Monday, May 27, 2013

Let's All Go Medieval

    That voice! All a'quiver with the dread of self-knowledge that it is confabulating a story, much like the "money" that his Open Market Committee spins out of the increasingly carbonized air. His words fill the vacuum of the collectively blank American mind, where hopes and dreams spin like debris in an Oklahoma twister, only to fall incoherently on a landscape of man-made ruins. If Federal Reserve chairman Ben Bernanke were hooked up to a polygraph machine when he made a public statement -- such as last Wednesday's testimony before congress -- I bet the output graph would look something like a seismic record of the 9.0 Fukushima megathrust, all fretful spikes and dips. 
     When historians of the future ponder our fate around their campfires, they will marvel that this society invited such a temporizing little nerd to act as its Oracle-in-Chief... that he made periodic visits to sit before the poobahs of the land, and issued prophesies that nobody could really understand -- and that the fate of the people in this land hung on his muttered ambiguities. Let's face it: people need oracles when they don't know what the fuck is going on.
     What's going on is as follows: America's central bank is trying to compensate for a floundering economy that will never return to its prior state. The economy is floundering because its scale and mode of operation are no longer consistent with what reality offers in the way of available resources at the right price, especially oil. So, rather than change the scale and mode of operations in this economy -- that is, do things differently -- we try to keep doing things the same by flushing more "money" into the system, as though it were a captive beast receiving nutriment. 
     One problem with that is that the "money" is no longer money. That is, it's not really an effective store of value, or pricing reference. It remains for the moment a medium of exchange, but the persons exchanging it grow suspicious of what this "money" purports to represent. Does it stand for promises of future repayment? Hmmmm. Those promises are looking sketchy lately, especially since this is an economy that does not generate enough new real wealth to make the interest payments, let alone manage to pay back the principal. Is it a claim on future work? Some are afraid that the future work deliverable will be less than they expect. Whatever else it is, does it find respect in other societies where different money is used?
     These questions are making a lot of people nervous these days. Of course, a time will come when all matters concerning this particular incarnation of money will be seen as strictly ceremonial. Ben Bernanke, we will understand, was not stating facts before congress but rather singing a song, or rather chanting in a low, repetitive, tedious way in the primal manner of a frightened person trying to comfort himself with reassuring sound -- that is, prayer. You'd be surprised how well that goes over in a place like congress, which is stuffed with prayerful characters, people who exist in a religious delirium. These are not the people who are nervous, by the way. The nervous tend to be more secular, and inhabit the margins of life where unconventional thinking thrives weedlike at a remove from all the mental toxicity at the center.
     These nervous ones are looking ever more closely these days at the distant nation of Japan, where an interesting scenario is playing out: the last days of a giant industrial-technocratic economy. The story there is actually pretty simple if you peel away the quasi-metaphysical bullshit it comes wrapped in these days from astrologasters like John Mauldin and Paul Krugman, viz. Japan has no fossil fuel resources. Zip. You can't run their kind of economy without the stuff. And they can't. Japan is crapping out, as they say in Las Vegas. Tilt! Game over. As this happens, Japan issues a lot of distracting financial noise that involves evermore "creation" of their own "money," and the knock-on effects of that, but it's all just noise. Japan's only good choice is to go medieval, that is, to give up on the rather hopeless 150-year-long project of being an industrial-technocratic modern super-state, and go back to being an island of a beautiful artistic hand-made culture. I call that "going medieval," though you could quibble as to whether that's the best word for it, since I'm not talking about cathedrals or crusades.
     One of Japan's other choices is to "go mad-dog," something they actually tried back in the mid-20th century. It didn't work out too well then. The Japanese leadership is making noises about "re-arming," and a nice state of conflict is already simmering between them and their age old rivals-victims next door in China, a country that has lately enjoyed the upper hand in the industrial-techno racket (though it will be faced with the same choices as Japan not too many years hence). Do the Japanese start another world war on their side of the planet? Let's hope not. Let's hope they lay down their robotics and their nuclear reactors gently and go back to making netsuke. Just give it up and do things differently -- after all, that's what all the human beings on the planet have to do now.
     For what it's worth, Japan's stock market has tanked a hearty 14 percent in the past five days, if that means anything, and I'm not sure it does considering the aforesaid "noise," but there you have it. Our own stock markets are mercifully closed this holiday, having given American worriers an extra day of anxious reflection on the state of things out there. My own opinion is that we're all going medieval sooner rather than later and the big remaining question is how much of a mess we'll make on the journey to it.
     Also, personally, I don't like these manufactured holidays when the landscape is cluttered with morons enjoying motorsports. I'll be working today, and grateful when it blows over.

