Taking a step back outside of our predetermined schools of thought and simply looking at the world versus where we were say 20 years ago and OMG what a difference 20 years can make. For instance you wouldn’t know what OMG meant 20 years ago and you wouldn’t have google to figure it out. But more seriously 20 years ago we were on the precipice of the longest stretch of world peace the world has known in modern history. We were on the precipice of the first US budget surplus since abandoning Bretton/Woods. We were on the precipice of the only period of true economic growth we’ve seen since the 1970′s. We were on the precipice of the period that would see American’s standard of living higher than ever before. We were also on the precipice of implementing the foreign and monetary policies that would end up being the catalyst for a perpetual state of global meltdown.
Years from now students will only read about a time when the world had increasing real incomes, positive interest rates, debt used for investment rather than for consumption, employment was assumed to mean full time, welfare was a temporary relief for only the most unfortunate, disability was given only to those disabled, a majority of kids were born into two parent households, America did not lead the world in imprisoning its citizens, the police actually served and protected the public, money had both time and intrinsic value, news was verified, the Constitution was a nation’s supreme mandate, democracy meant a self governed people, freedom didn’t come with chains, war wasn’t peace, lies weren’t truth, earnings growth came from operational expansion rather than operational contraction, productivity gains meant the same amount of workers generating more output rather than less workers generating the same output, production was the manufacturing of something you could touch, climate change meant taking a vacation, wars were approved by congress and fought against aggressor nations not disagreeable concepts, banks were pillars of commerce rather than wrecking balls, and you could take your family to the movies for less than a week’s wages.
Listening to the news today is absurd in the context of recent history. Our nation is bankrupt. By every definition known to accounting and economics our nation is bankrupt. Meaning we will never, no matter what happens, ever be able to pay off the amount of liabilities we’ve amassed. That is not debatable, it’s not arguable, it’s not conjecture, it’s not anything but absolute cold hard fact that cannot be denied by any politician, economist, macro analyst, anyone. The sun will come up tomorrow and America is bankrupt; these two propositions are equally probable. Ok has that sunk in then? Great.
A once great nation, only 20 years ago so full of potential with peace and prosperity, today completely bankrupt and engaged in multiple simultaneous major theatre wars (remember where we saw that phrase first come to light??). Our only lifeline being our military strength and the fact that the central banks not only destroyed our nation but all Western nations meaning our worthless currency, if definition permits it which it must, is less worthless than all other currencies. And this is where things get really interesting because fiat currency is backed by nothing other than perception of strength of the economy for which a fiat currency is attached and not against the worthlessness of other currencies as is commonly misunderstood and ill-measured.
This must be so because there is no real value to something that has, by definition, no intrinsic value. That is blindingly obvious. I say blindingly because it is something that we all look past in our day to day lives. We all know that piece of paper or Note has no value and can have no value relative to another piece of paper with no value. But we look past that fact and transact with it every day without really contemplating why the other person is accepting that piece of paper in exchange for a given amount of food or rent. And so the key is that there exists both value and perceived value.
There is a fine line between these two concepts but like a worm hole in the spatiotemporal fabric of time that fine line can separate an entire universe. That is, a fiat currency today has the value given it by today’s perception of tomorrow’s respective economic strength, nothing more and nothing less. Fiat currency has no value in and of itself. And so today’s value is real only in the sense that you can trade today at today’s value. However, today’s perception of tomorrow’s economic strength is not necessarily accurate.
What this means is that there is no guarantee that today’s given value to the fiat currency will have any relation to tomorrow’s given value of the fiat currency. The reason is because when we believe something to be already validated we don’t further adjust it for the likelihood it is still wrong. So if I believe a bond is AA, I expect that all the adjustments have been done for the probabilities that it isn’t what it seems it is, which is why it didn’t get AAA. And therefore I don’t further adjust it to account for the fact that the adjustments were wrong.
The implication is that the difference between perception and truth have no relation outside of a fallible measure of perception. Now the perception of the economy is based on several indicators but so is only as good as the indicators and thus those calculating the indicators and then those delivering the message told by the indicators. You see there is a lot that can go wrong between the economic strength and the perceived economic strength that is providing the backing or value of the intrinsically valueless currency. The implication of that is when we’ve valued something based on perception the actual value of that thing has no inherent relation to its true value.
