Risk? We don’t Need No Stinking Risk!

Risk? We don’t Need No Stinking Risk!

We’ve crossed the monetary Rubicon. There is no going back to the way things were. With the creation of a series of Special Purpose Vehicles (SPV) the Treasury Dept. and the Federal Reserve have fundamentally altered the financial landscape of the United States.

We are no longer a country that tolerates the risk of capitalism. To be honest, we haven’t been that country for a very long time. Steadily over the course of my life (I was born in 1968 the year the London Gold Pool failed), the global monetary system has cut tie after tie to the discipline of the free market in money.

With the U.S. at the center of the system, it was inevitable that we would reach the point of no return once there was no other way to reflate the system.

And it has been in the service of arrogating the power of money creation, and by extension the power that confers to the printers, to a global oligarchy I’m fond of calling The Davos Crowd.

My last post was an open letter to these folks letting them know that no matter how much they try to scare us into accepting a world where they have total control over our lives their chances of success are limited because we can see them and what they are planning.

The response I’ve received from people to that post confirm my view on this. Few things I have written have generated the kind of passion I’ve seen from folks.

And this Davos Crowd is the most risk averse of any crowd there is. Because near unlimited power makes you both paranoid and stupid. Paranoid that the power will slip from your grasp and stupid because you believe yourself immune to the consequences of your actions.

They use that insane power of the printing press to erect walls around competition and ensure nothing but one-way trades where no matter what ‘risks’ they take, someone else pays the price for their failure.

Their failures are nearly complete today. Because when you divorce money creation from the discipline imposed by the proper pricing of risk you divorce the application of that money towards sustainable and productive activity.

These people were always monetary Marxists. And the Austrian economists of the last century accurately called them out on their methodological errors while ruthlessly applying their reason to predict exactly why it would all eventually fail.

Because mispricing risk by mucking with interest rates alters the structure of production to misallocate capital from where it is actually demanded in a free market for money to what they want to use it for: global governance, endless wars and the subjugation of humanity.

Money flows into projects which wouldn’t be funded otherwise and at the end of the business cycle reveals them to be uneconomic. This is why we’re staring at a world today that only needs 70-75 million barrels of oil per day versus the 100+ million we needed just last month.

This is why we’re staring at a world of endless strife and conflict and not one where the biggest thieves are brought to account for their actions but seeminingly rewarded for it.

And with each intervention to prop up asset prices, by keeping interest rates at or below zero, all that happens is the uneconomic businesses stay functioning far longer than they should have, ensuring that the next time the cycle turns against them, the needed intervention will be even bigger.

This is why every time there is a crisis the numbers get bigger, the responses more ludicrous and the effects on the real economy ever more brutal.

And guess who always bears the brunt of the collapse? Those that caused it with their profligacy and thievery? No.

You do. I do. And our children do.

When government creates a risk-free trade in one area of the economy it forces inordinate risk onto another area. It turns everyone into speculators and not builders of wealth. The money they print raises the demand for those commodities which they value while retarding the demand for the ones we value.

This is why the Quantity Theory of Money fails. It’s why the CPI and GDP are poor metrics to set in opposition to justify more money printing, more government intervention and bigger bailouts.

It only looks at the supply of money but ignores the demand for it. And right now, thanks to a biblical short position against the U.S. dollar demand for money is still insanely high.

It will allow them to ‘get away with this’ for another period of time.

Mises laid all of this out in The Theory of Money and Credit in 1912. The basics are all there in chapter one. And it’s why we’ve reached the end of the fiction of a debt-based monetary system here in the U.S.

But once the demand subsides, the money is still there. The latent inflation that doesn’t show up in the CPI is still there. There is no calling this money back in without deflating asset prices and causing the exact situation they are avoiding today.

We’ve reached the end of laying off risk onto a greater fool. There is no one else to sell the next round of debt to to finance the bailouts. So, now the Fed and the Treasury have merged, as Jim Bianco pointed out two weeks ago, to ensure the free flow of money completely unmoored from risk.

This is the Rubicon I said we crossed at the beginning of the article.

