House of Cards

Economic theory tries to deal with a limited number of factors and the mechanisms by which they interact. The main factors are population, food, energy, property, and manufactures, all of which are physical realities capable of being counted. They are the beans that bean counters count with. There are four mechanisms of exchange: money, barter, markets, and allocation. These are the mechanisms by which the beans are exchanged.

Different economists have put emphasis on different factors. David Ricardo, the classical economist of the 19th century, was a banker who gave special attention to money; Thomas Malthus, another founder of 19th-century theoretical economics, paid particular attention to population. Indeed, he is the founder of population studies.

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Karl Marx, the founder of socialist theory, paid attention to manufactures, and to population, seen particularly as labor. The leading 20th-century economists, such as Maynard Keynes, Irving Fisher and Milton Friedman, have been derivatives of the Ricardian or monetarist school, though Keynes was a rebel against classical Ricardian orthodoxy.

Unfortunately, it is impossible to think of all these factors simultaneously. Perhaps there will be a time in the future when some supercomputer will be able to calculate the interreaction of the global economy holistically. We are still far away from that day.

At present, the limitation of the human intelligence means that we can concentrate effectively on only one of these factors at a time. The selection of any one of these factors or interreactions for study draws attention away from other, equally important factors. One can be both a Ricardian or a Malthusian, but one cannot concentrate on both aspects of economic analysis simultaneously without a loss of focus.

However, one can simplify economics by using the different physical factors as a checklist to detect signs of difficulty. That does make economics the gloomy science. At present, the world is suffering from a crisis of overpopulation, with the human population stretching the food supply beyond its limits. Population is continuing to grow, although there is already an inadequate food supply for 6 billion people and famine is growing in Africa. It is possible that the 21st century will replace the 19th as the century of famine.

Food is very closely linked to energy. Food production is dependent on the oil industry, in cultivation, in transport, and in protection against pests. The food price has followed the oil price, to the point at which millions of people cannot afford a minimum food supply. That is already a catastrophe, and the trends are unfavorable. There is also a significant shortage of water.

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Markets have flagged food and energy as danger areas for the world economy, by raising their prices. Property and manufactures are secondary to food and energy, in that their prices can change without immediately affecting the price of food and energy. In fact, there has been a worldwide fall in housing prices, particularly notable in Britain and the United States, at a time of steep increases in food and oil prices. The price of manufactures has been held down by the growth of low-cost Asian manufactures.

There is much discussion of the scale of the global economic crisis. Some people expect it to cause a crisis comparable to the Great Depression, a wiping out of capital values, a liquidation of global debt. We cannot yet be sure, but we can see that the main factors of global economic development are all in difficulty. On the one hand, there is oil at $130 per barrel — on the other, there are banks writing off billions of dollars of assets.

I do not see any basis for economic analysis that would not throw up really alarming signals. These adjustments of the fundamental factors in any analysis put huge pressures on every government. In the 1930s, most governments were destroyed by the slump. In Britain, Labor lost office in 1931; in Germany, Hitler came to power in 1933, as did Franklin Roosevelt in the U.S. I fear that process will be repeated, even if only by democratic defeats. The storm of the world is still rising.

Regards,
Lord William Rees-Mogg

Source: Economic Alarms

Total Fed Credit, the actual source of the fabled Money From Thin Air (MFTA), was surprisingly down by $8.7 billion last week, which is NOT the kind of thing you need if you are trying to buy your way out of the big stinking mess you have made. And you can believe me as a guy who has tried to buy his way out of a lot of embarrassing messes over the years!

First thing you do, usually, is carefully forge your wife’s signature on some stupid forms so that you can quietly draw down your savings or tap the kids’ college funds or something. Sure enough, the Fed’s own stash of government debt was suddenly down another $28 billion last week, about 5% of their total stash gone in one week, as those Fed weenies flail around in their hysterical panic at the mess that they have made with their ridiculous neo-Keynesian, econometric theory and laughable computer models.

Like, one of the supreme stupidities of the Federal Reserve is thinking that there is no upper limit on debt, and now they believe that growth in asset prices via additional money and debt is more important than controlling inflation in consumer prices, which is caused by the additional money and debt! Hahahaha! Theater of the Absurd at its best!

And it isn’t just the Greenspan and Bernanke weenies, but also Milton Friedman, the “father of the monetarist school of economics”, who never saw too much debt as a problem, and who only cautioned that the money supply should not grow too quickly. As Darryl Robert Schoon of drschoon.com writes, “Markets dependent on credit-based paper money produce increasing levels of debt until the amount of debt becomes unsustainable. This is where we are today. The growth, contraction and coming collapse of debt based credit markets is Friedman’s legacy, not free markets. Friedman’s theories gave bankers the intellectual cover they needed to indebt America beyond its ability to repay and indeed survive. Hailed as the champion of the free market, Milton Friedman was, instead, its leading assassin.”

As a result of all of this monetary madness in the past year alone, the dollar is down roughly 20% in comparative purchasing power against key currencies! In one year! What this means to you and me is that, on a stand-still basis for foreign exporters, we would have to pay prices that are 20% higher for our imports, just for them to break even when converting dollars back into their native currencies! Hahaha! We pay more for things! Welcome to the hell of a falling currency!

But there is so much panic that the Fed and the government are doing weird things, and sure enough, even a cursory glance at the repo market, as made handy at 321Gold.com, shows that absolutely astonishing sums of money are flying around through the banks, being lent on a short-term basis, to the tune of (hold onto your freaking hat!) $40 billion per DAY! And more! Per day!

And all of the money being pounded into the economy by the federal government and the Federal Reserve is finally making the prices of commodities rise in a general inflation. But with all this new money being created by the central banks looking for somewhere to go, the world is not producing any more commodities, as we learn from an interview of Jimmy Rogers, identified as a “private investor” in Barron’s this week, who says, “the commodities market started in early 1999. But nobody had brought on any new supply of anything in the last 25 or 30 years. The last gigantic oil field was discovered in the 1960s. The number of acres devoted to wheat farming has been declining for more than 30 years. Food inventories are the lowest they’ve been in 60 years.”

In short, be prepared for huge inflations in food prices, and generally all commodities, too, which will get so bad that it will “end in a bubble and hysteria”, which he figures will peak in 2018. Maybe.

Anyway, he summarizes that “the real problem is that our foreign debt is increasing at a rate of $1 trillion every 15 months.” Yikes! He’s right!

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Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.