Guest Post: When the Weakest Critical Part Fails, the Machine Breaks Down

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

When the Weakest Critical Part Fails, the Machine Breaks Down 

Consumer spending is the bedrock of the global economy, and consumer spending depends on expanding debt and leverage. Once that subsystem fails, consumerism and the global economy grind to a halt.

The failure of any critical subsystem in an organism triggers a catastrophic, fatal decline. It doesn't matter if the rest of the critical subsystems are functioning at optimum levels; the failure of even one essential "part" leads to death.

The metaphor is easily extended to machines, where a perfectly sound engine will fail once the oil pump ceases functioning.

The cliche is that a chain is only as strong as its weakest link. The conventional wisdom is that the U.S. economy is so large and diverse that the failure of any one part will have only limited consequences on the economy as a whole.

But this belief was undermined by the financial crisis of 2008, in which the apparently "limited" implosion of subprime mortgage debt dominoed into a full-blown global financial crisis.

Conventional wisdom confuses redundancy and complexity. The implicit foundation of the conventional view (that the U.S. economy is so large and diverse that the failure of any one subsystem will have limited negative effects) is a belief that the system's complexity offers intrinsic redundancy: that is, if one part of the economy underperforms or even vanishes, it will quickly be replaced by the expansion or emergence of some other part.

This view can be distilled down to a belief in a sort of "automated redundancy," that capital and labor that is displaced by failure in one sector will naturally flow to a replacement sector.

This belief system fails to grasp the critical roles of financialization and consumerism in the economy. The two are of course intrinsically bound together, two sides of a single coin: consumption depends on expanding credit, leverage and assets, and financialization depends on consumers' expanding debt service and collateral.

When financialization fails, the consumerist economy dies. This is what is happening in Greece, and is starting to happen in Spain and Italy.

The central banks and Central States are attempting resuscitation by issuing credit that is freed from the constraints of collateral. The basic idea here is that if credit based on collateral has failed, then let's replace it with credit backed by phantom assets, i.e. illusory collateral.

In essence, the financialization system has shifted to the realm of fantasy, where we (taxpayers, people who took out student loans, homeowners continuing to make payments on underwater mortgages, etc.) are paying very real interest on illusory debt backed by nothing.

Once this flimsy con unravels, the credibility of all institutions that participated in the con will be irrevocably destroyed. This includes the European Central Bank (ECB), the Federal Reserve, the E.U., "too big to fail" banks, and so on down the financialization line of dominoes.

Once credit ceases to expand, asset bubbles pop and consumerism grinds to a halt. And since ever-expanding consumption is the bedrock of the global economy, the global economy will also grind to a halt.

There is no magic redundancy in a complex economy that ultimately depends on the functioning of a single subsystem, financialization, i.e. the permanent (and thus eventually exponential) expansion of leverage and credit based on phantom assets and illusory limits on risk.

As noted yesterday in Financialization's Self-Destruct Sequence, the one critical subsystem of the economy (along with liquid petroleum fuels) is self-destructing before our eyes if we look beneath the surface chatter of propaganda, bogus official statistics and officially sanctioned manipulation of stock, bond and currency markets.

As I observed in We Are All Muppets Now, everyone with a stake in the Status Quo wants the resuscitation/reflation to succeed, by whatever means are necessary, lest their piece of the pie vanish along with the phantom assets and illusory guarantees.

These expectations of security and wealth have been slowly raised to lofty, impossible-to-meet heights, and the inability to meet those expectations will inevitably lead to the wholesale destruction of institutional credibility: Heightened Expectations and the Collapse of Credibility.

Everyone who benefits from the continuation of financialization hopes it will continue expanding and thus save their piece of the Status Quo. But systems that self-destruct by their very nature cannot be fixed by waving dead chickens around and declaring "we will do whatever it takes to save the Status Quo."

This magical-thinking Cargo Cult mentality is the result of expectations exceeding the resources and surpluses of the real world: rather than accept losses, we prefer to place our faith in "leaders" who have painted radio dials on rocks and are busy declaring that they are now in contact with the gods of permanent prosperity, and that the gods will magically restore the broken machine.

Alas, it's all artifice, theater and stage tricks: the assets are still phantom, the collateral nonexistent, the guarantees empty and the power illusory.

Comment viewing options

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

yawn, nothing new on the western front.

The hottest news is pussy banging in Moscow! What a bunch of lousy inquisitorial freaks!

Imagine locking up a girl for 2 years  just for shouting against Vlad and the church.

redpill's picture


Friday Humor: 3 Reasons Why This Rally Is Real and Will Last


Quite possibly the most ridiculous thing I've ever seen on Yahoo! Finance, and THAT is saying something.


buzzsaw99's picture

devoid of substance and a typo too. i guess we're just supposed to read the headline. matt nesto, lulz

SWRichmond's picture

The central banks and Central States are attempting resuscitation by issuing credit that is freed from the constraints of collateral.


