Report on currencies and regional global governance as of December 28, 2011
1) …. Introduction
Asia emerged today December 28, 2011, as a region of global governance as Japan entered into a yuan based bilateral trade agreement with China, complimenting the existing Shanghai ASEAN free trade agreement. Of note, Japan took the lead in global factory production decline. Oil traded lower which turned currencies, commodities, and stocks lower. The S&P entered into an Elliott Wave 3 of 3 decline.
2) … Oil traded lower turning currencies, commodities, and stocks lower.
Oil, USO, is a risk trade, and today it turned strongly lower, turning the world major currencies, DBV, and emerging market currencies, CEW, lower. Oil like gold is both a commodity and a currency. Gold has turned down, with the other currencies. Today it was oil’s turn to participate in currency deflation.
The British Pound Sterling, The South African Rand, The Euro, The Swiss Franc, The Brazilian Real and the Australian Dollar, were the currency loss leaders of the day, which stimulated the US Dollar, $USD, UUP higher. The Euro, FXE, fell to 128.9. Falling currencies stimulated debt deflation in world government bonds, BWX. Today’s falling currencies, delevered oil, which in turn sent investors derisking out of chemical manufacturers seen in this Finviz Screener, DD, ALB, ASH, WLK, HUN, CYT, NEU, RPM.
The currency demand curve, the ratio of small cap pure value shares, RZV, relative to small cap pure growth shares, RZG, … RZV:RZG … traded lower, evidencing that competitive currency devaluation is underway again. A.Trader.Mind relates The Euro Is Pulling Down All Rrisk Currencies
Copper miners, COPX, silver miners, SIL, and Aluminum producers, ALUM, plummeted. Small cap gold mining shares, GDXJ, fell more than their larger peers, GDX. A commodity premium, and a currency premium washed out off copper shares. Stockpiled copper in China and in New Orleans has been part of a ponzi lending system in China; and today a failing of the seigniorage of credit, that is the moneyness of credit, turned copper mining stocks, such as Southern Peru Copper, SCCO, strongly lower. Risk trade and carry trade leverage washed out rare earth, REMX, miner Molycorp, MCP. Iron ore producer, Cliffs Natural Resources, CLF, traded strongly lower today. Coal Miners, KOL, and Uranium Miners, URA, traded lower as investors pursued risk avoidance.
Silver is continuing to prove to be a risk trade and not a safe have trade, as it was the commodity, DBC, USCI, loss leader. Gold, GLD, traded strongly lower. Copper, JJC, Lead, LD, Nickle, JJN, led base metals, DBB, lower. Timber, CUT, was a strong commodity faller. The Ron Paul portfolio of silver mining companies, seen in this Finviz Screener, SIL, HL, PAAS, CDE, SSRI, MVG, got derisked, as Silver was deleveraged by falling risk currencies today.
M3 Financial Analysis presents a chart of commodities, and the Euro. An inquiring mind asks will a continuing falling Euro, FXE, pull commodities, DBC, lower? And an inquiring mind asks will continuing falling Commodity Currencies, CCX, pull Commodities, DBC, lower? The chart of Commodities relative to Commodity Currencies, … DBC:CCX … shows an Elliott Wave 2 up, and ready to enter an Elliott Wave 3 Down.
The leverage of stocks relative to commodities has reached another falling point. The chart of US Stocks, VTI, relative to US Commodities, USCI, … VTI:USCI … turned down today. And the chart of World Stocks, VT, relative to Commodities, DBC, … VT:DBC, also turned down today. The death of fiat money is deleveraging not only commodities but stocks as well. Global derisking and deleveraging is underway once again. And an inquiring mind asks, will political devolution get underway as well? Will deleveraging mean that investment capital will be replaced by political capital? What will be the nature and way of that political capital?
An inquiring mind ask has the maximum safe haven value of utilities, XLU, seen in this Finviz Screener been achieved? And an inquiring mind asks likewise of health care providers, IHF, seen in this Finviz Screener, the Health Care REITS seen in this Finviz Screener, the energy partnerships, AMJ, seen in this Finviz Screener, the synthetics producers seen in this Finviz Screener, the automobile dealers seen in this Finviz Screener, the tobacco companies seen in this Finviz Screener, the business service companies seen in this Finviz Screener, the education companies seen in this Finviz Screener, and the apparel retailers seen in this Finviz Screener? All fiat safe haven investments have run their course, as the death of fiat money, that is, the death of fiat currencies is underway.
