The Energy War

Posted on October 6, 2022 by thezman

The golden rule states that the man with the gold makes the rules. In this age, gold is energy in its various forms. The world as we understand it runs on electricity, which comes from fossil fuels like oil, gas and coal. If you happen to sit upon a lot of these things, you get to be important and have a lot of money. If you do not have these things, then you are dependent upon others for your welfare. There simply is no way to have a modern society without cheap energy.

In case the West forgot this reality, OPEC+ sent a gentle reminder this week by committing to a large cut in production. Over the next two months they will reduce supplies of crude to the market by two million barrels per day. The stated reason is to bring market prices back in line with the target of $100 per barrel. The unstated reason was to remind Washington that they are not the only voice in the room. The Saudis were sending a message to Washington.

Since Biden took office, there has been a sharp decline in relations with Saudi Arabia, due, in part, to Biden’s reckless language regarding the Khashoggi affair. He was the CIA operative pretending to be a Washington Post reporter. The Saudis decided to have him chopped up at the Saudi consulate in Istanbul. This became a major scandal, as the events were leaked to the press, most likely by Washington. Biden has called Saudi Arabia’s Crown Prince Mohammed bin Salman a murderer.

There are also the recent efforts by the Biden administration to manipulate the energy markets through various means. It is clear that the administration has been faking gasoline demand numbers to suppress the futures market. Then there was the promise to buy 200 million barrels of oil from Saudi Arabia at $80 a barrel in exchange for OPEC not cutting production. The Biden admin has reneged on that deal. The Saudis have good reason to not want to play ball with Team Biden.

The larger issue for the Saudis and every other country outside the collective West is the issue of regime change, which has become a fetish for Washington. MBS looks at Biden’s reckless words regarding the Khashoggi affair and sees it as a potential first step on the regime change escalator. Whenever Washington decides they want to blow up a country, they anathematize the leader, by claiming he is in violation of the moral consensus and thus fair game.

The Saudis have become closer with the Russian over the last year and the main driver is the regime change issue. The OPEC countries, Russia, China and even India are coming to understand that Washington sees them as lackeys. As long as they do what they are told they can keep some of their stuff but get out of line and Washington will install someone new. The willingness of Washington to try regime change on a nuclear power says that no one is safe from this policy.

Of course, the Russians are a member of OPEC+ and they have their reasons for supporting a production cut. The EU is still plotting an oil price cap on Russian oil, which is mostly a face saving measure. They will set the cap at a price well above what Russia will find acceptable, so they can act tough while importing as much Russian oil as they can handle. This announcement by OPEC will make sure that the Europeans do not get creative with their math.

There is something else here. It is the first sign in the Middle East that the major players are thinking about a post-America world. The Saudi – Russia relationship has grown stronger over the last year to the point where the Saudis have been circulating a Ukraine peace plan in Europe. They have agreed to join BRIC’s, which is the political alliance formed around Brazil, Russia, India and China. Interestingly, Iran has also said they wish to join, despite their relationship with the Saudis.

Some observers suggest that Russia is playing peacemaker between Iran and the Saudis, with China and India supporting the effort. Getting these two regional rivals on the same team would be a sea change in regional politics. It is the sort of thinking that imagines a world where America is not a major force. It is also the sort of thinking that comes when all involved fear the same enemy. The sign outside their clubhouse will read, “No Regime Change Allowed.”

All of this is a reminder that while ideology plays a huge role in the current crisis, it is energy that has been the driving force. America’s presence in the Middle East has always been premised on the claim they are guarding the oil supply. The long war on Iran has been as much about keeping the Persians out of the energy markets as it has been about containing Islamic radicalism. The Iranians will not play ball with the West over energy, so they must be isolated.

This brings us back to the golden rule. Washington’s power lies solely in the power of the dollar, which is pegged to energy. The real reserve currency of the world is the BTU and the dollar is the physical manifestation of it. The war on Russia, like the war on Iran, is as much about protecting the control of energy as it is ideology. What we are seeing is that the countries with vast energy wealth are starting to figure out that they are better off as partners rather than as competitors.

Where all of this leads is hard to know. Washington is sure they can win a war of attrition against Russia, a people famous for their endurance. A lot will depend upon how much suffering Western Europe is willing to absorb. Washington is willing to fight the war in Ukraine to the last Ukrainian. Maybe they are willing to fight the energy war to the last European. As winter approaches, we will soon learn who is better equipped to survive the first energy war of the 21st century.

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The Moral Hazard Society

Posted on October 4, 2022 by thezman

For the last couple of weeks, there have been whispers that some large banks may be in trouble due to the rising dollar. The strength of the dollar is due, in part, to the Federal Reserve’s effort to fight inflation. It is also due to the decline in both the Euro and the British pound. Economic conditions in Europe are deteriorating quickly because of poor management at every level. The relative strength of a currency is the relative strength of the managerial elite that issues it.

Recently, the gossip has turned to Credit Suisse and Deutsche Bank, both of which have seen their share prices collapse. The former has lost about 60% since the start of the year and the latter is down around 50% off its recent high. Credit Suisse could be at risk of imminent collapse, due to its deteriorating credit condition. Banks need credit to function and right now, no one is excited about extending credit to a bank whose CEO is telling employees that the bank is not about to fail.

Some are calling the Credit Suisse crisis the Lehman moment. This refers to the collapse of Lehman Brothers in 2008, which triggered the financial crisis. Banks are dependent upon one another, so if one fails, it can set off a chain reaction where the next weak bank fails, then the next weakest bank. Get enough banks unable to make payments to other banks and the whole system crashes. This is why everyone is worried about the banks all of a sudden.

It is also why the market boomed on Monday. The stock market is wholly dependent on central bank policy now. Loose policy means lots of money creation in the banking system, which means lots of money flowing into markets. Tight central bank policy means the money gets fussy about where it flows. It can even sit on the sidelines and wait until things appear more stable. The robots are betting that Jerome Powell blinks and ends his tightening to save the banks.

