by John Galt
Wow. What a month this has been. The start of a new stock bull market, now postponed by that pesky insolvency thing that I’ve been warning about for two years.
Then those dratted politicians daring to question the edicts of the Almighty General Zog, er, Hank Paulson (Zog sounds more intimidating than a nickname of Hanky-Panky) and daring to question a demand for $700 billion per Viagra moment to buy that pesky alleged sub-prime/Alt-A/Prime/Jumbo/Commercial/CDO/CDS/CLO/Auto-loan-securitization/Credit-Card-Securitization/Student-Loan-Securitization/the-Salmon-I-Loaned-To-My-Cat debt load America is carrying so they can create new debt loads to be purchased eight years later by another ignorant bunch of slobs.
Then gold rising almost $100 in a week. Then Oil rising $25 in a day only to fall back to a much more palatable and reasonable $16 plus gain.
Yes, well, I’m just happy the markets are stable and have not crashed and burned yet so I can find a nice safe money market fund to, er, never mind.
Despite popular belief, I am not focused on precious metals, equities or Senatorial song and dance routines. The smart money is and always has been in the corporate, municipal and Treasury bond markets. If anyone does just a wee bit of research, they will find what everyone at those formal dinner parties, you know, the ones schmucks like I do not get invited to, a total disintegration in market stability which indicates a real fear that the big jet liner that Glenn Beck refers to has fortunately not careened into a mountainside. Instead it has plowed into Mount Rushmore and the pilots, Ben and Hank, while free falling through the air are still barking out “please assume the crash position.”
Unfortunately for the United States while the games are afoot, the rest of the world, the smart money, is voting while Congress plays its election year games during this crisis.
The world is not sure if the United States is a ’sure bet’ and the investing community is trying to reconcile the instability in our banking system with a ration investing approach that will enable them to liquidate dollar holdings in a rapid fashion should the worst case scenario erupt. So what is the worst case scenario? Glad you asked. It is all related to the super duper MOAB (Mother of All Bailouts) also known as the biggest nationalization in capitalist history since Castro told the United States to assume the position.
The Final Vote
Despite popular rhetoric, the vote is a 50/50 proposition; yes or ‘yea’ = inflation and no or ‘nay’ = deflation. While this might sound like an over simplified version of events, I think it gets into the crux of reality. Politicians are not the best and brightest souls in the world because if they were they would be running hedge funds making $80 million per year or managing a corporation with enough naked pictures of other politicians with mules to insure they get bailouts and a $10 million per year salary for life. So assuming that the majority of our politicians are that stupid, corrupt or perverted (there’s a reach, eh Barney?) let’s get down to brass tacks. They will jawbone. They will demand concessions as if the Treasury did not anticipate that. They will threaten. Then the Fed and Treasury will grab them by the short hair, set it on fire, then reinsert it painfully to remind them that bankers control their primary arteries of Western Civilization and the votes will occur. Sadly, when this vote occurs, there is a consequence for all of North America. I will skip over the geopolitical implications and get down to some bottom line information as some idiot might make some money off of this, adopt me and prevent my wife and I from stealing a monkey from the Lowry Park Zoo to dance for pencils and pennies.
With that cheery little introduction, a brief explanation to the title of this editorial. The damned do not cry as they are cast into hell for they realize their sins and the pain they are to endure forever. The American economy is on a precipice, but sadly it seems that few beyond the smart money ‘get it’ and even they are shuddering in fear as to the consequences of action or inaction this week. World markets, be they capitalist, semi-capitalist, socialist hybrids or outright Marxist monopolies are voting on America and the actions of its politicians every waking moment of the day and have been for years. The voting was mild for years as the perception was that we could create a new deck of cards to build a new house of cards to support the elephant dancing on the top card year after year.
The voting is much more intense and despite popular belief that we are ‘too big to fail’ that voting in our bond markets has major implications for our future. Thus why I present the final vote.
Unfortunately for the American public, your opinion is limited. Despite numerous website proclamations and the voices of the boisterous on mainstream commercial talk radio, this is a decision left to bankers and bankers hold 51.75 of the 52 cards in every deck. The protestations are heard by secretaries, volunteers and clerical staff in every hall of Congress but the reality an adult has to admit is that the control of our economic and political system is summed up by basic mathematical formulas:
Do you listen to the guy with $1,000,000,000.00 or the guy with $2,000.00 ?
So you think you have found 50,000 people with $2,000.00?
