INTERNATIONAL POLITICAL ECONOMY FINAL EXAM NOTES, 2018

It's final exam time. Below is a brief discussion of several talking points from my last lectures this spring. While much of what is presented below is provided without context - keep in mind this post is a list of ancillary "cliffs" notes for my class - my regular readers (and the well informed) will understand the story. For those who need more information you can begin by reading the links below.

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In my International Political Economy (PS 4640) over the last two week we discussed how our national and global economies have changed over the past 50 years. Beginning with a flood of dollars in the post-war era - which economist Robert Triffin explained, and France's Charles de Gaulle famously complained about when he discussed America's "exorbitant privilege" - we learned how U.S. policies helped accelerate the disintegration of the world's financial stability and global equilibrium.

Simply put, we dumped too much money in the global economy to maintain price or market stability over time. In the process, the value (or purchasing power) of the dollar declined.

What followed was a period of transition, where market players began to adjust to dollars as just another commodity, and to the subsequent rise of derivative products that were originally designed to shield (or hedge) companies and market players from market instability. Things would kick into high gear with the shocks of the 1970s - the Nixon shocks, "legalized" currency futures, and the instability and debt caused by OPEC price hikes - and the subsequent political paralysis that came from trying to deal with stagflation in the U.S. and the effects of a crumbling global economic infrastructure (the decline of Bretton Woods).

Market players who once hedged now began to speculate and even gamble in a growing casino market economy.

Instead of dealing with the issues that brought us stagflation and the collapse of the Bretton Woods system - cold war spending, the rise of Euro-currency markets, new competition, the Nixon shocks, OPEC price hikes, deficit spending, etc. - the United States and the world embraced neoliberal policies in the 1980s. Because the focus was on tax cuts and deregulation, record deficit spending and speculation in a recklessly deregulated market environment became the norm.

We ended up with old market wine in a new market bottle, with a deficit spending twist.

By the late 1980s U.S. deficits were breaking records. The national debt under Ronald Reagan effectively tripled, while deregulation and tax cuts for the rich helped artificially spike markets in America. The debt crisis in Latin America insured that debt and deregulation would be an integral part of the world's future. But this was just the opening act.

Apart from the deficit dollars dumped into the economy by Ronald Reagan, market interventions under new Federal Reserve Chair Alan Greenspan helped insure that market players wouldn't stumble too much when the economy began to hiccup. This helped supercharge the already irresponsible tax cutting and deregulation policies at the time. The Federal Reserve's penchant for dumping cheap money into the economy every time market players got scared would eventually become known as the Greenspan Put.

In a few words, Alan Greenspan made it difficult for anyone to actually lose money in a stock market whose growth was rivaled only by the growing amount of money dumped into the economy at the time (which the graphs below illustrate).

As I pointed out in class, a monkey throwing darts could have had a successful career on Wall Street in this deregulated and cheap money policy environment. Ironically, it's precisely this environment that would supercharge the economy and lead to the blowup we saw in 2008.

Notes on how our markets changed from the money dumps and the rise of the symbolic economy are listed below the graphs.

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THE STOCK MARKET & THE GREENSPAN PUT

DJIA growth, 1930-2010 compared to Money Supply growth, 1918-2010

Dow Jones Industrial Average, 1930-2010

Money Supply, 1918-2010

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EXAM-BLOG NOTES

IS HISTORY WHISPERING IN OUR EAR?
History whispering in our ear ... the short version.

Is history whispering in our ear ... with modern (Greek) twist.

THE RELATIONSHIP BETWEEN EASY MONEY AND MARKET SUCCESS

Market analysts are really just riding a wave of cheap money and deregulation ... A monkey with darts shows us how.

The relationship between the money dumps (i.e. Quantitative Easing) and our "surging" stock market.


STRUCTURAL CHANGES IN THE ECONOMY
Decoupling of Productivity from Labor ... The Rise of the Machines, Part I

Decoupling of Productivity from Labor ... The Rise of the Machines, Part II

The moral justification of capitalism is on the ropes ... how the promise of the liberal revolutions are beginning to disappear (this is also a review of both Liberal Revolution and The Dark Side of Our Free Market Myths).