World stocks, ACWI, VSS, EWX, EBB, EEM, EMT, DIA, QTEC, QQQQ, IYM, IYT, IYJ, IWO, JKH, and even the safe have dividend stocks, DVY, DTN, traded lower on debt deflation, that is currency deflation. The Russell 2000, IWM, safe haven trade is starting to wain as is seen in the chart of the Russell 20000 relative to Banks, KRE, … IWM:KRE
The strong fall lower in Turkey, TUR, Russia, RSX, and Argentina, ARGT, reflects significant carry trade unwinding. Other countries turning lower included RSX, EWZ, EWA, EWG, EWI EWP, INP
YAO, CAF, EWN, EWD, EWO, VGK, EZA, VGK, EWJ, EWT, EPOL, VTI.
Sectors falling lower included, TAN, WCAT, OIH, IEZ, XLE, PSCE, IYC, XSD, SMH, SOXX, XLV, XRT, IBB, WOOD, PAGG, XLU, IYZ, XTL, IHF, PXN XLV, XLP, IHE, AMJ, SEA, FAA.
Industrials traded lower. China Industrials, CHII, Steel, SLX, and Metal Manufacturing shares, XME, NUE, STLD, RS, AKS, SMS traded strongly lower. Small tools, LECO, SNA, SSD, SWK, traded lower. Industrials, XLI, and small cap industrials, PSCI, WTS, HEES, PH, NR, EMR, ROLL, AIT, BRC, CLC, DCI, LL, PSCI, FAST, traded lower. Industrial equipment manufacturers ETN, ROK, AME, ENS, FELE, TNB, turned lower. Ford, F, General Motors, GM, and Caterpillar, CAT, traded lower.
Technology shares, MTK, SKYY, IGN, FONE, IGV, XSD, PSCT, traded lower.
The small cap scientific instrument leader ZIGO, networking, FIO, and the small cap industrial electrical equipment manufacturer, AMRC, were strong fallers of the day.
Real estate, IYR, Small Cap Real Estate, ROOF, and Residential REITS, REZ, turned lower.
The relative strong fall in home builder, XHB, ITB, suggests that the risk trade, that is the dollar rally, in US Homebuilders is over. Christian Science Monitor reports New home sales near all-time low. NPR reports 2011 shaping up as worst year ever for home sales
Avoidance of the risk trade, turned Junk Bonds, JNK, lower. The Morgan Stanley Cyclical Index, ^CYC, trade lower. Debased currencies are unable to support risk and growth.
Bespoke Investment Group reports S&P 500 10-Day A/D Line Pauses Just Below Overbought Levels. This is as good as it is going to get. The S&P, SPY, is now turning lower as S&P Materials, MXI, and S&P Global Financials, IXG, and as the equal weight ETFs, RSP, RYF, RYE, RCD, RHS, RYH, RGI, RYT, RYU, RYM, show downturn. It’s hasta la vista baby to profitable investing in the S&P. Global currency deflation means unprofitable stock investing. The chart of the S&P, $SPX, shows that it is now in an Elliott Wave 3 of 3 Decline from its July 2011 high. The Elliott Wave 3 of 3 downs are the most destructive economic waves known to mankind, they for all practical purposes wipe out all wealth that was formerly built up on the 5 o5 wave up. This 3 of 3 wave down is best seen in the chart of the equally weighted RSP, which may go down in the text books as one of the most important investment charts of all time. Corey Rosenbloom in chart article shows today’s failure to rise higher with close below resistance of $1,260 which is the just under the middle of a broadening top pattern. Street Authority relates that when you see the broadening top, the market will eventually drop.
Eddy Elfenbein presents the The S&P and Sector P/E Ratios. I comment that Telecom, XTL, and Utilities, XLU, have been prized safe haven investments because of their dividend payouts. Staples, XLP, Discretionary, IYC, and Health Care, XLV, prized for stability and outlook. Energy, XLE, has been shunned because of its poor dividend payouts and Materials, XLB, and Financials, XLF, shunned because of risk. Telecom dividend payers T, VZ, Pharmaceutical dividend payers, PFE, MRK, Utility, dividend payers, DTE, NEE, all turned lower today.
