Guest Post: The Resilience And Fragility Of The Status Quo

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Resilience And Fragility Of The Status Quo

The apparent resilience of the Status Quo masks its fundamental fragility.

Longtime correspondent K.B. recently posed a question that is on many minds, including mine.

For the last 5 years, I have been watching the slow train wreck that is our economy. We have been preparing by not spending extravagantly, not being home owners, and more or less being mobile. However, the “perception management” as you call it of the markets and the general economy today doesn’t seem to have an end. I have been waiting so long for the wheels to fall off, a black swan event, or generally to see capitalism take its toll on the existing markets, that I am starting to believe that maybe Mises was wrong. Maybe, in addition to helicopters, Ben does have the magic touch. In short, I am exasperated at the gullibility of the remaining market participants (or perhaps their culpability) and I’m starting to think that the great correction isn’t coming.


Because of that, I’d like to know what your thoughts are on how long the perception management can last. Do you have a notion as to what the key element will be that forces the train off the tracks? Other than silly stuff like logic and simple mathematics, what keeps you convinced of the eventual outcome of our predicament? This isn’t about trading, but more about fatigue.

When I read Status Quo magazines like The Economist or BusinessWeek that exude an oily sheen of permanence, they always make me wonder: how much longer can the patched-together Status Quo continue on more or less as is?

Let's start with the basics: What was easy--papering over every problem with trillions of dollars in "free money"--has been done. That application of wallpaper held everything together, but it can't be repeated; it's no longer as easy to borrow and blow $6 trillion (the Federal deficits over the past four years) or loan $16 trillion to the corrupt, predatory financial system (Federal Reserve loans to banks).

This four-year paroxysm of political and financial expediency has run up against various political and financial obstacles. The European debtor nations would like to repeat the papering over process in Europe, but the notion that a loss of collateral can be repaired with more debt is in the process of being repudiated by reality.

The real problems have not even been touched: the demographics of entitlements based on a shrinking workforce are still impossible, technology and globalization are still reducing the need and value of labor ( Labor Day 2012: The Future of Work), and the overleveraged, over-indebted, parasitic financial system remains solidly insolvent.

The flood of free money has lifted the global economy into “the Zombie Zone” --nothing is extreme enough to trigger a regime-changing crisis. House prices aren’t low enough to trigger organic demand, but they’re not high enough to trigger a collapse in sales. Oil prices aren’t high enough to trigger a real energy revolution, but they’re not low enough to enable a return to cheap abundance. Austerity isn't enough to actually repair national balance sheets and restore trust, but it's not deep enough to unleash a political regime change and renunciation of the unpayable debt.

The Status Quo hasn’t fixed anything, but it has managed to stave off any extreme that would trigger consequences.

As you probably know, The Fourth Turning authors posit the next 80-year cyclical crisis will arise in 2021-22, about a decade away. Various other analysts are predicting some sort of economic low in the 2013-15 time frame.

Two things that were unseen 5 years ago have added resilience to the U.S. Status Quo. Cheap natural gas from fracking has dramatically increased domestic energy and at absurdly low prices, at least for now. NG could double from $2.50/ to $5/ without doing much economic damage, and even double again to $10/ without triggering a crisis. It is abundant enough (though I certainly wouldn’t want a fracking rig in my backyard or water supply) that the constraints of energy price and supply have been loosened to some degree.

A geopolitical crisis could push oil much higher, but as I have posited, minus that sort of crisis, oil could drift lower as oil-exporting nations open the tap to fund their welfare states as demand falls in a deep global recession.

The amount of money pouring into the U.S. from overseas is looking like it might be a major factor in supporting the Status Quo. Four years ago we were all looking at China’s purchases of U.S. Treasuries as something that couldn’t last. It hasn’t, but with cracks forming in Europe and China, billions of dollars of paper wealth are flowing out of those regions and into the “safe haven” of the U.S. and Canada. This is supporting real estate prices in Vancouver, Los Angeles, Manhattan (NYC) other desirable (to overseas investors) cities.

