Home Economic Trends No Recession Ever Again? The Yellowstone Analogy – Charles Hugh Smith (12/06/2019)

No Recession Ever Again? The Yellowstone Analogy – Charles Hugh Smith (12/06/2019)

Just as forestry management’s policy of suppressing forest fires insured uncontrollable conflagrations, so central banks’ attempts to eliminate recessions insure a financial conflagration that will burn down the entire global financial system.

The first task of those at the levers of neoliberal global capitalism is to deny that global capitalism is in crisis. 

One manifestation of this is the no recession ever again policy that is the implicit goal of central banks and governments globally. Any hint of global slowdown draws an immediate and overwhelming deluge of credit and currency as central banks slash interest rates, buy bonds and stocks to push markets higher and unleash a tsunami of fresh credit so corporations can buy back billions of dollars of their own shares and consumers can continue to buy vehicles, houses and other goodies.

Neoliberal global capitalism has one unstated law: credit must always expand or the system dies. The rate of credit expansion can increase or decrease but it must continue expanding forever. This is the foundation of the no recession ever again policy: as long as governments, consumers and corporations continue to borrow more, nothing else matters. But as the Yellowstone Analogy illustrates, something else does matter: the financial dead wood of mal-investment, bad debt and excessive speculation is piling up, creating the ideal conditions for a financial conflagration that will consume the entire system. Let’s start with neoliberal global capitalism.

Neoliberal global capitalism has two elements: one is the ideological quasi-religion that everyone prospers when everything is turned into a global marketplace of freely flowing capital, labor and buyers-sellers. The second element is the model of State-managed capitalism which has been in vogue since the Great Depression and the Keynesian revolution: when capitalism’s business cycle veers into recession (unemployment, slowing sales and borrowing, etc.) then the government suppresses recession with monetary policy (quantitative easing and injections of liquidity) and fiscal policy (debt-funded stimulus programs, etc.)

Sounds good, but the Yellowstone Analogy reveals the fatal flaw in this recession-suppression strategy. “Free market private sector capitalism’s” normal business cycle of over-investment and excessive risk-taking is naturally followed by a reduction in debt, the liquidation of bad loans and excess inventory, a trend to reduced risk, etc.–in other words, a fast-burning forest fire which incinerates all the dead wood, clearing space for the next generation of growth. For decades, the operative theory of forestry management was that limited controlled burns– mild reductions of dead underbrush and debris–would essentially reduce the possibility of a major fire to near-zero.

But the practice actually allowed a buildup of dead wood which then fueled the devastating forest fire which swept Yellowstone National Park in 1988. Recessions are like low-level naturally occurring forest fires that cleanse the system of the dead wood of bad debt, mal-investment and excessive speculation. The global financial system has been busy piling up dead wood since the brief fire in 2008-09 threatened to burn down the entire system. 

All the derivatives originated and sold prior to 2009 were supposed to, along with “self-regulating markets” (heh), limit the risks in the financial systems to near-zero. In other words, even as dead branches piled ever higher, various complex hedges would insure no fire in global financial system would ever spread. Meanwhile, the Federal Reserve made sure the slightest whiff of debt reduction or other signs of recession were instantly snuffed with unprecedented low interest rates and abundant government stimulus. But this private and public risk suppression not only failed to eradicate risk–it enabled risk to grow to unprecedented levels. The recession-suppression technique being pursued by governments everywhere are simple: borrow and print staggering sums of money to bail out the private-sector banks which sparked the crisis, and then borrow and print even more money and throw it into the economy as monetary and fiscal stimulus.

Unfortunately, all this credit-stimulus is adding more dead wood to an already vast pile which is choking what’s left of the economy’s living forest. Rather than close down failed banks and businesses, various games are being played to negate the fires of creative destruction which real capitalism needs to thrive; without a write-off of bad debts and risky failed gambles and a closure of overcapacity then the new business cycle cannot take root. Instead of letting the dead wood burn, the system props up zombie corporations and banks that would be destroyed if credit wasn’t “free.” The zombie banks and businesses–the equivalent of dead but still-standing trees–are the perfect tinder for a fast-spreading conflagration that burns everything to cinders. Isn’t it obvious that by trying to make forest fires a thing of the past then you’re actually killing the forest? The same mechanism is at work in the multi-trillion dollar attempts to make financial cycles of over-indebtedness and excessive risk a thing of the past: the no recession ever again policy. You can’t make people and enterprises with little real collateral creditworthy. To shove more debt into the system is to pile more dead wood onto the already-dense pile of dry debris awaiting a lightning strike.

The big conceit here is that borrowing trillions of dollars is risk-free as long as the government is doing the borrowing. That is an illusion: there is always risk when you borrow or print or backstop/guarantee trillions of dollars of risky debt; the risk has simply been transferred to taxpayers, who will soon suffer the consequences. For the crisis in capitalism is not just debt-based–it’s also resource and demographic-based. Back when the Social Security system was designed, it was assumed there would always be 10 workers to “pay as you go” to support 1 retiree. The Baby Boom in the 1950s made that projection reassuringly long-term–or so it seemed. Now that we’re approaching a worker-retiree ratio of 2.5-to-1, the system cannot possibly pay the benefits promised without borrowing trillions of dollars each and every year–and from whom?

Neoliberal capitalism is in crisis for one fundamental reason: the central bank and state have played “the fixer” with monetary and fiscal policy in the belief that risk could be suppressed or even massaged away by spreading it over the entire system. But the excesses of credit, risk, bubbles and overcapacity are now gutting the very middle class which the State relies on to pay most of the taxes. And as tax revenues stagnate, the State and the “private sector capitalism” which depended on passing off its risks and gambles-gone-awry to the State will find the firestorm was not suppressed– the dead wood was only piled higher, so the only possible outcome is an uncontrollable conflagration that consumes the entire neoliberal global system.

The no recession ever again policy is exactly like suppressing forest fires: just as suppressing naturally occurring fires that keep the forest healthy insures a raging conflagration that burns down the entire forest, so too does the no recession ever again policy insure an uncontrollable financial conflagration. Shouting that “we owe it to ourselves” will not stop the conflagration, and neither will any other form of magical thinking.

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