Death and destruction

My analysis of the Ukraine situation has continued to attract criticism. I have been saying for some time that American and NATO strategies are fatally flawed and extremely dangerous. Responding to the latest episode of my podcast, Culture and Value, which was featured recently at The Electric Agora, Daniel Kaufman commented:

"The idea that somehow Ukraine is at fault for the prolonged death and suffering from the war – or those like the US, UK and others who are helping Ukraine – is not only a poor analysis of the situation, it represents what to my mind are really terrible values. Ukraine does not want to surrender. It does not want to hand over part – or all – of its country to Vlad the Impaler and his armies. It does not accept the rape and torture and mass murder that Russia has been inflicting on it. The idea that it should ... in order to satisfy your conception of proper geopolitical order – or that of Russia or any of the other murderocracies and kleptocracies on the planet – is just so out of whack, I don’t even know how to respond to it."

I question some of Dan's assumptions here and naturally reject any suggestion that my values are flawed or my motives tainted. My brief reply to his comment did not deal with Ukraine so much as with what arguably lies at the root of this and certain other international crises (or potential crises): the failure of those currently in power to see and come to terms with a changed geo-strategic environment.

I wrote as follows:

I am not talking about some desired political order. Rather I am noting, as carefully and accurately as I can, current geopolitical and geo-economic realities. I am making the point that the situation has changed over the last thirty years or so and not in ways which favour an overwhelming level of American dominance (such as applied immediately after WW2, and again after the break up of the Soviet Union) in the future.

For example, the US is no longer as economically dominant as it once was. Its share of the global economy has declined from about 40 percent in 1960 to about 24 percent today. This in itself is not necessarily a bad thing but it does mean that a broader range of countries will have a say in reshaping the financial system than was the case, say, in the immediate post-WW2 period.

This is important because economic factors underpin military power. And though the USD is strong at the moment, the widely-acknowledged fragility of the current debt- and derivative-based financial system – a system which creates demand for (and so guarantees the value of) the dollar – strongly suggests that the United States will not be able to continue to play, at least to the same degree, the dominant global role which it has played over the last three-quarters of a century.

Politics, personal attitudes and the approaching crisis

The following observations had their origin in an exchange I had with a friend, some of whose ideas about, and attitudes towards, politics and human freedom I saw – rightly or wrongly – as being false (the ideas) and counterproductive (the attitudes).

1. Attitudes

For me politics is a boring necessity which, at its best, runs in the background. Enthusiasm for politics is always a danger signal.

Such enthusiasm may manifest itself rhetorically or be rhetorically generated, but I am not condemning rhetoric per se. Rhetoric is an inevitable feature of any communication which incorporates a human element and engages the emotions. You can’t avoid it, and political talk – which is often designed to persuade or (let’s face it) to manipulate – is always going to be rhetorical to some extent.

So I am not criticizing people for utilizing rhetoric in the political sphere so much as for believing it – for falling for their own or other people’s rhetoric. Doing so, they are often implicitly seeking in politics something which politics or political action cannot, in the end, provide: that is, some kind of deep satisfaction or “salvation”. They are turning politics into a religion-substitute. This is a very dangerous thing to do.

Emotional satisfaction is a personal rather than a political matter and is best sought, I believe, in interpersonal relationships and personal, non-political activities and practices (work, hobbies and “creative” activities, walking, sitting in the sunshine, etc.). When people get (or seek to get) their deepest satisfactions from political or, more broadly, from ideological beliefs and activities, something is amiss.

2. Romanticism and politics

I keep seeing not only ideological (that is, political and personal-value-based) but also metaphysical elements in the political views of activists both of the left and the right. Much has been written about the implicit (and in my view dangerous) metaphysics of Marxism but right-libertarians – with their views on natural rights and their fetishization of freedom – are also committed to their own, ultimately empty and baseless, metaphysical ideas.

The origins of many current ideological fashions can be traced to the 19th century and the Romantic movement. Many Romantic ideas carry religious and metaphysical baggage deriving from Biblical as well as classical sources (Plato, the Stoics). It took me some years to see my own Platonist and Romantic commitments and assumptions for what they were – and so let go of them.

