Guest Post: Welcome To The Age Of Instability

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Welcome to the Age of Instability

The phony fixes have failed, and the dam of toxic sludge and debt is leaking; instability will be the New Normal until the dam finally bursts and the financial Status Quo is swept away.

If you liked the past two weeks, you're going to love the next two years: welcome to the age of instability. As I explained yesterday, the quasi-religious belief in the stock market as a secure store of wealth has faded, and for good reason: The Junkie in the Pool and False Idols: Faith in Wall Street and The Fed Has Has Eroded (August 10, 2011).

In a nutshell, the Federal Reserve and Federal government's extend-and-pretend, mark-to-fantasy, paper over bad private debt with trillions in public bad debt "fixes" of the broken economy have failed, completely, utterly, miserably. Rather than drain the cesspool of impaired debt, risky bets gone bad and rampant abuse of the rule of law, the Fed and the Central State have poured trillions of dollars more bad debt into the fetid pool of sewage and sludge, which is now full to bursting.

For a deeper explanation of why instability is now the norm, and destabilization is now inevitable, I turn to my new book An Unconventional Guide to Investing in Troubled Times for this excerpt.

As Nassim Taleb of “black swan” fame has explained, it is misleading to say the last few grains of sand on the debt pile, for example, subprime mortgages in the housing bubble, are responsible for the entire sand pile collapsing: the masking of risk was systemic, and thus the sand pile was doomed to collapse regardless of the nature of the final few grains of sand.

Similarly, it won’t really matter what the final trillion dollars of Federal debt was borrowed for; the default/collapse of the government debt pile is inevitable.

In betting the farm to prop up a façade of financial stability, the Federal Reserve and the Federal government have doomed the entire system to collapse. Taleb explained why in the June 2011 issue of Foreign Affairs: “Complex systems that have artificially suppressed volatility become extremely fragile, while at the same time exhibiting no visible risks.” That describes the global economy in 2007, just before the financial meltdown of 2008 “surprised” conventional economists and Wall Street apologists.

As Taleb has explained, the very act of suppressing fluctuations renders systems extremely prone to large-scale disruptions that are viewed as low-probability events, the infamous “black swans.” The key to understanding this rising likelihood of supposedly improbable disruptions is to understand the difference between linear and complex systems. Linear systems lend themselves to causal chains (A causes B which causes C) or probability (the odds of drawing two aces in a game of Blackjack) that can be calibrated with a high degree of accuracy.

Complex systems such as financial markets exhibit fractal or chaotic characteristics that lead to an unpredictability that is prone to disruption by seemingly small events. When volatility and risk (in political terms, dissent) are suppressed by central authorities, the variations that inform an open market (“variation is information”) are lost.

The misrepresentation (and thus the mispricing) of risk and the suppression of everything which doesn't pander to the Status Quo is a defect not of individuals or specific institutions but of the entire system, including the Federal Reserve, the Treasury and the regulatory “alphabet soup” agencies (SEC, FDIC, etc.).

The misguided attempts to engineer a false stability by suppressing "undesirable" volatility have created an intrinsically fragile system that is doomed to crises of ever greater dimension even as the periods of calm between crises shrink from years to months. Recall that risk is like water in a closed system: it can never be squeezed into nothingness. The more pressure that builds up, the more inevitable it is that the risk will burst out in some part of the financial system that was viewed as “safe” and “stable,” for example, home mortgages.

This is how financial events that are widely viewed by conventional economists and government officials as “impossible” can occur with increasing frequency.

One model for this type of apparent stability that is disrupted by unpredictable spikes of volatility is stick/slip destabilization. In “sticky” systems—for example, those with major forces creating credit and regulations to maintain the Status Quo--pressure builds up within the system that is invisible to those looking at an apparently stable surface. But at some impossible-to-predict moment, the built-up pressure within completely disrupts the system, and it “slips” into a new and unpredictable configuration.