This vast inflow of safe-haven money is enabling the U.S. to sell its Treasury debt with ease. It seems we can run $1.3 trillion deficits with little pushback from the market as long as the U.S. continues to offer a relatively safe haven for wealthy Chinese and Europeans fleeing their own unstable economies.

A recent survey claimed 44% of wealthy Chinese are in the midst of moving their wealth (and offspring) out of China. I suspect this understates reality; it is probably closer to 95% who are shifting wealth and getting foreign passports for themselves and their children. Many people have made staggering sums of paper wealth in China, and there are trillions of euros of “old money” in Europe seeking an alternative to the euro. Gold is good but somewhat illiquid and it doesn’t earn any interest, while smaller currencies lack the liquidity and size to facilitate this enormous transfer of financial wealth. Hence the USD and U.S. Treasuries have emerged as easily accessible places to stash wealth.

Another factor is the vast number of people who support the Status Quo because they want their slice of the promised swag. People don’t want any real change if it means facing the reality that Central State promises are as phantom as the assets; they want their share, and they don’t care how the Status Quo manages to fund it: borrowing trillions from our children, no problem, just give me my Medicare/Medicaid now!

The complicity of the majority is a source of surface resilience and structural fragility: the promises can't be kept, regardless of how often they're repeated or the depth of recipients' faith in the system.

Ironically, crises in other regions will likely accelerate the inflow of paper money to the U.S., further supporting the Status Quo, which now has the resilience offered by cheap natural gas and cheap money.

The odds of some instability erupting globally in 2013-14 seem high, but what the trigger might be remains unknown. The fragility and vulnerability of systems pushed to extremes are like sandpiles: it doesn't really matter which grains finally trigger the cascade; the system's rising instability is the causal factor.

Where does this put us? If the ultimate crisis is another decade away, we might as well enjoy what we can in the meantime and assemble the pieces of a semi-sustainable life: income streams that we own/control, a very low cost of living, and property in areas that are universally desirable, i.e. they have decent weather, surface supplies of water, concentrations of intellectual and financial capital, and ideally, a functioning local government that isn’t hopelessly corrupted by vested interests. Any disadvantages in these resources can be offset by a solid network of friends, family, associates, business contacts, etc., i.e. social capital.

I think it is safe to assume the promises of Social Security, Medicare and pensions will be chipped away by one force or another (inflation, taxation, “austerity,” etc.) and so those who have written these out of their own personal expectations will be psychologically primed for self-reliance embedded in local support networks.

People often ask me whether it is a good time to buy real estate, and the answer depends on issues I cannot assess from a distance. If the total cost of ownership is roughly equivalent to rent, and the property could generate some income (via a workshop, small orchard, spare bedroom rented out, etc.) then the purchase price is not the only factor to consider. Taking advantage of super-low mortgage rates has some potential merit, but income and liquidity must also be factored in.

Can the household pay the mortgage and property taxes if its income is cut in half? If not, then that leaves the household vulnerable to some sort of financial shock. If the locale is desirable to offshore wealth seeking stability, the property is probably much more liquid (i.e. buyers will emerge) than areas solely dependent on domestic demand.

Access to a full-spectrum job market is also valuable, as is “walkability.”

In general, buying into that which is vulnerable to financial, climate, political and FEW (food, energy, water) disruptions will remain a risky investment, while buying into that which is independent of pushed-to-extremes global systems and based on the timeless fundamentals listed above will be less risky—-not risk-free, but less risky.

In general I think it prudent to accept risk that is transparent and open to your own management, and avoid risk that is opaque and in the control of others. The more something is dependent on cheap energy, cheap credit, and some perfection of extreme factors (long supply chains, 100% State funding, etc.) , the more vulnerable it is to instability, disruption and sudden changes in the rules.

