Wednesday, March 5, 2014

Currency Collapse is an Agency of Reform

"[...] the new philosophy takes its bearings by how men live as distinguished from how they ought to live; it despises the concern with imagined republics and imagined principalities.  The standard which it recognizes is "low but solid."  Its symbol is the Beast Man as opposed to the God Man: it understands man in the light of the sub-human rather than of the super-human.  The scheme of a good society which it projects is therefore in principle likely to be actualized by men's efforts or its actualization depends much less on chance than does the classical "utopia": chance is to be conquered, not by abandoning the passionate concern with the goods of chance and the goods of the body but through giving free reign to it."
-- Leo Strauss, Thoughts on Machiavelli, Free Press, 1958

What sense can we make of James Madison's famous Federalist No. 10 today?  This is his essay on the danger of divisive and controlling factions to government, and how the Constitution would guard against them.  His solution was to eliminate the problem by encouraging factions and fragmenting them, so that none of them could abuse its influence and upend the system, and by structuring the scale of the republic so that no faction could have undue influence and deprive others of their rights.

It's not clear, from Madison's point of view, just who the factions are in our world today.  Are they the political parties?  The beneficiaries of transfer payments?  Is the military-industrial complex a single faction, or many?  Likewise with the too-big-to-fail financial elites, or the health-care cartels, the endless political bureaucracies and rent-seekers -- are they unified threats, or a multitude of self-interested parties?  Or is the entire system simply overrun?

What strikes us today is the overwhelming enormity of our situation, the unpayable debt and unmeetable liabilities, the intentionally-blown asset bubbles, an economic system that can no longer create the organic credit it requires for growth, and the complete failure of politics to address the situation or even discuss it openly and honestly with the public.

There was a shift not of degree but of kind, the Republic replaced by Empire, particularly after World War II.  The "republican remedy" cherished by the Madison could not be maintained in the tide of History, the changes brought by a Lincoln, a Woodrow Wilson, or a Franklin Roosevelt; of new amendments to the Constitution; of innovations such as Keynesianism and unbacked debt-based currency.

"Public choice" economics emerged in the postwar period as an effort to examine the problems inherent in this new world.  Bentham and Mill could not have invented it; public choice thought was grounded in the unique situation given by the West: industrial economies (initially) with surplus productivity, with democratic institutions for allocating and dividing the spoils.  In what might be putting the cart before the horse, the school of thought attempted to discern political insights from primarily economic analysis.

An important insight from the public choice school was a sort of deep pessimism about these spoils.  A subsidy or favor, once granted, tends to perpetuate itself forever because of the asymmetry of costs and benefits for everyone involved.  To the beneficiary -- a faction? -- a subsidy is absolutely essential, but to the rest of us, the impact is minimal.

A good example is the Small Business Administration, whose budget of $1 billion is pure gravy for its beneficiaries and the in-house bureaucracy that administers its programs.  The agency budget, divided by the number of U.S. taxpayers, is about $7 per person.  Those feeding from the trough will fight tooth-and-nail to keep their privilege, but who among us would campaign to end it?  Who cares enough to crusade to shut down the SBA?  Is $7 worth the effort?  Write a letter?  An email?

Extend out this analysis across the now-vast Federal government, and add to it sketchy ideas such government expenditures counting as GDP, and we see very quickly what a dire situation we are in.  The monster cannot possibly be reformed, the debts cannot possibly be repaid.  Why, with the current definitions, cutting government expenditures will cut GDP.  We are doomed to failure.

If it were possible to reform the American system, to trim government to its bare essentials and pay off the debt, the last opportunity we had to do this was the mid-90s with the GOP surge led by Gingrich.  This was the last chance as an ideological moment, but more importantly as a demographic one, since the Baby Boomers were still in their prime earning years.  If the whole project had not crashed and burned so horribly, it would have been possible to tackle the outstanding debt (if not the entitlements) via austerity.  But we blew it.

The Weekly Standard, first issue

Our entire economic system now rests on an outrageous fiction, that the debts incurred on the nation since the 20th Century are "money-good", that they can be paid, and that they are binding on current and even future generations.  This is a sickening idea, for to the young and those unborn it is odious debt and is not in any way binding on them.  In fact, the system is desperate to create any new debts it can, however it can, to keep the game going.  At the moment, permanent student loans, 84-month subprime auto loans, and securitized rental housing payments are holding things up.

But "the system" cannot be reformed with policy.  The trenches are dug too deep.  The factions are secure in their bunkers, enjoying their privileges.

The solution is currency collapse.