A flood of dollars, new competition, and a crumbling economic framework ... yet we do nothing (still).

Why the American Dream is Disappearing: What's wrong with Detroit ... and America


FROM PART I OF OUR CLASS
Developing Afghanistan and Iraq ... It's mindless Modernization Theory, again

Waves of Imperialism ... War and Markets: Why Great Wealth is not a product of individual initiative alone.

Waves of Imperialism, II ... It's not free markets ... the state creates the conditions under which wealth is created (with an all too brief discussion-mention of John M. Keynes and Friedrich List).

- Mark


While we didn't have time to go over these topics, for those of you interested in learning more about our growing symbolic economy, the links below will prove helpful ...

THE SYMBOLIC ECONOMY EXPLAINED
America's evolving symbolic economy.

Derivatives explained, Part II

Converting Euro trash into European gold ... how the gods are smiling on Spanish and European banks, again.

EASY MONEY / FED MONEY DUMPS
Quantitative Easing Explained + bonus information

Quantitative Easing III (a.k.a. Corporate Welfare) in Europe has begun (again).

Quantitative Easing Explained (again, this time in England).

S&P breaks record, again (yawn) + bonus info

OK, one more on Quantitative Easing.

HISTORY WHISPERING IN OUR EAR

Following World War I and the punitive Treaty of Versailles Germany found itself in quite a predicament. It was forced to pay for the war, but was stripped of it's capacity to produce and earn income at the levels necessary to pay. When Germany defaulted on its obligations in 1923 French and Belgian troops occupied the center of Germany's coal and steel country (the Ruhr River Valley), which incited German resistance and led to hyperinflation in Germany as they attempted to print the money needed to meet their obligations.

To deal with the problem the U.S. led an effort that would help Germany meet it's obligations. Under a proposal put together by American banker Charles G. Dawes, arrangements were made to restructure the reparations agreement. But perhaps the most important element of the Dawes Plan was how it funneled money from U.S. investors into Germany in the form of U.S. bank loans. Money put together by U.S. banks would be used to pay off European states who would then use the money to pay off their creditors. In a circular-like flow, money would eventually flow back into the United States.

While the plan was somewhat successful in staving off Germany's creditors, and defusing the effects of the French and Belgian invasion, it didn't address the primary reality: The Treaty of Versailles was so punitive and unrealistic that it presented Germany with few options.

Worse, the remedy - the Dawes Plan - was based on the blind assumption that new loans from could fix Germany's problems. They couldn't. Germany owed too much. Worse, the source of new loans was tied to an environment created by the Roaring Twenties and Wall Street's nascent bubble mentality. Investor fever, which allowed U.S. bankers to secure money from ordinary Americans, blew up within 5 years. Wall Street's incompetence and greed would take the aspirations and hopes of Germany and, later, Europe down in flames in 1929 (the Young Plan would follow).

When the loans and the circular flow of money dried up - which had been based on Wall Street's bubble - the shortsightedness and stupidity of Versailles was revealed. Worse, it starved Germany and set the conditions for the serpents of Nazism to make their way through Germany.

I bring all of this up because it appears that, following another financial hit from Wall Street, the world is entering another period where trade partners are poised to become increasingly vicious trade competitors.

Rather than learn the lessons of history, world leaders seem to think they're immune to history's lessons. In this piece, from former Labor Secretary Robert Reich, we learn that the world is once again betting the house on another circular flow of market stupidity. Only this time national leaders, who understand that their nation's consumers are broke or tapped out, are betting that they can solve their country's economic problems by exporting to other countries, whose consumers also happen to be broke or tapped out. Seriously.

Reich's article is important for what it tells us about our current predicament, and how simple-minded our leaders have become (yeah, it looks like President Obama might be in this group too). They simply don't understand (or refuse to recognize) how currency wars, the blind alley of debt, and trying to appease Wall Street at the expense of Main Street have ended historically.

