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.

Endgame

The foreign, defense and trade policies of the United States and the overt and covert operations designed to implement and support them have, over the last 80 years or so, had profound effects on the world. I used to think those effects were positive on the whole. Like so many other foreign consumers of American popular culture, I had absorbed from childhood the usual cinematic clichés concerning the fundamental probity of generations of US leaders and their agents, both civilian and military. Moreover, it was obvious that old empires had failed and it seemed reasonable to see the United States as having taken on the role of de facto imperial power, keeping the sea lanes open and stepping in where necessary to deal with threats to peace and security. The fact that many of us had family who had been saved or protected by US military operations further encouraged and reinforced such views.

What about the deliberate mass killing of civilians by Allied forces during World War 2, the firebombing of cities in Europe and Japan, the Hiroshima and Nagasaki catastrophes? We were inclined to see these as lapses and not representative of the true (and basically benign) nature of US interventions. But such an interpretation has become more and more difficult to sustain.

It is just possible that, for a time, there was some truth to the myth of the essential benignity of US power. But, since the Vietnam War, and certainly since the exposure of the egregious deceptions involved in the lead-up to the invasion of Iraq, that myth has lost all plausibility.

In the course of a recent discussion at The Electric Agora, E.J. Winner claimed that people outside the US often fail to appreciate just how combative ordinary Americans are. Quoting General George S. Patton’s remark that “all real Americans love the sting and clash of battle,” he suggested that, “[d]espite the occasional revulsion against war, Americans are on the whole a violent people.”

On the whole? Violent, compared to which other nationalities? Forgive me for being skeptical. Such generalizations may sometimes be meaningful in respect of countries with relatively homogeneous cultures but not, I think, in respect of countries as large and diverse as today’s United States.

Nonetheless, my interlocutor had two specific, and not implausible, points to make regarding “the nuances of the context” in which American foreign policy develops and is carried out. Many Americans, he claimed, are brought up to believe “that they have a special place on this earth,” this feeling of specialness or exceptionalism being reinforced by the knowledge that “the US has the most powerful military the world has ever seen.”

His second point was that the governing elites have a responsibility to constrain and manage these unfortunate inclinations in the context of foreign affairs.

“[Hillary] Clinton may not have understood that, but her advisors would have. [...] Some of Trump’s original advisors understood that – so he got rid of them and surrounded himself with yes-men.”

There are many ways the facts can be analysed here. I would be more inclined to emphasize the isolationist and anti-imperial strands of American culture and to see particular (usually elite) interest groups as having manipulated public opinion in generally hawkish directions. The neoconservative movement, for example, has a well-documented history. Neoconservatives and others committed to various versions of American exceptionalism have profoundly influenced US foreign policy and encouraged high levels of military spending and extensive covert and direct military interventions under successive administrations.

Due to fiscal constraints such policies are clearly unsustainable however. US military power is inextricably bound up with – and dependent on – economic factors and the dominant role that the US dollar has played in world trade. The dollar-based financial system has been failing for years and now seems to be imploding.

I talked about some of these things on this site in January, as a novel coronavirus was silently spreading in the city of Wuhan and beyond. I discussed quantitative easing and the Fed’s failed attempts to wind this back. In the event of another financial crisis occurring, I wondered, 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.

That crisis is now upon us. For the time being the dollar is strong and analysts at Goldman Sachs and Bank of America recently predicted that it would strengthen further in the near term against most other currencies.

The larger question relates to the sustainability of the US dollar-based financial system. As this system underpins America’s prosperity as well as its geopolitical status and power, radical changes would have radical implications for America’s place – and role – in the world.


[This is a slightly modified version of an EA piece which was published early this month.]

Stagflation on the way?

Whilst not necessarily endorsing Ambrose Evans-Pritchard's general approach to economics (too Keynesian for me), I always find his analyses worth reading. In a recent article he sounds a warning about equities and a stalling US economy, addressing the big question about how long disinflationary forces will persist.

What is clear is that the Fed and fellow central banks can do precious little to reverse a chronic decline in productivity. In this respect, we have reached the limits of central bank action.

Fed chief Janet Yellen is in a horrible predicament. She can keep running the economy 'hot' - and by her own admission real rates are 1.25pc below their 'neutral' or Wicksellian level - in a bid to build up momentum.