The rules of the investment/speculation “game” will be changed without warning as authorities attempt to stabilize an increasingly chaotic financial system. Their attempts to force a superficial stability will only make the next round of instability more severe and less controllable.

The Grand Partnership of the Central State and the Financial Plutocracy (parasitic globalized cartel crony-Capitalism writ large) has suppressed this natural implosion of speculative debt by printing and distributing trillions of dollars in "free" money so over-indebted borrowers and speculators can continue to “extend and pretend,” that is, continue the illusion that they are solvent.

As a special bonus to these financial Power Elites, this limitless pool of "free money" enabled them to ramp up their favorite pastime, leveraged financial speculations based on fraud, collusion and misrepresentation of risk. As any profits will be theirs to keep while any losses will be backstopped by the Central State and its taxpayers, it's a return to the risk-free days at the races for the financial Oligarchy.

But massive doses of free money unleash two destructive forces on the economy: as the free money flows into speculative bets on tangible resources, it reinflates asset bubbles and fuels rising costs.

As a result, the system is now facing the same old problems--asset bubbles held aloft by "free money," massive government intervention, systemic financial fraud--and a new problem: price inflation for the resources that sustain the real economy.

The Central State/Financial Elites are thus faced with an impossible choice: if they let the speculative free money flow, then their populations become impoverished as the prices of tangible goods such as food and energy skyrocket. Recall that the masses aren't provided with billions of dollars at zero interest; that privilege is reserved for the financial Elites who fund the campaigns of the Central State’s political class.

The Classical Capitalist answer to this vast financial overshoot is simple: once the unlimited free money and moral hazard guarantees stop, interest rates will rise as risk is repriced and the market “discovers” the cost of borrowing scarce capital (savings). Once interest rates rise, then the ballooning debt can no longer be serviced. Borrowers big and small go bankrupt, their assets are sold at auction on the open market, and their unpaid debts are absorbed as losses by their creditors.

This renunciation of debt triggers a domino effect as credit becomes increasingly expensive and other overleveraged borrowers and insolvent creditors are toppled into bankruptcy.

In other words, the Status Quo is now addicted to unlimited flows of free credit issued by central banks. If the flow continues, then inflation will destabilize it; if it's cut off, then rising interest payments will destabilize it. No matter what policy path is taken, the result is the same: instability and destabilization.

This is why a systemic financial meltdown is now inevitable.

Nobody knows how this devolution will play out, but we do know that those who are open to the possibility will do better than those who discount or dismiss the inevitable reckoning as “impossible.”

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boricuadigm-shift's picture

Avoid instability, risk and volatility by getting physical.  We are in for the ride of several generations.  Thanks Tyler for all your work!

DarkAgeAhead's picture

Looks like somebody's been reading some resilience science. 

fuu's picture

Wasn't he Mandelbrot's protege?

DarkAgeAhead's picture

CS Holling?  That's a good question.  No clue but I should probably know that!

There's no better construct / tool than the Panarchy and the adaptive cycle to analyze all of this with. 

fuu's picture

Sorry I meant Taleb.

Sounds like I have some fun reading to do over the weekend. Thanks for the tip.

DarkAgeAhead's picture

The resilience science literature is good stuff.

The open source journal, Ecology and Society, makes most available for free -

The book Panarchy is the deepest of those available.  The fastest but still good read is Resilience Thinking (Salt and Walker) that articulates the underlying research in Charles Hugh Smith's post - about fragility, complexity, collapse, novelty, renewal, etc..

Another great place to start is Holling's Understanding Complexity of Economic, Ecological and Social Systems - available here:

And a good interview about it all:

shazbotz's picture

In betting the farm to prop up a façade of financial stability, the Federal Reserve and the Federal government have doomed the entire system to collapse.

100% spot on!

SheepDog-One's picture

In order to save the patient, we must kill him.

Taku's picture

TPTB are centrally planning, selectively intervening here, artificially propping up there. Won't work.