That is, the perceived value may be 100% accurate or 0% accurate. And so today’s given value of the fiat currency based on the perceived strength of tomorrow’s attached economy may be 100% accurate or 0% accurate. This means if anything happens to affect our fully malleable perceptions of the economy there is no telling how tomorrow’s given value of the fiat currency may change. Now I know that sounds slightly philosophical but it really is not.
It simply describes the fickleness of our monetary system. That is, when something is based on a perceived value that value can change by the largest possible amount that the perception can change at any given time. And that is a scary proposition. Because what is beginning to expose itself is that our perception of tomorrow’s economic strength attached to our fiat currency is, in fact, wrong. And so the question then becomes how wrong and how long before the perception basis resets to its new perception? I’ve been talking a lot lately about the Giant Con. This is the heart and soul of the Giant Con.
Controlling (stabilizing) today’s perception of tomorrow’s economic strength attached to (and thus backing) the USD is the Fed mandate. For if we lose control of today’s false perception well then god only knows what tomorrow’s given value may be. This is the absolute ‘mandate’ of central banking. The Fed’s mandate to target employment or inflation within a certain range are really just less terrifying ways of saying controlling today’s perception of tomorrow’s economic strength which, in effect, defines the value attached to our fiat currency. What does all this mean?
Well it means that if the cracks in the dam of perception continue to widen, at some point the dam actually gives way and we have a perception reset. Where the new dam of perception is rebuilt will be the new value given to USD. However, what happens by way of the reset is that everything that was based on the allotted value between the two perception points will be washed away and destroyed.
In practical terms it means that everything collateralized by prices attached to items exchanged for USD (i.e. bought on credit – real estate, automobiles, future expected wages, etc) must now be repriced and the difference in the pricing is what disappears. I beg you to read that again and ensure you understand all that that embodies, the corners of the financial universe that will be impacted by that and thus the unimaginable systemic reaction that is already beginning to shake loose. And so the disappearing value must be recorded as a real loss and effectively written off by at least one transaction stakeholder (e.g. banker, consumer, manufacturer, bondholder, equity holder, etc).
In economic terms it means the things which we had counted toward our standard of living (or GDP on the macro level) that were not owned but leveraged will disappear. And that means a decline in our measured ‘standard of living’ or GDP. And that get’s us to the operations of the Giant Con. Specifically, adding debt into our income calculation (which the Fed does and is the sole basis of all GDP ‘growth’ since 2000) or into our standard of living calculation. The obvious implication is that debt ‘growth’ can disappear overnight and so it is not real and thus nothing more than a con and a f*cking giant con at that.
However, it doesn’t mean we lose everything because all those items that were owned rather than leveraged, remain regardless of the reset. This is why my Adjusted Real GDP figure is so important to be aware of. It actually tells us how large the reset can be. And what we see is that our official standard of living has the possibility of being reset downward by more than 50% or upwards of $10 trillion.
It is important to understand that any new perception is not necessarily any more correct than the old perception of tomorrow’s economic strength attached to the USD. And so I hope at this point you begin to see the difficulty of valuing the world’s economies using intrinsically valueless assets and how doing so can and will lead to incredible destruction anytime we have a reset of perception.
We haven’t had a reset before on an economy as large as America’s nor on one that has the systemic implications on the global economy, but you would be wise to acknowledge the rattlings of Greece and the Euro as perhaps the beginning of a massive fiat monetary reset. And why do I think this? Well let’s discuss that.
When I see CIO’s of major banks like Jack Ablin of BMO Private Bank come out and start making arguments that Greece dropping the Euro would actually be very bullish for the Euro
it tells me the pre-tremors are being felt. For when a CIO is willing to jump on a credibility grenade like that one, it suggests that either BMO PB has a massive long Euro position or that the true impact of Greece dumping the Euro will result in extraordinary systemic destruction.
Here in the US think about the day in and day out bombardment of results of ‘in depth analysis’ performed by this think tank or that bank analyst or this university professor that “conclusively determines” America is back to full on growth mode. (If these studies are anything like the recent study released by the Pentagon claiming President Putin of Russia suffers from Aspergers Syndrome well we should be very afraid. I’m sorry but you gotta just love the world today. I just cannot think of that Pentagon study without literally laughing out loud. I try to imagine the sort of person a study of that nature is targeted to. You know it is beyond absurd when even mainstream media is questioning the merits of the study.) But I digress.
My point is that the effort on manipulating today’s perception of tomorrow’s economic strength attached to the USD is stronger than ever. And looking at the market strength of USD the message is getting through. This means the Fed has actually performed incredibly well in what is its true mandate as discussed above. But it also means that if the perception of the strength of tomorrow’s economy is that much further off the true mark then a perception reset will likely be that much larger resulting in that much more destruction.
