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.

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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.

The Ownership Standard

Posted on May 10, 2022 by thezman

Note: In a break from the grifter code, I am not going to assume the new merch is the greatest merch in history. Criticisms and suggestions are welcome. This is new ground for me, so I expect to be terrible at first and get better over time. Please shop here and leave a comment when you can. Also send feedback to me.

It is fair to say that ownership is a prerequisite for human society. The ability to own things and have ownership respected by the other members of society is what allows for settled society to form. The evidence we have says that hunter-gatherers understood the concept of property and property rights. People in these groups owned thing and that ownership was respected. Early settled societies formed around the claim of ownership of necessary resources like hunting land.

In theory collective ownership is possible, but the one big experiment with it in the last century was a disaster. The theory was that once private property was eliminated, inequality and conflict would be eliminated. Yet within communist societies, there were laws against theft, thus tacitly acknowledging ownership. It also underscored the fact that conflict was not purely economic. Most crime is caused by an immutable fact of the human condition. Some people are born bad.

Not only does it turn out that private property and property rights are prerequisites for human society, but they are also a good measure of societal development. By the time the Europeans were ready to conquer the globe, they had worked through the problems of property ownership and how to settle disputes. Europeans landed in Africa and the Americas, only to greet people who had yet to master this basic concept. Even in Asia, property ownership was still in development.

In this age, property rights are a good way to see how things are slipping within Western societies. This story about a woman finding an ancient artifact at a junk store is a good example. She spotted what she thought was a strange lawn ornament that turned out to be a Roman bust from the first century AD. Its last know whereabouts were in Bavaria, but she found it in a Texas thrift shop. No one knows how it got to Texas, but it was most likely a war prize.

The interesting thing about the story is the women is being forced to give the bust back to the last known owner. Since that owner does not exist, it will be turned over to the Bavarian government. The argument is that the last acknowledged owner did not sell or transfer the bust. Without proof of that or something to suggest there was a rightful owner after the Bavarian king, the king still has rights to it. Since the king is no more, his rights revert to the Bavarian state.

On the one hand, it seems like a good result. Respecting property rights, even across countries and generations is a good practice. Jews have been hunting lost property, or claims to lost property, since the end of the war. Their argument rests on the fact that their items that were lost in the war are still their items, as they did not voluntarily transfer those items to the Nazis. The current owner may have honestly acquired them, but the seller was not legally allowed to sell them.

On the surface, this looks a good example of how modern Western societies enforce ownership rights. There is a global database of art. Unless you can go into that database and show you are the rightful owner, you cannot sell the item. That is why this Texas woman is being forced to give up her Roman bust. She probably could keep it in her garden, but she could never sell it to a collector. In other words, the lack of provenance has rendered it worthless to her.

This heartwarming story of rich people getting their toys back, however, is an exception, rather than the rule. This example of enforcement of property rights is the exception in the modern West. For most people, the phrase “you will own nothing and like it” is becoming the new normal. Even real property rights are conditional in America, as we saw with Kelo v. City of New London, Connecticut. That case basically turned property ownership into a privilege granted by the state.

At a more basic level, ownership is a thing of the past in America. Tech companies are allowed to harvest your personal information without your permission and sell it, often using it against the people from whom they stole it. Privacy, which can only exist in the context of property rights, has been lost. The mass media routinely violates the privacy of people it has deemed enemies of the state. Ownership and everything that springs from it is slowly being eroded in the current age.

Here is a simple example of how the erosion of property rights has eroded the basic order of society. We get daily reports of computer breeches in which the personal data of consumers is stolen by thieves. The companies trusted with this information are never punished for their negligence. The thieves are never caught. In fact, no one bothers to look for them. Often the stolen property ends up in the hands of the media or random weirdos on the internet.

The result is you lose the right to privacy and the ownership rights to your data, with little recourse in the law. If something private about you, your views on some political issue, get stolen from a tech platform and posted in the media, you have no way to reassert your ownership rights. You cannot sue the news site that posted the stolen information and you cannot sue the site from which it was stolen. You, the victim, have no protection while the beneficiaries of theft are protected.

