–In today’s Markets and Money we will offer a revolutionary theory that explains and predicts the life and death of economic systems. This theory will show you that any economic order must ultimately fail if it is based on the illusion of control. But before we get to that, we should probably talk about the terrestrial world and the stock market.
–The stock market is stuck in a trading range. For an explanation of that range, we refer you to the inimitable Murray Dawes. The technical picture of the markets is helpful now because it strips out all the noise. It tells you what investors are actually doing. And what they’re doing is vacillating between abject fear of systemic collapse and the need to preserve and grow their money before retirement.
–It’s not an enviable position. But no one said the road to wealth through financial asset inflation would be an easy one. More on that shortly.
–What about Greece? It’s still there. G-20 honchos met in Paris over the weekend. No big announcements were made. If anything, the G-20 finance ministers handballed it to the French and the Germans. This is fitting. It’s a test of whether the pan-European project is going to end after 60 years and lead to a break up, or whether further “union” in Europe is possible.
–Specifically, the G-20 lot has given the two pillars of the European Union the job of figuring out three things: how to organise an orderly write-down of Greek government debt, how to recapitalise European banks, and how to prevent the Greek strategic default from infecting Spain and Italy.
–The deadline for having a fix in is October 23rd. That’s when the political leaders of the European Union meet in Brussels to sign off on the expanded European Financial Stability Facility (EFSF). That particular European slush fund has around $600 billion in it. But Europe’s leaders think it will need more to boost capital in European banks after bond holders (European banks) take a 50% write-down on their Greek government bonds.
–As you can see, not much has changed in the last week. We’re on the slow-road to crisis. But the spring weather in Melbourne makes it hard to worry too much. The Europeans will figure it all out, won’t they? And besides, that’s in Europe. We’re here in Australia, which is not Europe.
–Still, there are some weird and worrying signs. IMF President Christine Lagarde speaks of “precautionary credit lines” being extended to “non-consenting victims of the economic crisis”. The credit lines aren’t loans as such. They are a little like the Berlin Air Lift, we suppose…a way of dropping in extra liquidity to prop up the balance sheets of banks whose equity might be wiped out by a Greek default.
–Once again, the use of baffling terms like “non-consenting victims of the economic crisis” tells you something funny is afoot. Does a victim ever consent? Isn’t the definition of a victim someone who has a harm imposed on him or hers without consent? Obfuscation is the last stand of the intellectually bankrupt…or…when they can’t win because their ideas suck…they try to baffle you with language.
–This brings up a strange point about the world we’re living in that MAY be in Australia’s favour. The IMF is a global slush fund that normally loans money to bankrupt governments in exchange for economic policy changes that favour Europe and the United States. But the IMF is made up of the most deficit-challenged governments in the world. How can they be loaning money to anyone, much less telling anyone else how to manage their economy?
–There is a shift in the global balance of power underway at the moment. In 2005, we dubbed it “The Money Migration”. The G-20 has been expanded from the G-3, and the G-4, and the G-7 and the G-8 because the industrial Welfare states have become less productive over the last 30 years and grown large structural government deficits.
–Now you have a world where the poorest countries – Brazil, India, and China – are creditors to the so-called rich countries, the US, the UK, much of Europe. The creditors have gained in political power as the debtors consumed their way to decadence. Which brings us back to the point of asset inflation.
–One of the reasons, we reckon, so many people are sympathetic to the Occupy Wall Street sentiment (despite the sheer ignorance of many of the participants) is that they sense something in the financial system is not right. The incentives are not aligned for normal people to produce things, save money, and get wealthy.
–Instead, we have a financial system built on unsound money. In that system, the incentive insists for the financial sector to expand credit and put people in debt. It can do so by creating money from virtually nothing with fractional reserve banking. It can then loan that money to households, businesses, and governments at a handsome rate of interest.
–The financial sector and the investing class benefit in one shared way from a world of unsound money and credit growth: asset price inflation. In Australia, this is favourably called the nation’s retirement assets saved up via superannuation.
–People are now sensing that only the financial sector truly benefits from inflation. It amounts to a wealth transfer from productive people to money shufflers. Most people don’t quite understand how it happened or even how it works. But they sense it. And it makes them very angry.
–But we think the people bedding down with the Occupy Wall Street movement are making a crucial mistake in their thinking. We didn’t realise this until we read the introduction of Lee Smolin’s The Life of the Cosmos while doing laundry on St Kilda road.
–Smolin makes the great point that in our age, scientists have replaced priests as the people with the most authority to explain the universe we live in. Scientists with a philosophic bent are called cosmologists. Cosmos is derived from the Greek word for order.
–The idea that the universe is ordered – according to the immutable laws of Nature (or given by God) – is a standard conception of the world we live in. But herein lurks a temptation. The temptation is to meddle. Let us briefly explain.
–If the world is ordered according to certain laws, then we can understand how it works in a mechanical, scientific way. And if we can understand how a machine works, certainly we can modify the machine to produce more desirable outcomes. A scientific, mechanistic view of the world, in other words, leads us to place great faith in the ability of scientists to diagnose problems and prescribe solutions (sort of like global warming).
–But Smolin offers another theory. His theory is that that the universe is an evolving thing, not a static system governed by immutable laws. If he’s right, then understanding the universe is more about understanding the processes of evolution. We’ll have more from Smolin tomorrow.
–In the meantime, what does this have to do with anything? A lot of the protesters we have heard yammering on YouTube and in the media are talking about changing the system. The most common idea is to police corporate greed by making government more powerful. They would also, we imagine, like to outlaw greed and make equality compulsory and justice absolute.
–But you can’t change human beings. You can only change their rules of engagement with each other and the world. The most important change you can make to a system is a change to the rules that govern it.
–The system that the Western World had for almost 300 years was based on some basic ideas: sound money, low taxes, private property, free trade, and the rule of law (where the freedom of the individual was presumed and the limits were not on what YOU could or couldn’t do but what the State must never do).
–That system produced prosperity and wealth and improved standards of living for billions of people. It’s been perverted by the introduction of unsound money, the predatory nature of the Welfare State, and relentless intervention into private and public life (as advocated by all the economists who are subsidised by and profit from the government).
–Any changes to the system that don’t address the soundness of money won’t result in a better system. A new system that hasn’t addressed the failure of fiat money and the oligarchic power of a central banking cartel will be like a Tyrannosaurus Rex with a new fluffy pink tail, or a giraffe that has been taught to roller skate…an adaptation that leaves the resulting being completely unable to compete and survive in the world.
–Tomorrow, more on the origin of revolutions and how self-ordering systems are better than ones designed by people who want to control everything. The old order is ending. The cosmos is giving way to chaos. But what comes next? Find out tomorrow!
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