Today, in an effort to appease Wall Street's financial institutions world leaders are demonstrating once again that they prepared to drive their own citizens, and each other, into a blind alley with austerity programs and beggar-thy-neighbor policies that inflame national passions. You can't do this and expect the players involved to act rationally over the long term.

For those of you inclined to disagree with me, keep this in mind. This is not me talking about a theory I use in class. This is history whispering in our ear.

- Mark

FINAL EXAM NOTES / PS 3040

It's time for final exams. Below are blog posts with information that touch on lectures that I have given in my International Relations Theory class. For my students who are preparing for the final, remember these notes are supposed to help fill in the blanks, or jog your memory, and are in no way supposed to be final outlines for any one question.

Have fun, and good luck.

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FINAL EXAM: PART I

The Scientific Method
Science, according to Neil deGrasse Tyson ... click here.

The scientific method in the social sciences ... click here.

The scientific method 2.0 ... click here.

Why the scientific method is important ... click here.

Liberal Revolution, Treaties and Modernization Theory
From Liberal Revolution to failed development ... click here.

Soft power (sort of) ... click here.

Global treaties and the forces of cooperation over the millennium ... click here.

Developing Afghanistan and Iraq, it's mindless Modernization Theory, again ... click here.

FINAL EXAM: PART II

Blowback in the Middle East ... click here.

Blowback and the decline of the Bretton Woods system ... click here.

History whispering in our ear ... click here.

Is history whispering in our ear? When it comes to Greece, yes ... click here.

- Mark

APPROACHING OUR FUTURE AS IF HISTORY NEVER HAPPENED ... WHY "A STUDY OF HISTORY" AND INEQUALITY MATTERS

After thinking about the importance of the topic, my previous post needs a little more context. A lot more. Here it is ...

Arnold Toynbee, author of the epic A Study of History, believed that there was nothing in the biology, geography, or mysticism of a civilization that determined their destinies. In his view, theories of master races, an abundance of natural resources, or Manifest Destiny-like visions don't determine history. What determines a society's ability to adapt, survive, and prosper as a civilization is the way it responds to challenges.

Toynbee believed how great civilizations - at least the 21 or so civilizations that he located - responded to challenges depended on how "creative minorities" acted when confronted with protracted problems.

It could be spiritual, as was the case when the Catholic Church responded to the Dark Ages by organizing Germanic tribes and kingdoms into a single religious (and Catholic) community. This helped make the Dark Ages less dark, and set the stage for the emergence of feudalism and, eventually, the rise of our modern nation-state system by 1648.

Historian Arnold J. Toynbee

Responding to challenges could also be physical, as when the Sumerians organized society to drain and reconstitute the swamps of present day Iraq, in the process building large scale irrigation systems that allowed the agriculture revolution in the region to take off. The ability of the United States to conquer the vast expanse of the continent with canals, the rail roads, and the Army Corps of Engineers is evidence of this too.

When civilizations stop responding to big challenges creatively they begin to spin into gradual collapse, with nationalism, militarism, and the tyranny of a despotic minority overshadowing and finally replacing the ingenuity of creative minorities. 

It's at this time that civilizations begin to swirl the drain of history.

According to Toynbee, apart from nationalism, militarism, and tyranny, one of the features of a civilization in decline was growing wealth inequality - or what Toynbee might have called the "schism" between the "satiated" and the "hungry."

Once incomes and wealth became more concentrated great civilization were on the path of decay. This path was paved by the reluctance of elites to participate in the maintenance of society and, especially, to the maintenance of those at the bottom rungs of society. This is what makes growing inequality today so troublesome.

Compared to history's financial gluttons - when there were fewer rules, and slavery was legal - the income (and wealth) gaps we're experiencing today tell us that history is whispering in our ear. And it's not good.

Our modern "schism" works like this. Conservatives today see a world where those with wealth earned it on their own. Liberals like Hedrick Smith - author of Who Stole the American Dream? - and me see wealth created by corporate lobbyists, who douse their clients in favorable legislation, bailouts, and business friendly tax cuts that effectively guarantee financial success and class dominance - all at the expense of America's middle class.

