Sunday, March 18, 2012

Don’t Call the Plumber for a Liver Transplant

Over the past several months I have been intrigued by the number of people who are certain that the economy’s getting better because companies are sitting on loads of cash. And as we come sneaking up on the infamous anniversary this week – you know the one, March 23, 2006 when the Federal Reserve Board of Governors ceased the publication of M3 – I find myself puzzling over why the selective erasure of a metric makes us think that the problem it measured can’t come back. (For those of you too young to remember, M3 was a measurement of monetary supply which included large denomination deposits, repurchase agreements, and Eurodollars – a key indicator to measure the threat of inflation.) It’s kind of like saying that by destroying all cholesterol tests, we can eliminate heart disease. After all, having an ability to measure the liquidity trading between extreme large financial players, governments, and banks shouldn’t impact the economy that much, right?

Forbes published an interesting note yesterday by Michael Pollaro entitled, “Money Supply booming, seeds of the next Greater Recession”. For those of you who find my blog posts somewhat tedious and in great need of simplification, I would commend this article to you. In it he argues that we are poised, yet again, for another even more pronounced recession triggered by yet another credit bust. Both U.S. and European Central Bank activity – pumping productivity-uncorrelated money into circulation (well, not so much circulation – more congealing in a few nearly dead organs) – has put us in a position where our only exit will be inflationary accompanied by equally unpalatable credit busts. Forex commentator Sean Lee largely dismissed Pollaro’s concerns suggesting that despite another jump of $15 billion in monetary supply last week, we should not have correlated crises because were in what he described as a Keynesian ‘liquidity trap’. Kind of like a gunk filled trap under your sink only filled with soggy money.

Quietly attracting no attention is the piece of the economy that troubles me more in its anonymity than in its actual gravity. Receiving too little attention in the recent Olympic Greek drama is the fact that it was pensioners who took the biggest proportional consequence of the default. These are the same ones who vote. They’re the same ones who need to spend money for an economy to work. And they just had half of their mandatory pension contributions erased. In a macabre sort of way, this tragedy seems to be rather Promethean. You know the story. The titan Prometheus steals fire from Zeus and brings it to mortals and, for this crime, Zeus has him bound to a boulder where, once a day, a giant eagle comes and eats half of his liver. The bummer is that, over night, his liver grows back only to have said bird come and gnaw it out again. In our story, the IMF plays the role of Zeus. Opportunistic investors and bank reserve investors are the eagle. And last but not least, Central Banks are the mysterious regenerators of the liver – pumping more blood into the system just in time for the eagle to devour it again.

Now, to be clear, Prometheus in our story is humanity. And lest we wish to invoke a pity party on our sorry lot of being chained to a rock for wanting to have fire, we need to clear up a few things. We have all participated in a system that has dripped soporific tranquilizers into our veins encouraging us to ‘work’ less, ‘consume’ more, and keep the hamster wheel spinning. We’ve been presented with Herculean challenges and petty drivel and have, for the most part, decided that a tweet-attention span consciousness is to be desired over something that takes, look it up, considered thought! Too many of the chains that are holding humanity to its rock awaiting the daily visit of the eagle have been forged not from Thor’s anvil but from the swipe of our credit and debit cards. And, as if to portend the gift of Pandora (another one of the great works of Aeschylus), we’re seeing that at the nadir of the housing market, younger people are using reverse mortgages to pump liquidity into their own consumption. And this isn’t just for taking that extra trip to Florida. At present, nearly 16% of seniors are officially in poverty – a number that’s growing. So at a time when we already know that entitlements are bankrupt, pensions are gutted and/or underfunded, the Pension Benefit Guaranty Corporation is stuck in a zero return interest rate environment courtesy of the Fed so it cannot fulfill its mandate, we’re awash with money that is more decoupled from productivity than ever before.

The process set in motion during the Nixon Administration is nearly run its course. Cut from any mooring in the form of assets, we are now harvesting the crop of uncorrelated debt-based monetary policy. Massive wealth transfer has concentrated more money in the hands of fewer people than at any other time in our industrial history. Far from a system falling apart, we need to understand that the system is working to near perfection for its designers. The mistake most people make when they’re looking at what’s happening is to actually think that the system was designed with their best interest in mind. It wasn’t.

At the end of this particular Greek tragedy we know that there will be a number of people – disproportionately senior citizens – who will be hardest hit. Sure, there will be pain to spread around as is always the case in Great Recessions / Depressions. So before the full bloom of the next bust, why don’t we work to build some support infrastructure for those upon whom the furies might fall hardest. Let’s work to engage our seniors in our present endeavors and reignite the spark that once burned brightly in our history – a flame of industrious production in which the young and old worked together throughout all of life – not for some arbitrary time to retirement. Having just spent several days with my parents building a windmill in Papua New Guinea, I’m here to tell you that my experience with them showed me that it was this cross generational richness that seemed to unleash the only thing Pandora didn’t let escape her jar – Hope.

1 comment:

  1. David. Isn't it good to know that so many banks passed the Fed stress test? Did anyone notice the pool of blood while the banks were proclaimed fit?


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave