William Buckler, with his Privateer report, once again establishes that in the pantheon of newsletters, he and Kiril Sokoloff are untouchable at the very top. In his latest piece, Buckler deconstructs geopolitics, finance, economics and explains the plutocrats' behavioral modeling in a way fre else seem capable of doing. For anyone confused what all the recent events out of Korea, China, Europe, and the US mean, read the following.
WHAT ARE WE TO WATCH FOR?
Is it not ironic that after nearly two years of international discussions, all supposedly aimed at nurturing the economic “recovery”, the innocent observer of current events is being snowed under trying to keep track of it all? The European “sovereign debt crisis” has once again been pushed to the fore. Dissension in the Fed ranks has been revealed with the minutes of the latest FOMC meeting, the one where QE2 was initiated. The Chinese government is threatening price controls while warning their banks that the “quota” of new loans for 2010 has been met already. NATO is actually inviting Russia to join so that they can all point their missiles “somewhere else”. Politicians everywhere are battling to maintain their “authority” while their subjects grow ever more fractious.
Oh, and the two Koreas have decided to lob some shells at each other.
On November 23, surveying the gyrations on world markets in the wake of the Korean shelling(s), one US fund manager was quoted as saying that it was - “A fear day. There’s a tremendous amount of bad news to absorb.”
“Absorbing” The News:
Sadly, this is all that most people have time to do. If one was inclined to watch them, every “developed” nation has 24-hour TV news broadcasts. Those who don’t have such coverage have ready access to those who do. And, of course, the internet never stops. Its advantage is that a lot of the news is neither “official” nor officially approved by those who are intent on making sure that nobody does any more than “absorb” the news.
As a topical example, take the exchange of shelling on the 38th parallel, the border between North and South Korea. This incident took place at 2:30 PM Korean time (half past midnight in Washington DC) on November 23. In the English-speaking press, it was universally reported as a North Korean attack or assault on South Korea. The condemnation was instant, unanimous and choreographed.
What actually happened was this: South Korea was in the middle of a nine-day live-fire exercise by their navy near the “Northern Limit Line”. This is a maritime border drawn by the UN which North Korea does not recognise. Yeonpyeong, the island shelled by the North Koreans, is just south of that line. The North Koreans claimed that as part of their live-fire exercise, South Korea had fired shells into their territory. South Korea denied this, saying they only retaliated after the North began to shell.
This, by the way, is the second similar incident over the past year. The first one never even rated a mention. This one is being called the most serious incident since the end of the Korean War. But when you don’t want people to think about what is REALLY going on, inducing fear is a great ally.
A Small Example Of A Pervasive Situation:
In April 2010, the US and South Korea staged a live-fire exercise 15 miles south of the demilitarised zone. Officials from both the militaries insisted that this was NOT a warning to North Korea. The date of the exercise, which had been planned for months, was the birthday of the founder of North Korea, Kim Il Sung and a national holiday. The US commander, William Graves, had picked the date. When asked about the provocative nature of picking that particular date, he replied, “I didn’t realise it was his birthday until last night, when somebody happened to mention it to me. It is truly a coincidence.”
Transparently ridiculous statements of this nature are par for the course. They are indulged in by the powers that be in every nation on a routine basis. They are blandly offered to the news media and equally blandly and unquestioningly reported. From there, the expectation is that if they are noticed at all, they will be “absorbed” by the great majority as the background noise of modern events.
Clearly, the April exercise itself was designed to provoke North Korea. Clearly, the date chosen was designed to maximise the provocation. This latest “incident”, the North Korean shelling on November 23, came after days of South Korean live-fire naval exercises within a few miles of the border. It also came less than two weeks after the G-20 heads of state summit - held in Seoul, South Korea - broke up in acrimony and disarray. Few global regimes are as reliable as North Korea when it comes to providing a distraction as and when required. And today, distractions are required like never before.
International Crowd Control:
North Korea is one of the very few nations left in the world in which total control over the populace is wielded by the government. It is a one-party military dictatorship whose leadership has been handed down literally from father to son ever since it was created out of the Soviet occupied part of Korea in 1948. It is a creation of the “cold war” and the only nation that remains intact and unchanged almost 20 years after President Reagan’s “Evil Empire” - the USSR and its bloc - collapsed in 1991. If there is a nation on earth in which the people are totally innocent in the actions of their government, that nation is North Korea. It is kept intact by both China and the US for one simple reason. It is a “bogeyman”.
The English term “bogeyman” has its equivalent in almost every language on earth. But whatever the language, it historically defines an imaginary and threatening figure used by parents to frighten children and thus keep them in line. Modern child psychologists stand aghast at such practices. But modern governments don’t bother much with children because they don’t vote or pay taxes or protest too much.
For adults, the role of parental “guidance” has long since devolved to the state. Here, the practices against which our child psychologist protests so vehemently are used routinely. When the adults threaten to get out of line, they are laid on with an ever more indiscriminate trowel. Today, everywhere one looks - whether at relations between nations, economies or international or domestic financial markets - the bogeymen are proliferating as seldom before.
The Ballot Box Rebellion:
Look at any national election anywhere since the formative days of the GFC in early to mid 2007. You will find that the ruling party or coalition has either been defeated or has seen its majority reduced to a wafer-thin margin. That in itself is not seen as a fundamental threat by the establishments in these nations. What they DO see as a threat, though, is the growing tendency to throw out the incumbent regardless of his or her political affiliation. This was seen in Australia where an election in August resulted in a “hung parliament” with independents holding the balance of power. It was seen even more clearly in the November 2 US mid-term elections with the rise of the “Tea party”. In this election, incumbents by the score were summarily turfed out of office. Once this process starts, the next step is to threaten the unelected government - the bureaucracy. And this threatens the parental state itself.
“Security” - Its Purpose And Its Cost:
What is it that all us “children of the state” get in return for being duly terrified at all the bogeymen which are thrust in our face on a continual basis? We get security, of course. We see it everywhere we go. We hear it every time we listen to a political speech or a news broadcast. We read it in everything from financial prospectuses to geo-political analyses. You will be “safe” - if you do what you’re told.
On an actual or physical level, security has a long record. In the lofty realm of political oratory, WWI was fought, according to President Wilson, “to make the world safe for democracy”. On a more mundane level, it was fought to prevent the enemy from tearing the people limb from limb. The Allies reported that German soldiers were cutting off the hands of babies and crucifying non-combatants. The Germans reported that the allies were poisoning German wells with plague germs and putting out the eyes of German captors. The longer the war dragged on, the wilder these (entirely false) claims became.
Nowadays, of course, the actual war is against “terror”. The physical war is in the process of moving from Iraq to Afghanistan. Iran and/or North Korea are being kept in reserve . The psychological war is fought on the home front, mainly by means of terrorising (or attempting to terrorise) the populace. The most obvious example in the US is the recent notoriety of the Transportation Security (there’s that word again) Administration or TSA. It seems that their “security” methods may finally have gone too far.
The TSA was formed after the 9/11 attacks. It is one of many agencies - the Department of Homeland Security is another - created by the government to take advantage of the outrage and fear caused by 9/11. According to the US Congress, the TSA was set up to eliminate the risk of “terrorist attack” while flying. The TSA grew with amazing rapidity, even for a government agency. It began in January 2002 with 13 employees. A year later, it had 65,000 employees. The cost of running the TSA is enormous and the cost in terms of inconvenience, delay and sheer exasperation to the flying public is incalculable. Or is it? With the TSA’s latest deployment of full body scans or as an “alternative”, very invasive “frisking” techniques, the resentment has boiled over. All of a sudden, a growing portion of the public is mad as hell and isn’t going to take it anymore.
