April 11th, 2012

Brandon Smith: Dueling Economic Banjos Offer No Deliverance


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BrandonSmith_billy_redden

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Read at Alt-Market dot com:

http://www.alt-market.com/articles/699-dueling-economic-banjos-offer-no-deliverance

Dueling Economic Banjos Offer No Deliverance

By Brandon Smith * 11 April 2012

Americans have been listening to the mainstream financial media’s song and dance for around four years now.  Every year, the song tells a comforting tale of good ol’ fashioned down home economic recovery with biscuits and gravy.  And, every year, more people are left to wonder where this fantastic smorgasbord turnaround is taking place?  Two blocks down?  The next city over?  Or perhaps only the neighborhoods surrounding the offices of CNN, MSNBC, and FOX?  Certainly, it’s not spreading like wildfire in our own neck of the woods…

Many in the general public are at the very least asking “where is the root of the recovery?”  However, what they should really be asking is “where is the trigger for collapse?”  Since 2007/2008, I and many other independent economic analysts have outlined numerous possible fiscal weaknesses and warning signs that could bring disaster if allowed to fully develop.  What we find to our dismay here in 2012, however, is not one or two of these triggers coming to fruition, but nearly EVERY SINGLE conceivable Achilles’ heel within the foundation of our system raw and ready to snap at a moment’s notice.  We are trapped on a river rapid leading to multiple economic disasters, and the only thing left for any sincere analyst to do is to carefully anticipate where the first hits will come from.

Four years seems like a long time for global banks and government entities to subdue or postpone a financial breakdown, and an overly optimistic person might suggest that there may never be a sharp downturn in the markets.  Couldn’t we simply roll with the tide forever, buoyed by intermittent fiat injections, treasury swaps, and policy shifts?

The answer……is no.

No economy has ever endured the circumstances that ours endures now without reaching a point of maximum tension; that inevitable moment when the structure can no longer hold under the weight of the cold hard fundamentals.  Regardless how hard we try to paddle backwards, in the end, the boat WILL eventually tip over the waterfall, and the results will not be pretty.

What we are witnessing so far this spring is a world on edge, cloaked by a series of seesaw events that confuse the citizenry and obscure the truth of our circumstances.  When confronted with people who embrace the recovery lie, or allow the sweet talking mainstream dialogue to hypnotize them, I sometimes find myself reminded of the naïve canoe vacationers of the infamous film ‘Deliverance’.  Their happy-go-lucky attitude at the beginning of their adventure, heightened by a friendly battle of strings with the locals before departure, leaves them oblivious to the impending danger.  To the other side of existence.  A lethal and carnivorous force inherent not only in man, but in nature, in matter, in everything.  And, of course, we all know how they end up paying the price for their ignorance…

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httpv://www.youtube.com/watch?v=g9LVRHigxiE&feature=player_embedded

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Dueling banjos and squealing piggies aside, there is an economic lesson to be learned here.  Today, we are at the very onset of our own journey into the heart of darkness.  The music is still playing, though growing fainter, and the sway of “normalcy” has begun to tilt in a perverse sort of way.  The key is to see the financial pendulum for what it really is; an epic distraction away from the end game.  Here are just a few apparent fiscal oppositions that give the impression of balance and semi-stability to the masses but which ultimately will lead to the same brand of calamity:

Debt Vs. Inflation

I remember when the debate over the need for the banker bailouts was still raging, before “quantitative easing” became the go-to stop-gap for U.S. markets.  The primary argument used by deflationists and Keynesians was the assertion that with so much debt generated by the government and the derivatives bubble, inflation or hyperinflation was a “near impossibility”.  The basis for this claim was not rooted in historical fact, but mere theory.  No country that chooses to debase its own currency in the process of monetizing its own debt and the debt of its faulty business sector ever escapes from considerable inflation.  Debt does not erase fiat creation, and it does not halt currency devaluation.  Where this delusion first sprang from, I have no idea.

Prices in the U.S. continue to rise, or have risen and refuse to return to levels common four years ago, while the debt vacuum grows relentlessly.  More Americans are slated to face foreclosure in 2012 than in 2010 at the so called “apex” of the mortgage crisis:

http://news.yahoo.com/americans-brace-next-foreclosure-wave-210253440.html

Fannie and Freddie continue to lose billions to the housing bubble and continue to request bailouts quarter after quarter (apparently, no one told the government backed mortgage giants that we are in a “housing recovery”):

http://www.forbes.com/sites/steveschaefer/2012/02/29/the-bank-bailouts-ugly-stepsister-fannie-mae-still-losing-billions/

U.S. debt obligations have exploded, with the “official” national debt standing at 100% of GDP.  Leading to the least reported and probably most important news of the year so far; the second downgrade of America’s credit rating by Egan-Jones:

http://news.yahoo.com/us-credit-rating-downgraded-again-050101872.html

Some might argue that Egan-Jones is one of the smaller ratings agencies and so not as relevant to market psychology, but it was Egan-Jones that downgraded U.S. credit first back in 2011, heralding the later downgrade by S&P.  Is the small company ahead of the game, warning us of major credit troubles yet to come?  Again, what has past experience shown us…?

