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The Decline and Fall of the American Empire

Does the hypochondriac who is ultimately diagnosed with a real, physiological illness have the right to say “I told you so”?

Well, maybe. Sometimes a “hypochondriac” might be ill all along, but those diagnosing him just did not conduct the right test, or look at the right data. Medical science and diagnostics are nothing like as advanced as we like to hope. There are still thousands of diseases and ailments which are totally unexplained. Sometimes this means a “hypochondriac” might be dead or comatose before he ever gets the chance to say “I told you so.”

Similarly, there are are many who suggest that their own nations or civilisations are in ailing decline. Some of them might be crankish hypochondriacs. But some of them might be shockingly prescient:

Is Marc Faber being a hypochondriac in saying that the entire derivatives market is headed to zero? Maybe. It depends whether his analysis is proven correct by events. I personally believe that he is more right than he is wrong: the derivatives market is deeply interconnected, and counter-party risk really does threaten to destroy a huge percentage of it.

More dangerous to health than hypochondria is what I might call hyperchondria.


This is the condition under which people are unshakeably sure that they are fine. They might sustain a severe physical injury and refuse medical treatment. They brush off any and all sensations of physical illness. They suffer from an interminable and unshakeable optimism. Government — or, at least, the public face of government — is littered with them. John McCain blustered that the economy was strong and robust — until he had to suspend his Presidential campaign to return to Washington to vote for TARP. Tim Geithner stressed there was “no chance of a downgrade” — until S&P downgraded U.S. debt. Such is politics — politicians like to exude the illusion of control. So too do economists, if they become too politically active. Ben Bernanke boasted he could stanch inflation in “15 minutes“.

So, between outsiders like Ron Paul who have consistently warned of the possibility of economic disaster, and insiders like Ben Bernanke who refuse to conceive of such a thing, where can we get an accurate portrait of the shape of Western civilisation and the state of the American empire?

Professor Alfred McCoy — writing for CBS News — paints a fascinating picture:

A soft landing for America 40 years from now?  Don’t bet on it.  The demise of the United States as the global superpower could come far more quickly than anyone imagines.  If Washington is dreaming of 2040 or 2050 as the end of the American Century, a more realistic assessment of domestic and global trends suggests that in 2025, just 15 years from now, it could all be over except for the shouting.

Despite the aura of omnipotence most empires project, a look at their history should remind us that they are fragile organisms. So delicate is their ecology of power that, when things start to go truly bad, empires regularly unravel with unholy speed: just a year for Portugal, two years for the Soviet Union, eight years for France, 11 years for the Ottomans, 17 years for Great Britain, and, in all likelihood, 22 years for the United States, counting from the crucial year 2003.

Future historians are likely to identify the Bush administration’s rash invasion of Iraq in that year as the start of America’s downfall. However, instead of the bloodshed that marked the end of so many past empires, with cities burning and civilians slaughtered, this twenty-first century imperial collapse could come relatively quietly through the invisible tendrils of economic collapse or cyberwarfare.

But have no doubt: when Washington’s global dominion finally ends, there will be painful daily reminders of what such a loss of power means for Americans in every walk of life. As a half-dozen European nations have discovered, imperial decline tends to have a remarkably demoralizing impact on a society, regularly bringing at least a generation of economic privation. As the economy cools, political temperatures rise, often sparking serious domestic unrest.

Available economic, educational, and military data indicate that, when it comes to U.S. global power, negative trends will aggregate rapidly by 2020 and are likely to reach a critical mass no later than 2030. The American Century, proclaimed so triumphantly at the start of World War II, will be tattered and fading by 2025, its eighth decade, and could be history by 2030.

Significantly, in 2008, the U.S. National Intelligence Council admitted for the first time that America’s global power was indeed on a declining trajectory. In one of its periodic futuristic reports, Global Trends 2025, the Council cited ”the transfer of global wealth and economic powernow under way, roughly from West to East” and “without precedent in modern history,” as the primary factor in the decline of the “United States’ relative strength — even in the military realm.” Like many in Washington, however, the Council’s analysts anticipated a very long, very soft landing for American global preeminence, and harbored the hope that somehow the U.S. would long “retain unique military capabilities… to project military power globally” for decades to come.

No such luck.  Under current projections, the United States will find itself in second place behind China (already the world’s second largest economy) in economic output around 2026, and behind India by 2050. Similarly, Chinese innovation is on a trajectory toward world leadership in applied science and military technology sometime between 2020 and 2030, just as America’s current supply of brilliant scientists and engineers retires, without adequate replacement by an ill-educated younger generation.