A good example of this is Trump’s tax returns. During his time in office, the New York Times came into possession of his tax returns. These were stolen from the IRS by an employee, most likely. This person had no right to those documents and they had no right transfer them to the Times. The Times knew this and knew they were in receipt of stolen goods, but they published them anyway. The standard in America is finder’s keepers and society is the weeper.

If the Supreme Court really wanted to do some social justice, they would forget about Roe and find a case to overturn Kelo in the context of the reestablishment of basic property rights. Imagine if we go back to the ancient custom that says you own you and you own what you make by default. Most the abuses of the tech monopolies go away as their ability to steal your property goes away. The media’s ability to use stolen property would evaporate along with much of their power.

A simple example on that latter point is the Roe leak. The person who received the stolen item knew it was stolen. The person who gave it to him, unless it was Sam Alito, had no right to transfer it to the reporter. Imagine a regime that says the reporter gets charged with receiving stolen goods and the leaker gets charged with theft. All of a sudden, the journalistic practice of selective leaking goes away and they have to go back to old fashioned investigating and reporting.

Beyond that, this case of the Roman bust underscores the root cause of societal collapse in the West. The elites care more about the chain of custody for works of art than they care about fixing roads or making sure the people can feel secure in the person and in their papers. For the same reason they care more about Ukrainian borders than the Mexican border, they care more about tracking art items than defending the basic concepts than make society possible.

It is easier for the elites to “care” about the chain of custody for a Roman bust than it is to care about busted roads or decaying schools. It is easier to slap on a Ukrainian lapel pin than it is to do something about fentanyl. The public gesture is also more fun and rewarding than the grunt work required of elites to keep society going. Ours is a Nero elite, people who spend their days dreaming of new ways to flatter themselves while the basics of society crumble. They need to come to the same end.

The Long Dark Winter

Posted on April 14, 2022 by thezman

The government released the latest inflation data and the results were the worst we have seen in forty years. The retail number came in at 8.4% and the wholesale number clocked in at 11.2%. Of course, the retail number excludes the things that people buy, like food, fuel and housing. These numbers also rely upon the new math rather than old math used the last time inflation was an issue. By the old inflation standard, retail inflation is over 15%.

The political class is poleaxed by these numbers as they have been assured that inflation at these levels was impossible. Modern economic theory says that inflation is caused by too much money chasing too few goods. We now have top men in place to keep an eye out for this. They just need to manage the money supply to keep inflation under control. This assumption led the top men to assume inflation was transitory, the result of supply chain issues.

That should be the first red flag when looking at the economic data. Those top men that are supposed to have a handle on the money supply say they are as surprised as the rest of us that food has doubled in price. A month ago, they were talking about a series of exceedingly small rate hikes. Now they are talking about a series of substantial rate hikes to prevent inflation from going even higher. You get the sense that there is both panic and confusion among those top men.

One reason for this is the long period of historically low interest rates. What the Federal Reserve did forty years ago to tame inflation was remove money from the system by raising borrowing rates. The real creators of money are the banks, who create money through lending. By raising their cost of money creation, they create less money and the result is fewer dollars chasing goods. At its peak in 1980 the 10-year Treasury was going for 15% versus 2% currently.

In other words, getting rates back into the normal range means three or four times the current rates. The world is simply not prepared for such a thing. Think about what happens to the real estate market if rates simply double. Refinancing comes to an end and homes sales collapse. No one is trading out of their home with the 3% mortgage into a home with a 5% mortgage, at least not on purpose. This would be the new reality throughout the financial world.

The other problem with this approach is the massive government debt. The way government handles debt is not like normal people. They issue bonds, pay the holder interest, but never pay them off. Instead, they issue new bonds to pay off the old bonds and the cycle begins anew. Rolling debt like this works as long as the market for new debt looks like the market for old debt. If the Federal government has to start borrowing at two or three times the old rate, it is big trouble.

The other way the Federal reserve can tackle inflation is to sell its massive holdings of equities, treasuries and other assets. The latest balance sheet from the Fed says they are holding about $8 Trillion in assets. They can begin selling which removes cash from the system. Keep in mind that the value of the S&P 500 is about the same as the Fed balance sheet, so this is a powerful option. They added about a trillion in equities during Covid as a way to juice the markets.

