japanisation

by

Liquidation is Vital

Many Keynesians really hate the concept of liquidationism. I’m trying to grasp why.

Paul Krugman wrote:

One discouraging feature of the current economic crisis is the way many economists and economic commentators — apparently ignorant of what went on over the last 75 years or so of macroeconomic debate — have been reinventing old fallacies, imagining that they were coming up with profound insights.

The Bank for International Settlements has decided to throw everything we’ve learned from 80 years of hard thought about macroeconomics out the window, and to embrace full-frontal liquidationism. The BIS is now advocating a position indistinguishable from that of Schumpeter in the 1930s, opposing any monetary expansion because that would leave “the work of depressions undone”.

Andrew Mellon summed up liquidationism as so:

The government must keep its hands off and let the slump liquidate itself. Liquidate labor, liquidate stocks, liquidate the farmes, liquidate real estate. When the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. A panic is not altogether a bad thing. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

In light of the zombification that now exists in Japan and also America (and coming soon to every single QE and bailout-heavy Western economy) — zombie companies, poorly managed, making all the same mistakes as before, rudderless, and yet still in business thanks to government intervention  — it is clear that the liquidationists grasped something that Keynesians are still missing. Markets are largely no longer trading fundamentals; they are just trading state intervention and money printing. Why debate earnings when instead you can debate the prospects of QE3? Why invest in profitable companies and ventures when instead you can pay yourself a fat bonus cheque out of monetary stimulus? Why exercise caution and consideration when you can just gamble and get a bailout?

Unfortunately, Mellon and his counterparts at the 30s Fed were the wrong kind of liquidationists — they could not heed their own advice and leave the market be. Ironically, the 30s Fed in raising interest rates and failing to act as lender-of-last resort drove the market into a deeper depression than was necessary (and certainly a deeper one than happened in 1907) and crushed any incipient recovery.

Liquidation is not merely some abstract policy directive, or government function. It is an organic function of the market. As the stunning bounce-back from the Panic of 1907 shows — especially when contrasted against the 1930s — a  market liquidation on the back of a panic avoids a depression. Prices fall as far as the market deems necessary, before market participants quickly come back in into the frame, setting the market on a new trail toward growth. For without a central bank, asset-holders who want to maintain a strong economy and growth (in 2008, that probably would have meant sovereigns like China and Arabia) have to come in and pick up falling masonry as lenders of last resort.

Under a central banking regime (especially a Bernankean or Krugmanite one committed to Rooseveltian Resolve) all expectations fall onto the central bank.

My own view is not just that liquidation is vital. It is that the market mechanism is vital. Without their own capital as skin in the game, central bankers are playing blind. The pace of the liquidation and the pace of the recovery should be dictated by market participants — in other words, by society at large — not by the whims of distant technocrats. Society has more skin in the game. The Great Depression was not a crisis of too little intervention — it was a crisis of too much well-intentioned intervention.

As we are learning in our own zombie depression, a central bank doing the opposite of the 1930s Fed and reinflating may solve the problem of debt-deflation, but it causes many of its own problems — zombie banks, zombie corporations, zombie markets, corporate welfarism, and the destruction of the market mechanism.

by

Breaking the Banks

Simon Johnson at the New York Times takes Ron Paul seriously:

Mr. Paul  has a clearly articulated view on the American banking system, laid out forcefully in his 2009 book, “End the Fed.” This book and its bottom-line recommendation that the United States should return to the gold standard – and abolish the Federal Reserve System – tend to be dismissed out of hand by many. That’s a mistake, because Mr. Paul makes many sensible and well-informed points.

But there is a curious disconnect between his diagnosis and his proposed cure, and this disconnect tells us a great deal about why this version of populism from the right is unlikely to make much progress in its current form.

There is much that is thoughtful in Mr. Paul’s book, including statements like this (on Page 18):

“Just so that we are clear: the modern system of money and banking is not a free-market system. It is a system that is half socialized – propped up by the government – and one that could never be sustained as it is in a clean market environment.”

