There's No Way to Go Back to Business as Usual

I find the article "Confidence Is Leaving the Fiat Money System" very interesting, and it provides a good insight of what is happening and what we should expect.

By increasing the base money supply in the interbank market, guaranteeing financial institutions' liabilities or nationalizing the banking industry, governments suppress free-market forces, which could move the system back towards equilibrium.

Markets need to be liberalized to the greatest extent to allow prices to adjust back to equilibrium.

In the Road to Serfdom Hayek wrote:

It is not difficult to see what must be the consequences when democracy embarks upon a course of planning. The goal of the planning will be described by some such vague term as "the general welfare." There will be no real agreement as to the ends to be attained, and the effect of the people's agreeing that there must be central planning, without agreeing on the ends, will be rather as if a group of people were to commit themselves to take a journey together without agreeing where they want to go: with the result that they may all have to make a journey which most of them do not want at all.

In other crises, you could see the flow of money from bear markets to more promising assets. From equities to bonds, from equities to housing, from technology to defensive, and so forth. You could see investors moving away from the "bad" returns toward the "new" vein of expected future returns. This time it is a simultaneous meltdown.

This crisis signs the transition to a new balance of power in the world. I learned at my expense that systems and organizations continue to act, while ignoring that they are moving at the edge of an abyss. Factors for a change of balance accumulate, but they are ignored. Suddenly they ignite rapid and impressive changes with an avalanche effect (black swans?). It seems that these transitions cannot occur smoothly or gradually.

Awareness does not grow gradually. People live in a dream until they are brought abruptly to reality. The reality is that the US and Europe have lived a number of years spending and consuming more than they could afford. A continuously growing current account deficit and immense flows of money out of our countries did not ring the bell. Now, whatever the specific cause that started the crisis, we are brought to reality. More regulations vs less regulations, more government vs less government are the discussions we hear in order to try and find a solution.

The problem lies in the fact that our societies consume and spend more than they earn, accumulating debts that eventually nobody will be able to pay. This has to be changed somehow, and hopefully not through increased presence of the governments in the economy or, even worse, through protectionism.

We will not be able to go back soon to previous levels of demand. The relative weight of some of the "new" emerging countries will increase as their internal demand will pick up to fuel their growth while we lick our wounds. And demography contributes to explain the dynamics of aging western societies.

We need to be aware that this historical shift is developing and accelerating. I do not think we will be able to go back to "business as usual". This will have effects in the long term, in my opinion, also in the strategic posture of the US and Europe and in their role in the world governance. There are already signs of increased weakness from the military and political perspective. In general, we need to understand the possible answers to this crisis and their implications.

Stock position: None.

Comments

[a. palmer jr.:]

Is anybody ever going to stop the U.S. government from spending money it doesn't have? Seems to me that's the real problem.

2008 Oct 13 08:16 AM

[Dr. Charles...:]

I held a fairly high position in Washington D.C. in the mid 60's and found graft and corruption to be rampant on both sides of the fence. We are wasting billions of dollars in wasteful grants, studies and contracts where people know how to work the political system to direct or indirect payoffs (returning favors for election help etc.) and we could cut our taxes and deficit by half if we could reduce the corruption. I personally saw one man receive as much as $30,000.00 (as I recall) in the morning mail just for making phone calls to people in various departments to secure grants that were worthless and would have no net result for the American people. You cannot stop it because it is has grown to big and everyone protect everyone else especially at the lower underworld of Washington, D.C.

2008 Oct 13 08:53 AM

[sieraromero:]

As long as we continue to ignore reality ,then and only then, will the economy, the government and the middle class start to recuperate. We have experts on CNBC still discussing weather or not we will go into a recession. The leaders in the executive branch of our government are total idiots! The republican party wants to keep on going on as if nothing is wrong and want to continue the same old, broken policies that we have had to endure with, by putting a fresh face in the white house and calling him a maverick. LOL! The republican party has been trying to shrink the middle class of this country of ours for years by promoting trickle down economics.The only thing that this dasterdly economic theory promotes is that the rich get richer at the expense of everything and everyone else. People it is time to wake up and get educated and get involved and more importantly, START PAYING ATTENTION to what is going on and ask questions. There is always motives and reasons, albeit subtile, that things are happening. To think that this whole current situation is not being engineered is totally illogical!

