SW Richmond's  Instablog

Many economics bloggers and posters are totally concentrated on markets and market phenomena.  This was more true in times past.  Lately, the focus of economics blogging has become political.  Why the shift?  More importantly, is it truly a shift at all?

Sometimes it’s important to state and restate the obvious.  For me at least it helps to clarify issues, bringing into focus what needs to be done.  What are we trying to do, how important is it, why does it matter?

Nearly all of the interactions most of us will have with the other inhabitants of this planet are economic in nature.  Either we are buying goods and services or selling them to others.  Even when we are engaging in leisure activities we are interacting with others economically, often engaging others in their livelihoods to help us.  The importance of this cannot be overstated: economic cooperation is the basis of human coexistence.

What, then, is the purpose of politics?  That depends entirely on several factors.  Simply put, political systems fall into two categories: systems characterized by force, and systems characterized by voluntary action.  Either:

1. The political system is a reflection of the underlying economic system.
2. The economic system is an imposition by the underlying political system.
   

In both of these cases the political system decides who gets to keep the output of economic activity.  Historically, some pretext was used to seize the output of the commoners for the maintenance of a ruling class and to pay an armed force to hold power.  This system could be maintained as long as the commoners were unable to arm themselves and resist. 

If on the other hand economic actors are to be “permitted” freedom to act economically within the system in nearly any manner they see fit, the political system those actors will create will be a reflection of this freedom to act, and the system’s stated purpose will be to protect the right of the actors to pursue their own economic ends.  Note that under such a system, given that most of the interactions we have with others are economic, the system elevates both self-interest AND cooperation.   For this reason the cooperation is voluntary.  The need for an internal armed force is negated by the inherently voluntary nature of the system.

This notion is uniquely American, and is the thing that is being murdered before our eyes. 

Locke’s Two Treatises of Government must have read like Atlas Shrugged to the men of the day.  Here was a total refutation of the existing system of human coexistence, primogeniture, really a system of class and privilege, imposed from above by armed men who served by working the master’s will upon everyone else under threat of death.  I can easily imagine America’s founders, many of whom are known to have been greatly influenced by Locke, realizing they were in the right place at the right moment in history to unleash human creativity.  The shining star that was once America was their monument.  America is more than what it has become.

Today America is being overtaken by a movement that promises a return to a rigid system imposed from above and that is decidedly non-voluntary in nature.  It might be difficult to hang a name on it, but it is plainly there for all to see.  The system contains elements of socialism, fascism, and certainly is oligarchic.  Its most stark features, though, are that it is characterized by force and privilege.  Internal armed enforcement has returned as a distinct feature of our system.  There is no need to name this system; it is not voluntary, and I want nothing to do with it.  We must stop it; failure means our future is in chains. 

It's finally occurred to me what is happening. 

The United States has committed sovereign default at least twice in the past 100 years; once in 1933 when Comrade Roosevelt seized gold from private hands and revalued it, and again in 1971 when Nixon ended convertibility.  Neither of these events were presented at the time as defaults.  Neither of them is taught academically as a default, yet that is exactly what they were.  Both events represented a significant devaluation of paper fiat "currency-thingies".  Both events represent a sovereign government, the United States federal government, breaking its word and revaluing its currency (downward, of course) for its own benefit. 

We are doing it again, right now, in plain sight.  The visible effects of this default will play out over the next few years, or perhaps all-at-once, but play out they shall.  And we are all so distracted by the idiotic inflation / deflation debate that we can't see it.  Other than default, how else can you characterize $24 Trillion in Fed and U.S. Treasury economic backstopping?  Remember, this is in the U.S. alone.  Had this backstopping, equivalent to 1.5 times U.S. GDP, not been set in place, the economy of the world would have collapsed.  Question: is this $24 Trillion in new currency, $24 Trillion in new debt, or something else?  Is it a promise?  Does it exist only in our minds, perhaps only in our hopes?  Is it a lie, or is it true?  Remember, had it not been done (so they say), we'd be riding bicycles and cooking rats over burning automobiles.  So does it exist, or doesn't it?