Mr. Paul is also broadly correct that the Federal Reserve has become, in part, a key mechanism through which large banks are rescued from their own folly, so that their management gets the upside when things go well and the realization of any downside risks is shoved onto other people.

But Mr. Paul’s book also acknowledges the imbalance of power within the financial system that prevailed at the end of the 19th century. Wall Street financiers, like J.P. Morgan, were among the most powerful Americans of their day. In the crisis of 1907, it was Morgan who essentially decided which financial institutions would be saved and who must go to the wolves.

Would abolishing the Fed really create a paradise for entrepreneurial banking start-ups, enabling them to challenge and overthrow the megabanks?

Or would it just concentrate even more power in the hands of the largest financial players?

Important questions, no doubt — but also something of a contradiction.

Absolute power — who gets bailed out, who gets access to a lender of last resort, who gets access to money at next-to-zero rates, who gets stimulus funds — is today concentrated in the hands of the largest financial players— the US government, and the Federal Reserve system.

And the US government is susceptible (understatement is an art!) to the activities of lobbyists.

Here’s the NYT on that issue:

The financial industry has spent more than $100 million so far this year [2011] to court regulators and lawmakers, who are finalizing new regulations for lending, trading and debit card fees. During the second quarter, Wall Street spent $50.3 million on lobbying, a small dip from the prior period, according to an analysis by the Center for Responsive Politics.

 Big banks are among the most prolific spenders. JPMorgan Chase‘s team of in-house lobbyists spent $3.3 million, a slight uptick over last year. The biggest war chest among organizations focused primarily on Dodd-Frank belongs to the American Bankers Association, which so far spent $4.6 million on lobbying. The organization wrestled the top spending spot from the Financial Services Roundtable, a fellow trade group that represents 100 of the nation’s largest financial firms.

And the Federal Reserve itself is much worse still. Its stock is owned by private banking interests:

The 12 regional Federal Reserve Banks  issue shares of stock to member banks. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

The banking industry effectively writes much of its own regulation, because it is enmeshed into the governmental-bureaucratic superstructure:

Frankly, I don’t think that power could get any more concentrated.

So surely only the naive would be surprised that the banking industry — through their benefactors at the Fed — bailed themselves out of the last crisis to the tune of $29 trillion.

And that is not just unfair; it’s unhealthy.

As I wrote in November:

Bailing out failed and failing financial institutions creates a zombie economy. Why?

In nature, ideas and schemes that work are rewarded — and ideas and schemes that don’t work are punished. Our ancestors who correctly judged the climate, soil and rainfall and planted crops that flourished were rewarded with a bumper harvest. Those who planted the wrong crops did not get a bailout — they got a lean harvest, and were forced to either learn from their mistakes, or perish.

These bailouts have tried to turn nature on its head — bailed out bankers have not been forced by failure to learn from their mistakes, because governments and regulators protected them from failure.

So it should be no surprise that financial institutions have continued making exactly the same mistakes that created the crisis in 2008.

So while it is all very well debate the various schemes to end the problem of too-big-to-fail, it is important to remember that the problem will ultimately solve itself — a system that rewards failures and creates zombies is fundamentally unsustainable.

Ron Paul does not need to end the Fed. By bailing out a system shot with fragility, leverage junkies and counter-party risk — by attempting to sustain a system that is fundamentally unsustainable — the Fed is quietly abolishing itself, or at very least strongly endangering the status quo.

by

Stiglitz vs Krugman

A very interesting front is opening up regarding the current state of America.

Some economists believe that the main problem in America is a lack of demand, defined as the desire to buy, the willingness to buy, and the ability to pay for it

From Paul Krugman:

There is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn’t, ultimately, economic; it’s political, brought on by an elite that would rather cling to its prejudices than turn the nation around.

The implication here is that people just don’t have the money in their pockets to spend at the levels they were five years ago, and the solution is (through whatever means) giving them that money.