Of course, this is not without consequences. If they liquidate that trillion in equities, they hoovered up during Covid, the market will go down. The tens of millions of retired people living on their investments will not be pleased. If they liquidate some of their $4 trillion in treasuries, those assets will lose value, which means the cost of borrowing by the government goes up. This is why monetizing the debt is like eating the seed corn during tough times.

Another problem for the Fed is the politicians have started a global economic war against the majority of the earth’s population. Exporting excess dollars to places like China, India and Russia is no longer possible. In fact, dollars are starting to come back to America in response to sanctions. When Washington declared war on the globe, the globe declared war on the dollar. At least in the short term, exporting extra dollars to the rest of the world is not a viable option.

This is why there is panic in Washington. Biden’s official approval rate is 40% and Congress has an approval rate of 20%. Now they are faced with grim choices that promise to be very unpopular. They can support a war on inflation that will result in a deep recession or they can let inflation rob the public. Worse yet, it is not all that clear the Fed can wage an effective war on inflation. Like a bug trapped in the spider’s web, they have nothing left but panic.

While the suffering of the political class brings joy to most everyone, this means normal people are going to suffer for an extended period. The gap between wholesale inflation and retail inflation says prices will keep rising. The war on the world will also put pressure on commodities like energy and fertilizer. That will put upward pressure on prices at all levels. Wages are not keeping pace, which means everyone is getting poorer by the minute.

When Joe Biden ran for office, he promised a long dark winter. Most people assumed he flubbed his lines, but it turns out he was telling the truth. The long dark winter of mismanagement and manufactured crisis now promises to extend into the summer and autumn. Worse yet, the people who created this mess are now tasked with solving it. It looks like the label for the Joe Biden regime will be the long dark winter of American decline.

World War III

Posted on April 6, 2022 by thezman

The war that the Global American Empire has launched against Russia is just the beginning of a global war it believes will bring about the end times. That sounds extreme but the top foreign policy people of the regime are quietly talking about regime change in both Moscow and Beijing. The main focus right now is Moscow, but they also have Beijing in their crosshairs and maybe even New Delhi. They believe the war is the final phase of the end of history.

This sounds insane given that Russia has more than enough nuclear weapons to reduce the empire to dust. Despite this reality, the people in charge of the empire have the current figurehead demanding Putin be arrested for war crimes. This is a new reality that needs to be acknowledged. Joe Biden is not in charge of anything. That was made clear when Barak Obama visited the White House recently. Biden was completely ignored by everyone, including Obama.

Putting that aside, the Global American Empire seems to have determined that the next war to end all wars and usher in the end times will be a financial one. Their response to Russian defensive measures in the Ukraine have revealed this thinking. The Ukrainians have been begging for air cover, heavy weapons and even troops. What Washington has organized for them is a series of Twitter campaigns intended to cancel Putin and all Russians, along with an organized economic war against Russia.

In a way, Ukraine is the proof of concept for the empire. They are fully committed to an economic war with Russia that transcends Ukraine. What happens a month from now when the war is over? The Russians will destroy the Ukrainian army in the east and that will force a deal. Either Zelensky is killed by his own people or he flees. The alternative is Russia simply partitions Ukraine along ethnic lines and imposes the deal on Ukraine that matches what has been proposed.

Will these sanctions last forever? Will the West simply acknowledge reality and strike a deal with the Russians? It seems pretty clear that Washington will not allow Zelensky to make a deal with Russia, so what happens when the Ukrainians get tired of dying and kill Zelensky instead? Will his replacement be recognized? These simple questions make clear that this war Washington has launched against Moscow goes well beyond the events in Ukraine. It is a war of conquest.

There is another front in this war. Beijing correctly understands that they are also in Washington’s death pool. This is why they have backed Moscow and why they will probably look to join the fight sooner rather than later. The reason for that is they know the empire cannot win a two front war. Slapping sanctions on Russia will impoverish the imperial subjects in Europe, but not those in North America. A trade war with China, on the other hand, will hit Americans very hard.

