On The Edge Of Disaster, The Tail That Killed The Dog

In my 2013 book MEMEnomics, I dedicate an entire chapter to the analysis of the 2008 financial bailout, its shortcomings and the toxic effects it had and will continue to have on the global economy. To get a better understanding of how dangerous and toxic things have gotten today, it’s important to understand the simple, but delicate relationship money must maintain to economic activity. A layman’s statement of this correlation appears in the book and, to my surprise, has been quoted by several financial planners in their newsletters to clients. It also came close to having me thrown out of a conference in Chicago that was organized by the friends of Milton Friedman, the father of Monetarism who popularized the term “Only Money Matters.” These 3 words became the title of another chapter in which I describe the dangers of having a financial sector in an advanced economy decouple from that economy’s measure of productive output. The quote is this:

“Money is to an economy as nutrition is to the human body. When central bankers ignore that relationship by providing more capital that functionally needed, they debase everything capitalism stands for.”

In the fall of 2008, the financial sector was addicted to a gambling problem originated by something called notional assets, which was made worse by the absence of regulation. The growth of this toxic form of finance had thrown the historically delicate relationship between money and productivity way out of balance. This became a phenomenon that threatened to collapse the global economic order. The entire organism called the global economy, was suffering from  metabolic syndrome and its major organs were shutting down. As this ravenous beast ran out of money, it came home begging for a bailout from a government whose regulatory institutions had become impotent and its representatives had no capacity to understand what a responsible regulator should do.

A prudent course of action would have been to rebalance the system by forcing the financial sector to go on a diet. In other words, what was needed in 2008 was a downward revision of the value of the banking industry’s assets, what was historically referred to as price discovery after a market crash. This also needed to be coupled with the decision to allow insolvent banks to collapse or be taken into receivership. This would have allowed the economy to organically regenerate, as the detoxification process would have realigned the financial sector back with productive output. The problem was that instead of our government being the good doctor who saw the long term benefit of these painful and necessary choices, it chose the easy way out and granted the addicts everything they asked for.

One might think this was the end of the story that averted disaster, but the bailout was just the tip of the iceberg on the road to the complete debauchery of global financial systems. Enter Ben Bernanke, Chairman of the Federal Reserve during the financial crisis. Bernanke was considered a god sent to the demigods of global finance as he built his entire career on the argument that the Great Depression would have been averted if it weren’t for Fed policies that tightened the money supply. Desperate for a miracle from the most powerful banker in the world,  leaders and CEOs alike,  embraced this philosophy as their savior. A decade into these unproven grounds of finance and the move seems to be nothing but a long desperate gasp for air.  This linear fallacy from the very top became the catalyst that is now destroying monetary policy and the very virtues that money  historically stood for.

In the years since the financial crisis, the Fed started printing money out of thin air. Sure, they gave these financial instruments fancy names like Quantitative Easing, asset buybacks, and special credit facilities. The list of clever names was endless, but the truth remained the same. A central bank only has two boring tools at its disposal and they must remain boring due to the critical function they perform, and here they are: 1. Regulating the money supply and 2. Controlling interest rates. But this was Bernanke’s Fed, and he had completely exhausted these tools and backed himself into a corner from which there will be no escape. Interest rates were effectively at zero, and the money supply had long lost any relationship to economic output. Additionally, the hope that the toxic assets the Fed purchased, will become investment grade at some point has greatly faded. But, instead of writing down these assets, the Fed extended their buyback programs into 2014.

Here we are, a decade into these policies and a gigantic tragedy is beginning to unfold in front of our eyes. In addition to keeping a steady, fat-rich diet of low interest, and an unimpeded money supply, global markets and the Fed’s balance sheet are full of over-inflated and non-performing assets. This phenomenon has become common among many advanced economies it matters not who is in charge of their central banks.