Put another way, growing inequality in America is a deliberate and on-going process. Arnold Toynbee would recognize it. We should recognize it, and understand what it means for our future. But we don't. We're acting like historical illiterates.

Worse, we're approaching our future as if history never happened.

- Mark

IS HISTORY WHISPERING IN OUR EAR? WHEN IT COMES TO DEBT, GREECE SAYS YES

It was 1920. The Europeans were still upset with Germany. In addition to all the blood that was expended on the battlefields of WWI, the major players now found themselves deeply in debt. While the United States found that it owed 33 cents for every dollar in goods it produced, Italy owed 153% of what she could produce in a year. Things were even worse for the United Kingdom (154%) and France (258%). 

Germany's debt to GDP ratio - effectively what it owes compared to what it produces in a year - hovered around an astounding 300% (depending on who did the math). 

Since U.S. banks demanded that the Europeans repay them in full for the loans they took out during the war years France, Britain, and Italy (among others) were in no mood to cut Germany any slack on their war reparations. Indeed, when European leaders went to President Wilson asking for help to pay back their loans he told them they were on their own (and suggested they see JP Morgan).

Believing that playing hardball would force repayment of all the credits and loans they had provided during WWI, U.S. bankers effectively turned their backs on European states seeking debt relief.

With no relief in sight the Europeans put pressure on Germany who, in turn, began printing money to meet her domestic needs. The world watched in horror as the value of the German mark collapsed. So much money was being printed that newspaper presses were commandeered by the German government. By 1924 it took 4 trillion German marks to purchase one U.S. dollar. 

To deal with the unfolding disaster - which British economist John Maynard Keynes famously predicted as he walked out of the Paris Peace Conference in 1919 - the U.S. and the allied powers decided to act. In an attempt to maintain sense of control, the allied powers approved the first restructuring of Germany's debt in 1924, the Dawes Plan. 

Named after the principal architect, Charles G. Dawes, the Dawes Plan failed to deal with the dollar amount owed. Instead the Dawes Plan papered over the cracks and focused on currency stabilization, new taxes, and new loans (sound familiar?). Germany was effectively placed in receivership.

Germany's position, however, didn't improve much. How could it? They had neither the means nor the will to pay what the Treaty of Versailles demanded. Even after the Dawes Plan the Germans still owed 123% of what they produced. Germany had effectively become a debtor's colony, which provided the Nazis with a propaganda bonanza. 

When the markets crashed in 1929 the Dawes Plan was shown to be what it always was, a political fig leaf forced on the Germans for the sake of international bankers. And this is exactly how the Nazis played it up.

Still, the bankers wanted to hold on to some semblance of profits and control, which compelled them to restructure and reduce Germany's debt to GDP ratio to "just" 80% in 1929. A third, and similarly useless, restructuring would see Germany's debt to GDP ratio fall to 19% by 1932.

Unfortunately, the "too little, too late" restructuring of Germany's debt could not stop the political serpents that had been unleashed in Germany. The debtor's regime pieced together by the bankers and the allied powers proved to be worse than a fig leaf. It was also a house of cards.

EUROPE'S NEW DEBTOR REGIME ... HISTORY WHISPERING IN OUR EAR? 
Understanding the financial situation in Europe after World War I is instructive. It helps us understand the financial similarities between the debtor's regime that was built then, and now. 

If we take a look at how debt to GDP ratios around the world have been growing over the past 10 years it becomes clear that there are many similarities with what's happening today and in the 1920s. The obvious difference is that it's the Germans who are acting like the grown ups this time. 

Complements of the International Monetary Fund's World Economic Outlook 2015 (p. 182; p.199 on the scroll) we learn that many countries are heading towards the same blind alley of debt that haunted Germany in the 1920s.

