"The Wasteland" - How Central Planning Broke All Markets... And What We Can Do To Fix Them
In his latest ruminations in ruination, Diapason's Sean Corrigan does nothing short of a brilliant post-modernist collage of all the fragments of our broken economic reality and capital markets which, just like the defining 20th century poem by TS Eliot (further exemplified by the Flesch-Kincaid reading complexity of Max+1 inherent in both works), summarizes the terminal situation that we currently find ourselves in. And while in The Waste Land, Eliot focused more on the existential breakdown of society in the "entre deux guerres" period, Corrigan does the same for the trader/financial archetype of the 21st century. But all is not lost. Just like the Waste Land ended on a glimmer of an optimistic note by invoking the Three Principal Virtues of the Brihadaranyaka Upanishad (be self-controlled, be charitable and be compassionate) wherein according to the Nobel winning author the germs of social salvation lay in understanding of our own intractable and self-destructive complexities, so too does Corrigan provide an outcome to our mangled reality based on a trio of our own actions which may one day save us from the economic, financial and capital destruction we (through the creeping dictatorial pervasiveness of central planning, but not only) have brought upon ourselves. "What lies broken, we can surely fix, but only if we break in turn the habits of mind and the tyranny of the man-made institutions which we first allowed to break the things we value - our freedom of association, our independence of action, and our individual chance of prosperity."
Must read from Sean Corrigan
So here we stand, exactly eighty years on from the collapse of CreditAnstalt, the run on the Danat bank, and the disastrous abrogation of Britain of sterling's gold status which turned and earlier stock market setback into an enervating slough of Depression.
Here, we stand, almost forty years to the day from Nixon's abandonment of the dollar's pivotal membership of the bastardized gold-exchange standard and the horrifying decade of rampant inflation which followed.
And here we stand, a week shy of four years after the Fed's first, tentative response to the looming CDO/wholesale funding disaster which would threaten to seep away not just those hooked up to the eyeballs in America's grotesque sub-prime bubble itself, but feckless borrowers and risk-insensitive lenders - both public and private -right around the globe.
So let us take stock of what we have wrought in the meanwhile by following mainstream economic exhortations to emulate what we thing the hallowed FDR may have enacted or the venerable Keynes may have ordained, were these two leading lights of cynical expedience and willful interventionism each alive today.
With over $2 trillion in excess reserves parked with the Fed, the ECB, and the BoE; with unsecured, interbank loans for anything other than the shorter of terms all but impossible to obtain; the the thirst for security sporadically driving rates on T-bills, general collateral - even deposits - below zero; with the benchmark LIBOR rates increasingly inoperative and their replacement OIS rates barely standardized - with the spread between the two varying widely and with the latter diverging from supposedly stable official base rates which they are supposed to reflect - it is clear that the money market is broken.
With even short-dated basis swaps between the major currencies wandering far, far from their near-zero normal levels, with countries like Brazil attracting peer group interest for imposing taxes on inflows into and bets on the appreciation of its currency; with the Swiss trying to stem a 7.8 sigma, one-in-300-trillion, two-week move in the currency by aiming to swell sight deposits by 10% of GDP and by showering hapless East European carrt-traders with precious francs; with EUR-USD risk reversals at their most extreme ever, both in absolute terms and as a percentage of underlying volatility - what can we say but that the FX market is broken.
With the DAX - for example - undergoing its own, 6.3 sigma, 7-in-a-billion chance, two-week move - one only exceeded in its compressed magnitude during the Crash of '87; with the peak five days of frantic selling seeing record volume, thanks in part to the less-than-benign influence of the high-frequency trading which hummed along the fibre-optic cabling at triple the normal rate and accounted for up to 75% of overall trades, according to the Nasdaq's biggest execution broker, it is no wonder the VIX doubled in only four days, a jump only exceeded by last May's HFT-led "flash crash." No wonder either that several European and Asian authorities saw fit to intervene, either to prop up prices or to outlaw short selling, or both. The only inference to be had - the equity market is broken.
With the ECB being forced to take drastic - and arguably illegitimate - action to cap the 3-month, 225 bps rise in the Spanish-Bund and the concomitant 270 bps rise in the Italy-Bund spread; with US Treasury bonds plunging amid the rout to record low nominal and negative implied real yields, all the way out to 10-Years; with record low mortgage rates forcing duration-hungry investors and hedgers to receive long-dated swaps at minus-40 bps; with record levels of junk issuance having been conducted at record low yields, before a frozen market saw spreads explode a 5.6 sigma, 218 bps to stand 50 bps wider in just ten days - to cite just a few instances of a widespread disruption - it is fairly evident that the bond market is also broken.
With the ratio between the two main oil benchmarks - WTI and Brent - having crashed from ts well-behaved, long-term, pre-crisis ratio of 1.07:1 +/-0.2, to hit 0.79:1; with gold trading to a 5% premium to platinum for only the second time in at least the past quarter-century; with base metals showing less and less correlation between price, curve shape, and visible inventory as funding games and warehouse manipulations distort trading patterns; with industrial commodities being driven more by CB inflationary-"Risk On" considerations than by the specifics of usage and production - perhaps we must admit that the commodity market is broken, too.
