when i'm not in jail :> i have no fuking idea!  that is my legal knowledge of mineral rights

but maybe like all rights which have  been bifurcated from the land they hafta be enforced

so maybe it's some big goobermint piece and you know the senator and have a judge in every county, just in case?  no problemo

but if there is a young family living there and yer "deed" is from the 5th century BC and written in greek, maybe not, especially since they just put in a new well and are raising organic chronic on the 7500 acres

Boxed Merlot's picture

yer "deed" is from the 5th century BC and written in...


Joseph Smith's golden tablet "language".  I find it quite amusing that mormon "antiquities" predate american indigenous people's claim to the land given the water craft walk across the pond by Joe's forefathers.


Thanks for the laugh about legal advise outside the confines of jail.  Who would ask such mundain things unless one were being detained?  Or un(der)-employed with nothing better to do?


The best to you and yours, regardless of the future.

Now, where's that box and my bottle of water?





Alcoholic Native American's picture

"They have put so much debt onto this that our unborn great, great, great, great, great, grandchildren could not possibly pay this off."


That is simply not enough, public debt is one thing, but with persistance, we can also enslave them to private/government debt as well.  Student loans, car financing, mortgages???? The possibilities are endless.

EAT THE YOUNG.  Let's double tripple or even quadrouple dip into their capital pool.

These future rent payers have to pay for the privledge of being in my world.

Wynn's picture

"The rich are the scum of the earth in every country". - G. K. Chesterton, (1914)

Alcoholic Native American's picture

Rich is a relative term, and countries are for little people. We live in a global economy now.  Baseless class warfare.


Pure Evil's picture

Unless of course you've just won the $300+ Million Powerball, and then everyone else is the scum of the earth.

Perceptions do change when your bank account is full of wads of cash.

Alcoholic Native American's picture

I remember when I had a stuffed bank account, not much has really changed except the people that enjoy my company though.  Imagine that.

AnAnonymous's picture

For 'Americans', everything is situational. It is all a matter of being on the wrong/right side of the fence.

TheFourthStooge-ing's picture

For AnAnonymousitizens, everything is situational. It is all a matter of crapping on the left/right side of the road.

Intoxicologist's picture

Situational awareness to Chinese Shitizinsim Citizens: Watch your back lest you be run over by a magic time-traveling rickshaw whilst you're pooping on the roadside..

Arnold Ziffel's picture

A new report flags 26 companies that paid less in taxes last year than they paid their CEOs, ending up with little or no tax bill on an average $1 billion in revenue. Here's how they pulled it off.

How did they pull this off? Mainly by using loopholes such as offshore tax havens to reduce Uncle Sam's take, while handing out executive perks along with astronomical pay and generous stock-options grants.

On average, the 26 companies had more than $1 billion in U.S. pre-tax income, yet they still got tax benefits -- or refunds -- that averaged $163 million, concludes the study, "The CEO Hands in Uncle Sam's Pockets," from the Institute for Policy Studies. The tax breaks helped CEOs hit profitability targets, one reason CEO pay continues to rise.

"We're being fed this image that America is broke, and we have no choice but to slash spending," says Sarah Anderson, a co-author of the study. "We are actually quite a rich country, but so much of our wealth is diverted into the pockets of top executives."


AynRandFan's picture

Pure hokum.  Do CEO's often make too much?  Yes.  Does their compensation make any measurable impact on shareholders or the economy?  No.

BigJim's picture

More to the point, what was the tax rate on the CEO?

Typically, higher-income earners pay higher taxes that corporations, so if you're a 'tax-is-good!' kinda person, you want individuals working for corporations to earn more than the corporations, because in aggregate they'll pay more tax.

This whole 'corporate tax is too low' bsuiness is bullshit. Corporations don't pay tax - people do. Think this is wrong? Then consider:

Let's say corporation 'A' has yearly profits of $1 Billion, but has 1 million shareholders. That means, before tax, they'd be getting on average $1000 each.

Now, let's say, corporation 'B' has ernings of only $10 Million... but has 2 shareholders... ie, before tax, they'd be getting on average $5 million each.

Still think coporation 'A' should be taxed higher? 

Tax people, not companies. Companies are just collections of people.

odatruf's picture

I up arrowed you because I agree. Anyone who thinks about it for a second should, too.

