Saturday, January 28, 2012

Bretton Woods super-nova reprise

My central thesis is the current debt super-cycle will end in a race to inflate and cause currency depreciation by all the world’s central banks that foolishly adopted the Western fractional reserve monetary system with the U.S. greenback as its reserve currency, that was at first pegged to gold up till Richard Nixon’s abandonment of the gold peg in 1971.

What a conservative, Nixon.  Wage and price controls, abandonment of any shred of monetary discipline for the entire world.. but he went to China…. What a dude!

Just as virtually every American must go up a learning curve with credit cards—many marriages have a “credit card moment” where the cards get cut up and a new fiscal regime begins—so the entire world has traveled down the borrow-and-spend-because-we’re-worth-it path that has led to the current mountain of debt on the shoulders of the global Sisyphus, as the world tries to push the boulder back up to the mountaintop.

The world is now on the steepest upward slope of the credit learning curve.

But central banks are not like people.  Central banks print money.  Too much money chasing too few goods equals inflation.  Inflation equals reduced purchasing power, and hence reduced real debt burdens.  This is all undisputed by all brands of economists.  The disagreement is whether the central banks, who have stated publicly that a little more inflation would definitely be a good thing, can get an inflation going in a liquidity trap, where, because everyone already has too much debt, they don’t want any more.

Ah, but even as all fractional reserve fiat money is technically credit debt, it is also a medium of exchange used for transactions for goods and services, including labor.

If an inflation is a sustained rise in the general price level, a working definition that should be acceptable here, then it is a labor market phenomenon as well as a monetary phenomenon.  I’ve gone so far as to say that “Inflation is always and everywhere a labor market phenomenon—a wage-price spiral—accommodated by monetary policy.”

So to get an inflation going in an admittedly quite deflationary environment (deflation is what happens when asset values supported only by bad debts on the liability side of the social balance sheet collapse as the badness of the liabilities is recognized, however slowly) you need to have some prices rise, perhaps because of a supply shock, and then to have businesses accommodate the however feeble demands for increased compensation to maintain real wages, a move that businesses would make only out of a renascent sense of social responsibility to labor and out of the record share of GDP they have garnered to capital in recent years. 

Then it is simply a matter of supply costs maybe going up a little more, maybe as the result of a different supply shock from a different sector—say the first was oil, as a war gets going in the Middle East, and the second is due to crop failures around the world because of a summer drought—and rather than send their economies into depression, the central bankers will accommodate as necessary, although with the level of excess reserves available in the banking system it may not take much accommodation in the initial phases of the new inflation.

And so a wage-price spiral is born that can support a sustained rise in the price level that can reduce the real value of outstanding debts.

The nation that gets the inflation going first wins in the super-nova of Bretton Woods.  Everybody’s got too much debt (in the Western world) and the first nation to depreciate its currency and the value of its debt picks up exports while paying down debt.  They reach the top of the mountain first.

And as I pointed out recently, the quickest way to get an inflation going—and I would maintain this applies even in a deflationary environment—is via the supply shortages and rationing that accompany a big hot war.

Hence I believe Daddy Warbucks and his military-industrial complex friends are pushing the United States toward war as quickly as possible.

But what will happen when the entire Western world rushes to follow, as I don’t believe the Europeans will be able to avoid the temptation in the event?

Collapse of the world financial system is a distinct possibility.  A galloping inflation or hyperinflation across the Western world would make international transactions highly uncertain.  Barter arrangements might be made for big ticket items like energy (already happening between Iran and China).

In the U.S. inflation and a return to positive real interest rates would at least kill the carry trades that have enriched the financial elite for a decade or more, would pull many homeowners into positive equity, and would most benefit those who locked in to super low rate financing as they leverage the funds into commodities.

When this will happen is anyone’s guess.  There are credible predictions by Charles Nenner, John Robb and others that a major war will begin this year or next.

China will implode into authoritarianism as their bifurcated economy tanks.  There will be no war with China this time, except for a possible skirmish or two in the Caucasus.  

