Reasons for Optimism in the Long Haul

No.: 
66

Has America lost its soul? Is America too immoral and shortsighted to allow prudent capitalism to work properly? (Yes.) Is the Canadian hedge fund manager, Erick Sprott correct that the U.S. government is now a “dead man walking,” with central bank intervention the main dynamic that allows the U.S. Treasury to roll over government debt at low interest rates? (Marketwatch, Oct. 20, 2009). Is the off-loading of Wall Street’s recession onto the Fed balance sheet the handwriting on the wall?

In an October 20, 2009 Marketwatch article, Paul Farrell gives plentiful reasons why the American economic empire is crumbling. Big business and government have not planned adequately for Black Swan events. Wall Street has sacked Washington. The government has institutionalized greed. The Fed has replaced the U.S. Congress as the nation’s core economic policy institution. Ultimately, the nation looks like Rome near her ancient tipping point (i.e., overspending, corruption, decadence, costly wars, gross wealth inequality, etc.).

One can agree that catastrophic economic events are coming, yet without agreeing that the future will be a disaster. This is a great time to be alive! Optimists with premium skills have fabulous opportunities to help create a better world. Granted, the establishment system is in decline and the emerging system appears pernicious. But the fireworks will pass, greed itself undermining the viability of its creations.

The world has never known a better time to learn than in today’s documentation intensive environment. Difficult times will catalyze our learning. Millions of people are almost ready to recant materialistic superficiality and cultivate robust character. Faulty religious assumptions are nearing a new transparency — a development that may lead to religion becoming more constructive before long.

The expectation of a brighter future is not a denial of the unfolding reality. The U.S. is in trouble — economically, politically, socially, and culturally. Lies, distortions, intellectual dishonesty and foolhardiness bog down our institutions. Sanctified bribery (pressure lobbying) infects our legislative institutions, the wish lists of financial elites further completed each time government changes hands. Lacking a viable third party, American voters are without meaningful economic choices, neocons and neoliberals sharing a globalist economic philosophy. Nevertheless, new opportunities to cultivate goodness will blossom as the storm passes.

Paul Farrell declares a high probability of U.S. economic collapse by 2012, a black swan activating the meltdown. Black swan events (as theorized) are not amenable to precise forecasting; however, the contexts that make black swans plausible are discernable. When a nation has a strong economy and healthy culture (key components of its “immune system”), a World Trade Center attack can be taken in stride. But when a nation’s economy, politics and culture are deeply compromised, a dangerous event can turn into a catastrophic black swan. In America’s weakened condition, a massive earthquake in California might buckle the nation’s weakened legs. A nuclear pre-emptive strike by Israel against Iran might work to the same effect. A loss of the U.S. dollar as the world’s reserve currency could trigger global repercussions as could a mega-spike in the price of oil. History is littered with accounts of nations that fell when theoretically manageable events turned into unmitigable crises during periods of vulnerability. Is the U.S. immune to such hazards less than two decades after the Soviet Union’s collapse? Hardly!

Many traders on Wall Street expect a Treasury funding crisis that is not currently priced into the market. When the market becomes ready to price in the funding risk they will adjust their trading models accordingly. Meanwhile, the current fad is to price in a low odds prospect that U.S. stock market indices might approach 2007 highs. While a return to the highs is unjustified by macroeconomic fundamentals, the same could be said of the 2007 market highs. Yet, the fundamentals did not prevent markets from running on speculative fever. The Dow at 14,198 and the S&P500 at 1,565 look ridiculous in hindsight, but people who rode the lunacy to the top and then bailed out did grab big money — whatever that’s worth (not so much). No universal law prohibits market insanity from taking us there again. However, it is better to manage money with an eye to probabilities than to bet on long shots.

In the aftermath of the technology bubble of 1997-2001, Alan Greenspan claimed that neither he nor the Fed Governors discerned the NASDAQ bubble. While the Fed claims to know the right inflation rate for consumer prices, Fed governors claim agnosticism regarding the right price for assets. Thus, while many media commentators saw the real estate bubble in 2005, the Fed was happily blind.

The Fed wants it both ways: It claims not to manage the money supply based upon asset price considerations, then it turns around and does so for the benefit of banking elites. The Fed is America’s great dissembling institution. It serves the upper end of the banking industry, its policies fostering trickle-down economics. It deceives the U.S. Congress with propaganda about the common good and broadly fails to serve the nation’s best interests.

The Fed is betting that the greed of the financial sector will be so great during this upturn that only a small portion of the newly minted wealth will be disgorged out of financial instruments and into consumer markets. Thus, in an environment of cheap international labor and high unemployment, consumer prices in the U.S. will remain tame. Since most nations are keeping their interest rates relatively low, the Fed anticipates the viability of loose monetary policy without the annihilation of the dollar (with some sleight of hand). Federal Reserve Governors are pursuing bull market paper asset price targeting on behalf of banking elites, surreptitiously growing the money supply asymmetrically for cronies under the cover of maintaining full employment monetary policies.

The general public has taken such a beating in real estate — literally and psychologically — that the home equity ATM for spending and investing will remain marginal for quite some time. Ben Bernanke and his co-conspirators know the public’s back is to the wall because of prior borrowing. They now have another opportunity to run monetary inflation on behalf of paper asset prices with little leak-through to consumer prices. This is the core strategy of the money game: Grow the money supply for privileged market participants while constraining real income growth for wage earners through steady low-rate inflation. All the rhetoric aside, the Fed is playing the same kind of game now that it played during the Bush administration — a game that skews wealth acquisition in this country. Nevertheless, persistent global imbalances may limit the Fed’s continuing discretion.

A 50% retracement of the Dow’s plunge from a pre-crisis level of 13,500 to around 6,500 eliminates most of the crisis disequilibria. Wall Street traders may find that the approach of a Treasury funding crisis does not allow them to push much above DJIA 10,000 to 11,700 if they want to be able to dump massive amounts of pumped up paper assets onto the public before awareness of the approaching sovereignty crisis guts paper asset values.

The Federal Reserve is loaded with experts attached by educational prejudice and social fraternity to democratic plutocracy — the idea that monied elites should rule society from behind the veil of democratic appearances. In a democratic plutocracy a country retains its republican forms and its classic constitution. However, the laws of finance and commerce are read so as to liberate elites to manage national affairs for their own benefit, the constitution silent about new economic dynamics. Indeed, a constitution unamended to defend against central bank malfeasance is a toothless constitution in great matters that impact our destiny.

If the Fed does manage to re-inflate the stock market bubble in the face of an impending Treasury crisis, the gains will not hold. The world’s financial kingpins do NOT want an enduring recovery here because they need additional economic turmoil and social upheaval to flesh out the institutional changes and global bureaucratic apparatus needed by an empowered democratic plutocracy. There is no way to reach the end game without marching many nation-states to the brink where panicked citizens regurgitate long cherished rights of economic autonomy.

Don’t despair! This is an incredibly attractive environment to identify what is wrong with our cultures and institutions. This is a fine season to fight nobly for moral character, global goodness, fair enterprise, ecological sanity and sustainable policies. Greatness grows best in difficult times. Pressures that turn greedy people into garbage will turn people of sound character into diamonds for God and good stewards for society.