This allows the U.S. government to complete its transformation into an entity wholly indistinguishable at this level from China with state ownership of strategically and systemically important businesses.

From my latest piece at Money and Markets:

This, folks, is pure MMT — Modern Monetary Theory. The Fed is creating money out of thin air having bought the debt they never intend to sell from the Treasury so that it can buy whatever it wants and will have Blackrock (NYSE: BLK) be the fund manager, to make the whole thing quasi-legal.

The only functional difference between this and Lincoln’s Greenbacks of the Civil War year (1861-63) is the accounting fiction of the asset (U.S. Treasurys) on the Fed’s balance sheet.  Functionally, there is zero difference.

And the funny part about this is that it was done by the so-called fiscally responsible Republican president. Now Trump is happy with his Federal Reserve Chairman, Jerome Powell. In order to save the stock market, the frackers, the municipalities, the 16 million people who have lost their jobs in the past three weeks (and possibly the stink bugs hounding my blueberry bushes), they will print whatever money is needed to forestall the cure for what ails the world — deflation.

They will buy whatever assets they feel they have to (or just want to) to save their skins and maintain the power amassed to this point. The moral hazard will be as biblical as the short position against the dollar. The outright thievery of good businesses ruined by this bust will happen right alongside the bailout of of the crappy ones.

And they will expect us to thank them for it.

Risk isn’t just something for the other guy to worry about. It is the nature of life itself. They can avoid it for another phase of the cycle but they can’t avoid it forever.

Because the real risk on the table today is the risk of us no longer believing that funny money holds any value at all. When we’re sitting at home, out of work and destitute and prices for the things we need to stay alive rise above our ability to pay for them, that’s when things get real.


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Now, We Get Local. Now The World Gets Real

Now, We Get Local. Now The World Gets Real

“Reality is that which when we stop believing in it doesn’t go away.”    Philip K. Dick

In March of 2003, we broke ground on the first real thing I ever built, the house I currently live in. Then I understood that there was only one way this economic and political system ended, badly.  And I knew then that I was woefully unprepared for the challenge. When I started building my house I could barely drive a nail straight. By the time the first part of it was finished I could lay a square of asphalt shingles with the best of them…. if only until about 10 am or so.  I could now solve logistical problems of much larger scale. I learned that building a house wasn’t one big task but a million little ones, some good and some, well, not so good.  My wife and I had a lot of help, to be sure. We leveraged the skills, labor and knowledge of family and friends.  My house became a kind of community project with some weekends having as many as eight or ten people milling about like semi-competent Amish men setting trusses, digging trenches and installing windows.  And I’m forever in the debt of those who gave up their Saturday to work in the singularly horrific heat of a north central Florida summer, a place I’m sure Dante had in mind when he wrote about the eighth circle of Hell.  I figured then we had about five to eight years before the system would break. During the 2008 crisis I was convinced that, ‘This was it.” It turned out to be bad but the world wasn’t quite ready to give up on the system it had built.  And we allowed the central banks to coordinate a global bailout. But that was granted with the explicit understanding that there would be no next time or there would be hell to pay on both sides of the traditional political aisles.

Welcome to the Coronapocalypse.

Regardless of what you may think about the origins of COVID-19, bio-weapon or not, ‘just the flu’ or the new plague, the reality is that it is here. The response to it is real and the damage it has had on the global economy is real. It doesn’t matter at this point in time whether the response is the right one or the wrong one. Because in an age where perception is more important than reality and has been that way for so long, we have no real frame of reference to guide our conclusions.

Prices and costs have been distorted beyond all recognition to the saved capital they represent. The epic meltdown of markets speaks to just how insanely overvalued the world was once the layers of credit contracted.  In the end, all we have are our observations. And those observations are intensely personal. And most of the the time the conclusions we draw from them are wrong no matter how tightly we believe in them.  Be that as it may, we still have to make choices. We still have to act.  And, if this is truly now a survival-like situation, one that I personally tried to prepare for nearly a generation ago, that means we have to deal with reality.