Banks in Germany, DB, South Korea, WF, SHG, India, IBN, United Kingdom, RBS, IRE Australia, WBK, Argentina, BBVA, BMA, Brazil, BSBR, BBVA, BBD, Europe, EUFN, Japan, NMR, and the Too Big To Fail Banks, RWW, BAC, C, RF, STI, were the World Financial, IXG, loss leaders of the day. Bank shares KBE, KRE, IAT, XLF, QABA, turned lower. Investment Bankers, KCE, turned strongly lower. Revenue small caps, RWJ, such as Rent A Center, RCII, and Nicholas Financial, NICK, traded lower. Credit firms traded lower, AXP, NNI, COF, MA, V, AMT, ADS, CATM, GPN, AEA.
Gonzola Lira questions A run on the global banking system? When is there ever a panic? When is there ever a run on a financial system? Answer: When enough participants no longer trust the system. It is the classic definition of a tipping point. It’s not that all of the participants lose faith in the system or institution. It’s not even when most of the participants lose faith: Rather, it’s when a mere some of the participants decide they no longer trust the system that a run is triggered. And though this is completely subjective on my part, backed by no statistics except scattered anecdotal evidence, but it seems to me that MF Global has shoved us a lot closer to this theoretical run on the system.
“The MF Global scandal has made it clear that the integrity of the system has disappeared,” said a good friend of mine, Tuur Demeester, who runs Macrotrends, a Dutch-language newsletter out of Brugge. “The banks are insolvent, the governments are insolvent, and all that’s left is for the people to realize what’s going on, and that will start a panic.” there will be such a run on the system: It’s only a matter of time. In fact, the handling of the MF Global affair has sped up the time frame for this run on the system, because the forward edge players, such as Demeester, myself, and my other acquaintances who understand the implications of the bankruptcy, realize that the regulators will side with the banksters, and not the ordinary investors: So we are preparing accordingly. … I’ve consistently recommended that one buy and take possession of gold bullion. I recommend dollar cost averaging of gold at this level. A buy and hold strategy in gold is the only investment strategy that will preserve wealth.
Coordinated Central Bank provision of Dollar FX Swaps and Mario Draghi’s provision of the LTRO facility have prevented the world’s financial markets from seizing up, but they have now commenced the loss of America’s debt sovereignty and today started a delveraging out of stocks.
Last week, Leveraged Buyouts, PSP, Junk Bonds, JNK, Municipal Bonds, MUB, California Municipal Bonds, CMF, Michigan Municipal Bonds MIW, rose. The Flattner ETF, FLAT, turned lower and the Steepner ETF, STPP, made what is a likely plummeting bottom, as the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, steepened, 2%, signaling the beginning of the end of US debt sovereignty and US Hegemony, that has accompanied the Inflationism, that came with the Banker Regime of Neoliberalism. The last remnant of the Milton Friedman Free To Choose Age floating currency regime of leverage, is now history, as the maximum safehaven value of US Treasuries appears to have been achieved. With the fall lower in US Government Bonds, the failure of US Debt Sovereignty has commenced.
A sell signal developed in US Treasuries and in corporate bonds: the longer out debt LTPZ, TMF, ZROZ, EDV, TLT, BLV, all turned lower more than their shorter duration counterparts. Mortgage Backed Bonds, MBB, turned down this week. The 300% bear of the 30 Year US Treasuries, TMV, has turned up. And the Zeroes, ZROZ, has turned down. The Finviz chart of Bonds, BND, LAG, AGG, all showed topping out characteristics this week, signaling that Peak Credit has been achieved. Deflationism has come to bonds. There are no more safe have investments other than gold, GLD, which closed lower at 151 today and cash price of $1,558. Risk and competitive currency deflation, has turned the spigot of investment liquidity completely off, resulting in even the go-go restaurants McDonalds, MCD, and Starbucks, SBUX, trading lower.
3) … Regional cooperation and diktat are rising to replace credit and financial deregulation as the dynamos of economic and political organization.
