17 March 2009

The real deal, more or less, is common sense


SUNDAY, MARCH 15, 2009
Capitalism, Socialism and Democracy - and Common Sense
Monitoring financial and political news has become a very depressing task recently.
While the USA enjoyed a short fairy tale period between president Obama Barack's election and his inauguration, the staccato of catastrophic news has accelerated into a crescendo of crisis since January. Financial TV gushes with appearances of the global top brass, united in the goal to fend off the consequences of 22 years of highly expansive monetary policy, free market gospel and excessive leverage on public and private levels, but clueless how to achieve this.
Europe fares still worse. What looks like a nosedive in American economic activity evokes images of a freefall in the old world at close range.
Overindebted consumers, now also fearing the increasing possibility of losing their jobs and tightening the grip on wallets thinned by rising public service fees, overshadow the progress in the East.
China's exports hit a roadblock in January with no signs of an improvement and India has to sober up from a credit financed shopping spree, now that the demand for online personal valets is on a steep decline and endangers many a call centre.
Daily closures in the Western hospitality industry clearly mirror a new mindset of frugality among consumers.
Eastern Europe is the ticking time bomb in the backyard of the Eurozone. The region currently wakes up to the devastating effects of forex borrwoing to finance consumer goods. Now the local currencies languish close to their record lows.
Major forecasters offer no relief. The World Bank, the OECD and many other institutions expect the global economy to shrink for the first time in ages. Deutsche Bank recently warned that the German economy could shrink an unprecedented 5% this year. This may still be optimistic given the recent halving of German machinery orders.
"They" Don't Have a Clue
While first being overwhelmed by the fastest contraction in economic activity in recorded history, hanging on the lips of central bankers and politicians in order to get an idea about the future, I have rescinded from this time-wasting procedure for a simple reason. "They" don't have any clue how to handle the rapid disintegration of the world's financial fiat currency system.
Memorializing financial history the current crisis finds multiple precedents. All economic crises in the western hemisphere have rooted in excessive monetary expansion that is only possible under a fiat currency system.
One cannot blame politicians for their preference of a monetary system that allows to catch voters with perks and benefits that will have to be paid for by future generations. But how could I cast a vote for them when they ultimately hang on to economic theories that have never proven to work in the last 4 centuries??
It is a fact that the purchasing power of all unbacked fiat currencies has always been wiped out by inflation. Floating currencies don't float. They only sink at different speeds.
This leads to the ultimate crux in the enduring discussion how to mitigate and solve the crisis. This is not a problem of the acting persons but a problem of the domineering theories where the supremacy of fiat money does never get questioned in the first place.
The global big-wig elite comprised of central bankers, bankers and CEOs, finance ministers and other government members, clings on to a bizarre mix of empty free market phraseology that stands in deep contrast to recent nationalizations on both sides of the Atlantic, and Keynesian attempts to jumpstart the economy with new debts on top of those that have become unbearable already, leading to the current disastrous environment.
Plunging stock markets may be a good indicator that investors correctly mistrust public promises that those in charge have a plan other than to echo the fallacies of John Maynard Keynes, who preached anti-cyclical government intervention to revv up the economic engine. But they conveniently forget the other part of Keynes' model. Keynes also talked about government savings in the fat years in order to finance the deficit spending periods.
At the same time the government's share in the economy rests well above the 40% threshold, hardly a proof that capitalism has developed according to the slogans of promoters from all political camps.
Conservative and progressive political camps apply the old standard fare. Hypocritical calls from the right that demand to let markets work their way through this crisis of epochal proportions are nothing but empty words, given the string of nationalizations initiated by comrades Henry Paulson, Britain's Alistair Darling and Germany's Peer Steinbrueck, all with a strong conservative background.
Capitalism, Socialism Converge in Their Late Stages
Current events disclose a remarkable convergence of capitalism and socialism in their final stages. A privileged few cronies enjoy the perks of power and money while the other 95% have to come to terms with policies that are beneath contempt to the true interests of the average citizen/consumer.
It is not in my interest to prop up ailing banks with my future tax payments who steered themselves into unsustainable profit expectations by rejecting common sense for years.
Peer pressure adds to the systemic problem that no banker can forego profits made by all others. Going back to 2005 there were only a handful of bloggers, economists and market pundits who stood out by warning well ahead of August 2007 when irrational exuberance vanished overnight and the credit crunch set in.