Remember, too, that all it has done is stem the hemorrhaging.  The balance sheets of the major banks, and of goodness knows how many smaller banks, are shredded.  It's pretty well established that banks are insolvent, right now.  The only reason they're still open is because the government "regulators" have allowed them to lie about their balance sheets.  They've done this for political reasons, not economic ones.  It's already been pointed out that Western banking "authorities" are doing exactly what they told those silly Asians not to do just a few years ago: hide the truth and hope to muddle through.  This time it's the Western authorities who are doing it, and they are doing so in an internationally cooperative manner; they're all in the same condition.

Governments have clearly demonstrated their willingness to use their legal monopoly, via the courts, to pick winners and losers.  They are perfectly willing to do whatever it takes to maintain this monopoly.  So, I wish to revisit the $24 Trillion.  Do any of you honestly believe they wouldn't print it if they had to?  Are we reduced to merely arguing whether or not it will be necessary?  In my opinion an argument can be made that they've already printed it, merely by suggesting they would do so if they had to. By their admission it was urgently necessary for them to announce its possible creation; again, does it exist or doesn't it?  If it exists, the currency has been debased; if it doesn't, then break out the bicycles.  Mass realization of this fact has been stalled by a massive misinformation campaign and massive vested interest in the status quo.  Which financial players (bankers, economists, accountants, politicians, central banks, etc) are willing to go to bat for reality?  The answer is the same as to the question of who is willing to step outside the two-party political paradigm: almost no one.  They all earn their living from the (old) system.  They can be counted on to continue supporting the lie.

So the people of the world wait patiently for reality to assert itself.  I have to ask, though, a very important question: If $24 Trillion is only sufficient to slow the crash, how much will be needed to start a "recovery" where jobs are created?  The $24 Trillion constitutes default.  The system failed and could only be rescued, and even then only partially, by a $24 Trillion promise against $800 Billion currency in circulation.  Oh, look, it's our old friend the 30:1 leverage ratio again.  Am I the only one who sees this for what it is?  We HAVE defaulted.  Math doesn't lie.  Where is the money going to come from to pay off all this debt?  Bernanke's computer mouse.

Meanwhile, blinded by B school conflation of money and credit, we sit around arguing about inflation or deflation. 

Disclosure: Long PMs and various dollar shorts, hedged by a substantial cash position.

Part II

The government's handling of the Chrysler and the GM bankruptcy cases, their proposed structure for the PPIP, the $700 Billion dollar bailout package, the AIG CDS payouts, and numerous other measures and proposals, make it clear that the power structure of this country no longer believe in the country's future.  Why do I say that?  The overt behavior of the Administration and its politically favored groups resembles more a group of hyenas fighting over a corpse than a governing body gently and covertly stroking its vested political interests.  It seems a last-minute grab for whatever you can lay hands on before anyone stops you, like looting.  In fact, exactly like looting.  Looting means lawlessness.

Denninger of Market-Ticker has repeatedly noted that the Fed's purchases of long-term non-Agency MBS debt is not within its charter; in other words, the purchases are illegal.  I know of no legal challenge in progress to the Fed's actions; such a challenge would likely run into challenges of its own related to "standing".  In the meantime, expedience and lack of challenge allows the Fed to continue breaking the law, in the open, with impunity.

The courts seem to be the preferred vehicle for this administration to work its will with regard to the ramrodded automaker bankruptcies.  The ongoing GM case provides a worthwhile glimpse into the way that precedent / expected legal treatment of creditors is being brushed aside in the name of expedience. 

I present for your prerusal these extended initial excerpts from a filing by "The Unofficial Committee of Family and Dissident GM Bondholders".  The filing seeks to enforce their rights as unsecured creditors under the Bankruptcy Code, something that the Obama Administration's Car Czar, Mr. Steve Rattner, apparently seeks to avoid.

At issue is the accelerated sale of GM under the prenegotiated agreement; that is, the agreement prenegotiated by the Administration, the UAW, and other favored groups.  The administration is attempting to ramrod through an accelerated "363" sale of GM assets.  This desire reveals again the modus operandi of this administration: government by Blitzkrieg, achieving its dubious aims before any effective resistance can be mounted or appropriate questions can even be posed. 

A picture is clearly drawn of an admininstration with no regard for anything other than patronage, telling pretty lies in public while at the same time ruthlessly stealing from that same public to reward connected interests.  The filing opens with a salient quote from His Majesty's inaugural speech, its mendacity all the more chilling given the current context: