Home Stock Market Commentary 2022: The Year of Breakdown – Charles Hugh Smith

2022: The Year of Breakdown – Charles Hugh Smith

In other words, our economy and society have been optimized for failure.

If we look at the fragility and instability of essential systems, it’s clear that 2022 will be the year of breakdown. Let’s start by reviewing how systems break down, a process I’ve simplified into the graphic below.

1. Regardless of whether it was planned or not, all systems are optimized to process specific inputs to generate specific outputs. Each system is pared down to maximize efficiency as the means to maximize profits. This efficiency in service of maximizing profits requires trade-offs that only become visible when some key part of the system fails.

The system that ships containers around the world offers a useful example. Shipping containers revolutionized shipping and reduced costs by commoditizing containers (all standard sizes), container ships (specifically designed to carry thousands of containers and container ports with specifically designed cranes, docks and truck lanes / queueing.

It’s possible to load a container on some other craft with a jury-rigged crane, but the efficiency of that is essentially a fraction of the optimized system: the jury-rigged crane will only be able to load a handful of containers, the ship will only be able to carry a few containers, and the likelihood of the containers shifting increases.

The infrastructure and labor are both highly specialized. Calling out the National Guard to speed up container offloading is a useless gesture unless the Guard can deliver more cranes and experienced operators.

The greater the optimization, the greater the fragility as the breaking of any one link brings the entire system to a halt. Throwing in equipment and labor that the system isn’t designed to use will fail.

Virtually every essential system has been stripped of redundancy, resilience, reserves and adaptability as the means to fully optimize inputs, processes and outputs. The system works well if every link in the dependency chain is working perfectly. Should one link go down, the entire system goes down.

2. Cost-cutting has stripped systems of back-up staffing and expertise. Full-time workers have been replaced by gig workjers, contract workers, part-time staff on call, etc. Experienced staff cost too much so they’ve been let go as well, so there is no depth in numbers or knowledge.

3. Management is top-heavy with MBAs and bean-counters with little pragmatic experience or knowledge of the systems they’re managing. Management is optimized to advance those who can generate big profits, not those with experiential skills needed to meet crises in real-world dependency chains, production, breakdowns, etc. So when the system comes apart, managers simply don’t have the knowledge or skills to solve real-world problems.

The skills that are most desirable when everything is running smoothly are useless in crisis. Who do you want to go into combat with, the continuously promoted officer who won high marks for filing reports on time or the officer with actual combat experience who got passed over for promotion because he/she didn’t devote the proper attention to paperwork, meetings, virtue-signaling and derriere-kissing?

Unfortunately the vast majority of our systems are managed by people who lack the long experience and hands-on skills needed to meet cascading crises.

4. Systems are now so complex and opaque that they are in effect optimized to fail in ways that are impervious to quick fixes. Bureaucratic mission drift, virtue-signaling, the erosion of accountability, multiplying platforms and software and the endless expansion of compliance and regulatory burdens have loaded every system with numerous points of failure and procedural friction that contributes little or nothing to the organization’s core mission. As resources are devoted to make-work procedural black holes, the mission decays and collapses at the first crisis.

Stop me if you’ve heard this before: contacting essential services (tax payments, etc.) rarely generates a timely reply, much less a solution; a new bridge or subway line takes decades to build and is billions over budget; software projects intended to streamline complex regulatory processes (building permits, etc.) never work right and end up slowing the whole system down, fraud is rampant, software security is laughably poor….the list is almost endless.

5. Once the system has been stripped of resources, experienced staff, back-up equipment and supplies and loaded with unproductive friction, even a small crisis will bring down the entire system. In the graphic below, all of these resources are the buffer that enables systems to respond to the pressing demands of crises. Once these are gone, the only possible result is systemic collapse.

6. We’ve collectively lost the ability and willingness to deal with crises for which there is no happy-story ending. We only want to hear the optimistic story, the glimmers of hope, the miracle cures, the painless tech fix, etc., and if we get a dose of reality instead, we’re quick to dismiss the bearer of inconvenient news as an alarmist, a doom-and-gloomer, etc.

In other words, our economy and society have been optimized for failure. Drifting along in a daze of disconnected-from-reality complacency we are completely unprepared to deal with realities that don’t respond to magical thinking, optimism, hope and tech fantasies.

My new book is now available at a 20% discount this month: Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $8.95, print $20)

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