Thursday, December 24, 2009

A Possible Scenario Regarding Our None Too Distant Future.

I think people need to realize, and perhaps they soon will, that the Powers That Be [ I won't use the term government in this piece, except, in quotes, because, in my view, too many otherwise intelligent folks completely misunderstand who and what the "government" are. Hint: An enabler and junior participant in the management of a kleptocracy] are engaged in a massive cover up/fraud, of which the stock market is but one component. Inter alia, I now have serious doubts the U.S. stock market will come close to revisiting the lows of March anytime soon, as the PTB engage in the process of turning the U.S. economy into something absolutely surreal.

Let me be less elliptical by saying that the economic and social deterioration that went into an accelerated phase as of late '07, is, for a variety or reasons, such as the impending collapse of commercial real estate, set to pick up its pace in '10. The PTB's response will be predictable; they will shower massive sums of dough wherever they deem it necessary to the maintenance of their dominant position. My view is that they will start to dispense large sums of money directly to the little people, not out of the goodness of their heart, of course, but simply as a prophylactic measure to forestall the presently somnambulant American public from waking up. Additionally, there is another, more immediate, reason that the "government" will shower we citizen consumers with money, and that simply has to do with the "velocity" of money, which I will get to shortly.

But first: How will government get money into our hands?

"Government" will achieve this goal simply by initiating yet more incentive laden programs and by creating new agencies for the purpose of providing the growing legion of unemployed Americans with jobs. Yes, more Americans will be, either literally, or de-facto, employed by "government" doing all sorts of things. What better way to control the restless and hungry then if you are their source of sustenance, sustenance being broadly defined. "Government" is, after all, the only sector of the economy that is actually growing, and the purpose of having the "government" grow even more, which seems suicidal given our fiscal and financial state, is to create a mechanism by which all the pending credit can be successfully funneled into what remains of the non"government"portion of the nation's economy.

The big robber baron banks simply will not lend, and the "government", acting as, to put it crudely, the big banks' bitch, can't make them. So, the "government", with the big banks' blessing, will begin to act as the direct dispenser of filthy lucre, putting cash directly into the hands of citizens, aka consumers, via the aforesaid mechanisms. Expect some sort of "New Deal II" plan to arrive next year as the double dip recession- more properly seen as a one off, long term, deep dip, Depression- reasserts itself. All this activity will finally begin to unleash the fearsome forces of hyper-inflation as massive numbers of people are literally induced into spending. There is, however, a fly in the ointment.

This last ditch effort to avert the massive force of the deflationary black hole sucking the life out of the U.S. economy will fail, because the bond market will smell a rat-it likely already has- and the subsequent panic out of sovereign credit instruments, and another nasty round in dollar selling, will cause the U.S. to have to monetize even more, if not all, of its debt.

The deflationist argument, or the strongest part of it, has, as near as I can tell, centered on the idea that all the credit creation will fail to make its way into the general economy. It's the old "pushing on a string" thesis. This has been true so far. The (velocity of money) problem that has neutralized, to date, all the massive credit creation, save for inconsequential stock trading and government bond parking-will be temporarily ameliorated by putting money directly into the hands of We The People. However, to repeat, the effect, but not the only effect, of that, will be a panic in the credit markets as those markets realizes that there is no practical limit or end to what is euphemistically referred to as Quantitative Easing.

As an added note, a less powerful-but not wholly errant-part of the deflationist argument has been that fostering hyper-inflation would destroy the credit markets. The implication is that the Powers That Be wouldn't take the hyper-inflationary course so as to avoid such an unthinkable outcome. This argument rests on several false premises, but I will focus only on one. Where the deflationists have it wrong, in my view, is that hyper-inflation is the result of the failure of credit markets to work properly, not the other way around. When the source of sovereign debt funding dries up in the face of the realization that tax receipts are collapsing to negligible sums with no end in sight to that condition, monetization, to a degree that causes a currency debacle, which is the proximate cause of the worst effects of hyper-inflation, becomes the inevitable outcome.


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