The Next Recession Will Be Devastatingly Non-Linear

Authored by Charles Hugh Smith via OfTwoMinds blog,

The acceleration of non-linear consequences will surprise the brainwashed, loving-their-servitude mainstream media.

Linear correlations are intuitive: if GDP declines 2% in the next recession, and employment declines 2%, we get it: the scale and size of the decline aligns. In a linear correlation, we'd expect sales to drop by about 2%, businesses closing their doors to increase by about 2%, profits to notch down by about 2%, lending contracts by around 2% and so on.

But the effects of the next recession won't be linear--they will be non-linear, and far more devastating than whatever modest GDP decline is registered. To paraphrase William Gibson's insightful observation that "The future is already here — it's just not very evenly distributed"the recession is already here, it's just not evenly distributed-- and its effects will be enormously asymmetric.

Non-linear effects can be extremely asymmetric. Thus an apparently mild decline of 2% in GDP might trigger a 50% rise in the number of small businesses closing, a 50% collapse in new mortgages issued and a 10% increase in unemployment.

Richard Bonugli of Financial Repression Authority alerted me to the non-linear dynamic of the coming slowdown. I recently recorded a podcast with Richard on one sector that will cascade in a series of non-linear avalanches once the current asset bubbles pop and the current central-bank-created "recovery" falters under its staggering weight of debt, malinvestment and speculative excess.

The Intensifying Pension Crisis (37-minute podcast)

The core dynamic of the next recession is the unwind of all the extremes:extremes in debt expansion, in leverage, in the explosion of debt taken on by marginal borrowers, in malinvestment, in debt-fueled speculation, in emerging market debt denominated in US dollars, in financial repression, in political corruption--the list of extremes that have stretched the system to the breaking point is almost endless.

Public-sector pensions are just the tip of the iceberg. What happens when the gains in equities and bonds that have nurtured the illusion that public-sector pension funds are solvent and can be funded by further tax increases reverse into losses?

Pushing taxes high enough to fund soaring public pension obligations will spark taxpayer revolts as the tax increases will be monumental once the delusion of solvency is stripped away in the upcoming recession.

The entire status quo rests on the marginal borrower/buyer. All the demand for pretty much anything has been brought forward by the central banks' repression of interest rates and the relentless goosing of liquidity: anyone who can fog a mirror can buy a vehicle on credit, get a mortgage guaranteed by a federal agency, or pile up credit card and student loan debts.

Those with stock portfolios can gamble with margin debt; those with access to central bank credit can borrow billions to fund stock buy-backs or the purchase of competitors, the better to establish a cartel or quasi-monopoly.

What's not visible in all the cheery statistics is how many enterprises and households are barely keeping their heads above water as inflation shreds the purchasing power of their net incomes. Inflation is supposedly tame, but once again, following Gibson's aphorism, inflation is already here, it's just not evenly distributed.

While employees with employer-paid health insurance are dumbstruck by $50 or $100 increases in their monthly co-pays, those of us who are paying the unsubsidized "real cost of health insurance" are being crushed by increases in the hundreds of dollars per month.

The number of cafes, restaurants and other small businesses with high fixed costs that will close as soon as sales falter is monumental. Add up soaring healthcare premiums, increases in minimum wages, higher taxes and junk fees and rising rents, and you have a steadily expanding burden that is absolutely toxic to small businesses.

The first things to go are marginal employees, overtime, bonuses, benefits, etc.--whatever can be jettisoned in a last-ditch effort to save the company from insolvency. The first bills cash-strapped households will stop paying are credit cards, auto loans and student loans; defaults won't notch higher by 2%; they're going to explode higher by 20% and accelerate from there.

Here are a few charts that reveal the extremes that have been reached to maintain the illusion of "recovery" and normalcy: total credit has exploded higher, after a slight decline very nearly brought down the global financial system in 2008-09:

The massive expansion of assets purchased by central banks will eventually be slowed or even unwound, removing the rocket fuel that's pushed stocks and bonds to the moon:

As governments/central banks borrow/print "money" in increasingly fantastic quantities to keep the illusion of "recovery" alive, the currencies being debauched lose purchasing power. Venezuela is not an outlier; it is the first of many canaries that will be keeling over in the coal mine.

Wide swaths of the economy won't even notice the recession devastating the rest of the economy, at least at first. Public employees will be immune until their city, county, state or agency runs out of money and can no longer fund its obligations; shareholders of Facebook et al. who cashed out at the top will be doing just fine, booking their $18,000 a night island get-aways, and those few willing to bet on declines in the "everything bubbles" of real estate, stocks and bonds will eventually do well, though the Powers That Be will engineer massive short-covering rallies in a last-ditch effort to mask the systemic rot.

The acceleration of non-linear consequences will surprise the brainwashed, loving-their-servitude mainstream media. The number of small businesses that suddenly close will surprise them; the number of homeowners jingle-mailing their "ownership" (i.e. obligation to pay soaring property taxes) to lenders will surprise them; the number of employees being laid off will surprise them, and the collapse of new credit being issued will surprise them.

Don't be surprised; be prepared.