Given the number of systems that are operating at extremes, I expect some sort of "second stage" crisis to emerge within the next year, possibly triggered by second-order effects that appear to most people as unintended or unforeseen.

That might create opportunities for those with cash and access to cheap credit, i.e. those who can prove they don’t need credit. We might even get some sort of relief-boomlet once the instability of 2013-15 clears. That relief rally will signal the “all-clear” to most people, but it may well be the final calm before the real crisis unfolds in 2021-22.

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redpill's picture

He should change the title of his blog from Of Two Minds to Of Two Mouths because he rambles enough for at least two people.  Is someone paying him by the word?  

And volume of words does not make up for such lack of conviction!  The last time I saw someone punt so many times it was a Raider game.  Save us some trouble and just say "I don't know"

BlueCollaredOne's picture

C'mon Redpill, he's doing a lot more than the rest of us.  

Give the man a break, at least he isn't talking about how he just bought land in Chile, but can't even celebrate because he is so jetlagged from some European country where he had to deposit some gold.  

Don't take this the wrong way, but anyone can bitch

fonzannoon's picture

Funny blue I usually like his stuff, but this seemed to be one big rambling post and when he recommended buying an orchard I started thinking he sounded a bit like Simon too...

redpill's picture

Simon Black gets his own share of flak
Although at least has a real plan of attack

But when I read two pages from Chuck
It makes me yawn and say "who gives a fuck?" 

The Big Ching-aso's picture



Hey Chuck, lemme get this straight.  2021-2022 is the real crisis becuz of crystal-ballers?

redpill's picture

When prognosticators start to get cold feet they like to move the goal posts.


ZerOhead's picture

The odds of some instability erupting globally in 2013-14 seem high, but what the trigger might be remains unknown.

Hmmm... Israel (US) vs. Iran perhaps?

American34's picture

I think its high time Tyler Durden and John Galt get together.

redpill's picture

Left unchecked, Obamacare will prompt many physicians to "go Galt" in that they are no longer willing to practice their expertise under the rules the establishment is insisting on.  It's not as romantic as a secluded valley in the Rockies, but the economic results will be just the same.

American34's picture

Many already do, they go to Mexico and other places to practice.

Totentänzerlied's picture

They already are, the older ones are getting out while the getting is good.

Dr. Richard Head's picture

Had to get a splinter removed from my iris the other day.  The eye doc, whom I have not met before, offered me some insight on why he is taking early retirement.  Turns out, the electronic medical records, that are required through ObamaNONCare, take his staff 40 minutes PER PATIENT he sees.  Not just new patients, but every last patient he sees.  Because of this, he doesn't have enough man power or time in the day to meet this one requirement alone.  His patient stream was getting killed, so he said, "FUCK IT" and is cashing his chips in and going home.  He explained he is not the only one, according to him.

I just said to him in parting, "Welcome to kommunist USSA Komrad."

bank guy in Brussels's picture

Jim Sinclair thinks a couple of years as well before the Mother of All Financial Collapses ... with duct tape and some wire they might hold it together another 30 months or so

diogeneslaertius's picture

one of only three men with a bowtie i trust

fonzannoon's picture

WTF is this guy rambling about?

Snakeeyes's picture

It really isn't an issue of status quo. It is really about big government crowding out entrepreneurs. The Obama years so far are 1) highly regulated, 2) highly taxed, 3) NOT GROWING!

LawsofPhysics's picture

Growth is dead, period.  The kleptocrats (fascists on both sides of the asle) own your representation and continue to demand their "rent" by having the taxpayer bailout their failed companies, failed ideas, and failed management.  

Now where the fuck is my free money (the banks get zero percent interest loans), Pretty easy to be "successful" when you get a fucking zero percent interest loan, just buy fucking treasuries at 1.5% and the taxpayer covers your "profit".

Totally fucking stupid.

pods's picture

A beautiful skim if you can get in on it, that is for sure.


