All of this and nothing
By J.M.
Hamilton (3-12-11)
The first
panacea for a mismanaged nation is inflation of the currency; the second is
war. Both bring a temporary prosperity; both bring a permanent ruin. But both
are the refuge of political and economic opportunists.
In the song All of This and Nothing, Richard Butler’s lyrics take us on a journey
describing a shattered romantic relationship and the wreckage left in its
wake. The song contains one of the most haunting saxophone intros known
to rock and roll. Per Mr. Butler of the Psychedelic Furs, the
abandoned flat that hosted the relationship doesn’t contain much of anything,
but assorted debris, painful memories, and “a picture of the
queen.” Inflation is a lot like a problematic relationship… perhaps
a love story that comes to nearly the same ending throughout history, a very
bad one.
Inflation often
serves to provide temporary economic relief, and provides a smokescreen to a nation’s
real problems, which often require long term and economically painful
solutions (call it a structural reconfiguration). Politicians and central bankers often deploy inflation,
as a means to an end: namely, achieving victory during the next election
cycle. The short term beneficiaries of inflation are the financial and political elite, who know better, but ride the wave – enriching themselves –
while the general population, ultimately, suffers with the aftermath:
unemployment, a stagnant economy, soaring costs for commodities and services,
and a stumbling currency. The economic sugar rush that is inflation can
have the look and feel of a normal economic recovery – initially, while hiding
festering problems that desperately need to be addressed, like global banking,
run away government debt, and the lack of a national energy policy, driven by predatory oil monopolies.
Of course,
inflation eventually catches up with everyone – even the elite: politicians
fall, governments are overturned or change parties, corporations fail, and
fortunes are eroded and spent. Take a look at the following chart
showing the S&P 500 results through the seventies, pretty stagnant stuff (for the babes in the woods out there, the '70's and early '80's were a period of rampant U.S. inflation):
According to
the CIA fact book, the median age in this country is thirty-six. This
means nearly half of the U.S. population wasn’t around in the seventies and
early eighties, or was getting ready to enter kindergarten. The
hypnotic – sleeper effect quality of QE2, present monetary policy, lulls the
nation into a false calm, a sense that something is being done about the
public’s problems, which gives our elected leaders an opportunity not to
address the politically undesirable problems that lay before them: like cutting
social security, Medicare, Medicaid, or reining in corporate welfare and tax
breaks, and defense spending.
And the Chamber
of Commerce was afraid of the “uncertainty” allegedly created by the Democratic
Party’s feeble, half-hearted, and weak attempts to overturn three decades of
financial deregulation, culminating Dodd-Frank (banking legislation that is so
pathetically weak that Republicans aren’t threatening to overturn
it). Brothers, sisters, and business community… you haven’t seen
anything until you have lived with double digit inflation. Inflation is
the father of economic uncertainty, as we are all about to discover or
rediscover. And it’s already here.
Fear and
unemployment will drive the 2012 election. No surprise. And this
creates a problem/ opportunity, which is Washington feels the need to do
something, like enrich themselves and their friends, the oligarchs. But
with two wars going, record budget deficits/federal stimulus, and the Fed
printing money like there’s no tomorrow, if the power elite are still struggling
to get this relationship/economy off the ground or put a dent in unemployment –
then we as a nation are in very big trouble. Usually a war kick
starts the economy. Trillions in deficit spending… the “relationship”
heats up and goes into overdrive. Fed hits the switch on the printing
presses and the economic honey moon begins.
The problem created by Washington’s solution this time, as this blog has argued, is that all the government’s efforts are directed at propping up Wall Street banks, the Wall Street produced fallout in the housing sector, or ameliorating the effects of same, VERY LITTLE OF WHICH IS TRICKLING DOWN TO MAIN STREET – UNLESS YOU CATER TO THE RICH. U.S. Republican and Democratic leadership replaces one bubble with another, via war-booms, deficit spending, or asset bubbles in housing, stocks or commodities – created out of thin air by the Fed. And with the herd stumbling back into the stock market in record numbers, how long before the elite banks, and the government, takes their profits out of the stock market and run?
Our “capitalist
society” is hooked on a very bad relationship with big government, with 40 percent or greater of GDP coming from government spending. It is
unsustainable, and as Mr. Herbert Stein, Richard Nixon’s Counsel of Economic
Advisors chairman, so eloquently stated: “If something cannot go on
forever, it will stop.” Can a global restructuring of debt be
around the corner? Watch the PIIGS in Europe closely, for the answer to
that question.
Inflation stands
for the ultimate debasement of the dollar, and the defilement of the American
dream! And the unintended consequences of QE2 are stacking up like
so many couples headed for divorce court. While the Fed maybe trying to
kick start the economy with a boom in manufacturing, to replace the boom it had
previously helped create in housing, with easy money policies designed to make
dollar denominated U.S. manufacturing goods more affordable overseas, this love
interest may be short lived; this is because emerging and foreign markets are
already raising interest rates to stave off QE2 induced capital inflows and
inflation. Interest rate hikes in developing nations will have a
contractionary effect upon their economies, and slow down demand for U.S. manufactured
goods. So America manufacturing will be faced with less global demand at a time when demand here at home is very limited, because we are still suffering
the ravages of the last crisis created by the Fed and Wall Street banks.