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Gross Debt as 

a % of GDP

                    Average                                                                                Projected

                1997–2006    2009    2010      2011     2012     2013     2014     2015   

Germany          61.3        72.4     80.3      77.6      79.0      76.9      73.1       69.5 

UK                  40.6       65.8      76.4       81.8      85.8      87.3     89.5       93.5

France             61.9        78.8     81.5       85.0     89.2       92.4     95.1        97.0

USA                60.2        86.0     94.8      99.1     102.4    103.4    104.8     105.1 

Italy                105.0     112.5    115.3     116.4    123.2    128.6    132.1     133.8

Greece*          100.0      112.9   129.7      146.0    171.3    156.9   175.0     177.1

Japan               155.0     210.2    216.0     229.8    236.8    242.6    246.4    246.1

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Euro Area          68.7        78.4    83.9        86.5     91.1      93.4     94.0       93.5 

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What's worse, in spite of what we know about the past, we are prescribing many of the same policies and stipulations that we saw 80 years ago. Think about it. 

Global financial elites want everyone to believe that new loans, new taxes, and austerity measures imposed on Greece (with bankers and financiers getting paid off first) will somehow stimulate a debtor state like Greece. The problem here is Greece has had access to loans and austerity measures since it entered the Euro in 2001, but has little more than soaring debt to show for their efforts.

Here's my question: If policies that promoted wealth extraction over wealth creation didn't work in the 1920s, why should we expect them to work now? 

- Mark

* Greece figures derived from Trading Economics.

WHY GROWING INEQUALITY IN AMERICA IS ALL WRONG FOR AMERICA

Breaking down figures provided by the Federal Reserve, the People's Policy Project found that the top 1 percent of Americans gained $21 trillion in wealth since 1989 while the bottom 50 percent lost $900 billion. This means that wealth inequality in America is worse today than it was in the 1920s, right before the market collapsed and created the conditions for the Great Depression.  

If we're to believe in the logic of the market, the wealth gains of the top 1 percent over the past 30 years is due to the fact that they're smarter, stronger, harder working and better looking than the rest of us. 

But we know better. Since the 1980s the U.S. government has deliberately created the conditions for wealth to accumulate at the top, while systematically working to drain more of it from those at the lower end of the economic scale. 

How does this happen? Very simple. It's deliberate and, as I pointed out in an earlier post, it's happened before. History helps us see how it's happened, and how we're cutting our own throats in the process.

Arnold Toynbee, author of the epic A Study of History, believed that there was nothing in the biology, geography, or mysticism of a civilization that determined their destinies. In his view, theories of master races, an abundance of natural resources, or Manifest Destiny-like visions don't determine history. What determines a society's ability to adapt, survive, and prosper as a civilization is the way it responds to collective challenges.

Toynbee believed how great civilizations - or at least the 21 or so civilizations that he located - responded to challenges depended on how "creative minorities" acted when confronted with protracted problems.

It could be spiritual, as was the case when the Catholic Church responded to the Dark Ages by organizing Germanic tribes and kingdoms into a single religious (and Catholic) community. This helped make the Dark Ages less dark, and set the stage for the emergence of feudalism and, eventually, the rise of our modern nation-state system by 1648.

Historian Arnold J. Toynbee

Responding to challenges could also be physical, as when the Sumerians organized society to drain and reconstitute the swamps of present day Iraq, in the process building large scale irrigation systems that allowed the agriculture revolution in the region to take off. The ability of the United States to conquer the vast expanse of the continent with canals, the railroads, and the Army Corps of Engineers is evidence of responding to the collective challenge of geography too.

When civilizations stop responding to big challenges creatively they begin to spin into gradual collapse, with nationalism, militarism, and the tyranny of a despotic minority overshadowing and finally replacing the ingenuity of creative minorities. 

It's at this time that civilizations begin to swirl the drain of history.

According to Toynbee, apart from nationalism, militarism, and tyranny, one of the features of a civilization in decline was growing wealth inequality - or what Toynbee might have called the "schism" between the never "satiated" elites and the unfortunate "hungry" pawns at the bottom.

Once incomes and wealth became more concentrated great civilizations were on the path of decay. This path was paved by the reluctance of elites to participate in the maintenance of society and, especially, to the maintenance of those at the bottom rungs of society. This is what makes growing inequality today so troublesome.