Wrapped in imperial hubris, like Whitehall or Quai d’Orsay before it, the White House still seems to imagine that American decline will be gradual, gentle, and partial. In his State of the Union address last January, President Obama offered the reassurance that “I do not accept second place for the United States of America.” A few days later, Vice President Biden ridiculed the very idea that “we are destined to fulfill [historian Paul] Kennedy’s prophecy that we are going to be a great nation that has failed because we lost control of our economy and overextended.” Similarly, writing in the November issue of the establishment journal Foreign Affairs, neo-liberal foreign policy guru Joseph Nye waved away talk of China’s economic and military rise, dismissing “misleading metaphors of organic decline” and denying that any deterioration in U.S. global power was underway.

Frankly — given how deeply America is indebted, given that crucial American military and consumer supply chains are controlled by China, given how dependent America is on foreign oil for transport and agribusiness — I believe that the end of American primacy by 2025 is an extraordinarily optimistic estimate. The real end of American primacy may have been as early as 9/11/2001.

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The New Cold War

The United States is turning our attention to the vast potential of the Asia-Pacific region.

— Barack H. Obama

From al-Jazeera:

When it comes to China policy, is the Obama administration leaping from the frying pan directly into the fire? In an attempt to turn the page on two disastrous wars in the greater Middle East, it may have just launched a new Cold War in Asia – once again, viewing oil as the key to global supremacy.

The new policy was signalled by President Obama himself on November 17 in an address to the Australian Parliament in which he laid out an audacious – and extremely dangerous – geopolitical vision. Instead of focusing on the greater Middle East, as has been the case for the last decade, the United States will now concentrate its power in Asia and the Pacific.

“My guidance is clear,” he declared in Canberra. “As we plan and budget for the future, we will allocate the resources necessary to maintain our strong military presence in this region.”

Given that a proliferation of American military hardware and components — including crucial semiconductors — are now made in China, the notion of America truly asserting itself on the Asia-Pacific region is absurd. If relations with China breaks down then trade with China breaks down, and America loses the ability to manufacture and import certain military hardware. Furthermore, it loses the free lunch of Chinese goods that furnish the heartland of American consumerism, and placate an American people whose real incomes and purchasing power have consistently fallen since the 1980s. Worst of all, it jeopardises the global energy infrastructure upon which America’s agribusiness and infrastructure depends. While America is moving closer to being able to exploit “tough oil” hotspots in North Dakota, Alaska and the Gulf of Mexico, those oil production capacities cannot be brought online overnight.

Not only this, but America funds her military adventurism through unsustainable debt acquisition (a huge part of which is Chinese-held) rather than productive output. The strange reality is that American assertiveness against China can be cut off by China refusing to buy America’s increasingly debased debt. Unsurprisingly, China is already reducing her American debt holdings.

Simply, American attempts to assert itself on China risks alienating a nation upon which America is totally and inexorably dependent. While this is difficult to recognise for blustering “national security” neo-conservatives like Mitt Romney — the archangel of American imperial decline — or Obama, it is as inescapable and undeniable as the sunrise.

The remedy is not more American imperialism. It is not more debt. It is not more bravado or self-aggrandizement. It is an open and honest commitment to the truth — America’s imperial strategy, based on oil supremacy and the petrodollar — is an anachronism. Its time has come and gone. To get over this hump America needs to commit to a greater degree of energy, and manufacturing independence. American imperial policy acts as a humungous subsidy on the price of oil. Ending such a subsidy will allow the free market to do its work, and make all kinds of alternative energy — from solar, to hydro-electric, to synthetic oil, to thorium – far more competitive.

Only by accepting the changing realities of geopolitics can America prepare herself for the coming realities of the 21st Century.

Further Reading:

The Only Chinese Hard Landing will be on America’s Head 

America’s Eurasian Endgame

Huntsman Cable: China and US Trade War Heating Up

Team America: World Police

The Problem with Military Keynesianism

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The Great Treasury Dumping Game Continues

A few months ago I wrote:

A couple months ago, I hypothesises about the possibility foreign treasury dumping:

It is becoming clearer and clearer that America cannot and will not produce a coherent economic strategy. China seems to be beginning to offload not only its Treasury balance, but also its dollar pile.

Then I noted some of the prospective dangers:

Now we get the news that creditors are currently engaged in a huge Treasury liquidation.

