My Two Cents - "The Day the Music Died"

1/25/2013

Spurious rumors, small substantiating facts, incontrovertible evidence, and finally, undeniable conclusions. We’re now at the undeniable conclusions stage. The buildup has been slow, but steady, the dots, sometimes slow to connect, are now doing so, and the only question remains how many more sets of eyes will be opened before the inevitable happens?

Obviously, anyone who writes, talks, or communicates about these matters does so in the hopes that it will prompt even one more person to wake up and take measures to protect themselves and their own. Those who choose the blissful elixir of ignorance have no one to blame but the guy in the mirror. Many have written me saying they missed the boat and as such are not going to bother trying because it’ll all work out somehow. I literally weep for those of you who think that any of these people have your best interests at heart when they create and implement policy. If you aren’t concerned for the future of your children, grandchildren, and the health of this nation, please depart from us. Go read the sports page or the funnies. Seriously. This material is not for the faint of heart or mind or those who lack courage.

Never before in American history have we seen such a pitiful, pathetic, and anemic response to challenges and trials. We are truly a society of wimps. Spiritual wimps, devoid of any courage and conviction when it comes to speaking the truth, and milquetoast coelenterates for failing to look past our own materialism to accept the common truth that what we have been doing is simply not sustainable. You and me both. Let’s dig into the undeniable conclusions, shall we?

USGovt Debt – Chasing the Parabola

Even beyond the common sense of anyone willing to grasp the concept that we are in debt not for $16+ Trillion and growing steadily, but many times more than that when an honest derivation is compiled, is that there is simply no way to pay this back using conventional means. By conventional means I mean producing beyond consumption, saving, and paying down the debt. Why? We live (despite some recent shifts) primarily in a petroleum based economy. There simply isn’t enough oil on this planet to burn that would permit the kind of growth necessary to pay off our debts. Never mind the fact that America is still running massive monthly trade deficits. So we’re still diving further into the red. The USGovt is still borrowing money – nearly $5 billion a day at last count, and we’re STILL going 110 mph in the wrong direction. We cannot even logically begin the discussion of improving things when there is absolutely no recognition of the fact that we’re still piling on the mistakes.

Before the problem can even be addressed, our leaders would have to come up with and implement a plan that would set us on even keel on an annual basis, then move forward from there. The social and economic pain necessary to do that is politically unfathomable to those who serve no useful purpose outside the arena of politics. And we have allowed it to become this way. We allowed them to transition from public servants to lifetime wards of ‘We the People’. This is not a political essay, but in short, we cannot expect our leaders to the do the right thing. They have neither the courage to do what is right, the expertise to identify the right steps, nor the skills to implement them. Government does not create; government destroys. And the bigger government gets, the more it destroys. Ours, along with those of most of the developed world, has become a wrecking ball on steroids.

The ‘national debt’ will not be paid off. Yes, it is very likely that we’ll be asked (more likely mandated) to sacrifice the rest of our freedoms, economic and otherwise, in the pursuit of such a goal, but we will be asked to do so by people who already know that it is an impossible task to accomplish. One must really begin to consider motives if any honest discourse is to be had regarding this topic.

Asian Signposts – Directions for the New Paradigm

The old adage that misery loves company is absolutely true, and nowhere is this clearer than with Japan. Buried by its lost decade, Japan is a country without the ability to play the fiat game because its people are savers not spenders. Savings and inflation via fractional reserve banking just aren’t compatible. The Japanese people exemplified the way to beat a fiat system, but unfortunately they didn’t go far enough. They needed to oust their leaders who were bent on destroying the country via Keynesian largesse, rather than just succumb to the eventual order of ‘all ahead flank’ regarding the printing presses. Japan is a tale of two cities. It is one of America’s largest creditors – albeit in absentia at bond auctions of late – and at the same time it is in debt up to its own eyeballs.

Slowdowns in Europe and America, coupled with constant and mounting pressure from China on all sides, whether it be disputed islands or trade and currency wars, have crippled the island nation. And all that happened before March 11, 2011 when a devastating earthquake and subsequent nuclear disaster proved to be the coup de grace for the once-great nation. While it is certainly true that Japan may muddle along a good bit longer, don’t expect much. Their markets are suspect, particularly the bond market. And this is not a hit piece on Japan either. Neither this firm nor any of our clients are short Japanese debt, so let’s get that out of the way right up front.

