Swag

When the global financial pie is expanding, there's plenty of swag for everyone, so competition is limited and cooperation is rewarded. If we step back, what is most striking about China's emergence in the global economy over the past 30 years is how little actual conflict between global players this generated. To fully understand why this period of cooperation is ending and competition is heating up, we need to understand two key dynamics of global capitalism.  Either way, the game of depending on ever-expanding debt and exports for growth is over. This global competition is playing out on multiple interlocking levels.

The list of public/private institutions that desperately need structural reform is long: the Pentagon, healthcare (a.k.a. sickcare), Social Security, the complex mish-mash of programs that make up the Welfare State, the 73,000 page tax code, public pensions and the financial sector, to name just the top few. Regardless of the need for reform, it isn't going to happen for these structural reasons.

We are living in the United States of Delusion. The delusion has four key sources. The irony is that clinging to delusion rather than face the necessity of deep cuts in borrow-and-squander budgets will lead to the involuntary reset of the entire system, depriving every vested interest of their share of the swag. Is delusion a sustainable state? No. Thus we can confidently predict that causality, factuality and karma will eventually sweep aside delusion and all those who cling to it.

Denial doesn't change reality. It only cripples our response to reality. Psychologists and behavioral economists have found that we deceive ourselves (conceal the truth) to serve our own interests. Perhaps this is why the mainstream ignores the Id Monsters in the shadows: shadow banking, shadow housing inventory and shadow liabilities.

The key to understanding higher education in the U.S. is to grasp that it is at heart just another debt-dependent neofeudal cartel. In other words, it is just like sickcare and the national defense complex. The most implacable enemy of innovation is monopoly. If you're protected from real competition, then you have no incentive or need to innovate. That is the essence of cartel-capitalism and the neofeudal model. In the case of the higher education cartel, the Federal funding is both cash grants and loans issued to newly minted debt-serfs. Student loans cannot be discharged in bankruptcy like other debt; these loans have ballooned to about $1 trillion. This is the essence of the neofeudal model: a protected Elite parasitically extracts wealth from the debt-serfs below. Should the debt-serfs resist, the State steps in to coerce compliance. The problem with protected cartels (neofeudal fiefdoms) is that they are unsustainable.

If the citizenry cannot dislodge a parasitic, predatory financial Aristocracy via elections, then "democracy" is merely a public-relations facade, a simulacra designed to create the illusion that the citizenry "have a voice" when in fact they are debt-serfs in a neofeudal State. When the Status Quo remains the same no matter who gets elected, democracy is a sham.  The U.S. Status Quo is also like an iceberg: the visible 10% is what we're reassured "we" control, but the 90% that is completely out of our control is what matters. There is another dynamic in a facsimile democracy: the Tyranny of the Majority. When the Central State issues enough promises to enough people, the majority concludes that supporting the Status Quo, no matter how corrupt, venal, parasitic, unsustainable and dysfunctional it might be, is in their personal interests. In this facsimile democracy, citizenship has devolved to advocacy for a larger share of Federal government swag. Is Democracy Possible in a Corrupt Society? No, it is not. Our democracy is a PR sham.

Last week we discussed what the expectations were for Draghi's OMT - approximately EUR250bn - which coincidentally provided cover for the rest of the year (conditionally) for the entire new issuance of the European Union. Based on EURUSD's recent exuberance - something we saw ahead of QE1 and QE2 - the market is now more than primed for some serious USD debasement. The current EURUSD of 1.2850 implies a Fed-to-ECB balance sheet ratio around 1.11x. If we assume the ECB wil not have to fire its conditional bazooka (of which is priced in 100% likelihood of EUR250bn), then the Fed is expected to conjure a monetization scheme of around USD580bn - anything less would be a disappointment to the market. However, if we assume the ECB will be doing it's bond-buying monetization thing  - as per the equity market's expectations - then the Fed will need to come to the table with a bag of swag around USD850bn in order to debase the USD just enough to regain some hope. It seems like the market has priced in a great deal of monetary policy exuberance  - especially considering how 'confident' consumers appear to be.

The disregard for the future and the fundamentals of fiscal well-being is about to reap consequences. The Powers That Be counted on "time healing all," as if the mere passage of time would magically heal a broken economy and political machine. Time heals all--unless you have an aggressive cancer. The system has been pushed to extremes: the expectations are impossibly high, the promises are impossibly generous and the sums of money demanded by the vested interests "just to stay afloat" are stratospheric. The "run to fail" levers have all been pushed to the maximum, and it is simply too politically painful to make any real-world adjustments that might save the system from imploding. Nobody wants a crisis, yet a crisis is the only thing that can save the system from implosion.