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odatruf Jus7tme Wed, 05/23/2018 - 09:56 Permalink

Me too, except where he says that one of the extremes which will be unwound (corrected) is political corruption. There is zero evidence to support that claim and plenty to support that it will become worse.  

Most of this isn’t the hard payola stuff, but the softer access and market tilting kind of corruption that is hard to root out except by a wholesale replacement of nearly everyone involved. 

In reply to by Jus7tme

QuantumEasing Arnold Wed, 05/23/2018 - 14:37 Permalink

Sadly, not even this is real:…

Remember ((who)) created "nukes" and for what reason: to keep the fear going, to provide a never-ending spigot of funds for the MIC, and to justify world governance. Einstein was borderline retarded (nothing he shat forth amounted to anything valuable, even he admitted "Relativity" was untestable and unprovable). Oppenheimer was known as an "actor," and the ((family name)) should be a clue. The only man that could have torpedoed the dog and pony show was the smartest man in the world (as admitted by Einstein), Nikola Tesla. Tesla died under suspicious circumstances in 1943.

Dr. Nakatani's work vindicated my and other's research that lead to the (rather obvious, in retrospect) realization that nuclear weapons are fiction. Miles Mathis and Anders Bjorkman both independently connected the dots. The TL:DR is simply that a sustained nuclear reaction cannot occur without a moderator.

The Germans realized this in 1942, and discontinued work on a "nuclear explosive". The US, with its scientists ((compromised)), decided to spin up a fake, scary superweapon. 108 tons of TNT laced with radioisotopes was detonated in the desert of Alamogordo (look it up, they don't even try to hide it), making a pretty explosion and a pathetic little soot mark on the ground.

A few months later, without any testing or calibration of the Norden bombsights, a single bomb was allegedly dropped through a 30 knot crosswind to hit within a few meters of the aimpoint (CEP for high altitude bombers was still half a mile at best), leaving no crater (which, since it was a ground burst, one would expect) and most of the nearby buildings and trees intact, to include their windows.

Pretty amazing. The inhabitants had street cars running within a week, and life returned to normal in the radiation-drenched, glowing glass crater. Oh wait. No radiation, no traces of Uranium of Plutonium in the soil (I've been there, and taken both soil samples and tested for radiation).

The second "bomb" was even more pitiful, doing negligible damage to the already bombed-to-shit Nagasaki (there were no "virgin targets" at this point. Japan had been terror-bombed to rubble).

Interesting note, Hiroshima was likely hit by a flight of 66 B-29s on August 5th: Imabari, utterly destroyed some months earlier, did not warrant any more raids. A "divert" to Hiroshima would have been trivial, being only a few dozen klicks away. Since there was no blast damage or crater, it was clear Hiroshima (and Nagasaki) were firebombed like the other nearly 70 Japanese population centers.

"It is easier to fool a man than to convince him he's been fooled."

-Mark Twain

Edited to add: the downvotes are either those too retarded to comprehend basic nuclear physics, or trolls for the usual suspects. Fortunately, the lie is eroding fast. Even several otherwise apathetic friends pointed out (from out of the blue) that if "nukes" existed, they would have been used many times already. A "nuclear explosive" is allegedly caveman technology: banging two rocks together. Fat Boy of the North would have simply used them if they were real, instead of the Lil' Kim levels of drama.

This really is a litmus test for separating the truly intelligent from those that just waste oxygen. Those that "believe" in nuclear weapons will someday be looked upon as similar to those believing in the geocentric universe, or the flat earth.

Some additional reading:

In reply to by Arnold

karenm Oldwood Wed, 05/23/2018 - 10:26 Permalink

No, it won't be "non-linear"

The govt reports bullshit data like "GDP dropped 2%" but somehow 40 million lost their jobs, representing 30% of the workforce.


Think, stop believing your govt. In 2008, tens of millions lost their jobs. Do you believe companies laid that many off due to a measly 2% drop in GDP?


Stop believing everything the media and govt says, and suddenly the lights will come on.

In reply to by Oldwood

Let it Go Wed, 05/23/2018 - 08:45 Permalink

During the next big market crisis liquidity will be an issue. With this in mind it would be wise to understand the difference between a "liquidity trap" and our normal or standard liquidity problem. In many ways, they are opposites. This causes a great deal of confusion in that it can be difficult to comprehend why too much liquidity is an issue. This is why it is important to look a little closer at these two terms and what they represent. The article below looks at the ramification from each as they play out and how they affect the economy.

 http://Liquidity Trap Differs From Standard Liquidity Problem.html

shortonoil Wed, 05/23/2018 - 08:45 Permalink

The economy will do the same thing on the way down that it did on the way up: follow the energy function; and that has always been exponential. We are now a little past the peak, but the central bank shenanigans of the last couple decades are going to make the ride down a lot faster!

surf@jm Wed, 05/23/2018 - 08:55 Permalink

What gets me, is as nasty as people act these days, with their ill mannered personalities, ill mannered driving, ill mannered dealings with each other, imagine how they will act in a full blown depression.....


Gun control my ass......