To actually bring real stability, underlying issues need to be fixed. They have not done so. In fact they ignore, then paper over, creating massive, new inefficiencies which further destabilize.

But they continue. They profit from it. They will not stop.

yipcarl's picture

I'm not sure if it's a scam to MAKE the market crash or people who make these decsions are really this stupid.  Like Banning short selling is going to solve problems.  It's like bailouts, same retarded logic. solve the debt problems with more debt and the TEA PARTY are demons for not wanting that.  WOW.  Beam me up Scotty. 

Diogenes's picture

You need to read the story of Nick Leeson, Brian Moloney or anyone else who started by stealing small amounts of money from his employer. At first it seems like a smart idea, and harmless, to "borrow" and pay it back later. But you end up owing so much the only chance of getting even is wild gambling. In the end you are just trying to cover up for one more day, hoping for a miracle.

Smart people can make decisions that seem smart at the time, but back them into a corner in the future in ways they never expected.

fonestar's picture

Geez.... and right when I was getting cozy in the age of lowered expectations!

tony bonn's picture

bridge without flexibility fall down on windy day

snowball777's picture

Bridge with flexibility on windy day with right harmonic fall down too.

Long-John-Silver's picture

The only things that will be stable are the weight of bullion in all forms.

treemagnet's picture

Big fan of this author, but this one is kinda sorta a rehash of the known in my unqualified humble opinion.

Nothing To See Here's picture

Taleb is merely refining arguments developped by Hayek. This Hayek lecture is timeless and even more relevant today :

snowball777's picture

More like Minsky.

You might learn something by trying to see the world with more than just the one lens, but at least you didn't link to

Dick Fitz's picture

The article is just an abridged version of Mises' "Crack Up Boom" anyway.

flattrader's picture

Nothing CHS writes is original as best I can tell.

I've noticed he's been re-regurgitating non-original themes.

It's de ja puke all over again.

Nothing To See Here's picture

I'm trying to see the world through the lenses of the few heretics who have correctly foreseen the monetary mess in which we are now and who have been cast out of academia for calling it like it is. Still better than trying my own lenses and sticking to it like you apparently do.

snowball777's picture

Dr. Michael Hudson

Dr. Dean Baker

Dr. Nouriel Roubini

Your anti-intellectual bias is a real hoot.

I've read Mises, Hayek, and Rothbard...have you read Keynes, Minsky, or Basil Moore?

Nothing To See Here's picture

Reading Roubini amounts to watching CNN. You need to get a grip on reality.

Find me one statement in Hayek's 1974 lecture which you can demonstrate as wrong and I'll bow to your might.

Oh, and who cares about Moore and Minsky? I've read Minsky's teacher Schumpeter and that should be enough for anyone.

Besides, reading 1000 clueless economists do not nearly provide as much knowledge as reading one who's got it right.

snowball777's picture

One lens for you then...thanks for wrapping things around to where we started and proving my point so succinctly.

I don't read Roubini...he's just an academic who predicted the crash, like the other two PhDs.


"consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level."

Untrue; Keynes showed that lack of effective demand leads to lower employment (good luck denying this...especially since 2008), basically, that Say's Law is bunk, and furthermore that 'full employment' does not exist in the real world.

I can claim that Austrians believe fiat currency is preferable to 'sound money', but that doesn't make my claim true, does it?


"Competition, for instance, is a process which will produce certain results only if it proceeds among a fairly large number of acting persons."

False; competition can have an immediate effect when even a single alternative to a monopoly enters a given market.


" A theory of essentially complex phenomena must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts."

The proper use of statistical methods successfully derived the standard model of particle physics despite the rather concrete unmeasurables contained therein, those methods can be applied to other complex phenomena as well.

I leave you to your chosen religion, however ludicrous it may be.

shazbotz's picture

Why is the stock market rising on the jobs data when we've been told that it will be revised next week to include the Airline Industry layoffs, which they didn't add amongst other layoffs conveniently kept off the tally for the day?