Bloomberg reports Deflation's Grip Returns in Japan as Factory Production Decline Japan’s rebound from the March earthquake and tsunami sputtered in November as production and retail sales tumbled, deepening the nation’s return to the deflation that first took hold a decade ago. Industrial output slumped 2.6 percent from October, more than all the forecasts in a Bloomberg News survey of 29 economists, a government report showed today in Tokyo. Retail sales slid 2.1 percent. Consumer prices excluding fresh food fell 0.2 percent from a year earlier after a 0.1 percent decline the previous month. The weakening economy, hurt by Europe’s debt crisis and plans by companies from Panasonic Corp. to Nissan Motor Co. to shift production abroad, may undermine Prime Minister Yoshihiko Noda’s plan to raise taxes and cut the world’s largest debt burden. Noda’s party today is scheduled to propose boosting the sales levy, which polls show a majority of the public oppose. “Fundamentally, Japan’s economy is on a downward slope,” said Yoshimasa Maruyama, chief economist at Itochu Corp. “Exports are falling and negatively impacting Japan’s economy due to the global slowdown.”
The Washington Post reports Japan And China Announce Yuan Based Regional Trade Agreement ... and in the process becomes a reserve currency. During a visit to Beijing by Japanese Prime Minister Yoshihiko Noda, the two governments said in a surprise announcement Sunday they will encourage use of their own currencies in bilateral trade, which now is conducted mostly in U.S. dollars. They also agreed to support the sale of bonds denominated in China’s yuan by Japanese companies in Tokyo and foreign markets and by the state-owned Japan Bank of International Cooperation in mainland China’s markets, which are closed to most foreign investors.
Nature economist and historian Elaine Meinel Supkis relates China And Japan Form Trade And Currency Union As I explained a year ago, China now is Japan’s #1 trade partner. The US has been dethroned. This leads, INEVITABLY, to many severe shifts in trade directions, the relative power of empires and other things that will see the US become a #2 power in the world, not the Ruler of the Seven Seas. As I have explained over and over again, when we destroyed our own sovereign merchant marine, we doomed ourselves to future failure.
We imagined if we spent trillions on having an immense military navy, the loss of the merchant marine wouldn’t matter. This was utterly childish and anyone reading history could see the end results, yet all of our ‘historians’ like the fraud, Gingrich, hired by our government to advise them proved to be a madras of maniacs, not historians looking coldly at that bloody bitch, History.
The present fall in world trade is due entirely to China raising the bank rate reserve ratios and limiting foreign investment in China. This squeezed Japan mercilessly and this was deliberate since Japan was two timing China, talking trade when in Beijing and then talking war when in DC. The Japanese always joined US attacks on China’s huge FOREX holdings while holding nearly just enough to keep the dollar strong against the yen so they could ravage our domestic markets. There is no turning back this particular wheel of history: it will grind forwards no matter what. The US had its chance to dominate Asia and blew it with the Vietnam War. Since then, we have been treading water. We let Japan’s shipping industry destroy our own industry so that NO American ships EVER went to Japanese harbors while a huge flotilla of Japanese merchant ships came pouring into all our ports, for example. China can buy whatever it wants since it has money! Lots of money in all currencies. Its FOREX holdings are immense and not in dollars but in many currencies and this was deliberate, too. China can buy whatever it wants since it has money! Lots of money in all currencies. Its FOREX holdings are immense and not in dollars but in many currencies and this was deliberate, too.
Tyler Durden writes in Currency Wars Update The currency war is won by the government that can debase its currency at the fastest rate while still boosting employment creation and manufacturing capacity in its domestic economy. This is why China’s currency policy is scorned by the West, they have managed to maintain a weak currency while becoming an economic powerhouse. Other countries feel China has achieved this at the expense of their own economies. While all governments are simultaneously in the process of debasing currencies against one another by increasing respective money supplies, they cannot debase the value of real assets as they do not and cannot control and manipulate its supply. As a result, the global economy is bound to see continued increases of commodity prices across the board in nearly each and every currency denomination. It is set to result in a global price inflationary environment if the currency wars continue, which we expect will. Monetary metals such as gold and silver stand to benefit tremendously as the currency wars continue.
I relate that China raised the bank rate reserve ratios at exactly the same time that the stock market expansion of QE1 was ending and needed a second monetary expansion with QE2. The combination of the exhaustion of QE1, and the raising of the bank rate reserve ratios, turned China Industrials, CHII, lower, in October and November of 2010, as is seen in this Yahoo Finance Chart of CHII, KOL, ACWI, SLX. Then Coal, KOL, Steel, SLX, led world stocks, ACWI, and China Industrials, CHII, further lower when investors became aware that a debt union had formed in the EU, and as investors became aware that a ponzi financing scheme was being used in China based upon stockpiles of copper as collateral, which propelled China Minerals, CHIM, China Financials, CHIX, and China Industrials, even more strongly lower.
