Thursday, September 16, 2010

humanity's defining moment?

Counsel on Renewal | Mish Shedlock has made a well-deserved name for himself, especially since the crash of 2008, as one of the few people who understand the problem we’re facing. I agree he’s way beyond the regular financial media that’s utterly clueless. This means he carries a certain moral obligation. But based on a recent article

I’m afraid he has yet to step up to the plate because he’s still endorsing the same archaic left vs. right, union vs. business, capitalist vs. socialist rhetoric from politicians who have no clue about the flaws in our debt-based monetary system.The 2-tier Economy
Embedded in the article is an unspoken assumption that the lower classes need to take pay cuts and layoffs so global bondholders and Chase bankers can be paid in full. That’s so…uh…20th century. If astute bloggers don’t start educating politicians by injecting into the political debate what they clearly know when they engage in market debate, the coming downward mobility for everyone but the bondholders is going to be galactic.

Mish agrees with NJ Governor Christie that the reason teachers are facing layoffs is because of teacher unions. Of course that’s true within the constraints of our current monetary system where lower class pay cuts are “good for the economy” while at the same time increased rent extraction by the financial class is “good for the economy.” One is the flip-side of the other. Manufacturing workers have learned this in spades, especially since their communities and way of life have been completely destroyed and moved to China. It’s a predator-prey economic relationship, precisely the reason unions exist in the first place. So what’s the real problem: the unions or the nature of the monetary system itself?

In a system where 100% of all money is sourced by going into debt to private capital holders who demand exponential returns, employees in fields like education which are managed on the balance sheet as “cost centers” must live within the austerity of cost reduction metrics. In real life terms, this means in order for the bondholders at the top to maintain their ever-increasing quality of life, millions of employees in cost centers must be happy with continually declining quality of life. During inflationary periods when capital holders are injecting more liquidity, this translates into cost center employees receiving raises that stay below the inflation rate (these teachers stayed ahead, but systemically across the entire economy, cost centers are managed below inflation–again just look at the offshoring). During deflationary periods when capital holders are removing liquidity, cost center AND revenue center employees take pay cuts and get fired so the capital holders can keep making more money.

Questioning the Status Quo
Unlike politicians, Mish is smart enough to step out of the existing monetary framework and ask himself what might be a better solution given the extreme situation we’re facing. Why doesn’t he? Why don’t most people? Perhaps they haven’t been faced with the type of austerity that forces a person to question the sanity of a system where all money is controlled by private capital. Or perhaps they’re “survival of the fittest” fundamentalists like Larry Summers, i.e. private sector bondholders deserve to win all the poker chips while everyone else is left with nothing. Or maybe they’ve just been enjoying a comfortable inflationary ride for so long that they can’t fathom the fatal flaw that’s been embedded in the monetary system from the very beginning.

That is…until now. The exponential game is reaching its end as the debt load approaches the point of saturation. If we don’t change the system before that inflection point, we’ll see the biggest austerity program ever as millions of people enter a tomorrow most people can’t dare to ponder today. In market terms, that inflection point is when global capital holders run on Treasuries and the Fed is forced to jack up its short rate to defend its balance sheet. That point may be next year or 10 years from now, but it’s coming if the status quo is not changed. And look out when it does.

This is not populist rhetoric, but the basic mathematical fact of our system.

Rather than justifying it, this should make us reevaluate the monetary system we’ve been living under for 100 years. We’ve experienced a lot of development. We’ve already built the brave new world. Does a never-ending stream of new gadgets from Apple, reality shows from Fox, and dead bodies from wars really justify milking more return on capital (ROC) from the lower classes forever? Of course we know that’s impossible. The system is reaching not only its human velocity limits but its mathematical limits. A systemic sabbatical has never been more necessary, so an alternative form of liquidity to supplement our current system is necessary. Fist tap Dale.Justify Full