The neocons, including Obama, who faces reelection, for which a war is always a useful ruse, will argue that we need to occupy the Middle East to assure supplies of “our” oil.  Israel will encourage the U.S. to decimate the populations of several Middle Eastern countries that it considers a threat to its survival.

All across America, Americans are transfixed by a Republican primary race that rivals the tackiest daytime soap opera for lurid content and lowbrow appeal.  Keep that TV on so you don’t have to think!

All the talk about taking America back will be put on hold for a moment as Chaos rears its ugly head and the last vestige of normality in the economy vanishes.

But then, as the world enters a period of Total Uncertainty, there will be an opportunity for revolutionary change.  For an amendment to the Constitution to declare that corporations are not people.  For progressive taxation that recognizes that the people sitting at the top of our corporations are not doing all the work, and that returns after-tax income distributions to levels found in healthy societies (cf. Wilkinson).

Because if we’ve learned anything in the years since Hank Paulson announced that if he didn’t get his way, a depression would start on Monday and martial law would need to be declared—if we’ve learned anything, it’s that the false god of Econ has lied to us lo these three or four decades.  Lied abjectly.  And the psychologists and epidemiologists, whose best work is ignored by behavioral economist whores running investment management businesses, have shown us that happiness and human welfare do not increase with GDP in any meaningful way, that more income above a level that satisfies some basic human wants and needs does not make us better off, but that what makes us happy and vibrant and alive and long-lived and healthy is living in an interconnected, more-equal-than-now human community, with a sense of interconnectedness and a lack of the chronic status insults, social stratification and isolation and personal degradation that accompany life in latter day banana republics like the United States.

The last world war produced the most pronounced leveling of the American income distribution in recorded history (cf. Income, inequality, debt, crisis and depressions).  There is a secret hope within the Beltway, methinks, that we can pull off the same trick again with the right conflict, started by the right false flag incident.

But the public is smarter than it has ever been.  IQ scores have been rising.  Information is instantly available around the world.  It’s hard to create a bogey man today.  The people know all the Hollywood tricks.  And they’re sick of war.

It’s no accident that folks in the U.S. military services overwhelmingly support Ron Paul.

So the next time the world enters a historical moment of Total Uncertainty, let’s be ready to use it to get what the 99 percent want, starting with a Constitutional amendment that corporations are not people, and from there on to a clean up of the laws that should govern this land, that the 1 percent who currently live above them may rejoin the human fold.

The readiness is all.


Wednesday, January 25, 2012

Bomb bomb bomb, bomb bomb Iran

Via:  John Robb in a really bad mood. He believes the neocons long-desired war will happen.  The President was banging the war drums in his speech last night.  Remember, historically a war is the quickest way to get an inflation started—to inflate out our debt and beat everyone else in the super-nova of Bretton Woods to the punch.

I’ve spent a considerable amount of time over the last decade working on “what if” scenarios for the Pentagon, CIA, and NSA.

One of those scenarios, naturally, was a war with Iran (one of the world’s top oil exporting countries).

A little known conclusion of that scenario analysis was that a war with Iran greatly increased when deep sanctions were applied.

Why?  Simply:

  1. Sanctions disconnect the Iranians from the global economy which soften the impact of a war with them.
  2. Sanctions also accelerate societal and economic decay in Iran, making it highly likely that it would start a conflict.

The reason I’m bringing this up, is that these deep sanctions are now being put in place.

In particular, the EU is about to start a boycott Iranian oil and the Chinese are already looking for alternatives.

This means one thing:  our governments have radically increased the probability of a war with Iran.

Oh joy.

So, what does a war with Iran mean?  I could spend hours on this analysis, but most of that really would not matter to you.  What does matter is that a war with Iran will ripple through the world as energy prices zoom and economies already on the brink crump.

It will be a global train wreck, and through tight coupling, you will be along for the ride.

So, what can you do?  Most of the advice you will get will be hedge your finances.  That’s fine, but that’s only a small part of the solution and clearly insufficient given the exposures involved.

No, what you really need to do is decouple your future from the world’s future.   To find a way to stay connected to the benefits of a huge global economy while eliminating your exposure to its downsides.

