Obama, Romney And The Deflation FireballEconomics / Deflation Nov 11, 2012 - 10:35 AM GMT
OBAMECONOMICS, MORMONOMICS: SAME THING
US voters rallied to the lesser of two evils or two Also Rans, and voted Obama. His economic style, the house style of all OECD country governors and far beyond, was attacked by the leading Mormon business writer and Romney supporter, Howard Ruff, as "Obameconomics". Who won in the election however had no importance - or hold on what happens next, as financial and commodity market operators have already signalled, in their own easy-to-deny way. Oil prices and European equities in a widening number of "most exposed" countries went on weakening, as the Obama victory news came in, with several indexes now at six-week lows, as Fitch Ratings and leading commentators again warned the US could re-enter open and frank recession if it fails to "manage" the so-called fiscal cliff and if China slows more, the UK economy turn further downward, French industrial production and business confidence shrinks further, and German industrial output continues to weaken.
Behind all this, and denied or called impossible by almost everybody, lurks the spectre of Surprise Deflation, not runaway hyperinflation. One key test of this argument will be what happens to gold prices in coming months and through 2013. Inflationists and gold bugs say the price has to rise.
Not yet called an Austerity Cure of the European type and with the same European economic effects, the Fiscal Cliff has a programmed, two-part double detonation: by December 31 the expiration of some tax cuts and the introduction of several tax increases will automatically mean less money in people's pockets for buying goods and services. For government spending and from January 1, 2013 the scheduled start of automatic cuts will cap federal spending and this again means less money in the US economy. The overall impact is presently forecast at taking around $600 billion out of the economy, equivalent to a 4% cut of GNP, vastly overturning the effects of economic growth running at 2% annual, if that. Increased taxes can be inflationary, but also can trigger deflation; a slowing economy is almost always deflationary; rising unemployment is always deflationary; declining energy and commodity prices are always deflationary; rising manufacturing capacity across a host of industries can only force down unit prices, which is deflationary.
The so-called fundamental political conflict in the US on the Fiscal Cliff, is that Republicans favor reducing government debt, by cutting government spending but somehow not raising taxes, while Democrats want a combination of spending cuts and tax increases. This conflict supposedly "makes compromise positions hard to find". The European experience is totally clear in this matter: all-party support to Austerity + QE is the new normal. Beyond the posing and playacting, it is the same in the US. What is not added is that whenever the QE slackens, deflation can almost certainly surge into the economy and wreak at least as much damage as an inflation surge.
THE MORMON TEA PARTY
Joseph Smith had (or was given by God) ideas on how to run the economy and about 180 years after Smith invented Mormonism, Mitt Romney occasionally inserted these ideas into his failed presidential campaign. The Mormon economic ideal can be considered similar to any fundamentalist religious Nice Idea on the economy, even including Islamic "wafd and brotherhood", or Buddhist "omkara and om". It is based on the biblical notion of stewardship, that is communal ownership, but with the private enterprise frill added, that Mormon church members would firstly strive to accumulate individual wealth, and then consecrate all their property and all surplus earnings to the church. If you call this latter the State, you have old-style Communism or Obama's taxation urge and its carbon copy lookalike versions in Europe, based on the new cult of higher state taxes but less government spending - and handwringing that the economy only goes on slowing down!
The Mormon church (or the Obama state) in turn would distribute to each fully declared and loyal member household all that it needed to survive. Although the "Mormon plan" was never fully implemented, Mormon communities generally operate a 10% tax-paying or tithe-paying system in favour of their church, but never moved to full and formal church ownership of all property. Conversely, both the US Fed, and the European ECB are moving rapidly in this direction, through buying "non performing real estate loans", and-or bailing out the banks who own non-performing realty loans. Other facets of early Mormon economic ideas included a heavy interest in food, farming and irrigation development. Although absolutely denied, with legal pursuit of anybody who affirms the link, Nevada, Reno, Las Vegas and the easy money which goes alongside casino culture and its bank and finance spinoffs certainly helped and help Mormonism.