But in doing this she risks falling behind the curve on inflation, or more accurately 'stagflation', since that is where the US seems headed. She can pick her poison from one side or the other of the 1970s Phillips Curve - jobs or prices - but pick she must. “The longer the Fed dithers, the higher rates are eventually going,” said Paul Ashworth from Capital Economics.

Yellen has a revolt on her hands in any case. The heads of the Atlanta, St Louis, and San Francisco Feds have all been talking up the inflation threat. Even the ultra-dovish Boston chief has gently cautioned markets to expect more than the one solitary rate rise priced in by futures contracts for this year.

The Fed may succeed in stretching this cycle until 2017. But sooner or later it will have to grasp the nettle, and then we will discover how much monetary pain can be taken by a dollarized global economy with post-QE pathologies and total debt ratios some 36pc of GDP higher than in 2008...

There has been a lot of talk about stagflation recently. It seems like it may indeed be coming.

The scariest statement here is the remark by Paul Ashworth: "The longer the Fed dithers, the higher rates are eventually going."

And dithering they have been for years now.

For a slightly different perspective, emphasizing the current global deflationary situation and competitive currency devaluations (but equally critical of the role of central banks), note the latest – very bearish – views of Bob Janjuah of Nomura.

Jim Rogers on the looming crisis

I don't know how to take Jim Rogers. Though a graduate of Yale and Oxford, he has no advanced degree, but that shouldn't necessarily count against him as an interpreter of the economic and financial scene.

Since economists routinely disagree about even the most basic issues, there is scope for others who have some expertise in finance and related areas to make their contributions. And, arguably, pragmatic freelance investors – whose only concern is to get things right (primarily for their own portfolios but also for reputational reasons) – have an important role to play in the public debate.

And Rogers has no doubt been a phenomenally successful investor. This means something, even if you put it down to mere luck and commonsense.

His ideas are worth looking at not because they are interesting but because they have an 'emperor's new clothes' quality – and (who knows?) he may just be right.

His economic assumptions are not doctrinaire, in the sense that they appear to have been arrived at independently. They just happen (as Rogers has himself observed) to correspond with some of the main tenets of the Austrian school.

He emphasizes the relevance of morality to the markets, but not in a naïve or objectionable way, it seems to me.

So here are some extracts from a recent interview in which he talked (amongst other things) about morality and the markets and the coming crisis (as he sees it) for the US, Europe and Japan.


Félix Moreno: [You have written that] the US [is the] largest debtor in the history of the world.

Jim Rogers: That’s not an indictment, that’s a fact. If you consider it a negative fact, it’s an indictment. It happens to be a fact that it is the largest debtor nation in the history of the world. The debt is going through the roof, you know with all the shady rates. I do criticise it. I don’t like it. I’m an American citizen. I’m an American taxpayer, so I hate what’s happening with the debt situation in America. No nation in history has gotten itself into this situation and got out without a crisis. So I guess it is an indictment.

FM: Do you expect the US politicians to do something about the debt? To balance the budget any time soon?

JR: No, not at all. Not either the present politicians or future politicians. The situation is so dire that it would be almost impossible to balance the budget and pay down the debt without an enormous amount of pain. Now suppose that somebody could win an election on that platform – well within six months or a year or two, he would either be assassinated or give up because the people would say “wait a minute, we didn’t know it was this much pain. This is not what we had in mind” and he would be thrown out and his policies reversed. No it’s not going to happen until there’s a crisis or a semi crisis. That’s the lesson of history. Nobody gets out of this situation until there’s a crisis.

FM: What would you say to those that see the current situation as perfectly sustainable, especially in reference to the money printing, quantitative easing, etc.

JR: I would suggest that they get out a couple of simple history books and see if there has ever been a way out. For what it’s worth, there has not been and there won’t be. I suggest that they look it up. They don’t have to listen to people like me, look it up.

FM: Do you think that Bernanke and the Fed have an exit plan from QE and zero-rates?

JR: Mr Bernanke’s exit plan apparently is that he is going to leave his job. He doesn’t want to stick around for the hangover. He doesn’t want to be around for the consequences of what he’s doing. I don’t know if there’s an exit plan. If and when they stop it’s going to cause lots of ramifications in the market and lots of, perhaps even chaos, but certainly turmoil and upset. The only exit plan that he’s talked about is to let it all mature. That sounds wonderful, but it’s not very practical.

FM: It seems that the whole “let’s get out before it crashes” worked well for Alan Greenspan.

