In Uncharted Waters

What I see as extremes that must necessarily end badly, others see as mere extensions of recently successful policies and trends.

A long-time reader recently chastised me for using too many maybe’s in my forecasts. The criticism is valid, as “on the other hand” slips all too easily from qualifying a position to rinsing it of meaning.

That said, given that we’re in uncharted waters, maybe’s become prudent and certainty becomes extremely dangerous. I have long held that the financial policy extremes that are now considered normal are unprecedented in the modern era: extremes in debt, leverage, risk, complexity and willful obfuscation of these extremes.

Consider the extent to which sky-high asset valuations and present-day “prosperity” depend on extremes of leverage: autos purchased with no money down, homes purchased with 3.5% down payments and FHA loans, stocks bought on margin, stock buybacks funded by loans, student loans issued with zero collateral, and so on–an inverted pyramid of “prosperity” resting precariously on a tiny base of actual collateral.

Since we have no guide to the future other than the past, we extrapolate past trends. Human nature hasn’t changed over the short time-frames of civilizations (i.e. the past few thousand years), so in terms of human drives, emotions and responses, the past is an excellent guide to the range of human responses to crisis, euphoria, greed, fear, etc.

But extending trends is a shifting foundation for forecasts, as trends end and reverse, generally without telegraphing the end of an era. Few in 1639 China foresaw the collapse of the status quo Ming Dynasty a mere five years hence.

With the hindsight of history, we can discern the cracks in the Ming Dynasty before its collapse, but once we shift to our own era, things become less certain.

In my view, we’re drifting in uncharted seas.

I have covered the dangers of certainty before: Certainty, Complex Systems, and Unintended Consequences (February 14, 2014)

What I see as extremes that must necessarily end badly, others see as mere extensions of recently successful policies and trends. Let’s review a few of the many extremes that we now accept as ordinary and harmless.

Consider how much new debt is now required to lift GDP (“growth”) off the flat line:

The slightest pause in the expansion of credit nearly collapsed the entire global economy:

Extraordinary central state and bank policies have boosted the wealth of those closest to the Federal Reserve’s money spigot and left everyone else poorer:

It’s not just real income that’s declined–so has household wealth.

Incentives to borrow money to obtain a college degree are declining while student loan debt hits astounding extremes:

Feel free to extend this line of Federally funded student debt: where does it end?

The Federal Reserve has pushed astonishingly extreme policies for six years. Now that the Fed owns significant chunks of the Treasury bond and mortgage bond markets, it’s being forced to limit these easing programs:

All the Fed money-printing and bond buying has sent money velocity in the real economy into a tailspin: this is good, right? No, actually it’s a calamity. Money has slipped into a coma.

Extend the trendlines in these charts, and then ask yourself: where do they end? What will they trigger as they push ever deeper into uncharted waters?


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  • The matter is just awesome and very informative for the title and thanks for sharing this site with us.

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  • cettel

    The 50th percentile is not the median, though you say “50th [percentile] (Median)”

    • kimyo

      spot on! chs is deceiving us! thank the lord for your sharp eyes, we might have all missed that! we should ignore this whole article and never read mr smith’s work again!

      (for those gentle readers NOT from planet zuesse, mr. smith never used the word ‘median’. in his reporting, he included a table of data prepared by the ‘panel study of income dynamics’. if cettel/zuesse has a beef, it’s with them, not mr. smith. cettel’s laser-like focus has come to rest on yet another trivial non-issue. why is it that when cettel attempts to guide the conversation, he always steers us to the the most meaningless part?)

  • MOLON LABE

    Here is your sign folks! Thank you, for your due diligence and commitment to providing all us with a wealth of knowledge contained in your posts Mr. Smith!

    October 21, 2014 Fearing a Future Emergency, Governors Declare a State of Emergency

    When most of us think of a State of Emergency, we think of isolated natural disasters like hurricanes, winter storms or a flood that passes through. In those cases it’s quite obvious when the emergency is over. But what if an emergency is declared for something that hasn’t happened yet? How will we know when it’s over? Both Pennsylvania and Connecticut governors recently declared a State of Emergency, not because a disaster is taking place at this moment, but because bad things may happen in the future. This is an incredible development that citizens should be concerned about.

    http://www.activistpost.com/2014/10/fearing-future-emergency-governors.html

  • MOLON LABE

    Obama Signs NDAA Martial Law

    http://www.youtube.com/watch?v=NW-e7z7S6VI

    September 18, 2001 Wartime presidential powers supersede liberties By Frank J. Murray THE WASHINGTON TIMES

    http://web.archive.org/web/20010918184425/www.washtimes.com/national/20010918-1136.htm

    The 14 Senators Who Voted Against NDAA (D-MD), Coburn (R-OK), Crapo (R-ID), DeMint (R-SC), Durbin (D-IL), Franken (D-MN), Harkin (D-IA), Lee (R-UT), Merkley (D-OR), Paul (R-KY), Risch (R-ID), Sanders (I-VT), Wyden (D-OR) (14 American Heroes) This is the very thing the government is using against U.S., and is responsible for our current police state.

    December 16, 2005 By JAMES RISEN and ERIC LICHTBLAU Bush Lets U.S. Spy on Callers Without Courts

    http://www.nytimes.com/2005/12/16/politics/16program.html?_r=1&sq=James%20Risen%20nsa%20surveillance&st=cse&adxnnl=1&scp=1&adxnnlx=1371236105-LBEhxFyzDQjHxqzAtixy5g