2008 Oct 13 09:05 AM

[venividivici:]

You are dead right Paolo but the Government continues on its merry way, borrowing and printing more and more money just to hold everything together today and they'll worry about the consequences tomorrow or the next day. It just makes any real solution to the nation's terrible debt situation more and more difficult and painful. Sooner or later those propping up America will come to the conclusion that America is not too big to fail and then watch out.

2008 Oct 13 09:58 AM

[Al-USA:]

I salute sieraromero.

For my part, the point that the US is consuming more than it can afford results from a huge transfer of wealth from the working class, those who pull a paycheck, to the owners of capital, or the capitalist elites. The wage of the average American worker has seen no increase in the last 30 years or so, relative to inflation.

Why is it that not to long ago a man, single wage earner, could support a whole household and still be considered middle class? As his earning ability eroded, and as more societal risk was shifted from the corporation to the working man (pensions to 401k, increased medical co-payments or no benefits at all) the working stiff was able to cope by putting the woman to work.

That served well for the next 20 years or so, but the same unrelenting forces that eroded a mans wages did the same for the working woman so that in order to maintain the same lifestyle the working stiffs were forced to rely on credit: credit cards, refinancing of homes, etc...

All of this was planned and orchestrated by the capitalist elites and their corruption of governement policy to shift the wealth of the country from the producers of wealth, the workers, to the owners of capital.

What's the solution? It's simple, pay the damn people higher wages... Or else descend into brutal class warfare where the masses might end up throwing out the capitalist system and the elites, out "the window". It was averted in the 1930's, can it be averted again?

For the record, I want capitalism to survive, but the way it is headed, once again, I don't see much of a future for the working man and woman against the systemic forces working to grind them down.

2008 Oct 13 10:36 AM

[blisterchicken:]

I hear on that Dr. Lasser!

When I worked at Stennis Space center on an SAIC contract for the National Data Buoy Center, a guy bragged to me about how he was on a junk project. Thought it was funny and brag worthy that for 2 years they showed up to work each day and worked about 2 hours, then screwed off. It was some sort of engineering project as I remember, and they basically bought a bunch of pre-made items, and re-assembled them.

I remember sitting there looking at this guy who was 20 years my senior and thinking...what the hell?

Also met many Defense Contractors for the Space Laser program. They had a computer animated presentation that they paid some big Hollywood Special FX firm $100K of OUR money!!! And the smug arrogance of the contractors was amazing!

I like Smedley Butler's idea that we should pull in all of our "forward" positions and only defend the USA with a set perimeter. The DOD and the cost of keeping people deployed all over the world is immense. And his War is A Racket speech is something that can now be paraphrased to central control of banks.

I think the whole thing is a big Ponzi Scheme! We need to gut it and revamp our entire money system. Base it on sustainable forests, clean air and water, clean power! Seems to me, that would be the only way corporations will be able to exist and allow humans to be on the same planet.

So as the enternal optimist, let me just say...this crisis is a good thing! It's going to spur in a new economy.

2008 Oct 13 11:16 AM

[blisterchicken:]

I hear a lot of people discussing the "elite" and the planned destruction of America going on here.

I wander when the US Forces will figure out whats going on, and do what they were swron in to do. Defend our country from all enemies, foreign and domestic.

Maybe it's because I was a Marine, but the thought of seeing a Marine General, or Navy Admiral, (yes I'm biased) on TV telling us that they've arrested all the people responsible for this mess would not bother me at all. I could see them doing a clean sweep, and reorganizing everything just to simply get our constitution back as the MAIN focus of our goverment's motivation. Their focus now seems to be greed.

Also, you have all these media enablers that are to blame. The talking heads and also the sensationalism and hero worship of greed is amazing.

Where is a man like Smedley Butler when you need him?

2008 Oct 13 11:24 AM

[notsosmart:]

there are so many people who are right.unfortunately te sheeples can do little or nothing as most are just dumb.a new car every 3 yrs(monthly pay) a flat screen tv of huge size,fancy cell phones, granite counters,costly beer swilling days @ the stadiums,oversized houses,etc. yet they cant name their 2 sen.te congressperson from their distric,just 2 supreme court judges.they deserve what they get from the people they keep reeelecting(those that vote).sad.the elite insiders laugh all the way to the swiss bank.

