Longtime correspondent K.B. recently posed a question that is on many minds, including mine.

For the last 5 years, I have been watching the slow train wreck that is our economy. We have been preparing by not spending extravagantly, not being home owners, and more or less being mobile. However, the “perception management” as you call it of the markets and the general economy today doesn’t seem to have an end. I have been waiting so long for the wheels to fall off, a black swan event, or generally to see capitalism take its toll on the existing markets, that I am starting to believe that maybe Mises was wrong. Maybe, in addition to helicopters, Ben does have the magic touch. In short, I am exasperated at the gullibility of the remaining market participants (or perhaps their culpability) and I’m starting to think that the great correction isn’t coming.

Because of that, I’d like to know what your thoughts are on how long the perception management can last. Do you have a notion as to what the key element will be that forces the train off the tracks? Other than silly stuff like logic and simple mathematics, what keeps you convinced of the eventual outcome of our predicament? This isn’t about trading, but more about fatigue.

When I read Status Quo magazines like The Economist or BusinessWeek that exude an oily sheen of permanence, they always make me wonder: how much longer can the patched-together Status Quo continue on more or less as is?

Let's start with the basics: What was easy--papering over every problem with trillions of dollars in "free money"--has been done. That application of wallpaper held everything together, but it can't be repeated; it's no longer as easy to borrow and blow $6 trillion (the Federal deficits over the past four years) or loan $16 trillion to the corrupt, predatory financial system (Federal Reserve loans to banks).

This four-year paroxysm of political and financial expediency has run up against various political and financial obstacles. The European debtor nations would like to repeat the papering over process in Europe, but the notion that a loss of collateral can be repaired with more debt is in the process of being repudiated by reality.

The real problems have not even been touched: the demographics of entitlements based on a shrinking workforce are still impossible, technology and globalization are still reducing the need and value of labor ( Labor Day 2012: The Future of Work), and the overleveraged, over-indebted, parasitic financial system remains solidly insolvent.

The flood of free money has lifted the global economy into “the Zombie Zone” --nothing is extreme enough to trigger a regime-changing crisis. House prices aren’t low enough to trigger organic demand, but they’re not high enough to trigger a collapse in sales. Oil prices aren’t high enough to trigger a real energy revolution, but they’re not low enough to enable a return to cheap abundance. Austerity isn't enough to actually repair national balance sheets and restore trust, but it's not deep enough to unleash a political regime change and renunciation of the unpayable debt.

The Status Quo hasn’t fixed anything, but it has managed to stave off any extreme that would trigger consequences.

As you probably know, The Fourth Turning authors posit the next 80-year cyclical crisis will arise in 2021-22, about a decade away. Various other analysts are predicting some sort of economic low in the 2013-15 time frame.

Two things that were unseen 5 years ago have added resilience to the U.S. Status Quo. Cheap natural gas from fracking has dramatically increased domestic energy and at absurdly low prices, at least for now. NG could double from $2.50/ to $5/ without doing much economic damage, and even double again to $10/ without triggering a crisis. It is abundant enough (though I certainly wouldn’t want a fracking rig in my backyard or water supply) that the constraints of energy price and supply have been loosened to some degree.

A geopolitical crisis could push oil much higher, but as I have posited, minus that sort of crisis, oil could drift lower as oil-exporting nations open the tap to fund their welfare states as demand falls in a deep global recession.

The amount of money pouring into the U.S. from overseas is looking like it might be a major factor in supporting the Status Quo. Four years ago we were all looking at China’s purchases of U.S. Treasuries as something that couldn’t last. It hasn’t, but with cracks forming in Europe and China, billions of dollars of paper wealth are flowing out of those regions and into the “safe haven” of the U.S. and Canada. This is supporting real estate prices in Vancouver, Los Angeles, Manhattan (NYC) other desirable (to overseas investors) cities.

This vast inflow of safe-haven money is enabling the U.S. to sell its Treasury debt with ease. It seems we can run $1.3 trillion deficits with little pushback from the market as long as the U.S. continues to offer a relatively safe haven for wealthy Chinese and Europeans fleeing their own unstable economies.