As well as the obvious (and accurate) Austrian retort that demand in 2006 was being pushed skyward as part of a ridiculous and entirely artificial debt-financed bubble, other economists believe that a lack of demand is just a symptom of other underlying symptoms. I myself believe that the three main problems are a lack of confidence stemming from high systemic residual debt, deindustrialisation in the name of globalisation (& its corollary, financialisation and that sprawling web of debt and counter-party risk), and fragility and side-effects (e.g. lost internal productivity due to role as world policeman) coming from America’s petroleum addiction.

Now Joe Stiglitz has weighed in in a lengthy and essential Vanity Fair piece:

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.

Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity — the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.

The consequences for consumer spending, and for the fundamental health of the economy — not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.

So far, so excellent. Stiglitz first shovels shit over the view of Fisherian debt-deflation as the main cause of the slump in demand — debt-deflation is a symptom, and a very nasty one, but not really a cause. Second, Stiglitz also correctly notes that today’s ailments are the result of social, infrastructural and productive upheaval in the real economy. He correctly identifies the leading trend here — manufacturing (and, it should be added, primary industry) has been ripped out of America by the forces of globalisation, and the powerful pull of cheaper wages. This is a strong explanation of why Krugman’s view — that the only thing missing is demand, and that government can fix that in an instant — is nonsense.

As I wrote earlier this month:

The point here is that economic health — and real industrial output, measured in joules, or in “needs met” — and money circulation are in reality almost totally decoupled. Getting out of a depression requires debt erasure, and new organic activity, and there is absolutely no guarantee that monetary easing will do the trick on either count. Most often, depressions and liquidity traps are a reflection of underlying structural and sociological problems, and broken economic and trade systems. Easing kicks the can down the road a little, and gives some time and breathing room for those problems to be fixed, but very often that just doesn’t happen. Ultimately, societies only take the steps necessary (e.g. a debt jubilee) when their very existence seems threatened.

Stiglitz continues:

What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.

Now, I don’t really have a problem with the idea that government can do some good. If people in a democracy choose to solve problems via public spending, well, that’s part of the bargain in a democratic state. Even Adam Smith noted that government should fund “certain great institutions” beyond the reach of private enterprise.

But here we reach the great problem with Stiglitz’s view:

The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want — into productive activities that increase living standards, not those that increase risk and inequality.

The United States spent the last decade (arguably longer) and trillions of dollars embroiled in wars aimed at keeping oil cheap, and maintaining the flow of global goods precisely because America is dependent upon those things. America does not play global policeman out of nicety or vanity — she does it out of economic necessity. That is precisely because America let globalisation take away all of her industry, making her dependent not only on the continued value of her paper dollar, but on the flow of global trade in energy and goods.

Investing more money in services will leave America dependent on these contingencies. And dependency is fragility — and the more fragile America becomes, the more aggressive she becomes in maintaining and controlling the flow of global goods.

Any stimulus package ought to instead be focussed on making America energy independent, and encouraging innovative new forms of manufacturing (e.g. 3-D printing) that can undercut Chinese labour.

So while Stiglitz must be commended for seeing through the haze, it is rather puzzling that his alternative is services, rather than self-sufficiency.

While America is dependent on foreign goods and energy, she is prone to not only waste huge amounts of productive capital on war and weapons, but she also risks serious economic damage from events such as oil shocks, geopolitical shocks, regional wars, and — well — anything that might slow down or endanger global trade. Her need to police the world makes her even hungrier for oil, which means she spends more money on the world, which makes her hungrier for oil.

by

Death by Hawkery?

Joe Wiesenthal presents an interesting case study:

These two charts basically explain everything.

The first chart shows the yield on the Swedish 5-year bond.

As you can see, it’s absolutely plummeting right now.

chart

Image: Bloomberg

Now here’s a look at its neighbor, Finland, and the yields on its 5-year bond.

chart

Image: Bloomberg

Basically they look identical all through the year up until November and then BAM. Finnish yields are exploding higher, right as Swedish yields are blasting lower.

The only obvious difference between the two: Finland is part of the Eurozone, meaning it can’t print its own money. Sweden has no such risk.