Calming official voices have failed to inform the public correctly ever since.
ECB president Jean-Claude Trichet erred especially at the beginning of the crisis, spreading the wrong word that central banks are capable of ending the crisis. By now he concedes that the end may be far off.
Fed chairman Ben Bernanke did not perform better. Both his speeches and the FOMC's monetary policy of the past 18 months are undeniable proof that the Fed has been behind the curve since the onset of the crisis, fulfilling former Fed chairman Paul Volcker's predictions that US fiscal and monetary policy would be "too little, too late."
The short breath of relief in the aftermath of Obama Barack's electoral victory has meanwhile given way to a far more somber scenario. The president's daily live appearances may show his commitment to the American people, but they lack any guiding substance. Neither he nor treasury secretary Tim Geithner have offered more than vague promises to fix the system, unfortunately omitting anything that could be construed as an effective start to tackle the worst insolvency crisis in history. Do they have a plan, it has to be asked repeatedly until they come forward with an unambiguous policy that shows a willingness to save and distribute government money to those in need.
The situation in the final era of busting fiat currencies reminds me a bit of the system wars between a sleek Apple MacBook Pro and the failure-prone Windows software architecture. Although 90% of PCs are running Windows this does not make them better computers. Remember Microsoft CEO Steven Ballmer who wrote in an email last year that he would get a Mac were he not working for Microsoft!?
The same happens on capital markets. Although the history of fiat currencies is a stream of hyper inflation tales the gold standard does not even get discussed in top circles. This will be hard to overcome as the hopeless indebtedness of the first world can only be written off via hyper inflation or war.
Also do not forget that the world has alrady turned upside down. Now it is the former paupers financing the profligacy of the western money sultans who wrongly thought that creating more paper equals more wealth.
What Happened To Common Sense?
The failure to apply common sense in a world where external business consultants direct company fortunes with their one size fits all templates appears systematic. Over-specialization has elevated many consultants to their own level of incompetence.
Take the car industry for instance. German producers still bet heavily on HP monsters capable of 150 mph top speeds. That's maybe useful for 3 AM commutes between Frankfurt and Hamburg, but in the daily traffic jam choking all metropolitan areas worldwide I would rather prefer some sort of living room on 4 wheels.
The Wrong Dogma of Ever Expanding Credit
Monetary policy has the same shortcomings. Blind to any other model than the perma-failing fiat currency ideology central banks shy away from any thought other than the current - but probably outdated - dogma of ever expanding credit.
Continuous failings of the fiat money system in the past 3 centuries have been aggressively ignored by economists and those actually involved in the economic process. Apart from Hungarian Antal E. Fekete there are no scholars researching the virtues of a gold standard that held inflation close to zero for more than a century in the USA before the Federal Reserve was formed.
Central banks have certainly done an excellent job in demon(eti)zing mankind's oldest currencies: gold and silver.
I am always appalled that the majority of fund managers still doubt the virtues of the only asset that is not somebody else's obligation.
As the whole world is about to suffer dearly from a crisis that has its roots in the irresponsible easy money policy of central banks I begin to wonder why there are no calls for responsibility. Like 9/11, where not a single military was charged with the greatest blunder in American defense policy, all those responsible for the current economic mess have been sent home with a golden parachute after proving their incompetence in the field. This is morale hazard and socialism for the rich at its best.
Who Will Be Held to Account?
While stealing an apple in a grocery store can earn a hungry impoverished evictee a life sentence if it was the third apple he grabbed to fill his revolting stomach, Ponzi schemers like Bernie Madoff are treated with silk gloves. Bankrupting thousands of investors to the tune of $50 billion, Bernie was let to enjoy his luxury condo another 3 months. What an awkward reminder of the sad truth that you are a murderer when killing one while one advances to a statesman when having killed thousands. The same seems to apply for fund managers who bet their clients money on exotic derivatives. It can be safely assumed that Madoff is only the tip of the iceberg.
The breakdown of morale at the wealthiest levels came with the markets nosedive to its current lows: When the going gets tough, everybody runs for the cover of cash.
While the banking crisis in the Great Depression took ist victims, today's Wall Streeters can only be seen jumping out of windows with fat golden parachutes. So much about the self-esteem of the posterboys who had never tired to preach the virtues of performance optimization and risk-taking.