One’s views on art and human creativity and action need not have a metaphysical dimension but Romantic aesthetics certainly does, and these ideas have and still do play into political thinking in unfortunate ways. I am not saying that we, as individuals, can’t find deep satisfaction in creative activities at a personal level. My point is that no political solution can ever alter the underlying realities and imperatives of social and economic life and deliver the sorts of universal freedoms and satisfactions which are typically promised by radical, progressive or libertarian ideologies.

3. The current situation

Ideologies are real in the sense that they motivate political action and affect the way people interpret history and current events. They are essentially action-oriented, reality-distorting mechanisms and are worse than useless as analytical tools.

The “system” we currently find ourselves in is not capitalism, at least in the historical sense of the term. Western capitalism had deep cultural roots and was associated with certain patterns of thought and behaviour which no longer prevail (work ethic, deferred gratification, thrift, certain religious ideas, etc.). It involved the slow accumulation and deployment of actual capital, “creative destruction”, unprofitable companies being allowed to fail, and so on.

This is nothing like what we are witnessing today where everything is driven by debt and derivatives and there is an unholy alliance between heavily indebted governments, central banks and financial institutions. Markets are grossly distorted. Currencies are losing purchasing power. The financial system has become detached from economic reality.

The seeds of the current crisis were sown when the USD’s link to gold was finally severed in 1971. Or actually before that: in the fiscal profligacy of the 1960s which made the suspension of the Bretton Woods arrangement necessary.

Governments and central banks have played a major role in creating the current perverse and dysfunctional system, but other groups have also been involved (Wall Street bankers, certain business people and billionaires, NGOs, big tech and media). The system – such as it is – is now collapsing.

There will be inevitable pain.

Debt and the monetary system; I invest in a gold mining stock

What follows is a modified version of (a part of) a personal email which I sent recently to a friend who had asked about my views on the current economic situation. He is a fan of Andrew Yang. I am not…

I listened (on YouTube) to an interview with Andrew Yang. He is right about jobs and automation but I find him to be very naive on economics. He doesn’t seem to understand money and debt. He talks about America as the richest nation in the history of the world when the country is actually in dire economic straits. The real economy has been hollowed out and ultimately the status and purchasing power of the dollar is at risk.

I agree with Yang that there will not be anywhere near enough jobs in the future. This will inevitably lead to trouble. I don’t pretend to have a solution, but to get to a solution we need to understand economic realities at a deep and basic level.

My friend asked: “[W]hat about other currencies? Are they all fiat, rather than backed by something?”

They are all fiat. Most float; some are pegged to the dollar.

There are a whole bunch of other names I could mention but George Gammon (accessible on YouTube and Twitter) has a good grip on the way the monetary system works. At least he is interested in understanding what is going on and uses evidence and reason and communicates well. It’s not rocket science, but most people can’t be bothered.

On recent monetary history, my understanding is that the petrodollar replaced the gold-backed dollar in the early 1970s. It involved an understanding with the Saudis. Before Nixon was forced to abandon the gold-backed dollar (because France and other countries wanted gold for their dollars and the US had nowhere near enough gold to pay them with), the USD was pegged to gold at $35 an ounce and all other currencies were pegged to the dollar. This was the Bretton Woods system. Since Bretton Woods fell apart you have had the current debt-fuelled system which has now gone completely crazy and exponential.

Gold is now about $1900 an ounce. It’s not so much that gold has gone up in value. It is that the dollar and other currencies have lost value (i.e. purchasing power). Technological advances (especially robotics and AI), debt defaults and current demographics (aging population) are all disinflationary but debt-ridden governments can’t allow deflation because it increases their (and every other debtor’s) debt burden. They have to print more money and create inflation in order just to keep things going. You can see where this is headed.

I have started buying shares in a smallish gold miner (ASX: SBM). I try to base my decisions on research and reason. But there seems nothing wrong with letting sentiment come into it a little. After all, everything is uncertain and there is so much data out there it can be overwhelming. Sometimes sentiment can help push you to act, to take the plunge. After all, nowhere is safe. Staying in cash long term is certainly unwise.

So this is the personal and quite irrelevant detail that helped to get me moving: my father was born at Gwalia, a small Australian gold mining town in a very inhospitable region. Mining eventually became unprofitable and the town was abandoned. However, the Sons of Gwalia mine around which the town had been built – and with which a young Herbert Hoover (future American President) had been directly involved – was reopened and extended and currently represents St Barbara Limited’s chief Australian operation.

