We are heading towards the end of another flawed economic model. Our freedoms may not survive the transition.
For me, things started going wrong bigtime in the West when America’s rising debt hove into view, Nixon reinvented fiat currencies, and trade unions in Europe lost their focus on members in favour of political power. Before the start of the Going Wrong years – that is, from roughly 1950 to 1970 – the acceptable face of capitalism looked positively handsome in its consensus guise as the Mixed Economy.
During those two decades, steady growth was an assumption, and nobody foresaw the decline of the West. There was near to full employment, the financial sectors on both sides of the Pond were varietal (including large numbers of Mutuals), while from Kennedy Democrats to Macmillan Conservatives via Gaullist France and worker-participation West Germany, the cost of the State’s duty of care was rarely an issue: a degree of social welfare was accepted, various civil rights issues were seen as inevitable, and the citizens who’d fought in the Second World War felt that, by and large, a great deal more econo-political power and leisure hours had come their way. The threat of nuclear war between the USSR and the USA dominated and dwarfed all other issues.
In the UK and some European countries, this near-total willingness to be a social democrat in all but name led to the rise and rise of powerful and undemocratically elected ‘block vote’ trade union bosses. Steadily, a left wing element in the movement began to push its role closer and closer to Sovereign government. Strikes and ‘Communist sabotage’ perceptions did enormous damage to ‘Old Labour’.
Margaret Thatcher began, in 1979, the transfer of power from labouring workers and Government to capital, and from the politicised working man to the growing (increasingly materialist) middle classes. Ronald Reagan began the same process in the States two years later. Banking’s Big Bang completely redefined (in every sense, badly) the nature and role of capital.
In the 34 years since then, that power transfer is now almost complete. And in the UK, just as the Unions got too big for their boots in 1972, so too the banks became the ruinous bully-boys of the 21st century. On both sides of the Pond, what the English-speaking peoples have lost is regular employment, real wage growth, employment rights, the ability to save, a suspicion of debt, community awareness, and trust in those who occupy that odd place called ‘public life’.
I think it was Perry Worsthorne who first wrote in 2008, “We have merely swapped one bunch of thugs for another”. I’d concur up to a point: sadly, I think we’ve also massively increased the size and depth of the Thug Lake. But overall, just as the 1970s TUC broke out of its niche and began to want tea and biscuits at Number Ten, so too the banking community broke out of its main role as the provider of affordable business/housing capital, and began more and more to think of themselves as a cross between Superman and a Time Lord.
So since the late 1960s, we’ve had two shots at how to run society: fluffy liberalism with no commercial perspective screwed up by Stalinist Union bosses; and naive Friedmanism backed up by a huge transfer of responsibility from State to private sector.
The bottom line is that multinational business and banking is in the driving seat. It has been far more successful than the Unions ever were in wresting political power from legislators to large-scale capital interests. Examples of this abound – Mario Draghi’s unaccountable power in the eurozone, Rupert Murdoch’s pernicious control over elected Assemblies and law enforcers in the UK and US, mining companies running the government in Australia, George Soros destabilising entire currencies, Lord Ashcroft working hard to destabilise Cameron, the Barclay twins on Sark putting a spanner into any works that don’t include Boris Johnson – and now Mark Carney at the Bank of England who seems to care not a jot for what George Osborne or indeed anyone else thinks.
Yet despite the role of the State getting smaller, the bureaucrats remain exactly where they’ve always been: a permanent presence. The ENAs in France, the Whitehall Mandarins in Britain, and the Brussels Sprouts in the EC: they always survive.
This potentially disastrous mix of frontal-lobe run business technocrats and incompetent bureaucrats is the worst of all worlds for the citizen: but it’s looking increasingly likely.
Either or both of these next two scenarios are very possible: a widespread fightback via social unrest by working people throughout the West; and the collapse of elective legislator government in favour of illiberal and undemocratic dictation to everyone else by multinational business and banking élites.
World events on the econo-fiscal front are now poised to destroy, in very short order, many things that we take for granted. In this piece, I want to suggest (and illustrate) that those with most of the power in 2013 are about to run out of road. They’ve had a good innings – nearly five years of rigging, manipulating, cheating, stealing, and otherwise juggling. But the options open to them have closed down.
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One of the fundamental tensions in the econo-financial world is that those who see themselves as “in charge” (in fact, nobody is) want to make everyone – from disinterested to dynamically savvy – do things that the investors themselves don’t want to do. People go to work to make money, not to help the State: the overwhelming feeling in the West now among thinking folks is that the State has had more than enough from all of us as it is. So as those with financial resources don’t always respond to sticks without getting uppity, carrots are also required.
They come in various forms, and they almost completely explain WTF is going on. The biggest one so far (all achieved with our money, by the way) has been QE, designed solely – in reality – to keep delivering high stock-market dividends and thus a rising market in share prices. Not only does it provide a living to an important professional/investor sector, it give the impression of boom and prosperity. An astonishing number of otherwise intelligent people fall for this bollocks, and rubbish anyone talking (quite logically) about 30-60% corrections in the stock markets in due course.