This is similar to what recently happened with the Bank of England. All of a sudden, there was no market for the long dated British bonds. This is why the British pound declined in value. This in turn created a crisis for British pension funds, as their collateral started to evaporate. The BoE had to step in and buy long dated bonds to guarantee their price and save the pension funds. As a result, the gilt and pound have stabilized over the last few days.

The weirdness of this age is right there in that action by the BoE. On the one hand, they are trying to fight inflation by reducing the money supply. They do this by raising interest rates, which reduces bank activity. This slows the creation of money, thus reducing the supply of money relative to demand. As relative demand increases, the relative value increases, which is what brings down inflation. In reality, it means a recession, which does the hard work of cratering demand.

Where we are now with the BoE, and probably the Federal Reserve, is that the bank is trying to reduce the amount of money in the system relative to demand. At the same time, they are trying to increase the money in the banking system in order to prevent the banks from running out of cash. Put another way, we may be in a situation where central banks are injecting and withdrawing money at the same time, which is one of those things that is supposed to be impossible.

The current crisis is due to the choices facing central banks. They can provide liquidity to the system or they can fight inflation. If they raise rates to fight inflation, major players who got sloppy with interest rate swaps, for example, are suddenly facing an extinction event, which threatens the whole system. On the other hand, if they protect the system by leaving rates alone, they face the political fury of governments contending with double digit inflation and energy shortages.

There is a bigger issue. The energy problems, the supply chain disruptions, inflation and the fragile credit markets are due to political incompetnace. Over the last three years, Western governments, led by Washington, have found every bad decision possible and then made it with furious enthusiasm. People cannot be blamed for thinking it is deliberate, because that is the best answer. The odds of rulers being this dumb this often strikes most people as impossible.

This is a time when Occam’s razor does not apply. They are this dumb. Liz Truss came to power promising to give rich people free money to boost the economy. This was a moronic plan that nearly blew up the economy in her first weeks. Truss is a simpleton who has no business in politics, so she thought it was a grand idea. She is in office because her predecessor was a bloated party boy who saw Churchill whenever he caught a glimpse of himself in the mirror.

Go back through British PM’s and it is one buffoon after another. This mirrors what has been happening in America. Joe Biden is in the late stages of dementia and he will be on the ticket for 2024. His predecessor was a carny act. The guy before that was a formless nobody who was willing to act the role created for him. The guy before that was a simpleton controlled by his father’s friends. You can do this in every Western country going back decades. They are as dumb as they act.

The crisis of competence in the managerial elite is not the root cause. The real first mover is the moral hazard economy. Going back to the 1970’s, the Western political system has come to rely on a handful of clever bankers to save the political class from their own idiocy. Starting with Paul Volcker, central banks have been the mother hen of political economy, always right there to kiss the boo-boo of the politicians or the pirates in the financial system when they stepped on a rake.

This safety net under the political economy of the West has warped the selection pressure on the people in the system. In a world of no real risk, feckless airheads like Liz Truss can rise to the top on promises to the powerful. After all, if she breaks something, nothing really bad can happen. The result of this risk-free political environment is that it rewards reckless behavior. The bigger the claim, the bigger the media splash, which means bigger political clout.

The same selection pressure can be seen in banking. In a world where bankers go to jail and lose all of their money if they screw up, there is a low tolerance for people who are reckless and foolish. In a world where the Fed steps in to not only save your bank but save your golden parachute and those of your colleagues, why would you not take the most dangerous risks? For over thirty years central banks have created a moral hazard, which in turn created a culture of reckless disregard.

It is this sense that no harm can ever come from error that is leading the West into a crisis from which it may not survive. It is this mentality that is leading to the game of chicken with nuclear weapons. The West is now led by a collection of mentally unfit bullies who think they own the school yard. At some point, like all bullies, they will get punched in the nose and see their own blood. In this case, it is reality that will do the punching and the bankers will not be their to kiss the boo-boo.

This raises the serious question. Bullies learn their lesson in the schoolyard because that lesson is not lethal. In the present age, how can the ruling class suddenly feel the pain of their own stupidity, without blowing up the world? How can real risk be reintroduced to change the selection pressure without risking collapse? The moral hazard society may have reached a point where there is no solution. The phrase that may be needed here is creative destruction.

Economically Pondering

Posted on September 27, 2022 by thezman

A feature of this age is words and phrases have fluid definitions, rather than the old, fixed definitions from our dark history. Vaccine used to mean a preparation to simulate the immune system in order to prevent infection. Now it means the sponsor of the regime friendly cable chat shows. Recession used to mean two consecutive quarters of negative GDP growth, but now it means a thing that never happens. After all, who can really say what words really mean anyway?

It looks like we may be getting a new definition for bear market, which used to mean a prolonged decline in equities. The rule of thumb is that a long decline that reached 20% off the previous high is a bear market. Yesterday, the Dow Jones Industrial Average reached that point when it dipped below 29,300. It is now off 20.4% from the high in January 2022 when stocks rallied after the end of Covid. The index is now below the level it was at when Biden took office.

The main reason the market is in decline is the global economy is a mess and Western finances are even worse. The wild spending during Covid was always going to come with a hefty cost, but the assumption was that the economy would just turn back on and everything would be fine. Western government could then stretch the cost of Covid policies over a long period of time. Instead, we have inflation, war and a global energy crisis that is demanding government action.

The post Cold War economic model, the New World Order, is based on the assumption that conflict between major states was a thing of the past. America was the last remaining superpower, who would police relations between the major powers of the world and prevent minor powers from getting out of line. Disputes would be sorted through the various international organizations. The business of the world was no longer ideology. It was business.

That turned out to be a grand bit of self-deception. The ideological fervor of the West, particularly the Global American Empire, was the main driver of Covid policy and is now the main source of economic chaos in the world. Western rulers saw the pandemic as a chance to launch their Build Back Better schemes. This not only led to massive shutdowns of the economy, but the scrambling of global supply chains. It turns out that the magical replacements did not just appear as assumed.