There comes a point where the practice of invoking “terror” rebounds upon those who invoke it. True to his character and consistency, Ron Paul introduced legislation titled the “American Traveller Dignity Act” to Congress on November 17. The act is designed to remove the provision of “security” from the government and return it the entities it most effects, the airlines themselves.
After limited success in trying to sell his latest program of monetising government debt, Fed Chairman Ben Bernanke went off on a new tangent on November 19. In a speech to the ECB (of all institutions) in Frankfurt, Germany (of all places), Mr Bernanke declared that the term “quantitative easing” as a description of the Fed’s latest policy is “inappropriate”. Mr Bernanke’s preferred substitute was “securities purchases”. How magnificently innocuous. After all, everybody does that, don’t they?
If you have ever bought a debt instrument of any nature or a common or preferred stock, you have indeed bought a “security”. That is and has long been the generic term describing almost any type of paper instrument tradeable on the markets. Even the ones which have long since become worthless are still called “securities”. The message is obvious, intentional and long since been taken for granted.
If you want to be “secure”, buy government approved and regulated “securities”. If you want to be REALLY “safe and secure”, buy government-issued debt paper “securities”. They must be safe. After all, the Fed is officially buying them. Ron Paul has introduced a bill to Congress (which has little if any chance of becoming law) to remove the provision of physical security from the clutches of government. But entrusting financial security to government is very much more dangerous.
Another “Bogeyman” In Focus:
We are sure you have noticed the resurrection of the European sovereign debt crisis over recent weeks. This new chapter (with Ireland replacing Greece as the villain) has surfaced in the global media and on global markets in the wake of the Fed’s decision to proceed with another round of Treasury debt monetisation. It has led directly to a turnaround in the US Dollar and has put a floor under the faltering secondary market for US Treasury debt paper. It has also deflected attention from the avalanche of condemnation - international and domestic - which greeted Mr Bernanke when QE2 was announced.
It is true that Ireland (like Greece) is a fiscal basket case. It is true that the Irish banking system (like its Greek counterpart) horribly overextended itself in a booming real estate market which has long since gone horribly bust. These things were known well before the global credit freeze of late 2008. They were known when the Irish government took the unprecedented step of guaranteeing ALL the deposits in its banks. They have been known ever since.
So why is the “Irish Card” being played now? A November 22 headline from Bloomberg makes the answer clear: “Treasuries Rally as Moody’s Ireland Outlook Spurs Safety Demand”. The issue here is not that the fiscal and banking mess in Ireland (and in Greece) is not real. It most certainly is. The issue is that this mess is GLOBAL. The more pressing issue is that the nation which has done least, so far, to address the problem is the US, the cornerstone of the global system.
You Can’t Eat IOUs:
When the mainstream media talks about the growing “problem” of government deficit spending, they always focus on nations which are having trouble servicing their debts. The issue of actually “repaying” the debt is seldom mentioned. If it is, it is taken for granted that the debt will be repaid - sometime in the indeterminate and nebulous future. Further, most mainstream media examinations of the fiscal problem facing any particular nation measure the annual deficit as a percentage of Gross Domestic Product (GDP). What is not pointed out is that the government spending which this borrowing makes possible is a component of that same GDP.
Government spending does not contribute to the creation of wealth in an economy, it inhibits it in direct proportion to the amount of that spending. That is true even when there is no borrowing involved, with the government running a genuinely balanced budget. Government creates no wealth, it simply confiscates it from those who do. The situation deteriorates rapidly when government spending exceeds government “revenue”. The dead weight of government then falls not only on present production but on future production. The higher the debt grows, the further into the future the burden stretches.
Government spending has no place in any measure of REAL economic growth. Government borrowing is the greatest economic threat to REAL economic growth. Once government borrowing is established as a prime component of the statistic (GDP) that purports to “measure” economic growth, then gradual economic impoverishment is assured. Once government borrowing is deemed to be the most important component in re-establishing economic growth, financial collapse is assured.
