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A Thousand points of Blight

|Includes: AIG, Goldman Sachs Group Inc. (GS)

   One of the advantages of the republican (small "r") form of government prescribed in the US Constitution is that extreme ideologies seldom get sufficient control of the government to see their agendas fully expressed as law. There are just so many seats to fill, and over so many elections, that the normal ebb and flow of crowd dynamics, together with the inevitable exposure of the human foibles of those with no self control ("I did not have sex with that woman") tend to ensure that all but the most moderate movements get discredited before they can get all the way to the top. In fact, getting enough of your agenda passed that its failure is the cause of your party's fall from power is something of an achievement.
    And for this reason, I must extend a sort of congratulation to the Democratic party. They have managed to establish their own 'high water mark', not from a sex scandal of a key player, or the passage of many years of difficult choices, but from 1 (count 'em, one ) year of having everything their own way. 
   Swept to power by pretty profound public disapproval of the preceding regime, they have shown themselves to be at least as bad. That's not a partisan crack; like Roosevelt after Hoover, they are not only continuing, but magnifying on, the bad ideas of their supposed ideological antagonists, so I speak of actual behavior. 

    But this is a financial site, so the subject at hand is, what is the financial effect of the passing from power of this movement? Sadly, in the short to intermediate term, not much. The core controllers of their Republican (big "R") alternatives seem unable to realize, much less embrace, what needs to be done. Certainly they won't even get the chance until Obama leaves office in 2012 (yes, I will take bets). I strongly suspect his inevitably Republican replacement (probably a Big Government Republican a la'  Romney, or an ignorant creationist like Palin) will fare even worse, becoming another one termer. 

    What will the financial landscape look like in 3-5 years?
    Collapsing money supply, together with a phobia for recognizing bankruptcy, will drive demand for the $US, and thus its relative valuation, sky high. This will impair exports, and doubtless the powers that be will try to "moderate" this trend. Doubtless, they will fail. Governments have a terrible track record of controlling Forex. The markets are just too big. Even in the depths of a depression they may be too big. 
     By then, the collapse of The Great Real Estate Swindle will be manifest, all efforts to paper over it exhausted. This will slowly but surely disembowel the balance sheets of most financial institutions, the main holders of this garbage. Banks will be falling like wheat. 
     The first time the FDIC is stretched too thin to reopen a failed bank over the weekend, the televised crowd of angry depositors will change the way Americans think about their bank balances for years to come. No, not years; to paraphrase General Sherman, 'Generations will Pass Away' before it is forgotten. 
    The resulting drawn-down in balances will further stress the system, killing more banks. More interestingly, it will lead to a resurgence of the cash economy, as merchants' understandable distrust of bank-mediated payments in such an environment will encourage discounts for actual currency notes. This in turn, will savage tax receipts, as big parts of the economy simply disappear into cash, largely invisible to the tax man. 
    The public will not take this kind of suffering lying down. Expect every icon of the recent troubles to be the target of venomous hatred by the electorate. Paulson, Bernanke, Geithner, Fannie and Freddie, AIG, GS, pretty much all banks, will be the target of indictments, and punitive legislation, if not actual mob violence. 
     It may be pretty hard to profit from anybody's financial insights in such an environment, for what brokerages, clearing firms, or even exchanges can you count on to stay open?

     Another particularly unfortunate consequence of the coming troubles, aggravated by our current president's ancestry, will be a serious deterioration in race relations. The clock could easily be turned back 50 years. Which is a damn shame.

    One of the bright spots in this will be a collapse of commodity prices. Lower money supply = lower demand. Period. In oil alone, this will, among other things, insure that the infamous international villains of the future will be a different crew than the current batch. For example, if oil goes to $30 a barrel (likely),
   1) Putin's dream of a resurgent Soviet Empire will be dust. Russia will go back to being merely the largest piece of wreckage of the old Union. 
   2) Iran will be unable to maintain a robust nuclear program. 
   3) The Saudi aristocracy will be without the means to materially support islamic extremists.
   Speaking strictly for myself, I won't mind that part of this century. I for one am sick of that bunch.

   At some point, likely after both of our current main political parties have discredited themselves utterly, the deflationary destruction of credit will have dropped the money supply down to where the printed Federal Reserve Notes actually represent a significant fraction of the money supply. At that point, "printing press" inflation will work, and the initial 'success' of this will probably mark a bottom.
    By then, we will have bred another generation like the one that weathered the last depression. That one has been called "The Greatest Generation"; I am not so comfortable with that label. All over the world, people of that generation flocked towards ideologues, and were quick to embrace confrontation, and blind or callous to the magnitude of potential consequences. This is not something I am anxious to experience in my old age.
    But history is not (quite) destiny; we can resist these impulses. And we'd better try really hard, because the alternative will be a real war. Not an ugly occupation of some second rate dictatorship we knocked over in a few weeks, but great powers seeking to obliterate each other with whatever means are available. The world has forgotten what those are like. 

    All this, from hubris. All this, from the notion that an unsustainable status quo could, and must, be defended, at the expense of all else, and that those making bad bets shouldn't have to pay. Thank you, John Maynard Keynes. Thank you, Hank Paulson.