Heightened Expectations And The Collapse Of Credibility

This article was written by Charles Hugh Smith and originally published at Of Two Minds

As the Status Quo manages perceptions to maintain the illusion that lofty expectations can still be met, it widens the gap between reality and those expectations. The inevitable snapback to reality will destroy institutional credibility and fatally undermine the Status Quo.

Yesterday we outlined the interwined dynamics of credibility and expectations (The Keys To Understanding the Collapse of the Status Quo: Credibility and Expectations). To grasp the inevitability of this collapse, we need to explore the heights expectations have reached globally.

Let’s begin with yesterday’s observation that expectations are like debt-money claims on the real world: the claims can expand to near-infinity, but the real world remains stubbornly limited. In other words, expectations are inner states constructed by media and Central State imagery, propaganda and promises, both implicit and explicit. As such, these expectations are claims on the real world.

If the claims exceed the resources of the real world, the expectations will be crushed, and the credibility of the institutions that issued the promises will also be crushed. Once the credibility of key institutions has been lost, the Status Quo is fatally impaired.

Let’s take two American examples: housing and higher education. For at least three generations (roughly 60 years), the Federal government has subsidized home mortgages via guarantees issued by the Veterans Administration (VA), The Federal Housing Administration (FHA) and other agencies, and by offering an enormous tax deduction for mortgage interest–the single largest tax deduction for most households.

The expectation fostered by the real estate industry and this government policy was that buying a house and dutifully paying vast sums of interest for 30 years would yield the foundation of middle class wealth: home equity that could be passed on to future generations.

Before the real estate bubble transformed housing into a speculative pursuit of “easy money,” buying a house was a form of forced savings incentivized by government subsidies. During the bubble, building home equity via decades of payments was fuddy-duddy: wealth could be acquired in a matter of months by leveraging modest incomes into multiple home purchases and “flipping” of properties.

When the debt/leverage bubble popped, this broke the back not just of the speculative expectation of easy, quick wealth but the old model of forced savings. Anyone who buys a house now will still get a tax deduction for mortgage interest, but there is no longer an implicit expectation that the house will retain its value or be worth more than the payments made.

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