China also has the long term objective of capturing Taiwan, which will open the way for China to being the dominant power in the region. Look at a map and it is clear that Taiwan is the Malta of the China Sea. Whoever controls it controls access to the Pacific and control of the sea lanes to Asia. As long as the Global American Empire controls Taiwan, China is a landlocked power walled off from the sea by countries financially and militarily tied to the American empire.

There are some questions that are unanswered at the moment. One of them is whether China would prefer a shooting war with America or an economic one. If it is the former then the only way to do that is to make a hard play for Taiwan. That would start with blocking access to the Taiwan Straits. This would force the United States to send the navy to open the straights, which would expose those ships to attack. This would give both sides reason to organize for war over Taiwan.

If it is an economic war, then the logical play is to openly and aggressively defy the sanctions regime on Russia. This would lead to sanctions from Washington, which would be answered with sanctions from Beijing. The Chinese could pick a range of strategically important products to withhold from the West. This would have a real impact on the imperial subjects living in North America. Imagine a shortage of clothing and vehicle tires or a shortage of car parts.

There are good arguments for both scenarios, but no one seems to know how China sees this war unfolding. They have certainly studied it. Back in 2013 the Pentagon learned that the Chinese have been studying the relative human capital between China and the GAE. To their shock and horror, they learned that the Chinese do not think diversity is our strength. The Chinese have also been studying Pearl Harbor, which suggests they are thinking about a shooting war as well.

China is not the only other front in this burgeoning global economic war. India has been hostile to the empire since the war on Russia started. Saudi Arabia has also been unpleasant about the sanctions regime. Most likely the pending Iran deal has been scuttled to keep Riyadh from changing teams. Then you have the global south, which will suffer first in this war. How the West keeps them from moving north en masse is a question no one seems to ask.

What Washington has done is organize the West for a global economic war against the rest of the world. It is a conflict of visions. China and Russia imagine a multipolar world while Washington demands a unipolar world. This conflict began and will end around the global economic arrangements. Of course, economic disputes often lead to military disputes, so that is always on the table. No one knows if Washington has thought this through, but we do know who will pay the price.

Bretton Woods III

Posted on April 4, 2022 by thezman

Note: The Monday Taki post is up and related to this post. All of a sudden, macroeconomics is becoming an important topic again. The Sunday podcast is also up behind the green door.

The technical definition of money is “something generally accepted as a medium of exchange, a measure of value, or a means of payment.” For most people this has always meant the legal tender of their homeland. Until fairly recent, this was a coin with the face of the king on it. The better the reputation of the king, the more valuable his coin, because traders were more likely to accept it. A good king made sure his coins had a consistent amount of gold or silver in it.

The reason for that is precious metals like gold and silver were always the world’s reserve currency. Everyone in the world would accept gold and silver for payment, even in places that restricted the use of the metals. You could always take the metal to the king’s mint and exchange it for his coins. Granted, he took a fee for himself and you were charged the cost of minting the coins, but that was predictable. In the end, all currency was measured in gold and silver.

We no longer use gold coin for money. Every country in the world uses what the economist call fiat currency. This is a government-issued currency that is not backed by a physical commodity, such as gold or silver. Instead, it is backed by the “full faith and credit” of the issuing government. Money is now an expression of the government power behind it. The US dollar is the reserve currency of the world largely due to the fact the American government was the most trusted.

Hard money enthusiasts assume this means the United States can print as much money as it needs, but this is not exactly true. The international monetary system that evolved after the collapse of the Bretton Woods system in the 1970’s is a framework that controls the exchange rate of the major currencies. Every major currency is based on the dollar, just as oil and gas are priced in dollars. The petrodollar was created in the 1970’s when the Bretton Woods system collapsed.

What the current system does, in effect, is link currencies to the supply of crude oil through the dollar. How much oil you can buy with your home currency is dependent upon how many dollars you can buy with it. It is not a direct link, as oil production rises and falls and the supply of dollars rises and falls, relative to other major currencies like the Euro or Chinese Yuan. In effect, America controls the world by controlling the price of commodities like crude oil and natural gas.

