Let’s Play ‘Capitalism’!! The Bizarre World of Western Financial Markets
For me, yesterday was a bizarre day. On the one hand, a BBC interview with a European trader was making its way through the financial blogosphere where the trader basically said he believed a large, global meltdown in the stock markets would happen in the next twelve months and that politicians worldwide are helpless to really do anything as the financial industry (Goldman Sachs) basically rules the world. On the other hand, rumours that the European zone might come up with some ungodly large amount (I heard 2.5 trillion, which is supposedly not enough) to basically insure that the global banking system will not go belly-up.
Of course, and showing their complete disconnection with reality, the stock markets shot up (hey, rumours of band-aid solutions are as good as anything to trade upon I guess).
And then, this morning, markets are already up as much as they were yesterday because the Greek P.M. went begging, telling potential investors (bail-outers) that they would be investing in the ‘new’ Greece. Consequently, clueless media-talking-heads on the radio, TV, and online are confidently gushing and in Canada this is especially worrying since there are a lot of people that believe the country is fundamentally sound and well-run (even though we have a similar debt-to-GDP ratio as many other countries, governments cannot balance the books (even in Alberta), and most people are themselves over-leveraged).
All this tells me just how much we rely on wishful thinking and good news… and just how much economic activity is based on small amounts of poor quality information. It also shows to me that we have no idea what ‘capitalism’ and ‘free-market economy’ even mean anymore. Let’s survey the situation. Western governments everywhere are living completely beyond their means and when you include future liabilities like health care and pensions, we are essentially bankrupt. The financial/banking system, which is on the hook for billions because of bad loans to governments, has also created an unregulated, derivatives market that is basically one giant casino… except this one deals in the hundreds of trillions (with a ‘T’) of dollars. If this system is not bailed-out by taxpayers world-wide, it will fall in on itself, taking with it the savings and investments and pensions of millions of people across the globe. This system fits the definition of a Ponzi scheme to a ‘T’ (which is of course measured in trillions).
So, for the Western system to continue, we need to have further bailouts… that is, on top of the bailouts of three years ago. And then you have to think of all of the quantitative easings (basically, injecting more monopoly-money into the financial system and stock markets). And, of course, there are all of the government loan-guarantees that are given out regularly (this morning, the promised loan-guarantee for the asbestos industry in Canada is in the news). Oh, and then there are the subsidies and tax-breaks for massive industries ranging from petroleum to agriculture to biotech. And, then there are those industries–communications, aerospace, weapons, defense, etc.–that are dependent upon government spending for the majority of their annual sales. When you add it all up, it seems we capitalists are indeed socialists… or corporate-socialists. (Hmmm… isn’t that partly the definition of fascism?)
At any rate, that pretty much sums up the world economy. I do see more capitalism and competitive markets around me but these are mostly restricted to local, small businesses and entrepreneurs. Anything on a larger scale (where one can afford lobbyists) seems to feed almost entirely from the public trough of make-believe money and the future wealth of taxpayers.
Peace.
.
What Does the U.S. Downgrade Mean?
It will be interesting to see what happens on the various stock indexes tomorrow. Asian markets (which opened 8pm EST today) were down and futures for the exchanges are all off. Others are worried but many in the U.S. government and financial establishment are blaming S&P or saying its numbers are off or saying it doesn’t matter because other (major Western) debt rating agencies still have the U.S. at AAA. Some say it will not have long-term effects and others are worried about contagion or market meltdowns and what this will do to already flagging Western economies and the still-emerging emerging economies.
From my (humble) perspective, this is what is going down:
The S&P downgrade might be somewhat flawed and comes from a flawed institution, but it is spot on and much too late.
This is, in itself, not going to be disastrous and completely crash an already declining system. It might get ugly but it has to happen. Bubbles need to deflate and right now there is much too much monopoly money in the system simply because Western governments are terrified of their populations realizing that their lifestyle is unsustainable and so have been (with the complicity of the financial system) pumping trillions into the financial system, and preventing losses from being counted. That is why we don’t really have a capitalistic, free market system today because the financial systems (that which is usually but falsely referred to as ‘the market’) and politicians have colluded to keep a ‘too big to fail’ and corrupt system afloat. Anyway, that is why S&P’s downgrade is overdue (but let’s not hope it is too late to fix the system). And that is also why S&P’s downgrade will NOT be the cause of further financial decline… because the system is already gaining momentum downward… it is already in decline.
