Mike Krieger, formerly a macro analyst at Bernstein, and currently running his own fund, KAM LP, summarizies the pretend reality we are all caught in now, knowing full well America is set on a crash course with reality at some point, yet sticking our collective heads in the sand, as the collapse will be some time in the "indefinite" future. In the meantime, banks will continue to boost US GDP by peddling "financial innovation" and restructuring advice to countries like Greece... and nothing else.
Goodbye Disneyland, by Mike Krieger
In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality was tacitly denied by their philosophy. The heresy of heresies was common sense. And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right. For, after all how do we know that two and two make four? Or that the force of gravity works? Or that the past is unchangeable? If both the past and the external world exist only in the mind, and if the mind itself is controllable – what then?
- Winston Smith in George Orwell’s 1984
A government big enough to give you everything you want is a government big enough to take from you everything you have.
- Thomas Jefferson
We Must Move to a Free Market and Shun the Welfare-Warfare State or all will be Lost
Unfortunately for all of us, the primary economic policy of the U.S. government as well as many others around the world is an extend and pretend strategy that is economic suicide primarily in that it keeps the irresponsible in their assets and it makes the responsible shudder and shun productive investments. Whether it be a homeowner that is subsidized to stay in a home that he cannot afford or a bank that doesn’t want to come clean on the extent of its bad assets, the result is the same. Complete economic inertia. Now of course there has been a rebound in demand, but my argument has been and continues to be that this is the most unproductive rebound in aggregate demand that perhaps the world has ever seen. Whether it be in the U.S. or China, the demand is taking away spare capacity in many areas indeed but we must question the methods. This is where the whole idea of inflation comes into play. The whole reason why printing a million dollars and giving it to everyone doesn’t work is because this “liquidity” is not created through a productive process. It is purely an injection of new dollars into the economy. The basic rule of supply/demand kicks in. In the average person’s pocket, this money is unlikely to be “invested” in productive capital endeavors, rather the vast majority of it will simply be spent to consume the resources of that which can be supplied by the already existing capital stock. So in many ways it isn’t that the creation of the money itself that is the biggest problem, it is the distribution channel of that money. Only a small percentage of the population that receives the million dollars has the ability, drive and discipline to invest the money into something that will create economic value for the society at large rather than just blow it on a flat screen television. This is the entire premise of why a free market economy works when it is allowed to work (which I would argue is not possible under the current Federal Reserve system). The Fed is a socialist organization that SETS the most important price in the economy, the price of money. Even worse, when they set that price at say 0% as is basically the case today that 0% or anything close to it is not offered to all the small businessmen or potential entrepreneurs out there. It might not even be so bad if the low interest rates weren’t simply being used to gamble or play a carry trade with treasuries. Of course, the banks or anyone else for that matter playing a spread by borrowing at near zero to buy long-term treasuries is doing irreparable harm to this nation. They are complicit in the gross misallocation of capital to the government, capital that can then be doled out at will to favored interests. So all we have today is essentially a creation of money and credit out of thin air that is allocated to two major constituents. First, it has primarily been used to maintain the people of wealth, power and political connections (on both sides of the isle) before the crash entrenched in their socioeconomic roles. Second, is to pay off political favors. Those who supported the President in his campaign have been paid back handsomely and are today much more powerful and secure than before whether we are talking unions or the oligopoly banks. If we wish to have any hope of a sustainable recovery preventing the inevitable social unrest to come from truly getting dangerous we must restore the free market and end the union of big business and government, which historically has presented an extremely dangerous situation. For those that are in big business and think they have made a great move by joining forces with the state I suggest you go back and read your history. You never will possess the ultimate power, you will be seduced into thinking you do and then when the time is right government can eliminate you and your fortune with the stroke of a pen. Power is granted to you by this authority when you engage in this unholy union and it can be taken away on whim and your wealth confiscated. Selling out freedom and your fellow citizens for some extra money or government contracts will come back to haunt you. Your legacy to the United States will be as Max Keiser has called it, a neo-feudalistic, gulag casino economy that has already begun. Below is a link to an excellent interview with Bill Moyers on PBS about our financial oligarchy (I believe many industries here are becoming oligarchies but the financial one is the most powerful) and the need to stop its cancerous growth.
There Will be Surplus...In 2050!