In the old days, minting coins was a profit center for the king. A strong king would restrict the use of other coins in his domain. His people had to take their foreign coins, gold and silver to his mint for conversion to his coin. In addition to the cost of production, he tacked on a profit for himself. This is called seigniorage and it works the same for fiat money as it does hard money. This profit from controlling the global currency is one way the United States has grown so rich.

One of the consequences of this system is the world has an insatiable appetite for US government debt. Because it is denominated in dollars and considered the safest of financial bets, it makes the ideal collateral. This has allowed the United States and other Western countries to run massive trade and spending deficits. The world wants the debt and the world wants to sell the West their products. US debt was 30% of GDP in 1980 and now it is 127% of GDP.

This is the subtext of the Russo-Ukrainian war. Russia and China, especially China, are tired of this arrangement. They correctly see it as to the advantage of Washington at their expense. This is why China is backing Russia’s play to demand rubles for its energy and agricultural products. This would pave the way for China demanding yuan for its products and the right to pay for energy in yuan. India is also quietly supporting what the Russians are doing for the same reasons.

This is why Washington is in no mood to strike a deal over Ukraine. It is not the only reason, but it is a big part of the plan to protect the dollar. If Washington can break the Putin government through financial war, China and India will drop their plans to buck the dollar in the global economy. A century after the Great War, the new global war is being mainly fought in finance. The West, led by America, is now at war with the world over control of the global currency system.

It is probably a war that the West cannot win. The reason is the same reason the king would put his face on his coins. Money is the physical expression of power. The strong king could enforce his monetary policy in his domain and his money had a predictable amount of gold and silver. In effect, his money was the representation of his people and the cultural that defined them. The legal tender of a country is the measure of that country’s wealth and power relative to the world.

The West no longer makes or invents anything useful. The power of the West is the legacy power to control the financial system. It is a system arranged by Mercurian people in order to control the Apollonians. The former are the people who operate as middlemen and service providers, while the latter are the people who grow the food, make the goods and keep the gears properly lubricated. The former operates in the West, while the latter exist outside the West.

Reality is the thing that does not go away when you stop believing in it and reality says that growing and making things counts for more than thinking of things. The reason Washington has not crushed the Russian economy is the world needs the stuff Russia pulls pout of the earth. In this economic war of attrition, Russian can feed itself and keep its homes warm, while Europe will have to hope America can provide the food and energy at a reasonable fee.

The most likely outcome of this global conflict is something people have suspected for quite some time. The global currency will become a basket of commodities like natural gas and crude oil. Maybe agricultural products will be in the mix. The reason for this is the world runs on energy and food. Bretton Woods III, as some are calling it, will be a new set of currency arrangements whereby money is based on its purchasing power for the agreed upon basket of products.

What this means in the short run is that the West is about to get poorer as governments are forced to cut spending and debase the currency to get out from under domestic debt obligations like pension payments. It also means the end of globalism as has been defined by Washington for three decades. Trade will continue, but between countries rather than independent global enterprises. Thirty years after the Cold War the world is about to start healing and return to something close to normal.

Fighting Time

Posted on March 30, 2022 by thezman

One of the puzzles from the Great War is how the leaders on both sides allowed themselves to get drawn into the war. There are plenty of reasons why each country would want war, including the infamous one that caused a certain Austrian fellow to coin the term “the big lie.” The problem with all of the reasons is they made little sense in light of the obvious costs of war. As a result, the Great War is a great example of how events can tale on a life of their own.

The remarkable thing about that war is that once it settled into trench warfare no one realized the hopelessness of it. One can understand how the initial events would spiral into a global conflict. That is not a new phenomenon. Similarly, you can see how the initial moves in the war made a lot of sense to the leaders on both sides. This was the first industrial war, so they had a lot to learn. New weapons needed new tactics but few people realized that at the start of the war.

The great puzzle of the war is that the sides did not see the hopelessness of the situation once in settled into a stalemate. Both sides were losing tens of thousands of men with each attack, only to gain a few yards of ground. The Battle of the Marne and the subsequent race to the sea made sense. The losses were high, but both sides had hope for quick victory. Two years later the French and Germans lost over a million men at Verdun and the winner got nothing for their trouble.

