H/T Tyler Durden
By Michael Krieger
A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. When governments do not think it necessary to accommodate their expenditure and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.
- Ludwig von Mises
How Wall Street Died
Let me take you back to the fall of 1999. I was a senior in college without a clue what I wanted to do with my life. Wall Street was in a boom and seemed exciting. I had always loved the financial markets since I had first discovered them years earlier; however, I wasn’t convinced this was the profession I wanted. I had majored in Economics at school for practical purposes but I found almost all of the courses to be extraordinarily uninspiring with the exception of a few like Corporate Finance and the Economic History of China. It was the general micro and macro economics courses that I found the most painful to sit through. I wasn’t alone in this assessment. Many of my close friends were Economics majors as well and we all felt the same way (I later found out this was because we were being indoctrinated in voodoo Keynesian economics) . So even with the Economics degree I wasn’t sure that I wanted to pursue a career in finance given the fact that I found myself more interested in subjects such as English , History and Philosophy. Nevertheless, the firms were hiring, I had the degree and it would allow me to move back to New York City without living at home.
What I discovered as I interviewed for jobs disturbed me right away. Every single firm with the exception of one was completely obsessed with math. Entire interviews revolved around “how quantitative are you” and the like. Although I hadn’t had much experience with investing I had enough to know this line of thinking seemed preposterous. It seemed to me only basic math skills are necessary to be a successful equity investor. Besides that, it seemed that the key is understanding that the world is always changing rapidly under the surface and therefore what is a good business today might be bankrupt tomorrow and what is a start up today could be the next Microsoft. This seems obvious but the skill set to figuring all this out is more geared to an appreciation of human psychology, historical cycles and cultural shifts (both fads and structural changes) than math. What I realized later is the reason they were so focused on mathematicians and Phd’s is that Wall Street was moving away from what it was always meant to be - a conduit between the holders of capital and those that wish to deploy that capital in productive economic activity. Rather than trying to hire a well rounded workforce of intelligent college graduates the firms were hiring a cadre of quantitative robots that would play an instrumental roll in blowing up the world’s financial system.
When you get too many people of a particular mindset (in this case highly quantitative and academic) to aggregate in a field that is very much a people business and one where “street smart” common sense is of extreme importance you are asking for serious trouble. When you couple that with a Federal Reserve that keeps interest rates too low what you get is a bunch of quants inventing products that provide a yield sufficient for pensions and others struggling to earn a return. Products that are completely mispriced for the risk inherent in them. I am not placing all of the blame on the Wall Street firms (although they deserve a lot and the fact people haven’t been punished severely is a huge reason why there is no confidence on main street), rather I believe the Federal Reserve deserves 95% of it. If it wasn’t for them manipulating the price of money to absurdly low levels you wouldn’t have had the rush into toxic products in a search for yield. While the newly enthroned Wall Street quant army would surely have done their damage nonetheless it wouldn’t have resulted in the complete destruction of the financial and monetary system that we face today. In a nutshell, this is how I think Wall Street died and until it gets its act together will remain a corpse.
The Elites Have Lost Their Right to Rule
One of my favorite quotes is from Joseph Schumpeter who said “everyone has elites the important thing is to change them from time to time.” Of course, this is what happens in a well functioning democracy. The problem today and the reason why the United States is on the verge of some sort of revolution (I believe it will manifest as a revolution of ideas and not an armed one) is that the election of Obama has proven to everyone watching with an unbiased eye that no matter who the President is they continue to prop up an elite at the top that has been running things into the ground for years. The appointment of Larry Summers and Tiny Turbo-Tax Timmy Geithner provided the most obvious sign that something was seriously not kosher. Then there was the reappointment of Ben Bernanke. While the Republicans like to simplify him as merely a socialist he represents something far worse.
