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Thursday, March 03, 2011

Decline of the Imperial economy inevitable

Today I was watching CNBC's coverage of Bernanke's testimony when the anchor came on and went to commercial break. Turns out Ron Paul was next in line for questioning.

Is it a coincidence that CNBC breaks away before Ron Paul gets to ask Bernanke a question? Hardly. The moneyed elite represented by the network don't want a Paulian assault on the Federal Reserve. More specifically, the money power--to borrow the Depression Era phrase--works by deception. It's like the infamous quote in The Usual Suspects, that the devil's greatest trick was to convince the world that he doesn't exist.

In our age of smoke and mirrors, the idea is that no one in the public should know the scope of market manipulation, the free ride granted those with the most influence in Washington. Probably the most damning piece of evidence is manipulation of the Dow. I don't know who else noticed but from about mid-2010 on the Dow almost never really fell. I mean a few times, it went down, but ever since that anomaly where the Dow plunged some 1,000 points in just a few seconds, it appears that someone, somewhere is doing things. That someone of course, would be the Plunge Protection Team, a real life organization called the President's Working Group on the Capital Markets.

That group was created in the aftermath of the 1987 crash to prevent excess volatility in the financial markets. It may not be such a great leap to assume the Plunge Protection Team has expanded its mandate to further the illusion of market stability when in fact there is none. Making the PPT's job easier is the fact the 40% of the Dow Jones Industrial Average is based on two companies in the index: 3M and IBm I believe they are.

The point here isn't that the markets are being manipulated--they always have been, in some fashion, but rather whether investing in such a synthetic environment is such a good idea. I would say that any market which seeks to tame volatility is ultimately creating more of it, as pent up demand to sell grows. Better that these urges play out. Instead we have a government that seeks intervention continuously, in matters both near and far--like in Libya. Rather than let nature run its course, our arrogance is such that our leaders believe we need to garner some benefit from every event, turn every crisis into opportunity.

I'm going to take a risk and call the market. I don't know if it can plunge, with the Plunge Protection Team so active and diligent. Yet just like the Revolution we're seeing unfold across the Middle East, so too are unshakable forces gathering, storm clouds not on the horizon but directly overhead.

I'd look for a correction to begin soon. A foreign crisis would be a likely cause, being our profile is so utterly pronounced on the world stage. Wise it would be to assume we can't control everything. there are real limits to the projection of AMerican military and economic power. We will meet these limits and they will force us to change. We can only accept the fact that we've reached the boundaries of empire and begin the inevitable march back home.

All empires die. They wither, contract, they sputter to a final end-some not overnight, others in an instant reduced to a mere shadow of their former glory. The point isn't how long it takes an empire to die, but how painfully the empire acquiesces to its own demise.

In their death throes, the empire must choose between denial or reality, accepting or procrastinating the changes that must come. For years I've talked about hard limits imposed on American empire. Economic limits, military limits, diplomatic and legal hurdles and shortcomings that seal the ultimate fate: one of decline and death. Of course, exceptionalism feeds denial; an alcoholic is no different in saying he's not an addict than an empire feigning invincibility in its final days. Like Charlie Sheen, accepting reality may be too painful. Easier it is for the brain to presume that one is beyond the limits that affect us all, special. In his way Sheen was admitting the size of his ego when he said his mind couldn't be understood by normal brains. Isn't that the nature of greed...of celebrity? The exact same forces that compel greatness by confounding limits and convention end up distorting reality.

In achieving greatness we all too often lose our humility. We begin to believe it's different for us. In the case of empire, mass delusion exists, at one time both covering reality and distorting it, denying the real facts while producing myths and lies, the largest among them being the fantasy that American empire will never die.

Empires don't die off entirely, but the illusion that's central to the sustained lie does end and with it the empire's former majesty like some forgotten mythical beast. Even now, you can taste the former glory in places like Rome, and at the Parthenon in the heart of ancient Greece. Visit those places, shut your eyes, and you'll swear you can hear sandals on the cobblestone, subdued voices, smells, amid a swirling city now long dead, at least to the unimaginative. They can be remembered for their greatness in the imagination but not with open eyes.

Empires have risen and fallen with a regular cadence over the centuries. No matter how far they were separated--by seas, time, and continents--each empire possessed a common characteristic: they all thought they'd last forever. It's actually the hallmark of empires to believe they're invincible.

