A World of Guarantees
October 6, 2013·0 comments
The Federal Reserve crossed a line it may never uncross. A market support system once kept deliberately vague and probabilistic has hardened into an explicit, unconditional guarantee. Game theory suggests this should create stability. Instead, it locks the entire system into a fragile equilibrium that requires ever-escalating intervention to maintain, all to prevent the one outcome the American regime cannot survive: deflation.
- The guarantee has become the problem, not the solution. Absolute promises create weaker behavioral equilibria than probabilistic threats, which is why Cold War nuclear doctrine worked only when it stayed deliberately fuzzy and credible. Once a threat becomes certain, it invites testing at the margins.
- The Fed cannot walk this back without triggering the collapse it's trying to prevent. Every programmatic government guarantee (Social Security, Medicare, pensions, deposit insurance) becomes politically irreversible once embraced. The system is now dependent on asset prices never falling significantly again.
- Deflation is the regime's true enemy, not inflation or growth. The American political system cannot survive a second wave of asset price declines because the existing guarantees would unravel under deflationary pressure. This, not economic theory, is driving QE's permanence.
- The cost of maintaining the guarantee will compound silently. Structural growth will decline, crowding-out effects will intensify, and the balance sheet will keep expanding, but these costs express themselves as persistent mediocrity rather than dramatic collapse, making them politically tolerable for decades.
- The question is not whether the guarantee will hold but what holding it costs. Neither runaway inflation nor catastrophic collapse is most likely. What's most likely is an "Entropic Ending" of stagnation, where nominal growth just barely sustains the system while nothing actually improves.
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