Of course the MIC is going to try to refi itself via fraud.  There is no other course reminaing for them.

MEFO Bills.

Dalago's picture

Retail.   The tip of the dick of the iceberg.

Bicycle Repairman's picture

@ SWRichmond,


Schact's bonds were bought on the basis that the proceeds would be used to re-arm Germany and then Germany would generate war booty by conquering Soviet Russia. This is a possible course for the MIC.

robobbob's picture

Many of the bonds were not bought at all. Companies doing business with the government were sometimes forced to accept bonds as payment in lieu of cash. To make the experience even more fun, some bonds came interest free, and or with very restrictive terms and dates for redemption. A blackmarket arose to convert them to cash, but thats another story.

This shell game served several purposes, such as to allow the government to buy much more than they could have afforded otherwise. Some of those things were vast stores of weapons. Not talked about was the economic miracle that helped cement the Nazis power over the nation. While much of the civilized world struggled with the depression, Germans were being put to work making trains run on time. All the government expected in return was for people to do what they were told, and don't ask questions. And thats just what most of them did.

Another fancy trick was that the issuance of bonds hid the scale of rearmament from suspicious world governments who were keeping an eye on Germanys printing habits to make sure their blood money payments weren't getting inflated away.

diogeneslaertius's picture

a post clearly written by insane muppet unicorms

i hope the check clears

StychoKiller's picture

Does that painted-rock radio pick up stereo FM? :>D

Hype Alert's picture

Jim Paulsen?  He's always pumping the market.  Always a good time to buy.

malikai's picture

+1 It's pretty hard to beat that.

To da moon, bitchez!

Dreadker's picture

What is really inspiring is i remember reading an article like this back in 2009 and not a single comment under the article mentioned ponzi, money printing, fiat etc. etc. 


Its nice to see that more and more sheeple are waking up.... Still not enough, but its progress nonetheless ;-)

aint no fortunate son's picture

But, but, isn't "backed by the full faith and credit of the U.S. government" sufficient collateral??????????

Getting Old Sucks's picture

Heck, with our new laws and exec orders, anyone can just disappear for any reason.  Of course most will ever know about it.  

Things that go bump's picture

Yes, and they will be coming for us in the night, and if not you, your neighbor or your brother or your friend, just the way Stalin's Security Operatives did with Solzhenitsyn, but I doubt they will want to waste food on us.  They'll probably just load us in buses and take us to the nearest stadium to line us up and shoot us.   


"And how we burned in the camps later, thinking: What would things have been like if every Security operative, when he went out at night to make an arrest, had been uncertain whether he would return alive and had to say good-bye to his family? Or if, during periods of mass arrests, as for example in Leningrad, when they arrested a quarter of the entire city, people had not simply sat there in their lairs, paling with terror at every bang of the downstairs door and at every step on the staircase, but had understood they had nothing left to lose and had boldly set up in the downstairs hall an ambush of half a dozen people with axes, hammers, pokers, or whatever else was at hand? After all, you knew ahead of time that those bluecaps were out at night for no good purpose. And you could be sure ahead of time that you'd be cracking the skull of a cutthroat. Or what about the Black Maria sitting out there on the street with one lonely chauffeur--what if it had been driven off or its tires spikes?

The Organs would very quickly have suffered a shortage of officers and transport and, notwithstanding all of Stalin's thirst, the cursed machine would have ground to a halt! If...if... We didn't love freedom enough..."

Aleksandr I. Solzhenitsyn, The Gulag Archipelago (1973). Excerpt from Footnote 5, Chapter 1.

slewie the pi-rat's picture

our goonies are not commies, comrade_tonguester

hooliganism is a crime! 

slewie'sGrrrrL.fren (recent photo)

Blind Blakeshe's in the Jailhouse Now  YouTube


Anusocracy's picture

Here today, desaparecido tomorrow.

Banana Republistan

Dalago's picture

Boom goes the dynamite.

magpie's picture

With all due respects to the ladies' grievances and uh artistic talents, staging such a performance in a German mosque or synagogue would have immediately incurred the believers' immediate vengeance or some bullets from the Kripo.

jeff montanye's picture

kripo?  if they could time travel.

fonzannoon's picture

since this article was bland may I update that the CEO of perogrine just pleaded innocent.

madcows's picture

Well, $hit, Corzine got off.  Why the Fark wouldn't he plead innocent.  Only and absolute retard would say he's guilty.

jeff montanye's picture

while jon has likely gotten off many times he is yet to be indicted.  perhaps it awaits him.  perhaps a presidential pardon (eric holder has experience).  perhaps not.  

HyperLazy's picture

Well that is bold. Usually the arraigners will only let you plead guilty or not guilty.

fonzannoon's picture

yup he went with innocent. Also you are now allowed to ground your club in the sand. Changes everywhere.