It's been central to the philosophy shared by its citizens from the days of Socrates forward that the chief criterion for membership in the empire is pride. Pride in the achievements of empire. They unite and define the people, contribute to the sense of national pride and buttress the duplicity of war by smothering it in militarism. Swallowing with pride, the armies of empires charge off blindly into the dust of conflagrations long forgotten.

Military power is the first obvious contradiction. In our present case, do we see a increase in outcomes from additional war? Or is the outcome highly questionable, yet phrased a victory, pyrrhic? Results do matter in military matters. If the result of intervention doesn't expand or strengthen the empire, it weakens it. And because of pride, nationalism, people don't want to accept the possibility of anything less than total victory. So they don't imagine anything less.

To rationalize the outpouring of useless effort and cost on military adventurism, all manners of excuses are given. Easier it is to just pretend this is what we wanted than accept we didn't know what all the fighting was meant to achieve. Do we have any sense of closure? Or instead do the wars just drag on endlessly?

One big reason is hard power--the inflicting of harm or intimidation by force of arms by one nation on another. The more hard power that's used, the less benefit it has. As long as the dictator can stay in power, the hard power assistance in the form of military aid complements the use of force. Eventually though we see the tables turn like they did in Tunisia, or Egypt or Libya. The people grow tired of the abuse of power, and react by storming the castle gates like here in 1776, or the Bastille in 1789.

Another area of denial is the economic shrinkage of empire. Empires of course have their expansionist phase, where all the revenue concentrating back to the capital makes the empire an attractive location to invest and trade. Over time, empires tend to overtax. We'll see this now in America, as an inevitable consequence of too much public debt. Borrowing for public works is becoming harder. Overseas credit is drying up. In my last post about the Romans, I noted emperors complaining about the cost of imports-the empire's gold heading eastward.

So bad it is that now the Federal Reserve owns more public debt than anyone else. This says that Federal debt is far less attractive to the rest of the world. When debt becomes less attractive, it correspondingly falls in value. The borrower--in this case, us--must offer more and more interest, a proposition made doubly difficult by increasing the quantities of debt that must be sold out.

With the Federal Reserve as the buyer of last resort, the government can get away with paying lower rates of interest. As long as the Fed can conjure money into existence, it can use it to buy the Treasury's debt. The ride can last until the money itself declines in value, a phenomena known as monetizing the debt. Again, the nature of money is that it must be finite to maintain its value. The more that gets printed, or spent by issuing debt, the less those dollars buy.

Now the velocity of spending may have slowed down dramatically. These are the brakes that so much unemployment offers to what would otherwise be a headlong drop into hyperinflation. By not working, and not earning, and therefore not spending, the unemployed are doing the rest of us a favor. Interest rates can stay low, for at least as long as a Depression-like malaise rules the economy as it does in many parts of the U.S.A..

Now if all those people were to work, they'd earn, and they'd spend. The economy would grow. This in itself isn't inflationary but the increased demand would put upward pressure on prices...too many dollars chasing too few goods. Production would increase to meet demand, and this would accelerate the use of money, the rate at which it circulates through the economy--what is known as velocity.

Right now, the supply of money--which is vast--isn't circulating freely. The banks have it, and they're reluctant to lend. They're reluctant to lend because of risks associated with a stagnant economy and, more importantly, because they're seeking to build up reserves, not only here but all over the world.

The credit crunch put sufficient fear of failure in the financial industry to foster greater self-reliance. This is because of the sheer size of the Mortgage Backed Securities market. Derivatives, exotic investment vehicles, allowed financial entities to make vast profits on leveraged debt. By converting streams of future payments into securities, bundling, then selling them, the risk could be transferred away and spread out. Then attaching a quasi-form of insurance called CDSs, the issuer of debt securities could claim to be offering risk free investments that could pay off if the issuer were to default.

Now none of this derivatives business is helping things. Instead, the giant risk pool has been shifted from private banks to the Federal Reserve. Even as Bernanke and Barney Frank were explaining how profitable TARP was, we see massive piles of mortgage-backed debt languishing on the balance sheets of Freddie and Fannie, the equivalent of nationalized zombie banks absorbing bad debt and offering good backed by none other than Treasury and your taxes.

I don't think we should be congratulating ourselves about how great the response was to the Credit Crisis. There's a singular reason for this: the Credit Crisis isn't over. All that debt still exists, albeit held by a different set of investors. The total notational value of all derivates exceeds the total supply of money (some 97% of which exists only in digital form) by several multiples. In other words, the sum total of all which is owed exceeds the total value of all financial assets on the earth. And the Fed-designed response to the sudden devaluation of all the debt back in 2008-9 has been to issue more debt.

