THE SYSTEM IS *!?@!#

Peter Souleles B. Com. LLB.

The world’s economy is starting to resemble a highway with only one lane that is used by, cars, trains, trucks, bicycles, buses and sewage, all at the same time. They travel in both directions at different speeds and they all use different rules.

The highway of course is a metaphor for globalization which supposedly provides the means for everyone to consume, invest and trade for the purpose of mutual benefit. The various vehicles are metaphors for the consumer, the employed and unemployed, the workers and the entrepreneurs, the free and the enslaved, the corporations, the governments and the international institutions. The sewage is the darker side of humanity that peddles drugs, arms and the other vices and which manipulates paper to achieve unjust redistributions of sweat and wealth.

It must now be obvious that this highway had for a period of time provided some exciting impetus for the movement of people, capital, goods and ideas. It is now looking like a mad scramble that threatens to morph into road rage. We have already witnessed a long line of minor trade spats including U.S. tariffs on Chinese tyres and the Chinese probing of unfair U.S. practices over chicken and auto products.

We have also witnessed pressure on high-tech Western corporations operating in China to disclose their technological secrets or risk being shut out, as well as pressure on Google and others. Whilst this is understandable when a nation has the muscle to demand this, it is also confusing to see the U.S. hand out cash for clunkers even though:

“The Cash for Clunkers program has been widely credited with boosting auto sales in July, but most of the sales boost is benefitting foreign car companies.  In fact, four of the top five cars bought through the program as of today have been Japanese cars.” (ABC August 4, 2009)

These spats are now giving way to competitive devaluations and possibly trade wars. What will follow trade wars is anyone’s guess.

The leaders of this world are hamstrung because the concept of globalization is still in its primitive stages and is therefore falling victim to the base urges of man to conquer and devour.

If you think that the above analogy of the one lane highway is an exaggeration then consider that nations have different population sizes, different land masses and natural endowment, different stages of economic development, different consumption levels and patterns, different political and belief systems, different agendas, different weapons capabilities, historical enmities with one another, often different psyches and finally (amongst other things) different purse sizes.

At the root of the problem lies a double paradox. On the one hand the U.S. has consumed over many decades a disproportionate amount of the world’s resources and savings, and in recent times has continued to do so with an increasingly discredited and overvalued currency. On the other hand the Chinese are attempting to find their own place in the sun by feeding the ailing USA with the use of an undervalued currency and a glut of savings. They are as ludicrous as one Siamese twin threatening the other one with death.

Do the leaders of this world honestly believe that globalization, one world currency or competitive devaluations are going to produce, restore or maintain eternal prosperity and one world brotherhood? In my view the results to date show they are clearly mistaken. Globalization in its current format has been highly damaging for the fabric of society in at least two ways.

Firstly it has destroyed jobs and therefore destroyed the foundation upon which families can exist with dignity, hopes and aspirations. Secondly, it unleashed a short term mirage of consumption and investment paradigms that are clearly neither sustainable nor beneficial either to man or his future. The attempts by government to sustain this model with debt accumulating stimulus has only succeeded in stamping the birth certificate of every new born child with a mortgage that it will carry like a medieval serf for a lifetime. A fair percentage of the consumer driven structure that was created over the last decade or so is clearly ready to topple. As Bill Bonner has beautifully remarked:

“The entire world economy rests on the consumer; 
if he ever stops spending money he doesn’t have, 
on things he doesn’t need — we’re done for.”

Bill Bonner’s words are quite witty (as he usually is) but even funnier is the latest news out of Britain:

“Pension experts are urging the government to give people early access to their retirement savings as a way of injecting £65 billion into the ailing economy…. The Society of Pension Consultants says if the government relaxed the rules and allowed people to take out the cash from age 50 instead, it could put billions into the pockets of consumers, who could spend it on goods and services and thus support the economy.” (City Wire News October 11, 2010)

Neither modification nor retreat from this model of globalisation will be simple or painless, and early access to retirement savings will not save the world or the Queen for that matter. In fact the world has become entwined by a Gordion knot of criss-crossing interests and debt that threatens to asphyxiate civilization. The vast movement of people from other lands, particularly into the USA and Europe, the incredible movements of investment and speculative capital across borders and the ongoing war on terrorism (by terrorists on both sides) are not likely to induce enduring and acceptable solutions.

