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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Global Monetary Policy - Negligence, Ignorance or Fraud?

Interest-Rates / Global Financial System Nov 22, 2010 - 03:31 PM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleRecovery? What recovery? With more money in circulation than ever before in history, Midas Letter Editor James West asks, "Where's all the money?" The government would have us believe a "recovery" is underway and that we're all firmly back on the road to prosperity. "A recovery is underway," says James, "but those elements of the global economy that are recovering aren't in the economic interests of most planetary citizens." In this Gold Report exclusive, James looks beyond media talking heads and rosy governmental economic forecasts to ponder the eventual consequences of a regulatory framework that is fractured and impotent.

Ken Fisher, the U.S. billionaire fund manager and Forbes columnist, recently quipped, "We are chimpanzees with no memory. The next 10 years are going to be just as good the 1990s."

Well, maybe Ken Fisher is a chimpanzee with no memory; and for billionaires, I'm sure the next 10 years will be fabulous. But there are only about 400 billionaires on earth, and this chimpanzee is looking at the last 200 years of world financial history and is making note of a disturbing pattern. Acute financial contractions (AFCs, in recognition of our ongoing love affair with acronyms), such as that just experienced in 2008, are increasing in frequency, intensity and scale.

Billionaires are generally right out of touch with reality because they are isolated from the real world by their immense wealth. Billionaires don't get foreclosed on (well, rarely anyway. They certainly never become homeless) and they don't get laid off (ever).

Billionaires start off as normal people but, through what usually turns out to be a character defect, they work very hard. And because they work so hard and amass so much cash in return for the lack of a social life, they become isolated from the real world and develop a sense of entitlement and self worth that are well beyond what is warranted. They surround themselves with people who are no threat and who refrain from criticizing their excesses. They feel powerful, and it is the intoxicating effect of that power that spurs them on to make more, more, more. They ultimately develop a deity complex and think they can make decisions for the rest of us, though few would publicly admit that.

As for the other six billion of us who are not billionaires (and many are smart enough to not want to be a billionaire), reality is the day-to-day working, saving, investing and planning for a comfortable life for our families balanced with as much free time as possible to enjoy it with our families.

It is out of touch with reality billionaires, however, who are making that task difficult with their unbridled rapaciousness, which, thanks to the outsized egos that accompany these greedy punks, shows no sign of abating.

Their quest for the ever-bigger deal than the last one, combined with unlimited financial resources, has them underwriting the engineering of complex gambling algorithms in an effort to make capital grow. The capital does indeed grow and, when asset bubbles are created by the intense financial attention they receive, the pop is felt by the down-ladder population upon whom these parasites feed.

In an effort to facilitate the perennial criminality of their activities, they invade and dominate government and media to provide copasetic legislation and "perception management."

So when billionaires like Ken Fisher, who hasn't got a clue how a global economy without financial steroids should function, speaks thus, you can rest assured that he is indeed a chimpanzee, performing exactly as trained.

The next 10 years will be prosperous all right and, yes, there has been a recovery; but it's the definition of these words—complicated and confiscated by the perception management department—that creates confusion in the minds of individuals in the general population.

Prosperity is relative but if the vast majority of the population is not prospering, the human race could be described as suffering from an absence of prosperity.

The news, the government, the economists (some) and a great many CEOs would have us believe that a "recovery" is underway and we are all firmly back on the road to prosperity. A recovery is underway, but the elements of the global economy that are recovering are not in the general economic interests of most planetary citizens.

On the second point, however, I beg to differ. In fact, my argument is that a return to general prosperity, such as that experienced by the majority of first world citizens in say, 2007, is impossible, given that the circumstances that precipitated the crash and subsequent global economic contraction of 2008 and 2009 are still present. In fact, the conditions that resulted in the asset-backed commercial paper (ABCP), mortgage and real estate market meltdown have intensified. But, in conceding the first point, I wish to inquire what exactly it is we are recovering. Or, more appropriately, what are we recovering from?

Have we recovered the lost homes and jobs? Or, are we still losing homes and jobs?

Have the prices of key commodities, such as fuel and food, come down? Or are they rising faster than ever in history?

Have we recovered a stable and adequately regulated market, where fraud is rare and bankruptcies abnormal? In Canada, for example, 1 in 10 Canadians live beneath the poverty line. Foreclosures on residential properties continue in the hundreds of thousands per month in the United States. And in England and the United States, official unemployment numbers remain in the 10% range while unofficial numbers are much higher.

Bank loans in Europe currently remain at about 50% of their pre-2008 levels, and teetering economies of Ireland, Greece, Spain and, yes, the United States are all ripe candidates for sovereign debt default.

