massornament

Oh my… I have not been very active on this blog as of late.  It’s not for a lack of reading and/or thinking but more because what I have been reading and thinking about lately has been somewhat depressing and not something that one would want to share.

I just came across a most interesting website and wanted to share a very interesting article on another interesting article.  The first is located at The Daily Bell: “Buffet’s Partner Says America Is Finished.” The second is the article penned by ‘Buffet’s Partner’: “Basically, It’s Over: A parable about how one nation came to financial ruin.” By Charles Munger (Slate.com).    (By the way, I find The Daily Bell to be a very interesting website and plan to include this in my daily web-reading.)

Now, surely the titles of the two articles are using just a little hyperbole in order to grab attention, and I would also add that if the U.S. were indeed to unravel or is finished, it will take a lot of other countries in this globalized world with it (including Canada).  In fact, the authors of the first make the interesting point that the U.S., as an empire, would in reality include the U.K. (I would add that it would also include Canada, since we are a major ally and trading partner).  But even though the authors of the first article disagree somewhat with Munger (the author of the second), they are in reality only adding more nuance and detail.

Munger’s Slate article is a parable of a country that finds itself in dire economic straights similar to what the U.S. has been going through in the last few decades.  Munger warns that the fictional country, if it continues down its fiscal path, would eventually turn into ‘Sorrowland.’  Of course, Munger’s partner, the famous Warren Buffet, penned a similar parable a while back warning of very similar things.

As I mentioned, the authors at the Daily Bell offer a more nuanced and detailed version and two paragraphs particularly caught my eye:

The problem with Munger’s point of view – from OUR point of view – is that is seems to leave out a lot of pertinent history. We would argue that the problems America faces go back a long ways. They have to do in fact with the creation of the Federal Reserve, the graduated income tax, the growth of the federal government, the empowerment of the executive branch, the loss of power of the states (which began after the Civil War) and the rise of America’s mighty military industrial complex which has supported the generation of nearly 1,000 military bases around the world.

America is truly an empire, though one can make the argument it is a bifurcated empire that includes Britain as well. One can also make an argument that an intergenerational power elite has worked patiently to hollow out what once was a republic with an eye toward creating a larger, international structure supported by America’s military might. It is this perspective that we find lacking in Munger’s parable.

Sorrowland/Empire.  I would agree that that is what we are seeing struggle at the moment and it is not just the U.S. or the U.K.  Most large powerful countries (and not just ‘Western’ countries) are looking like shadows of their formal selves (and not just before this recent financial crisis hit).  Most of the powerful counties on the planet have been living off of a financial system that produces little more than monopoly money.  Carmen M. Reinhart, Kenneth Rogoff call the current situation, the Great Contraction (I just finished their very interesting book a couple of days ago).  But one aspect that I think is missing from all the above analyses is that the 20th century was basically the century of cheap energy (for those countries who controlled it) and that the 21st century will be marked by increasingly scarce and expensive energy.  More succinctly, I think that the analyses of all the authors listed above are furthered by something that they don’t acknowledge: peak oil or the end of the era of cheap energy.

The easiest way for me to visualize this is that the early 1970s were a turning point for the U.S.  It reached peak production in terms of domestic oil production (the backbone of its economic and military strength for almost a century) while it continued and expanded its efforts in the Cold War and military and economic expansion.  It is not surprising that real purchasing power for U.S. citizens has been stagnant over that time but that the rise of the financial industry (think Nixon fully abandoning gold and the Bretton Woods agreements) and the rise of credit both exploded.  So, while the petroleum that fueled the U.S. economy and empire began to gradually decline, it was propped up (for a time at least) with monoply money created by the federal reserve (and then multiplied by banks and other financial institutions) and giving it out freely to everyone in the form of credit (cards).

So, it should not be surprising that the ‘house of (credit) cards’ and the ludicrous belief that home values would magically grow forever would come down.  It should not be surprising that it is financial firms (frauds and thieves, more accurately) like Goldman Sachs are the only ones making money these days… too bad it’s just monopoly money.

Sorrowland indeed.  We will soon realize than Sorrowland is not just a country but the entire globe.

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