OneTinSoldier66's picture

Green Arrow for speaking the truth. But I hope you're not endorsing or encouraging it! :-O

mrktwtch2's picture

great more 4th turning crap..are you related to grahm summers??

q99x2's picture

Damn looks like markets are set to make a very fast climb higher:

An equity strategist for Goldman Sachs is predicting a September selloff that happens so rapidly he is telling clients to protect themselves before Sept. 14.

Inthemix96's picture

Well try this on then.

Any member of the status quo who comes knocking on my door will be asked to leave.  I will give them the benifit of the doubt and ask them again if the first time doesn't get through their thick fat heads.

And then I will use extreme predujise to remove them.

Status quo, knock here if you want.  Mr 96, says bring it.

Meesohaawnee's picture

told you all at 10am. Red finish NOT ALLOWED!! come on now. Obamma is desperate.

madcows's picture

Despot, not desparate.  DESPOT.

Madcow's picture

The bankers have sold 1000 tickets for a flight that has just 80 seats - thinking that no one would show up at the airport.


pods's picture

Not to mention that the flight doesn't even exist.  


PiratePawpaw's picture

This is where I have been for some time, lessening dependancies and saving. But the question remains, "how long can the unsustainable be sustained?"

I'm reminded of the story of the man who jumped from the roof of a 100 story building and was heard to say "so far so good" as he passed the 50th. I think the outcome is the same, just unsure which floor we are passing.

I think closer to 2013 than 2021.

Azannoth's picture

It's not about being All In or All Out, you simply have to adjust to the new normal of a slow decline(with a reasonable possibility of a rapid but not catastrophic move lower)

Insuring your self against a SHFT scenario is Not expensive, and it should not force you to put your whole life on hold by any means

It is most about changing your habits not about digging a fallout shelter, have at least 6 months of cash(including gold/silver) on hand at home, have at least 3-6 months of food(for the entire family),

have a supply of tools and all weather gear to feel comfortable when and if the heating and lights go out etc.

Would I buy a house now? No, unless in a non urban environment with a plot of land for farming/gardening, a Car? only if I had a real need for it and I would buy only the cheapest thing that would satisfy my needs etc.

prepare and be smart don't panic

madcows's picture

Sure, any number of things can trigger the great unwinding, but my bet is on economic collapse due to overleveraged citizens and states/countries no longer being able to pay the bills.   Brilliant, I know.  But really, what's more likely to happen, Israel bombing Iran or Spain/Greece crapping the bed... with every other domino, I mean nation, following thereafter.

LawsofPhysics's picture

Nothing will change so long as things can be papered over, period.  Look to history for your answers, we have been here before.  When the supply lines for essential commodities start to fail then, and only then, will shit get real.

The banks and financial houses (paper-pushers) are pointing the gun at their own head again, threatening to "destroy the world" if we don't do as they say.  Forget the concept of "money", this is about power and control of resources.  Same as it ever was, the only question now is whether or not we let that worthless, greedy, fucking den of paper-pushing theives re-define the rules again or whether we look them in the eye say, "go ahead, pull the trigger motherfucker."

Vincent Vega's picture

+100 for 'go ahead, pull the trigger motherfucker.' That's the same thing I was saying back when Hank Paulson was pulling this shit.

madcows's picture

It's already too late.  We already own AIG, GM and every crap bank out there.

I say the shit gets real when the big banks start failing, ala Lehman and Bear Stearns... which in turn causes bank runs like we're seeing in Greece and Spain.

Or, when governments can't get people to lend them anymore money. 

The US borrows 40% of its budget.  When people no longer buy their treasuries, they don't pay their workers, they don't build bridges, etc...  They control a massive portion of the GDP directly and indirectly.

Central banks can't paper over forever.  Even they don't have endless supplies of money.

LawsofPhysics's picture

"Central banks can't paper over forever.  Even they don't have endless supplies of money."

Truer words have not been spoken, unfortunately we are going on about 100 years since they were first uttered in earnest.  Forget the "money" construct, this is about power and control, period.

