The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.
We think that generations move history along and prevent society from suffering too long under the excesses of any particular generation. People often assume that every new generation will be a linear extension of the last one… Instead, every generation turns the corner and to some extent compensates for the excesses and mistakes of the midlife generation that is in charge when they come of age. This is necessary, because if generations kept on going in the same direction as their predecessors, civilization would have gone off a cliff thousands of years ago.
– Neil Howe author of The Fourth Turning
There are two broad issues affecting banking. One of them is the structure of the banks themselves, of the industry. The other is the rules, if you like, under which the banks operate. There was a big opportunity to change the structure of the industry. The FDIC is actually quite good at taking over banks and resolving them. In the case of small banks, what they usually do is merge them into bigger ones, find partners, so that the insurance fund isn’t touched at all. In the case of larger banks, it’s more complicated. You have to rip it up—sell it, close parts of it; you might have had to touch the insurance fund. But the result would have been a smaller overall banking sector in relation to the economy, achieved very quickly. And some part of the leadership class of bankers would have been gone, on the beach, replaced by middle managers and bankers from elsewhere who were not implicated in the same practices. And the result of that would have been a clean audit of the books of the taken-over bank—a straightening out of all kinds of practices that banks should not be engaged in anyway. Regulatory arbitrage, tax arbitrage, would have been a much smaller piece of the business—the government is not going to run a bank that’s in the process of facilitating tax evasion, just for example (at least one hopes).
– James Kenneth Galbraith
Four Epic Battles
Those that assume that the financial crisis has passed and have gone back to thinking and seeing the world as it was will suffer immense financial and emotional trauma in the years ahead the likes of which has not been seen in the United States since the Great Depression. This is precisely what makes this period in time so dangerous and is a significant driver behind my decision to write these pieces on a regular basis. The biggest risk is that too few people understand on a very deep level what is happening and therefore will not be able to deal with the consequences of “The Fourth Turning.” The more people that have a very strong comprehension of the massive social, political and economic changes that are about to occur the better chance we all have of getting through this period without a major war. In this email I am going to introduce four epic battles that are currently underway, the outcomes of which will largely determine the way the world works for the next generation and understanding them is extremely important to capital allocation decisions today. The battles as I see them are listed below and I will briefly outline each of them today and then will be referring back to them often in the future.
1. Speculators vs. Savers
2. Corporatism vs. Small Business
3. Baby Boomers vs. Their Children (and Grandchildren?)
4. Power of the State vs. Power of the Individual
Essentially, every generation experiences one of these moments and ours is now. Let’s do the right thing and make the world a better place.
Speculators vs. Savers
Myself and many other have discussed this over and over during the past several years and as a result I am not going to spend too much time on it here. Basically, for at least the last ten years (but arguably longer) the speculator class has taken over the economy and with it has brought tremendous ruin and imminent social chaos. This is because the speculator economy really has no regard for the real economy or those that participate in it. Rather the speculator class in its most egregious manifestation of sociopathic behavior focuses on extreme leverage facilitated by cheap funding costs to make outsized rewards and pay themselves handsomely. While everyone these days seems to be talking about these “bad people” we are missing the bigger point. The system itself is the real problem and at the heart of this system is too much leverage and Central Banks that engage in a free money policy. If we eliminate those things we eliminate a lot of the problems going forward. Of course there will still be people that find a way to break rules and engage in destructive financial practices but the amount of incidences will be greatly reduced since the system will not inherently encourage such behavior. We need a system and policies that encourage certain financial behaviors and discourage others. I am sorry, it is not a free market when the big banks can gamble with a taxpayer backstop while consumers pay double digit interest rates on credit cards. If you call this a free market you aren’t fooling anyone but yourself in a desperate attempt to believe in a failed and morally reprehensible financial system.