Wednesday, May 15, 2013

No Mo' PoMo?

     Whenever the Federal Reserve wants to tweak the dials of the economy -- or pretend that it can -- it turns first to its sock puppet at The Wall Street Journal, John Hilsenrath, and "leaks" a rumor of policy change (HERE). They like to do this late on Fridays when financial markets are about to close, so that market players will have a whole weekend to ponder the Fed's actions like medieval viziers reading goat entrails.
     Last Friday's puddle of steaming guts was a supposed preview of the Fed's "exit strategy" from its reckless policy of "quantitative easing" or "money" creation (or "liquidity," if you like). In other words, they supposedly intend to stop juicing the financial markets with fake wealth, i.e. capital not accumulated from real productive activity, but just fictively created on computer hard drives. For the past year they have been doing this to the tune of $85 billion a month, "buying" US Treasury bonds and bills and an assortment of miscellaneous securities (mostly trash that can't be pawned off on anyone else) through their so-called "primary dealer" bank cohorts, the too-big-to-fail usual suspects, who "earn" hefty transaction fees in the process of conveying all these pixels from Point A to Point B. These interventions are called Permanent Open Market Operations, or PoMo.
The theory all along has been that this $85 billion a month would seep down to Main Street to provoke spending (increasing the "velocity of money) and therefore "jump start" the economy. The theory has proven itself to be complete horseshit, of course. All it has done is suppress interest rates on bonds, depriving old people of income off their savings by so doing. It also artificially jacked up reckless lending on loans for houses, cars, and college degrees, juiced the share price of stocks, and boosted food prices. Meanwhile, an increasingly former middle class languishes in a purgatory of foreclosure, penury, and desperation. The Fed can't really do anything to help them. It can only burden them with more easy-credit debt, especially their college-age children. But ours is a financialized economy and finance is too abstruse for most ordinary people to understand, so they just muddle along in a fog of dashed hopes and repossession.
Lately, though, the financial markets at the heart of the financialized economy -- that is, an economy based on buying and selling increasingly dubious "paper" assets rather than on capital formation through producing things of value -- are sending distress signals. The aforesaid efforts at economic dial-tweaking have only produced distortions and perversions in the basic functioning of the markets they're designed to tweak. They pervert the "price discovery" mechanism by dumping "free money" into equity markets. They distort "risk premiums" by steering money out of savings, where it earns less than nothing, into riskier investments subject to the vagaries of everything from weather (commodity markets) to control fraud (bank stocks) to geopolitics (Toyota stock). They debauch market expectations in general by implying permanent artificial life-support. They promote market gaming such as front-running equity prices via high frequency trading on computers, naked shorting (pretending to borrow shares that, in fact, do not exist) and the abuse of futures markets -- lately illustrated in the ongoing smash of paper gold and silver contracts, with the side effect of driving yet more money into stock markets. Finally, they undermine the meaning and value of money itself, which is the most dangerous game of all because when people lose confidence in their national currency, nations dissolve in political chaos.
Despite the aura of control, Fed officials (and casual observers) may sense things spinning out of control. Of course, hyper-fragility is exactly the effect that all the Fed's own actions would predictably lead to. When you divorce truth from reality, strange things are bound to happen. The Fed ventriloquists who speak through Hilsenrath at The Wall Street Journal suggest they would accomplish their exit from the current $85billion-a-month QE policy in a set of "halting steps" by irregularly dialing down QE issuance month-by-month to fine-tune the results on-the-fly, as markets may require. This is also complete horseshit because they could only accomplish controlled tweakings by somehow signaling their intentions beforehand through some lackey like Hilsenrath. Otherwise, they could not pretend to control the results of their actions. They might as well just throw spaghetti at the wall to see if it sticks. Unfortunately, the "halting steps" idea would only provide even more opportunities for selective, complex front-running, shorting, and gaming -- which is to say setting up more dangerous behavior with more uncertain and possibly destructive outcomes.
Anyway, there's no evidence at this moment that anyone believes what was leaked to Hilsenrath. It could easily be more smoke and mirrors aimed at concealing the fact that the Federal Reserve has no idea what it has been doing and fears the consequences. There is one thing that we know for sure in this strange period when bankers have tried to manage reality in the absence of truth: that advanced industrial-technological economies designed to run on $20-a-barrel oil can't run on $100-a-barrel oil, and that is why the US economy was subject to financialization in the first place -- to offset declining productive activity by an attempt to get something for nothing. Notice that this macro-trend coincided exactly with the rise of legalized gambling all over America. That is how the idea that you could get something for nothing got to be normal. The world is about to find out that you really can't get something for nothing. It will be a harsh lesson.

