March 6, 2014

The Disfigured Past and an Ominous Future

With monetary and fiscal policy being completely exhausted in the majority of the developed world, a 'Grand Solution' to the debt debacle is on the horizon. What's coming will ignore the many and empower the few.

"Dictatorship naturally arises out of democracy, and the most aggravated form of tyranny and slavery out of the most extreme liberty" - Plato (The Republic)

The truth is often ugly, not beautiful. It's often hard to accept, and often the first reaction is to deny it being so, despite the glaring inconsistencies of the lies that you are trying to displace. "It can't be", "They wouldn't do that", "That's impossible", "They couldn't"... are all too familiar guttural responses to new paradigms unfolding before our very eyes. Today, there are some assumptions and facts we hold true that are in fact completely false.

Maybe that's why people are so often misled by lies - simply distracted; it is always more pleasurable and comfortable to behold something beautiful rather than something ugly. It seems this tenet is at the core of today's society as a whole. Distraction by the beauty of lies. Safety in numbers.

Before this article becomes a philosophical treatise, let me explain how all this applies to the financial markets we all participate in today. Do remember, that simply by earning an income or buying goods & services, you automatically take on currency risk in the form of purchasing power/relative value depending on what other members of society consider that currency to be worth. So even if you do not participate in trading and investment activities per se, you are in fact a financial market participant nevertheless.

What's the problem?

The nature and breadth of the 2008 economic crisis re-wrote the rules of the game for all asset classes and challenged the foundations of accepted economic theory. The personal debt bubble became a corporate debt bubble and in turn it is now a sovereign debt malaise awash with currency debasement. There is no more space left for further debt inflation - the water has reached the ceiling. Central banks have run out of options in their task of delivering stable inflation, growth and employment. Not to mention a robust monetary system. 

Photographic illustration of financial markets in Q2 2014
The established authorities do want a stable monetary system that works reliably and efficiently. For them. The issue that was announced as the root cause of the Global Financial Crisis (GFC) in 2008 was household mortgages (upon which so many of the trillion sized derivatives/insurance markets were based).

Household mortgages/sub-prime debt could have been financially reinforced thus avoiding the sub-prime rooted debt debacle that was created since. Instead of arranging hasty summits and forcing taxpayers to rescue large banks, the US Treasury/Fed could have met in a hastily agreed summit and rescued the millions of household mortgages and consumer credit that were the root of the GFC.

According to the US Census Bureau, the United States had ~115 million households in 2010. Depending on various reports, at the height of the financial crisis in 2008, the US had between 10%-30% of households classified as being in 'financial distress' and on the verge of foreclosure/repossession. The median house price in the US in 2008 was approximately 250,000 USD according to Federal Reserve Economic Data (FRED).

Even a rough calculation suggests that to directly support homeowners/borrowers and save the entire US housing market in one swoop, thus alleviating the sub-prime problems in a 'bottom-up' way, the US Treasury/White House/Fed would need to raise ~ 5-9 Trillion US dollars. That may sound like a huge number and the whole idea may sound very socialist/interventionist - but surely it would have been preferable to the Fed signing off on a $16 Trillion capital line to US and foreign banks that same year?

A socialist/interventionist response was enacted, just not in favour of homeowners. After the folly of rescuing insolvent banks/insurance companies/automakers, the Fed then embarked on a destabilising course of action that has undermined capital markets, global trade and market equilibrium in almost all asset classes. Fed buying of US Treasuries has distorted the bond markets and warped equity valuations. Quantitative Easing (QE) has distorted the USD plus the broader FX market as well as Gold and Silver.

The 'top-down' support method of helping conglomerates, multinational corporations and large banks first (and hoping for that assistance to trickle down to the lower rungs of the pyramid) has left real and comparative value completely blurred. The very fabric of the the financial environment the Fed was supposedly founded to ensure has been vagariously sullied by zero rate policy (ZIRP), extensive money supply manipulation and currency debasement on a global scale - led primarily by the Federal Reserve (Fed) and its band of brothers: Bank of England (BoE), European Central Bank (ECB), Bank of Canada (BoC), Swiss National Bank (SNB), Riksbank, Bank of Japan (BoJ) and the mysterious Bank of International Settlements (BIS).

