MACRO ANALYTICS - December 2012
Red Sky at Night, Sailors Delight,
Red Sky in the Morning, Sailors take Warning!
We have a new era dawning in Global Monetary policy. It is a new day with the monetary skies already red.
Within 90 days the captains of monetary policy have steered the world into uncharted waters and on a course that history warns us against.
Federal Reserve: QE3 "Unlimited" and QE4 within 90 days,
ECB: OMT "Uncapped",
BOJ: QE 10 and the newly elected Prime Minister Abe's mandate for "Inflation at any cost"
BOE: UK's newly appointed BOE Governor, Mark Carney's Monetary Evan Rule targeting.
These untested and newly commissioned captains all have PhD's from the finest Economic schools in the world, but they clearly have not studied nor grasped the key lessons of history.
Old Lessons Being Relearned
The following lessons, in the following sequence, should resonate with all who are clearly watching, listening and paying attention to what is going on around them, and not what the press 'conjures up' and the political apparatus 'spins'.
1- It starts with LIVING WITHIN OUR MEANS.
2- The Understanding of the Critical Importance of SOUND MONEY
"It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically, it belongs in the same class with political constitutions and bills of rights."
The Theory of Money and Credit (1912),
Austrian economist Ludwig von Mises
3- The Maintenance of Money as a STORE OF VALUE
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks...will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered....
The issuing power should be taken from the banks and restored to the people, to whom it properly belongs"
4- Being Aware of the MORAL DECAY that begins to happen when we veer from these previous tenets
"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it"
5- Knowing the UNAVOIDABLE conclusions it leads to
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved"
Ludwig von Mises
6- REMEMBERING the Central Lessons of History
The problem is WITHIN OUR SOCIETY
"A great civilization is not conquered from without, until it has destroyed itself from within. The essential causes of Rome's decline lay in her people, her morals, her class struggle, her failing trade, her bureaucratic despotism, her stifling taxes, her consuming wars."
Will Durant, The Story Of Civilization III, Epilogue, 1944
"A system of government where the least capable to lead are elected by the least capable of producing, and where the members of society least likely to sustain themselves or succeed, are rewarded with goods and services paid for by the confiscated wealth of a diminishing numbers of producers".
7- The resulting INEVITABLE ROADMAP
Not having learned these lessons, our Monetary Captains have set us on a course of Monetary Malpractice that leads to:
- Increasing Authoritarian Control and Central Planning,
- Crony Capitalism, Corporatocracy which increasingly feeds off an ever expanding state, while stifling open competitive innovation,
- Financial Repession, Moral Hazard, Unintended Consequences and Dysfunctional Markets, and
- Statism breed through the forces of Collectivsm and Complexity.
Doomed Middle Class
The engine of prosperity is SMALL BUSINESS and a strong MIDDLE CLASS. The economic foundation is presently under unprecedented assault. In the last 15 years, the shift from defined to contributory benefits, a housing collapse, exploding education costs, a crushing shrinkage in real dispoable income, and growing 'financial insecurity', have left the US middle class paralyzed.
Growing Social Stress
EQUALITY & FAIRNESS has been broken.
Whether the growing hoards of frustrated and unemployed youth, worried retirees unable to garner any earnings on their life's retirement savings, the increasing ranks of "part time worker" or the squeezed employed worker with lost or reduced benefits and unmatched cost of lving increases, there is a historic disparity between the "haves and have nots". Corporate profits are at record levels against GDP, while labor against GDP continues to plummet. There is a palpable sense of inequality and unfairness?
RULE OF LAW is in jeopardy and the US Constitution is in peril.
Our transition from more-or-less free country to police state is accelerating.
- The NSA's Utah Data Mining facility,
- Ever-tighter restrictions on offshore accounts,
- The Internet "Kill Switch",
- The Patriot Act's many assaults on the Bill of Rights,
- The Militarization of local police, (Equipment, FEMA Graduates ... the new NDAA's "indefinite detention without trial")
- The spread of Drones for domestic surveillance (FAA planning for 30,000 by 2020)
- The NCTC's (National Counterterrorism Center) " Disposition Matrix" - Kill Lists
... each has a role in the high-tech updating a very old idea: that the state is paramount and the individual a slave to public order and national power.