This is a narrow version of something that much of the media picks up on earlier last week that UK gilts were trading with a lower yield that German bonds, a reflection of the same principle: In UK the government can print. In Germany, it can’t.

Yes — investors are happier with the idea of buying bonds which may be debased by money printing, than they are with the idea of buying bonds which may be defaulted on because the sovereign cannot print. But there is another element at play here, which may be much bigger.

Easing, of any sort won’t solve the underlying global problem — as explained by Reinhart and Rogoff in better detail than I have ever done — of excessive debt levels. By conducting QE (i.e. taking sovereign debt out of the market) governments are simply artificially contracting the supply, and in my view pumping up a debt bubble.

It’s important to consider Japan here — yields in Japan are as low as ever, and creditors are still taking their pound of flesh. That can’t be a bubble, can it? Creditors aren’t losing their money? Well, it depends how you define return on investment. Investors in Japanese bonds may be getting their money back, but Japanese society is slowly being strangled by a lack of organic growth and a lack of any real kind of creative destruction. Wages and living standards fall while unemployment rises. So Japan has become zombified, and in theory similar cases like the United States and Britain should follow down the path of death by slow Keynesianism (they won’t, because they are far more combustible societies than Japan, but that is another story for another day).

In light of all that, while the Teutonic monetarist hawkery may superficially look stupid, if we look at the resulting Euro-implosion as a potential trigger to crash global markets, burst the global bond bubble, trigger a cascade of AIG -esque events, culminating in the breakdown of the global financial system, a debt reset, and a new global financial order well then it’s really quite clever. Ultimately, a debt reset is what is needed to effectuate new organic growth and new jobs, and to clear out the withered remains of umpteen bubbles that have been created in the last twenty years through easy money.

I doubt that the stern bureaucrats at the ECB are anywhere near as clever or far-sighted as this (their most significant concern appears to be sound monetarist economics) but there is quite possibly genius in this stupidity.

So — rather than death by hawkery, I foresee rebirth.

Of course, on the other hand the “hawks” may just end up printing like their American counterparts.

by

Abstraction & Reality

Brad DeLong alleges that critics of fractional reserve banking and fiat money suffer from (at best) a mental disorder (or, at worst, anti-semitism).

From Brad DeLong:

I think that the deep point of view underlying von Mises’s — and von Hayek, and Marx, and Ron Paul — complaint against fiat money in general and monetary management of the business cycle in particular is this: that value comes from human sweat and toil, not from being clever. Thus it is fine for money to have value if it is 100% backed by gold dug from the earth by sweat and machines and muscles (even if there is no state of the possible future world in which people actually want to exchange their pieces of paper for the gold that supposedly backs it). But it is not fine for money to have value simply because it is useful for buying things. There is, von Mises — and Marx, and von Hayek, and Ron Paul — think, something profoundly wrong on an economic and on a moral level with procedures that create value that is not backed by, in Marx’s case, human labor, and in von Mises’s and von Hayek’s case human entrepreneurial ingenuity. And in its scarier moments some of the trains of thought emanating from this deep point of view slide over to: “good German engineers (and workers); bad Jewish financiers” (and “good Russian Stakhanovites, bad Jewish Trotskyite intellectuals”).

Now I cannot speak for any of those named, but I am a critic of aspects of fractional reserve banking, and monetary management of the business cycle.

As I wrote last month:

Fractional reserve banking… means that the money supply is not in fact determined by the central bank (or by gold miners, politicians or economists, etc) but mostly by lenders. The problem is the fragility of any such a system to liquidity crises. If 10% of investors decide to withdraw funds at the same time, banks will quickly be illiquid. If 20% of investors do, bank failures will usually pile up. The system’s stability is contingent on society’s ability to not panic.