The basic numbers for the company look okay to me, though I don’t pretend to have a grasp of the details. Their other two operating mines (both gold mines) are in Nova Scotia and Simberi (an island in the Western Pacific). Currently I am down a few thousand dollars on my investment but am quite optimistic for the medium and longer term. If there are declines in the share price and the fundamentals stay the same, I will be buying more over the next year or so.

America in decline

An American friend, who shares my views on global politics, diplomacy and foreign policy but not on economics or fiscal and monetary policy, recently wrote:

“I agree that the US is in decline. In theory I believe it can come back, but it is getting harder all the time (and the recovery process more painful). If Trump or Biden are elected this year I will give up on the US as it will not recover to a meaningful degree (if at all) in my lifetime.”

Here is the substance of my response…

Whoever wins the election, the country will remain divided. To an outsider, at any rate, the national symbols and myths no longer seem to be working to create the sense of cohesion which they once provided. America is not the nation it once was. I wonder if it is still a nation at all. (It remains a very powerful state, of course.)

In terms of comparative economic and military might and the diplomatic leverage associated with this, the decline is (I think) irreversible. This may not be such a bad thing, given the increasingly destructive nature of US foreign interventions.

The projection of US power has, at least since World War 2, been closely associated with, and facilitated by, the global role of the US dollar in trade and its status as a reserve currency. But the current US-based system is breaking down. This has implications for all countries, but especially for the US.

The Federal Reserve responded to the 2008 financial crisis by lowering interest rates and pumping hundreds of billions of dollars into the system. This was supposed to be a short-term emergency operation. But the expansionary policies continued. A precarious economy increasingly dependent on government spending and a financial system increasingly dependent on cheap credit led the Federal Reserve (and other central banks) to suppress interest rates by any means possible, including by injecting money directly into the financial system through the purchase of securities from commercial banks and other financial institutions (i.e. quantitative easing). Such policies have facilitated and encouraged further borrowing and malinvestment on an unprecedented scale. The problems are now systemic.

Price signals, which are key drivers of any functioning market, have become so distorted that they can no longer be trusted. Fixed-interest securities, shares and many other financial instruments appear to be massively overvalued. Government and central bank interventions are largely to blame for this but other factors – such as the rise of index funds and other forms of passive investing – have contributed to the problem.

I see it as extremely significant that attempts made in recent years by the Federal Reserve gradually to raise interest rates towards more normal levels and to wind back quantitative easing have failed. In both cases, the Fed has reversed course.

In the event of another financial crisis occurring, what would happen? Interest rates are extremely low and central bank options are limited. Defaults and/or falling equity prices would destroy large amounts of paper wealth. In the short term, this could lead to a period of dollar strength but – if the actions of the Federal Reserve in recent times are any guide – the money-printing would be stepped up. This could easily lead to serious inflation and an undermining of international confidence in the dollar. Of course, no one can predict exactly how (or when) the endgame will play out but there is little doubt that the US dollar’s days as world reserve currency are numbered.

Before confidence – and properly-functioning markets – can be restored, bad debts need to be recognized as such and written off. Zombie banks and zombie companies must be exposed and either allowed to fail or taken over. But, because of the extent of the problems, the system itself – the entire post-Bretton Woods, USD-based system – is now irredeemably compromised. There is no easy way out.

Though it may appear otherwise, my basic sentiments are not – and never have been – anti-American. I am not a US citizen but I love and value many features of 20th-century American culture. Many of these features are exemplified and live on in individual Americans even if they are no longer reflected in contemporary social structures and institutions.

The old ways are dying, the old institutions are gone or changed beyond recognition. Even so, I hold to a hope similar to one I have expressed regarding older European and British traditions: namely, that what is good in what has been lost will eventually be rediscovered and find new (and perhaps more enduring) forms of expression.

Debt: the endgame approaches

Something unusual, something historically significant is going on.