The odds of some instability erupting globally in 2013-14 seem high, but what the trigger might be remains unknown. The fragility and vulnerability of systems pushed to extremes are like sandpiles: it doesn't really matter which grains finally trigger the cascade; the system's rising instability is the causal factor. Where does this put us? If the ultimate crisis is another decade away, we might as well enjoy what we can in the meantime and assemble the pieces of a semi-sustainable life: income streams that we own/control, a very low cost of living, and property in areas that are universally desirable, i.e. they have decent weather, surface supplies of water, concentrations of intellectual and financial capital, and ideally, a functioning local government that isn’t hopelessly corrupted by vested interests. Any disadvantages in these resources can be offset by a solid network of friends, family, associates, business contacts, etc., i.e. social capital. I think it is safe to assume the promises of Social Security, Medicare and pensions will be chipped away by one force or another (inflation, taxation, “austerity,” etc.) and so those who have written these out of their own personal expectations will be psychologically primed for self-reliance embedded in local support networks.

Complicity reigns supreme as everyone benefiting from a scam keeps quiet about everyone else's skim lest their own share of the spoils fall under the harsh light of inquiry. Can an economy that has become dependent on lies, misrepresentation, "fudging" of numbers, fraud, embezzlement and a multitude of skimming and scamming operations escape the moral and financial black hole it has created? The self-evident answer is "no."

What do we call a power center that enables and enforces neofeudal exploitation and predation? We call it evil. The Federal Reserve is a force of evil that should be abolished at once. Its purpose - enabling and enforcing a neofeudal transfer of wealth from the productive many to the unproductive, parasitic few - is evil. Those within it are serving evil. Those who defend it are serving evil. Those who worship its power are serving evil. Those who mask its true nature are also serving evil. In a society and culture that has lost its moral compass, a culture of greed, self-serving lies and corrupt vested interests, the word "evil" has lost its power. It has been reduced to a cartoonish label, a cynic's smarmy joke.

Silver, wine, art and gold – or SWAG – may be the solution for investors looking to protect their wealth in the coming years according to perceptive Reuters Columnist, James Saft. In an interesting article and an interesting video for Reuters, Saft coins the term “Investing 201” which means having SWAG in your portfolio in order to protect investors from “a grim decade of money printing and financial repression.” SWAG, as in silver, wine, art and gold, are real assets that might just outperform if official policy causes the money supply to surge according to Saft. This is the idea of Joe Roseman, who says SWAG will do very well over what could be a very troubled next decade. "These assets effectively act as a money supply index tracker," said Roseman, who for 16 years was a money manager and economist at Moore Capital, run by the legendary Louis Bacon. "If the authorities are going to bail themselves out, money supply will expand. Every single time governments have been here, this is exactly what they have done."

Gold continued gains on Friday receiving a boost from Angela Merkel’s comments saying she supported ‘Super’ Mario Draghi’s pledge “to do whatever it takes” to save the euro. While this sentiment lifted markets and some investors hope ECB action is sooner rather than later - it is also creates the risk of currency debasement and could lead to further falls in the euro. At the beginning of August, the European Central Bank said that it might buy Spanish bonds if the government first applied for the European Financial Stability Facility (EFSF) support. The ECB has said that specific committees within the bank would design the appropriate mechanisms for the bond purchases in the coming weeks, suggesting a possible green light within a few weeks.

Incentivize debt, and you end up relying on debt as a sustitute for productivity and income. Increase debt, and there's not enough income left for productive investments that might boost income. Incentivize debt via making interest tax deductible, and you create a self-reinforcing feedback of a rising share of declining income being devoted to interest payments. With demand and borrowing both suppressed by debt-serfdom, demand for housing, goods and services declines. Borrowing more to consume simply speeds the cycle of rising interest and falling net incomes. Incentivize debt and you create multiple overlapping death spirals. We are seeing the death-spirals play out in a fractal manner, from households to nations to entire regions. High debt levels lead to high interest payments which lead to low investment and savings rates which lead to lower productivity which leads to stagnation of income, consumption and investment: in other words, a death spiral.

How do you get "consensus" in politics? You horse-trade. You give everybody something they want. You cut everyone into the deal. That passes for "consensus" in politics: divide the swag. If you want to understand President Obama's failure as a leader, ask (as my friend G.F.B. did) where did he learn politics? In Chicago. Big-city politics boils down to getting the ward bosses, ethnic-neighborhood leaders, Chamber of Commerce and public unions together and making them all happy with concessions, give-aways or some other slice of swag so they all agree to to support some minor policy tweak of the Status Quo. Any constituency left out of the swag distribution squeals like a stuck pig and kills the "consensus." This "making sausage" consensus is passed off as "the only way to get anything passed," but the truth is that it's the politics of failure: nothing meaningful can possibly get done in the politics of "consensus" because 95% of any useful reform must be traded away to get everyone willingly on board.