Those few changes made at the top executive level are only window dressing a yet unsolved problem: Out goes the guy who didn't see it coming, and in comes another guy who had not see the oncoming disintegration of American (or European) banking. Is this really the needed change? I highly doubt it.
Politicians Asleep at the Wheel
Our honorable representatives in national and supra-national parliaments are asleep at the wheel meanwhile. Their ears filled with SOS calls from the banking lobbies they are not shy to announce 14-digit bailout packages as if they had only to reach into the state's coffers.
This is not the case anymore. After 4 decades of Keynesian politics all Western countries find themselves at the top of international creditor lists, meaning they have only excelled in creating more public debts instead of obeying the basic rule of commerce: You cannot live on debts forever.
American and European politicians are in for a rude awakening any day soon. China has already publicly voiced its concerns about the solidity of US debt paper in light of an economy caving inward.
The enormous self-destructive dynamics of the current economic hurricane may bring rapid change. People were trampled to death when Wal-Mart offered cheap holiday packages. What will happen if there is a food shortage?
I do not fear that there will be not enough food. But the fact that foods goes through 20 transport stations, on average, until it lands on our table, leave enough risk factors for possible supply disruptions that a recession inevitably creates.
Politicians, now still willing to throw gazillions of fresh fiat money, will very soon have to come to terms with a broadly changed capital market. Close to a billion mostly indebted Western consumers are not exactly the kind of clientele the emerging nations in the eastern hemisphere would like to have. Confronted themselves by faltering economies due to plunging exports they are more likely to use their national savings for domestic stimuli instead of feeding a Western elite that was entirely wrong in its predictions about economic developments although deteriorating indicators had written it on the wall since at least 2005.
Western States Find Themselves in the Role of Beggars
10% unemployment in the USA and not much less in the EU, at least according to official figures, will not make raising capital any easier.
While Mr. Obama certainly radiates a strong commitment to change America's fate, it can nevertheless be denied that he is the biggest beggar in the world who has to come up with some $5 billion in new funds every day, 365 days a year, in order to keep the US in its ill-fated tracks where the military's role seems only to grow.
The situation is not much different in Europe. Starting with my home country Austria that turns out to become the biggest victim of the financial recolonization of the former Austro-Hungarian empire and will probably need IMF help at some later stage, faltering property bubbles in other European parts will only serve as a precursor to a wave of corporate and personal bankruptcies.
Investors have already shed quite some fat last year. According to venture capital group Blackstone, in 2008 $50 trillion or half of the world's savings, were eradicated by crashing stock markets. Or do you know anybody who still made a good bundle last year?
This will limit lending for governments too, when even the ultra-rich have downgraded to merely ultra-rich within a year.
A Struggle of 2 Ideologies That Have Both Failed
This leads me back to my headline. As we have now witnessed the complete and total failure of both Communism and Capitalims within 2 decades the question has to be allowed why politicians still stare at the same worn out pages of their PR cook books, offering only more of the same nonsense that has brought the global economy down to its knees in the first place.
The dispute whether state management or private management is the better option is so long meaningless as we are not able to improve the safeguards that effectively block opportunities to loot the system. As we see these days it often was not a problem that authorities did not know about possible felonies among fund managers and bankers, but that the whole regulation procedures were not enacted against the respective cronies profiting illegally from it. IMHO effective regulation can only be enacted with a focus on true transparency. Why not the Swedish model, where all public documents are indeed public and accessible online?
When taking a closer look at the EU, I notice alarming trends towards more secrecy of this supra-national body that intervenes in the daily lives of some 500 million Europeans. I cannot shed the impression that current political activity serves more the ruling powers who keep telling us they are proteting democracy for us while a slew of police state like legislative shows the opposite. Do they want to save democracy from their citizens who may think very differently than the elected representatives.
As long as there is cronyism and tightly knit elites both political models mainly serve their promoters but not the voters. It is time to think about a 3rd way that combines the motivating factors of capitalism with a social security net that is an expression of the development of our civilization. After all, we should be able to talk instead of wielding ever more sophisticated sticks and stones in countless wars around the world.
Labels: central banks, credit, crisis, ecb, europe, Fed, fiat money, usa

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