Epochal shifts do occur in history, but they usually only become clear in retrospect. One of my professors had a large print of Seurat's "A Sunday Afternoon on the Island of La Grande Jatte" hanging in his study. It is emblematic of a period (between 1871 and 1914) which came to be known as la belle époque, a time of prosperity and peace and scientific and technological advancement which preceded the horrors of the Great War. Never again would such naïve, unclouded optimism prevail.

Some would say that the post-World War 2 world was such a period. And, perhaps surprisingly in view of the threat of a world-destroying nuclear conflict, there was during those years both optimism and rising prosperity. This time it was not military conflict which broke the spell, however, but rather deep underlying economic and social problems which have only slowly become evident.

I want to focus on two indicators, one economic and one social: the first quantitative, the second qualitative.

The quantitative indicator I am referring to relates to debt-levels, especially government and household debt; boring, I know, but extremely important and relatively easy to grasp. The qualitative indicator relates to levels of trust between different societal groupings and individuals and their relationship to freedom, morality and social cohesion.

Internationally, sovereign debt is at historically very high, if not unprecedented, levels. In the U.S., the national debt currently stands at 20 trillion dollars, or about 100% of GDP. Household debt is also very high, having returned to the levels which preceded the 2008 crisis. Total U.S. debt (public and private) stands currently at about 350% of GDP.

The situation is quite obviously precarious, not least because a continuance of the status quo is dependent on the very low interest rates which the coordinated activity of central banks has engineered. But central banks don't have complete control of interest rates. Longer dated government bonds (seen as indicators of expected inflation, and also as a bellwether of commercial interest rates) will eventually rise, putting severe pressure on highly indebted governments and other borrowers.

Another way of seeing the problem is in terms of the relationship between economic growth and borrowing. Basically, for the last forty years or so, growth has been dependent on increasing levels of borrowing. For the last nine years, loose monetary policy, which has allowed rapidly increasing debt levels, may have forestalled a worldwide recession, but only anaemic growth rates have been achieved. The consequences should be obvious to anyone who thinks about it. There are limits to what borrowing can achieve, and responsible planners realize that levels of sovereign debt are unsustainably high.

In the case of the United States and many other Western countries, the looming problem of unfunded liabilities – especially relating to pensions and social security programs – dwarfs official national debt figures. These promises can never be delivered on, but admitting this would have a high political cost.

There are only two ways out in the longer term: default, or inflating away the debt/liabilities (by money printing). I don't know what the consequences of default (on sovereign debt, say) would be – not good, obviously – but the inflation road is also a dangerous one. Inflation, once it takes hold, is notoriously difficult to contain. Moreover, the sorts of anti-inflationary policies which have succeeded in the past may not be politically possible today.

Already, Western (and Eastern) economies seem to be stalling. Highly indebted households in the U.S. are cutting back on discretionary spending. The endgame – probably beginning with a deflationary crisis which would lead to widespread defaults – may well be approaching. I hope it is, because the longer this debt-based charade continues, the more serious the consequences will be.

No individual or country has a right to a certain standard of living, even if people living in rich countries all too often assume that they do. But, not only can continuing prosperity not be guaranteed, poverty is already with us – even in the still relatively prosperous West. Look at the youth unemployment levels in many European countries, for example. Or the stresses being faced by middle- and lower-income families in America and elsewhere. Or the bleak prospects facing many (most?) retirees.

The loose monetary policies pursued by central banks has had the (presumably unintended) consequence of enriching the few at the expense of the many, as the prices of financial assets and certain categories of real estate have been disproportionately inflated.

Moreover our collective memory of the two World Wars and the Great Depression is now fading. Such knowledge as we have of these times is based more on reading and films than on actual memories or family stories. Having grown up (in the West) during a time of peace and prosperity we might be tempted to assume that what we have experienced is the norm, to see war and poverty as some kind of aberration. But history teaches us otherwise.

Even the years immediately after World War 2 were very tough, especially in Europe. Many areas – including Britain, France, Germany and Scandinavia – were in dire financial straits. The material standard of living was much lower than it is today.

Who is to say, then, that our present levels of prosperity will persist? Why should they? Debt levels strongly suggest that we are living beyond our collective means and have been for some time.

So perhaps the question should be: how can present levels of prosperity persist, given the fact that we have been increasingly dependent on credit and deficit spending by governments to fund our lifestyles?

I will address the (qualitative) question of trust and social cohesion another time.