Wednesday, March 9, 2016

High Time

Well, here we are. It's 2016 and the global economy still has not recovered from the so called Great Recession. How is it possible that things have improved hardly at all? Simples. The terminal state of the $IMFS, an acronym for the dollar based international monetary and financial system, will simply not allow for anything that smacks of a return to a healthy state.

In truth, the landscape that existed just before the onset of The Great Recession wasn't really healthy either. How could it have been since it gave rise to the ensuing collapse? The years that followed the end of the internet bubble bust may have seemed a time of halcyon breezes by comparison, but things were absolutely headed in the unhealthiest of directions from 2003 to 2007. The wide spread deployment of MBS, CDOs, and CDS attests to that fact. The period when instruments of mass destruction are being assembled is a happy one compared to the interval when said destructive devices are unleashed.

A tremendous amount of ink was spilled discussing and dissecting sub prime -and everything that was part and parcel of laying the groundwork for The Great Recession- in the aftermath of the aforesaid economic collapse, but our post Bretton Woods system, aka the $IMFS, has always been, at its core, all spur and no brake where credit/debt creation is concerned. As such, it really doesn't matter what the precise kind of debt instrument or credit derivative was at the scene of the crime, just that it was inevitable that some infernal debt concoction would be the culprit for a series of disastrous consequences. What's more, as the real economy choked on "old debt",  it was a foregone conclusion that ensuing debt gambits would become ever more audacious in their size and scope.

I am revisiting Disasterporn for the first time in approximately three years to proclaim that the forty four year old experiment, aka the $IMFS, is finally coming to an end, and in much less time than the time I've spent away from this blog. The monetary authorities have gone about as far as they can go, and, while they will undoubtedly unveil, or at least try to unveil, some number of idiotic schemes to keep the party going, by my runes, support for the system is now well down the road of entirely disintegrating.

Let it be known that foreigners hoarding U.S. sovereign debt has always been the linchpin keeping the $IMFS intact. When physical gold ceased to be the official reserve of the system, the world found it had no choice but to support the insupportable. The oil states, particularly the House of Saud, did what was in their best interest at the time and recycled their more than ample surpluses into Uncle Sam's debt. The rest of the world followed the oil state's lead and, though I am leaving out a few key details, suffice it to say that the rest is a litany of misallocation of wealth and mal-investment, and myriad other societal and cultural deformations, the likes of which the world has never even come close to seeing. From misbegotten monetary systems spring all manner of ills. As one of the Rothschild's observed several centuries ago, "Give me control of a nation's money and I care not who makes its laws." I choose to take that bit of pith to mean not that he who has the most money wins, but, rather, the kind of monetary system one employs has everything to say about how those under its sway are apt to behave. And, so, here we are, in the land of the free and the home of the brave, faced with The Donald versus Hillary.

In fairness to our forefathers who cobbled together the ramshackle $IMFS, the world really didn't have a choice back then. The dollar had to be supported as there was no alternate currency system that could adequately handle world trade. In short, the choice was support the unbacked dollar or face global barter town. Trust me when I say that you absolutely don't want door no. 2. Thankfully, this no choice condition no longer obtains. However desperate the situation appears in the EZ, and it appears quite desperate indeed, my view is that the Euro is here to stay. Most pertinently, the Euro, which can certainly be mentioned in conjunction with the EZ, but should not be conflated with it, was built precisely to survive the dollar's inevitable collapse. Right about now you may be saying to yourself, "The last time I checked the world seemed quite pleased to pony up and buy U.S. sovereign debt."

Indeed. Private capital is still heartily engorging itself on Uncle's IOUs...for now. But there is clear evidence that officialdom, particularly officials who represent nation states who operate with surpluses, not deficits, are no longer bellying up to the bar as they once did. You may have heard or otherwise noticed that China and Saudi Arabia are spending down their dollar reserves toute suite. On the surface it might appear that this is simply due to economic hard times, but I submit that, certainly in the case of the U.S.' number one creditor, China, that there is far more to the story. China stopped becoming a net buyer of Uncle's IOUs a few years ago, and, what's more, even as China has been selling down their reserves, they have been adding physical gold to their official coffers. The House of Saud's activities are more opaque, but, then, it is a matter of record that they are long standing enthusiastic owners of tremendous stores of physical gold. In the meantime, the preponderance of CBs around the world, Venezuela and their minority ilk notwithstanding, are net buyers, not net sellers, of the shiny. To be perfectly clear in a non Nixon like fashion, I do not advocate or expect the emergence of yet another iteration of the gold standard, but I am fully expecting that gold will be the sole asset utilized to effect an overdue and desperately needed monetary and financial system reset.  After all, gold's unique attributes mean that it is the only asset in existence that can both retire the mountainous debt and allow the the old system to, in essence, swap out its bad DNA for good.

But let me conclude this post by briefly returning to the concept of "private capital" for a moment. Private capital's buying, whether it be real estate, or paper assets is qualitatively different than official buying. Private capital is in it to make money. Officialdom, on the other hand, buys to provide support to the system, and doesn't worry too terribly much about profit and loss. Quantitative Easing, of which there has been a boatload over these last seven years, is an excellent, albeit extreme, example of official buying enacted for the purpose of systemic support. For officialdom, making money on such deals, when it happens, is just a happy accident. Things always eventually go sour for private capital, especially in the $IMFS, where serial bubbles and busts are endemic to the system. As far as the system is concerned, that's generally manageable as long as officialdom fills the void left by fleeing private capital. What sunk the last system was a lack of support, and so too will that be this system's ultimate undoing. At such time as we find ourselves in a world where private capital's buying of U.S. sovereign debt constitutes the market entirely, or even just mostly, only the thinnest divide will then exist between a condition where dollars buy much more than they ought to and dollars that can barely buy anything at all.


Roger Lewis said...

I think your analysis is there or there abouts.
I made this observation earlier to someone fretting over article 50 and Brexit. The EU and the UK are basically the titanic of Globalism which is sinking. Brexit is a Lifeboat or a deckchair and Remain is a deck chair or a lifeboat. You takes your choice and pays your money.I wrote this last November.

Remote as the possibility is according to the Media/Establishment polling that Old Labour can be elected in 2020 or sooner, it is not impossible especially with a high voter turnout, this is why the spin against Corbyn is so persistent, the establishment are petrified that a high voter turnout would bring in Corbyn. The current SNP play regarding independence could result in PR, I conjectured that PR would be a price the establishment would be prepared to pay to hold onto a kind of federated UK, I have started thinking about how a currency federation ( devolved Bank of England ) might work as part of the same process, its an idea which I will also be modelling into the ECB/EURO as if the European commission are serious about saving the EU and getting it back to a useful track a devolved currency federation is their only solution.
What you say about Atlanticists, The world needs to help the USA wind down from Petro Dollar Hegemony, it is perhaps a little late but in the digital age the solutions are easily employed it is a question of incredibly powerful vested interests. Dodd Frank repeal by President Trump if it leads to a sensible 21st century Glass steigle could start that winding down process.

Just my 5 penneth worth.

Roger Lewis said... sorry link