Redefining The "Art Of The (Im)Possible" As The Last Gasp Of A Failed Politico-Economic Regime
Many are quick (and correct) to blame Keynesianism for the current near pre-collapse state of the entire developed world. After all, the economy of the western world now functions strictly on an auction to auction basis (or, as is better known in layman's terms: "living paycheck to paycheck"): a state in which the US Federal Reserve and the global central banking cartel is responsible for making sure that not one hint of possible bond auction failure trickles down to the broader population. The fact that primary dealers, which are essentially the monetization vehicles of the New York Fed, account for taking down well over half of each auction is not lost on those who wonder what could happen in a world in which Ben Bernanke's organization were to lose its power, authority and market intervention capacity. Yet Keynesianism is merely an offshot of a far older thought experiment: that developed by Otto von Bismarck in the aftermath of the Franco-Prussian war 140 years ago. The "welfare state" regime created by Bismark is one that predates Keynesian economics, and serves as the nexus of today's rancid, nebulous and very much destructive intersection of economics and politics, at whose core, like a black hole which no wealth created through honest labor can escape, resides the "central bank" apparatus of status quo perpetuation. Luckily (for most), the welfare state experiment is ending. And as it departs one last time, it will expose the "depredations" of developed world governments for all to see, without the benefit of the cloak of the insurance provided by "welfare state" premises, which made the wealth transfer of 7 generations acceptable to those who knew they could extract at least something in exchange for the fruits of 140 years worth of labor. In his latest report, Bill Buckler, of the very highly recommended Privateer report, explains why and, more importantly, how this will happen.
“The Art Of The Possible”
That quote is attributed to German Chancellor Otto von Bismark, the man who is also responsible for the creation of the modern welfare state. The original “wherewithal” for Bismark’s welfare state came from reparations payments extracted from France in the aftermath of the Franco-Prussian war of 1870-71. Prussia, with Bismark as its Chancellor, was victorious in that war. The victory allowed Bismark to bring together the various German principalities into a German nation. The French reparations allowed him to buy the allegiance of the people by offering them “insurance” against unemployment and the infirmities of old age. This was the welfare state, and politicians all over the world have been following Bismark’s lead ever since.
Otto talked about “the art of the possible”. He did not elaborate. He did not define what he meant. “The Possible?” - for whom? - by what means? - to what purpose?
Taking It To The Limit:
In all so-called “developed” nations, the welfare state is the mechanism which makes government depredations acceptable to the public. To establish and enhance the power of government, an ever larger portion of wages and salaries are sequestered through taxation and an avalanche of rules and regulations are enforced via government fees and charges. Some “compensation” must be found to make this bitter financial medicine go down without becoming dangerously unpalatable. This is where the welfare state comes in. The only way to ease a situation in which it is difficult, to the verge of being impossible, for an individual to take care of him or herself is to create a situation where the State takes over the role. Or at least the State promises to take over the role, should it become “necessary”.
This mechanism can “work” - for a while - but the result is that there are more people dependent on the State than there are people who are able to create the wealth on which the State depends. This situation is inherent in all welfare states, approaching in most of them, and already here in one. That state is Japan.
In Japan today, 23 percent of the population is over the age of 65. Forty years from now in 2050, given present Japanese birthrates, that will have blown out to 40 percent. At present, the ratio of retirees to working-age Japanese is 35.5 percent. In ten years that ratio will be 48 percent and in forty years (again given present Japanese birthrates), it will have blown out to the literally impossible ratio of 76.4 percent.
Saving the worst for last, today, more than half (56 percent) of Japanese workers rely on financial support from their parents or other sources to cover their living expenses. These are the same people who will, in future, be expected to perpetuate the ever more bloated Japanese welfare state. This stark and obvious impossibility is the current situation in Japan. It will soon be the situation right across the developed world. The “solution” will be a rapidly increasing sell-off of rapidly diminishing “assets”. Most of these assets will be paper claims to wealth which does not exist and never did.
Going Beyond The Possible - With Debt-Based Money:
In rational economic thinking, economic “growth” is only taking place when REAL wealth is being produced faster than it is being consumed. There is not one “developed” nation in the world today where that is taking place. Every one of them is now and has for some time in the past been in the process of capital CONSUMPTION. This is true even in nations like China where massive construction has given an impression of whole new cities springing up from the ground over the past two decades.
The real wealth used in this construction has been consumed, but the means to service, maintain, and eventually replace it has NOT been produced. The mechanism used in its creation is debt created out of thin air. A debt, any debt, is an UNFINISHED transaction to be completed when and ONLY when all capital and interest has been repaid in full. The repayment has been deferred indefinitely.
Take a look at any political program of “stimulus” undertaken anywhere in the world. What do you find? You find a government acquiring the required economic goods and services by issuing IOUs, known in more polite circles as government bonds. You find these governments selling these bonds for “money”. This money, in all cases, must be accepted in “payment” for all debts, public and private. The money is “legal tender”. It is money because the government says it is and forbids the use of anything else.