Truth is stranger than fiction

If the Fed was seriously interested in stimulating the 'multiplier effect' and increasing the 'velocity of money' in order to raise aggregate demand, intensive market support would have been directed towards those that spend/consume rather than those who hoard and speculate. Disposable incomes, spending, investment and job creation would have been the likely outcomes. However, a policy of recapitalising unhealthy firms as a priority has only allowed the disease to spread and fester. By taking the top-down approach the world central banking community (led by the Fed) has aggravated and intensified the core problem (debt) rather than alleviate it.

Trying to stimulate economic activity with a top-down approach instead of bottom-up is the equivalent of a zoo-keeper giving food to only the largest animals and expecting them to share it. Or trying to grow a tree by attaching fertiliser to its branches rather than spreading it over the soil. It seems the Fed has mistaken the US economy for a champagne tower.

The approximate nominal sum of money required to help homeowners and those at the bottom of the problem would have been smaller compared to the admitted trillions provided in 2008, billions more between 2008-2014 and still counting at $75bn per month today in the US alone. There are so many different abbreviations and categories of support and its all made purposefully complicated in order to distract from the underlying truth that central banks do very little to help economies and in fact, they are a huge burden that prevent the sickly patient from recovering. Their policies are always carefully worded, always rhetorically vague and hardly ever graced with success or achievement. They manage the very bedrock of financial markets and yet they are unelected, unaccountable, immune from consequences of any kind and their loyalties are clearly tilted towards the rich and powerful rather than the poor and weak. Ugly, isn't it?

Fed transcripts recently published after a suspiciously long 6 year hiatus, are being publicly propagandised, spun and advertised as if they are the historical record that narrates a truthful account of what occurred in 2008 during the initial stages of the crisis. I don't dispute what was said or what wasn't. The focus of their deliberations and final decisions is what I am questioning. All Fed members were focused on supporting firms and corporations that were insolvent, severely under-capitalised and unfit for purpose. That much is clear. Conglomerates were helped because they were too big to fail, while distressed homeowners were ignored because they were too small to matter. Profits were privatised, losses were nationalised. Ugly, isn't it?

A disfigured past

In actual fact, most of the events preceding the financial crisis were already decided and agreed prior to their outcome. The hasty meetings, feigned surprise, scare-stories of civil unrest and threats of 'Martial Law', emergency bailouts etc. were all sideshows to promote the distraction.

It is now a near certainty that Ben Bernanke publishes a book that further disfigures the past and adds another false layer to the story.  Thereafter it will be a procession of awards and renown for saving the US economy and handling the pressure with such aplomb. 'Bernanke's scholarly understanding of financial crises was the bedrock of his wisdom and unwavering nerve even in the darkest of times' is what the heralds will cry from the rooftops and 'Time Magazine' proclaims to be the 'inside story finally revealed' of what happened in 2008. His book will be a NY Times best-seller in days as reporters stumble over themselves to ask the simplest of questions - yet as always, to receive the most vague and rhetorical of answers. It will be a beautiful story that distracts a plethora of peer reviewed authors, financial editors, market analysts and ensnares historical record, to be sure.

Fed policy has been an outstanding failure for the majority of US citizens and by extension the rest of the world, although it has been a boon for major corporations, monopoly-engaged moguls and the staffs they all keep. It is worth mentioning that the Fed's focus on targeting unemployment when deciding QE/QE Tapering is completely mistaken. Corporate profits are rising despite the lack of employment and according to some sources, unemployment is rising, not falling. The world is changing: as the Industrial Revolution evolved the Manufacturing process, so today, Mechanisation is doing the same. The Fed seems to believe that today's unemployment in the US is cyclical whereas in fact it is structural. The jobs are not coming back.

TARF, TALF, QE, and now QE Tapering are but mere beautiful distractions to the ugly truth that globally cabalistic central bank policy is like a dose of chloroform, sedating every financial market participant and leading them down the proverbial garden path. Up trending equity markets alleviate denial but they will not offer a cure.