Yes, there are other (Western) ratings agencies that are still maintaining that U.S. government debt is AAA, but it is they who are mistaken… or, more likely, are too afraid to also admit that the emperor just might not be wearing any clothes. (So, again, hats off to S&P for finally waking up.)
As well, S&P should not be blamed here or vilified. It seems clear that the markets were beginning to price in the next, anticipated round of quantitative easing by the U.S. federal reserve and bailouts of the banking systems (who, after all, are the ones loaning billions of dollars to countries like Greece and Ireland and the rest of the PIIGS). That is, the market was confident that the financial and banking system would be bailed out yet again by governments/taxpayers and therefore the market exuberance that has brought stock markets high again after the 2008 collapse was beginning to build once even more. Essentially, this is classic market distortion and on a huge scale. Thankfully, S&P’s downgrade seems to be one event that caused at least a little bit of reality to set in.
Sure, the U.S. economy is not a basket case and it could still pay its bills. But the era of American Exceptionalism has ended. The U.S. economy has been hollowed out, its financial system is rotten to the core (and I am not exaggerating here… just look into the whole murky world of financial derivatives) and what we are witnessing is the end of the American Empire. So, what the S&P downgrade means is that it will become increasingly difficult for the U.S. to service its debt, maintain spending (to maintain its position in the world), and maintain the standard of living that most U.S. citizens aspire to. The U.S. is now AA+ and will probably be downgraded further. What this means is that buying U.S. treasuries will become less desirable as will the U.S. dollar.
Leave it to Zero Hedge to quickly sift through the opinion/information out there when trying to make sense of this. The following quote comes from QBAMCO’s Paul Brodsky and Lee Quaintance, courtesy of ZH) and lucidly identifies what the downgrade means:
The stark difference separating nominal return of principal and interest from the return of inflation-adjusted principal and interest for holders of US Treasury obligations is the critical issue. The necessity to manufacture more money to service and repay existing Treasury debt suggests substantial diminution of the purchasing power of existing US dollars in which Treasury interest and principal have to be repaid. We believe unlevered holders of Treasury obligations are locking-in negatve real interest rates and levered holders of longer duration Treasury obligations are at great risk of capital loss in real terms.
What they are saying is that by purchasing U.S. treasuries one would be losing money because the U.S. government would–in the future–pay back the principle and interest in weakened, future U.S. dollars… and that is because the U.S. has to print money to pay its debt and will have to print even more in the future (since it seems incapable of dealing with its problems). Describe this any way you want but the U.S. dollar is a bad investment that will only get worse.
What the ridiculous ‘debt-ceiling debate’ did was pretty much cement in many people’s minds that the U.S. political system is corrupt and incompetent. It is a fascinating political system but it is ruled by political ideology and corrupting corporate interests… which means it has no seeming capacity to solve actual problems. I watched some of the Sunday morning political shows today and it is strange how the pundits and politicians seem to be walking around in another reality. The spell of American Exceptionalism/Empire is very strong and most inside that system just cannot get a grasp of anything else. Call it what you want: the blue pill (or is it the red pill?), the koolaid, spectacle, the ideology of empire, but the ideal/illusion that has fed the American Dream is for some all-encompassing and continues to colour the perceptions of many inside that system.
China and other emerging markets/economies will certainly be affected… because they already have been affected. But imagine what this means. The U.S. consumes an enormous amount of resources and commodities. The U.S. military spends slightly more than all of the rest of the world combined. It is the U.S., along with other Western nations, that keeps the emerging markets humming. China could not survive without the U.S. current rate of consumption… that is why they have been buying so much U.S. debt. But they will be paid is the future U.S. dollar that will be worth much less than it is now and the flood of printed U.S. monopoly money also creates inflation in those countries buying the debt too (kind of a double whammy… and that is why so many countries are actively trying to devalue their currencies too). So, when Vladimir Putin said today or yesterday that the U.S. is basically a parasite living off of other countries, he was partly right. IN fact, it is a fascinating, abstracted form of economic exploitation.