The collapse of the Treasury complex, and with it, the U.S. dollar, is the one event that puts a full-stop to the madness that our debt-powered society has become.

In the event of a collapse of the currency, all of the factions feeding off the system, the government workers, the recipients of transfer payments from their betters, the scandalous public pension recipients, will need to make other arrangements.  No law, no arguments will be necessary.  The checks may still be written, but they will lack any real purchasing power.  All dollar-denominated debts and values will have to be revalued in terms of something else, something real.

No one will be spared.  It's not as if your employer flips a switch, and your paycheck comes to you as Morgan dollars or Mercury dimes.  Institutions simply collapse under these conditions.  Most of them, in fact.

It is a fair question whether the United States itself will survive the experience, or if it will fragment into autonomous regions.  We quickly get into questions of energy and societal complexity, what will be both manageable and stable in this future.  A posh enclave like Loudoun County, VA, will go from the upper echelons to full-on Mad Max in the space of a weekend.

Thomas Hobbes will be the latest intellectual fashion.

More important are questions about whether or not we are still a nation, in the full sense.  But that topic is for another day.

Collapse of the Treasury complex and of the Dollar do not necessarily bring back our Old Republic.  Classical political thought holds that tyranny follows democratic excess and collapse, and we are very likely to have a series of Caesars.

Vladimir Putin is a Caesar, actually not a bad one at that, but he is what the Russian people needed after their own collapse, and I believe that he does act in the best interests of the Russian Federation.  His personal fortune is excessive and an embarrassment; a true statesman would repatriate the bulk of it to the Russian people in their hour of need.  But I am not Simonides to Putin's Hiero.

Again, I maintain that just as your regular paycheck will not transform overnight into junk silver, the United States will not magically roll back to republican government under the Constitution circa 1800.  The problem is that the citizenry is thoroughly debased and no longer capable of the self-governance required of a free people.  An extended period of deprivation and attrition will be needed to get the population into proper shape.  The survivors have a chance to emerge as a free people one day, only if they are worthy of it.  First we will have a few Caesars.

We are entering a period where all of the classic questions of our (Western) civilization will come to the fore, questions of law and order, of the true natural rights of man, questions of man's right of resistance to a tyrannical sovereign, of the nature of money, of the best political order.  Our unserious, ephemeral, late-Modern culture ignored these issues, but they were there all the time, and will continue to be so.

When will currency collapse take place?  To answer that, we need a bonus chart, on the 10-year U.S. Treasury bond.

U.S. 10Y Treasury bull market


I argue in this chart that we are entering a terminal phase of the bull market in bonds that began with the end of Kondratieff cycle Summer in 1980.  This long-term chart shows yields forming a bullish wedge, the upper edge of which will be broken violently when it completes.

The final leg of the chart is a fifth-wave ending-diagonal pattern, a compressing, overlapping pattern that indicates that the trend is running out of steam and about to change direction.  This fifth-wave has one more leg down, a deflationary shock that will rock the equity markets and take 10Y yields down to a Japanese-like sub-1%.

After the deflationary shock plays out, the folly of the Fed's maneuvers will be evident, and we will be left with a wrecked economy and unsustainable debt loads.  Confidence will be lost in the value of Treasury bonds and in the Dollar.  Its status as an equivalent of crude oil energy will be absolutely critical.  Once yields break back above 1%, bonds will sell off in increasingly vicious cycles, and the derivatives bomb in the U.S. banking system will -- at last -- detonate.

And that's how and when you get a currency collapse, even in King Dollar.  The unpayable debts will all become worthless.  Any attempts to re-validate these debts -- Treasurys, Social Security payments, pensions -- in the new order will only trigger a series of nasty civil wars until these claims are abandoned.

I have on my wall a framed collection of German currency from the Weimar era, ranging from 1DM to the 500 million DM bills from the crack-up boom.  The bills are dated and, toward the end of 1923, printed only on one side.

Weimar Papiermarken

What is shocking about the German hyperinflation is the insane speed at which it took place, which you can see across the face of these bills.  It was all over within a few months.

With electronic, global trading systems, how long do you think a modern Dollar collapse would take?

And, whether we like it or not, the collapse of the Dollar will be a climactic act of Reform, completing the long credit cycle with Kondratieff winter.  It will change the world we live in overnight -- nothing will be the same, for the 20th Century will now, at last, come to a close.

We look to a great German stoic for advice, a witness to the last cycle.