A century on and we are getting some fresh insight into why the Western leaders in the Great War were incapable of seeing things clearly. The war in Ukraine is proving to be nothing like Western planners imagined. They assumed the Ukrainians would stall the Russians into a stalemate of urban warfare. The world would rally to the sanctions regime and it would quickly be a question of how long the Russians could suffer the economic consequences of the sanctions.

After just one month it is clear this is not happening. The Russians did not fight like the NATO planners imagined. Instead of rushing to Kiev, they pinned the Ukrainian army in the north, using classic maneuver tactics. Meanwhile their main army is systematically destroying the Ukrainian army in the south and east. It also appears the Russians were well prepared for the Ukrainian tactic of digging into urban areas. It is now just a matter of time before the Ukrainian army in the east is lost.

That is just one miscalculation by the West, but it should be concerning. The Russians are not doing anything novel in Ukraine. They are using classic tactics that have been used in Europe since Napoleon. Further, they are following a doctrine they evolved in the Second Chechen war. That was a doctrine Vladimir Putin created as the guy running that war for Russia. It seems that no one in the west bothered to study the man they claim is the new Hitler.

That is only one small part of the miscalculation. The decision to cutoff the Russian central bank appears to have been a massive blunder. The Russians, faced with the threat of their dollar and Euro assets being seized by Western banks have told the West they must pay for goods in rubles. Otherwise, they are forced to send product to the West but not be paid for it. Alternatively, they would have to make concessions in order to get their assets unfrozen by the West.

Why anyone in the West thought this was a good idea is a mystery. It turns out that the Biden administration did not consult with the Federal Reserve. Europe appears to have just followed along without questioning the policy. Now that Russia has countered their move, Europe is in a terrible position. They either support the ruble with massive purchases or they face an imminent shortage of natural gas. That means rationing of energy products could happen as soon as next month.

Of course, the words “shortage” and “rationing” will trigger the natural response, which is hording and price gouging. That will also mean a political response. The German political elite appear to be embracing their inner Marie Antoinette by telling the Germans to wear a sweater as they shiver in the dark. Presumably, they will tell the people to eat bugs when the food shortages hit this summer. Maybe German TV will start celebrating the Turnip Winter as a way to motivate the public.

In fairness, we have to no idea how the Russians and Chinese are viewing this thing as Western media refuses to cover that aspect. We should assume the lack of food riots and social unrest in Russia means they are not teetering on collapse. This was the prediction at the start of this war. The best and brightest in the American managerial elite predicted the Russians would have collapsed by now. They also assumed China would be wavering in their support at this stage.

The point is, we are seeing in real time how supposedly clever political leaders can stagger from one blunder to the next. Unlike the Great War, this war has one side that seems to have updated its thinking since the last century. The Russians are planning for tomorrow, while the West is planning for 1985. The Biden people actually thought his speech in Poland would be his Brandenburg Gate moment. That is the most terrifying event of this crisis so far.

There we see the best parallel to the Great War. The men moving pieces on the board were men of a prior age. They were trying to fight the old wars. Similarly, the political leaders were operating in a 19th century mindset. The trouble was they were armed with 20th century weaponry. Today, the West is led by 20th century men desperate to maintain 20th century arrangements. Their opponent is not Russian, China or the new world order, but the passage of time.

The False Society

Posted on March 17, 2022 by thezman

Imagine you are the head of a grocery chain and one of your executives comes to you with a plan to boost sales of over-the-counter remedies. These are the things you buy for a sore throat or an upset stomach. His plan involves subtly infecting the customers with a mild virus. They will get sick and then come back to buy something to remedy the symptoms of the virus. The virus will be mild, but enough to cause most people some symptoms in the week after having been infected.

Unless you are a sociopath, you will think the guy is nuts. Odds are you will think it is some sort of elaborate gag. If he is serious, then you will call security to have the guy removed from the building. The reason is not just the ghoulish plan to poison people, but the fact that he could think of such a thing. You would quickly start to wonder what else this guy is capable of doing. If he is willing to poison thousands of people to boost sales, he is capable of anything.