A new post from Zero Hedge establishes that Russia is joining the Treasury-dumping party:

  • IMF’S LAGARDE SAYS EUROPE DEBT CRISIS `ESCALATING’
  • IMF’S LAGARDE: CRISIS REQUIRES ACTION BY COUNTRIES OUTSIDE EU

Well, we know the UK is now out, courtesy of idiotic statements such as this one by Christina Noyer. So who will step up? Why Russia it seems.

  • RUSSIA CONSIDERS PROVIDING UP TO $20B TO IMF, DVORKOVICH SAYS

Why’s that? Because like China (more on that in an upcoming post), Russia just dumped US bonds for the 12th straight month and instead both Russia and China are now focusing on making Europe their vassal state. So now we know where the money is coming from – sales of US debt of course!

Source: TIC

Is the US quietly becoming increasingly isolated in global affairs?

The question as to whether the US is becoming increasingly isolated is completely spurious; the United States isolated herself politically way back when in 1971 she took itself off the gold standard, and decided that she could get a free lunch at others’ expense from printing money.

The key thesis I have advanced seems to be hotting up:

What would a treasury crash look like? Most likely, it would be dictated by supply — the greater the supply of treasuries coming onto the market, the more there are for buyers to buy, the lower prices will be forced before new buyers come onto the market. Specifically, a treasury crash would most likely begin with a big seller dumping significant quantities of treasuries bonds onto the open market. I would expect such an event to be triggered bylower yields— most significant would be the 30-year, because it still has a high enough yield to retain purchasing power (i.e. a positive real rate). Operation Twist, of course, was designed to flatten the yield curve, which will probably push the 30-year closer to a negative real return.

A large sovereign treasury dumper (i.e. China with its $1+ trillion of treasury holdings) throwing a significant portion of these onto the open market would very quickly outpace the dogmatic institutional buyers, and force a small spike in rates (i.e. a drop in price). The small recent spike actually corresponds to this kind of activity. The difference between a small spike in yields and one large enough to make the (hugely dogmatic) market panic enough to cause a treasury crash is the pace and scope of liquidation.

Now, no sovereign seller in their right mind would fail to pace their liquidation just slowly enough to keep the market warm. After all, they want to get the most for their assets as they can, and panicking the market would mean a lower price.

But there are two (or three) foreseeable scenarios that would raise the pace to a level sufficient to panic the markets:

  1. China desperately needs to raise dollars to bail out its real estate market and paper over the cracks of its credit bubbles, and so goes into full-on liquidation mode.
  2. China retaliates to an increasingly-hostile American trade policy and — alongside other hostile foreign creditors (Russia in particular) — organise a mass bond liquidation to “teach America a lesson”
  3. Both of the above.
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Long Production, Short Consumption

An excellent interview of The China Money Report‘s Dan Collins from Max Keiser, wherein Collins debunks much of the “China is a bubble” nonsense so popular in circles that should know better:

Some readers have had a hard time understanding my position on China and America.

In a nutshell: I am long production and short consumption. I am long creditors and short debtors. 

Or, in more depth:

China has a property bubble, resulting from excess supply. It is also the world’s greatest industrial behemoth, controlling the world’s supply chains in many key components, and is becoming an increasingly powerful player in energy markets thanks to its buy-out of Venezuela and its close ties to authoritarian Eurasian energy powers like Russia, Iran and Pakistan. This means that it’s probably not the best place for Westerners to park capital in the short term. But it has no bearing on China’s strategic standing in the medium to long term.

A comparison with America is inevitable. The United States destroyed its industrial productive capacity, has a zombified financial system (including a huge derivatives ponzi that is yet to collapse), a stagnating labour market, stagnating infrastructure, a clueless establishment, and its currency is about to lose global reserve currency status.

Every day, America becomes more dependent on foreign oil and resources.

America needs the global resource and trade infrastructure. That’s why America is in Iraq, Afghanistan, Yemen, Pakistan. That’s why there are hundreds of bases around the world and why America spends trillions policing the world.

The counter-argument I often hear is “but America has nukes, America can order other countries to do things and they will do it”. But, ever since mutually-assured destruction that hasn’t been true.

If you don’t control your supply chains, you have a geostrategic problem. China grasped the importance of supply chains, and through cunning use of long-term planning has made itself the spider at the centre of the web of global trade. America grasped they could get a free lunch with US treasuries and that free lunch destroyed their productive capacity.

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The Start of the Sino-American Trade War

So the global currency wars are hotting up.

As I expected, the first aggressions across the Pacific are coming from America. Why? Because with the current drift of globalisation, America is losing out, while other nations are gaining.