We have to put away the childish things we’ve been fighting over for the past five years politically. How ridiculous and insipid do the identitarian fights over gender, race, sex and color look now? How dangerous and stupid does all that capital, that time spent, look now in hindsight when today people with skills, humility and high executive function are needed? Do you really care today if the guy behind the meat counter at your local supermarket is a MAGApede or a Bernie Bro, hates gay people or is a closet transsexual? If you do then I suggest you stay home and reassess your priorities and your choices. The reality is that now that the damage to the economy has been done we will need each other more than ever, regardless of what we thought about each other yesterday.

The reality is governments are grabbing for insane levels of power. Martial Law is here in Europe. The U.S. isn’t far behind if we look at how some governors and mayors have acted. The reality is that the more power governments grab the less capable of protecting you, your family and your community it was before that. It will view you as a threat. It will treat you as less than human because your disobedience threatens their control. If the Trump administration is smart it won’t go there. If Trump wants to ensure the U.S. is the destination for global capital in the near term, he won’t go to where Europe goes. Because the way to restore confidence in a currency, a people and a government is to not panic. Lead and show competence and trust.

Those that over-react, enforce one-size-fits-all mandates become incapable of solving problems, only maintaining the current misery. So we have to be strong enough and brave enough for commerce to flow. If you aren’t then stay out of the way of healthy, low-risk people taking real risks necessary to keep the lights on, the sewers functioning and the food supply from collapsing. Celebrate that guy behind the meat counter or restocking the shelves. Because the life he saves may be yours and vice versa. Yes, some people will make the wrong choice, but most won’t. Stop using them as straw men to grind your political axe. Old habits die hard but guess what? You’re not an old dog.

We’re moving into that dangerous area of zero tolerance which implies maximum costs for marginal net benefits. Striking the necessary balance to keep our communities alive is how we best fight back against these threats — the government overreach or the virus itself. It means realizing that bad people will do good things and good people will do bad things.

It means decisions made today may need to be reversed tomorrow. Top down order separates us from our greatest strength, our ability to try new things, solve new problems and turn what is into what will be.

It means keeping your opinions tempered, your humility high and finding ways to solve real problems that alleviate current and potential suffering.

It means realizing you don’t have all the answers, and pretending like you do is literally a matter of life and death.

The economy isn’t some big aggregate thing. That’s the fundamental flaw of all dominant economic thinking, these concepts of aggregate demand and aggregate supply. They don’t exist. They aren’t real. We talk about them like they are but they aren’t. They are pale and unfocused reflection of trillions of small decisions taken by billions of people everyday. And no matter how much you try to model reality by looking at the big numbers, the reality is that you only see things through the densest of fog, near blind and full of hubris. This is the central flaw in all forms of central planning, the lack of specific knowledge to come up with the right policy decisions. That’s not ideology. That is fact. Any guess at my behavior, no matter how educated, carries with it a measurable error which when multiplied by the number of decisions I make per day and the number of people whose actions you are trying to aggregate makes the entire exercise a futile and dangerous attempt to play god. Even God doesn’t play dice with the Universe. And the sooner we give up our grand ideas of top down control through the decisions of wise and insouciant verified smart people the sooner we can deal with the reality of the life in front of us.

Today the world is contracting, not ending. It’s a smaller, tighter world than it was yesterday. That means the closer your relationship to someone, the more valuable they are. The people in charge now if they are competent, if they have a shred of decency and humility, will realize by getting out of our way we can thrive. And if they won’t, then we have to do the other thing humans are really good at, subverting crude attempts at control.

That’s not ideology folks, that’s who we are. And I love people for it.

It’s simply giving up control over what you cannot and staying focused on what you can. It’s the humility to know that I don’t have the answers to the problems of the world but maybe the problems don’t exist as I think I see them.

We’ve been given a huge wake up call that what we’ve built is a house of cards. You’ll hear a lot of cries for people to ‘get local.’ Use the time you have in front of you to build skills you didn’t have yesterday. Find ways to be more valuable to those nearest you that may need you tomorrow.

Forge real relationships with people you never thought you could.

But most importantly, it’s time to stop denying that which is in front of us.

Because, try as we might, it isn’t going away.

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