Wednesday, June 24, 2009

About Face

Greetings good citizen,

Do you smell at rat? After months of insisting that everything economic was ‘on the mend’, all of sudden they (the punditry) have done an abrupt about face…

It seems all of those ‘less bad’ bits of economic data that were heralded as ‘green shoots’ were actually pretty horrific after all.

As you are already well aware, the reason behind the sudden reversal has less to do with saving ‘credibility’ than with the potential to spark widespread civil unrest for not occasionally making a passing acknowledgement of reality.

That and our boy Ben Bernanke is up for ‘re-appointment’ in January.

Understand that Uncle Ben is the one who started the ‘green shoot’ nonsense as a defense of his (so far) reckless financial policies that obviously aren’t working.

Let’s phrase this question differently: How many of you would be willing to ‘take it to the streets’ if Obama re-appoints ‘Helicopter Ben’?

He got away with appointing Geithner and Summers because we (foolishly) believed he had the situation under control. That these ‘out of touch’ policy advisors would in fact be ‘advising’ him and not making policy, as they obviously are.

This, naturally, points to another ‘rat’ entirely but let’s not go there, the whole damn thing is confusing enough.

At this point in time, Mr. ‘Green Shoots’ looks like an idiot…but he is apparently a ‘useful idiot’ for those calling the shots.

Which is to say not only will there not be a ‘recovery’ in the second half of this year, if things continue on the path they’re on, there won’t be a recovery in the second half of this century!

In fact, there won’t be a recovery period! (But I’m pretty sure you already realize that.)

Not that there won’t be tons of ‘eyewash’ to the contrary, like we’ve seen since the crisis began and those of us old enough to know better realize the crisis started long before 2007, it goes all the way back to 1980, if not 1972.

History provides us with countless examples of capitalism turned predatory and tonight’s first offering gives us a peek at the precursor to the ‘Zimbabwe syndrome’.

Then we arrive at tonight’s second offering which makes a hell of a lot more sense after you’ve read the first part.

Postscript on the Inflation and Deflation Question

First, thanks to the many readers who mailed in a link to the book by Adam Fergusson at the Mises Institute. It is a good read, and free is much more attractive a price than $1,000 which is the price for a hard copy in good condition on Amazon. I purchased my own copy some years ago at a bookstall in Brighton. The online version is available here.

As to the discussion on inflation and deflation, I feel the need to make it clear that that inflation / deflation is a "policy decision" in a fiat currency regime with nothing preordained. In other words, either outcome is possible within a wide range of gradation. Most outcomes in the real world follow a similar pattern, not black and white but many shades of gray.

But not all things are equally possible. "Life is a school of probability."

If the Fed came out tomorrow and raised short-term rates to 22% we would see a stronger dollar and the beginnings of a monetary deflation.

This arbitrariness of a fiat currency is intellectually difficult for most people because their domestic money has a natural patina of 'confidence' and objective value to it.

It is an assumption, one of those shorthand beliefs that help us through day to day life without having to intellectualize and analyze every aspect of every decision. It comes from using that currency as a store of wealth and medium of exchange, almost every day of our life (presumably even an American can take a day off shopping occasionally) and assuming that it (money) will hold its value in the short term.

So we tend to invent 'rules' for the creation of money that preclude 'arbitrariness' and help us maintain our assumption set against 'black swan' thinking. When an assumption begins to conflict with the underlying reality it can become a 'prejudice.'

It is this very arbitrariness that is the goal of the central bank and statists whose preference is aggressive financial engineering. The limitation on the Treasury/Fed in a fiat regime is ultimately the value of the dollar and the sovereign debt. While people accept it, they can print it. This is a soft limitation with much more latitude than a hard external standard.

Having added the important caveat of possibility, given that the US is an enormous net debtor, it would be suicidal for the monetary authority to choose deflation as the Japanese did for their own particular reasons.

Almost all money issuing entities will choose inflation if they have the option. Sometimes they lose control of the process, the confidence game, and fall into a more serious and pernicious inflation and even hyperinflation. But this is not 'the norm.'