Murry Rothbard reported that the fiat monetary system began on August 15, 1971, when the US government suspended the convertibility of the US dollar to gold. The death of fiat money, that is, the death of fiat currencies, began in August 2011, as the US Dollar, $USD, began to rise from 73.50. This was immediately after investors sold out of stocks, ACWI, in July 2011, when they became aware that a debt union had formed in the Euro zone. Then in August, they sold heavily again, when Angela Merkel and Nicolas Sarkozy called for a true European economic government, and when Herman van Rompuy called for a sovereignty union.
Failed currencies reflect sovereign insolvency and banking insolvency. Failed sovereigns and credit depleted financial institutions are unable to support growth and do not provide security and stability.
A paradigm shift is occuring in globalism. The former focus of globalism was for banking and corporate profit; but as nations loose their debt sovereignty and banks are nationalized, the focus of globalism will increasingly be on coordinated governance for regional stability and security.
It was Milton Friedman who provided the Free To Choose script of floating currencies in 1974. But now his Banker Regime of Neoliberalism is crumbling. The economic, political, and financial tectonic plates have shifted an an authoritarian tsunami is on the way.
The word dynamo comes from Greek dynamis, means power, and carries the connotation of an electrical generator.
Credit and financial deregulation were the dynamos of the Milton Friedman Free To Choose floating currency and Banker Regime. Now diktat is the dynamo of the Beast Regime of Neoauthoritarianism.
The seigniorage of diktat is rising to replace the seigniorage of fiat money, as the political capital of diktat is rising out of the ashes of the Milton Friedman Free To Choose floating currency known as Neoliberalism.
The economic capital that underwrote democracy is history. Choice is now a epitaph on the tombstone of a prosperous bygone era. The cherished Libertarian concepts of Freedom and Free Enterprise are mirages on the Neoauthoritarian Desert of the Real.
The rule of bankers is being replace by the rule of authoritarians, as evidenced by the appointment of emergency financial managers in Michigan by Public Act 4, and by the appointment of technocratic governors in the EU’s periphery. Fate is passing the baton of sovereign authority from nation states to the EU ECB and IMF Troika. WSWS reports that Detroit Politicians Are Attempting To Outdo One Another In Eliminating Jobs in order to salvage the city of Detroit. Millionaire Detroit Mayor Bing proposed that Governor Snyder appoint him as an emergency manager to run the city. Bing has called for a 10 percent pay cut for city workers, 1,000 layoffs, and a “voluntary” reduction in benefits on the part of the city’s 22,000 retirees. The city council is calling for even more drastic attacks, including the layoff of 2,300 city workers. An inquiring mind asks, will martial law be declareed to deal with a collapse of government in Detroit?
Yahoo Finance chart shows that the most toxic of debt, Michigan Municipal Bonds, MIW, has had a terrific run up since QE1, rising from 6.84 on Dec 8, 2008 to a high last week of 14.87, far exceeding the gain in Junk Bonds, JNK, and the toxic debt taken in by the US Treasury under QE1, which is approximated in the value of the mutual fund FAGIX. US Central Bank monetary policies and a “flight to safety” out of the Euro, FXE, have boosted the most bad credit to a spectacular level. The debt debauchery practiced central bankers, has run up bad credit to grotesque levels. The monetization of debt by the world central banks is causing the death of fiat currencies, and a most painful deleveraging and derisking out stocks. A strong rise in municipal debt in the 1920s was a leading cause of the 1929 to 1932 depression. This time the depression is going to be so terrific, that a change of governance will be required.
The Beast Regime of Neoauthoritarianism is rising up out of the Mediterranean Sea. This monster of statism has seven heads, symbolic of its occupation in mankind’s seven institutions and ten horns symbolic of its rule in the world’s ten regions.
This behemoth of statism is being called forth by the 1974 Clarion Call of the Club of Rome for regional global governance, as a means of providing security and stability, in a world of chaos, that is coming from derisking and deleveraging out the Banker Regime of Neoliberalism.