Meanwhile, the inflationary effects of QE2 may very well be felt in
this country for years to come (And can we see QE3 around the corner to bailout state, county and municipal government? Yes we can.).
One positive
unintended consequence from QE2 is the democratic revolution throughout the
Arab world. It appears that these folks have been under the boot
heel of European and U.S. sponsored thugs for decades and they are not going to
take it anymore. Rather than rejoice at the possible freedom of the enslaved and impoverished, the big fear here at home is that rising oil prices may stall a nascent economic recovery, and U.S. political aspirations for re-election. What our elected leaders and business community may
fail to realize is that monarchies and military dictatorships are both highly
unstable, and that Arab democracies will be just as hungry to sell BRICS,
Europe and the U.S oil, if not more so, as the cutthroats who presently run the
Arab world. And if, per chance, during this time of governmental
transition throughout the Persian Gulf, oil prices should spike, than the U.S.
should look upon it as an opportunity to, finally, reduce our dependence upon
foreign energy, and start hooking up U.S. transportation and power facilities
to natural gas and alternative energy. But I digress.
In 1979 my
father, a smart man on many financial matters, explained certificates of
deposit to me, and said that he could tie my meager amount of savings
into a C.D. that would earn roughly 14%. I was young and distracted by
other things, like skirts and hotties, but even with my short attention span
fourteen percent seemed like a good deal. The problem was that by late
1979, early 1980, my “real rate of return,” that is my return adjusted for
inflation, at an interest rate of 14%, was probably negative or minus five to
six percent. And that’s inflation. No matter how fast your
earnings and wages may climb the cost of goods and services, once those
inflationary expectations are set, often rise faster. It is very destabilizing.
That is until a Gandhi – like figure comes along at the Fed, an economic marriage counselor if
you will, and says enough is enough, we are going to strangle inflation, even
if the short term economic pain or cure is almost as great as the inflationary
illness, itself. Unfortunately, there are not many Paul Volckers in the
world, and we have certainly not seen his like at the Fed, since his
departure. Had Paul Volcker not saved us from inflation, the
U.S. might have continued to plod along with stagflation, indefinitely, or
worse, really gone off course, “Weimar style.”
At the end of
the day: When you weaken a country, as both our political parties have
done for years, with excessive and unsupported government spending, weak
business regulation, unfunded foreign adventures, and loose monetary policies,
you set a country up for problems and possible failure. Those in
the know, the elite and the politicians, can sometime plan ahead and via
currency arbitrage, protect their interests and assets (all at the expense of
the nation). Shucks, politicians and the elite may even profit from the
demise of a countries currency and economy, through the purchase of credit
default swaps (C.D.S.) and derivative contracts; that is as long as
the counter-party to that financial instrument has the assets to pay off, in the
event of collapse or default.
You see, one
really is gambling when Americans purchase C.D.S. betting against the
dollar and the U.S., because if such a bet comes to
fruition, in all probability there would be no U.S. government
in any semblance of financial shape to bailout the counter-parties.
As happened in Iceland, it has been written that many of the government officials who were
responsible for the collapse of that nation’s banking system, currency and
economy, took out hedging positions against their own country. So
there’s a flag right there. But with derivatives contracts not open to
public purview on open exchanges, how is the U.S. public to know that we won’t
be left, like a jilted lover, with anything other than “a picture of the
queen?”
P.S.
There are some who may still argue that there is no inflation, but if we study the history of the consumer price index (CPI), we know that the government took out unimportant items, such as food, commodities, and fuel a long time ago. Apparently, price spikes that affect the vox populi are inconvenient economic and political truths. As for interest rate inflation, as Mr. William Gross so well noted on the PIMCO web-site this month,the Fed dominates, that is to say, purchases 70% of Treasury debt issuance; effectively crowding out the bond vigilantes, who would, undoubtedly, demand higher yields and insist upon Federal budgetary and monetary policy reform.
There are some who may still argue that there is no inflation, but if we study the history of the consumer price index (CPI), we know that the government took out unimportant items, such as food, commodities, and fuel a long time ago. Apparently, price spikes that affect the vox populi are inconvenient economic and political truths. As for interest rate inflation, as Mr. William Gross so well noted on the PIMCO web-site this month,the Fed dominates, that is to say, purchases 70% of Treasury debt issuance; effectively crowding out the bond vigilantes, who would, undoubtedly, demand higher yields and insist upon Federal budgetary and monetary policy reform.
In
response to the Fed’s monetization of the national debt, both Messrs.
Hemingway’s and Stein’s comments immediately come to mind.
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