Then we have the war on Russia and to a lesser extent China. This is a two phase war, with one phase public and one phase private. The public phase is the vast array of sanctions levied against Russia and any country aiding Russia. The private phase is the currency war being waged by Washington. The booming dollar is supposed to curb domestic inflation and protect the petrodollar. There are also acts of economic sabotage like the recent attack on European gas lines.

The question that is never asked, but may turn out to be the most important, is why has it taken so long for economic data to turn sour? Shuttering wide swaths of the economy to fight the flu should have triggered a massive recession. Expanding the money supply through massive credit creation should have resulted in massive price hikes and many asset bubbles. The policies of the last three years should have brought disaster, but here we are with only the threat of disaster.

One thing the last three years has revealed is that the people who think they are indispensable to the running of society are not that important. The managerial elite made one terrible decision after another but the system carried on, because the people who actually work found a way. Businesses figured out a way to keep the lights on, despite the best efforts of government. Their people figured out how to get their work down, even with the lockdowns.

One possible source of the paranoid terror we see in the ruling class is the unspoken understanding that they are unessential. Their pompous self-regard is a mask concealing a deep fear that the Dirt People might figure out that the Cloud People are just an expensive ornament. Joe Biden is a dementia riddled vegetable, which makes clear that the job of president is ceremonial. Next in line is a former prostitute with the IQ of a goldfish. These are not serious jobs.

Another possible reason the economic data is defying economic theory is that the numbers are not what they claim. An iron rule of life is that anything with value will be faked or stolen. Economic data has value to the ruling class, as it is seen as a tool of control, so faking the numbers is possible. For example, many people think the Biden people have been giving us fake gasoline demand data. This would be an effort to jawbone down gas prices.

This is an old game that was popular in the Obama years. Every month the Feds would release rosy economic data, only to revise down the numbers at some point in the future when no one was paying attention. How much of this is going on today is hard to know, but we can use inflation as a guide. Anyone who has been to the grocery store knows that inflation is much bigger than the official government stats. We can probably assume similar manipulation everywhere.

Even so, you can only fake this stuff for so long. Providing fake data and false narratives is like check kiting. It works initially, but eventually the gap between reality and the false narratives gets too broad to maintain. This is what we see with immigration in Europe, where the it has toppled two government recently. Those romantic stories about how immigration enriches society do not hold up when the subway station is a warzone controlled by African gangs.

The other question, now that reality seems to be catching up with Western governments, is how bad will things get economically? The Europeans are just at the start of the long dark winter promised by Joe Biden. The British pound is in crisis and members of the ruling party are revolting against the new PM. The Euro is not doing much better, having fallen to ninety-six cents on the dollar. Of course, the dollar is soaring as people flee to the reserve currency for protection.

The soaring dollar creates a dilemma for the Federal Reserve. If they continue to withdraw dollars to fight inflation, they risk a currency crisis. If they back off the tightening, they risk a fresh explosion of inflation. Because of the dollar’s relationship to energy markets, it would also trigger rising energy prices. Then there is the politics, which is already turning up. Bad political environments tend to result in bad economic decisions, which make for more bad politics.

That is the final question at this stage. Can the managerial elite of the Global American Empire talk their way out of this? A central belief of the ruling class is that if they can create a plausible narrative and talk about it enough, it becomes reality. Can they convince the world that this is all just transitory and what lies ahead is the promised utopia they have been plotting for decades? They talked their way out of responsibility for the Covid vaccines, so anything is possible.

Hard Times

Posted on September 14, 2022 by thezman

Note: The comments have been getting bombed by Ukrainian bots, which is why moderation has been so immoderate. This was part of the public relations campaign around the recent offensive. It is slowly abating, but for now moderation will remain tight to prevent a flood of nutty comments.

The American stock exchanges dropped sharply yesterday when it was announced that the inflation reduction act had not reduced inflation. The consumer price index came in higher than expected. This triggered the robots to sell on the expectation that the Federal Reserve will keep tightening the money supply. The DOW dropped 3.94% bringing the decline for the year to 14.4%. Luckily, they have changed the definition of a bear market so this is still a bull market.

The inflation report was all bad news. Gasoline prices declined ten percent, but all other energy increased for the period. That probably means two things. One is the gas price decline is due to less driving. In other words, people are adjusting their spending because inflation is not starting to take a bite out of their budgets. Instead of a weekend car trip, people are staying home. According to AAA, over all sales of gasoline declined in August to levels last seen during the lockdowns.

Another piece of the gasoline puzzle is the dumping of cheap crude on the domestic refineries by the Biden administration. They panicked when gasoline hit five bucks a gallon nationally so they started releasing crude from the SPR. This drives down the price of gasoline a little. The taps run dry at the end of next month, just before the election, so prices will tick back up. In other words, some of the bad news has been pushed out to after the November elections.

The reaction to the inflation report is a good example of how the people in charge believe their own narratives. The never ending debate on this side of the great divide is whether they believe their nonsense. When it comes to the economy, they can talk themselves into anything. They had Biden out bragging about the good economy just when the report was released, on their assumption that it would be the proof they needed to go along with his speech. Whoops.

This also ties in nicely with the orchestrated media campaign in August claiming that Joe Biden was leading his party to victory in November. They rolled out a bunch of polls along with pleasing narratives about specific races. Of course, they claimed that abortion was killing the Republicans with voters. The narrative said the economy was catching fire, inflation was falling and this would result in the most popular man in history leading his party to a smashing success.

Putting that aside, inflation is the second worst thing that can happen in an economy, the worst being deflation. There is a debate about where the sweet spot is with prices, but everyone agrees that anything outside the two percent range is bad. The Fed targets two percent inflation. The sound money guys think a two percent decline in prices is the right target. Right now inflation is at eight percent using the current model and double that using the old model.

That last bit is key. We have been lying to ourselves about inflation since the 1990’s and it is obvious when you look at old bills. Pull out a cable bill from ten years ago and you see the difference. Food is probably twice what it was ten years ago. Ten years ago, people were complaining about two dollar home heating oil. In places with real winter, oil contracts are around five bucks a gallon now. This has been over a period when they say inflation was around two percent.

