It often appears as though we are hurtling towards eminent disaster when we are in fact, inching our way off the cliff. In fact, given the ‘slow motion’ manner in which this sort of thing unfolds, most of you would be surprised to learn we’ve already leapt off the edge and are plummeting towards, er, ‘terra firma’ a.k.a. the hard stuff down below.
Like they say, it’s not the fall that kills you…it’s that sudden stop!
Naturally, we do not ‘appear’ to be falling; haven’t the pundits been assuring us that we are ‘on the mend’ (even if nobody else can see it?) Hell, they just announced that GDP is growing at a blistering 5.7% annual rate…despite unemployment and wages being stuck in reverse.
Which is to wonder if our GDP reporting process has been taken over by the same accounting firm that handles ‘mark to fantasy’ accounting for the bankrupt banks?
If we had numbered the steps of ‘the collapse of civilization’, which starts with the failure/corruption of the ‘justice system’ (How did Bernie Madoff ‘skate’ for almost 20 years? They must not have been looking too hard/hard enough…)
If we count that as ‘step one’ and the ‘alleged collapse’ of the financial markets as step two. (Understand, banks handed out record bonuses AGAIN this year so they didn’t really ‘fail’, did they?) We could stick the number three label on the eminent failure of the global currency regime, which hasn’t happened…yet (but is already underway.)
Ironically, this will let us know when we’ve ‘hit bottom’…it will be like a dog reaching the end of his leash at a full run. Unlike the poor pooch, it is unlikely we will simply pick ourselves up and ‘shake it off’…no, an impact like that is liable to break our neck.
Which is what the engineers of this fiasco are hoping for…(most of them must be plenty frustrated that we aren’t already rioting in the streets, making easy targets of ourselves for the ‘population reduction forces’.)
Sadly good citizen, if you follow the ‘Greed is good’ mindset to its logical conclusion, the ‘extermination’ of the ‘surplus population’ equals ‘more for me’ via the reduced threat to what I have claimed for myself.
It is deeply debatable if this mindset is what separates the ‘winners’ from the ‘losers’ because in absolute terms, we all lose.
Which brings us to tonight’s offering for a look at the perilous state of global affairs:
[Hat tip: Some Assembly Required]
Don’t go wobbly on us now, Ben Bernanke
Barack Obama's home state of Illinois is near the point of fiscal disintegration. "The state is in utter crisis," said Representative Suzie Bassi. "We are next to bankruptcy. We have a $13bn hole in a $28bn budget."
By Ambrose Evans-Pritchard
Published: 8:45PM GMT 28 Feb 2010
The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. "It's a catastrophe", said the Schools Superintendent. [What’s the problem here? You don’t suppose it is the way capitalist commerce funds necessary but ‘unprofitable’ services (a.k.a. taxes) do you? The whole scheme relies on ‘full’ employment. If you don’t have that, it all falls apart!]
In Alexander County, the sheriff's patrol cars have been repossessed; three-quarters of his officers are laid off; the local prison has refused to take county inmates until debts are paid. [Here we have a prime example of gross ‘mis-management’ yet nothing is being done about it…I wonder why? (Understand that the mis-management is NOT at the local level but at the top of the legislative process, in Washington…) So, the problem is national while the ‘suffering’ is localized…and no, printing more money only makes matters worse.]
Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing crises. California has cut teachers salaries by 5pc, and imposed a 5pc levy on pension fees. [Are we rapidly approaching the ‘FU’ point, where it no longer makes sense to keep reporting to a job that doesn’t pay you enough to crack your nut? How long will you keep doing the same job for a paycheck that shrinks almost daily?]
The Economic Policy Institute says states face a shortfall of $156bn in fiscal 2010. Most are banned by law from running deficits, so they must retrench. Washington has provided $68bn in federal aid, but that depletes the Obama stimulus package.
This is not to pick on America. Belt-tightening is the oppressive fact of 2010-2012 for half the world. Hungary, Ukraine, the Baltics and the Balkans are already under the knife. Latvia's economy may contract by 30pc from peak to trough as it carries out an "internal devaluation", ie wage cuts, to hold its euro peg. [An exercise in ‘foolhardiness’ if you ever saw one!]
The eurozone's fiscal squeeze is well advanced in Ireland. Brussels has told Greece to cut by 10pc of GDP in three years, Spain by 8pc, Portugal by 6pc. Britain must slash soon, or face a gilts strike.