Of course it is not just Obama. He is at the end of a long line of Presidents that think they have some sort of divine right of kings to rule. Think about the Presidency of the United States since 1988. Bush, Clinton, Bush…If Obama had not won the Democratic primary we would have ended up with President Hilary Clinton. Catch my drift? Something is not right here. This is the United States not some sort of petty monarchy. There is no divine right of any family or group of families to rule. When this starts to happen you get the disaster we are now faced with. That said, the bigger point is this. What Obama has attempted to do is to wipe a complete economic collapse under the rug and maintain the status quo so that the current elite class in the United States remains in control. The “people” see this ploy and are furious. Those that screwed up the United States economy should never make another important decision about it yet they remain firmly in control of policy. The important thing in any functioning democracy is the turnover of the elite class every now and again. Yet, EVERY single government policy has been geared to keeping that class in power and to pass legislation that gives the Federal government more power to then buttresses this power structure down the road. This is why Obama is so unpopular. Everything else is just noise to keep people divided and distracted.
Getting Into the Mind of Ben Bernanke
I do not have a clear window into the highest levels of power in many areas such as the military or the intelligence community but I do have a very good understanding of it when it comes to the financial system and the economy. At the end of the day everyone knows that those who can create the money and credit have the ultimate power over any political system. Therefore, at the top of the economic power of the world is the Federal Reserve and at the top of that is Ben Bernanke. This is why I took a great deal of interest in reading the full text of his speech today. Much will be written about it but I want to tackle it from two points. First, who is Ben Bernanke?
You can really see into his head from reading this speech. He is an academic who thinks he is smarter than everyone else which is why he is in the position he is in. He thinks the key to monetary policy is to trick people into doing things that will hurt them in the end. He believes the mal-investments he intends to push people and institutions into equals economic growth. What surprises me so much about the investment community and the American public in general is that so many fail to understand that we live in a top down centralized economic system much more similar to China in more ways than people want to admit. We look at how the government steers the economy in China and sneer. How are we so different right now?
As far as the speech itself, it confirms something I mentioned several weeks ago. Banana Ben absolutely wants to do a massive QE2 program. The only thing holding him back is gold is near an all time high. What he wants is gold much lower and stocks much lower to give him cover. Gold has not cooperated so he is in a bind. He cannot print a massive amount of money with gold here and stocks at 1055 because what happens if gold soars and stocks sell-off in the days that follow such an announcement? What if the response in the treasury market is not as desired? He is scared to do it here and he is right to be scared because such a reaction would be the end of the Fed right then and there. The Fed will be gone anyway within a few years in my opinion but it’s going to fight hard to survive and if you want to make money in this market you need to understand that. The most powerful institution in the world is fighting for its survival. Never forget that.
So what is he going to do? I believe that the Fed and government are doing a lot more than people think to manipulate all markets behind the scenes. After all, they have publicly announced their manipulation in many other ways so does it make any sense whatsoever to assume they aren’t doing a plethora of other things behind the scenes? Of course not. I think that with the Fed in a bind they will accelerate and become ever more aggressive in behind the scenes games. This will make markets even more volatile and extraordinarily challenging. This is financial war make no mistake about it. The only way in my opinion to survive this is to buy all dips in precious metals, agriculture and oil. It is in these three areas that I expect to see the most price inflation as money eventually figures out the end game. The end game is more and more people will eventually wake up to the fact that the markets are a hologram put in front of you by the magicians at the Fed. That what constitutes real wealth in the years ahead will be owning food, energy and a means of exchange that will be accepted should a black market economy arise as it has in virtually all nations at one time or another throughout history.
In the end, the elites will be overthrown and a power vacuum will form. The transition period will be extremely difficult as the elites will fight their demise to the end. For you see, they care nothing for you they care about their power and control. Nevertheless, rulers have always only ruled by the will (or apathy) of the people and when the people become overly taxed and abused they always rebel. The main thing to think about is what kind of society do we want to rebuild from the ashes. I am of the view that it must be a return to the Constitution and an elimination of central banking power and secrecy. Let’s not fall for a demagogue or be pushed into a war when things are at their worst.
Have a great weekend,
H/T Tyler Durdan