While Neoliberalism featured wildcat finance, a Doug Noland term, Neoauthoritarianism features wildcat governance, where leaders bite, rip and tear one another, and only the most fierce top dog comes out on top. Markus Salzmann of WSWS reports Hungarian Government Passes Authoritarian New Laws
Throughout history, fate has provided a series of kings and a progression of kingdoms to rule mankind, Freedom and Free Enterprise, the Libertarian dream, has come only recently and existed for a brief period, that is from the end of the Revolution War to the beginning of the Civil War. Fate appointed kings have included Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, and George Bush, The Decider, ruling America with Unilateral Authority. And fate is pushing political and economic power of the UK and the US, the two iron legs of global hegemony, into the hands of ten kings, who will eventually come to rule, each in his own regional power base. With this distribution of power to regions, we see the rising of the Ten Toed Kingdom of regional global governance, where rule in the ten toes will be mired in the clay of democracy and the iron of diktat. The coming President of the EU will be one knowledgeable with the scheme of framework agreements. As credit instruments break down, not by any human action, but rather by fate, the curtains will open, and The Sovereign, and his banking partner, The Seignior, will step onto the world’s stage. In a credit exhausted and currency devalued world, the people will come to place their faith in the word, will, and way of these two; they will give their full allegiance to their diktat.
Richard Fisher in speech on November 8, 2010, before the Dallas Fed, “The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt. This is risky business. We know that history is littered with the economic carcasses of nations that incorporated this as a regular central bank practice.” Jeremy Grantham of Guru Focus writes more of debt monetization in his article the Dark Side of QE2
The reproduction of bad money via credit easing policies, QE1, QE2, and now, coordinated central bank dollar FX Swaps, and the ECB's LTRO, have goosed up stocks; but this constitutes global debt monetization, which eventually will destabilize all nations, and is resulting in an economic, and political coup de etat in Europe, whereby, a credible ruler and his banking partner, will rise to power and provide order out of chaos.
Free market monetary policy has led to debasement of currencies and is giving rise to regional regional global governance. The failure of monetary credit will give rise to people placing trust in totalitarian rulers: totalitarian collectivism is the Eurozone’s future where public private partnerships work for the region’s security and stability.
An inquiring mind has Bernankeism and global central bank monetary policy reached the point of no return? The financial crisis was a natural consequence of extravagant credit policies. Has the world reached another crisis point, that no central bank monetary policy can resolve? Has fiscal profligacy and central bank profligacy reached its toxic tipping point? Has central bank monetary policy only served to zombify banks? Will a sacrifice of sovereignty be required for such credit profligacy?
John Chapman writes in the Daily Capitalist Mises knew, and predicted, that a regime of fiat currencies everywhere in the world would not end well. He asserted at the time that this would lead to an era of unprecedented monetary instability, fiscal profligacy that guaranteed retrograde government policies, depressions, and inevitably, social conflict. Without a sound monetary system to facilitate trade and harmonious cooperation between countries, peaceful and progressive economic order disintegrates.
Mises Institute relates One of the most famous quotations of Austrian economist Ludwig von Mises is that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” In fact, the US economy is in a downward spiral of debt deflation despite the bold actions of the federal government and of the US Federal Reserve taken in response to the financial crisis that began in 2008 and the associated recession. Although the vicious circle of debt deflation is not widely recognized, precisely what von Mises described is happening before our eyes.
Neoliberalism was characterised by a Spirit of the Cat in the Hat, where bankers, national legislators and country presidents waived their magic wands and conjured up prosperity and electric growth. But Neoauthoritarianism is characterized by a Spirit of Wilding, where authoritarian leaders waive clubs and subject people to debt servitude.
Charles Hugh Smith, OfTwoMinds, writes of ZIRP addiction and its consequences in Travesty of a Mockery of a Sham, Phase II. Keynes’ proposed to counter these worsening business cycle implosions with massive injections of Central State borrowing and spending. The atmosphere of fear as assets, credit and consumption all contracted would be replaced by a revival of “animal spirits” (the magical elixir of Capitalism), consumption would be stimulated by direct government spending on capital projects and welfare (fiscal stimulus), and banking credit would be restored via stimulative Central Bank credit expansion (monetary stimulus).