Doubleguns's picture

Law of physics that almost sounds like a line from blazing saddles.

Peter Pan's picture

I somewhat agree with the author's contention that we are balancing precariously between opposing forces but when he said that gold is illiquid he totally lost me. Has the man tried selling US or Spanish real estate?

Or what is both liquid and safe in the event of a meltdwn? A bank deposit at a bank that declares a bank holiday? A stock who's trading or exchange has been halted?

antidisestablishmentarianismishness's picture

My neighbor has a shed and I have an old mattress.  Bingo...shelter.  My sister-in-law has a big piece of cheesecloth that we can use to run our urine through to produce potable water.  Well, semi-potable anyway. Potable in the emergency that might or might not be coming in ANOTHER 10 YEARS.

odatruf's picture

Urine is NOT potable. Yes, you could drink it in the case of already underway dehydration. But in a couple days, toxins would concentrate to the point where you'd be better off going thirsty. Replace the cheese cloth with some bottled water and / or a filter pump that you can use in a puddle.

falak pema's picture

Resilience and fragility in the same breath, means it trends to schizophrenic. 

Does it know who runs the show or is it on self pilot?

The quintessentiel, icnonistic dream phoenix of Ayn Rand, rising during the day from its ashes, like the new dawn of free markets and the paranoid, acid pumped, HFT addicted, zombie banksta-run bot that dreads the midnight chimes of deadly night, fearing the demise of another day gone by in futile pursuit of contrived levitation. 

Satus Quo like old Napalm trails in the rice fields of another killing age which seems to be coming back with renewed rage to haunt and taunt a dying breed of hubristic dinosaurs. Drones and clowns, out n about...we have a job to succor resilience and exacerbate fragility in a region where oil is king, like intolerance of race and religion.

Anusocracy's picture

Twelve thousand years ago the Status Quo was the hunter-gatherer/socialist culture. That culture has outlived its usefulness, socialism doesn't work in a modern economy.

Currently, the Status Quo is the pharonic/fascist culture. Its days are numbered because it is also an economy based on theft first and general prosperity last.

The newest culture is the freedom culture. At its core is a disdain for government and all the distortions, theft, and war that it brings. Think RP.

Those countries that abandon fascism and socialism and embrace the freedom culture will be the prosperous ones, not those maintaining the Status Quo.

Think of an early America.


LawsofPhysics's picture

"Think of an early America."

Was this the america with abundant natural resources, clean water, and a sustainable population?  Better think again...



Anusocracy's picture

I don't get your point.

Japan has very little in the way of natural resources, 1/8 surface water and 10x the population density of the US,

They have a modern crony fascist government like the US. They are both wealthy, collapsing countries, thanks to their respective government.

Natural resources, water, population??

Azannoth's picture

I'd take those "socialist hunter-gatherer" societies anyday over what we have now and probably over anything that I will see in the next few decades

remember in those good'ol days if you didn't pull your weight you where discarded and thrown to the wolves now that kind of socialism I could live with

Totentänzerlied's picture

What CHS should have said about buying land: if you live in the city or 'burbs, get the fuck out, now, although you're probably too stupid and sheltered and liberal to enjoy life in any place where the corporate state's presence isn't constantly felt and seen and food doesn't make itself.

Yeah, I know, don't insult your audience outright, but please don't insult them with platitudes and euphemism either.

The worst trader's picture

Thanks for the calming words, but it still sucks out here in the real world.

OneTinSoldier66's picture

I echo the sentiments of a user named 'chunga' on The Daily Bail...


"I keep fighting but I am not ashamed to say I am very tired."

linrom's picture

This writer is an awful loser. He is jealous of his neighbors collecting Social Security and Medicare. He was likely self-employed all his life and now faces a stark future of no safety nets for himself. Guys like CHS would be willingly joining Pol Pol or SS in a different era. Sick bastard wants to make everyone miserable.