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Upon The Next Crisis, The Rules Will Suddenly Change

For the benefit of the elites; not the rest of us
Friday, September 29, 2017, 7:02 PM

We can add a third certainty to the two standard ones (death and taxes): The rules will suddenly change when a financial crisis strikes.

Why is this a certainty? The answer is complex, as it draws on human nature, politics and the structure of societies/economies ruled by centralized states (governments).

The Core Imperative of the State: Expand Control

As I explain in my book, Resistance, Revolution, Liberation, the core (i.e. ontological) imperative of every central state is to expand its reach and control.  This isn’t just the result of individuals within the state seeking more power; every centralized state views whatever is outside its control as a threat.  The way to reduce or neutralize a threat is to take control of the mechanisms that generated it.

Once the state has gained control of these mechanisms, it is loath to relinquish them; to relinquish control is to invite chaos.

There is of course an intensely self-serving dynamic to extending state control: those being paid to enforce this state control have an immense vested interest in the state retaining (or even extending) this control, as their livelihoods now depend on the state doing so.

The higher-ups in the state also have a vested interest in retaining these new controls, as more control means more wealth and power accrue to those at the top of the centralized power pyramid: this extension of state control means private enterprise must now lobby the state for favors, and it gives the higher-ups more perquisites and favors to dispense—for a price, of course.

This vested interest arises throughout the power pyramid, from the bottom functionary with newfound power over common citizens to the managers of the departmental bureaucracy tasked with enforcing the new control to the apex of state authority.

This hierarchy of state power creates another threat to the central state; the corralling of state power by fiefdoms within the state itself.  In other words, fiefdoms can become semi-autonomous agencies that are only nominally under the control of central authority.  The answer is of course additional layers of oversight, compliance, investigation and enforcement within the state itself.

The State Serves Elites First and Foremost

Though modern states always claim to serve the common citizenry, in reality the state serves the wealth/power elites who need state complicity to maintain their wealth/power.  These power elites function as the modern-day equivalent of aristocracy: everyone is equal, but some or more equal than others, to use Orwell’s timeless phrase.

This reality leads to a non-formalized two-tier system: one for commoners and one for the power elite/New Aristocracy.  A formalized two-tier system would incite political disorder, so the system is nominally “everyone is equal under the law” but in practice there are two tiers.

Tax collection is a good example. The corporate/financier power elite have access to complex tax avoidance schemes that are unavailable to commoners, who have few tax reduction tools.  The judicial system is another: power elites can play the system via high-cost attorneys while commoners are left to plea-bargain a reduced sentence, even when they are innocent.

When crises arise, the state first protects its own authority and control. Its second priority is securing the wealth and power of the elite.

The Self-Serving Savior State

Human nature being what it is, there are two motivations for state authorities to expand their reach and control.  Some of those with state authority feel it is their prerogative (or even their responsibility) to expand state control to protect the commoners who are likely to suffer should a crisis erupt. This do-good impulse may be genuine in some, but by and large it is not compassion that dominates decision-making but the dynamic of a central state having so much power in the first place: you have the power, so do something to save us from the consequences of crisis.

In other words, once power is concentrated in the hands of a few, those few are responsible for handling crises that would have otherwise fallen on a decentralized system with many levels of response.

Then there is the Machiavellian impulse to use crisis as the cover for a power-grab, a dynamic encapsulated in the phrase, never let a good crisis go to waste. This dynamic doesn’t have to be passive; power elites don’t have to wait for a crisis, they can engineer one by exploiting their control of state and private-sector mechanisms.  This process of engineering a crisis can be policy-driven (as described in Naomi Klein’s book The Shock Doctrine) or propaganda-driven (the sinking of the battleship Maine, Nazi Germany’s Lebensraum, etc.).

Though many call an expansive state The Nanny State, I prefer the term The Savior State, as the state claims its expanding powers under the guise of saving us from a variety of threats—including those that arise from the socio-economic system the state oversees. In other words, The Savior State’s guiding ideology is to save us from ourselves.

If we might harm ourselves with addictive drugs, the state’s solution is to imprison everyone caught with addictive drugs—except of course those addictive drugs that enrich the Power Elites (nicotine, alcohol, synthetic opioids, etc.).

If the state deems it risky for children under the age of ten to play outside unattended, the state’s solution is to treat the parents/guardians as criminals.

Each extension of control creates new layers of vested interests—more functionaries who gain not from solving problems but insuring they fester into the future as a form of guaranteed employment, and more opportunities to dispense favors in the informal two-tier system of powerless commoners and influential elites.