As of April 2019 the central banks of the top 4 economies in the world, the US, EU, England and Japan have a hugely bloated balance sheet that represents an astounding 36% of their countries’ combined annual GDP. This is unprecedented. It is more than 12 times the post WWII historic average. What this essentially means is that the global economy has been living on borrowed time and that the Fed has been in crisis mode since 2008 and must remain in crisis mode for years or maybe decades to come. It has acknowledged defeat and cannot take its foot off the gas pedal. It is a corner from which the only escape is to keep doing the same. It cannot raise interest rates for the fear of crashing stock markets, and it’s unable to sell the toxic assets it has on its books. These holdings are called  Mortgage Backed Securities that were at the heart of the 2008 collapse. Today they have grown faster than all the other segments of the Fed’s balance sheet and represent 40% of its holdings, or $1.6 Trillion.

The economies that these 4 central banks represent account for over 55% of the total global output and the bigger these numbers get, the higher equity markets rise on a completely deceptive premise that has little to do with real economic output. It is one big bubble that’s making the global economy increasingly more vulnerable to several contagions. One of these contagions could be an economic slowdown that confirms the systemic failure of this end-stage monetary policy where investors  in a panic dump their equity holdings and resort to the safety of cash. The other and more likely catastrophic scenario is if the economy heats up and the Fed decides to raise interest rates to stem the threat of inflation. We witnessed a glimpse of this in 2018 when the Fed raised rates twice and the market lost 5000 points in a few short months.

Whatever wildcards appear, we know one thing for sure, and that is the world’s central bankers have abused every possible tool available to them. Add to that the overvalued toxic assets that caused the 2008 financial crisis which have systemically been legitimized by the world’s central bankers who sanctioned them under different names and repackaged them as legitimate holdings on their books . All these actions  have completed the debauchery of  money. Today there’s a palpable fear about the precarious state of the global economy and central bankers  are quietly beginning to acknowledge their role  in getting us there.  It’s just a matter of time before the whole house of cards begins to collapse.

Sven Henrich, a leading market strategists and an expert on macroeconomic issues describes the central bankers’ ill advised journey of the last decade and the predicament they’re in today  in these terms:

“The capitulation is as complete as it is global and 10 years after the financial crisis there is not a single central bank that has an exit plan. So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure.”  

This destiny wasn’t written in 2008. It was born when the Monetarists rose to power along with Reaganomics in the early 1980s. This is when central bankers drank the Kool Aid that sought to make finance an economy on its own. They fully bought into the idea that financial innovation can take money far beyond  its historically  boring function and made themselves much richer in the process. When the experiment failed in 2008, instead of reversing course, they decided to become even more creative. They manipulated the world’s resources and debauched its financial architecture.  They made the poor ten times poorer and the rich 20 times richer and  didn’t care about the deep damage they were causing  in the long term.

Today, the debasing of a capitalist system based on finance has reached its end state. The tail that has been wagging on a fat-rich diet for the last 4 decades has finally killed the dog. It’s just a matter of when the death certificate will be signed, and who will be brave enough to sign it.





Graves and the Anthropocene

The World Economic Forum published its 2019 Annual Global Risk Report this week, and for the third consecutive year, it points to Climate Change as the most ominous threat to the global economy. Sadly the paradigm this powerful group holds on this issue only has the effect of re-arranging some of the chairs on the sinking Titanic as it seeks solutions for our greatest threat through the narrow scope of economic activity.  What is needed is for these world business leaders to shift their focus from “economics” to “everything that underlies planetary life.” This is quickly becoming the essential Quantum Leap in our values that we must make to ensure planetary survival.

This is a monumental task that’s being undertaken by people and institutions from many different disciplines,  but what hasn’t been considered seriously is the psychosocial approach to the challenge. Specifically, the Gravesian approach. In a recent piece I wrote for Kosmos Quarterly‘s Special Edition on Climate Change, I introduce the possibility of what’s missing from the current calculus on this matter.  Below is a small section of that piece describing the nature of the problem.

In the Gravesian development model, we believe that evolution of human consciousness is an endless quest. It is a psychosocial model that relies on two essential cornerstones that determine how adequately we resolve life’s challenges. The first lies in the problems of existence. It is in how well we identify the depth and breadth of these problems that the necessary Adaptive Intelligence within us (individually and collectively) is triggered and an adequate solution is pursued as our conscious recalibrates at higher levels.