It is my belief that this fragility has been totally overlooked. Many have fallen into the lulling notion that the only thing we have to fear is fear itself — and that that fear can be conquered by rationality. This is to ignore man’s animal nature: the unforeseen, the unexpected, and the wild (all of which occur very, very frequently in nature and markets) make humans fearful, and panicky — not by choice, but by impulse. This is the culmination of millions of years of evolution — primeval reality is unconquerable, immutable and obvious. More than half a century after Roosevelt and Keynes markets still crash, fortunes are lost, and millions of grown men and women still tremble in irrational, primitive fear.

The textbook answer to this is that a lender of last resort should fix this problem by ensuring that enough new money is disbursed into the system for it to remain liquid, and confidence regained. The recent reality, though, has been that rather than fixing the problems, policy  — both in Japan in the 1990s, and now in the West — has resulted in zombification. Governments chose to keep bad banks going. Almost all the new money the government created has gone to shore up the balance sheets of irresponsible bankers. Now those banks sit on piles of idle cash while other businesses starve or cannot get started for want of credit.

As I noted earlier:

Vast sums spent on rescue packages to keep the zombie system alive might have been available to the market to increase the intellectual capabilities of the youth, or to support basic research and development, or to build better physical infrastructure, or to create new and innovative companies and products.

Zombification kills competition, too: when companies fail, it leaves a gap in the market that has to be filled, either by an expanding competitor, or by a new business. With failures now being kept on life-support, gaps in the market are fewer.

In other words, fractional reserve banking seems to lead to fragile systems that are hard to fix when they go awry. Now, I will readily admit that perhaps I am railing against a system that I can’t change or ban. Banning fractional reserve banking, or shadow banking or the various forms exogenous money creation will probably just drive it underground. Certainly, a pure gold standard has never prevented it. Perhaps full-reserve banking or the Chicago Plan may be some kind of panacea, but these ideas remain untested.

So — for me at least — the problem is not where money comes from, or whether it is backed by gold, or backed by labour, or entrepreneurship, or the Flying Spaghetti Monster. It is the managerialists’ mundane and matter-of-fact ignorance of the depth, the richness, the randomness, and the texture of reality – not captured by models that focus solely on money. The problem for me is that I see a fragile system and I want to fix it. But I am not sure I have the tools…

by

Japanisation & the Zombie Apocalypse

America and Japan’s responses to their housing blow-ups have been eerily similar. So too have been the results.

As I wrote in August:

Essentially, in both the United States and Japan, credit bubbles fuelling a bubble in the housing market collapsed, leading to a stock market crash, and asset price slides, triggering deflation throughout the respective economies — much like after the 1929 crash. Policy makers in both countries — at the Bank of Japan, and Federal Reserve — set about reflating the bubble by helicopter dropping yen and dollars. Fundamental structural problems in the banking system that contributed to the initial credit bubbles — in both Japan and the United States — have not really ever been addressed. Bad businesses were never liquidated, which is why there has not been aggressive new growth. So Japan’s zombie banks, and America’s too big to fail monoliths blunder on. Policy makers “saved the system”, and ever since then have gradually dealt with slowdowns through monetary and fiscal easing.

Today Zero Hedge provide some empirical evidence for just how similar these events have been.

Stocks have followed broadly the same crisis-bailout-crisis-bailout pattern:


Money velocity has slouched at a similar rate:


Equity values relative to earnings have not recovered in either nation:


Some of those among us may say that all of this shows that Japanisation really isn’t that bad: with an ageing population, and powerful vested interests demanding consistently high government spending in spite of falling real incomes and falling real estate values, we’re about to head into a 15-year deflationary tunnel. “It won’t be pretty”, they say, “but it will be liveable.”

I think they’re wrong.

So what’s the key difference between America and Japan?

Look at the difference between Hurricane Katrina, and Fukushima.

From NewsFlash.org:

Reuters reported that Yakuza gangs have been sending trucks from the Tokyo and Kobe regions to deliver food, water, blankets and toiletries to evacuation centres in northeast Japan, the area devastated by the March 11 earthquake and tsunami which have left thousands of people dead and missing.

Not to glorify the Yakuza by any means, but compared to the looting and violence in New Orleans that followed Hurricane Katrina in August 2005, this speaks volumes about the enormous difference between Japanese and Americans in coping with natural crises or disasters.