Zirp was unquestionably a stick. From my point of view, it was a well-swung baseball bat to the side of the head. But when Sovereign debt is so absurdly out of control, States can’t risk the carrot approach: a rise in interest rates would bankrupt most Western treasuries within three years maximum (depending on how fast and high they went) and knock over every pretty much every firm on Wall Street. Further, there are two downsides to Zirp: it reduces income among the retired wealthy – big consumers today; and once more it means those making a living from investment have to look elsewhere for it. Many of them went into the stock markets – thus buggering my Bear Notes – and others went into Sovereign bonds.
Aha you say (or think) but that means spiking bond rates and thus less manageable Sovereign debt. Not really, because interest rates have been Zirped to zero – and anything’s better than that – plus the Bourses are booming thanks to QE. European bond rates spike in ClubMed for reasons not even Goldman Sachs or Bernanke can control much of the time: it’s called ‘a mad currency project being run by equally mad eurocrats and politicians in Brussels-am-Berlin’. It’s always a real and present danger to Ben the Banker, but thus far his swirling circle of manipulated interest rates and rigged stock markets has kept all the balls nicely in the air. The juggler looks at ease in his role.
The problem now is, what happens when the truth comes out?
There are three truths being hidden at the moment in the West. The first is that full-time employment is plummeting, and wages are falling. Good against inflation, very bad when trying to kickstart an economy. The second is that Zirp may control traditional interest rates, but it cannot in the end control the individual’s need for investment income. I believe we are seeing one effect of this at the moment in US 10-year bonds – which have been massively overbought by people looking for any income outside a topping stock market, and made anxious by the collapse in the gold price.
The third truth is indeed the shiny metal itself. I was doing some back-of-envelope calculations earlier this morning, and plotting its historical price (before it became hysterical seven weeks ago) against other factors like economic outlook, interest rates and US company reports. My best estimate on gold is that – in a truly open and free market – it would be up around $9600 an ounce at the moment. It is actually, as I type, $1245 – and since June 12th it has dropped a gnat’s short of $120.
Now that – in the light of eurocrisis, Chinese slowdown, devaluation by QE of fiat currencies, rising US debt, China buying tons of it, and every growth forecast being slashed as time moves forward – is utterly counter-intuitive. The market was obviously being manipulated. I was watching tracker prices flatline in the mornings…and then being told by bullion dealers that demand for the stuff was going through the roof…and they could only offer me an ounce here and there.
I believe the gold thing has been through two broad stages. In the first – from around 2004-8 – capping the price using various means (mostly via the Fed) kept the focus firmly on the new paradigm of perpetual economic growth being powered by the BRICS. A gold price not doing much also gave out a signal that business and government were in good shape, which in turn generated stock market confidence. It’s possible too that, at times, the US Fed was concerned to defend the Dollar – not with a high price, but as still the most widely used and respected unit of currency in the world.
Once gold was allowed to float naturally in 2010-11, of course, it shot up to $1785. I bought in late 2009 at $979, and sold at $1778.50. A nice little earner – but one that’s been taken away by Sovereigns and central banks since then….because they need gold at a cheap price to defend banks against the hurrican-powered Tsunami heading our way at some point. As China still wants all it can buy, that suits them too. Everybody wins…except the private investor.
And so once again, we’re back to the need for some form of investment income. Commodities look dodgy given the global outlook, gold is being artificially Beared for the time being, bank rates are Zirped, and the stock market is increasingly seen as overbought. Finally, three weeks ago, Bernanke signalled that the age of QE was over….which means that Bourse downward corrections are inevitable.
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As of now – and from here onwards – every Treasury, taxation, fiscal, and economic professional around the world has run out of wriggle-room. The juggler looks nervous – not entirely surprising, given that the Powers That Be just chucked him some ingots, futures contracts, and consumption charts to balance along with all the other balls.
No more QE = stock market drops of around 30-60% = massive layoffs = lower consumption = recession becomes depression. We’re not talking fictitious Double Dips here, we’re looking at the collapse of the rope bridge now the elephant just left the room to head for home….via the bridge.
Depression = higher welfare costs = acceleration in Sovereign debt growth = falling bond confidence = [+ income-desperate investors] spiking bond yields = multiple Sovereign insolvency.
I’ve left gold out of the equation this time, because I’m reasonably sure that private dealing in it will be stopped fairly soon. However, its intended use might well become irrelevant if bank-collapse events overtake Basel III fiddles on gold’s worth in a bank balance sheet. What happens then is anyone’s guess: I’m staying clear of the sector until cast-iron assurances about that and other stuff are available – or not.
But what must be included in this necessarily dire outlook are (a) at least one eurozone default (b) slump and unrest in China (c) a potential German departure from the eurozone (d) money-printing on a massive scale to cope with the increased Sovereign costs outlined above (e) coups in SE Europe and South America (f) the Russian economy in a world where energy markets are heading for the seabed (g) widespread banking collapses, during which a great deal of real citizen wealth will be stolen and then lost, (h) continuing unrest in the Middle East destabilising access to energy and (i) what develops in gold and diamonds rich South Africa when Nelson Mandela is finally allowed to die with dignity.
It’s always as well to fear The State. But an illiberal technocratic bureaucracy is another thing altogether. If we the citizenry don’t nip its fruition in the bud now, then we will be a long time getting our freedoms back.
Last night at The Slog: Troikas depress the hearts other tears cannot reach.
The Slog 