Compared to history's financial gluttons - when there were fewer rules, and slavery was legal - the income (and wealth) gaps we're experiencing today tell us that history is whispering in our ear. And it's not good.

Our modern "schism" works like this. American conservatives today see a world where those with wealth earned it on their own. Liberals like Hedrick Smith - author of Who Stole the American Dream? - and I see wealth created by corporate lobbyists and obsequious members of Congress, who douse their rich patrons in favorable legislation, undeserved bailouts, unrelenting attacks on labor, and wealth friendly tax cuts that effectively guarantee financial success and class dominance - all at the expense of the American middle class.

Put another way, growing inequality in America - and $21 trillion in new wealth for the top 1 percent - is a deliberate process that has more to do with political connections than hard work. Arnold Toynbee would recognize it. We should recognize it, and understand what it means for our future. But we don't. 

We're approaching our future as if history never happened. 

Worse, we're acting like historical illiterates.

- Mark

HISTORY'S WHISPER, AND DONALD TRUMP'S DARK POLITICAL DANCE

This winter break my plan is to put the finishing touches on the book I've been working on over the past three years. Tentatively titled "Is History Whispering in Our Ear?", I'm drawing on lectures and presentations I started giving after my first book was published in 2009. My primary argument is that we are seeing many of the same ugly characteristics and patterns that we saw in the 1920s and 1930s, and are either too historically illiterate or too politically warped to see the parallels. I've been blogging about these developments over the past few years, which you can access by clicking here.

As you can imagine, I have felt an extra sense of urgency to finish ever since Donald Trump danced his way into America's dark conservative heart, and won the electoral college two weeks ago.

This article from Chris Hedges speaks to several of the themes I'm discussing in my book. His opening paragraphs helps drive home the broader political implications of what's happening in the United States, and across the globe:

We await the crisis. It could be economic. It could be a terrorist attack within the United States. It could be widespread devastation caused by global warming. It could be nationwide unrest as the death spiral of the American empire intensifies. It could be another defeat in our endless and futile wars. The crisis is coming. And when it arrives it will be seized upon by the corporate state, nominally led by a clueless real estate developer, to impose martial law and formalize the end of American democracy. 

When we look back on this sad, pathetic period in American history we will ask the questions all who have slid into despotism ask. Why were we asleep? How did we allow this to happen? Why didn’t we see it coming? Why didn’t we resist?

I'll be posting more about my book in the coming weeks. You can access the rest of Hedges' article by clicking here.

- Mark 

THE EURO MESS ... MARCHING US TOWARDS THE PAST?

This commentary on the European Summit-Debacle - from Tyler Durden at Zero Hedge - is both succinct and spot on. This one pretty much sums it up:

"... it means that the Greek scheme of playing chicken with the Euro zone, has now been adopted by everyone else in the core."

Our (America's) political and economic challenges won't make things any better for the global economy.

Not only is history whispering in our ear, but the coming calamity doesn't appear to be on anyones radar screen. I don't know whether it's a product of people not knowing their history, or because people are still caught up in a failed free market ideology that blinds them to reality. Simply believing in free market myths does nothing for people who are desperate and out of work. Desperate people do desperate things.

Indeed, desperate people will also follow stupid people who say and do stupid things. It may take a while, but a collapsing global economy is a bigger threat than al Qaeda. Big time.

Stay tuned. Sigh ...

- Mark

THE COMING CALAMITY ...

In my book and on my blog I've written about the impact collapsing economies could have on global security, and how we can see historical parallels to what we are experiencing today with what happened in the 1930s. It's not pretty. But it doesn't seem to matter.

The Europeans, who should know better - and who have taken steps to rein in some of the stupidity - nonetheless have embraced their own blind alley of debt. Meanwhile, in the United States income inequality, wealth gaps, and personal debt loads continue to grow. America's financial mandarins, however, are doing just fine, which is part of the problem.

All of these developments, as unfortunate as they are, were pre-conditions to the frivolity and stupidity that preceded the global calamities of the 1930s and 1940s.