How Mormonism fits "the American experience" was given some media coverage during the presidential race, but the media made a point of not explaining the Mormon world view of economic life and how to organize it, Mormon-style. For pure acquisitiveness, Mormonism could be called Ayn Rand's dream fallen to Earth, or as US academic Mark Skousen puts it: “Mormonism is the Protestant ethic on steroids”. In his opinion Mormons are no less than free-market zealots, shown by their strident distrust of the New Faith, of big debt and big government. This leads Mormons to fetishize precious metals and land assets over paper currencies and equity assets, but with the important point that early 19th century religious-minded agriculturalists in the newly colonized USA also had little faith in industry or manufacturing other than strictly agriculture-oriented.
To be sure, Smith and other early Mormon leaders and doctrinal developers made repeated efforts at creating their own bank, in the US Northeast before moving to Nevada, which would have acted like any other bank and issue more paper money credits than the value of deposits on its ledgers. These deposits were set by Mormon mythology as rooted in a "hard-money ethic", and therefore completely protected from the vice of boom-bust cycles in the economy caused (almost uniquely, Mormons say) by sloppy and irresponsible money creation. The acquisition principle was so strong, in Mormon ideology that “eternal progression” operates to the benefit of true believers, who are taught they can go on expanding their personal wealth and their family numbers even in the afterlife. Having already boosted church membership through the posthumous conversion of all human ancestors (a well known sci-fi project of Mormons), their ideology also implies that the afterlife is a locale of ongoing entrepreneurial activity, much like the views of hard-line US Tea Party extremists.
CAPPING AND TRADING
Possibly surprising to some, leading Mormon incumbents have supported cap-and-trade schemes for "monetizing carbon", and Mitt Romney himself voted for the US "troubled assets" TARP bailout, the Bush bailout program which started in 2008 and to date has handed out about $475 billion, of which about $250 billion has gone to non-American "troubled banks" operating in the US.
Romney's total lack of realism on how he was going to tax less than Obama, and increase defence and military spending, if nothing else, was very surely one reason why so many US citizens had no time at all for "one more religious freak of the George W Bush type".
The Mormon "economic survivalist" writer Howard Ruff reasoned in his late-1970s and 1980s best-seller works (and still says today) that gold in pure metal form is the best or even the only long-term investment plan - because inflationary Apocalypse is certain. Since the time when Joseph Smith organized an ill-fated treasure hunting expedition to Salem, where extra-terrestrials had (he thought) buried gold, Mormonism and gold run together - Ruff was one of the first prominent American writers advocating gold hoarding as about all that an average citizen has to do, because “socially created” wealth is illegitimate and hideous. Ruff, in his book "How to Prosper" made a now well-known, well-worn tirade against Social Security based on (in his words) a “Ponzi chain letter,” that is “the most dishonest, reprehensible, deceitfully unsound scheme ever foisted by government upon a trusting public—a fraud so huge that the imagination is inadequate to grasp it.” This socialist evil, Ruff said, could only and would only end in an inflation fireball.
Obama could or might fear inflation, if not in the same existential way as Romney claims he fears inflation, but here again both candidates and both parties in the US, like their lookalikes in Europe, have missed out on what the global economy is doing. The great fear of inflation could or might have been a realistic fear "only 30 years ago", when Republican Ronnie Reagan took power and took up the vastest-to-date program (in relation to GNP) of tax and spend plus borrow and spend. Reagan in his earliest and most "virile" ideological format was able to achieve several years of outright recession in the US, and nothing much else. In the UK his lookalike Margaret Thatcher achieved the same thing, while socialist Francois Mitterand of France also achieved the same No Alternative of mass unemployment, slow economic growth, de-industrialization and either massive, or constantly growing trade deficits.