From Zero Hedge:

A few hours ago, the maniac simians at the Senate finally did it and fired the first round in the great US-China currency war, after they took aim at one of China’s core economic policies, voting to move forward with a bill designed to press Beijing to let its currency rise in value in the hope of creating U.S. jobs. As Reuters reports, “Senators voted 79-19 to open a week of Senate debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies. Monday’s strong green light for debate on the bill bolsters prospects it will clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky. If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach.” The response has been quick and severe: “China’s foreign ministry said it “adamantly opposes” a bill pushed by the U.S. Senate that will allow the United States to impose duties on countries that undervalue their currencies.” And just because China is now certain that the US will continue with its provocative posture, most recently demonstrated by the vocal response in the latest US-Taiwan military escalation, we would not be surprised at all to find China Daily report that China has accidentally sold a few billions in US government bonds.

Now there are two angles to approach this from. Firstly, the cheapness of Chinese goods. In my view the cheapness of Chinese goods has absolutely nothing to do with currency manipulation, and everything to do with economies of scale, cheapness of labour, and the fact that jobs and productivity migrate to places with the highest population density. It seems like — to some extent — the growth of China is a reversion to the historical mean:


What does it mean for America (and other nations) to pursue the trade war route? Well, it means a whole lot of effort and policy-making will go into a “solution” that really doesn’t have much bearing on reality. Currency manipulation doesn’t necessarily boost export competitiveness. That’s because in a global marketplace prices aren’t that sticky — they adjust to reflect the relative values of currencies. If Chinese goods were so under-priced, Chinese inflation would likely be significantly higher. Chinese inflation seems to be slowing. If China ceases to peg the yuan to the dollar, the yuan would certainly strengthen, but goods priced in yuan might not ultimately get much more expensive in dollar-denominated terms, especially in the long run. 

Second, the uncompetitiveness of American manufacturing. In my view American manufacturing is uncompetitive because trade conditions are artificially level, and global shipping costs and insurance costs are artificially low — a situation bought and paid for solely with American tax dollars. This means America not only accrues debt through military overspending, but it also has gutted much of its productive infrastructure, and hard-to-rebuild supply chains and skills.

If America were to close half its military bases, and slash its military spending in half (still leaving it as by-far the biggest military spender in the world), insurance and shipping costs would likely significantly rise, making made-in-America goods significantly more competitive in the American market — and making a balanced US Federal budget much more achievable. Other nations would either have to choose between making up for the deficit in global security out of their owns budgets, or forfeiting the benefits that global security brings to shipping costs.

The ultimate consequences of this crazy zero-sum trade/currency war will be a swifter end to the reign of the dollar as the global reserve currency. Why? Because threatening your greatest creditor with tariffs is a surefire way to get them to dump your debt, bursting the bond bubble, and making American debt significantly harder to sustain with resorting to money-printing.

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The Emperor is Wearing No Clothes

As I’ve covered in pretty excruciating depth these past few weeks, the Euro in its current form is sliding unrelentingly into the grave.

Some traders seem pretty excited about that eventuality.

Why? There’s plenty of money to be made killing the Euro, (just like there was plenty of money to be made in naked-shorting Lehman brothers to death):

Markets are ruled right now by fear. Investors: the big money, the smart money, the big funds, the hedge funds, the institutions, they don’t buy this rescue plan. They know the market is toast. They know the stock market is finished, the euro, as far as the Euro is concerned they don’t really care. They’re moving their money away to safer assets like Treasury bonds, 30-year bonds and the US dollar.

I would say this to everybody who’s watching this. This economic crisis is like a cancer. If you just wait and wait thinking this is going to go away, just like a cancer it’s going to grow and it’s going to be too late.

This is not a time to wishfully think the governments are going to sort this out. The governments don’t rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither do the big funds.

A few points:

“They’re moving their money to safer assets like Treasury bonds, 30-year bonds and the US dollar.”

Safer assets like the US dollar? Sure, that’s what the textbooks tell you has been the safest asset in the post-war era. But are they really safe assets? On dollars, interest rates are next to zero. This means that any inflation results in negative real rates, killing purchasing power. Let’s have a look at the yields on those “super-safe” 30-year bonds:

At 2.87%, and with inflation sitting above 3.5% these are experiencing a net loss in purchasing power, too. Yes, it’s better than losing (at least) half your purchasing power on Greek sovereign debt, or watching as equities tank. But with the virtual guarantee that stagnant stock markets will usher in a new tsunami of QE cash (or better still, excess reserves) expect inflation, further crushing purchasing power.” 

