Plus Ça change…

These days I get up at around 4 in the morning to feed my 7 month old daughter. As she falls back to sleep after her bottle I generally cannot do the same. So I start my review of the press and blogs for the next few hours. But although in the past ten years I have often suffered brief periods of apathy brought about by the recurrent inability of our leaders to address effectively the elephant in the room, these days my apathy seems to be more persistent.

The past two days have not been different. More of the same all around. The political class in the West is all aflurry. When they are not making “ground breaking” announcement to the media they are calling emergency meetings with their peers. In either case, great sums are expended if not on new programs then on the security our public figures need these days in order to meet with their accomplices, uncomfortable in the knowledge that not only are they overtly acting illegally and against the wishes of the public they are presumed to serve but acting too against all principles of decency and common sense.

But such is the lot of a politician in the Democratic West today. Like the chap hauled to court following a failed bank heist said when he was questioned by the judge as to why he decided to rob a bank: “Because that’s where the money is your honor!”

Indeed. In the past century we have allowed our politicians in cahoots with the banks to inexorably and subtly subvert the nature of our monetary system. No longer is wealth generated by the gainful employment of human and productive capital. No sir. Wealth today is borrowed in monetary form. Or at least, that’s what the banks would like us to believe and our politicians have swallowed the lie hook line and sinker. Money = wealth. Hence our politicians’ unwavering if obtuse allegiance to the banks because of our politicians’ belief  that money comes from the bank. The concept of “capital” today no longer implies that which was created through the gainful employment of economic actors and re-deployed in order to obtain something that is of greater value still than the original input. Capital today is simply borrowed ready made from the banks and spent thus neither does it it give rise to the traditional chain of employment of resources nor, in a consumer society, does it go on to create something of greater tangible value. This is the very nature of a consumer society. We consume capital we no longer create it.

Capital today is conjured by the banks. Capital today no longer generates something of greater value than the original input thus the difficulty we face in confronting our debts.

Debt can only be repaid or written off. That’s it. There is no third way. So that if borrowed money is not employed to create tangible wealth, the result is an infinite spiral of growing debt just to stay in place.

If debt is rolled over the basic equation does not change; it still needs to be repaid or written off. But, if the capacity of the underlying economy to service the increased debt load wanes, at one point even rolling over existing debt becomes mathematically impossible. This is when gimmickry goes into overdrive. But the underlying equation does not change. In the past century, the USA have been afflicted by a similar situation twice already in 1929 and in 1970. Both instances occasioned drastic and dramatic government intervention and, arguably, at least a world war. Government intervention on both instances has created circumstances that are biting us in the ass today. For example: the origins of Fannie Mae can be traced back to the 30s and the final nail in the European monetary system was hammered in by Nixon when he closed the gold window 40 years ago to the day.

Experts can do all sorts of fancy foot work to show that debt does not matter but anyone with a basic grasp of arithmetic can see the absurdity in borrowing progressively greater amounts of money in the absence of production of intrinsic value that grows at the same rate. Over the past twenty years, Japan should have shown the futility of this strategy. Over the past ten years, the USA should have confirmed the futility of the strategy. So why is now Europe going down the same road when all major markets are evidently and glaringly bogged down in the same cesspool of debt? Insert the definition of madness here.

“If the US Government was a family, they would be making $58,000 a year, yet they spend $75,000 a year, and have $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt, reduced to a level that we can understand.”
Dave Ramsey

John Hussman of Hussman Funds puts out a free letter every Monday morning. John Hussman may not be one of the (self proclaimed) masters of the universe but he is a fund manager that plays cards on the table and has a rather scientific grasp on all things economy and finance. Mr. Hussman’s style is sober, measured and clear. He is neither prone to flights of emotion nor fits of rage nor, indeed, to calling a spade a spade. And yet, in his latest missive “Two One Way Lanes on the Way to Ruin”, even Mr. Hussman had to call the proverbial spade a… spade.

Without question, one of the notions buoying Wall Street optimism here is the hope that the Fed will pull another rabbit out of its hat by initiating QE3. That’s a nice sentiment, but it does overlook one minor detail. QE2 didn’t work.

Actually, that’s not quite fair. The Federal Reserve was indeed successful at provoking a speculative frenzy in the financial markets, which has now been completely wiped out. The Fed was also successful in leveraging its balance sheet by more than 55-to-1 (more than Bear Stearns, Lehman, Fannie Mae, Freddie Mac, or even Long-Term Capital Management ever achieved), and driving the monetary base to more than 18 cents for every dollar of GDP – a level that requires short-term interest rates to remain below about 3 basis points in order to maintain price stability ( see Charles Plosser and the 50% Contraction in the Fed’s Balance Sheet ). The Fed was indeed successful in provoking a wave of commodity hoarding that affected global supplies and injured the poorest of the poor – particularly in developing countries. The Fed was successful in setting off a very predictable decline in the value of the U.S. dollar. The Fed was successful in punishing savers and the risk averse, and driving investors to reach for yield in risky investments that they would normally avoid were it not for the absence of yield. The Fed was successful in provoking those with strong balance sheets to pay down existing higher interest-rate debt, and in creating an incentive for those with weak balance sheets to issue more of it at low rates, resulting in a simultaneous deterioration of credit quality and compensation for risk in the financial system. The Fed was successful at boosting the trading profits of the banks that serve as primary dealers, by announcing precisely which securities it would be buying prior to Treasury auctions, and buying them on the open market a few days later from the dealers that acquired them. The Fed was successful in creating a portfolio of low yielding securities that will be almost impossible to disgorge without capital losses unless the Fed holds them to maturity. On proper reflection, the list of the Fed’s successes from QE2 is nothing short of stunning.

It is beyond comprehension why anyone would wish for more of this recklessness.

Two one-way lanes on the road to ruin

The reason we are facing a renewed economic downturn is that our policy makers never addressed the essential economic problem, which was, and remains, the need for debt restructuring. There are two one-way lanes on the road to ruin, and these – in endless variation – are unfortunately the only ones on the present policy map:

1) Policies aimed at distorting the financial markets by suffocating the yield on lower-risk investments, in an attempt to drive investors to accept risks that they would otherwise shun;

2) Policies aimed at defending bondholders and lenders who made bad loans, which they now seek to have bailed out at public expense.

There is much more in the article that is well worth a read.

As I type this, Merkel and Sarkosy are meeting for another emergency meeting and other than the pathetic big picture pronouncements that beg more questions than they provide answers, the only thing to come out of the meeting that is defined, quantified and dated is that we have to create a Eurobond. In other words, we must borrow more money.

That’s it. Nothing else. Just borrow more money and give it to the banks. Oh, and yeah. Appoint a president for Europe which, if you follow this blog, you will know dove tails perfectly with the aims of the Lisbon Treaty.

No wonder there is no shortage of politicians.


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3 Responses to “Plus Ça change…”

  1. Pat Donnelly Says:


    Not a statesman among them!

    Where is our Bismark?

    • guidoamm Says:

      Without harking that far back, where is our Olafur Ragnar Grimsson? Just like Ron Paul, Iceland is being totally shunned by the punditry, the press and, of course, our politicians. Western leadership is hell bent on hiding the truth. The question as I keep asking is this: are our politicians willing and witting accomplices of the banks or are they truly mere useful idiots?

  2. bertusmaximus Says:

    its like a poker game where the losers keep doubling up, unable to cut their losses but at some stage there will be on more chips to go around … madness.

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