The bottom line?  Fiat easing has changed nothing.  Debt is still on the rise, the housing markets continue to dissolve, and the only result has been high prices on goods across the board.  There is NO battle between debt and inflation.  These two consequences are working in tandem within our economic system in the form of stagflation, generating the worst possible environment for financial survival.

Supply Vs. Demand

The two most concrete indicators of economic destabilization are supply and demand.  The problem is, with so many indexes and markets easily manipulated by the shifting of capital by major banks, it is extremely difficult to find honest data anywhere.  When I wrote about the collapse of the Baltic Dry Index to record lows back in January, I pointed out that it is one of the few indicators of supply and demand that is not open to outside speculation, and that 6-8 months after almost every major drop (sometimes a little longer), the markets invariably follow.  The mainstream media’s response to the BDI issue was to shrug it off, claiming that “too many new ships” were the cause of its decline to 25 year lows.  This was the same debate point they tried to use when the BDI plummeted back in 2008, just before the derivatives bubble burst.

Those who cling like fleas to the “too many cargo ships” delusion are beginning to see that the BDI was, in fact, showing a decline in global demand.  Even the MSM is now forced to admit this development (while still promoting the shipping oversupply theory), as cargo companies around the world are attempting to file Chapter 11 Bankruptcy in the U.S. due to, among other things, a lack of demand, especially in long range shipments from Eastern to Western markets:

http://www.reuters.com/article/2012/04/03/us-shipping-bankruptcy-idUSBRE8320XT20120403

Durable goods orders in the U.S. show distinct weakness, and the Commerce Department, which issues the stats monthly, has been forced to “revise” previous month’s numbers downwards on several occasions; a strategy used often by the Labor Department to soften the effects of negative data:

http://www.reuters.com/article/2012/03/28/us-usa-economy-idUSBRE82Q0VN20120328

For those who look to Asia or the developing economies for signs of recovery, China has reported the largest decline in manufacturing in the past three years, while Japanese production has also turned sour:

http://www.bloomberg.com/news/2012-03-30/japan-production-decline-undercuts-signs-of-recovery-economy.html

Manufacturing in the EU continues to fall while unemployment has hit the highest levels since 1997:

http://www.guardian.co.uk/business/2012/apr/02/manufacturing-data-uk-europe

It’s undeniable.  Demand for goods and raw materials is dropping just as the BDI predicted, and we are only seeing the very beginning of this trend.  With supply, or production, waning, the message is clear; consumers from America to Europe to Asia do not have the purchasing power to halt a downturn, let alone fuel a recovery.  Both supply side and demand side numbers signal serious concerns in the near future.

China Vs. China

China has been the most important litmus test for the progress of the collapse since 2008, which is probably why the mainstream media has spent most of their time focused completely in the opposite direction on Greece.  However, admittedly, China’s economic reality is so difficult to decipher, full-on brain implosion is not out of the question, and it is of no surprise that most analysis on the country is superficial at best.

There are, in truth, actually two Chinas.  The frustration is in figuring out which is which.  The fantasy China we see in the media (Chinese and American), and the real China that seeps through the cracks in unguarded moments.  The establishment version of China is tied forever to the U.S. dollar, and the U.S. consumer.  It has no ambitions to move beyond its traditional status as a major export hub and a cheap labor market.  Its currency will remain weak, just weak enough to boost exports and feed Americans with cheap goods, but not so weak that the U.S. government seeks extraneous trade restrictions.  We are led to believe that this China will never change, and that its role will remain ingrained in the skeleton of the global economy.

By the way, this is the part in our story where the hapless vacationers make a fateful stop on the river bank, unaware psychotic hillbillies are laying in wait…

The true China has been preparing to break from the U.S. and the greenback for years.  Slowly but surely, they have circulated Yuan denominated bonds in hundreds of countries, made bilateral trade agreements with BRIC and ASEAN nations cutting out the dollar altogether, and, are likely to begin dumping U.S. Treasuries when QE3 is announced (and it will probably be announced before the year is out).  The timetable for a Chinese break from U.S. markets may already be set, as Japan, China, and South Korea meet to finalize a trilateral free-trade zone at a summit scheduled for May:

http://english.peopledaily.com.cn/90780/7782639.html

This project for market integration was originally shelved, but has suddenly been reintroduced right after the ASEAN meeting at the beginning of this month.  The three countries represent 20% of global trade, and have discussed extensively the need to remove the dollar as the world reserve currency.  China’s struggle with rising inflation has exacerbated the country’s need to allow a major valuation in the Yuan, to increase the buying power of its citizens and counter high prices.  Such a move would have been impossible four years ago with the Asian nation’s extreme dependency on exports to the West.  But this has changed with the advent of trade agreements which have formed the framework for what is obviously slated to become the Asian Union.  China is essentially ready to drop the dollar right now.  While Chinese and American politicians speak often of cooperation and diplomacy, the real nature of the relationship is not so harmonious.  Chinese foreign policy insider Wang Jisi recently revealed that Chinese leadership sees the U.S. as a “declining power” which should be “discounted”.  He states:

“It is now a question of how many years, rather than how many decades, before China replaces the United States as the largest economy in the world…”

http://www.mysanantonio.com/news/article/Chinese-insider-offers-rare-glimpse-of-U-S-China-3453939.php

Given, Wang is a Brookings Institute inductee and little good ever comes out of that monstrosity, but, this attitude of Chinese distance from the U.S. is becoming more prevalent in numerous circles.  To hear it stated so blatantly by a Chinese government insider is not a positive sign.

