What is a delusion if not a false belief held in spite of invalidating evidence? Defined in this Webster’s Dictionary way, many of American’s financial and political leaders are delusional. Some elites claim that deficits don’t matter — they can be inflated away, the resultant distortions of little consequence. Others, including a large chunk of the “Forbes” crowd, think economic growth is a sustainable paradigm on a finite earth — an idea that is dumber in our time than the flat earth theory 400 years ago.
During the dot.com boom the Wall Street crowd thought it reasonable to value “eyeballs” above corporate net income (until it was discovered that page views are not the same as cash). Now, if a firm is granted “too irresponsible to fail” status, it may deserve to become a bank-holding company (see David Weidner’s Dec. 11 essay, “A bank holding company’s plea.”) Even the electorate is delusional, for we continue to allow people with bad judgment to lead the American daydream — in business, media and politics.
Home prices were supposedly set to rise endlessly, thus justifying no-brain mortgages, unsustainable business practices, defective securities, and fraudulent security ratings. Credit derivatives created by Ivy League “quants” were going to make financial risk more manageable, thus creating a safer world. Business executives deserved to be wealthy celebrities, enriched for grasping power rather than furthering sustainable corporate performance. Surrounded by these delusions, why should we be surprised if institutions now loan the U.S. Treasury money for free, and politicians behave like this free lunch will continue?
We could build out a national renewable energy infrastructure of real consequence for less than we’ve spent on one troubled institution — AIG. A big state-of-the art industrial plant may cost one or two billion. By contrast, twenty billion can disappear into one financial institution’s balance sheet, like Citibank, without even restoring the institution. The flawed architecture of our equity markets requires speculative growth; we’re delusional enough to think we should put money into stimulating the model rather than replacing it with an equitable and sustainable architecture. Is it any surprise that many financial elites don’t want an equitable system after becoming addicted to the growth system that effectively widened the gap between themselves and wage earners?
Daily we hear about the “liquidity crunch” and the destruction of investment capital. Supposedly, there is not enough capital so we need to pump up asset prices to recreate it. Questions of legitimacy in money distribution now take a back seat to the imperative of stimulus, as does the morality of bailing bad bets instead of rebuilding productive enterprises. Maybe we should ask why a “capital deprived” environment now produces demand that outstrips supply for zero yield Treasury securities. Maybe there is more money hidden away in elites’ accounts than what is revealed in the Forbes “richest 400 list.” After all, why should elites pay for their bad bets when they can con Congress into making the public shoulder the burden?
Why is it that banks paying 2.5% interest are struggling to attract people to CDs backed “by the full faith and credit of the U.S. government” (Mandaro), while the same government is overwhelmed with bids from those who want T-Bills at zero percent return? Real deflation, if it comes, will benefit both investments, so there must be something else at play. And there is!
The Mom & Pop held CDs just sit there earning 2.5%, whereas the Treasuries may be used by global investors as collateral to leverage themselves into assets that some may assume are now priced on the cheap. While the careful American saver gets 2.5% (less inflation), the fast money crowd is using Treasuries to claim the right of leverage to grasp a greater ownership stake of the world. Meanwhile, the FED is pressuring banks to loan the stimulus money to re-inflate the economy. In other words, the FED is subsidizing mega-investors in their return to the speculative paper-asset pursuit that got us here. This time, though, elites will do their hedging a little more carefully. In the last few years they put too much confidence in the financial discernment of their offspring — Ivy trained elites-in-waiting who anticipate inheriting trillions as the world moves toward global plutocracy decorated with the trappings of democracy.
The demand for low interest government debt may signify that big money coming out of equities, real estate and commodities wants to leverage its way back into depreciated assets — even if the leverage is constrained to more modest ratios than before. This means that economic stimulation policies now function to pump wealth into the speculative sector at the cost to productive sectors.
In all likelihood we are looking at a truncated equity price bounce, not a return to a true bull market. In Wall Street terminology, “we’re oversold” here. The symmetry of the bull and bear sides of the market (technically speaking) is distorted. While it may take five years to work out the technical picture, a middle-sized bounce from recent levels could occur — replete with zigzags. Any updraft will be exploited by Wall Street elites intent on acquiring strategic long-term stakes in key corporations.
This does not mean we’re not headed lower during the next five years. It only means that strategic elites buy up the valuable stuff when it becomes available. Some shares are being coughed up now by people who don’t see the whole picture; more shares will bust loose in the next panic. Meanwhile, super-elites keep cherry picking the good stuff at depressed prices as mutual funds play the rotation game they’ve been taught. The idea among super-elites is to distribute ownership among cultural fraternities, allowing the ownership pattern to get lost in the appearance of market-based distribution.
Of all the delusions we’ve been through, none is more serious than the one we now face. Our government is under the delusion that cheap money will endure. But it is a delusion, since a large swath of the bottom 65% of income earners are in trouble. Irrational materialism combined with debt loads and wage stagnation has taken a toll, evidenced in today’s MarketWatch headline: “U.S. households pay down debts for first time” (Rex Nutting, Dec. 11). The calculations of economic probabilities are complex, but the odds are high that no bounce can endure. Government revenues are going to stagnate or decline, and do so in an environment of growing entitlements.
A faltering real economy combined with downgrades of U.S. debt will not only drive investors away from Treasury Securities but will create technical trends that the fast money crowd will exploit through derivatives. Within a few years the cost of money for the U.S. government will climb much higher than people expect. When this occurs, deficits and the ballooned national debt will matter! With the government needing to refinance a third of its debt each year, rising interest rates will produce a situation where the U.S. government cannot go on without multi-trillion dollar bridge loans from international sources — loans that will be largely fiat money leveraged off of collateral held by financial elites.
Loans of this nature will come with terms that essentially end U.S. economic autonomy and curtail a great many liberties that Americans have taken for granted. Our weakened Constitution will not hold off the onslaught. The larger issue is whether people will have the good judgment to rebuild American institutions properly after plutocracy runs its dreadful course. Hardship can be the anvil for pounding wisdom and character into better shape.