The Crisis Toolbox: Political Expediency

History teaches us that authorities view crises as first and foremost a threat to state authority, secondarily as a threat to elites’ wealth and power, and then lastly as a threat to the socio-economic system they rule.

Given these crisis management priorities, their first response is to extend their authority by whatever means are necessary.  Once these new powers are in hand, the state deploys them to limit the threat posed to the power elites and the structure that supports state and elite wealth/power.

In a centralized power structure, this crisis management manifests as change the rules without warning to increase the reach and power of the state.  The justification is something along the lines of these emergency powers are needed to protect the nation—powers that all too often become permanent, as powers once taken are rarely relinquished for all the reasons outlined above.

While the rule changes are presented as both necessary and well-planned, in actuality the process is one of political expediency:  a hurried rush to do whatever limits the risks to the power elites’ wealth and power before opposition can be organized, and to cloak the power-grab in the usual Savior State garb: we are acting to save the system that benefits you.

But this expediency comes back to haunt both the state and the power elites, as expedient power grabs designed to protect the state and elites do not actually address the dynamics that spawned the crisis in the first place. Rather, they exacerbate the problem by introducing self-serving fixes that paper over the problem as a quick-and-dirty way of protecting the power and wealth of the state and private-sector elites.

These fixes end up crippling the mechanisms that are needed to actually solve the systemic sources of the crisis.

The Continuing Financial Crisis

Financial crises are inevitable, and the state (which includes the central bank) seeks to limit the crisis by taking control of the market.  Examples include: closing the stock market, declaring a bank holiday, issuing a new currency, fixing wages and prices, and banning short selling.

In the current financial crisis that started in 2008 (and that has yet to end), central banks and states have largely avoided these outright takeovers of the market in favor of a more subtle strategy of controlling the markets while maintaining the appearance of “free markets.”

In Part 2: How To Defend Against An Unfair Re-Set Of The System, we’ll examine the ways the U.S. state and central bank have already extended control over the market—for example, via the mass purchase of assets by central banks (see accompanying chart)-- and what additional controls they will likely impose as the simmering crisis erupts anew in the years ahead.

We’ll also look at what we mere commoners can do to protect ourselves from the inevitable risks and unanticipated calamities this centralized control will unleash.

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14 Comments

LesPhelps's picture
LesPhelps
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Charles wrote: Then there is
Charles wrote:

Then there is the Machiavellian impulse to use crisis as the cover for a power-grab, a dynamic encapsulated in the phrase, never let a good crisis go to waste.

My immediate thought, when reading this was 9-11, followed by the “Patriot Act,” TSA and Homeland Security.  

I thoroughly despise the “Patriot Act” and absurd security we are forced to endure now.

The sad part is, there are lots of citizens who find these horrendous losses of freedom justified because it makes them feel safer when flying hither and yon.


Ben Franklin wrote:

Those who would give up their liberty to purchase temporary safety deserve neither liberty or safety.

Geni Hackmann's picture
Geni Hackmann
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Crises are foremost opportunities

I agree with most of what Charles Hugh Smith writes, with one big exception: I think that the accelerating crisis is not so much an threat to the elites as it is an opportunity to expand their hold on the society, its wealth and peoples’ minds. Otherwise they would permit the problems to be solved. 

I agree that at the peak of the crises the rules will change very quickly, possibly over a weekend or so. That’s why I think that a network of informed people able to act quickly is of great importance. I guess peak proserity is doing just that.

dcm's picture
dcm
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the act of a patriot

The Patriot Act is indeed the largest systemic attack on the Bill of Rights ever unleashed. Curiously, the act, a lengthy one indeed, was produced in record time as if, dare I say, they were waiting for the opportune moment. The Project for A New American Century and its cast of characters are a political version of the Industrial Light and Magic Company. The only difference is that they have more than one Darth Vader 

Michael_Rudmin's picture
Michael_Rudmin
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Prejudi

Umm, I'm wondering why I'm seeing prejudice here?  Why the prejudice towards the *next* crisis, when you could as easily say the same about the LAST crisis? 

You could say, "In the PREVIOUS crisis, the rules will suddenly change." 

Given TARP, the statement would be valid.

Not only that, but it would answer the question "How do you know?" about your claims of the NEXT crisis.

David Allan's picture
David Allan
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Great timing Charles

The Core Imperative of the State: Expand Control

Great timing with this article Charles, the Catalan Independence vote has turned into a perfect illustration of your point. Interesting to see the Spanish prime minister denouncing the referendum as 'undemocratic' as he sent in the stormtroopers to smash things up.