Gold hoarding of the central bank type had little or no look-in or impact on this sorry tale of "New Classic" economics, mixing Keynesian big government spending and free market liberalism in a toxic no-win cocktail. Today's no alternative economics are simply a hangover or prolongation of the same endgame, with a few extra frills.
Capping state deficits, and trading around the servicing of sovereign and corporate debt, through the intermediacy of bailed-out crony capitalist banks (called "private" but not when it concerns their bailouts), is today's legacy of 1980s economic fundamentalism. This so-called Neo-Liberalism is at least as half-witted as any Mormon could invent and imagine in the 19thC but its economic impacts are deflationary more than inflationary. Today's near-term and coming fireball of deflation - not inflation - will be the surprise change from On High that nobody was expecting.
BIG GOVERNMENT, BIG DEBT AND DEFLATION
One key link between "the Mormon candidate" and the Obameconomics candidate is that both believe in the role of Big Spending by government - perhaps only for defence spending and bailing out banks, insurers, brokers and traders, not forgetting carmakers, housebuilders and other Troubled Industries, in the case of Romney. Whether it is Republicans or Democrats in the US, or centre-right and centre-left parties in Europe, Japan, South Korea, Australia or anywhere else, all believe in the horrors of inflation.
For Howard Ruff, as we know, inflation is the work of Satan and Socialism, but for New Normal political parties and governments, all across the OECD, inflation must be fought by a range of New Normal policies, most of which are denied as being doctrinal must-haves. These policies include mass unemployment to "moderate demand in the economy", de-industrialisation and outplacement to reduce dependence on costly and inflationary oil and other commodities (and "protect the ecology"), slow or near zero economic growth, intensive development and growth of the finance industry and services, the reduction of public services but the constant growth of government debt and spending, and others.
Due to this toxic cocktail and only surprising to idiots, the economy can at any time plunge into outright recession, called "negative growth" in New Economy newspeak, The constant threat of the near-totally opaque finance industry experiencing a Black Swan meltdown is made ever larger by this dysfunctional and parasitic industry becoming a seamless web extending from banks through insurers and brokers to the traders playing the pinball machines and one armed bandits of the 24/7 casino economy. This meltdown happened in 2008 and, very likely, nothing will ever be the same again.
As Mitt Romney and his lookalikes in Europe would instantly agree, and plenty of Obama's economic advisers would agree "with regret", government spending is a synonym for waste, misspending, and double spending: its "productivity" can only be low. The casino economy's fatal flaw of constantly duplicating and replicating the same business models - for example the Internet start up jungle - ensures that the productivity of "free market" financing is also as low as possible. Adding in the fatal penchant for de-industrializing and outplacing, and its instant corollary of rising trade deficits and constantly high unemployment, the real spending able to be made, inside the economy, can only stagnate or fall. This is made even more sure and certain, by swingeing, socially unjust and absurd Austerity programs "to pay down national debt".
This is all deflationary. Bringing in economic cycles, the period of 2000-2010 was a riproaring period for oil and non-oil commodity price growth: as a result investment in oil, gas, coal and renewable energy boomed, non-oil commodity development spending also flourished, resulting in the "fatal combination" of declining economic growth on one hand, and growing output and supply of energy and non-energy commodities, on the other - exactly as in the 1980s.
Energy and non-energy commodity prices can only fall. This is deflationary. Adding up the now existing, and fast-growing deflationary pressures in the economy, the mix-and-mingle of both monetarily inflationary but economic deflationary policies and programs operated by Obama and his lookalikes in all other OECD countries, and increasingly in China and India, the outcome is likely now tilting to deflation. Beyond certain tipping points, the process will likely accelerate very fast, creating the exact opposite of an inflation fireball, signalled by events like a large sell-off of private gold holdings and a crash of gold prices.
This will be a mega-surprise for all players, including the Apostles of Fiat Money Doom, such as the Mormon, Howard Ruff.
By Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
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