Why is this happening now, rather than in 1950? ANSWER: We're reaping the whirlwind that always accompanies fiat currency. We created a central bank in 1913 and freed it from the constraint of gold in 1971. Give the government or the large banks the power to create money out of thin air and you eventually create a dictatorship.
"Eventually" just happens to be now.
SOCIAL CONTRACT is breaking down
The Political Foundation of the status quo in America is based on a Grand Bargain of Complicity between the top 25% who pay approximately 90% of the taxes, and the bottom 50% who draw on the benefits that stem from government. James Madison, in the "Federalist Papers", outlined this complicity in the "Tyranny of the Majority". What is becoming painfully evident is that the political elite in America have falsely over-promised on the entitlements that can be delivered, which is now surfacing in the political turmoil of the Fiscal Cliff negotiations and has the potential to quickly lead towards a constitutional crisis.
This Grand Bargain is now rapidly fraying as 75 million baly boomers begin retirement and find that the promises made to everyone cannot possibly be met. As the Fiscal Cliff crisis is highlighting, for those who can read between the carefully crafted lines, funding for Social Security, Medicare/Medicaid, National Security and Interest on the debt is consuming more than can be realistically raised through taxation.
To collect enough tax revenue to avoid deeper debt levels would require over $8 trillion in tax collections annually. Expropriating the entire income of the top 25% of households that pay almost 90% of the tax and all corporate taxes would only bring in $6.7 trillion.
"The actual liabilities of the federal government -- including Social Security, Medicare, and federal employees' future retirement benefits -- already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion".
Chris Cox and Bill Archer, Former Congressmen - WSJ 11-26-12
Claims on welfare and disability programs are skyrocketing at the same time that the demographics of an aging populace are causing 10,000 people a day to enter Social Security and Medicare, the two costliest government programs. Meanwhile, the upper-middle class that pays most of the taxes has been slammed with lower income and a devastating drop in their housing-based net worth. Compounding this is the fact that the disillusioned wealthy have slowed dramatically their invested CAPEX (Capital Expenditures) in productive assets in the US.
The 2008 Financial Crisis which quickly morphed into a Global Economic crisis is now entering the Political instability phase, where the broken grand bargain and social contract is going to greatly impact the attempts by the global Captains of Monetary, Fiscal and Public Policy to steer a safe course.
FINANCIAL > ECONOMIC > POLITICAL = SOCIAL CONTRACT
As a larger percentage of the public becomes dependent on government entitlements, transfer payments and employment, the helm will be pulled from the Policy Captains' hands.
Austerity only works conceptually and as long as it doesn't impact anyone directly. Obviously, this cannot be the case. UK's Prime Minsiter Cameron was elected on a platform of austerity. When it came to implementation, it became quite a different matter. He is not alone.
The Democratic system becomes ungovernable when unsound money is sustained for any period of time. It is the virus that silently cripples it.
The Looming Adjustment
To any sane person, who has a grasp of what is presently occurring, it is obvious that the current state of affairs is unsustainable. The question is how long can the Monetary Captains' misguided policies keep us off the shoals of our economic destruction. How long can policies of "Extend and Pretend", Kick the Can Down the Road" or "Fake it Until You Make It" continue? The answer is likely unknowable, the certainty of it ending badly is not.
The Globalization Catalyst: FRAGILITY AND COMPLEXITY
The financialization, securitization and rehtpothecation of almost all our systems, the explosion of an unregulated, offshore, off balance sheet, off exchange and opaque $639 Trillion SWAPS markets, along with a $67 Trillion Sahdow Banking System on a $70 Trillion global conomy should beg some questions.
The complexity of the interwined and interdependent global Financial systems gives us a clue to what lies ahead.
All these systems are fragile and not robust. They have never been stress tested. They were never designed, but rather evolved in Darwinian fashion. Minor set backs and adjustments simply allowed for more layers of complexity to be rapidly and randomly added. So far, there has not been a catastrophic collapse. The probability of this not occurring is diminishing exponentially.
It will occur. It is only a matter of time. The internet and potential cyber attacks almost guarantee a triggering event.
Market Signals Are "Bright Red"
2012: Calm Before the Storm
2013-2015: A Market Clearing Event
2016: Sorting through the Debris
The charts are clear about what lies ahead based on our current path. Eventually, all this will end badly.
History is very clear that when something is UNSUSTAINABLE it is INEVITABLE that it will end.
TIME is the only unknown.
It is better to be way too early than one minute too late!