JohnH123's picture
JohnH123
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When will the Central Banks lose control?

Charles,

Fantastic article. Do you have any measure to tell us how long it could be before the Central Banks lose control? 

charleshughsmith's picture
charleshughsmith
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timing of next crisis

JohnH123, excellent question.  I have publicly proposed a "schedule" in which a preliminary disruption/ crisis (such as a currency crisis, oil shortage, sharp global recession, etc.) in the 2018-19 time frame forces the central banks/states to change the rules and create even more trillions with even greater abandon. 

This calms the water for a few years but only increases the systemic instability that finally breaks through the veneer of permanent convenience/ good times in the 2021-25 time frame--which is also the predicted existential crisis proposed by the 4th Turning authors (one of whom has been interviewed here, Howe, as I recall). 

For those who are skeptical of the 4-generation 80-year cycle, the timing aligns with reasonable projections of global energy shortages and debt levels rising to heights that historically trigger financial crises and re-sets.  Recently, I've concluded a sharp increase in inflation--which is supposedly going to be near-zero forever-- is the one trend the central banks can't resolve by creating another $20 trillion and injecting it into the banking /financial system.  Cycles of interest rates are long, but we're approaching the outer reaches of previous cycles, so the timing of 2022-25 also aligns with a rise in yields that makes all the debt accumulated since 1990 suddenly unaffordable.

 

Geedard's picture
Geedard
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Interesting view from Gerardo Del Real

The Fed Tightens: Prelude to QE4

Written Monday, October 2, 2017

For years central bankers around the globe have pumped cash into equity markets.

Since March of 2009 and the recent Fed decision to begin QT (Quantitative Tightening), global equity markets have rallied. The S&P 500 is up 271% within that same time frame.

The reason for the rise is simple... the chase for yield. With the Fed counterfeiting (albeit very skillfully) creating nearly 3.6 trillion dollars and using the bulk of that to buy bonds and artificially suppress interest rates, capital that would’ve flowed into the bond market has flowed into equity markets.

Let’s be clear that I’m one of the few who gives Fed Chairwoman Janet Yellen credit for how she’s handled the bad hand she was dealt.

She’s provided cover to head-in-the ass politicians for years in hopes that they would use that cover to be proactive in igniting a sustainable economy for everyone, not just the lobbyists and their benefactors. Heads remain firmly planted with no end in sight.

Back to how this has and will play out. Lower rates incentivized corporations to borrow at historically low rates and, like good corporate citizens, they did so with conviction.

Corporations didn’t use that money to innovate or raise wages for their employees, they used the bulk of the capital they borrowed to buy back their own stocks.

The result has been daily record highs in the stock market. Highs that are now taken for granted. But what the Fed giveth the Fed will taketh away... but only for a little bit.

The Fed's decision to start quantitative tightening (QT) in early October is the prelude to QE4 or, as I’m going to call it, QE ‘til infinity.

After the panic in 2008 the Fed cut rates at a frantic pace and once rates got to zero it pulled out the next weapon in its bag of tricks... debt monetization, or buying bonds.

How much bond buying went on?

The latest figures show approximately $4.41 trillion of monetized bonds. Down only 1.6% from the peak of $4.7 trillion.

Adam Hamilton has done an excellent job of putting together a much more detailed argument on why the tightening will lead to lower stock prices. You can read that here.

So a reversal from QE to QT should have an equally negative effect, right? Yes and no. Initially the tightening will consist of $10 billion per month. $6 billion of that will come from treasuries and $4 billion from mortgage-backed securities. Every quarter after that for a year the Fed will increase those monthly caps by an equal amount.

I’m a simple guy so let me keep it simple: over the next year $50 billion of treasuries and mortgage-backed securities ($30b and $20 billion respectively) will roll off the balance sheet. Using my handy dandy calculator gets me to $600 billion a year.

That matters for equity markets and will also have a material impact on precious metals, both in the near term and in the long term.

The Fed does not plan to unwind the entire balance sheet and the market isn’t going to give the Fed the chance to even if it wanted to.

The other notable thing from the Fed statement was the expectation of one more rate hike, a hike many had discounted.

Gold reacted negatively and the dollar rallied. A trend I expect to continue in the near term but only the near term. I also hope this is the trend that leads to the final low in gold that I’ve been expecting.

A short-term knee-jerk reaction that overshoots to the downside and provides the energy needed for a sustainable and historic move to the upside. I hoped that would happen year-end 2016. It didn’t and nothing has happened this year to convince me we’re out of the woods yet.