The subtext to this is the politics. The reckless behavior of the ruling class made people angry enough to vote for Trump when times were good. When people are worried about buying food, they tend to get a bit cranky. This hits the middle-class even more as they are riddled with angst. Poor people accept that they may have to stand in line for food, but middle-class people loath the idea of it. It is why we hide food banks from the middle-class, so they are not freaked out about it.

A suddenly panicked middle-class, still not happy about the 2020 election or the behavior of the elites, might start looking around for something a bit stronger than Trump and his one-liners. Whether that is happening or not does not matter, as the regime will assume it is happening. That is why the administration is sending goons out to rough up political opponents. Just as they were sure inflation was a social construct, they are sure the invisible Hitler army is angry over inflation.

This is probably why Russia and China are so confident about their prospects in this global economic war. They look at Europe and see an economic and political circus that is about to get very bad. In the United States, all the signs point to the last days of an empire in decline. Realistically, they are not wrong. America has been broken for a long time and now it is going broke. That is why countries like India and Saudi Arabia are not siding with the empire in the war against Russia.

Putting that aside, the news is all bad right now as far as the economy. The Federal Reserve has no choice but to keep raising rates. They should have moved faster and earlier, but Powell is doing his Arthur Burns impression. He was the Fed chief in the 1970’s who dithered while inflation raged. Powell seems to be finding his inner Volcker so that means tight money and that means recession. Just how deep is the only question that matters at this point.

Gas Pains

Posted on September 7, 2022 by thezman

According to the European Union, Russian imports accounted for 62.4% of all energy imports in 2021. Currently, the number is 58.2%. Obviously, the current figures reflect the impact of sanctions and unexpected delays in supply like the stoppages in the Nord Stream pipeline. The EU states that 58% of its energy consumption comes from outside the European Union. A little bit of math says that the EU nations get about 35% of its energy from Russia.

What this means is that a ten percent hike in prices from Russia is a three percent hike in the wholesale price to the European Union. Not all countries get the same percentage of energy from Russia and energy is a traded commodity within the European Union, so prices vary. France is far less dependent on Russian gas than Germany, but the French are not immune to energy markets. The rising tide of energy costs will swamp all European boats.

Currently, natural gas prices in Europe are roughly 300% higher for the year, but off the peak of last month. The reason for that is the EU is stepping into the natural gas markets to bring down the price. They do this through various ways, but ultimately, they will end up printing money to subsidize gas prices. In Britain, things are not quite so bad as gas prices are only 200% higher for the year. The new UK government plans similar interventions as the European Union.

Now, there are two reasons for prices to go up. One is speculators think there will be future shortages or future spikes in demand. Most energy is traded in the market with futures contracts, so it is like a casino. This is where governments can intervene in the market and impose caps. Even if you think gas will be higher in six months, you cannot buy or sell a contract to that effect. Government imposes a cap and subsidizes the utility companies for any shortfall.

The other reason prices go up is supply disruptions. Russian natural gas is the cheapest in Europe, but its availability has declined. That gas has to be replaced so European buyers must go to more expensive sources. This not only means a higher price, but it drives up prices for those products. This in turn drives up prices for the next level and the next level after that. Artificially replacing the cheap product with an expensive one alters the entire energy market.

As the figures in the first paragraph indicate, there is no way to replace Russian natural gas in Europe at this time. The global supply of LNG simply does not exist to replace Russian gas, even if the infrastructure existed, which it does not. Even if it did, the cost of liquifying, then transporting gas to Europe is much higher than getting it via pipeline from the lowest cost producer on earth. Replacing Russian gas will result in a massive spike in the cost of living and the cost of doing business.

That is the other piece of the puzzle. Much of the European standard of living depends on hidden subsidies to European business. The German government, for example, secured extremely cheap Russian gas for German industry. In the past, this gas has been purchased with euros, which magically appear when needed. The same trick happens with the American dollar. This means every time someone takes euros for payment, they are paying a hidden tax.

Now, the world must buy Russian gas in rubles. The reason for this is the West has been systematically stealing Russian assets, including their foreign holdings, in response to the war. The Russians did the prudent thing and stopped taking dollars and euros for payment. All European customers for Russian gas have to first buy rubles on the market and then buy their gas from Russia. This is why the ruble has been the best performing currency in the world.

This has another consequence. When those euros suddenly appear out of thin air, their relative value to the ruble changes. The euro is worth about sixty rubles at the moment, down from a peak of 150-1 earlier in the year. If more euros magically appear, the ratio of euros to rubles changes, unless the Russian central bank increases the number of rubles in the world to match the euros. This would then lower the value of the ruble compared to other currencies.

Russia is not obligated to create more rubles. They have inflation like everyone else, so they could choose to let the ruble adjust, which means the euro buys less gas and that means that hidden tax suddenly shifts back to the Europeans. In other words, those magically appearing euros no longer eat away at the profits of the seller but erode the purchasing power of the buy. This then drives up the cost of everything, especially the energy products purchased from Russia.

How many euros need to magically appear? Current estimates say about 1.5 trillion new euros are needed to bridge the gap. Then there is the liquidity problem that is facing Europe markets. The extra euros needed to buy energy cut into the cash reserves of industry. This impacts their credit rating, which drives up the cost of borrowing and we quickly arrive at a financial crisis. The only known solution is to make more euros magically appear.

As an aside, the United States faces a similar problem. Gasoline prices were artificially lowered through the release of the strategic petroleum reserve. Instead of making dollars magically appear, they made oil magically appear. That is scheduled to end, coincidentally, just before the November election. That means the supply of domestic crude will drop and that means prices go back up. It also means the price of home heating oil will go up in time for winter.

Putting that aside, the energy crisis in Europe is quickly becoming a financial crisis, which in turn can easily become a currency crisis. The euro has been a junior reserve currency for twenty years, but it is not the reserve currency. It can quickly decline to becoming just another currency in the world. The hidden profit, the seigniorage, that came with being a reserve currency goes away. That means more cost heaped onto the European economy in the form of inflation.