Remember what gets destroyed is not owned assets but leveraged assets both original and derivative. For example, not only will the house be lost or at least repriced but also the asset purchased on loan collateralized by the security (CDO) encompassing the mortgage on the house. Worse is that it becomes circular (as we saw in 2008) in that the destruction of those assets then further destroys the perception of strength that is the basis for the valuation of our monetary system and thereby opening the systemic floodgates. And yes this can get very layered and very complex and welcome to the world of high finance where synthetic value has been deemed as reliable as hard asset value.
But what is important to know then is whether or not our perception of tomorrow’s economic strength, being relatively very high given the current value attached to USD, is accurate. So let’s compare the strength of the nation 30 years ago vs 15 years ago vs today. I expect the information we can gain from this with a little bit of common sense will give us all we need to know. All of the following data was sourced from St. Louis Fed and BLS.
And so what we see is a listing of ‘indicators’ of economic wherewithal. The red indicates a worsening of condition during the period between dates, whereas black font indicates things improved (it doesn’t matter what indicators you believe are important as the underlying results will be exactly the same, trust me, I’ve run hundreds).
Now between 1985 and 2000 about half of the indicators improved while half worsened. The next 15 years i.e. the past 15 years has been a disaster with 6:1 indicators worsening. This in and of itself is enough to tell all the muppets spouting about how wonderful things are to stop because they really do look like fking idiots to anyone who verifies their storyline. But remember the job of the central bank is to stabilize the perception and it is done through the media. I will agree that wanting to maintain a stable state is not a bad objective. However, the fact that we have to manipulate perception in order to maintain a stable state should tell us the system is not right.
What I mean is that because a central banking monetary system requires a mandate to manipulate perception in order to control or stabilize the value of its money that should evidence that such a system is fragile at best and incredibly destructive naturally. That fact should warrant the search or simple reimplementation of a hard asset backed monetary system. Sometimes there is a right or wrong answer and continuing to back the wrong answer does not make it any more right. But so back to the numbers above.
Overall about half the indicators have improved over the 30 years with half worsening. But it’s not enough to simply look at the overall statistics because not all indicators individually and in their relationship to other indicators have equal weight. What do I mean by that? Well perhaps the grandest example is the fact that real median incomes have improved over the 30 year period despite declining over the past 15 years. So we would say well geez great we got something right. However, when we look at the details especially in comparison to other indicators it becomes downright frightening.
While real median incomes have increased by 7% over the thirty years we see that the cost to provide medical care to our families has increased by 400%, the cost to educate our families has increased by 655%, each workers share of social welfare has increased by 124% and each worker’s share of consumer debt has increased by 142%. Now taken in that context a 7% increase in income just doesn’t seem to mean much. In fact, it makes one wonder how in the hell a family even gets by nowadays and how in the hell we are ever going to pay for it all.
And the simple answer respectively is, debt and we won’t. I hope I am starting to get through to everyone on the complexity, enormity and significance of the Giant Con. If nothing else understand that what you and everyone you know has acquired by way of credit could disappear in a heartbeat and does nothing to improve your or their standard of living. Likewise every bit of GDP that is a result of debt consumption either at the consumer or government level could disappear and does nothing to suggest economic growth.
Those things you own outright do absolutely represent your standard of living. This doesn’t mean you cannot use credit but understand credit makes you no better off but may only make you feel better off until, of course, it doesn’t. Understand that when the measurement of our economy (i.e. our money) is based only on perception well then very little is real about that measurement. Why do you think Jack Lew, James Bullard, Jim Plosser, etc., etc. are constantly doing national televised interviews when before 2008 and certainly before 2000 most average Americans had absolutely never heard of a Fed governor or FOMC meeting?
The answer is because it is requiring that much more effort to stabilize the perception of tomorrow’s economic strength and thus the USD, despite the measure of the relative value of USD (i.e. vs other currencies). And because it is requiring such a significant amount of effort tells us that differential between the perceived and the true strength is growing materially.
We must begin to heed all of the warning calls that are now echoing off the walls. The universe always provides warnings of danger but we so often fail to observe them. It is why poisonous fish are brightly coloured, why rattle snakes have a rattle and why bankers and politicians are so flamboyantly obnoxiously arrogant. These things make it easy for us to spot danger but only so far as we are willing to acknowledge them.