This is not to say that people that did wrong should not be punished severely. In fact, I think the dearth of people on trial for their role in this crisis has made the social situation even more dangerous. Nevertheless, if we really want to get to the root of the problem we need to change the game so that savers run the economy once again and the speculators are kept to the areas where they belong. Investment banks should never be hedge funds. The entire notion that even a single investment bank focuses on proprietary trading is so absurd and dangerous those that are in the business should immediately change their business models on their own before the government does it for them. Believe me this is the lesser of two evils but these folks still can’t see the bigger picture it seems. Hedge funds, shorting and all of that should never be tampered with. The problem is not speculation in itself, but how the speculation is funded (and subsidized by the Fed), the leverage and which institutions are doing it.
So what can savers do to win this monumental struggle. First, savers (ie, the financially prudent members of society) need to understand who their enemy is. Enemy number one is the Federal Reserve whose current policy places a target on the backs of savers everywhere. The trigger has already been pulled and we have seen the results. A massive speculative frenzy into risk assets as money earns nothing in the bank. That said, we have seen a lot of savers mistakenly (in my opinion) pour enormous amounts of money into various credit instruments and I still hear things like “I am searching for yield.” The savers that really wants to protect their assets going forward from here need to allocate increasing amounts to physical precious metals. Gold has already become the world’s reserve currency in the last year or so because the market has made it so. Savers have made it so. This is a huge victory. The Fed and Central Banks hate gold because they can’t control it and it is the only real threat to their paper kingdom. If the Central Bankers hate gold you should love gold. Savers are fighting back and are starting to win. At some point governments may try to put restrictions on the ownership of gold or further use the tax code against it. Do not fear this. Understand that this will merely be an expression of how much they do despise the saver class and it will also be an evidence that they are losing.
Corporatism vs. Small Business
Let’s get a few things clear right off the bat. George W Bush was not a free market capitalist and Barack Obama is not a socialist. They are both “corporatists.” Simply put, this just means that while in rhetoric they appear diametrically opposed in their policies at the end of the day they are both paying back favors. They both advocate policies that maintain advantages for large and politically connected corporations at the expense of the free market and small business. Under both presidents the middle class gets squeezed and if we don’t stop it soon this crucial segment of society that ensures liberty will become extinct in America. Under Obama, the self-proclaimed “man of the people” and president of “change” it is the small business surveys that are showing the weakest numbers in this “V shaped recovery” I hear so much about on television. Then the spin from the big companies with all of the lobbyists is that them doing well is evidence of America and the free-market doing well. This is ridiculous propaganda.
So what can we do to win this battle? This one is a lot trickier but I think the most important thing a consumer can do right now is to be much more cognizant of where you spend your dollars. Buy less stuff but make sure you support local businesses that are key to the community you are in. Everything from financial services to groceries. The second thing to do is wait and jump on the opportunity when it actually presents itself. So many are buying real estate now or investing in the debt/equity of REITs thinking what just happened was the opportunity of a lifetime. I think those folks will end up getting wiped out once again in the not too distant future. For those that agree with me, the key is preserving purchasing power in the current period and then when China moves to revalue the yuan it will be time to deploy that capital into the local economy. When the yuan is revalued higher it will quickly become uneconomic to purchase a lot of things overseas due to the direct currency impact and also the cost of shipping which will also surely rise in U.S. dollars as a result. Big business will be sluggish to respond but small entrepreneurs that maintain their purchasing power into the imminent disaster will then be able to invest in U.S. manufacturing to supply the things our businesses need on a more local level. The transition period into this “new economy” will be very painful, but it can lead us to a much better place economically and culturally. The key is to get there without a dictatorship or war in between.
Baby Boomers vs. Their Children
I first started really thinking about this in depth after reading excerpts from Neil Howe’s book The Fourth Turning. Although I have not read the book yet, from the excerpts I read and an interview with him (link is here http://www.caseyresearch.com/pdfs/20090922_TheFourthTurningJMD.pdf) I am convinced this will be one of the most important books of our generation. Rather than going into his key points I suggest everyone take the time to read the interview. It is excellent. Below is a quick passage from it I would like to address:
This generation has had a lower voter participation rate in every phase of life that it has moved through than any other generation we have seen in this century. They also make up a smaller share of Congress, something between 15% and 20%. Boomers at the same age were close to 40%. And they have, by far, the lowest share of governors, senators, or house members for their age than any other generation we have seen in American history. In case it’s of interest to your readers, on our website, we have a database of American leaders by generation that includes thousands of American leaders. It includes all those that have served in Congress or as governors since 1789.