This latest round of competitive devaluations by the Swiss, the Japanese, the Brazilians and currency suppression by the Chinese, is nothing more than a morally and intellectually bankrupt attempt to keep the show going and will not work. The recent and unsuccessful IMF meeting simply exposed the global governance for what it is – NON-EXISTENT AND INCOMPETENT. Globalization cannot be just about PROFIT, it must also be about EQUITY and SUSTAINABILITY. The 2008 image of world leaders joining hands against the approaching economic tsunami was nothing more than a fear induced “prayer meeting” by a panic stricken oligarchy of big governments terrified by the possibility of apocalypse.

The capitalists of the West have been caught out badly. They have invested in the movement of industrial capacity and technological know-how to the East and simultaneously rely on that output to sustain their “retail” outlets in the West. If things become ugly, they will lose a bundle. At best the West can only write-off their paper debt to the East. The question is how far will the West go in prostituting itself with an open door policy to immigration, as well as goods and services, to avoid a confrontation with the East and inflation at home? The other question is for how long will the East resist any pressure to play ball?

For the reasons stated above, I suspect that it is the big end of Western business interests, rather than Western governments, that have allowed the imbalances to build up without confronting China in a more pragmatic and resolute manner. It is these same interests that convinced their national governments to save the banks with unlimited cash whilst imposing austerity and more national indebtedness on the masses. The result is that wealth and income disparities have grown in favour of the super wealthy whilst gutting the middle class and enslaving the working class. If globalization was meant to be a tool for enrichment of a tiny minority then it has succeeded. The current debate about U.S. tax cuts is a case in point and the cartoon below summarizes the issue quite succinctly even though the size and reach of governments everywhere is an even more serious matter.

The world suffers from serious unemployment and under-employment as well as some frighteningly excessive productive over- capacity. Simultaneously though, there is a very large unmet consumption demand by those that have no jobs.

All this of course is made even more complex by the West that is debt-ridden (perhaps bankrupt) both at a national and individual level. It is made even more complex by a West that has attained a certain level of affluence, with an East that aspires to that same level of consumption. Over-riding all this is a world that is faced with an environment that is under pressure and resources that are either in short supply or inefficiently consumed.

In recent times the world is contemplating life threatening grain shortages while in the U.S.:

“Big Apple Mayor Michael Bloomberg and Governor Paterson are joining forces in asking for a federal stamp of approval to deny soda and sugary drinks to shoppers using Food Stamps to pay for them.” (Free Range Talk Oct 7, 2010)

The question is, “how does one reconcile these disparate challenges without triggering apocalyptic scenarios?”

Let’s not fool ourselves. The situation is so volatile, unstable and poisonous that it will either take another broad-based crisis or a miracle to make any real changes possible.

Solutions are not simple but when the world and its consumers are allowed to function for an extended period of time with asymmetrical models of consumption, investment, savings and debt, the resulting imbalances will either have to be written-off or fought off as no one will willingly give up any economic, trade or political advantage to enable their neighbour or competitor to breathe more easily. One only has to witness what they have tried to do to the tiny population of Greenland to understand this point.

The recent offer by Premier Wen Jiabao to buy Greek Government bonds as a show of support for the Greek economy is nothing but another Trojan Horse at the gates of Europe. China is simply being strategic by cornering another continent in expectation of the US either toppling over or trying to force China into a revaluation of its currency.