For proof, lets look at Japan’s ability to pay off its own great debts. First of all, it can expect little or nothing in the way of substantial payment from America, save for inflated and increasingly worthless dollars. As a result, that cash flow is illegitimate and unreliable at best. Second, Japan has comparatively little in the way of natural resources because it is land-locked. So that is out. Where America can send her producing assets like toll roads, water systems, and even the Pennsylvania lottery abroad to appease foreigners, Japan has precious little in the way of opportunities in this area. Exports are sluggish thanks to stagnant aggregate demand globally, which I have chronicled ad nauseum. And anyone who wants to be competitive has to fall into the badly ending scenario of competitive currency devaluation.

What exactly is the end game of competitive currency devaluation (CCD) anyway? Well, let’s set the mechanism in order. Banks across the globe (USFed, ECB, BOE, and now the BOJ) engage in QE to infinity. They print money. Lots of it. This allows them to do two things.

First, they buy the debts of countries that the people of those countries are responsible for paying. Essentially it is an annuity for them. In perpetuity. They know the debt can never be paid, but they’ll put Joe Global Citizen on the hook for all of it and the people of the world can spend the next hundred or more years working to pay it all off. The money is worth nothing really, but this is about control.  We’re not talking about Robin Hoods here, but of hoods that rob. They are petty thieves and nothing more.  That is the first result.

The second is that in the act of creating all this money, they can buy up commodities, productive assets, companies, and basically anything of value without having to even break a sweat. They declare their money to have ‘value’, declare they have lots of it, then enslave the world’s population with it. Pretty simple. They get the mine and we get that tunnel part – come on, you know what I’m talking about here. Again, the sports page is available at your nearest newsstand for anyone who can’t handle the simple truth of this matter. I hear there is a great write up on the upcoming Stupor Bowl.

The Crack Up

However, CCD eventually reaches an absolute bottom and a reordering must take place. That is the stage we’re getting to now, hence the fact that the mainstream financial press is FINALLY starting to talk about what they are calling currency wars. As usual, they are years behind the curve. I will admit up front that I have no inside knowledge of or idea when we’ll see this re-ordering other than my own instincts. My opinion is that nearly all of those who claim ‘insider knowledge’ are profiteering, save for a precious few. You’ll have to discern for yourselves who is being honest and who is not. However, despite the profiteering aspect, the realities they portray are, for the most part, accurate.

Like I’ve said many times before, the ingredients for the re-ordering are already in the mixing bowl. It is all a matter of when someone – or a black swan type event – throws the switch. It could happen next week, next year, or a few years from now. The bottom line, and the most important thing to remember is that it will happen. That is an undeniable conclusion. It cannot be avoided. The time for talking about reversing course is long gone.

As stated above, this re-ordering could happen fairly quickly or it could get dragged out a few years. Many will say that once the US crosses the debt/GDP ratio of 106% (where we’re at now) that will be it because that is when Europe started to go into the tank. I disagree. Our piggybacking bank was already doing heroic measures long before we got close to 90% debt/GDP, whereas it took the ECB a while longer to get on board. The idea that they’re now ‘on the job’ has quieted many of the fears and that too is a pure falsehood. Europe’s reckoning day is ongoing, not gone. Even the IMF has acknowledged that 2013 will be a year of contraction in Euroland. There is no easy exit for anyone. Assertions to the contrary are based either in deception, fantasy, or vested interest - perhaps a little of all three.

Enter China – Tungsten to Gold

Remember all those stories about salted gold bars, filled with tungsten? The only reason those bars were even discovered is because the Chinese have been systematically converting their massive gold reserves to 1Kg bars, complete with Chinese government insignia. They’re going to put out the next gold-backed currency, at least a partial one. The Russians want in too and they’ve been buying gold with both hands. It might end up being a regional hybrid between the Ruble and the Yuan. It will likely replace the dollar as the reserve currency because gold is a legitimate reserve. Every central bank around the world has been buying gold like crazy while having their henchmen in the financial press bash it as a barbaric relic. They know how this ends and are already positioning for it. Just keep in mind, they’re not doing it on your behalf. Remember 1933? The government did the gold version of a gun buyback program, got the public gold, then promptly devalued the dollar.

If anyone here really thinks that Main Street America will escape the age of dollar hegemony without a severe haircut on its purchasing power, I’d seriously like to hear from you because we have much to discuss. There is not a person reading this that doesn’t have exposure in one way or another. Whether it is a pension plan, a bank account, an IRA, a government bond, a derivative, or some other vehicle, you will be affected by the paradigm shift that is already at our door. The real question looking back will be ‘Where were you the day the music died?”

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.