America Vs. Europe

So much has been written on the dichotomy between the U.S. and Europe I’m finding the repetition of it makes my eyeballs twitch.  To be brief, both the EU and the U.S. are in dire straights.  Though our currency rises as theirs falls, and though our markets retreat at every news brief from Greece, and though we are told in recent weeks that Europe has “stabilized”, there is really only two things you need to remember; debt, and employment.  Are half of the EU’s member nations still in debt far beyond what is restricted by its own membership guidelines?  Yes.  Is Europe’s employment situation still dismal?  Yes.  Do the same problems exist to an even greater degree in America?  Yes.

Neither region is in a position to support a global economic turnaround.  Period.

When The Music Stops, The Machine Breaks

Financial news is often like the back and forth of rambling dual guitars.  It can be entertaining to listen and catch the frenetic melody, but in the end, the music must eventually go silent, and the fun is replaced with dread of what rests just beyond the curve of the stream.  All the debate, all the counterpoints and contrariness, all the “brilliant” insights from self proclaimed “experts”; it amounts to little more than gasps for air in a barren atmosphere.  No one is legitimately confident of much.  The only certainty is that the system as it exists today is not sustainable.  In my view, the evidence suggests that it was meant to fail all along, and be replaced with yet another even more suffocating economic construct.  The facts further suggest that this change is to take a vast step forward this year.

We can get caught up in the momentary prattle of theories and rationalizations, or, we can get serious about our own survival.  Analysis serves men little if it distracts us from purpose and action.  For those in the Liberty Movement who are awake to the approaching dynamo, this means furious efforts to educate those around us, build alternative economic options, prepare ourselves and our families, and in some cases even put our reputations and our lives on the line.  The work ahead requires endurance and dedication.  A promise and a pledge.  There is literally no more time to shed in the name of academics, and what we do right now could change everything.

You can contact Brandon Smith atbrandon@alt-market.com

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4 Responses to “Brandon Smith: Dueling Economic Banjos Offer No Deliverance”

  1. 1
    Austrian Economics is Color Blind Says:

    Great article.

    Here’s a relevant article on the Deflationists, from an Austrian perspective:

    Why the Deflationist Argument Is Wrong in Both Theory and Practice
    http://www.garynorth.com/public/5745.cfm

    - Begin excerpt -

    A debate has gone on for over 35 years: Austrian School economists and analysts who predict price inflation vs. non-Austrian School analysts who claim to be Austrian and who predict price deflation.

    - Skip -

    The deflationists argue that the size of America’s debt — private and government — is too large for Federal Reserve monetary policy to keep from collapsing in a wave of uncontrollable defaults and price deflation.

    - Skip -

    The deflationists do not understand these crucial facts:

    1. the FED is 100% in control over the size of M1.
    2. The FED has chosen to imitate post-1990 Japan.
    3. Japan has has not had a year since 1990 in which consumer prices fell into negative territory by as much as 2%.
    4. The money supply shrank in the Great Depression because 9,000+ banks failed.
    5. The government passed the FDIC law in 1934.
    6. The money supply has not shrunk since then.

    - Skip -

    The deflationist argument is illogical. Ir denies what all schools of economic opinion have argued, namely, that the Federal Reserve can control the money supply through its balance sheet, so long as the failure of commercial banks is not allowed to shrink the deposit base. The FDIC has guaranteed this since 1934.

    - End excerpt -

  2. 2
    Austrian Economics is Color Blind Says:

    As for anticipating from where the first hits of the collapse will come, Peter Schiff is predicting a bond market crash:

    Don’t believe the hype — the U.S economy is not recovering, it’s getting sicker.
    http://www.youtube.com/watch?v=Vcd5IO_LMBs

    Peter Schiff: Ben Bernanke is Public Enemy No. 1
    http://www.youtube.com/watch?v=0LC1RIljtp8

  3. 3
    Austrian Economics is Color Blind Says:

    I also, in preparation for the coming collapse, wanted to share this video which explains why hoarding is a good thing; It’s not economically destructive:

    Defending the Undefendable (Chapter 15: The Miser) by Walter Block
    http://www.youtube.com/watch?v=x4XSEVJLrdY

    So, when the crash comes, don’t hate the hoarders, please! Try to see if they will allow you to work for some of their saved wealth.

    The profit motive is critical for escaping the tyranny of collectivism.

  4. 4
    Freedom Warrior Says:

    SDS Founder, Veteran Activist Tom Hayden on Participatory Democracy from Port Huron to Occupy Wall Street
    http://www.democracynow.org/2012/4/13/sds_founder_veteran_activist_tom_hayden

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