Zog the Bastiat Wed, 05/23/2018 - 08:55 Permalink

As long as you have a few hundred K liquid, it won't take a lot of brain cells to get filthy rich when it collapses.

Just stay out of debt, buy a few apartment buildings for cash while everyone else is shitting the bed, start the next cycle so far ahead of the cattle that it's not even funny.

evokanivo Wed, 05/23/2018 - 09:00 Permalink

This guy makes for an entertaining doom-porn read occasionally, but I sure wouldn't follow his financial advice. He actually thinks that the excesses will be unwound! When things get bad, the Fed will just blow another fucking bubble and then the currency will go to shit even more than it has. Then, finally, after many many years, *maybe* he'll be right and the malinvestment will be unwound, but only if we switch to a gold-backed or other verifiable/non-fiat currency.

In any case, he's a broken clock and has been providing bad advice since the last recession.

GunnerySgtHartman evokanivo Wed, 05/23/2018 - 09:38 Permalink

When things get bad, the Fed will just blow another fucking bubble and then the currency will go to shit even more than it has.


The FED will do what it has done in the past - try to inflate another bubble - and then when it doesn't work, it will resort to throwing anything and everything at the wall in desperation.

Regardless of what the FED does, there is one thing it will NEVER do - ADMIT FAILURE.  To admit failure would be admitting that central banking, as it is currently constituted, does not work (although the smart people already know it doesn't work).

In reply to by evokanivo

lizzoilz Wed, 05/23/2018 - 09:15 Permalink

News alert. Is already in play. Obozzo left the poor democrats out to hang dry and on drugs. No one even noticed. Look what they did to Nancy Pelosi.

BankSurfyMan Wed, 05/23/2018 - 09:17 Permalink

The U.S> Gubment is the largest employer in the World. "Public employees will be immune until their city, county, state or agency runs out of money and can no longer fund its obligations..." Gubment Jobs!

bigloser Wed, 05/23/2018 - 10:28 Permalink

Though I frequently criticize the author, this is a solid article from CHS, especially the inclusion of the Fed credit chart. Very telling that the small blip in credit in 2008-09 nearly collapsed the entire global apparatus.

The graph of the central bank money printing is pretty good as well. Both charts are going parabolic, and we all know that means nothing but trouble ahead. I would guess the first big falter will be right before the 2018 midterms, followed by subsequent  dips and dives into 2020.

Trump will get all the blame from the media, but, pro tip: Most Americans won't blame him because they've been fed so much bullshit from the likes of NBC, CBS, CNN, ABC, et. al., they've already figured out that the media is nothing short of a den of liars.

Blowback is going to be a bee-ache, BITCHEZ!

Zhaupka Wed, 05/23/2018 - 11:49 Permalink

PSYOP: University of California, Berkeley, Professor Emeritus Dick Walker has called the last 4 of 5 recessions. The next one shall be mild, if at all, felt by all, and nowhere near the 2007 - 2008 Capitalist Economic Failure. Relax. Unless one personally prefers the following: Fret. Fret. Fret. Fret. Fret. Fret. Fret. Fret. Fart. Fret. Fret. Fret.

There shall be no war, no secessions, no civil war, no revolution, no pandemic, no famine, - this is a sleepy time in Human History after major calamitous northern hemisphere planetary wars. And, yes, every Baby Boomer shall be paid all Social Security. No worries at all.

nsurf9 Wed, 05/23/2018 - 12:32 Permalink

I suggest every person on the planet celebrate the next 4th of July at 20th Street and Constitution Avenue, N.W., in Washington, D.C -  aka Marriner S. Eccles Building.

StreetObserver Wed, 05/23/2018 - 12:36 Permalink

Smith is a smart guy and can define complicated issues succinctly.

Make friends in your community, patronize small businesses and prepare accordingly.

Turn off your main breaker and live without power for a week to find out what you need to do.

Austrian Peter Thu, 05/24/2018 - 15:43 Permalink

Well, Charles, you are a happy teddy!  Although I have no doubt that you speak the truth.

QE/ZIRP has merely masked the effects of 2008 and combined with the fraudulent statistics from Fed, BLS et al is attempting to fool the people that the economies are growing which is patently not true and the people know this by merely measuring their own experiences.

Here's a very informative article from Paul Craig Roberts:…

You can fool some of the people all the time but many are waking up to the true situation by reference to their own micro economic experiences and I am getting an increasing number of requests for my book from people who want to know the truth.

I started the book in 2013 when the Cyprus event made me furious that a bank robbery had taken place and there were no cops in sight. I have tracked the economic and financial events ever since which prove beyond doubt that we have never recovered from the 2008 collapse.

There is no doubt in my mind that a major crisis will soon be upon us and it will be much worse than last time which is all described in my book,

Free PDF (100,000 words) is available on request from

My book explains all this and much more, here's a list of subjects:

Introduction (to a Bank Robbery)
Commercial Banks
Credit & Debt
Central Banks
Government Finances
European Union
Financial Engineering
Inflation & Deflation
National Economies
The End of Growth
The New Emergent Economy