The bonds and the “money” in which they are redeemable are DEBT-BASED. Since that is true, the activities governments “finance” with this paper are also debt-based. They cannot be anything else. Government produces NOTHING in the form of REAL wealth. The point has long since been reached right around the world where the servicing of all this debt-based government activity has been eating up the existing store of real wealth. We are living in a global era of capital consumption on a massive scale.
This guarantees that these debts will NEVER be repaid in the wealth which was consumed by them.
Exploring The Possible - Sound Money:
First things first. Money is a medium of exchange. That is ALL it is. The other attributes popularly associated with money are secondary effects of its efficacy as a medium of exchange. In modern economic textbooks, money is defined as having three (sometimes four) “separate” functions. Besides being a medium of exchange, it is also said to be a unit of account, a store of value, and a standard of deferred payment. But two of these “functions” are inherent in money’s basic facility of being a medium by which goods and services can be exchanged. The other, the idea of a store of value, is true of any unconsumed economic good, not just money.
For almost all of recorded history, economies have worked by means of indirect exchange with money as the one item common to all exchanges. Without money, economic calculation is impossible. Indirect exchange in which units (defined by weight) of money are exchanged for goods and services brings forth prices expressed in terms of units of money. These prices are the raw material of economic calculation. Most economic goods, especially raw resources, can perform many different services or be a component in many different kinds of production. But how can we find the most economical use of the good in question? That is the role of economic calculation. It is not infallible, the future is uncertain. But as long as the money employed is SOUND, the prices formed by exchanges in the market give the means by which economic calculation can be made. Tamper with the money and all prices are falsified.
Exploring The Impossible - Debt Used As Money:
A sound money is a defined unit (gram, ounce, pound, kilogram, tonne) of the economic good which has proven (in exchanges between individuals) to be the most easily tradeable good. A government never has and never will CREATE a sound money. What they can and have done is to arrogate to themselves, by law, the ability to decree what will be used as money - or else! When a government does that (and sooner or later all governments in history have done it), the path to an UNSOUND money is assured.
There are two ways to acquire wealth. One can produce it or one can take it from those who have produced it. The first method has often been called the economic method. The second method has many names. It has been called stealing, or usurpation, or expropriation, or “eminent domain”. Whatever, the description, there is one constant. It has always been called the political method. A government cannot produce but must consume in order to function. It must extract the means from the people it governs. That is true even of a government pared back to its essential services of the protection of life and property. But when government IS pared back to those limits, its costs are minute by modern standards and the burden of paying for it is easily bourne. A government which protects against criminal acts is cheap at twice the price. A government which indulges in them becomes, over time, impossible to afford.
And because it is impossible to afford, a new method must be found to “pay” for it. When taxes and charges prove insufficient, government can no longer live off the wealth its subjects have already created. It must live today off the wealth they are expected to create tomorrow. It must BORROW. “Money” created in the act of incurring a debt is UNSOUND by definition. It cannot function as a medium of exchange because no exchange has taken place. It cannot cancel a debt because it is itself a debt. It is said to be based on the “full faith and credit” of the nation which issues it. But neither faith nor credit has ever brought an atom of REAL economic wealth into the world. What unsound money literally does is to put the future “in hock” to the present. Sooner or later, the present catches up. That is what is happening all over the world today. And it is unsound money which has done it.
Nobody would accept a promise of indentured servitude for themselves and their progeny in return for something of no value. Yet that is what unsound money promises, and nobody has any choice in the matter of taking it in exchange for their goods. That is bad enough in itself, but when prices become increasingly distorted as the amount of debt “money” increases, the “art of the possible” falls on its face.
An Illustration - What Is REALLY “Growing” Today?:
When contemplating the antics of modern central bankers in general and the US Fed and Mr Bernanke in particular, it is best to keep some things in mind. First of all, there were historical periods of high renown when such practices as alchemy and phrenology (the claimed relationship between character and the shape of the skull) were taken seriously and practiced by honoured “professionals”. Secondly, the practice of providing “bread and circuses” for the masses has a long history. And perhaps most important of all, the vital motive force in human history is ideas. The more outlandish the idea, the more justification is required to “sell” it and the more exalted become those who do the selling.
The problem is that the message of those doing the selling is getting so garbled that it doesn’t seem to be working anymore. On the one hand, you have the IMF recently doubling its global “growth forecast” for this year. On the other hand, you have central bankers everywhere, led by the Fed, talking in public about the likely need for further “stimulus” by means of monetising their government’s debt paper. The polite term for this is “quantitative easing”. The accurate term is inflation.
How can an economy be “growing” in an era of capital consumption? The answer is that it can’t. When modern economists and central bankers measure economic “growth”, what they are doing is adding up prices. That is how GDP is derived. What they are actually measuring is not an increase in production, it is a decrease in the purchasing power of money which has resulted in higher prices. The purchasing power of money is being depleted because it is being created out of thin air.