That is why the European nations have opted for what is called “austerity”. Portugal, the latest nation to be singled out in the sovereign debt crisis, has already cut its deficit almost in half (by 47.3 percent) over the first ten months of 2010 as compared with the equivalent period in 2009. Every other European nation is on the same path. Only in the US are the government and the central bank both clinging to the old economic orthodoxy that it is possible to borrow one’s way to prosperity.
This is the simple fact which makes US Treasury bonds THE most risky investment imaginable at present. And this is the reason why “crises”, both geo-political and financial, are cropping up with increasing regularity everywhere EXCEPT the US. The bogeymen are being worked harder than ever.
This Is Not Rocket Science - It Is Well Understood:
On November 13, the day after the G-20 meeting ended, the UK Telegraph ran an article by Mr Edmund Conway (who we quoted in our previous issue). “For the past few months, the world’s major economies have been sleepwalking their way towards another crisis. ...It isn’t merely that the summit failed to come up with any decent solutions; it failed to diagnose the problem itself. ...the international monetary system has failed and there is no one willing or able to come up with a reconstruction job.”
The problem is recognised. The inability and/or unwillingness of those in political power to tackle it is recognised. The consequences of NOT tackling it are (grudgingly) recognised. But the only genuine way forward (see our previous issue - Number 666) to a REAL solution is dismissed out of hand.
In the same article, Mr Conway again brings up the “Gold standard” as a demonstration of the WRONG way to “fix” the current failure of the international monetary system. His minor objection is that tying one’s money to Gold still leaves one vulnerable to inflation or deflation depending on how much Gold is dug out of the ground in any given year. This is facetious nonsense. The US government alone borrows far more “money” in one year than the present $US value of all the Gold ever mined in history.
More serious, from Mr Conway’s point of view, a “Gold standard” would also mean the end of banking as we know it because Gold circulating as money is incompatible with fractional reserve banking. This is absolutely true. Fractional reserve banking is the practice of lending out a multiple of the “reserves” that a commercial bank keeps with its central bank. It is a universal practice among commercial banks the world over. It is wholly inflationary, being in essence the creation of a multiple of the bank’s deposits out of thin air, that multiple being determined by the central bank’s “reserve ratio”. It was, until the GFC hit, the prime engine of global credit creation.
But the most damning condemnation of a “Gold standard” - according to Mr Conway (and every head of state and central banker in the world) - is that adopting Gold as money would mean that governments could no longer “adjust” interest rates. This is also absolutely true. It is also the second best argument there is why Gold as a circulating international standard money is vital in ANY real solution to the present global financial crisis. Next to their monopoly control of what is used as money, the most pernicious power in the entire arsenal of government intervention is their ability to manipulate interest rates. This is the power which has led directly to the fiscal crises now breaking out worldwide.
What is the best argument as to why Gold should be re-introduced as money? Very simple. Government cannot print it or create it out of thin air by “borrowing” it. Because they cannot do this, their power OVER their people is severely curtailed. Gold circulating as money is an essential bulwark of both economic freedom and political liberty. It deprives government of their means to RULE.
What Do We Have To Watch For?:
The fact is that all the vital components of the modern monetary system, the one Mr Conway says has failed, are listed as sacrosanct. According to the arguments from politicians and the mainstream financial media, certain components must be retained in any “viable” monetary system. Governments must be able to create money out of thin air by borrowing what they do not dare confiscate. The commercial banks must be able to create money out of thin air by lending out a multiple of the money entrusted to them by depositors. Central banks must be able to create money out of thin air by manipulating interest rates so that existing borrowers can service their debts and new borrowers can be induced to go into debt. Whatever new system emerges must retain all the essential features of the present system.
As long as that “argument” lasts, the situation will get worse and the bogeymen will proliferate. This will go on as long as the rest of the world continues to cling to the US as the “heart” of the existing system. How long is that? That’s what we have to watch for.