The above paragraph is meant to reach those that are actually faced with important decisions every day that can have a meaningful impact on our future. Decisions on whether to sacrifice their country’s and their children’s futures for an extra buck or to stop the game, stand up for freedom and make a positive difference in this world. This paragraph is meant for a much more broad based audience. Key to the entrenched elite strategy (whether in government or business) is to keep the public in an infantile state. What I mean by this is to keep the notion alive that big daddy government is going to be there to provide for you and protect you. Taking it one step further, they really want the public to believe the government’s existence is in fact necessary for the realization of all one’s hopes and dreams whether it be economically or with regard to security. If you remember from Orwell’s 1984, there is never-ending war in Oceania. Think about how useful a never ending “war on terrorism” is to those in positions of power. All this said, while I am a small government person, I am no anarchist. I think government can do a lot of good. I merely think government must be used a tool, a complement to the freedom, independence and individuality. Once the government becomes so big that is the primary driver of capital and investment we are in big trouble. This is where the individual’s economic creativity becomes stifled and things shut down. One of the key strategies being used by insolvent governments around the world right now are fantasy long-term budget projections. They basically read something like “well we expect deficits to GDP to be elevated for the next several years but there will be a surplus by 2020.” Sadly, many people actually believe this nonsense. As I have said before, the biggest wealth destruction in the next 1-2 years will be in my opinion without a doubt in the sovereign/municipal debt markets. Whether it be through inflation or deflation this stuff can’t possibly be paid back in real money or anything close to it. The biggest fallacy I hear from people I know that own government or municipal paper is they say they are “comfortable just collecting the yield.” Ok, they may be comfortable with that now, but what if inflation escalates in a major way which is in my opinion a one of the more likely outcomes to all this. It means that clipping 3.7% per year on a 10 year note will not be so comforting. The only reason people think it sounds good is because of what they just experienced in 2007-2009. Use some common sense and there is nothing comforting about it. In fact, it is downright scary. Here’s why. As inflation escalates the overall price of these securities will trend lower and then one day, whether in two months from now or a year from now yields are really going to spike and you will be sitting on a pretty hefty capital loss. By the time an owner actually comes to the admission that there is big inflation in the system (remember the big holders of long-term treasuries will be the LAST to admit this) there will be a major principal loss on the securities and the decision to sell or hold at that point will not be a pleasant one. Clipping the coupons wasn’t such a good idea after all…
Why Extending Unemployment Benefits is Inflationary and Why Food Stamps = Bread Lines
One theme I have focused on for years now is how the government and the establishment relies on disinformation and propaganda to keep this phony economy alive the populace distracted with “bread and circuses” as the Romans called it, or as we can say in the modern United States “food stamps and American Idol.” Before I get into some of the “bread” tactics used by politicians on both sides of the isle, I want to make something clear. I am not saying we should get rid of food stamps and unemployment benefits. In the current world where we allow corporate oligarchies to control all aspects of the country this would be unhelpful and immoral. However, I would be in favor of reducing them AFTER the oligarchy problem is dealt with. To do so before would lead to social chaos and would as I said earlier be entirely immoral.
Ok, so first with regard to food stamps. The latest data shows that 39.4 million Americans are receiving food stamps. One of the biggest spins you have heard on the media since 2008 is that this is nowhere near as bad as the Depression, after all, where are the bread lines? Well of course there are no bread lines, this is 2010. Food stamps are the modern equivalent. It is a convenient way to keep the suffering and plight of 13% of the American citizenry out of sight and out of mind. That way those that are benefitting from the corrupt crony capitalism of the current system can feel better about themselves. How about you join reality instead.
Next, there is the issue of unemployment benefit extensions. This situation is very similar to the simplistic scenario of printing money and giving it to everyone. Except this is worse. In that situation, at least some percent of those getting the money will be in a position to put that money to productive uses. Someone that is struggling with the severe trauma that is unemployment is going to basically use that money to pay the bills, pay down some debt, and if there is a little left over…well that IPAD sure looks nifty. All the while this is an unused asset of the economy. This unutilized economic asset is consuming on the taxpayer dime while not adding to the productive capacity of the economy. This is pure inflation. Again, I want to reiterate that dealing with this problem is not the first order of business. Dismantling the oligarchies and restoring a free market is. Then the welfare issue can be dealt with.
Next, to those that continue along this irrational line of thinking that without wage inflation there is no inflation (2+2=5), I see the first signs of it appearing despite U6 employment at near 20%. Let me give you an example. Here in New York City, we were just faced with a prospect of a doorman’s strike. At the last minute a deal was reached with the union which calls for a four year contract with a nearly 10% pay raise and no cuts in benefits for workers. First Wall Street bonuses rebound and now the unions. Entirely coincidental I am sure.
Say Goodbye to Disneyland
One of my old colleagues when I was at Bernstein and who is from another country described America to me with the following statement: “it’s like “Disneyland.” I never fully understood what he meant until the last couple of years. However, what I have also realized is this sense of delusional entitlement is extremely manifest in most other OECD nations as well. In case you missed it, earlier this week the European Union declared traveling a “human right” and is “launching a scheme to subsidize vacations with taxpayers’ dollars for those too poor to afford their own trips” (see link http://www.nationalpost.com/news/story.html?id=2923469). A friend quipped to me after I sent him that article: “I just realized that there no longer exists any need for political parody. The Onion is a short.” Indeed.