But Keynes failed to grasp what Marx had intuited: the ratchet effect. Once the Central State ramped up deficit spending and expansive credit, then the organic economy became dependent on that new level of Central State spending and credit expansion.
As I described in the Survival+ analysis, in effect the central State rescued Monopoly Capital by partnering with it. This results in a financial/State Plutocracy which “saves” the organic economy by taking control of its income streams, credit creation and financial assets.
That is the U.S. economy in a nutshell: a travesty of a mockery of a sham. The consumer became dependent on easy, cheap credit and home equity extraction to maintain his/her consumption. The student became dependent on easy, cheap credit to fund his/her increasingly costly college education. Monopoly capital became dependent on financial slight-of-hand, the debauchery of credit, fraudulent mispricing/masking of risk, stupendously leveraged bets on risk assets, etc. for its swollen profits. Politicians became dependent on unlimited borrowing and spending to keep the illusions of competence, sustainability and “growth” alive.
State and local governments became casinos, dependent on skimming the profits from asset bubbles and financial fraud. Where did New York City’s and New York State’s rising revenues come from? By playing dealer on Wall Street’s scam tables, skimming a steady share of the profits.
Where did California’s bloated state revenues come from? The skimming of capital gains from the Ponzi-scheme real estate bubble.
The stock market rally circa 2003-2008 was merely Travesty of a Mockery of a Sham Phase I. In those glory years of the Central State/Cartel-Capital manipulation, it only required $2 of stimulus and credit expansion to blow $1 in asset bubble “growth.”
But alas, the growth was bogus, illusory, a simulacrum of organic growth, a house of credit cards and fraud that toppled when one card’s overleveraged precariousness was inadvertently exposed.
Now we are in Travesty of a Mockery of a Sham Phase II. As Marx had foreseen, the crises are ratcheting up: now it’s taking $7 of State/Plutocracy intervention to conjure up a pathetic $1 in What Marx failed to foresee was the Central State’s rescue of Cartel-Capital via a partnership: the Central State is now as dependent on financial capital’s maximization of fraud and credit expansion as the Financial Plutocracy is dependent on the Central State to mask and enable its expansion of income and control.
The problem is, of course, that the system cannot support borrowing and spending $7 to create $1 of “growth” for long: eventually, as in all business cycles, the cost of borrowing will exceed the ability of the borrower to service that debt. That’s what Keynes failed to foresee: the way in which the partnership of Central State and Cartel-Capital requires ever greater credit and State debt expansion just to keep the system afloat, never mind growing.
If I loan you $1 trillion at zero interest, with no principal payments, then the cost of servicing that $1 trillion loan is zero. Pretty easy to service zero, isn’t it? That’s the core strategy of the Federal Reserve and the U.S. Treasury.
That’s been Japan’s “secret” for 20 years: as long as the lenders (the Japanese citizenry and life insurance companies, etc.) accepted near-zero interest, then the cost of borrowing additional trillions has been bearable.
But as soon as that $1 trillion requires a serious interest payment, then the ratchet-effect game ends. We are not there yet, but the endgame is no longer over the horizon.
What will TMS Phase III require? $10 in Central State stimulus for $1 in nominal GDP “growth”? Or will it be $20 for every $1 of bogus “growth”?
The stock market is a reflection of this ratcheting up of Central State/Monopoly Capital intervention and manipulation. The stock market took off in the mid-1990s in the “easy money” era, and that led to the Phase I bust of 2000-2001.
That required TMS Phase II, which led to the next asset bubble in 2007-08, and that orgy of fraud and credit/leverage expansion led to an even more severe Phase II bust 2008-09.
If the partnership attempts Travesty of a Mockery of a Sham Phase III, then the consequent bust should return the stock market to pre-Phase I levels: The Dow around 4,000 and the SPX around 400.
Neither the public nor the Standard-Issue Punditry (SIP) understand the addiction-like dynamics of the Central State/Cartel-Capital partnership’s increasingly ineffective interventions on behalf of a facsimile of normalcy and “growth.” Like the addicted junkie, the Central State/Cartel-Capital partnership is approaching the point where their “high” requires ever higher doses of smack.
Nobody knows when the higher doses finally become lethal, but we do know there is such a point.
Finally, love grows cold in the age of deleveraging. Kate Randall of WSWS reports Deadly shootings over Christmas holidays in the US.