Ok, good luck with that one. That buys one politician if you have.
The reality is that our system has introduced a pathetic level of Roman Imperial corruption that would make Caligula, not Bill Clinton, but Caligula, blush.
Now that you have that basic understanding of math, $700 billion is more than you could ever conceive of, let us move forward to the consequences of an unfortunate and justified ‘yes’ vote.
The wording, no matter how you cut it, was for $700 billion “at any one time” to purchase securities. The definition was deliberately vague to infer that illiquid securities were the only ones to be purchased, yet the who defines “illiquid” was not. This could mean that Joe’s Sixpack Massage Parlor and Savings of Newark could submit his double lap dance coupons or Mary Joe Shclupper’s 13.7% subprime paper as an illiquid asset to be purchased by the government and added to the debt.
Of course, Joe’s is probably submitting better paper than Washington Mutual or Citigroup, but hey, who’s that picky?
The proposal is inherently inflationary as it gives discretionary powers to the Federal Reserve and US Treasury to issue new debt obligations, not only as needed, but as desired to “stabilize” economic conditions as they feel necessary. Since the positions in both branches in discussion are political yet tied to the banking substrata, there is no way in hell that paper will not be issued to bail out unfortunate (Ok, irresponsible) gambles by substantive banks in the system.
Considering our current situation where the various types of bonds created in the last five plus years have no assigned valuations other than that of the originating bank, why in God’s name would any bank devalue it’s own assets when selling the paper back to the taxpayer realizing that they can hedge that sale with commodities or a bond issuance from a more stable entity like the U.S. government? In the long run, the underlying assets be it a home or business with a declining market value could go to zero but our government will hold a security against that asset that could be worth thousands of times more than reality which means you and I own garbage. Monetizing assets that are near worthless is one of the most inflationary actions our central bank could take and at this time, considering the differing types of submissions they are wanting to accept, this could be the most inflationary action since the Central Bank in Weimar Germany attempted to monetize the war reparations debt.
Considering the alternative though a “Yea” vote could be the least painful for the American people when all is said and done.
‘Nay’ = Deflation
A no vote on any type of bail out package is the equivalent of throwing a grandmother on top of a live grenade to keep Senator Dodd’s suit from getting messed up. That possibility does exist. There is a level of vitriol, which is justified, as the regulatory authority that has been granted and expanded repeatedly by the House and Senate since 1913 to give the Federal Reserve and Treasury whatever authority it sought to manage the economy could undermine any efforts to allocate trillions of dollars to stop the bleeding. There are several politicians who understand the inflationary implications of allowing an unlimited flow of monetary creation to begin unabated in an effort to preserve the current system and allow the fox to not only steal the chickens, but the hen house and the farmer’s wife also.
If the political elites vote no, the banksters have the excuse they need to preserve those institutions they wish to by allowing a seizure of all credit and monetary markets, thus crashing the economy almost immediately and bringing any dreams of economic expansion to an end for almost a decade. There will be a massive wave of bank failures as a result and the real estate market would probably experience across the board price declines of another fifty to sixty percent as the lack of credit prompts bankruptcy after bankruptcy. The idea of a deflationary reset should terrify any sane man or woman but if the political class chooses a non-reflationary course of action, it provides cover for the financial world to allow this to happen.
The resulting implosion by such a move would create an unemployment level well over twenty percent in short order, cause thousands of corporate bankruptcies, millions of more individual bankruptcies and put well over half of the construction industry out to pasture for a long time to come. It would also create a political upheaval that will change the face of America forever and the reflationary effort would originate with a wave of government sponsored projects and an expansion of socialism to prevent retirees from suffering more than they have already.
This is a damned if you do something, damned if you do not approach and sadly, either choice puts those on fixed incomes into a box as they will not have sufficient resources to maintain their current standard of living.
The immediate contraction of the money supply also creates a lack of liquidity for state and local governments finally eviscerating the municipal bond market and bringing spending at the local level under control. Unfortunately services, both non-essential and critical for localities would be impacted.
There you have it gang. The choice is there and only those who are prepared will be able to survive. For those of you with more debt than the ability to repay, life will be hell. For those who did not buy essentials for the long term or prepare for a paralysis in financial markets via either deflation or inflation I hope you enjoy your government masters. It is a sad statement that our society has reached this point.
Unfortunately, we, the American people get to witness this and endure history one more time and at our expense.
Welcome to Weimarica.