At any rate, tomorrow will be interesting. I unfortunately will be preoccupied for most of the day so I will not be able to follow the goings-on very closely but what is of real consequence is not whether North American markets will take a beating but the near future and whether politicians and policy makers can get their act together enough to steer us through this mess. (My bet is that they will do nothing but jockey for political position and hand over more wealth to the financial system that got us in this mess in the first place… god help us all.)
Peace.
.
Things are scary…
In recent weeks, an extremely busy semester ended, I cleaned and organized two offices, built a new computer (and rebuilt an old one), had family visiting for about a week, and… well, I have been trying to ignore much of what has been going on in the world. Things are just too scary.
With Greece, renewed talk of the PIIGS (or is it just PIGS without Italy?), the Louisiana oil spill, mounting strikes in many Western countires, North Korea attacking South Korea (?), things seem a little strange. But the coup de grâce had to be the official handing over of the last few keys to the world economy to the financial industry… here, I am talking about the trillion dollar bailouts announced in the Euro zone to try to stablize bloated, debt-ridden economies. Of course, everyone is in a tither because, yet again, politicians (and their constiuents) cannot face the realities of their false economies (and, despite what Stepehen “as an economist…” Harper says, I am including Canada’s debt/deficit reliant economy too). But few ever realize that when it comes to Western economies, it takes two to tango and the other recipients of these bailouts are the banking and financial industries who have created a global system whereby they can take excessive risks because profits are privatized and losses have been socialized (at least, well into the future). (By the way, I was reading a economic historian’s book on the weekend and it seems the idea that socialized risk dates back to the early twentieth century.)
The last few days, I have returned to reading about global economics and it tends to scare even me. James Howeard Kunstler is his old, < sarcasm > optimistic self < / sarcasm >. But one thing that really hit home was a graph from an article titled “The Financial Crisis is Far From Over” at ChrisMartenson.com:
It is not a new idea… just one that is conveniently glossed over by our “Is-the-recession-over-yet” media. Sovereign debt, that which is owed to financial institutions, bond-holders, and other governments that buy treasuries, is represented by the red bars. Unfunded liabilites, which more and more, includes pensions, health care benefits, and the general social safety net that politicians have promised to their constiuents is represented by the grey bar. So, it isn’t so much that we are broke (and we are) but that everything that people are counting on in the future is quite simply way beyond our abilities to pay for them. I’m sure that that will be the real issue that all of us have to comprehend.
Those people who think they live in a non-socialized state (like many of the anti-health-care tea-partiers in the U.S.), are in for a rude awakening when it dawns on them that the health care benefits they (will) receive in their senior years–and much of what we call ‘modern society’–is actually subsidized by the state. The fact that the U.S. has something like 58 trillion in unfunded liabilities (58 trillion!!) simply means that the future of those services is in doubt. In fact, this post indicates it is beginning to be a reality:
“Medicare Implodes – Doctors Opt out of Medicare at Alarming Rate,” Mish’s Global Economic Trend Analysis, http://globaleconomicanalysis.blogspot.com/2010/05/medicare-implodes-doctors-opt-out-of.html.
My prediction is this: we are going to have to come to terms with what this means for the future and there will be many hard decisions to make. When resources dwindle, will we be (can we be?) so accomodating of those with physical or mental disabilities? Senior care? Health care? I am surprised at how many friends, family, colleagues and even acquaintances have expressed their desire to not “be kept alive” if their health fails or if they experience serious bodily injury, so I think that many are (un)consciously thinking about the future in this way anyway. But, many refuse to do so and will continue to in the future. That, is where things might get really scary, and perhaps James Howard Kunstler is correct in thinking that people will elect maniacs to ensure that the expected standard of living does not fall.
.
2010: The year we realized that the modern economy is nothing but a giant Ponzi Scheme
I really need to start posting more uplifting items… but, as usual, I spent my lunch hour reading some of the news and financial sites I frequent and finally had confirmed what I have been suspecting for some time: that the modern economy is nothing more than a giant ponzi scheme. Of course, I am not the first one to come to this realization but even today I am really surprised at the level of negativity by those who would appear to know what is what when it comes to fianances and economics (and, of course, who are willing to discuss it).