Bolstering the markets with a peanut butter bullshit sandwhich, yummeh!



snowball777's picture

It's the short ban in Zooropa that has them giddy with irrational exuberance...elevator up for now..."thrown off the building" descent to come.

How to manufacture a Minsky Melt-up...

  • 1- Have the Federal Reserve reduce Fed Funds Rate to Zero
  • 2- Have the Federal Reserve hold down rates for a historic length of time i.e. a “very extended period”
  • 3- Have Federal Reserve flood market with money (i.e. Quantitative Easing)
  • 4- Have Government initiatives that support asset appreciation (i.e. housing, auto programs)
  • 5- Have accounting changed that forced asset liquidation for mal-investments (see Accounting)
  • 6- Change Margin requirements or Leverage Pricing
  • 7- Spin or exaggerate economic news through the media in a positive manner only
  • 8- Decrease risk premiums and increase levels of speculation
  • 9- Establish a Carry Trade that will flow monies to US assets
  • 10- Weaken the US$ to solidify Carry Trade returns and reduce currency risk
  • 11- Give the market a surprise jolt - like China revising it's currency peg (China biggest US collateral holder)
  • 12- Increase the Velocity of Money by instilling an inflation worry in the public
  • 13- Place restrictions on market shorting (i.e. shortages on key dates)


slewie the pi-rat's picture

the "inflation" means anyone with lots of money can own "expensive" stuff (just abt everything) and "poor" people can't. 

same shit, different day. 

and chs seems to be asking:  in which category will you be, when the "financial system is swept away"???  impossible?  inevitable? 

yes and yes.

when?  about ten-20 years ago, i would say.  maybe earlier.  much earlier. 

but who tf knows?  by 1970, i had learned that "economics" is a truly ex-per-i-mental science and we make it up as we go along.  thru generational hatred but primarily thru dealing with false dichotomies, aka "muddling through" which may have discontinuities here and there due to rather extreme muddling. 

when we get past the false dichotomies, we are "dreaming", so deal with it, BiCheZ, and dream on!

walküre's picture

To better predict what may happen in the future, it's best to analyze carefully what went wrong in the past.

We are prone to making the same mistakes. Our DNA hasn't changed since and our DNA won't be manipulated with 24/7 bullshit TV either. When it comes right down to it, humans are quite easy to predict.

To this date we're not 100% able to determine what exactly caused the downfall of Rome. We agree that Rome overexpanded, diluted the money and was run by madmen. Her enemies eventually able to penetrate and destroy the empire.

Some speculation about lead poisening as well. That would be the trigger, perhaps the catalyst when more people than usually died and unexpectedly.

My point is this. We all agree that the US created financial system is overexpanded, not sustainable and that the lack of leadership is akin to being governed by madness. But what we cannot foresee accurately is what will be the catalyst eventually that will break the camel's back?

Just to make sure all understand what followed when Rome sunk. The dark ages came upon the world.


Diogenes's picture

Fail is normal. 80% of the worlds population lives in poverty, ignorance, superstition, fear, disease and death. 200 years ago it was close to 99%.

What we have is unusual. What the Romans had in their heyday was unusual. It took a tremendous amount of planning and work over a long, long period of time (more than one lifetiime) to get there. But you only have to slack off for a short time and it all unravels and regresses to the mean.

walküre's picture

"Slacking" would imply that the unravelling is accidental. That is not the case imo. There are clearly invisible forces at play with an agenda to manipulate events for their cause. In that sense, we're not at all different from the Romans who were manipulated, abused and "entertained" just the same.


Diogenes's picture

There are always crooks and swindlers around. What is new is that the majority don't care that their rights are being taken away or that the economy is based on a series of swindles.

Like Madoff's clients, some thought he was cheating for them, others didn't care as long as they got theirs. The swindle went on for years after it became obvious but nobody did anything about it. Then they found out he was cheating his clients not cheating for his clients and all of a sudden he was a bad guy. None of them believed cheating was wrong so far as I have heard.