Incredibly, it does not stop with bad policy. A plan being debated is to create a mechanism for financing current energy costs with future energy profits through a subsidy system to consumers and suppliers. The first step is a cap on what utilities can charge consumers. The gap between that cap and the real cost will be met with loans from the central bank. This way it does not have to be treated as pure money creation, but as an asset on the books of the central bank.

In exchange for these forced loans, the utility will be allowed to maintain the high price when the energy markets return to normal. In other words, this is a hidden debt imposed on consumers. In exchange for a smaller increase now, they will get a small decrease in the future. That means, in theory, a much larger profit for the utility in the future when prices decline. They can now use that hypothetical profit in the future as collateral to borrow money today.

This is not a new scheme. In the United States, something similar happened with cigarette taxes imposed after the tobacco settlement. States used the promise of more tax revenue in the future to create tobacco bonds. The buyer got a piece of the future tax revenue in exchange for cash today. Of course, those tax revenues did not materialize and the states took a bath. On the other hand, Goldman Sachs made billions from the scheme so it was all good.

What all of this tells us is that the Western economic model, rooted in the dollar and American military, is something of a Ponzi scheme. Assets are sold off for quick cash, but money is created to fill the hole based on the promise of some future bonanza that never materializes. This, in turn, means more money creation through the magic of debt, which inflates the credit bubble further. Europe is going to solve its energy crisis today with a financial crisis tomorrow.

The Reality Jubilee

Posted on August 24, 2022 by thezman

The Biden administration is gearing up to offer some sort of college debt jubilee as their answer to the student debt crisis. The details of the scheme are being leaked to generate interest in the forthcoming announcement. The idea is to use printed money to buy votes from the millions holding student debt. Coincidentally, this comes just as the regime begins the fall campaign. Currently there is $1.6 trillion in outstanding college debt, most held by the Federal government.

There is no economic sense behind the idea. A debt jubilee is just another way of dropping cash onto the economy. With roaring inflation and supply chain problems, this is pretty much the opposite of good policy. The net effect of the program is to put more money in the pockets of the debtors. They will spend the money, just as they did the stimulus checks, which puts upward pressure on prices. Of course, this will come after the midterms so it makes sense to the politicians.

The reason there is $1.6 trillion in college debt is that the government has been mucking around in the education markets for several generations. Financial aid, like public pensions, quickly became a good way to buy votes. Opposing it on economic grounds, while factually correct, looked like you were opposing it on moral grounds, which makes you a monster. It quickly became a political racket that grew out of control and now we have a multi-trillion dollar monster.

The madness of college financial aid is obvious when you look at the rise in tuition costs over the last thirty years. They have grown at multiples of the official inflation rate and that is excluding hidden fees. There was a time when a student could work his way through college. It was a struggle, but it was possible. Today, the cost of tuition alone dwarfs what a student can make working fulltime. In other words, in the effort to make college affordable, it was made increasingly unaffordable.

This is a well understood phenomenon. If the government starts issuing subsidies for the purchase of new BMW’s, the price of the cars will increase. The increase will track with the subsidy. The people running BMW are not stupid. Once they know the buyers can afford the premium, they will raise prices. This very same thing just happened with the subsidy for electric cars. The electric car makers raised prices to match the new subsidy from Washington.

The remarkable thing about this is everyone knows it is true. The reason the people animating Biden’s corpse have been slow to pull the trigger on this scheme is they know it will be bad for the economy. The timing is to get the applause before the election, then have the public pay the price after the election. They figure that in two years people will forget all about it. Come the 2024 election, the corpse animators will have some new scheme to sell the public.

Even more remarkable is the fact that some people in the media know it is true, but most are innumerate so they do not understand the material. Some of the former group will ask the Biden people about the math and the Biden people will make up a whopper about how the definitions of commonly used economic terms have changed so shut up bigot and clap louder. There will be no serious discussion of this scheme and the economic condition of the country will decline a bit further.

Critics will settle for blaming the voters, especially those rotten kids down at the coffee shop with their nose rings, philosophy degrees and college debt. “The people are voting themselves a raise from the public fisc!” It is a good example of the perverse effect of democracy on the public mind. The people responsible for the terrible governance get a pass, while their victims get the blame. When the people work through bad policy, the “leaders” take credit for the result.

If Joe Biden were the dictator, installed by the ruling class after the old dictator was deposed, there would be no question about who to blame. This is why they remain berserk over the 2020 election controversy. If the people think the game was rigged, then there is no way to shift the blame for the results onto the voters. It turns out that the best way to avoid the wrath of the people over the manifest corruption of their leaders is to give them a ballot and tell them they are in charge.

Putting all of this aside, the college debt crisis hides a much bigger problem going on that you can see in the college numbers. As the cost of a credential has gone up, its value has declined. One reason for that is the dilution of it by handing them out to anyone who qualifies for debt. The other reason is the changing complexion of the student body. The diversity push has changed what the credential means, which has diluted its value to the core market.

The people not going to college are the people who should be getting the additional training from the education system. That is the cohort that is dropping out of the system because the cost-benefit relationship has turned negative. The result is a swelling number of credentialed idiots carrying debt they can never pay. They are also more likely to stop paying, knowing you will not dare go after them. The moral inversion of the education system is creating new downstream problems.

Of course, all of this means the system can never be reformed. What needs to happen is a debt jubilee along with the abolition of all subsidies. Most colleges would close and half of the current students would drop out of school. The system would shrink down to its core of training bright young people and doing useful research. That can never be allowed to happen, so the system will stagger on like this until the printing presses can no longer keep pace and we reach collapse.

Our Weird New Reality

Posted on August 16, 2022 by thezman

One of the great unnoticed things about the current crisis is that the rules that everyone said were inviolable no longer seem to apply. This is most obvious in the economic realm where nothing makes any sense. Things that were said to be impossible a generation ago are now the default. Similarly, politics is now operating by a set of rules that no one can explain. Things that were considered outside of the realm of the possible are the new normal.

Way back in the before times, when Covid got going, the world literally shut itself down in response to the virus. In America, over twenty-five million people were laid off and tens of millions more were sent home to work. The official unemployment rate peaked at thirteen percent and was then restated to be just under seven percent. What the actual unemployment rate was at the peak is unknown. Regardless, it was an unprecedented attack on the economy that should have been devastating.