Do these realities constitute recovery? Absolutely not. So where are we 'recovering'?

We have recovered stock market performance. The Dow is up over 11,000 and on some days looks poised to march on 12,000. Earnings are up for some sectors, but those earning mostly can be traced back to the bailouts and financial stimulus that injects more money into the system.

Here's the irony—there's more money than ever in the history of the world in circulation, yet the majority of it is concentrated in the smallest number of hands in the same history. So the question is, where's all the money?

Without China's, and to a lesser degree, India and Latin America's muscular growth, we would all still be wallowing in despair, fearful for the future. But the forces of monetary policy have a different plan for us.

I'm going to assert that the cause of the most recent financial crises of the last 30 years is elementary: There is too much money in circulation. That's it. Simple. Too much money, credit, assets, deals, private equity, loans, debt—all money.

Money is the financial lubricant that smoothes the process of commerce among individuals and nations. With money, we transform the fruits of our labor into the necessities of living. Instead of trading our work for goods, which requires a great deal of extra in matching buyers with sellers, money is representative of both. More accurately, money, in theory represents a unit of measure for the value of both goods and services.

Others would argue that money is more like the fuel of the economy. Without money, no economic growth can occur. Money is the primary motivator, the inspiration for enterprise and invention. You need money to make money. Greed is good. What's your burn rate?

These two distinct ways of perceiving money appear similar, and the differences in the metaphorical categorization irrelevant. Yet the opposite is the true.

Money is representative of value. It is a tangible metaphor for labor and the products of labor.

We trust our governments to represent our interests in the protection of the integrity of money so that these values are accurately reflected in the national supply of money. Our economists supposedly assist the government in making monetary policy by sifting through the statistical minutiae to identify imbalances to be corrected by policy adjustments. At the same time, our government is entrusted to maintain a correct exchange rate for our cash with other nations, thereby preserving its buying power in the international exchange market.

Money is, therefore, the most important aspect of both a country's economy and of a globalized financial system. The goal of all economic policy, in the case of responsible government, should be low inflation domestically with a stable lending rate, while ensuring a correct valuation for the currency in the global community in which it trades.

The outcome of not ensuring such policy on a domestic level is financial inequality, limited opportunity and high bankruptcy rates, crime rates, foreclosure rates and unemployment.

The outcome of a unilateral approach to currencies in the global system results in excessive capitalization of the system. Excessive cash in the system only reduces the demand for and value of the cash, which in turn reduces the value of assets as expressed in any given currency, which undermines the investment necessary to keep the economy moving forward.

Therefore, correct and astute management of currency is crucial for economic stability both in the domestic and international sense. Monetary integrity is critical to national interest. Willful and intentional currency devaluation, overvaluation, oversupply and reserve bank interest rate tampering with the intention of inflating demand for a currency are acts of fraud and treason and should be punished as such.

Globalization, led by the interests of multinational corporations, is supposed to reduce the competitive aspect of currency trading to accommodate a more salubrious and expansive trade environment. The theory is that cooperation among governments on the monetary and exchange level will improve competitiveness for all participatory nations in the trade of goods and services. This while protecting the purchasing power of dollars domestically in the interests of the electorate.

But, in retrospect, what we have now witnessed culminating with 2008's financially crisis, and continuing now with the race to devaluation among the United States, China, Japan and, to a lesser extent, the United Kingdom, is that the long-term integrity of currency has been seconded to shorter-term superficial spikes in economic data. The popular economic mantra chanted daily by governments and their advisors is "more money, more money" in the mistaken belief that money is fuel and not lubricant. Money in and of itself does not beget prosperity.

Too much money, like too much lubricant, has the tendency to derail financial trains. First things get messy, and then a disaster ensues. And throwing more money at the problem in reality only compounds the essential elements of disaster. Excessive capital positions are encouraged and those large capital pools, in the form of sovereign wealth funds, hedge funds and private equity banks end up developing interests that run contrary to the general economy and the general population. Furthermore, those capital concentrations create ill-conceived influence on monetary and political policy, to ensure that the interests of the capital concentrations are prioritized over those of the general economy and population.

There is no lobby group in support of modest profits to ensure employment, affordable health care or loans to small businesses. Increasingly, we are seeing the reality that the banks only lend money to those who don't need it. Why would a bank lend an individual with an idea fraught with risk when they can lend huge sums to each other secure in the knowledge when asset values contract and the system seizes up, there will be government bailouts to protect them from the downside.