Our own Fed is rather arrogant these days, fully confident they know how to stop inflation given the Volcker experience. This may cause them to fall into a serious policy error on the inflationary side. In many ways our fate is no longer in their hands, but in those of our creditors, such as the Chinese.

Paul Volcker gave the odds of inflation in the current crisis as 99% for, allowing only for a serious policy blunder against it.

I wanted to highlight the Weimar experience to debunk the 'output gap' and the 'bank lending' restraints on the inflationary outcome. Much of what we hear on the financial channels smacks of propaganda, the 'confidence game.'

As for the need to create more debt, let us just say that the Fed and Treasury would have yeoman's work to monetize the debt obligations the US already has, which recent estimates put at north of 40 trillions. Even with inflation at their backs, the government will be pressing the default button selectively but surely in the coming years.

The most probably outcome is stagflation, perhaps quite serious IF the economy and financial system is not reformed. This could have the vestiges of a monetary deflation were we not a net importer and net debtor.

This is an important distinction between the US experience and that of Japan whose industrial policy is well known to be in the bureaucratic clutches of MITI and the various kereitsu. Japan sought to stimulate the economy while aggressively exporting their domestic productivity and inflation.

So, deflation is possible, but not probable. If people understand that, I will feel that I have done a good job in raising the level of understanding about monetary economics.

But isn't all this debate and too often name-calling amongst the bloggers a distraction from the real problem facing the average person, in the same sense as Paris Hilton, Survivor, big time wrestling, the McLaughlin Group and American Idol?

The banks must be restrained, and the economy brought back into balance, before there can be any sustained recovery.

This is as close as I’ve ever come to having a financial expert point directly to the ‘purely hypothetical’ nature of money.
If there is one thing people consistently fail to grasp it is that money isn’t the ‘fixed and immutable’ substance they ‘imagine’ it to be.

We think a buck is a buck…until we start moving that buck back and forth in time. Which is to say a 2009 ‘buck’ (in terms of purchasing power) is worth less than three cents of what a 1913 dollar would buy, yet both are ‘represented’ by very similar looking pieces of paper.

Much has been made over the public’s ‘reluctance’ to save. A big part of this is due to the ‘average’ person being unable to earn enough interest on their money to offset the rate of inflation.

You put a buck in the bank and withdraw it two years later you’ll only get 95 cents back. Which is to say you’ll get a whole buck back but it will only buy 95% of what it would have bought had you spent it immediately.

If you’ve got tons of money, there are ways of beating this ‘penalty’…but if you don’t then there isn’t. Which is to point out that it would take many (perhaps too many) years of ‘privation’ to accumulate enough to purchase a bond big enough that the interest rate does better than the rate of inflation.

And since the rate of, er, ‘depreciation’ is accelerating, most of us won’t live long enough to accumulate such a sum without experiencing a ‘windfall’ that puts us over the top.

So it is that the ‘utility’ of money is becoming less and less.

Work harder, work smarter and still make less.

For most of us ‘saving’ has already become an ‘exercise in futility’ and we’re rapidly approaching the point where work will prove similarly frustrating…because we have a huge ‘parasite’ problem.

We have people that have never lifted a finger in their entire lives that rake in more money in a day than you will earn in your lifetime.

I could go on about this for hours but best not to chew up too much of your valuable time good citizen, there’s little ‘profit’ in reading what you already know.

So we arrive at tonight’s final offering, one I didn’t dare to steal so I’ll link to it instead because these economic newsletters are ‘subscription only’ affairs and these guys WILL come after you.

Me likie this ‘King’ fellow, it’s hard not to like anyone that comes right out and calls investors ‘Patsies’.

Remember, these ‘Patsies’ are the same people driving the ‘global race to the bottom’, which might be better termed as the global race for higher ‘yield’…

When it’s all said and done, globalization isn’t about lower prices for consumers, it’s about higher profits for investors!

Globalization wouldn’t exist if there weren’t something in it for the investor that has repeatedly proven they don’t give a damn about the underpaid and over charged consumer.

Thanks for letting me inside your head,


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