According to official statistics, the economy shrugged it off. The official figures say the economy contracted by 3.4% in 2020 but all of the decline was contained in the third quarter of the year. The fourth quarter began a massive rebound. The official numbers say the economy grew by 5.7% in 2021. That more than made up for the decline in the prior year due to Covid. It turns out you can literally shut down an economy and nothing serious will happen. No wonder people want to stay home.

It is not just in America where the laws of economics have been suspended. In Europe they are allegedly facing an energy shortage. Since forever we have been told that steep increases in energy prices trigger recession. Germany is literally facing the prospect of having no gas and no one seems to notice. The massive disruptions to the flow of energy into the EU has thus done little to upset the economy. According to the old rules, this should not be possible.

It is possible that the media is simply lying to us. Maybe people are seething at the suffering that has been inflicted upon them. The official media, controlled as it is by state actors, is ignoring this in favor of happy talk. It could also mean that all of those economic rules were just made up. No on really knows why the economy does what it does but like court magicians, economist pretend to know in order to provide authority to the ruling class. The whole thing is a put-on.

It is also possible that we live in a simulation. What we think of as reality is just a bit of software that the creators can tweak as they please. Those old rules had to be abandoned because the system got a computer virus. In order to keep the simulation from crashing entirely they changed the code. It is a temporary patch to the system until the next upgrade. Maybe that is why big events from the past, like the lockdowns, suddenly feel like distant memories. We rebooted.

Politics has the same weirdness. Everyone reading this is absolutely certain that we did not arrest people for speech. That was written down somewhere and everyone agreed that you could say what you like with some very narrow limits. Yet Douglas Mackey faces a decade in jail for making fun of Hillary Clinton on Twitter. Maybe like the economic rules, there was a patch done to the software, a hard reboot and we are suddenly operating under a totally new set of rules.

This confusion is obvious with the political actors. Salman Rushdie was stabbed on stage in New Jersey. All of a sudden, the people dedicating their lives to suppressing speech were bemoaning this attack on free speech. In Britain, Boris Johnson has people thrown in dungeons for using the wrong pronouns, but he was out there decrying this attack on our sacred liberty. Maybe the software engineers forgot the update these guy’s code during the last service pack.

Even taking a step back and looking at things in the most general sense, the rules no longer seem to apply. Politics used to be defined by the three big human motivations, money, power and sex. How does drag queen story hour fit in here? Who is benefitting from this lunacy? The point of this assault on the children seems to be the promotion of general mayhem, which used to be the opposite of what rulers sought. The old rules said order was the goal of the people in charge.

Of course, we know that a tenet of the new religion states that only through mass confusion can we transcend this world. They believe if they get everyone into a state of agitation that we somehow break free from our old thinking. This lets us adopt a new model of thinking which is the passage to the glorious future. The endless “subverting expectations” is a deliberate effort to make everyone crazy. It is hard to accept, but this does explain why the rulers now prefer chaos.

That does not explain why the system trundles on, despite violating all of the rules we have been told are inviolable. We have double-digit inflation, periodic food shortages and record high gas prices. The whiplash effect is now emerging, where price hikes are followed by demand destruction, which collapses prices, only to see demand return and drive prices back up again. In other words, we are seeing stagflation in the economy but no one seems to notice or care all that much.

Reality is that thing that does not go away when you stop believing it. Maybe it takes us a while to recognize reality after a long absence. Perhaps what lies ahead is a mass recognition of reality and a sudden return of the old rules. Maybe the people running the simulation get bored and shut us down. At this point, given the general weirdness we are seeing, we cannot safely assume anything. For now, at least, we are in a new world with new rules and a new sense of reality.

Narrative Investment

Posted on July 28, 2022 by thezman

The sunk cost fallacy is the belief that prior commitment to some action requires continued commitment in order to regain the prior investment. Another way of stating this is throwing good money after bad. You invested in a project that is not going well but you keep putting money into it thinking that success will not only justify the next investment but recoup the prior investment. Despite this being a well know error, even very smart people fall into the sunk cost trap.

That may be something we are seeing with the Federal Reserve. Back when prices started to edge up, they created a narrative that explained the rising prices as the result of supply chain issues. Those supply chain issues were caused by the crackdowns during Covid that closed down the global economy. The narrative said that once the crackdowns ended, the supply chains would eventually return to normal and prices would then return to normal as well.

For reasons that no one has bothered to explain, this narrative was extremely attractive to the political class. They loved this story. The most likely reason it was so appealing is it promised them a triumph without effort. There would be a period of inflation then prices would re-normalize and they could take credit for it. They invested in this narrative based solely on future gains. Maybe this is why the Federal Reserve stuck with this story. It took pressure off of them.

We will never know why they invested in this crackpot idea but we can guess as to why they are continuing to invest in it. Even though they have stopped with the “transitory” messaging, the actions of the central bank make clear they still believe. Raising rates by three quarters of a percent is not a bold move. Given that we have double digit inflation and a global energy crisis, it is a grudging move. They still believe inflation is transitory but are raising rates for other reasons.

Maybe one reason they are sticking with the narrative is the markets seem to be deeply invested as well. Economic history says that these levels of inflation require a monetary shock to arrest them. The way to cure double digit inflation is to radically reduce the money supply, thus inducing a recession. The steep recession clears away the free riders and inefficient elements in the economy. This is like starting fresh with clear signals about the proper money supply.

Even though there are plenty of geezers kicking around Wall Street who remember the 1970’s and the actions of the Volker, everyone seems to be convinced that the rate hikes are short term. They can only believe this for two reasons. One is they think Powel is a coward and will never do what Volker did. Insiders have determined that the politics at the highest level are against a bold move and Powell is not a man willing to challenge the politicians on monetary policy.

The other possibility is they are just as invested in the transitory narrative as everyone in the political class. Wall Street is now hooked on hopium. They are sure that in time everything will work out. China will come back on-line, the war against Russia will come to an end and the flow of free money from the Fed will return to normal. In other words, they are investing in the original narrative because they have come this far, they may as well see it to the very end.