Who benefits? Certainly not the people, who didn't have any say over repealing Glass-Steagall and reawakening the crazy Casino capitalist environment of the Roaring Twenties, which led to...drumroll...the Great Depression.

Now things may not look as bad as all that...to the believer. To the dispassionate outsider, the US market has little more than a facade of stability, a mockery of honest, steady growth that market mavens have prattled on that we have since the days of "green shoots." Eager has the financial media been to spotlight European crisis. It's not the time to point fingers, when our house is in such disarray. It's the time to respond rationally to the systemic problems that created an environment where the Credit Crisis could occur.

The Dodd Frank bill will reconstruct some of the regulatory element that served us so well for so long. Yet the underlying fiscal problems are there. Many of these are self-inflicted like the state budget crisis in Wisconsin, brought on by a series of corporate tax giveaways given by Governor Walker at the start of his tumultuous reign. Starve the beast, and the money isn't there to help Democratic causes. Starve the beast enough and some day the money won't be there for things like schools and Medicaid. Starve it even more of needed funds and infrastructure collapses, like a Banana Republic.

The pie is shrinking in our economy. We have two choices: accept our economic decline or not. If we choose to accept a problem, like the problem drinker, we've taken the first step forward towards recovery. If however we deny that we've hit an economic wall--largely brought on by spending too much on our military, and letting corporations control their own tax policy--then we're likely to recommit the sins of the past. These would mean giving financial corporations even more control over the political process, which can further foster policy changes favorable to corporate interest at the expense of the general public and our nation's fiscal health.

Rather than passively sit around and wait for their jobs to dry up, many Americans have chosen to begin protesting. Now personally I have little interest in protecting anyone from budget cuts. For one thing, I'm sufficiently unimpressed with the quality of public education. And even if parents are mostly to blame for declining achievement, we don't have to pay so much for so little back. I wouldn't confuse the necessity of offering public education--a public goal--with self-preservation. Now if my pension were on the line, I'd protest. Of course I would.

Collective bargaining has been a successful tool in promoting the financial welfare of the nation's middle classes, which have been the traditional root of our nation's financial strength and economic stability. As more and more wealth migrates to the top, we're seeing an America that has two sides. And just like what we see in places like Iceland, which has dumped their bankers, the people can through the sheer force of numbers dictate terms if they're persistent enough.

With no unions to balance against the power of corporate control over our government, these industrial complexes will be free to further their agenda. De-unionization has long been a central agenda of the right. Now we're seeing the revenue pie shrink because of reduced taxes posing as a "pro-business" political stance. Of course no one wants to pay taxes themselves, just like no one wants to lose income. The lower taxes group offsets those on the public till clamoring for everything they can get.

Limits are limits, and if revenues can't increase--typically due to willful intervention by politicians on behalf of cronies--then someone has to pay. Or not. But sooner or later they will, at least at the state level where they lack printing presses for their money. And even on the federal level, the hard limit is the cumulative impact over time of so many newly minted dollars being spent, in what is typically an inflationary event but in these days tempered by massive unemployment. Devaluing our money will impact prospect for long-term economic growth.

I'm not offering any financial advice, but the typical response to all my morbid predictions would be to reduce equity exposure now. As for metals, I see the possibility of forfeiture, a topic I hope to continue to research going forward. Problem with investing in metal is that they don't do anything, and incur higher transaction, storing, and transport costs. Besides, unless you hold the metal yourself, can you really say that you own it?

I've been reading that Comex silver supplies are less than the total amount of Comex contracts outstanding. If Comex can't fill orders with actual silver, then the value of the silver on the open market could be higher, at least for those who actually own it and can physically offer it for sale.

When the music stops, any investor in paper metals could sue the exchange for failing to meet its contractual obligations to provide silver. This legal action would restrict Comex's ability to make good on its deliveries to all its clients, being that all its silver would likely be tightly controlled by a court-appointed overseer. Physical metal prices could soar, but certainly not on an exchange that's oversold its holdings. Unsure of their eventual settlement, many investors would likely settle for pennies on the dollar, glad to get out of the Comex entirely. Of course in time the metal would regain its attractiveness but perhaps the whole idea of owning metal that exists in paper form only would fall from grace.

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