“The governments don’t rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither do the big funds.” 

Well Goldman Sachs are the ones who convinced half the market to price in QE3. And they’re also making big noise demanding action in the Eurozone. I’m not denying Goldman don’t have massive power — or that they are ready and willing to book massive profits on Eurozone collapse. But — like everything in this crooked and corrupt system — they are vulnerable to liquidity crises triggered by the cascade of defaults that both myself and Tim Geithner (of all people) have talked about over the past week.

Of course, we all know that as soon as that tidal wave of defaults start, global “financial stabilisation” packages will flood the market to save Goldman and J.P. Morgan, and anything else deemed to be “infrastructurally important”, and survivors will take their pick of M&A from the collateral damage.

And kicking the can down the road using the same policy tools that Bernanke has been using for the past three years (i.e., forcing rates lower and-or forcing inflation higher) will result in harsher negative real rates — making treasuries into an even worse investment. Eventually (i.e., soon) the institutional investors — and more importantly (because their holdings are larger) the sovereign investors — will realise that their capital is rotting and panic. In fact, there is a great deal of evidence that China in particular is quietly panicking now. The only weapon Bernanke has is devaluation (in its many forms) — which is why he has been so vocal in asking for stimulus from the fiscal side.  

And — in spite of the last week’s gold liquidation, as China realised long ago — the last haven standing will be gold. Why? Because unlike treasuries and cash it maintains its purchasing power in the long run.

The Emperor is wearing no clothes.

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Huntsman Cable: China & US Trade War Heating Up

I have talked at length before about the dangers of a U.S.-China trade war.

Now, former U.S. Ambassador to China and Presidential candidate John Huntsman weighs in.

From Wikileaks:

a. ”Sino-U.S. ‘trade war’ is heating up again”

The Shanghai-based Shanghai Media Group (SMG) publication, China Business News: “The United States provoked a trade war again by imposing high anti-dumping duties on Chinese-made gift boxes and packaging ribbon.  This once again shows that 2010 is off to a difficult start for Sino-U.S. relations.  It also reflects that, because of the mid-term elections, Obama is eager to prove to the American voters that the U.S. Administration’s China policy is tough so as to restore his declining support rate. Yao Jian, the Ministry of Commerce spokesperson, issued a statement on February 1, saying that following the financial crisis American trade protectionism has risen.  China has become the biggest victim of the U.S.’s abusive implementation of trade remedy measures.

b. “The United States no longer sits still; it frequently uses evil tricks to force China to buy U.S. bonds”

The Shanghai-based Shanghai Media Group (SMG) publication, China Business News: “This time the quick change of the U.S. policy (toward China) has surprised quite a few people.  The U.S. has almost used all deterring means, besides military means, against China.  China must be clear on discovering what the U.S. goals are behind its tough stances against China.  In fact, a fierce competition between the currencies of big countries has just started.  A crucial move for the U.S. is to shift its crisis to other countries – by coercing China to buy U.S. treasury bonds with foreign exchange reserves and doing everything possible to prevent China’s foreign reserve from buying gold.

If we [China] use all of our foreign exchange reserves to buy U.S. Treasury bonds, then when someday the U.S. Federal Reserve suddenly announces that the original ten old U.S. dollars are now worth only one new U.S. dollar, and the new U.S. dollar is pegged to the gold – we will be dumbfounded.

Today when the United States is determined to beggar thy neighbor, shifting its crisis to China, the Chinese must be very clear what the key to victory is.  It is by no means to use new foreign exchange reserves to buy U.S. Treasury bonds.  The issues of Taiwan, Tibet, Xinjiang, trade and so on are all false tricks, while forcing China to buy U.S. bonds is the U.S.’s real intention.”

And considering that using military means to force China to continue to reinvest in treasuries is completely pointless it seems like America’s free lunch will soon be coming to an end. Most interestingly of all:

The nature of such behavior is a rogue lawyer’s behavior of ‘ripping off both sides’: taking advantage of cross-strait divergences, blackmailing the Taiwan people’s wealth by selling arms to Taiwan, and meanwhile coercing China to buy U.S. treasury bonds with foreign exchange reserves and extorting wealth from the mainland’s people.

No doubt, America’s divide-and-conquer tactics have been highly successful, and highly advantageous to America. The real question, of course, is how long will it be ’til both the Chinese and Taiwanese governments tire of sending their productive capital to America (either for treasuries, or weapons) so that Americans can have a free lunch? A dollar devaluation? War on the Korean peninsula? QE3? QE4? QE Gold?