An ominous future

In this article I am suggesting that the disfigured past is making way for an ominous future, as global monetary policy and its political associators escort the world's financial system toward a technocratic, centralised and monopolised quasi-feudal juggernaut. Why have several national, regional and local banks when it's more efficient to have a single global bank? Why have local grocers and supermarkets when you can have 'WalMart'?

This is the premise being adopted by key policy-makers behind closed doors, with supplementary plans for key industries such as oil & gas, healthcare, law, defence, technology, utilities, finance and the broader political process in various countries. Europe is moving towards a Banking Union while economic/political unions such as the EU, African Union (AU), North-American Union (NAU) are supplemented by numerous trade blocs (NAFTA)/trade organisations (WTO) that claim to catalyse foreign trade but are in fact designed to homogenise and harmonise every nation to the same standard - financial or otherwise. The rationale is that countries will be made more efficient and become more conducive to trade, the more they harmonise and give up national sovereignty to a larger, macro organisation that isn't bound by national parliaments and constitutions.

Putting aside the rhetoric, harmonisation in all scales and scopes may standardise how things are done but this is not the core goal. The core goal is to transfer as much power as possible from the many to the few. In order to make policy-making more unilateral, less transparent and pliable for the unelected elite. National sovereignty is one of the strongest barriers to this 'standardisation' which is why the European debt issue has raged on for so long.

Financial market solutions to the European debt problem will not be forthcoming until national sovereignty is signed over to central banks, think tanks, advisory committees, private consultants and Non-Governmental Organisations (NGO's). In Europe's case, that would be the Troika. As soon as this transition occurs, the debt problems will be solved very quickly as a proof of concept. Those responsible for the design will be given awards for their glorious economic prowess. Do remember that we live in a world where the grizzliest warmongers are given the Nobel Peace Prize and the most incompetent central bankers are titled 'Man of the Year'.

The reality is that all this is being done by design with public opinion carefully managed to ensure that desperate people beg for solutions that only further entrench their desperation.

If at first you don't succeed...

After the Second World War, many countries were considering ushering in a completely new financial status-quo. At the 1944 United Nations Monetary and Financial Conference at Bretton Woods, in the United States, British economist John Maynard Keynes proposed the formation of a clearing exchange which would have centralised all trade and exchange around the world and given full oversight of such transactions to a single entity called the International Clearing Union (ICU).

Originally, the ICU was earmarked for the following:
  • To serve as a global bank, acting as the sole clearer for all trade between nations
  • All global trade to be denominated in a single, global unit of account - The Bancor
  • The Bancor would have a fixed rate of exchange with each national currency. The rate would change depending on the balance of trade between each nation
  • Every good exported would add Bancors to a country's account, every good imported would subtract them
  • Each nation would be incentivised to keep their Bancor balance close to zero
  • Create a self-balancing system whereby if a nation had a large Bancor surplus, the ICU would charge a percentage to be kept in reserve at the 'Clearing Union's Reserve Fund'
  • Nations that imported more than they exported would have their currency depreciated against the Bancor; encouraging other nations to buy their products, and making imports more expensive
  • Gold and national currency would no longer be used in international trade and no longer move between countries
The plans never materialised for various reasons but Keynes has not been forgotten. The economic principles we hold true today are heavily influenced by Keynes and most central banks/governments in the world today operate extremely Keynesian economic policy. Interest rates and fiscal policy have been used exclusively over the past 10 years in order to stimulate and guide economies on all continents, following the 2000 dotcom bust and the 2008 GFC.

Keynesian policy has largely been a failure not only in theory and practise; its logistical implementation has been severely challenged by speculators to boot. However, most market participants remain under the illusion that the economic problems of today have been caused by not tweaking monetary/fiscal policy to the correct balance. In actual fact, any monetary/fiscal policy mix over the past 100 years would have led to recurring imbalances, boom & bust cycles and impotent policy effects regardless of which school of economics ruled the roost. This is because the people implementing economic policy are always encouraged to act in their self-interest which is often at odds with the interests of the citizenry. Fractional reserve banking is a case in point.