The best ways, and likely the only way, to do this is to live in a resilient community.  A community that produces most of what it needs and is not dependent on continuous support from an increasingly unstable global network.

See also:

Contrary to Widespread Claims, There Is NO EVIDENCE that Iran Is Building a Nuclear Weapon

Posted on January 25, 2012 by WashingtonsBlog

Iran Is NOT Building a Nuclear Bomb

Earlier this month, Secretary of Defense Leon Panetta said:

Are they [the Iranians] trying to develop a nuclear weapon? No. But we know that they’re trying to develop a nuclear capability. And that’s what concerns us.

Director of National Intelligence James Clapper confirmed in a Senate hearing – following the release of the classified National Intelligence Estimate in 2011 – that he has a “high level of confidence” that Iran “has not made a decision as of this point to restart its nuclear weapons program.” […]

Saturday, January 21, 2012

The crumbling edifice of American financial fascism

I’m a little late to just how far the dumping of the dollar as a transactions currency has gone:


Two weeks ago we wrote a post that should have made it all too clear that while the US and Europe continue to pretend that all is well, and they are, somehow, solvent, Asia has been smelling the coffee. To wit: "For anyone wondering how the abandonment of the dollar reserve status would look like we have a Hollow Men reference: not with a bang, but a whimper... Or in this case a whole series of bilateral agreements that quietly seeks to remove the US currency as an intermediate. Such as these: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", and now this: "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says."" Today we add the latest country to join the Asian dollar exclusion zone: "India and Iran have agreed to settle some of their $12 billion annual oil trade in rupees, a government source said on Friday, resorting to the restricted currency after more than a year of payment problems in the face of fresh, tougher U.S. sanctions." To summarize: Japan, China, Russia, India and Iran: the countries which together account for the bulk of the world's productivity and combined are among the biggest explorers and producers of energy. And now they all have partial bilateral arrangements, and all of which will very likely expand their bilateral arrangements to multilateral, courtesy of Obama's foreign relations stance which by pushing the countries into a corner has forced them to find alternative, USD-exclusive, arrangements. But yes, aside from all of the above, the dollar still is the reserve currency... if only in which to make calculations of how many imaginary money one pays in exchange for imaginary 'developed world' collateral.

Only Ron Paul, of all the candidates in either mainstream party, is speaking anything remotely resembling the truth about America’s status in the world.

Tuesday, January 17, 2012

The rise of the reptile brain

As the world economy begins its turn into contraction, there is a natural tendency for the reptile brain to take control.  Your loss is my gain.  A blood sacrifice is required.  You must pay.

Fight against that as hard as you can, even if you are the object of reptilian anger.  And if you feel the necessity to make ritual sacrifice of your people, your employees or country folk, think twice about what you are doing.

When the Lord comes to you on your last day and asks, “Where are the people you sacrificed to the false god of Econ?”

Will you say, “Am I my brother’s keeper?”

And the Lord will put a stain on your soul and your children’s souls that will last for all time.

Martin Luther King had different take in Loving Your Enemies, quoted at length in John Hussman’s weekly comment.


Friday, January 13, 2012

Secular exhilaration confirmed

My forecast of bettering “animal spirits” is confirmed in the pop of the Michigan sentiment series today.  With the bally-hooed unemployment rate—still the headline variable, even though just about everyone knows U6 and what’s going on with the labor force matter much more—now below its adaptation level, “animal spirits” are positive for the first time in the current “recovery.”  I am showing my freehand forecast of the unemployment rate and its implications for “animal spirits” below.   As I mentioned a couple of posts ago, the situation today most resembles early 1973, at right about the time of a stock market peak and about a year before the onset of recession.  [This is research, not investment advice.  You invest at your own risk, unlike the Wall Street banks, who also invest at your risk.]



Technically, my model shows “animal spirits” going negative, and the next “recession” (collapse of confidence accompanied by accelerating losses of income and product) beginning in mid-year 2013.

However, Europe’s recession and deceleration of Chinese growth may quicken things a bit.

It’s 1973 all over again, the year before a major social and economic crisis.  Watch my brother Marvin sing about it.