The problem we face today is that human existence so far has been limited to what we call the values of subsistence where we choose to either compete or cooperate, but with little awareness of planetary values. We are not fully conscious of the fact that we are an inseparable part of earth’s ecology. We rarely think in terms of the world being a single organism with its own collective mind and that we are all part of a compassionate, dynamic whole, inseparable from nature.

On our journey so far, we’ve identified our problems of existence to be primarily of social, political, or technological nature. As we exhausted the values of each system we successfully sought solutions from a higher-level system throughout the Holocene with little regard to problems of existence that lay outside our subsistent worldview and therein lays humanity’s biggest challenge.

In his research, Clare W. Graves showed this particular issue to be of utmost concern. His greatest fear was that our species will become complacent as it indulged in the spoils of the lower value systems ignoring existential threats that lay outside it’s conscious awareness thus derailing our emergence back to hunter-gatherer values. He made these predictions in the early 1970s a few decades before climate change became a major concern. Graves also offered an optimistic scenario where we embark on taking a momentous leap in values requiring completely different mindsets capable of responding to problems of existence that ail all forms of life, not just our own.

This is precisely what the Anthropocene calls for since our problems of existence are no longer just sociopolitical or technological in nature. We need to adequately represent the defenseless planet and all her ecosystems. In order to do that we first and foremost must embark on a comprehensive worldwide campaign to become the mouthpiece for the planet. It is in doing so that we gain a fuller picture of our new problems of existence in order to trigger the needed Adaptive Intelligence capable of addressing the degradation of planetary ecosystems.

In order to have more knowledge about this half of the Gravesian model at the level that addresses planetary survival, we must embody earth’s problems of existence as our own. Today, initiatives such as the empowerment of the values of the commons, the green revolution, sustainability practices, and regenerative economics, as noble as they are, they’re operating on partial data, and therefore, much of our Adaptive Intelligence on this issue has remained dormant.


Trapped in First Tier Thinking: The Black Elephant Phenomenon

Recently Quartz Magazine ran and end of the year issue about climate change. While acknowledging that 2018 will be the worst year on record, the authors praised our collective efforts to address the planetary ecosystems issues we’re facing. Should we give a pat on the back for these efforts for addressing climate change from a New Second Tier paradigm? Hardly.

This week a judge in my hometown San Diego rejected the county’s climate action plan in light of the October reports that say things are a lot worse than we initially thought. He ordered county administrators to draw up a realistic plan that is more restrictive than “the worst case scenario” which their pre-October research relied on.

Can that be real? Can matters be a lot worse than what our research shows, and are we ready to take the necessary action and still live within the paradigm we’ve created for ourselves? The simple answer is no, or we don’t know for sure. But we will continue addressing this issue through readily available methods, because if we admit that we really don’t know, we become completely paralyzed. Therefore the Black Elephant Phenomenon, ignoring rare and devastating events that are not hidden but are in plain sight.

I’m a believer in how Albert Einstein captured the nature of the First Tier mind in this simple statement: “We can’t solve problems by using the same kind of thinking we used when we created them”. Yes, let’s reverse that carbon stuff and all will be fine. This, is my opinion is the most complex form of linear thinking, but it remains linear in the face of a problem requiring the anticipation of exponential change.

Mother Nature is the most complex system we will ever be tasked to understand and we have weakened her resilience and ability to forgive. This requires our thinking to be as resilient as that of Mother Nature. We need to anticipate what a complex system in collapse is doing and plan from there.

We are not only warming the planet, we are destroying earth’s species and it’s oceans at an exponential rate. In our First Tier myopia that pleases the Blue-Orange Green Complex, we plant a tree and create ocean sanctuaries and go about our ways trusting that Mother Nature’s resilience will take care of the rest. That paradigm is quickly dying and we haven’t invented a new paradigm that renders our old ways obsolete. We cannot solve our problems from the same values prism that created them and therein lies humanity’s biggest challenge: Having the courage to take a monumental leap in thinking that will show us what we know today to be a Band-Aid solution for an issue requiring major surgery and decades if not centuries of restorative contraction and rehabilitation.




Uncovering the Values of a Regenerative Future