Civilization is very fragile at the moment and unless the world puts an end to unchecked capital flows, places a brake on growing wealth and income disparities and a curtailment of trade surpluses, then the world will not have a stable enough platform upon which to plan and implement enduring employment generating strategies. Stabilization is a prerequisite to normalization unless anyone thinks they can perform surgery on a patient who is writhing in pain. Long term unemployment and the poverty that it eventually brings is a highly volatile mix. The solution is not easy but stopping the above excesses from growing further is paramount.

“To jaw-jaw is better than to war-war” Winston Churchill once said. I agree but the time has come to “act-act”. There cannot be only one winner but there can be many losers if things are left as they are. It is ironic that the West did its best to overthrow Communism in search of new markets and in the process the West became the market itself. Communism is a bankrupt ideology but at least its leaders had the sense to adapt in order to survive. The capitalists of the West however did not adapt to changing circumstances, they simply allowed capitalism to mutate into a “great vampire squid” in the hands of bankers, the super wealthy and a populace that was willing to embrace the tentacles of cheap debt.

The world has become bound by worthless and toxic paper and the countdown to a resolution has begun. The recent speeches of Chairman Bernanke (at Jackson Hole) and in particular Richard Fisher who is President of the Federal Reserve Bank of Dallas (at Minneapolis) should be seen for what they are – warnings that Central Banks cannot deal with fiscal shortcomings of governments, unfunded expectations of retirees and demographic tsunamis. Chairman Bernanke probably knows better but his political and business masters are making him and his colleagues sign the “checks” under duress.

Medical science has succeeded in making us live longer but “monetary science” still has not figured out how to pay for this. Central Banks have always known how to print money but none of them have ever figured out how to retain its value. The Dow Jones forever stands like a lighthouse in the world of wealth, but the light has gone out on every single company except one of the original companies in the Dow. Just recently the financial cowboys were exposed when MERS was shown to have allowed financial whiz kids to trade spreadsheets of mortgages with unwitting investors. The result is that neither ownership of homes nor the debt attaching to them is safe.

The system is full of alchemy and the lynchpin of this alchemy is paper that has corrupted and corroded its workings. Its days however are numbered because debt and wealth cannot compound forever and people with no jobs and hungry children are not going to be patient forever. Politicians and political parties, their ideologies and their personal interests have become so divorced from their electorates, that one holds little hope of enlightened resolution.

While the world grapples with these issues there are only a few financial refuges. The approaching  tsunamis (yes there is more than one) seem slow and distant against the backdrop of a still functioning TV set, fuel in the car  and supermarket shelves full of goods, but the reality is that they are moving at speeds of close to 600 miles per hour like passenger planes. When they hit, whenever they hit, the chances are your credit card will freeze, shops will be shuttered and your bank will be closed because of some supposed cyber attack by unknown “terrorists”. As Marc Faber has said:

“The next war will be a dirty war,” “What are you going to do when your mobile phone gets shut down or the internet stops working or the city water supplies get poisoned?” Marc Faber told fund managers in a keynote speech at CLSA’s annual investment forum in Tokyo early this year ,“When I tell people to prepare themselves for a dirty war, they ask me: “America against whom?” I tell them that for sure they will find someone.”

Prepare for those possibilities. Filling your cupboards is only a small part of the preparation. More importantly prepare by testing yourselves by seeing with how little you can survive on. This will also open your eyes to how the unemployed and most of the world’s population is already living.  
 

The current masters will no doubt arise from the ashes of any chaotic resolution like a phoenix with new feathers. The problem is that in all likelihood the new feathers will be accompanied by the same bird brains and the same talons as before.

When governments are either powerless or disinterested in addressing severe wealth and income imbalances in their own nations, how can one expect that they will agree to some form of re-balancing on a global level? It just won’t happen.

Protect yourselves dear readers with at least some gold and silver, and a community of friends and relatives. Above all have faith that there is something higher than man and woman in this universe looking over us.

Peter Souleles

Sydney Australia