The Bank for International Settlements says Britain needs a primary surplus of 5.8pc of GDP for a decade to stabilise debt at pre-crisis levels, given the aging crunch as well. The figure is 6.4pc for Japan, 4.3pc for the US and France. It warns of "unstable dynamics", posh talk for a debt spiral. "Action is needed now." [Geez Louise! Does this explain our heavily doctored, 4th quarter GDP results?]
Indeed, though cutting too fast would tip the West back into slump and kill tax revenues, solving nothing – a risk that austerity priests rarely acknowledge. Pacing is everything. [Um, still a bit wide of the mark, Ambrose! The ‘message’ here is we can no longer do what we’ve been doing, the funneling of income to the top one percent is causing the bottom to, for lack of a better term ‘rot’. Those at the bottom have never, and will not this time, go quietly.]
Mervyn King, the Bank of England's Governor, seems strangely alone in facing the implications of this for central banks, and in seeing the absurdity of a recovery strategy where everybody tightens at once and surplus states keep on dumping excess capacity abroad. "I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can't be true of everybody," he said. [That should pretty well cover the prospects for anyone in an advanced economy looking for work…forgetaboutit! (Sadly, same thing goes for their kid’s prospects for future employment.]
The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract. [Left unsaid is whether or not anyone thinks this ‘neglect’ on the part of the central banks of the ‘developed world’ is an ‘accident’ or not? Looks intentional to me…]
Bank loans in the US have fallen at a 14pc rate this year, caused in part by Basel III rules pushing banks to raise capital ratios. [How this dovetails with the Feds decision to pay interest on those funds is suddenly more curious than it already was…cake, ice cream AND candy all at once! What’s not to like?]
The M3 money supply has fallen at a 5.6pc rate since September. The Fed's Monetary Multiplier dropped to an all-time low of 0.809 last week.
The contraction of eurozone bank credit to firms accelerated to 2.7pc in January, while M3 fell by a further €55bn. Japan's GDP deflator has dropped to a record low of -3pc.
These are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11pc in January to 309,000 units, the lowest since data began, and 24pc of mortgages are in negative equity. [You will note however, that the Stock Markets continue to rise, despite these terrible indicators…]
Fed chairman Ben Bernanke told us in his 2002 speech "Deflation: Making Sure It Doesn't Happen Here" that: 1) Japan's slide into deflation was "entirely unexpected", and that it would be "imprudent" to rule out such a risk in America; 2) "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted"; 3) that a "determined government" has the means to stop deflation, if necessary by use of the "printing press". [It is astounding, in light of this old ‘testimony’ that Bernanke was re-appointed!
Maybe he can play the ‘that was then this is now card’ that most capitalists like to pull out when current conditions no longer favor them. The ‘death spiral’ of falling wages and prices is more closely related to profits than ‘costs’ (considering everything is ‘free’ from nature and labor (plus mark-up) is included in the price. These greedy bitches need to be slapped…hard!]
Yet here we are, facing exactly that risk, unless you think one good quarter of inventory rebuilding has conjured away our debt bubble. The one-off inflation blip caused by a doubling of oil prices is already fading, revealing once again the deeper forces of deflation. Core prices fell 0.1pc in January. They plummet from here.
So why has Bernanke broken ranks with King and begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008? Have critics in Congress and the media got to him? Has China vetoed QE, fearing a stealth default on Treasury debt?
Don't go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench – as they must – their central banks must stay super-loose to cushion the blow. Otherwise we will all sink into deflationary quicksand.
Okay, quickly, Mr. Evans-Pritchard’s point diverges considerably from mine, although this article is quite useful in highlighting the ‘scope’ of the global train wreck.
The inflation/deflation debate becomes moot when all local currencies fail. A dollar is no good if nobody is willing to trade something of value for it. You may indeed find yourself trading your whiskey for somebody else’s gunpowder.
Silver & gold will be trumped by lead…because money isn’t the only thing doomed to fail. It will not be the dollar in your pocket but the gun in your hand that will become your most reliable ally.
At the end of the day good citizen, it always has been ‘A matter of trust’…and ‘somebody’ has been working real hard to prove they are ‘untrustworthy’…who do you suppose that would be?
Thanks for letting me inside your head,
Gegner
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