The New Normal: Death Spirals And Speculative Frenzies

Authored by Charles Hugh Smith via OfTwoMinds blog,

There is an element of inevitability in play, but it isn’t about central bank bailouts, it’s about Death Spirals and the collapse of unsustainable systems.

The vapid discussions about “soft” or “hard” landings for the economy are akin to asking if the Titanic’s encounter with the iceberg was “soft” or “hard:” either way, the ship was doomed, just as the global economy is doomed by The New Normal of Death Spirals and Speculative Frenzies.

Death Spirals are the inevitable result of entrenched interests clinging on to the status quo and thwarting any adaptation or evolution that might threaten or diminish their share of the swag–and that includes any real change because any consequential modification has the potential to upset the gravy train.

The status quo “solution” is to borrow and blow whatever sums are needed to satisfy every entrenched interest. Filling the federal slop-trough for all the hogs now requires borrowing a staggering $1.4 trillion every year, and billions more in municipal, county and state bonds (borrowing money via selling bonds) on the local level.

This borrow and blow strategy avoids any uncomfortable discipline and difficult trade-offs: everybody gets everything they demand.

This strategy looks “unsinkable” until the iceberg looms dead ahead. History suggests that fiscal and political discipline is eventually imposed by the real world in one fashion or another when diminishing returns enter a Death Spiral.

Any limit on debt is of course “impossible,” just as it was “impossible” for the Titanic to sink. But history is rather implacable in this regard. The self-serving hubris of “impossible” limits on largesse tend to collapse on contact with currency devaluation, structural inflation or a systemic crisis of legitimacy that sweeps away the entire worm-eaten facade of stability.

In other words, the entrenched interests benefitting from the status quo will continue to do what worked in the past until it all implodes. The pain of discipline and modest sacrifices is too great to bear, so let’s collapse the entire system.

Autocracies excel at Death Spirals because they eliminate dissent, transparency and competing nodes of power. Nobody’s left to push back on disastrous policy decisions, so autocratic regimes race toward the iceberg at full speed.

Rather than invest in real long-term solutions, everyone is in the casino, buying options that expire in a few hours. Rather than invest for an entire quarter–whew, three whole months!–speculators now consider a week an unbearably long time to hold a trade.

Speculative frenzies create their own Death Spirals, as gamblers front-run the “guaranteed” bailout of speculators by central banks. This is the consequence of moral hazard being elevated to “guaranteed”: there is no need to actually wait for the inevitable central bank bailout of bets gone bad, we can place bets before the bailout because we know it’s as assured as the sun rising tomorrow morning.

Nice, except central banks and bailouts also reach diminishing returns and enter Death Spirals. Doing more of what’s failed seems to work once, then twice, if you give it enough juice, but the third time is iffy and the fourth time collapses the speculative casino that the status quo was trying to save.

No one who benefits from the Moral Hazard Casino Economy believes it’s no longer sustainable. All the gamblers, big and small, are confident the Federal Reserve and other central banks can cover any losses and make good whatever befalls the casino. The hubris of the punters, big and small, is essentially infinite.

I’ll get out before the house of cards collapses, everyone tells themselves. In the meantime, I’m going to front-run the inevitable bailout of this speculative frenzy.

There is an element of inevitability in play, but it isn’t about central bank bailouts, it’s about Death Spirals and the collapse of unsustainable systems. Death Spirals and speculative frenzies have now been completely normalized. We can’t imagine any other way to operate. But this New Normal won’t last as long as punters believe. Doing more of what worked in the past is only accelerating the casino’s demise.

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