Of course, there are secret reasons that could explain things. Perhaps we are living in a simulation and the people controlling the rules of our universe have changed the rules such that double digit inflation is good. Maybe the ruling class has come to believe that only by making everyone poorer will Gaia be happy with us. It is possible that everyone in power has gone insane. There is a case to be made that we have crossed out of the domain of reason into the world of fantasy.

Sticking with what we can know, the best guess is that the Federal Reserve, Washington and Wall Street are simply committed to the narrative. They may have stopped using the phrase “transitory” for public relations reasons, but they are still committed to the transitory narrative. To change course as economic history suggests would mean abandoning their investment in the narrative. Even though that is the right course, they are psychology unprepared for it.

There is some history here. It has been forgotten that the two Fed chairs prior to Volker were a lot like Powell. Burns and Miller were both doves when it came to policy and they are credited with what came to be known as stagflation. Supposedly, the great lesson learned during the Volker tenure was that bold action from the central bank is the key to heading off catastrophe. The official narrative says that timid policy by the central bank is what caused the Great Depression.

Like a family business run by the third generation, the people running economic policy have no experience with tough times, so they are unprepared to take the bold actions the age requires. These are all men who rose up in good times, when ticking the right boxes is what mattered. Questioning orthodoxy was the best way to end a career, so the careerists in the system are all men who never question orthodoxy. Powel is simply this generation’s Arthur Burns.

The thing is though, the people in the 1970’s were in a world that said stagflation was impossible based on current economic theory. They could be forgiven for thinking that the recession would cure the inflation on its own. The current batch of economic leaders have the benefit of having lived through the 1970’s and 1980’s. They have either come to believe that this is not the same situation or they are so invested in that narrative they are no longer able to change course.

There is always the prospect that they are right. Maybe if given enough time global markets will normalize, energy flows will return to normal and the inflation we are seeing will slowly decline. There is no evidence of this happening in the short term but wait long enough and anything is possible. As the founder of modern economics famously said, in the long run we are all dead. None of us live in the long term, which is what makes this explanation uncompelling.

We may be seeing one of the terrible side effects of narrative politics. This is the belief that a good story often repeated can change reality. Elites have come to believe that saying it makes it real. This is why they invest so heavily in creating narratives and having them repeated by their media organs. Everything is about messaging rather than objective measures. Team Biden is now selling the story that gas prices are falling at historic rates, despite record high gas prices.

In a world where the people in charge are sure that all they have to do is create a really good story and that story will become true, there is no reason for them to ever reconsider the narrative. Once they commit, they are committed. This means anyone questioning the narrative is an enemy. Public policy ceases to be about trade-offs and is instead about the friend-enemy distinction. Friends repeat the narrative and enemies question the narrative.

Monetary Madness

Posted on June 13, 2022 by thezman

Note: The Monday Taki post is up in the usual place. It is a different take on the post here today. Sunday Thoughts is up behind the green door for those who are in need of audio stimulation. There is a post on the war as well.

A half century ago, President Richard Nixon closed the gold window. American citizens had been prohibited from owning gold since the early 1930s, but foreign governments could exchange their extra dollars for gold. France tried to make a run on the US gold supply so the American government was forced to break the final link between the dollar and gold, thus ending the gold standard. This set off a chain of events that eventually led to what has been known as the petro-dollar.

Nixon was forced to break the gold peg because it was a fiction. In theory, the amount of dollars in circulation reflected the amount of gold held by the United States, but in reality, the American government had been printing as much money as they thought they needed. The reason the French were racing to redeem their dollars for gold was that they knew the peg was a lie. Once that lie was fully understood, a run on the dollar and global monetary collapse was possible.

It is a good lesson about the reality of the gold standard. It was an example of the old adage that if you need a gold standard to control a corrupt government, that government is corrupt enough to find a way around it. Much of the good living of the post-war years was due to expansionary monetary policy. The cost of that was paid in the 1970’s with spasm of inflation and finally a recession in the early 1980’s that supposedly put monetary policy back in order.

The thing is the money printing after the war was not a problem because those extra dollars could find a home in the expanding American economy and most especially in the rebuilding of Europe. The dollar was the world reserve currency so everyone in the world was willing to take dollars for payment. Europe was in rubble and needed rebuilding, so the demand for dollars seemed endless. As a result, the United States supplied as many dollars as was needed.

The monetary crisis on the 1970’s was due in large part to the fact that Europe had recovered and no longer needed a flood of dollars. The trouble was the American economy was dependent on the expansion of the money supply. The subsequent negotiations that ended with the petro-dollar and the Louvre Accords was supposed to solve this problem. Instead, it merely shifted the target for extra dollars to low labor cost areas like Asia and South America.

That has been the story of the last thirty years. American manufacturing, technology and services have been shifted to low cost areas. The extra dollars followed them in the form of investment, thus keeping inflation in the United States low. The dollars not soaked up in these countries came back in the form of investments in treasuries, equities and real estate. The system let the government expand and asset values to mushroom, without creating retail inflation.

Like the 1970’s, the place for the extra dollars is drying up. That means they are flowing back in the form of inflation. China is no longer the cheap labor economy desperate for investments, so they are not soaking up extra dollars. In fact, China is a maturing economy determined to shift from exports to domestic consumption. It is also not willing to accept inflation from the United States and Europe. The result is too much money in the West creating an inflation spiral.

It is not the only reason for inflation. Stimulus policies aimed at sustaining the standard of living against economic reality are a big driver. The supply chain crisis that is the result of decades of outsourcing is another driver. Then you have the berserk response to the crisis in Ukraine, which is creating havoc in fuel and energy markets. In a complex system like the global economy, there are always many contributing factors to the things we see in the marketplace.

One way to look at the current economic crisis is as a consequence of the Second World War and the subsequent Cold War. The half century long state of war in the United States and the West resulted in an economic system designed to wage global war without operating a war economy. When the war ended, there was no great demobilization and normalization. The cost was seen as too high, so American leaders found what looked like a cheap way to avoid it.