Faced as we are with this destiny, there is only one world outlook that is worthy of us, that which has already been mentioned as the Choice of Achilles — better a short life, full of deeds and glory, than a long life without content. Already the danger is so great, for every individual, every class, every people, that to cherish any illusion whatever is deplorable. Time does not suffer itself to be halted; there is no question of prudent retreat or wise renunciation. Only dreamers believe that there is a way out.  Optimism is cowardice.

We are born into this time and must bravely follow the path to the destined end. There is no other way. Our duty is to hold on to the lost position, without hope, without rescue, like that Roman soldier whose bones were found in front of a door in Pompeii, who, during the eruption of Vesuvius, died at his post because they forgot to relieve him. That is greatness. That is what it means to be a thoroughbred. The honourable end is the one thing that can not be taken from a man.

-- Oswald Spengler, Man and Technics, Knopf, 1932

13 comments:

Depriv said...

A small notes on to that treasury chart: for an ED there are just three criteria.
- the 'wedge' shape
- corrective waves both way between the edges
- the last wave is the smallest

The overlap of the contratrend waves is just happens often but actually not necessary.

Tricky Dicky said...
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Christian Gustafson said...

You are correct, sir, the correct word here is "full". There is a typo in the PDF that I missed. I just checked with the 1932 1st ed of the book on my shelf in rainy Seattle, and corrected the error. The PDF is text of the same translation, but contains a few errors.

Tricky Dicky said...
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Tricky Dicky said...
This comment has been removed by the author.
Tricky Dicky said...
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Christian Gustafson said...

Mr. Nixon --

While I'm doing all I can to keep you informed and up-to-date, I just don't have the time right now to become a Talmudic scholar.

It's a serious undertaking! Maybe Steve from Virginia has the time.

I'm busy these days. I've got a big date night this Friday with my girls -- Dr. Paul Sereno from the U of C will be giving a dinosaur lecture over at the University of Washington.

Unless -- wait -- did Modern Library print a consolidated Talmud in English that can be read on the typical commuter bus? A Talmud suitable for today's on-the-go social media generation?

Christian Gustafson said...

Hey, Bicycle!

Did you notice my old Bernard Goldberg address label on that magazine?

Marina City, bitchez!

Bryan Franco said...

Thoughts on the implications of the spike in agricultural commodities over the last several months? Any spillover to FED policy at all likely?

Christian Gustafson said...

Bad weather? Food prices do actually relate back to reality, unlike shares of TSLA or FB.

We're still well below the recent highs from the liquidity excesses.

Even at new ATH's in SPX, the 10Y Treasury hasn't retaken 3%, and we still have no new high in the Dow. Possible we could tick that last one today, just as the Dow Transports have done.

Bicycle said...

Now that's subtle. I didn't notice it before, but I see it now...

I wonder if we ever crossed paths. In the summer of '95 I had an internship with the architecture firm of Perkins+Will, right next door up on the 35th floor of Mies' IBM building. I had a small desk with a magnificent view, looking right out over the lake. That was a great summer--the minimum wage wasn't even enough to cover the cost of my Metra pass into the city, but I was repaid with time... noone has surely spent so much time since on the Metra northwest line, scribbling in the margins of Durant's Story of Philosophy. With all of that nonsense in my brain I must have been a real mensch in my classes that fall...

I'm considering selling the last of my longs today. We're a short 18-19% ramp from my favored target of 2250, and it may no longer be worth the risk on the chance we underthrow it. It surely won't be worth the grief of sitting through the volatility we're sure to see as we approach that level.

As the spring thaws the earth in Illinois, I do believe it is now time to begin making preparations.

Bicycle said...

Speaking of Newt, I think I also read the combined works of Alvin and Heidi Toffler on the train that summer. No one would dare do that now. The trains have WiFi and the people have phones and tablets. Back then, if you wanted to know about the world, you grabbed a copy of the Trib or the Sun-Times that a fellow traveler that departed the car before you, left hanging over the railing. And you liked it!

Gingrich wrote a forward in one of Toffler's rambling missives, I think it was The Third Wave. It all seems like a bunch of wordy nonsense now, but I will give them credit for accurately predicting the kind of asymmetric information warfare currently in use by the NSA. Those dudes knew exactly what the US government was going to do with the computers, and they knew it twenty years ago...

ikh said...

It seems to me that well before the US dollar collapses the USA will be involved in a war. From the point of view of the power-brokers running the show this would have the time-tested advantage of "uniting" the American populace while creating a plausible scenario in which massive debts would (eventually) be repudiated. I don't think it takes a genius to see which country the USA would be at war with. If we are to ascribe inevitability to a particular scenario, I find the aforementioned more plausible than that outlined in your missive. Any thoughts CG?