JR: Well, Alan Greenspan did get out before it collapsed, more or less, but if nothing else, history has figured out that he is a charlatan who didn’t know what he was doing in the first place.

FM: So you don’t think that they have an exit plan. Does that mean that you are in the inflation camp? Do you think that the crisis is going to come from high inflation like in the ‘70s and ‘80s, or are you in the deflation camp? That it will come through bankruptcies, banking collapses and debt defaults?

JR: Throughout history when you print staggering amounts of money, it has always led to inflation. Now, you can have an inflationary boom, an inflationary feel-good period, but usually the politicians just keep printing. No politician is going to run on a platform, or could get elected on a platform of “we are going to have pain”, so they are going to continue to print money. You know as Mr Bernanke is doing, the BoJ, the Bank of England, the ECB. They all say the same thing. They are all doing the same thing. So they are going to continue to print money. Eventually of course what always happens is that inflation gets higher and higher and then the bubble pops and you have deflation and harder times. But between here and there is a long way, because they are not going to stop printing money. That’s all they know how to do. It’s the wrong thing, but it’s all they know to do.

FM: ...[Y]ou give examples of banking crises where there were no bailouts. What is your opinion on the bailouts?

JR: It’s not supposed to work that way. You are not supposed to take money away from the competent people and give it to the incompetent so that the incompetent can compete with the competent people with their own money. That’s not the way capitalism is supposed to work. That’s not the way morality is supposed to work. I know politicians don’t care about morality. It’s not going to work. You see what happened in Japan. Japan has had two lost decades. Their stock market is down by 70-75% from where it was 23 years ago. This system has never worked.

In the 1920s America had this problem and America balanced the budget and raised interest rates... They had a terrible 18 months, but then they had the most exciting economic decade in American history. Scandinavia did the same thing in the early ‘90s. When the Japanese were refusing to let people fail, the Scandinavians let people fail. They had a terrible two or three years, but since then Scandinavia has been an extremely strong and exciting part of the world. This way (the bailout way) doesn’t work, and there are no examples of something like this having ever worked. It’s not going to work this time either.

FM: Some argue that a current example are the eastern European countries: Estonia, Lithuania, etc, who made big cuts within one year of the crisis and are now growing faster than the rest of Europe.

JR: There’s no question. You can look at other places: Iceland, Ireland – you know, the places that did take some pain have certainly done better than the places that denied reality.

FM: From the Spanish perspective, it’s certainly not better to have a lost decade or two by trying to postpone all the big budget-balancing hard work.

JR: You can postpone it all you want, but the problems just mount. There is no country in Europe that’s going to have lower debt this year than last year, or lower debt the next year than this year. Every one of them will run up the debt, instead of decreasing the debt.

FM: Do you expect the Euro to lose the currency wars? Which will fall down the cliff first? The yen, the euro or the dollar?

JR: It depends on what standard of measure you are talking about. The Japanese claim that they are going to print “unlimited” amounts of money. That’s their word, not mine. Unlimited amounts of money. I would expect the yen to go the furthest the fastest. But America has also said “wait guys, we’ll print a lot of money too” – though they didn’t say “unlimited”. And the British said “we should do it”. So I don’t really know. It’s a very good question, which one to own. I don’t own the yen, because “unlimited” is a pretty hefty amount of money. I grapple with this every day, which currencies to own. Believe it or not I was even contemplating putting money into the ruble – only because it seemed less flawed at the moment than these others.

FM: You seem to have had a change of heart recently regarding Russia.

JR: In recent months I have seen that Mr Putin and people in the Kremlin have changed their attitude. It will take a while for all this to sink in. They said for many years that they welcomed foreigners and capital, but they were lying. They shot you, they put you in jail, and they confiscated your wealth. But now Mr Putin seems to understand that he has to play by international rules, he cannot go on putting people in jail and taking their money. If he wants to play on the world stage he has to treat international capital, and domestic capital, in a proper way. You can ask me in 10 years if I got it right or not...

The inflation road

So what does the re-election of Barack Obama mean in the broader scheme of things? I was impressed by a short, economic-historical analysis Matthew Stevenson did for Reuters focusing on the fatal flaw of the progressive agenda: its economic foundation (or lack thereof).

Stevenson alludes to the long-standing struggle between those committed to a stable currency and inflationists, a struggle which has been at the heart of many presidential contests.

In this instance, clearly '[t]he victors were the forces of cheap money. William Jennings Bryan would be proud - as would bimetallists and Weimar Republicans.'

'Inflation won because it is the panacea for all that ails the body politic: a short-term cure-all that promises economic growth, the possibility of paying off national and international debts, new-found prosperity for the middle classes and liquidity for the impoverished, who otherwise would be voting in the streets with rocks and burning tires.

'... Cheap money defers many liabilities. Real wages for industrial workers have declined since the 1970s. True unemployment – including those too discouraged to look further and others working part-time for unlivable wages – is closer to 22 percent than the official figure of 7.9 percent. The national debt, $16.3 trillion, exceeds the gross national product. With unfunded entitlement programs, such as Medicare and Social Security, the government is eventually on the hook for a further $46 trillion, which it would rather not pay with pieces of eight.

'The hard-money men have not been able to win many elections since the 19th century, arguing as they do for reductions in the monetary supply; an asset-backed currency (preferably with gold) and policies that lead to deflation...

'The magic of inflation, before it turns everything to dust, is that it papers over a number of financial problems. The United States government is now able to run monumental trade and budget deficits, fight multiple foreign wars, vote tax cuts, extend unfunded pension and healthcare benefits to citizens over age 65 and spend money with Medici-like munificence on myriad federal programs by printing money or borrowing in national and international capital markets.

'Were the dollar unacceptable as a reserve currency in investor portfolios here and abroad, these financial sleights of hand would have ended long ago. Imagine the consequences if the Chinese demanded gold, diamonds or barrels of oil as collateral for their U.S. dollar bond investments. Already, the dollar is badly depreciated against many currencies ...'

Stevenson suggests that the official inflation figures grossly understate actual inflation and cites 'four-year college tuition at $200,000, one-bedroom New York appartments for $1 million, gasoline at $3.46 a gallon and carts of groceries that routinely cost at least $250.'

Inflation 'allows the political classes to maintain the illusion of power and authority. Without the ability to print and circulate paper money to balance the books ... U.S. presidents would be riding Greyhound on their appointed rounds, not the magic carpet of Air Force One.'

Furthermore, inflation allows politicians to create 'a veneer of fairness' but 'it is a direct tax on the savings of American citizens, especially those of the middle classes who lack hedges against its effects ...'

'[T]he economic carnival will end when the dollar is no longer acceptable as a reserve currency, first in international markets and later domestically.'

The only reason the Chinese hold debts denominated in dollars, Stevenson notes, 'is because it helps them maintain the artificially low exchange rate of the renmimbi.'

'Whether or not the United States goes over the fiscal cliff, it will remain unified as a nation of debtors for whom the goal is always to repay their loans with debased currency.'

Matthew Stevenson has a nice turn of phrase and a good sense of history. I agree with the general thrust of what he says even if a few of his assertions are problematic. There is no doubt in my mind that the massive U.S. national debt is eventually going to bring the country down, but exactly how and when is just not predictable. (To his credit, Stevenson leaves the timetable open.)

Had Romney prevailed, I would have watched and waited and wondered whether, after all and against the odds, America could come back.

But it's gone now, headed for inevitable, irrevocable decline. It was probably too late to start to turn things around anyway. But that we will never know for sure.

When will inflation strike?

Adam Creighton sounds a warning in a recent piece on the policies of the Federal Reserve, the Bank of England and the European Central Bank. Money creation would normally lead to inflation, but inflation has not yet kicked in.

'Actual inflation appears dormant for now, and big lenders appear content to buy bonds at very low interest rates. But bond holders were very wrong about future inflation in the 1970s, and as [Milton] Friedman wrote, "monetary policy action takes a longer time to affect the price level than to affect the monetary totals."

'The amount of money has risen by almost 40 per cent in the US since early 2008, while consumer prices have risen only 6 per cent. More money chasing the same amount of goods and services should ultimately prompt inflation.'

Creighton argues that money creation programs have taken the pressure off politicians to implement necessary changes; and cheap money has protected highly leveraged private banks and dulled incentives to clean up balance sheets.

What makes this particularly disturbing is that it is occurring in a context of extremely high levels of government debt.

And yet liberals routinely fail to be disturbed by the situation. They are generally critical of bank bailouts, of course, but they see government borrowing for fine and noble causes (such as welfare programs, hospitals, schools and infrastructure) as a fine and noble thing, no matter the budgetary position.