It might be that modern economies are nothing more than the creation of a financial elite or cartel (and the politicians who empower them) which would include the U.S. Federal Reserve but it goes well beyond the U.S. and the 20th Century. I suspect that the true underlying cause was petro-wealth (cheap, petroleum-based energy) which was plentiful for most of the 20th Century. The bounty allowed developed nations like the U.S., Japan, Britain, Canada… to build a modern, growth-based economy where much of what was promised to citizens would actually be realized in the future. Promises and expectations blossomed.
Today, we are entering an era that will be characterized by expensive, hard-to-access and hard-to-refine energy. However, the promises and expectations are absolutely dependent upon vast quantities of cheap (20th Century) energy. And so, quite simply, something has to give. Unfortunately, it will most likely be our modern, consumption-based, cheap-energy-dependent, and put-off-until-the future economies.
And what will this mean? In some ways, I am sure it will affect your average citizen and his or her current lifestyle. But here is where I am less doom-and-gloom. While it will no doubt affect you and me (assuming you and I are both ‘average’ citizens of a developed country), I am sure it is going to affect the elites much more than anyone else. It will also affect governments (who are or who represent the elites) who tax away wealth and squander it (think of all the wars fought over the course of the 20th Century) or hand it over to those same elites (think of all the financial bubbles, printing of money, and corporate welfare/bailouts). For them, the Ponzi Scheme will no doubt end soon… and let’s hope it is a rather gradual and peaceful transition.
At any rate, these are some of the lunch-hour (or so) readings that influenced this post:
What Does Japan’s Implosion Mean For the Rest of Us? by John Rubino on January 26, 2010
Bernanke’s Doom Loop by Gary North
Banking on the State, Piergiorgio Alessandri & Andrew G Haldane, Bank of England, November 2009
On the end of the era of cheap energy, see:
Aleklett, Kjell, Mikael Hook, Kristofer Jakobsson, Michael Lardelli, Simon Snowdon, Bengt Soderbergh. “The Peak of the Oil Age: Analyzing the World Oil Production Reference Scenario in World Energy Outlook 2008.” Energy Policy, vol. 38, no. 3 (March, 2010): 1398-1414. http://www.tsl.uu.se/uhdsg/Publications/PeakOilAge.pdf
.
US (total) financial meltdown?
Today, I spent most of the day re-reading essays I have collected over the last year or so on the concept of the ‘military-industrial complex.’ I had a pile of articles that came from the 1960s and early 1970s which tended to focus more on the financial/economic aspects of the US military-state. Doing this also necessitated (to legitimately answer my questions but also to get in a little procrastination) googling various terms, writers, concepts.
Of all this web-searching, some themes started to emerge… which often pointed to the link between maintaining a military-industrial state (which could be thought of as ‘unproductive’ economically) and rising levels of debt, long-term currency devaluation… basically, the burden of costs associated with maintaining military/economy super-power status. Again and again, I kept coming across Nixon’s ending of the gold standard and the abandonment of the Bretton Woods system, mounting US debt, deficits, trade deficits, etc.
At any rate, here are two interesting articles among the many that emerged from these web searches:
The second, since it is so recent, is a little more alarming in that the author, who seems to be a credible financial analyst of the international scene, predicts there will soon be another major US financial/currency default. Here are some of the many interesting tidbits:
“The world, as a whole, is passing through an unprecedented and uncharted territory in terms of scale and scope of current financial crisis. Never before such large scale credit losses were recorded, and never before a sole super power was so indebted to the world. The implication of credit losses and potential default by USA is far reaching and affects almost all people in the world.” …
“The rising price of gold is an indication that quietly countries are shifting their reserve in gold. No one wants to create panic which will lead to massive sellout of US dollar leading to its depreciation to unacceptable levels. But the question is up to when this unnatural position can be maintained. In their self-interest, countries will opt out of US investment trying not to alarm others.” …
“If world musters courage to stand up against USA and come up with an alternative reserve and trade currency. The fate of USA as super economic and military power will be sealed and it will become another Great Britain or France-ex great power. It will rapidly close all military bases and withdraw to its soil to save money.”
Hmmm….