Monday, May 06, 2013

The Deep End of the Risk Pool
By James Howard Kunstler
on May 6, 2013 8:43 AM

Where on earth did Paul Krugman get the idea -- expressed Monday morning -- that ours is "a weak economy?" The Dow Jones Industrial Average is about to scale previously uncharted heights and the Standard & Poors Index is piling onto its molehill, too. If stocks are up the economy can't be weak since stock markets = the economy. All the efforts of the Gitchi Manitou behind the operations of money, the Federal Reserve, are bent toward inflating the stock markets, including now the novelty of outright strategic stock purchases, so these stock markets must hold the secrets of economic life.

Notice, the Federal Reserve is not inflating the precious metal markets. Rather, they might be inclined in the deep background to militate against them, or even engage in coordinated subversion of them. It would be convenient for the Fed if the public, increasingly befuddled by the absence of yield, the mis-pricing of risk, and the antics of Larry Kudlow, would just let go of its delusion that yellow and white metals had any intrinsic value -- after all, you can't eat them, can you? The weight of opinion is also against gold and silver. The redoubtable Martin Armstrong is even inveighing against them because, as he put it, these things trade only on the technicals, not fundamentals.

This does raise a sticky question or two, of course, such as, what if the technicals are detached from the fundamentals, which is to say that the numbers and charts don't jibe with reality? That may be possible, after all, when everything from interest rates to asset purchases are rigged and accounting fraud is the order-of-the-day in government and its larger-than-life handmaiden banks. Consider, for instance, that if our national government under Obama has continued the practical policies of the Bush II regime -- wars, Gitmo, non-regulation and non-enforcement, wealth confiscation (and reassignment) -- than it may have also continued the underlying principle that "we make our own reality." In which case, the fundamentals are whatever you say they are and the technicals are just traffic lights on the freeway of "liquidity."

That perhaps explains why stock markets rise on both good and bad news. If a few more spec houses are being built in Las Vegas and Phoenix (where, I'm sure, they're needed) then the stock markets go up. If a low manufacturers' index comes out, well, then that's fine, too, because the Federal Reserve puts up a smoke signal that it might increase its monthly bond-buying beyond the current $85 billion a month -- meaning more liquidity to juice the stock markets, so up-up-and-away they go up. The stock markets apparently rocked on last week's news that about 175,000 more car wash attendants were added to the work force, because that's where the money is these days. If I were Warren Buffet or Jamie Dimon, I would consider part-time work in a car wash to plump up the family fortune.

Consider, though, that when everything is mis-priced then nobody knows the value of anything, and when nobody knows anything and everyone is flying blind, then accidents can happen. Welcome to the deep end of the risk pool.

Count Paul Krugman of The New York Times among those who don't know anything and as you do that, consider also that societies get what they deserve, not what they expect. What Paul Krugman doesn't know (because he never mentions it), for example, is that oil prices around $100 a barrel (the average between West Texas Intermediate and Brent Crude) crush industrial economies. That implacable downdraft is what motivates and the Fed to intervene and manipulate the things that represent economic activity: currencies, asset values, interest rates, and markets, which in turn promotes the detachment of the technicals from fundamentals. Anyone actually paying attention to the weak signals coming through all the noise would hear the faint wail of desperation in the background.

These financial metaphysics are apart from conditions on-the-ground all over the foundering empire, namely, an infrastructure for daily life that becomes more onerous and obsolete every day. When historians of the future swap their stories around the campfire, this age will be remembered for little more than all the useless movement of automobiles and the fate of the crumbling surfaces they moved about on. Not even Paul Krugman is capable of noticing how we live, and what it means.

Well, spring has finally arrived in the bony northeast USA and I am preoccupied with cultivating my own garden. In honor of our heritage I planted two American chestnuts. The species was nearly put out of business in the first stirrings of the global economy, when previously unknown plant diseases arrived here with shipments of foreign botanicals. Now that the global economy is imploding, it is a favorable time to get with the older program, in which the technicals reflect the fundamentals.