God Gave Us Fast Twitch Muscles for a Purpose. n-PANIC => [Negative Volatility = Normalcy Bias] = n-[Bailout]-->Default

1. A super analysis on the psychological response to undeniable reality can be found here: http://watarts.uwaterloo.ca/~sreinis/quantum.html. Essentially, the US Fed's action to pump the markets on a given day which in effect is to destroy the whole basis of a free market is so "shocking" that it results in a "negative panic." The correlation of government action to negative VIX (volatility) is strongly positive, and is plausibly explained and isomorphically identified as normalcy bias.

2. In terms of our general theory of the Great Cycles of Default, we are in the 3rd phase of Default Invariance where the population viewed in terms of law and finance moves microscopically from bailout to bailout, or in shorthand notation, [B][B]. [B] is the domain of the morphism of default, or in shorthand, d:[B]->[B], where d stands for the transformation of default. As this micro-structure multiplies, we get n-[B] or an n-Category of bailouts. But as we know an n-Category is simply a finite number of inputs resolving into a single output. How many inputs do n-Bailouts make to produce the final Bailout?

3. The above question is one of accessibility. Consider the state x, is it possible to get into that state, i.e., does there exist a state x' for which a(x') = x? [See, Lawvere and Schanuel (2009) Conceptual Mathematics Second Edition, p. 138.] For our purposes, is there a final state of micro-bailouts such that we move to the next state of financial innovation? And what would that look like?

4. The movement from the third phase [B][B] ("Bailout to Bailout") to the fourth phase [B][I] (Bailout to Financial Innovation) is not a happy time. It will be a confused mess of punctured equilibria where sovereign authorities will be traded into private wealth. Note how the Greek Euro crisis which is purported to be a banking and government de facto default with Moody's and S&P downgrading Greece to the pitch darkness of C-, where default enters the no-game theory territory of 1 in 3 chances of default within a year, the actual beneficiaries of the IMF, ECB, and any other central bank largesse is to simply increase the profits of hedge arbitrageurs. The financial innovators cannot be denied in the [B]to[I] scenario. The ironic, daresay, sarcastic truth of the bailout regime is simply to push more money through the enlarged money pump of the post-2008 state of the world into the charming arms of the big investment banks and hedge funds. The hedge funds have bought the Greek debt, therefore, the Bailout funds (taxpayers money) are being used to pay interest on debts owed to elite
private parties. Of course, if this is the characteristic of the third phase, and there are only four phases, with the first phase being [I]to[I] or [I][I], what are the micro-steps to the [I][I]?

5. The reaction to [B][I] will be new sorts of "revengeful regulations." For example, the Whistleblower Incentives and Protection provisions of the Dodd-Frank Act provide original informants a minimum of 10% of any and all recoveries above $1 million. For billions of dollars worth of recoveries, the whistleblower wins astronomical lotteries. These regulatory rights should incentivise any and all members of the investment banking community "to take arms against a sea of troubles" and fink, rat, out the violators of any of the 1 million plus pages of code written to implement and enforce the 1933 and 1934 Securities Acts. But the [I]to[I] world state is a bit far away. Now, we are definitely in the [B][B], expanding the left [B] to a n-[B] until we hit that transformative macro-default--but this impending macro-Reset button is so hard to believe.

Normalcy bias is the denial of the need to panic. [In Hoohfeldian terms, this is tantamount to the individual's mistaken belief in his disability to exercise his privilege.] Remember in a wild fire and in a tsunami, God gave us fast twitch muscles for a purpose.