G20 policymakers are not stupid. They are not conducing the worst monetary/fiscal policy mix in history because they actually think it might work or because they think Keynesian economics is the best suited path. They are doing it because they are backed by gargantuan commercial interests that need policy decisions to go a certain way. Disagreeing means not being paid, and prevented from advancing to a higher station.

Corporotocracy enshrined in law

With monetary/fiscal policy being completely exhausted in the majority of the developed world and the central banking community ignoring the drastic failures of their policy decisions, in addition to being staunch Keynesian doves at heart - a fresh attempt to create a Clearing Union with a single global reserve currency attached are now moving from the developmental to the implementation stage. The goal is to create a globally centralised banking system that has minimal national sovereignty and maximum integration with the private sector. Corporotocracy enshrined in law.

The role of the ICU will naturally pass to the IMF and World Bank. Appropriately titled, to be sure.
It would fit into the charade currently being promoted that the world's sovereign nations have too many different interests for demand/supply to balance effectively.

The charade is that the financial crisis happened unexpectedly and spread like wildfire because national governments/central banks were unable to co-ordinate an adequate, multilateral policy response given the differences in each country's interests. Trying to get dozens of nations to agree to a standardised set of policies (and quickly) is understandably difficult which is why its easy to become distracted by the propaganda and believe that G20 central banks were powerless to prevent or to stop the GFC and the subsequent bubbles that have inflated since.

Agencies like the IMF/World Bank are readying themselves to be given the mantle of world saviours for the benefit of all. National governments have purposefully been made to look inept, error-prone, lazy and uncoordinated. This has been done by design: when there is no more room for 'kicking the can down the road', the 'People' will scream out for an agency that can avoid all the political, economic and operational hurdles and provide economic stability. Their own governments were powerless, but the IMF/World Bank are powerful.
Feigning independence, the IMF/World Bank will stand shoulder to shoulder as an economic silver bullet to slay the debt vampire.

Unifying and harmonising fiscal/monetary policy between nations and creating a single currency is a meme that is slowly rising to the surface as being the 'Grand Solution' to the problems in Europe, the US and the debt malaise gripping most G20 countries. Special Drawing Rights (SDR's) are already the IMF's standard unit of account, having been introduced in 1969.

Bubbles are made for bursting

In a previous article, 'Seasons, Cycles and Spirals' I discussed the tilt that will inevitably happen in the coming months or years. It may be an ugly idea, but there is the realistic possibility that the markets will be purposefully crashed when the frameworks required to facilitate ICU/Bancor have been put in place and readied. All it requires is for the Fed to remove the HFT-powered safety net and stop the printing presses. How far we are away from this is difficult to say. A European Banking Union would likely need to be completed first and foremost.

As they say in trading circles, 'markets go up the staircase, but go down in an elevator' - when the timing is right, the equity markets will crash. Backed by incessant media fearmongering, it will probably lead to widespread calls for supranational organisations to step in and calm the markets given the 10%+ daily declines that are bound to occur. The same narrative that founded the creation of the UN and the EU (to prevent future wars) is the same narrative that would be used to shift global economic policy decisions to the IMF/World Bank (to prevent future debt bubbles/financial crises).

Of course, despite the creation of the UN/NATO/EU, wars still occur on a regular basis (often legalised and backed by these same agencies). The real effect has been the erosion of sovereignty and national independence with power consolidated into fewer hands. Expect the same modus operandi when the financial system is systemically restructured to suit conglomerates and oligarchs while in the interim 'The Age of Austerity' squeezes the masses into desperation and submission. People are always more malleable and agreeable when they are desperate.

The ICU/Bancor plan may be renamed and re-branded but the gist will remain the same: advertise rest-bite and salvation only to deliver deepening market manipulation, inequality and financial servitude. A beautifully crafted lie is so much more sightly than the ugly truth. Isn't it?

Published by The Big Smoke
Written by George Tchetvertakov