Those of you who've read my book, or taken my classes, understand what's happening. Even the global institutions that were designed to help avoid these situations are in trouble. But no one seems to be able to piece any of this together. There is no sense of urgency, or instruction. Which is strange, because we've done this before.

As I pointed out in my book, and on this blog, history is now whispering in our ear.

This is why this piece from Market Watch is so interesting. I'm not so much concerned that it's advocating higher taxes on those who got us into - and are now profiting from - our market mess. Nor does it discuss the international implications with any depth. Still, the article is important because it points out how our domestic situation is on a path to blow up in our collective faces. The date the author is point to (2012) isn't as important as the parallels he discusses.

Apart from growing impatience domestically, the author points out that there “are two remarkable similarities in the eras that preceded" 1929 and the market collapse of 2008. Both eras "saw a sharp increase in income inequality and household-debt-to-income ratios” and in each case “as the poor and middle-class were squeezed, they tried to cope by borrowing to maintain their standard of living.” The end results was a market crash. The serpents of Nazism were unleashed, and economic warfare followed.

It's a short but good read. But don't get too caught up in the tax the super rich stuff (as much as I agree with the argument).  Your focus should be on tying what's happening today to what happened 80 years ago.

Seriously. History is whispering in our ear.

- Mark

THE REALITY OF OUR ECONOMY

I'm in Chicago for a conference. I'll be presenting on our economy, and why it's setting us up for an economic disaster that everyone should recognize. When it comes to the broader picture we've seen this story before. It's why my paper presentation's titled, "Is History Whispering in Our Ear?"

- Mark

FEDERAL RESERVE SUPPORTS MASK LARGER PROBLEM(S)

I've been saying this for some time now. The Federal Reserve has been helping to manage and keep our economy afloat for years. In the modern era, when the Federal Reserve (i.e. the Fed) intervenes in the economy it does so in ways that props up the market, which helps keep our economy moving along. It did so with trillion dollar money dumps immediately after the market collapse of 2008. It continues to do so with other market supporting tools today.

The problem with their actions is that they are not being done to clean out the market imperfections that brought us the 2008 market collapse. Instead, we're getting market infected band aids that are simply masking larger problems.

This is a distinct shift from the #1 job of any central bank, which is to guard the integrity of the currency.

Helping us to understand the Fed's actions is this article, "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates." In the article, authors Eric Swanson and John Williams demonstrate that Fed interest rate policies, and their purchases of bonds and securities, have been very effective at managing market expectations. This has worked to keep our economy moving along, as I've pointed out many times (with the Fed's Quantitative Easing I, Quantitative Easing II, and Quantitative Easing III  programs).  
 
These activities have worked so well that ordinary Americans not only can't see that there is no real free market, but they no longer care to look for the man behind the curtain.
 

 
   
The problem with this is that we now have the appearance of normalcy, so we keep on dancing towards Emerald City, as if everything is fine. 
 
 

 
But things aren't OK. We're living off of borrowed time. History's whispering in our ear, but we don't seem to see or care about the coming calamity.

I'll have more to say about this in a coming post, later this week.

- Mark

UPDATE: The CEO and co-CIO of PIMCO, Mohamed A. El-Erian, agrees with me that market valuations are dependent on central bank policies. Specifically, what's been helping to keep markets afloat are the money dumps (or, as El-Erian puts it, the "aggressive provision of liquidity") from the Federal Reserve and the European Central Bank.

THE FORCES SHAPING OUR FUTURE

Did you know that the world has amassed $247 trillion in debt, including $63 trillion borrowed by central governments? The U.S. leads the world with over $20 trillion in debt, which accounts for roughly 31% of the world's debt load. 

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A discussion of global debt loads, and "8 Major Forces Shaping the Future of the Global Economy" can be found by clicking here. 

For the click averse, the 8 major forces are ...

1. TECHNOLOGY: Data is now "far more valuable than physical, tangible objects."

2. THE EVOLUTION OF MONEY: The key here is regardless of what form money takes, "people are borrowing record amounts of it."

