Why the Unraveling Will Accelerate
The comments below are an edited and abridged synopsis of an article by Charles Hugh Smith
Since the pandemic began, Smith has been discussing potential accelerants to the unraveling of the financial system. Catalysts vary from the modest to a broad awakening that the status quo simply isn’t capable of adapting to new realities.
Financial catalysts tend to result in sudden, cataclysmic collapses in liquidity, solvency and sentiment. While the Fed can fix liquidity crises by creating currency, that doesn’t make bankrupt firms solvent or make employers hire employees.
Social-political catalysts are more difficult to reverse, and two are gathering momentum: the failure of the education system to provide workable childcare/learning solutions, and the hope of a V-shaped recovery.
There is a class dynamic in these potential catalysts that few follow to the logical conclusion. When socio-economic distress is limited to the working class, the power structure can safely ignore the brewing crisis, because the distressed workforce has insufficient economic-political power to threaten the rule of the elites.
But when the top 20% of the workforce (which accounts for 50% of all consumer spending and 80% of the citizenry’s political voice) is in distress, the elites better pay attention.
The same dynamic is in play with unemployment. As long as it was the marginal workforce that was losing jobs, the power structure reckoned unemployment was a solution. But as middle-class jobs vanish, unemployment doesn’t pay mortgages, property tax, etc., and the defaults of student loans, credit cards, auto loans and mortgages will start piling up.
As it dawns that the V-shaped recovery is a fantasy, sentiment will slide. The failure of institutions to adapt to new realities will be impossible to deny, and the choices may boil down to opting out (pool resources to hire a private tutor for home-schooling children) or organized revolt (teachers’ union strikes).
Too-big-to-fail institutions are not designed to change. Systems stripped of buffers and feedback are fragile, systems that optimize doing more of what’s failed spectacularly are fragile, systems that are little more than fractals of incompetence are fragile, systems that rely on the artifice of denial and fantasy are fragile.
Fragile systems break. This is why the unraveling is accelerating.