There was a time respectable people would not put their money into unsavory investments. Con men used to say you can't cheat an honest man, all their swindles were based on the victim trying to cheat someone else and getting cheated himself. An honest man, who refused to take part in swindling someone else, could not be cheated.

Is there anyone left today who would refuse to take something he is not entitled to? If so they are dam few.

walküre's picture

"Is there anyone left today who would refuse to take something he is not entitled to? If so they are dam few."

It's against human nature, that's why.

Does the Queen of England deserve anything she has? Nope. She's just a thief. Her family made their fortunes with "legalized" theft. Ages ago her clansmen set the parameters to establish a lie based on a blood line and with the help of an ominous church, the lie got manifested and the family established. This happened across the European continent.

Wars were fought over silly disagreements and later-on, wars were initiated by intrigue. The intrigue benefited those that financed the wars, the bankers. Thus over time the ruling class that established itself is made up of thieves and their enablers.

Bottom line is that theft is the wrong word to describe something that is completely human in nature. As we "evolve" we get smarter in hiding the way we steal from each other. In the end we're all predators with a few self delusional exceptions.

Diogenes's picture

""Is there anyone left today who would refuse to take something he is not entitled to? If so they are dam few."

It's against human nature, that's why."

You put your finger on it. At one time, basically taking up the 19th century and the first part of the 20th, people went against human nature in order to educate and improve themselves and to improve their lives, the lives of their families and of their community. This was not thought foolish, it was thought smart. The name they gave it was progress. People would actually deny themselves because they believed by doing so they could sacrifice short term pleasure for much larger or more valuable long term gains.

"Does the Queen of England deserve anything she has? Nope. She's just a thief. Her family made their fortunes with "legalized" theft. Ages ago her clansmen set the parameters to establish a lie based on a blood line and with the help of an ominous church, the lie got manifested and the family established. This happened across the European continent."

Her Majesty deserves what she has by right of inheritance. She never stole anything so far as I know.  Whatever power her ancestors had, has been diminished to practically nothing. Aristocracy by itself, today counts for practically nothing. If you study history as I have, it is astonishing how a set of people with everything going for them including the loyalty of the common people, threw it all away.

"Wars were fought over silly disagreements and later-on, wars were initiated by intrigue. The intrigue benefited those that financed the wars, the bankers. Thus over time the ruling class that established itself is made up of thieves and their enablers.

Bottom line is that theft is the wrong word to describe something that is completely human in nature. As we "evolve" we get smarter in hiding the way we steal from each other. In the end we're all predators with a few self delusional exceptions."

But that is the point exactly. Stealing is completely human in nature. So are a lot of other things, some nasty some sublime. When we learned to suppress the nastier tendencies in favor of progress, things got better. When we forgot where civilization came from and took it for granted, we started regressing to a savage state.

The funny thing is how few people, even educated people, have figured this out.

slewie the pi-rat's picture

it's good to be a pi-rat!

who is in charge of "we" deciding to remember or forget from whence civilization (& its discontents?) cometh?  moses?  a ritual remembrance of god?  of darwin?  secret societies?  or should we feel free to work this out on our own? 

Diogenes's picture

Go it on your own if you have to. But that gets us into religion, they all tell us in the end we are individually responsible for our own salvation, our own enlightenment.

From an economic and social standpoint it is possible to create a set of rules that will make society a heaven or a hell.

From a scientific standpoint we should set up a series of experiments where different groups live under different sets of rules and conditions. But this is impractical.

That is where history comes in. By studying history we can find societies with different religious beliefs, social and economic customs and see how they made out.

slewie the pi-rat's picture

some shithead once said:  people will never make rules so perfect that folks will no longer need to be good.   back in the 20th century, i'm pretty sure

or something like that.  i can't recall right now;  i'm working on my new monograph:  A Pi-rat-i-cal History of The Bong

walküre's picture

The educated people are the ones that either take advantage of the rest or they have arranged themselves with the thieving ruling class. Their arrangement may be based on ignorance or lack of comprehension. Can't blame the crooks for taking as much as they can. The deception is pretty convincing and has even acceptance from the most intelligent people.