The generation he refers to is the boomers’ children and he says part of the reason is this particular generation “is incredibly powerful on the business front, probably the most innovative and entrepreneurial generation our economy has seen in the last century.” They essentially have had a go it alone attitude. I am a member of this generation and I couldn’t agree with his assessment more. I always shunned politics as inherently corrupt and useless. Besides, I never felt comfortable with either political party. They both seemed to oversimplify everything and use a divide and conquer strategy whether it be along racial or cultural lines. Both parties did this, still do it, and it is a disgrace. Sadly, our refusal to engage in politics was a fatal flaw of my generation and as a consequence Washington D.C. has become the toxic wasteland it is today.
On the positive front, my generation is waking up very quickly and we all now understand exactly what John Adams meant when he said: “I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce and agriculture in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.” On this front I am very optimistic. Just take a look at your average member of congress. They are dinosaurs. They are going down whether through old age or the ballot box. Many are in the back pockets of lobbyists or can be easily blackmailed because someone has a video of them doing something wrong. Those that aren’t in that group are just woefully ignorant of the financial system. It is my generation that will decide the future of the United States and we have no interest in sacrificing the rest of lives to pay for generous benefits that the boomers promised themselves. Their cushy retirement will be of no concern to us. The boomers have placed a huge burden on their children and grandchildren and we know it. We aren’t going to pay for it so get ready. The “system” our parents created, whether financial/monetary or otherwise does not play to our way of thinking. Things are going to get turned completely upside down in the years ahead as one generation takes over power from the other. The 1960’s was how the prior turnover manifested itself and it will be interesting to see exactly how this plays out but one thing I can assure you is this. The world ten years from now will be almost unrecognizable to what we have today.
Power of the State vs. Power of the Individual
This is far and away the most important of all the battles because if this one is lost it is all over. In many ways this is an emotional battle for the hearts and the minds of everyone in my generation and below. Another way to frame this battle is the “The Freedom of the Individual vs. Control Freak Bureaucrats.” It has not been lost upon me that it seems neither the German people or the Greek people want this current bail out. Why? It just doesn’t seem clear to me that the people in the individual nations of Europe see themselves as something called “Europeans.” There are Germans and there are Greeks. The Greeks and many others of the PIIGS nations surely wanted in the euro for the benefits they received. Low interests rates and a subsidized spending spree. However, now that the whole thing has blown up it’s an entirely different story. So the populations are going back to their tribal ways as should be expected and the control freak bureaucrats are going nuts about it. In fact, they are going so crazy that they are willing to throw out the rules of the union in the first place to keep it together. Absurd! Just as absurd as this mantra that nothing can be allowed to fail anymore. The welfare state is dying in Europe and it will die in America. What is so incredible about this is that the current administration is trying to grow the welfare state in the U.S. just as it gets blown to pieces across the pond. We are very fortunate for this as it will prove to everyone that the idea is a total farce.
So what we are faced with in the West is a sort of awakening. A realization that daddy government is not our savior. That there is no cradle to the grave state and people need to get back to the idea of self-reliance and tightly knit communities to get on with life. After all, this was the entire idea in the founding of the Republic. That the Federal Government had some crucial roles to play but that the day to day life and choices of individuals are best made at the local level. To really achieve this, the partisan divide must end and moral and progressive thinkers on the “right” and “left” need to untie on certain key principals that primarily preserve individual freedoms at all costs. We are starting to see signs of this in Congress thankfully. Look at the partnership of Ron Paul the libertarian and Bernie Sanders the socialist on the audit the Fed bill. Any Congressperson that is against this bill is either corrupt or hasn’t bothered to understand the financial system in depth. Either way they must go.