Shortly after Hurricane Katrina left, some residents of New Orleans who remained in the city started looting stores in search of food and water that were not available to them through other means. There were also reports of carjacking, murders, thefts and rapes in the city, although many of these reports were found inaccurate due to the confusion. Then Louisiana Governor Kathleen Blanco had to temporarily deputize members of the National Guard and other federal troops to quell the looting and rioting. The governor said: “They have M16s and are locked and loaded. These troops know how to shoot and kill and I expect they will.”

Essentially Japan’s culture is a (largely) moderate, deferential, conformist, self-negating and (most importantly) united nation.

America is (largely) individualistic, greedy, bitchy and (most importantly) disunited.

From Colin Woodard’s sensational series of posts about America for Bloomberg:

The U.S. is wracked by internal discord between two blocs formed by seven of its 11 regional nations — the conservative bloc that includes the Deep South, Tidewater and much of greater Appalachia, pitted against the more liberal alliance of Yankeedom, New Netherland, the Midlands and the Left Coast. Increasingly, through American history, the conflict between these two blocs has been driving the nation apart.

The country has been exhibiting the classic symptoms of an empire in decline. Kevin Phillips — the political strategist who, back in 1969, used regional ethnography to accurately predict the ensuing 40 years of American political development – – has pointed out parallels with late imperial Holland and Britain. Like its superpower predecessors, the U.S. has built up a staggering trade deficit and sovereign debt while overreaching militarily. As financial services have come to account for a larger and larger share of national output, religious extremists have come to play a bigger and bigger role in political life.

Once a great exporter of innovations, products and financial capital, the U.S. is now deeply indebted to China, on which America relies for much of what it consumes and, increasingly, for the scientists and engineers who are needed by research and development firms and institutions. The U.S. citizenry is divided along regional lines. The country’s military has been mired in expensive and frustrating counterinsurgency wars in Mesopotamia and Central Asia, while barbarians have stormed the gates of Washington and Wall Street, killing thousands in the surprise attacks of September 2001.

Add in the damage to public confidence in the electoral system caused by the 2000 election, the near-total meltdown of the financial sector in 2008, and extreme political dysfunction in the capital, and it’s clear the U.S. hasn’t started the 21st century auspiciously.

Simply, America will blow up into secessionism, class warfare and civil unrest before standards of living for the middle class drop by anything like they have in Japan. The people will get mad as hell, and they just won’t take it anymore. They only hope for America is some kind of real recovery, coupled with new growth, and less dependence on foreign energy and goods. But with a zombified Japanised economy consisting largely of bailed-out uncompetitive failures there is little hope of that.

Civil unrest, followed by secessions, followed by a Second American revolution, is a far more likely scenario.

by

Is it Always a Good Time to Own Gold?

Is it always a good time to own gold?

Absolutely not. A portfolio in the S&P 500 or Treasuries in 1973 has returned a much higher rate than gold bought that year — even if gold raced ahead up ’til 1980, and is racing ahead again now. We know that throughout history gold has sustained its purchasing power, and fiat currency has lost its purchasing power. But we also know that stocks have grown their purchasing power.

But gold continues to rise — so what makes gold different right now? Well, from a technical perspective, America and the West are in a secular bear market:

But a technical perspective doesn’t really give enough political and economic background to explain why we are where we are.

Continue reading →

by

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.

by

Bernanke Didn’t Pump, Equities Get Dumped

So what happens now QE3 hasn’t occurred? Let’s see what I wrote last month:

QE3 has already been priced in so there would be shock. Confidence would plummet, followed swiftly by asset prices, especially the blown-up pufferfish S&P, DJIA and Nasdaq. Two exceptions would be gold, which would shoot up — well above $2000 — and treasury bonds, whose yields would edge ever lower. And plummeting asset prices would mean debt-deflation, leading to more bank failures, and the debt-deflation spiral posited initially by Irving Fisher, and later by Friedman, Schwarz and Bernanke.

Continue reading →