New_Meat's picture

"Also you are now allowed to ground your club in the sand."

Dang, I tried that once, eeeewwwwww that hurt.

- ned

Hype Alert's picture

All I know is when cab drivers start giving you tips on what the FED is going to do...


Seriously, is there any financial news anywhere that doesn't involve the FED?

Ying-Yang's picture

"gods of permanent prosperity".... Pagan?

Dig Deeper1's picture

Aahhhhh......People Against Goodness and Normalcy!  aka the Federal Reserve.

New_Meat's picture

thank you for digging deeper.

Tinky's picture

While the substance will not be news to most here, this is an excellent article.

Don't forget that the vast majority are completely unaware of just how badly broken the system is, and Chuck (not the round mound of rebound) often does a good job of explaining the fundamental issues in relatively simple terms.

nope-1004's picture

Agree.  At least he sticks to the issue at hand, and doesn't cloud the quality by including how good the lunch was with Prince Abdullah while on the train from Egypt to Ecuador.

centerline's picture

The point he is making really is critical.  It actually is even larger of a problem than pointed out.  Most of our modern society has gone from robust to very fragile in terms of almost anything one can think of.

dizzyfingers's picture

Weakest Critical Part Fails, Machine Breaks Down

Good analogy. And the smartest people in the room are just as prone to miss critical details as everyone else. Prepare for chaos, pray for rationality.


"Imagine locking up a girl for 2 years  just for shouting against Vlad and the church."

Right On Falak...

Right On...

DoChenRollingBearing's picture

Got to watch those bearings, they fail, you have a problem.  Buy them before they fail!

Korean ones are a good choice...


Debt and platinum...  Up, up and away:

BLOTTO's picture

SRT: How shall the new environment be programmed? It all happened so slowly that most men failed to realize that anything had happened at all.

~THX 1138 (1971)

diogeneslaertius's picture

a machine whose parts all respond in the same way is destined to come apart, such a crystal palace has a hidden flaw, a crack, and the proper Frequency can shatter the entire grandiose architecture


the artifice of a ponzi scheme collapses the moment people are AWARE it exists


this is the quantum rule of thumb, PERCEPTION CONDITIONS EXISTENCE


When financialization fails, the consumerist economy dies.

diogeneslaertius's picture

Dionysian Compassion: All that is Falling, I should also like to PUSH -fritz 

Winston Churchill's picture

Pretty long winded and superficial.

Is he paid by the word ?

As before,the repo market will be the first symptom of a total failure in confidence

in the underlying collateral propping up the system.

Total blackout on repo intervention on the NY Fed site.

Why ?

grid-b-gone's picture

Market volume already reveals that people have seen as much graft as they are willing to tolerate.

"Once this flimsy con unravels, the credibility of all institutions that participated in the con will be irrevocably destroyed."

Withdrawal from all markets was a common reaction after The Great Depression. It takes a couple generations for people to forget, which is just about where we are - about the same span as from the carpetbaggers of the late-1860's to The Great Depression.

Painters I know would find cash pinned into the folds of curtains when doing jobs for the elderly up until the 1990's. 

Daughters of one old man dismantled his small house rather than sell it to make sure all valuables were recovered from the walls.

At least five major religions have developed over the past 2,000 years, each calling for improved morality and putting community above self, but human nature continues to render them all nearly powerless to change our base instincts. 

LMAOLORI's picture



Trickle Up Bitchez

QE (quantitative easing) is essentially the printing of money and the addition of liquidity into the markets so that stock (and other asset) prices are given an artificial boost. Federal Reserve Chief Ben Bernanke believes that by pulling up stocks, the masses will feel richer and spend more on consumer goods, thus lifting up the economy. This is based on Karl Marx's reflexivity theory (George Soros essentially paraphrased Marx) that states by turning the small wheel (stocks), you can turn the big wheel (economy), which in turn will come back and turn up the small wheel (stocks). Bernanke subscribes to such a theory, and he wants QE to lift up the small wheel (stocks), which he hopes will lift up the big wheel (the economy).

De minimus's picture

Too bad it doesn't work that way, especially when government and their friends have inserted themselves in a controlling position and are no longer content with siphoning off just some, of the profits and now have a vampire like thirst for every last drop. 

Needless to say that they need complete control of their victims, in order to have their way and so this too is coming to pass. Courtesy of the media, who do understand what is happening and won't report it because they do have an interest in seeing this through to the end. Which they will promptly blame on any available enemy lest it fall upon them, with all the consequences that implies.

LMAOLORI's picture



De minimus


That was my point apparently too many people here don't recognize the art of sarcasim or they just don't like me pointing out Marx with obama being a Marxist

Chance of Fed Printing More Money Jumps to 60%