2008 Oct 13 11:34 AM

[henarl:]

notsosmart: Dead on! So it has always been and so it will always be.

2008 Oct 13 12:55 PM

[johnbee:]

History shows great empires like great institutions and corporations always get into excess, lose control, become corrupt and fail, and new ones are reborn with new idealist creeds. The US is trade empire based on the $USdollar and trade rules it benefits from enforced by a strong military threat. Once the $ is no better than equal to other currencies the US will lose its power.Democractic capitaism needs be accompanied by fairness in society or it will fall to new dictators. Jail a bunch of these failed and fraudulent bankers for a long stretch and confiscate their assets and perhaps democracy may get a second chance. Maybe Obama will have the guts or was everyone at the top turning a blind eye?

2008 Oct 13 01:01 PM

[swaps:]

It took Rome a few hundred years to actually recede into oblivion and I suspect we may too.

But there is no question our fiat money, consumption oriented dream world is just that...an illusion. Reality requires that we work productively, save more than we disperse. But we have been cleverly brainwashed into this new paradigm which made a lot of us feel comfortable in a belief we had never had it so good. But a very few people were accumulating incredible amounts of money and power as we dreamed along.

But now the big accumulators are really wealthy and the best of them have used their dream money to gain control of hard assets, whether a Colorado hideway or a coastal estate.

But this frantic shoveling of money into the banks is hopeless because it only tries to plub the holes in their balance sheet. On another board someone alleged HUD claims illegal aliens in the U. S. alone got a few million fraudulent loans. Banks cannot loan to a disappearing middle class that is strapped and now subject to really tough lending standards. And I suspect a few middle class people have realized that borrowing for consumption is not the way to permanent prosperity. They may stop applying for loans.

The only stable society may be a nation of mostly cottage farmers who grow their own food and have a little business or job on the side. But its not very exciting. Just realistic.

2008 Oct 13 09:11 PM

[carey_jim:]

To Dr. Lasser, user 270430 and other observers of government waste.

I was a professor of computer science at a state university for a long season and I can tell you that there was precious little waste.

One day I was walking out of the office with a packet of 8 1/2 x 11 paper that I needed to make overhead transparencies for class presentations and one of the secretaries reported me to the department chairman for stealing paper!

Then I went to work in Silicon Valley. (No, I wasn't fired for stealing paper. They weren't stupid. They were getting too much work out of me for too small of a salary to ever fire me!)

My first introduction to corporate waste was (in a well-known internet start up company which will remain nameless) an incident with my office mate who was still negotiating a trip to New York to give a conference and he had to be in New York within seven hours from San Francisco.

The deal was decided at the last minute (he had a half hour to get to the airport) and so it was necessary to bump someone in first class which caused the price of the ticket to be inflated to $10,000.

And yes, that is the correct amount of zeros. TEN THOUSAND DOLLARS from San Francisco to New York.

My company started out capitalized at about 100 million and within two years it was worth 18 billion dollars (compliments of the NASDAQ stock market bubble) and by the time I got out, it was almost in receivership.

I wont describe any other waste except this last one which can summarize the rest:

I was friends with one of our support engineers who flew all over the world installing our product (there were about ten of them) and one day I asked him how he managed to travel without a suitcase.

He answered: No problem, I just buy whatever I need when I get there and leave it in the hotel when I come home."

I said, "What if you need a suit or something expensive."

He gave me a blank look and then answered. "It doesn't matter what it is, if I can't wear it home, I leave it there."

Before he came to our company, he worked for a large, famous computer company where he said he learned to program.

I asked him how he had time to do his job and learn to program at the same time and he answered,

"They told me that I didn't have to do anything except learn programming. I had nothing else to do. No deadlines, nothing. When I asked them why, they said they were investing in me and they said most of their employees stayed with them and became productive after a few years."

After three years at the other company he came to our company. He quit the other company even though all he did there was learn how to program for three years and collect his salary.

There is government waste and there is corporate waste.

2008 Oct 14 06:27 PM