Back to QT and my simple premise.

QT will lead to a near-term pullback in the major U.S. indices but understand that QT is the Fed’s way of reloading in classic Scarface fashion. The Fed has to raise rates to reload and have bullets left for the next crisis.

The increase in rates and rolling off of treasuries and mortgage-backed securities is the Fed’s way of showing the markets what happens when you look behind the curtain. For all the talk of U.S. debt, the death of the dollar has been greatly exaggerated. It’s just not time yet.

Like Scarface, the end is not in doubt. U.S. rates go higher, dollar-denominated debtor nations start going bust, capital rushes back into the U.S., but this time will be different because the capital flight will find its way back into the U.S. indices — which will provide a safe haven and a return via dividends — back into the U.S. dollar and yes back into gold (albeit in small amounts that will make a big difference).

This time really is different. Game on.

JohnH123's picture
JohnH123
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Thank you, Charles! How do

Thank you, Charles!

How do you see the stock market performing during the time period you describe?

charleshughsmith's picture
charleshughsmith
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a box canyon

The central banks have flown into a box canyon at an altitude of 300 feet while the canyon sides are 2,000 feet high. They have no choice but to proceed with buying stocks and bonds in increasing amounts, i.e. they're trying to climb out of the box canyon. If they let yields/rates rise, the asset bubbles they've inflated collapse, if they cease their buying, the bubbles pop, so TINA rules: there is no alternative.  The question IMO is: do they need a 'crisis' to gain approval for the next increase in QE/asset purchases?  If they reckon they need a crisis to justify buying $500 B a month rather than a mere $200B a month, then we'll get a mini-crash that scares the bejabbers out of politicos, the ruling elites and the technocrat class, who will suddenly see a massive drop in their 401Ks, REITs, etc.

If no crisis is necessary, the market just lofts ever higher--until the aircraft slams into the rock face of the box canyon.

cmartenson's picture
cmartenson
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The Fed's Strategy

Hey I know that the Fed is trying things that have never been tried before, and other things that have failed in the past.

Here's a secret Fed meeting recording that leaked out.

I'm pretty sure this is their logic at present.

JohnH123's picture
JohnH123
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Bull market in stocks?

Charles, it sounds like you are saying you expect the bull market in stocks to continue for another 4 - 8 years, backstopped by the central banks, with a possible manufactured mini crash in 1 - 2 years.  

If we do indeed have another 4 - 8 years of this bull market left, then wouldn’t we want to still be invested in the market?

JohnH123's picture
JohnH123
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Timing

Chris,

Since you have been predicting an imminent market collapse for many years that hasn't happened, how do you see things going forward now?  Would you agree that we have another 4 - 8 years as Charles suggests, or do you still see the collapse coming very soon?

 

cmartenson's picture
cmartenson
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I simply don't know...
JohnH123 wrote:

Chris,

Since you have been predicting an imminent market collapse for many years that hasn't happened, how do you see things going forward now?  Would you agree that we have another 4 - 8 years as Charles suggests, or do you still see the collapse coming very soon?

...but of this I am certain;  if the rules weren't being constantly changed the crash would have happened back in 2011.  And then again in 2016.

But here we are, with new and even more heroic "emergency" measures being conducted all the time.  This has pushed the crash back, and then back some more.

The only positive thing I can derive from this is that it's given everyone more time to prepare, if they so chose.

But the downside to 'buying time' is that the eventual crash will be that much worse.  It's just how things work.  

This could all break with some event, such as a NK war, or it could break with a wayward comment from the German Finance Minister one Tuesday morning.  Such is the nature of bubbles.  Nobody knows or can predict when they will find the pin they are seeking.  

We all know that if the central banks pulled their $150 billion per month "emergency" funding that these "markets" would crash immediately.

My personal bet is that they will continue this financing for as long as they have to.  The 'pin' I am most carefully watching is the price of oil which I think will spike upwards somewhere between 2018 and 2020 on the basis of supply shortfalls driven by a lack of investment between 2014 and 2018.

One can divine a lot, I feel, by understanding this chart of the international offshore rig count.

There's a 3-7 year lag between rig utilization and oil production.  Offshore is a big contributor to new oil at an affordable price (high EROI).

Note the collapse in offshore rigs in 2000 due to oil plunging into the $ teens/bbl(!!).  In 2007 and 2008 oil was in severe shortage worldwide and the price spiked.  Over indebted consumers and countries crashed.  The rest is history.

The next spike hits an even larger wall of debt.  

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