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China Beats War Drum Over Taiwan?

As I have stated before, China has no reason to be belligerent to America, or to accelerate the death of the dollar as the global reserve currency. Firstly, this is because the current world order is strengthening China, and weakening America. Second, this is because China has accumulated a huge swathe of American debt, and wants to use it to acquire American (and global) productive assets and wealth.

America on the other hand, as the declining power, has every reason to be belligerent to China.

From the Economist:

An new book, discussed in this week’s Economics focus, by Arvind Subramanian of the Peterson Institute for International Economics argues that China’s economic might will overshadow America’s sooner than people think. Mr Subramanian combines each country’s share of world GDP, trade and foreign investment into an index of economic “dominance”. By 2030 China’s share of global economic power will match America’s in the 1970s and Britain’s a century before. Three forces will dictate China’s rise, Mr Subramanian argues: demography, convergence and “gravity”. Since China has over four times America’s population, it only has to produce a quarter of America’s output per head to exceed America’s total output. Indeed, Mr Subramanian thinks China is already the world’s biggest economy, when due account is taken of the low prices charged for many local Chinese goods and services outside its cities. China will be equally dominant in trade, accounting for twice America’s share of imports and exports. That projection relies on the “gravity” model of trade, which assumes that commerce between countries depends on their economic weight and the distance between them.

So should it come as no surprise that America continues to arm and train China’s enemies.

From Reuters:

China’s top official newspaper warned on Friday that “madmen” on Capitol Hill who want the United States to sell advanced weapons to Taiwan were playing with fire and could pay a “disastrous price,” as the Obama administration nears a decision on a sale.

The People’s Daily, the main paper of China’s ruling Communist Party, said the United States should excise the “cancer” of the law which authorizes Washington’s sale of weapons to the self-ruled island of Taiwan that China considers its own territory.

Taiwan’s biggest ally and arms supplier, the United States is committed under a 1979 law to supply it with the weapons it needs to maintain a “sufficient self-defense capability.”

Is America making a mistake? Should they instead be looking to integrate with the rest of the world, so that the necessity of a shared future means that war, threats and belligerence are in nobody’s interest?

I think so.

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Keynes, Bernanke, Krugman

There’s no doubt that the big question for markets this week and next is whether Bernanke will crank up the printing-press and purchase more US debt, in a so-called QE3. And from my point of view the answer is very easy: yes, he will. Bernanke’s academic career is characterised by him publishing papers on novel ways for government to stimulate the economy. And while he didn’t directly announce a program of easing, he did extend the next Fed policy meeting to two days, possibly to build consensus on the tools and the exact methodology that will be deployed. And with “highly-influential” investment bank Goldman Sachs foreseeing a program of great easing going into 2012  who am I to disagree?


Continue reading →

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To QE, or Not to QE…

Just a couple of days ago, I made the case that QE3 is coming — even if it is unannounced tomorrow . Indeed, it seems increasingly unlikely — in spite of Goldman’s pleas for a $1 trillion injection — that QE3 will be announced by Bernanke tomorrow. There are a multitude of reasons: the unseasonable austerity climate in Washington, the protestations of Wen Jiabao, inflation fears, and a number of positive economic signs in a national survey from the Chicago Fed.

Bernanke’s academic record suggests more easing. Here he is in 1999 on Japan’s monetary woes:

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and
to do what needed to be done.

Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary 26 authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.

By all means that would suggest that QE3 is very much on. So we have conflicted signals. It’s at times like these when I bring out Shakespeare:

To be, or not to be, that is the question:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles,
And by opposing end them? To die, to sleep,
No more; and by a sleep to say we end
The heart-ache, and the thousand natural shocks
That flesh is heir to: ’tis a consummation
Devoutly to be wished. To die, to sleep;
To sleep, perchance to dream – ay, there’s the rub:
For in that sleep of death what dreams may come,
When we have shuffled off this mortal coil,
Must give us pause – there’s the respect
That makes calamity of so long life.

- Hamlet

We all know that Bernanke will not stand and watch as markets, asset prices and confidence tanks. Yet in my view that no amount of quantitative easing alone can get America out of the troubles she is in. Those troubles are non-monetary — they are systemic and infrastructural: military overspending, political corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, systemic fragility, and so forth. The real question is when will America tire of the slings and arrows of fortune? When will America take arms against her sea of troubles? And how long will she last on this mortal coil? To die? To sleep? For in that sleep of death what dreams may come…