Unlike the 1970’s, the short term solution for the present inflation is not a contraction of the money supply. The Federal Reserve is carrying trillions of assets on its balance sheet which it has to unload. It will now be selling those into a rapidly declining market, as asset prices have been artificially sustained with the combination of free credit and the flows of extra dollars into assets. The Fed could easily set off a collapse in asset values and a global credit crisis if it is not cautious.

The biggest problem facing the country is the lack of competence in the decision making areas of the ruling class. The economic side is dominated by monetarists, who think an economy is just the sum of it money. The political class is full of carny weirdos selected for their entertainment value. Of course, the senior generation has been conditioned to seek good times, rather than make sacrifices. America lacks the human capital to tackle the problems we face.

The situation facing America is not unlike that which faced the Russians after the collapse of the Soviet Union. The cost of terrible governance over seventy years came home all at once and they lacked the political leaders to manage it. The Russians not only faced an economic catastrophe, but a political one as well. They went through a decade of chaos followed by a decade of slow recovery. That is what most likely awaits the United States and its European dependents.

Perpendicular Parallels

Posted on June 1, 2022 by thezman

For those old enough to recall the 1970’s, the present economic turmoil looks a lot like the stagflation from fifty years ago. Just like a half century ago, we have a mix of inflation, economic stagnation and incompetent leadership in Washington. Joe Biden is not exactly Jimmy Carter, as Carter was an honest man, but like Carter, the public sees him as a man out of his depth. Like Carter, he wound up in the job due to a crisis within the political class over a previous president.

It is a comforting parallel for many people, because if the pattern holds, it means there is a Ronald Reagan coming after Biden. The saner elements in the ruling elite will rally to a sober minded governor who can withstand the progressive crazies. Many people are looking at Ron DeSantis as the man who can save the system. Trump running in 2024 could throw a wrench in the story, but maybe the ruling elite has a plan to get that element out of the script so the story can continue.

This problem with the script is a reminder that historical parallels are like all generalizations in that they are a starting point. They help frame the times to better understand the details. We know the general plot of one side of the comparison, so it allows us to infer things about the other side. From there we have a basis from which to analyze the present. In this comparison, however, the observable similarities have different direct and root causes.

For example, the current energy crisis is different from the crisis in the 1970’s, which was mostly driven by the currency war and an oil embargo. The collapse of the post-war currency arrangements not only gave us inflation, but it also created havoc in commodities, which are sensitive to currency fluctuations. The big driver was the Arab oil embargo over US support for Israel. The embargo was always a short term strategy to get a better deal from the West.

The present energy crisis is primarily systemic. Generations of mismanagement are finally showing up in the price. The United States was the largest exporter a few years ago, but then the government reversed course and exports have collapsed, making America a net importer again. Europe is smashing its energy system in an effort to make the Russians look bad on Twitter. There is more than enough energy to go around, but the system to distribute it is collapsing.

In the 1970’s, the solution to the energy crisis was to make a deal with the Arabs so they would end the embargo. There were lots of new energy schemes launched to take advantage of the crisis, but the final solution was a deal with the Saudis. This current energy crisis does not have a simple solution. In the West, energy policy has been corrupted by the same cranks who have corrupted the culture. It will take a revolution to fix that problem in order to fix the policy problems.

Systemic problems are also at the heart of the inflation crisis. In the 1970’s, the issue was the old fashioned Econ 101 problem. There was too much money chasing too few goods, resulting in inflation. This time, the issue is more about systemic problems in the global monetary system and in the global supply chain. This is where dumb people like to say, “it is as simple as…” and then finish with their favorite bromides from the Mises Institute, but the current inflation crisis is not a simple one.

For starters, the monetary system that was put in place in the 1980’s assumed a few things that are no longer true. One was that the excess dollars created by Washington would be absorbed and laundered by low cost counties. This worked while Asia had an infinite supply of cheap efficient labor. Extra dollars could flow into these countries as economic investment. The extra from developing countries would then return in the form of assets like treasuries and equities.

That system is breaking down for two main reasons. One is China is becoming a mature industrial nation, which means labor is no longer cheap. The Chinese understand this and they are shifting policy to encourage domestic consumption rather than focus on exports. All of a sudden, those extra dollars are no longer as welcome in China as in the past. Instead of returning as assets to America, they hang around the system chasing too few retail goods.

Another cause is the breakdown of the dollar system. The dollar itself is doing great, but the rest of the global currencies are not doing so well. Their strength has been pegged to the health of the system based on the dollar being the global currency. As this system shows signs of crisis, the weaker currencies are in free fall. The Euro, the secondary global currency, is falling sharply. Of course, the ruble is booming, due to the crackpot policy response to the war in Ukraine.

The point is the solution to the current inflation is different from what happened fifty years ago because the causes are different. In the 1970’s, the Fed could tighten the money supply, wring out inflation and force a corresponding correction in the system with a deep, but short recession. This time, simply raising rates will not be enough to address the inflation problems. It could also trigger a crisis in the financial system, which is built on the assumption of free money from the Fed.

There are more comparisons like this, but the bottom line is that the crisis of the 1970’s is similar to this crisis, but the causes are different. Back then, America was a healthy business in need of new management. The demographics were good, the social capital was still strong and the working population was young. More important, the ruling class wanted a strong America and saw it as their duty to deliver it. A few tweaks to the system would unleash the economic power of the country.

The current crisis is driven by different forces. This is an end of cycle crisis as the American empire reaches its terminus. Critically, the demographics are much worse, the productive population is old and the social capital has been spent trying to prove Mother Nature wrong for fifty years. More important, the ruling class is now populated by feckless grifters and ridiculous people. They see their duty as throwing fuel on the fire in order to prove how little they care about the country.

What this comparison between this crisis and that of fifty years ago reveals is that this crisis is different in nature. There are general parallels, but the underlying causes are vastly different and that means the results will be different. New management may walk through the door in the next election, but unlike 1980 they will be taking control of an enterprise that needs bankruptcy protection. It may even require a fire sale to clear out the unproductive segments at the top.

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