A recent survey claimed 44% of wealthy Chinese are in the midst of moving their wealth (and offspring) out of China. I suspect this understates reality; it is probably closer to 95% who are shifting wealth and getting foreign passports for themselves and their children. Many people have made staggering sums of paper wealth in China, and there are trillions of euros of “old money” in Europe seeking an alternative to the euro. Gold is good but somewhat illiquid and it doesn’t earn any interest, while smaller currencies lack the liquidity and size to facilitate this enormous transfer of financial wealth. Hence the USD and U.S. Treasuries have emerged as easily accessible places to stash wealth.

Another factor is the vast number of people who support the Status Quo because they want their slice of the promised swag. People don’t want any real change if it means facing the reality that Central State promises are as phantom as the assets; they want their share, and they don’t care how the Status Quo manages to fund it: borrowing trillions from our children, no problem, just give me my Medicare/Medicaid now!

The complicity of the majority is a source of surface resilience and structural fragility: the promises can't be kept, regardless of how often they're repeated or the depth of recipients' faith in the system.

Ironically, crises in other regions will likely accelerate the inflow of paper money to the U.S., further supporting the Status Quo, which now has the resilience offered by cheap natural gas and cheap money.

The odds of some instability erupting globally in 2013-14 seem high, but what the trigger might be remains unknown. The fragility and vulnerability of systems pushed to extremes are like sandpiles: it doesn't really matter which grains finally trigger the cascade; the system's rising instability is the causal factor.

Where does this put us? If the ultimate crisis is another decade away, we might as well enjoy what we can in the meantime and assemble the pieces of a semi-sustainable life: income streams that we own/control, a very low cost of living, and property in areas that are universally desirable, i.e. they have decent weather, surface supplies of water, concentrations of intellectual and financial capital, and ideally, a functioning local government that isn’t hopelessly corrupted by vested interests. Any disadvantages in these resources can be offset by a solid network of friends, family, associates, business contacts, etc., i.e. social capital.

I think it is safe to assume the promises of Social Security, Medicare and pensions will be chipped away by one force or another (inflation, taxation, “austerity,” etc.) and so those who have written these out of their own personal expectations will be psychologically primed for self-reliance embedded in local support networks.

People often ask me whether it is a good time to buy real estate, and the answer depends on issues I cannot assess from a distance. If the total cost of ownership is roughly equivalent to rent, and the property could generate some income (via a workshop, small orchard, spare bedroom rented out, etc.) then the purchase price is not the only factor to consider. Taking advantage of super-low mortgage rates has some potential merit, but income and liquidity must also be factored in.

Can the household pay the mortgage and property taxes if its income is cut in half? If not, then that leaves the household vulnerable to some sort of financial shock. If the locale is desirable to offshore wealth seeking stability, the property is probably much more liquid (i.e. buyers will emerge) than areas solely dependent on domestic demand.

Access to a full-spectrum job market is also valuable, as is “walkability.”

In general, buying into that which is vulnerable to financial, climate, political and FEW (food, energy, water) disruptions will remain a risky investment, while buying into that which is independent of pushed-to-extremes global systems and based on the timeless fundamentals listed above will be less risky—-not risk-free, but less risky.

In general I think it prudent to accept risk that is transparent and open to your own management, and avoid risk that is opaque and in the control of others. The more something is dependent on cheap energy, cheap credit, and some perfection of extreme factors (long supply chains, 100% State funding, etc.) , the more vulnerable it is to instability, disruption and sudden changes in the rules.

Given the number of systems that are operating at extremes, I expect some sort of "second stage" crisis to emerge within the next year, possibly triggered by second-order effects that appear to most people as unintended or unforeseen.

That might create opportunities for those with cash and access to cheap credit, i.e. those who can prove they don’t need credit. We might even get some sort of relief-boomlet once the instability of 2013-15 clears. That relief rally will signal the “all-clear” to most people, but it may well be the final calm before the real crisis unfolds in 2021-22.

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.

We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.

The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.

Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

If this recession strikes you as different from previous downturns, you might be interested in my book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.


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