The only reason not to set corporate rates to zero is to retain some leverage in case there is an economic activity that is right on the bubble as far as being worth it for a company to make, but which has positive social value. In that case, a tax credit for doing it provides leverage and the push for the company to make the activity worthwhile.  This incentivizing is vastly better than a mandate on the company and I would much prefer that private entities do these things then having the government doing it directly.

The trouble would be in keeping the number of activities that deserve any incentive very low.

moonshadow's picture

right q wrong answer. some things are further reaching in significance than the $ figure of individual compensation- importance is both cumulative and social

moonshadow's picture

"To have a right to do a thing is not at all the same as to be right in doing it." G. K. Chesterton

"I believe in getting into hot water; it keeps you clean." G. K. Chesterton

Lednbrass's picture

Darwinism is no longer allowed.  Though the political left in the US ridicules Christians mercilessly and considers Darwin to be scientific fact they fear Darwinian theory more than anything else in life.

It is to be believed in but never, ever actually applied because that is mean.

Alcoholic Native American's picture

What are you trying to say?  I can't help but think you tried to rub off your assanine theories on me. Your post doesn't quite help me explain observable phenomenon.

Goatboy's picture

That's silly and shallow interpretation of Darwin's theory. Natural selection means only that those who survive survive. It doesn't state how. Its up to us if we attempt to survive as wise, cooperative and compassionate specie or a bunch of greedy, competitive, violent brutes. Former option is IMO our path to sustainable future while latter is just a wet dream of some heavily traumatized psychopaths in upper echelons.

Kimo's picture

"It doesn't state how."   er, would that be adaptation? 

How about a job with the Treasury?




Goatboy's picture

I concur, but then again adaptation is still quite broad term. It doesnt state proper way to adapt, as some people would like to imply when imposing ideas of competition and economic violence.

GeorgeHayduke's picture

I seriously doubt many Christians, let alone most free market cheerleaders or liberals have actually read Origin of Species and instead have used this misquoted phrase to support their own greed, hatred and their own inate assholiness. You can bet filling the empty heads of prison guards at concentration camps with "survival of the fittest" ideals helps them to beat and torture those they view as less fit.

The ironic thing is so-called Christian businessmen have no problem using the misunderstood "survival of the fittest" myth when applied to business. They are quite happy to throw out the whole humble, forgiving Christian philosophy when it comes to money, business or screwing over people they dislike. So take your moral holier than thou attitude somewhere else where the crowd is less intelligent.

This whole survival of the fittest mindset is useful for the owners of the sheep. It keeps the the sheep viewing their owners as obviously more fit, and therfore superioir, while the sheep fight each other over the table scraps. However, let's not forget the church's role in teaching that whole Divine Right of Kings mentality that did the same thing to keep the sheep in line.

Always remember, Christianity is a degrading slave religion. That's why the owners love it. It keeps the sheep in their place.


Goatboy's picture

Christian businessman is prime example of oxymoron.

LetThemEatRand's picture

Mitt Romney is a devout Christian businessman.

Pure Evil's picture

And, Barack Hussien is a devout Marxist Muslim.


But, what's that got to do with Ben Shalom being the devout ChairSatan?

knukles's picture

"Remember....Christianity is a degrading slave religion"

Unlike Islam wherein a woman's place is as chattel.


LetThemEatRand's picture

Also true of Christianity for most of its history.   The next President of the United States belongs to a Christian sect that until a few generations ago openly practiced bigamy.   Just a few hundred years ago, Christians burned women at the stake in America.

Even today, there are no women Priests in Catholicism because they are not worthy of direct communication with God.


Totentänzerlied's picture

What's wrong with voluntary polygamy?

11b40's picture

Give it try. You will find out.

Pure Evil's picture

Also true of today's Republican Party and their War on Women, denying them their free contraceptives. Gosh darn those Medieval brutes and their fuedal ways.

So, what would you rather be, a Mormon with the possibility of plural wives, or a faggety assed atheist marxist getting your ass fist pumped by Ben Hussien Shalom Obama?

LetThemEatRand's picture

Neither.  And I am not either.  But which are you?

Pure Evil's picture

Wow, what a come back. Maybe we could bring back the sitcom Happy Day's and you could play the part of Potsie.

LetThemEatRand's picture

Are you claiming the high ground now?  Ha.

LetThemEatRand's picture

"And, Barack Hussien is a devout Marxist Muslim."

I see we enjoy Rush and Hannity.  Carry on.

P.S.  Obama is a complete tool, and it is not necessary to make shit up in order to think so.  But for those with small minds.....