We've created a system where massive capital positions have subjugated governments to their interests above those of the populations they are in theory to govern; and our governments have become the willing agents of this financial services sector. They have corrupted our democratic process to the point that the influence this out-of-control industry can purchase creates nothing and feeds off the blood of our economic activity. This interest far outweighs the influence of voters voting for their interests.

In addition, the concentration of capital now controls the media. So, even our entertainment and sources of daily information are biased toward the financial services sector. We are anesthetized by feel-good imagery of new dads with sons and daughters giggling in carefree happiness that somehow is coalesced with words designed to associate banking with bliss.

Meanwhile, computerized trading programs fleece traders and individual investors by creating ersatz demand—demand that would not exist if these massive capital positions did not exist. When the overriding moral imperative ignores the general welfare of the people and the destruction of livelihoods is an acceptable casualty in the competition for profit, we are truly in a state of decline—financially, culturally, morally. We feed upon ourselves and revel in the cannibalism.

Exactly what are the interests of humanity in general that are being defeated by the interests of the criminal organizations known as government and banks? Because there is so much capital afloat, the effects of supply and demand are not unfettered. In fact, they are encumbered with the equivalent of excessive mass that creates profound inertias in capital flows that make demand forecasting impossible and encourages resource exploitation far beyond that which should be required for near-term use, which at the lowest end of the consumption level, begets waste. How many of us jettison not-quite-finished containers in to the garbage because they are messy and a fresh jar stands ready nearby? It might seem insignificant, but amplified times six billion—we're talking substantial ecosystem contamination that is unnecessary and resource waste on a massive scale.

This, in turn, accelerates the demise of human existence on this planet by bringing the future and inevitable tipping point temporally closer. And if that's not contrary to the interests of humanity, I don't know what is.

Nature has never been fair. Governed strictly by 'survival of the fittest,' it drives consumption according to each species' biological mandate, defends and attacks on grounds of interest born solely of the senses. The idea of competition evolves precisely as a reflection of the competitive imperative of nature. Eat or be eaten. Kill or be killed. Do or die.

So we can't realistically point to the dog-eat-dog world that characterizes the financial world and feign surprise at the actions of our most rapacious CEOs. It's do or die there, too. If you don't perform in the interests of shareholders, you will be replaced by someone who does.

We've had to temper the purely competitive motive, however, with a cooperative aspect, most readily embodied in religious institutions and writings—the idea of government, teamwork. One of the classic paradoxes of human existence is the idea that by cooperating you can compete more effectively. You can pool resources to defend against or attack those of lesser resources. It's yin and yang; give and take. As long as the interests of the members of a team are aligned, the team works more effectively together and is more than the sum of its parts. When the interests of one or more team members evolves to be contrary to those of the team, the team is weakened as dissent breeds polarity and divisiveness and, ultimately, the team becomes the target of a more unified group and, eventually, its victim.

The same thing applies to governments and finance. Teams excel over individuals. The essence of democracy is majority rules. And democracy governs the boards of directors, corporate teams, of the corporations who are mandated to drive profit at all costs, consequences be damned.

Do you think Jamie Dimon (JP Morgan CEO), Ben Bernanke, Bill Gates or Warren Buffett are chimpanzees with no memory? Or, are they shrewd businessmen who are willing to do things others aren't in the interests of shareholders? Are they the ones who make the tough decisions on behalf of the rest of us—the decisions that result in more frequent and more intense acute financial contractions?

These guys oversee teams of other billionaires. They give away half their wealth to charities to demonstrate their concern for humanity, but they don't set the ultimate example of true leadership, which is to live modestly and with a level of consumption that qualifies as exemplary.

These leaders create and influence a regulatory framework that is fractured and impotent. The rules and regulations are applied in the interests of banks, insurance and hedge funds first and foremost and the interests of the general population are seconded. We don't undermine just markets by allowing this to happen. We undermine our very humanity. Human beings have been around only for a blink in time relative to the 'eonic' sense. In that brief window, we have maxed out the productivity of our planet, saturated the globe with our population and altered the chemical composition of our atmosphere and ocean.

China cannot save us in perpetuity. When the bubble that is shaping up now around its real estate and debt markets deflates, who will drive economic growth? Or, perhaps more to the point, when this currency system implodes under its own excessive weight, what will we be left with?

James West, publisher and editor of The Midas Letter, an independent capital markets entrepreneur and investor. He has spent more than 20 years working in capacities, such as corporate finance advisor, corporate development officer, investor relations officer, media relations and business development officer for companies involved in mining, oil and gas, alternative fuels, healthcare, Internet technology, transportation, manufacturing and housing construction.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.

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