When the ancestor of a former group of thieves is still situated comfortably and lives off their spoils (call it inheritance, whatever), then she is still as much a part of the thieving group.

You speak of suppression. To try and suppress what is human nature will eventually boil up again, just more predominant.

Let's talk about solutions.

The thieving ruling class will never admit that they basically are illegitimate rulers in every sense of the word. Even if they were to admit to that, the stupid masses won't believe it and instead cheer on the thieves and their family in just another "royal" ceremony.

Was it ever any different? Not sure what time you're referring to, when you suggest we ever behaved differently.


Snidley Whipsnae's picture

""Slacking" would imply that the unravelling is accidental. That is not the case imo. "

What you are failing to see is that the 'system' is so complex that no one knows where or when it will collapse... but it will collapse.

If you watch carefully what the Fed is doing it becomes obvious that each day, they are playing for 'just one more day.'

There 'planning' has become that short scale. So is is with those playing in equitites are playing each day for ' a profit today'.

Imo, there is no grand puppetmaster, no man or men that know when and how the collapse will come, there are only the fools that got us into this mess and they are now muddling along trying each day to apply more masking tape to the latest crack that has appeared. We are well and truly fuked and it was done to us by a pack of damn fools trying to make a fast buck... not some grand conspiracy.

Diogenes's picture

I agree. It is the fools looking for the slick trick, the quick fix and the fast buck that I call slackers. What we need is grownups who can plan for a future 5, 10 or 20 years out. They seem to be scarce in government and almost as scarce in the general population.

slewie the pi-rat's picture

i never planned to be a planner, either

or did i?

Snidley Whipsnae's picture

The downfall of Rome was caused by the same schemes that are causing the downfall of the US Empire.

Democracy in the US evolved, as democracys always do, into a system that trades votes for pols for social handouts. Rome had a similar system labled by us as 'bread and circus', or 'patronage'. Though Rome prepared no budgets they did tax citizens by sending out tax collectors when the coffers were empty, or, alternatively, sending out the legions for another conquest. When Rome has stripped all possible loot from all possible places their system could not sustain itself by taxing the few remaing taxpayers to provide bread and circus for the many. When taxes on farmers became so high that farmers were going broke they renounced their citizenship and let their lands lie fallow. Roman farmers actually welcomed invading hordes for the invaders didn't molest the farmers and the lot of the farmers improved under the governance (or lack of governance) of the hordes.

Once economists adopted 'social engineering' into their dismal science the end for the US was inevetible. Even Greenspan admitted as much. I have only posted the last 2 paragraphs but all should read the entire essay... it is not long.

Gold and Economic Freedom

by Alan Greenspan
[written in 1966]

This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand's Capitalism: The Unknown Ideal

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

slewie the pi-rat's picture

hey, walk!  you:  To better predict what may happen in the future, it's best to...

you speak of the enemies of rome destroying her and then the dark ages which is just a tad gloomy for my tastes, but good luck to you with predicting the future

i still say the "science" of economics is stuff poeple make up as they go along.  almost like a priesthood;  or allopathic medicine;  or the Divine Rights of Kings~~something that must be b/c this or that "authority"  or "social convention" so decrees and will make yer styoooopid, insigificant life fuking miserable if you stand up to it and say (are ya ready?):  fuk you!!!

so, if you're gonna stand up to it, it's a good idea to make sure you know where you stand, too.  i'm not talking about anarchy;  i'm trying to get at the the near-impossibility of dialogue with "authority" when you are too poor to pay it to listen to your ideas, and when it will not respect you and your civil and economic rights as a fuking human BEing.  you know~~roots of radicalism and stuff like that

history, BiCheZ!  [something else we tend to make up as we go along?]

walküre's picture

Slewie, you're a pirat. You're as honest as they come!