28 February 2008

Bonfire of the paradigm

Let me draw on an example first, so that a basis for the explanation can be seen clearly: take the original Rolls Royce company just prior to Thatcher's England. The econo-politics of Thatcherism – a set of concepts that is one of the marker sources of the entire present-day economic reality – is about extending supply-side theory into every sector of life. And by supply-side, it is meant supply of finance and money. Thatcherism could well be critiqued as also placing the finance industry at the peak of a pyramid of priorities and privilege, ahead of anything and everything else including human rights, historically evolved principles of law and justice, god and the crown.

What this right wing idealism in practice translates into, is the theory that financial asset growth can pull the domestic economy ‘forward' even while the means and mechanisms by which growth occurs, focuses on the yearly average liquefiable MARKET price of a capital asset, not its underlying component individual values.

Mature public listed companies' values, are treated differently by common practice, from private assets, and principally are based on year-to-year back earnings records and comparisons of these results with the idea that you can draw certain conclusions about current and future performance from any divergences.

There are two problems with this, one stems from the fact that financial industry corporates are quantitatively dependent on money supply and hence monetary and central bank policy – not internal management quality and practice – and the second is that output/product price is often dependent on high stockpile levels, workforce skill and craft levels, and many other supposedly intangible things. The value of a brand, for instance, is based on the marketplace of real people expecting certain things that the brand traditionally has delivered.

In the case of Rolls Royce, the market that bought these cars, expected 22 years of stocks of spare parts held by the parent company so that there was virtually never, or a virtual lifetime guarantee on parts and serviceability. The price of the cars themselves reflected these expectations, but accounting practices did not reflect the capital asset value of such high levels of stockpiles – they wrote these down as depreciated assets. They were not, in truth, depreciated assets.

During the Thatcher years, Rolls Royce was put on the block and eventually sold. The process by which this happened was the induction of growth by selling off its spare parts stockpile, and the cutting back of the design and craft division. The market was still expected to pay the same price for the same vehicle, but the expectation of what service and spare parts were available was no longer deliverable. The company's balance sheet however, held greater short-term cash, and less depreciability. Year-on-year financial asset growth was the superficial result. The company and the cars have been ill-served though.

…Now let's take this example and filter today's banks and financial industry sector through its lessons. If you remove the internal staffing levels, quality, and evolved operating procedures that expert bankers would have automatically EXPECTED, in banks – thereby lowering radically the year-on-year operating costs – and push through ever higher amounts of cash via ever more bizarre capital inflows (as Bulldog as recently pointed out) and bizarre monetary policies, it then superficially appears that there is ‘growth' occurring. Provided that debt default insurance can cover sufficient percentages of cash write-offs, this picture can go on for quite some time.

In the end, the banks become husks, totally incapable of delivering anything to anyone except to their accountants who are permanently living in a lagging and unreal past. So long as fees can be paid to ratings agencies, accountants, and re-insurance companies, the façade may go on unchecked by any negative ‘authoritative'financial analysis.

Mortgages are concerned with long term assets and therefore capital, and yet huge immediate cash write-offs are seen to occur in what has been termed subprime mortgage lending. No such thing! What is occurring are losses having to be booked caused by the total lack of genuine earnings from THE COST OF REAL CAPITAL. Unlike Rolls Royce, the real market in banking has already discovered that banks do not have money to lend anyone who can genuinely employ debt, and the market does not therefore borrow from mainstream banks. There are some exceptions that still are banks, but their sources of capital and their client base is relatively unique. Everywhere else, all that happens is that a public constituency that is a political necessity, is ‘lent' some houses to live in but which must remain on banks' books as bank-owned capital stock. Some equities are held as bank capital stock, and some government securities too. None of these things earn sufficient real revenues to support the market valuations of banks. And that is why the Federal Reserve must do anything and everything to continue the façade. Underneath the façade lies the reality of a global economy of money and capital assets that are totally outside of the control of the US in particular and of Western banks: oil, industrial and scientific technology, gold, and most food production.

Daytraders often wonder whether their individual stops are met by sophisticated computerization that is designed to steal cash from them even though they have correctly positioned their bets in the major trend. Nobody can prove or disprove such a proposition. But it is far more prudent to assume that it IS the case.

There is a vast amount of inside-banking-circles anecdotal evidence concerning staff theft, ludicrous custodian practices that invite theft of safety deposits of cash and jewelry, and grossly inadequate systems that are exploited to siphon huge amounts of cash out of the bank by unethical and criminal employees and even management. This is the number one problem inside banks today. There has been no media attention given to it and rumours of it are scoffed at. But this is where the problem is.

Anyone who has valuable collector coins, gems, and bullion, is best advised to steer well away from any kind of bank custodial and safekeeping service – if one wants to avoid the tears of losing something truly prized and having sentimental value. Some things of monetary value are also irreplaceable if lost or stolen. The temptation that sees long dormant estate safe packages pillaged from, will soon enough visit itself on some truly valuable and physically small item such as a very rare old coin.

Front counter service standard declines are a sign of much worse internal decline.

Federal Reserve Chairman Bernanke is using outdated concepts about economics and assuming far too much about the power of government and the way societies behave when they are lied to on a sustained basis by their politicians, bankers and bureaucrats and when these try to take a moral high ground whilst scandalously promoting establishment theft.

Recently German banks and the German government has criticized Liechtenstein for inviting tax evading wealthy people to bank there. The German government even bribed one individual $6 million to have them hand over a list of names of tax evading clients.

However anyone who has a finer understanding of money and tax matters comprehends that banks are not the places for ‘offshore' accounts – they may act as short term clearing houses for remittances and monetary transactions, but they are not places for HOLDING money and capital.

As governments increase their ability and awareness of tax schemes and related matters, the upper end of what financial people know is also raised. As governments increase their bizarre impositions of sanctimony about law and justice, education and freedom of speech – whilst evading plain speaking at every turn – they enter into a new type of historical era. The only reason a Democracy can exist, is when neighbours can fight shoulder-to-shoulder risking their own lives and doubting nothing about each other's motives, and when there is a leader as clever about timing and with as good a judgement of critical forces as Miltiades.

There is no such leader anywhere and there has not been one for decades.

All revolutions spring from extraordinary innovations in technology. And constituencies line up behind those leaders who possess the secrets – Portuguese mapmakers, Chinese bamboo rocketry, Venetian gunpowder, Greenwich latitude know-how; there are many examples.

Money and banking just follows power.

Unless the US can make war against Iran and prevail quickly, and do so virtually now, it has already moved into an era beyond its peak moment in world history. Following the decline, discrediting of the ideas, economics and philosophies of the previous power that was, always occurs. Islam is the other side of the same coin – and it too is past its real prime. Places like Dubai are only reinforcing the lack of imagination present in all passing ruling elites.

What it will take to research and develop the new technology needed to resolve the current energy crisis, is beyond what façade economics can invest.

And that is why it is necessary to quickly take control of the oil wealth of Iran immediately. Otherwise, we are on the verge of a kind of Dark Ages. In reality, the current price of gold may be well short of a premium on stable capital. And it may well be true, that the means of locating it safely and using it as a form of real money has not yet been achieved. But it will be and it is inevitable.

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