Consumer spending is the bedrock of the global economy, and consumer spending depends on expanding debt and leverage. Once that subsystem fails, consumerism and the global economy grind to a halt.
The failure of any critical subsystem in an organism triggers a catastrophic, fatal decline.
It doesn't matter if the rest of the critical subsystems are
functioning at optimum levels; the failure of even one essential "part"
leads to death.
The metaphor is easily extended to machines, where a perfectly sound engine will fail once the oil pump ceases functioning.
The cliche is that a chain is only as strong as its weakest link. The
conventional wisdom is that the U.S. economy is so large and diverse
that the failure of any one part will have only limited consequences on
the economy as a whole.
But this belief was undermined by the financial crisis of 2008, in which
the apparently "limited" implosion of subprime mortgage debt dominoed
into a full-blown global financial crisis.
Conventional wisdom confuses redundancy and complexity. The
implicit foundation of the conventional view (that the U.S. economy is
so large and diverse that the failure of any one subsystem will have
limited negative effects) is a belief that the system's complexity
offers intrinsic redundancy: that is, if one part of the economy
underperforms or even vanishes, it will quickly be replaced by the
expansion or emergence of some other part.
This view can be distilled down to a belief in a sort of "automated
redundancy," that capital and labor that is displaced by failure in one
sector will naturally flow to a replacement sector.
This belief system fails to grasp the critical roles of financialization and consumerism in the economy.
The two are of course intrinsically bound together, two sides of a
single coin: consumption depends on expanding credit, leverage and
assets, and financialization depends on consumers' expanding debt
service and collateral.
When financialization fails, the consumerist economy dies. This is what is happening in Greece, and is starting to happen in Spain and Italy.
The central banks and Central States are attempting resuscitation by
issuing credit that is freed from the constraints of collateral. The
basic idea here is that if credit based on collateral has failed, then
let's replace it with credit backed by phantom assets, i.e. illusory
collateral.
In essence, the financialization system has shifted to the realm of
fantasy, where we (taxpayers, people who took out student loans,
homeowners continuing to make payments on underwater mortgages, etc.)
are paying very real interest on illusory debt backed by nothing.
Once this flimsy con unravels, the credibility of all institutions that participated in the con will be irrevocably destroyed.
This includes the European Central Bank (ECB), the Federal Reserve, the
E.U., "too big to fail" banks, and so on down the financialization line
of dominoes.
Once credit ceases to expand, asset bubbles pop and consumerism grinds to a halt. And since ever-expanding consumption is the bedrock of the global economy, the global economy will also grind to a halt.
There is no magic redundancy in a complex economy that ultimately
depends on the functioning of a single subsystem, financialization, i.e.
the permanent (and thus eventually exponential) expansion of leverage
and credit based on phantom assets and illusory limits on risk.
As noted yesterday in
Financialization's Self-Destruct Sequence, the one critical
subsystem of the economy (along with liquid petroleum fuels) is
self-destructing before our eyes if we look beneath the surface chatter
of propaganda, bogus official statistics and officially sanctioned
manipulation of stock, bond and currency markets.
As I observed in We Are All Muppets Now,
everyone with a stake in the Status Quo wants the
resuscitation/reflation to succeed, by whatever means are necessary,
lest their piece of the pie vanish along with the phantom assets and
illusory guarantees.
These expectations of security and wealth have been slowly raised to
lofty, impossible-to-meet heights, and the inability to meet those
expectations will inevitably lead to the wholesale destruction of
institutional credibility: Heightened Expectations and the Collapse of Credibility.
Everyone who benefits from the continuation of financialization hopes it
will continue expanding and thus save their piece of the Status Quo.
But systems that self-destruct by their very nature cannot be fixed by
waving dead chickens around and declaring "we will do whatever it takes
to save the Status Quo."
This magical-thinking Cargo Cult mentality is the result of expectations
exceeding the resources and surpluses of the real world: rather than
accept losses, we prefer to place our faith in "leaders" who have
painted radio dials on rocks and are busy declaring that they are now in
contact with the gods of permanent prosperity, and that the gods will
magically restore the broken machine.
Alas, it's all artifice, theater and stage tricks: the assets are still
phantom, the collateral nonexistent, the guarantees empty and the power
illusory.
Source: When the Weakest Critical Part Fails, the Machine Breaks Down