The Fed’s “Mandate”:
Like all central banks, the Fed has a “mandate”. The original idea was to provide an “elastic currency to meet the needs of business”. That has grown to encompass all economic activity. This was inevitable given the fact that control over money DOES encompass all economic activity. In its most recent legislative version, passed in 1977 and amended in 1978, 1988 and 2000, here is the Fed’s “mandate”:
“Federal Reserve Act”
“Section 2a. Monetary Policy Objectives”
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee SHALL MAINTAIN LONG RUN GROWTH OF THE MONETARY AND CREDIT AGGREGATES commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
(Emphasis by The Privateer)
The emphasised part of the above quote is the meat of the matter. That task alone IS - and always has been - the Fed’s mandate. As the depreciation of the US Dollar worsened, that mandate became ever more important. Once the US Dollar became a purely fiat currency with no official link to sound money at all, it became crucial. This “modern” version was first legislated in 1977, six years after the US Dollar became a purely debt-based currency. It has been adhered to with religious fervour ever since.
The problem for the Fed and all other central banks today is that they have used up all the means with which to “maintain long run growth of the monetary and credit aggregates”. That is the major reason why Mr Bernanke is so terrified of the spectre of what he calls “deflation”. When all prices and all economic calculation are based on money based on debt, the only way to keep the system functioning at all is to maintain the prospect of the soundness and eventual repayment of this debt. The only way to do that is to maintain the perceived value of the collateral which supposedly underpins this debt. But, as we pointed out in our last issue, most of this collateral is itself debt paper - notably government issued paper.
The Fed is facing the end of the road for the “art of the possible”. In the US, another political hurdle is coming up on November 2. After that comes the countdown to print or perish time.
The Cracks In the Facade Are Opening:
A September 27 headline from the UK Telegraph newspaper reads as follows: “Savers told to stop moaning and start spending”. This referred to a TV interview given by the deputy governor of the Bank of England, Mr Charles Bean. Reportedly, Mr Bean said that savers could afford to suffer and should not expect to live off the interest on their savings. He went on to say that a big part of the strategy of lowering official interest rates to the vanishing point (0.50 percent in the UK) was to force savers to start depleting their capital because their returns on investment were insufficient to meet their living expenses.
In short, the British central bank is doing everything it can to leave those who have managed to accumulate capital with no choice but to consume it. No clearer illustration of the desperate straits of the modern “money managers” could be imagined. While there is anything left to squander, the central bankers will NOT give up on their desperate efforts to grow the “monetary and credit aggregates”.
Needless to say, those who HAVE managed to produce more than they consume in the UK were outraged by both the TV interview with Mr Bean and the Telegraph story which reported on it. As one man put it: “For years we have been told to put money aside for retirement only to find that interest rates have sunk and now we have to use our savings just to pay the bills.” That is indeed what Britons are finding, the latest statistics show that the amount they save has shrunk by 20 percent since the start of 2010.
The idea of “perpetual bonds” goes back to the 18th century in the UK when they were issued as “consols”. Some of these still exist but the idea is even more tenacious. From the 1750s until the end of WW II - a span of two centuries - a “gentleman’s” income was measured by the annual interest payment spun off by his investments in “perpetuals” or “consols” or “gilts”. All were government bonds. All were expected to pay interest in perpetuity. That idea dies especially hard in Britain, where it was born. That is one major reason why Mr Bean’s outburst has been met with such outrage.
Back To The Main Game - In The US:
On September 27, the long end of the Treasury’s yield curve - for debt with maturities from five to thirty years - hit its lowest level since the near financial death days of December 2008. Back then, the Fed’s response was to lower its official interest rate to 0.00-0.25 percent, thus ending the ability of conventional “monetary policy” to resolve the situation. Three months later in March 2009, the Fed added “quantitative easing” to its repertoire. On August 10, 2010, it announced a second tranche of same.
Ever since that August 10, announcement, the US financial markets have been holding a gun to the head of the members of the FOMC. The Dow has been rising steadily ever since it dipped briefly below the 10,000 level on August 26. The market for Treasury paper has also been going higher and higher. For both markets, the rationale is that the Fed cannot afford NOT to embark in a SERIOUS second tranche of “quantitative easing”, one far bigger than the tentative program announced on August 10.
Americans in particular who are rushing into Treasuries as their ultimate form of financial safety should take a long and hard look at what has happened to the UK over their post WWII history. They should also contemplate the fact that a central bank literally monetising the government debt of the nation is the absolute last gasp of the “art of the possible” as far as the unholy alliance between politics and economics is concerned. It is the act of “saving” the system by destroying its foundation, the money.
All that it is accomplishing is to put as “healthy” a facade as is possible on the US economy as the days and weeks wind down towards the US mid-term elections. Elsewhere in the world, almost every election which has taken place since the onset of the GFC has seen a change in government. In more recent times, the tendency has been towards “hung” parliaments or no party forming a government as voters abandon the major parties in quickly growing numbers. Otto von Bismark’s “art of the possible” is not possible when the promises which gave it life in the first place are no longer believed. That is the case everywhere today, not least in the US. What remains to be seen is what will rush in to fill the void.
(And, as always, much more in the full Privateer Report)