The truth is though, companies are full of people who think like the ghoulish executive in that short example. For example, there was someone at the multinational that owns the Häagen-Dazs brand who decided to start shrinking the pint. It used to be that a pint is a pound the world around, but no more. A pint of ice cream in the United States has shrunk down to 14-ounces. The container has been subtly changed so the shrinkage is not as obvious to the consumer.

Shrinkflation has been a thing for a couple of decades now. Bottles of beer have started to shrink as well. Many are 11-ounces now. They changed the shape of the bottle to trick the consumer. This was a trick they started at ballgames. They made cups taller, but narrower, so they could call the regular sized beverage a large, when it was the same amount of fluid as the smaller size. Packaging science is now mostly about tricking the consumer into thinking less is more.

The marketplace has always been about deception. The seller is motivated to lie about his product and the consumer is motivated to lie about his interest. Since the dawn of the marketplace, authorities have promulgated rules in an effort to keep the lying to a minimum and therefore maintain a peaceful market. Those rules have fallen away in the modern age, where deception has now become a virtue. In this age, only suckers are honest in their dealings.

Mass media is the prime example. The big media operations publish stories that they know are false when they post them. They are not simply wrong about a few facts, but deliberately designed by a staff of people to tell a false story. We saw that with the Russian collusion hoax in the Trump years. The Post and Times had teams whose job was to make up fake stories, with the help of friends in government. Everyone involved volunteered for the job of deceiving the public.

We see this with the war coverage. This story is being pushed by the Drudge alternative called Revolver News. It looks very official, but a quick search of the three authors reveals they are Ukrainian activists sponsored by the usual suspects. All three are children, fresh from school, with no experience in this area. The people behind that institute had them do the copy editing and let them put their name on it in order to add to their resume. It is a common fraud in Washington.

That is the thing though. It is a swindle and a well-known one. Operations like “Institute for the Study of War” are just lie machines. Their task is to pump out regime friendly information that will get circulated by the media. The media, of course, knows this better than anyone, but they choose to pass it along anyway. Given what we saw in the Trump years, it is possible that the Washington Post put out an RFP for a fake study to fit the latest narrative on the war.

Joseph de Maistre famously said, “False opinions are like false money, struck first of all by guilty men and thereafter circulated by honest people who perpetuate the crime without knowing what they are doing.” This is true, in that the authorities in this age pump out false opinion in immeasurable volume. Normal people inevitably believe some of it and pass it onto friends. That gives it authority and before long a third of the public wants nuclear war over Ukraine.

Of course, that survey could be entirely fake. That is something else that has changed over the last several decades. It used to be that polling firms guarded their reputations by avoiding sensationalism. Now they only care about getting noticed, so we have polling firms publishing complete nonsense. Many are happy to give the customer what they want and those customers are sociopaths in the media. Polling is just a corrupt as everything else now.

If we return to our grocery store CEO and his psychopathic executive, the issue is not the scheme, but the person behind it. The sort of person who thinks it is normal to poison people is not going to think twice about poisoning his boss. Similarly, the sorts of people who think it is normal to fabricate studies, stories and so on in order to fool the general public is no different from the psychopathic executive. These are people who lack the ability to tell right from wrong.

It is tempting to think this is just the way the world is and we just see it more clearly now thanks to the mass media age. Some of that is true, but we also know that this sort of behavior was a primary concern in the past. Medieval governments passed rules to limit deception in the law and the marketplace. The ancients had draconian punishments for those who deceived the public. The ancient Persians treated deception more harshly than murder. People used to worry about this problem.

In this age, we have turned this on its head. Deception is a valued skill. The media selects for sociopathy. Our political parties admire those with a natural skill to deceive and quickly raise them to national status. That grocery store CEO would not exist as described, because he would have hand-picked that executive and probably gave him the idea for the mass poisoning campaign. The lie is the coin of the realm and the liars are the new aristocracy.

America is often called a great experiment and that is true. This is the first society to exist with nothing holding it together but impersonal economic relations. We are reaching the point where there are no rules, just who can get over on whom. It is the anarcho-capitalist society in which no one can trust anyone or anything. Instead, a war of all against all, it is an endless series of confidence games. Everyone has an angle and is trying to get over on someone else.

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