During times of universal deceit, telling the truth becomes a revolutionary act.
– George Orwell
Those whom the gods wish to destroy they first make mad.
– Euripides (some say wrongly attributed to him, but a great quote nonetheless).
The Great Illusion and the Importance of Seeing Through it
Last year I wrote a piece on the theory of “Reflexivity,” something that George Soros has talked about in the past and it basically concerns the notions of positive and negative feed-back loops. Greenspan also spoke a lot about this, particularly as it relates to the equity market. Without re-writing the entire piece, the main point was this observation that a rising equity market (even if illusionary at first) can inspire confidence and thus kick-off another economic cycle. The opposite can occur in a plunging stock market. I have many times mentioned that to get things right in this market it is more important than ever to know that mentality and philosophy of those that pull the strings since the U.S. basically ceased to be a free market back in the fall of 2008. When you look at the dominant mentality of those in economic power there are two driving economic philosophies. One relates to this idea of Reflexivity and the other is Keynesianism. Both are essentially economics of illusion and both will be disproven in striking clarity in conjunction with the wealth devastation of multitudes over the next 1-2 years.
When I wrote about this last year I certainly did not discredit the idea of Reflexivity, in fact it is a relatively obvious philosophy used by statesmen, kings and tyrants throughout recorded history in one form or another. There are two crucial differences however between its effectiveness and implementation now versus all other periods of human existence. First, regarding its effectiveness. The idea of using propaganda to instill confidence and thus stimulate investment is not an altogether reprehensible concept when used in small doses and as part of a grander economic strategy. At such times and in such measured amounts it can be effective and indeed socially beneficial. On the other hand, when propaganda and illusion are the primary tools and there is no larger real economic strategy other than printing money to cover a complete state takeover of the economy in question you have a major problem and will be left with utter collapse. This is how it is being used today in my opinion. Today, we have a financial and monetary system that began in earnest in 1971 and completely collapsed in 2008. For a purely fiat, paper money system that is actually a pretty decent run and its failure was written in stone the minute it was conceived (or actually just forced into being when Nixon defaulted on the international gold standard on August 15th, 1971). The big problem we have today is that this idea of Reflexivity or what I would call the EPOC (Economic Policy of Confidence) is trying to resurrect a dead system and therefore is extraordinarily dangerous since that seems to be the only economic policy we have!
The other difference of EPOC today compared to prior periods of humanity are the tools at the disposal of those that wish to propagate the illusion. With the trading systems and technology available, with the secrecy at the Fed (the institution that prints at will the world’s primary means of exchange) and so many powerful people beholden to or afraid of Washington these days the scope for misinformation and propaganda is rampant. So if you feel like the media treats you like a five year old with their simplistic arguments and trite storylines you are correct. If you feel that many financial experts are spinning the data (which is managed in many ways to begin with) you are correct. Remember one thing which is that those with the most to lose from the system being reformed and rebuilt are those with the wealth and power and they will use whatever tools necessary to preserve the status quo.
So What Does this Mean?
History shows us that governments or groups of men in power cannot stop market forces or major economic cycles from ultimately progressing to their natural end. What is most important for investors is the path that we take toward this end and that is always and everywhere shaped by the philosophies and worldview of those pulling the strings in a particular society. Back at my former role I had typed the quote “Those whom the gods wish to destroy they first make mad,” printed it out and taped it to my computer so I would never forget. Of course by “mad” the quote is not referring to anger but rather madness. I never want to be mad with arrogance such as those that are running things currently clearly are. Basically, it is only within a state of extreme arrogant madness that man can make such tragic decisions for a society. At the end of the day, if you can see clearly through the illusion you will see that there is no gold bubble, there is only a bubble in the confidence we collectively place in Central Planners (Bankers) and economic experts. This bubble is the biggest one we have seen yet and its bursting will leave the world an entirely different place.