With the widespread frustration of the masses spilling out onto the streets of the Maghreb, Egypt, the Levant, the Gulf, Spain, Greece, Eastern Africa, Bangladesh, Chile, and others; with even the mighty Chinese Communist Party quailing before the popular wrath excited by the divisive symbolism of the high-speed rail crash; with 80% of surveyed US voters saying the country is "headed down the wrong track"; with widespread unease in Germany at the executive's dismissal of the citizens' understandable reluctance to bankroll the wider EU; with the emerging realization that three generations of an ever-encroaching, 'tutelary deity' welfarism have not only sapped the vitality out of the economic organism, but have bred out all vestige of responsibility and self-restraint from the teeming, unweanable mass of perennial dole-puppies it has whelped - it is therefore undeniable that politics-as-usual is broken too.
With the glaring failure to predict even the possibility - much less circumstance - of the recent Crash and with the even more foreseeable failure of its tired old, rehashed nostrums of ending the slump by means of an inequitable programme of corporate welfare, inflationary "unorthodoxy", and the unleashing of the debt-spewing monster of the state to gorge itself upon such things as individuals and private concerns no longer care to consumer, it should hardly be controversial to asset that mainstream macroeconomics - and the reputations of the many panderers to power who practice it - are equally broken.
Breaking the mold [or Datta. Dayadhvam. Damyata]
Whatever our individual pre-occupations with the specifics of this collapse, we must bear in mind that, amid all the wreckage, there are countless millions of hard-pressed souls, each trying to earn an honest living by first identifying and then satisfying the needs of their fellow men in the best, most cost-competitive manner they can accomplish. In the attempt to do so, the overwhelming majority of these strivers cannot fail to provide a living to others, too - whether by employing their labor directly in their own factories and offices, or indirectly, by buying in the goods and services these latter work to supply at the workbenches and computer docks of other hirers of their effort.
In their constant struggle to peer into an uncertain future so as to estimate whether anyone will buy their output and, if so, at what price; and then to decide what they can afford to pay in turn for the necessary means to meet this potential market, they cannot in any way be assisted by the ramification of all the multiple breakages outlined above.
If they cannot trust the signals being sent to them about the cost of inputs or the acceptable charge for outputs; if they cannot assume a certain stability in the rent and availability of working capital, or rely on the calculus of securing longer-term funding; if they and everyone with whom they deal are being subject to wild swings in currency rates and commodity prices; if there is no clarity about the framework of regulation, the structure of legislation, or the outlook for taxation - but only a well-founded pessimism that none of these are likely to change for the better; if they begin to see themselves as the targets both of material expropriation and pseudo-moral condemnation - are they then likely to gove full reign to their innate spirit of enterprise, to fully express their characteristic get-up-and-go and, by so doing, give the rest of us a greater opportunity to sell our wares in the marketplace for skill and sweat?
Hardly, and therein lies the rub. For if we are to pull ourselves out of the quagmire into which we have stumbled, it will be to little purpose to take three short, backward steps before hurling ourselves deeper int the morass, not just with renewed energy, byt while carrying the growing weight of mud which clings to our clothes as the result of each previous failed attempt.
Debt cannot be the cure for over indebtedness, nor a more rapidly debased currency the antidote to its ongoing debasement. We must forgo the intellectual conceit that we can impose some higher order on the seeming chaos of the world and instead we must simply smooth the way so that its own emergent properties can seek out a better constellation of interconnections, all by itself.
We must recognize that there are no workable macroeconomic solutions which can be laid down: that everything is a matter of functioning microeconomics building things up; that the diamond takes on its lustrous geometry, atom by atom; that the masterpiece hanging in the Louvre came into being brushstroke by painstaking brushstroke.
Only get the microeconomics right and all else will follow.
Make labor once more affordable and its terms no longer and indentured servitude for the employer. Ensure that entrepreneurship is no more risky than it has to be and that it reaps the full fruits of its success - as well as seeing that it bears the full responsibility for its failure - by clarifying law, minimizing red tape, and, once this is achieved, by resisting the bureaucratic urge to tinker any further.
Set prices free to perform their function, insist that markets are able to clear, and see to it that titles to property are both secure and simple to transfer. Under such circumstances, we will each help to build a lasting recovery for the other, one job and one company at a time, much more certain of our success - however much patience will be required in its achievement -than if we were to heed the thundering decree of some sweeping, Collectivist Five-Year Plan emanating from the mouths of the tin gods who frequent the Platonic centers of world power.
Financial markets may be broken, politics and mainstream economics may be broken, but, fortunately the economy of men is a robust, highly redundant network, furnished with its own immune system and self-help mechanism, consisting of unhampered entrepreneurial search and action.
As Adam Smith famously remarked, "there's a lot of ruin in a country" - though, contrary to what our present rulers seem to believe, he was not issuing a challenge to them to seek to quantify its limits.
If we are to avoid that final ruin, if we are to properly rectify much of what is broken and not merely smother it in inflationary balm and patch it over with a plaster of false accounting for a further, brief, electoral, half-life, there are three things which we could and should usefully add to the list of the downcast and destroyed.
These are, namely: that unsound money which is truly the root of all evil; the unfunded mountains of government debt with which such bad money engages in a poisonous symbiosis of executive tyranny and political corruption; the duty-free but rights-encrusted Provider State which waxes fat on that unholy alliance of illusory finance and which not only robs Peter piecemeal to pay Paul, but empowers Pericles to oversee the theft, and so suffuses the commonwealth with a miasma of perverse incentives, ethical degeneracy, and irreconcilable conflicts of interest.
What lies broken, we can surely fix, but only if we break in turn the habits of mind and the tyranny of the man-made institutions which we first allowed to break the things we value - our freedom of association, our independence of action, and our individual chance of prosperity.