3. THE WEALTH LANDSCAPE: While it's expected that the United States will produce about 17.9% of global economic growth between 2017 and 2019, China will accumulate about 35.2% of global growth in the same period. One more thing: 86% of millennial investors are interested in sustainable investing, and put 2 times more money in such causes.

4. EASTERN PROMISES: Not only is Asia rising, but China has countless cities cities with higher economic productivity than entire countries. One more thing: By 2029 there will be more people in China's middle class than there are people in the U.S.

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5. ACCELERATING TECHNOLOGICAL PROGRESS: In real simple terms, "when it comes to technological progress, the rate of change ... is actually getting faster and faster." 

6. THE GREEN REVOLUTION: In two decades wind and solar energy will make up almost half of all installed electrical capacity. 

7. SHIFTING HUMAN GEOGRAPHY: By 2050, the world will have about 10 billion people. While population trends will stabilize in the west and in China, "on the African continent and across the rest of Asia, booming populations ... will translate into the growth of megacities, holding upwards of 50 million people."  

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8. THE TRADE PARADOX: While consensual trade makes sense, protectionism is always lurking in the background. When trade barriers have risen global tensions have increased, World War I, the Great Depression, and Word War II as the most recent examples. Put another way, the U.S. needs to rethink Trump's "America First" stupidities (this isn't me speaking, it's history whispering in our ear).

For a broader discussion on these topics, click here.

- Mark 

IT'S DEJA VU ALL OVER AGAIN

It's déjà vu all over again ... yet, all the U.S. media want to talk about are Herman Cain's girlfriends, while ignoring the GOPs "Just Say No" obstructionism in Congress. Today, with the debt crisis in Europe flaring up again (this time with Italy), we're reminded that there's another world out there that warrants some serious discussion. Yet, America's political burlesque show is mesmerized (again) by sex scandals, and appears more than content pondering why Mitt Romney hasn't caught fire with the GOP (like that's some kind of mystery). Sigh ...

All of this kind of reminds me of all the Gary Condit sightings, and the shark fear mongering off the Florida coast right before 9/11. Seriously, what's happening with Europe's debt-to-default dance is pretty big stuff, and deserves more attention than Herman Cain's predations. Consider the following ...

Here's a statistical table with more countries that could be affected once the financial dominoes begin to collapse in Europe ...

I know, I know. Simply putting figures like these up without context is unfair.

So consider this. When Germany finally defaulted on it's World War I debt obligations after 1929 it had a debt-to-GDP ratio that stood at around 90 percent (they owed about $33 billion, or about $402 billion today, which was a reduction from the original $63 billion, or about $768 billion today). Today Greece's debt-to-GDP ratio stands at 157.7 percent, while Italy is around 120 percent. Is history whispering in our ear, again? I think so.

Relatedly, when Germany finally defaulted the French Chasseurs Alins (elite mountain infantry) had already occupied Germany's Buer (in North Rhine-Westphalia) region in 1923.

Today, instead of sending in the troops to deal with troubled debtors the world's economic mandarins are banking on central bank (or IMF sanctioned) cash. Specifically, they're banking on the Federal Reserve shoving half a trillion dollars or more on to Europe's books (and hoping no one notices). When all is said they're doing little more than pushing the economic debt can down the road.

This is especially not good when you consider that MF Global's recent Chapter 11 bankruptcy was not supposed to happen. Think about it. In our post 2008 market collapse environment, a firm like MF Global wasn't supposed to be able to borrow so heavily (or use investor funds) to make multi-billion bets on European debt. How much did MF Global borrow? It appears that MS Global may have had a 40:1 debt to equity ratio. What does this mean? It means that if you made $40,000 per year at your job, the bank would give you a $1.6 million loan ... three years after doing the same thing and watching previous clients piss it away gambling.

Yet MF Global's private industry regulator raised no red flags about MF Global debt to equity ratios, nor said anything about it dipping into $600 million of investor money to make their bets.

Yeah, it's déjà vu all over again, on so many levels.

- Mark