Debt and slavery

Doug Noland sees the debt crisis spreading to the corporate sector; David Jensen writes a letter to the Governor of the Bank of Canada, including very telling graphs of mounting debt and the bubble in the financial markets; Michael Panzner discusses a piece from the Financial Times on the threat of a downgrade of America's historic AAA credit rating, and refers to the weakening of the USA's military pre-eminence; Sol Palha worries about the acquisition of Western assets by sovereign wealth funds ("Slowly but surely America and Europe are going to be owned by foreigners. The irony is that Congress is trying to keep immigrants out of this country but right in front of their eyes foreigners are slowly gobbling up huge chunks of this country.").

All this leads me to Jeffrey Nyquist's grim, but compelling latest piece. He despairs of the irrelevance of mainstream political discussion, especially as the polling process rattles on, and paints a far greater picture. I think you should read it all, but here are a few extracts:

What is happening in the news today, what is happening in the markets and in the banking system, has profound strategic implications... There are no invulnerable countries... If a government does not see ahead, make defensive preparations, establish a dialogue with citizens, lead the way to awareness and responsibility, then the nation stumbles into the next world war unarmed and psychologically unprepared.

Even worse, today's politics has become a politics of "divide and conquer" in which one constituency is played off against another: poor against rich, non-white against white, the secular against the religious. Before a positive outcome is possible, we must have unity and we must have reality.

It's more comfortable to ignore the crying of Cassandra, but maybe Nyquist is like Churchill in the pre-WWII political wilderness, trying to prepare us for the next conflict. We in Britain only just made it, and how we have paid for that struggle ever since.

But it was a price worth paying. History would have been very different, and very horrible I am sure, if Churchill had listened to some in his Cabinet in 1940 who advised him to make a deal with the Nazis. He said, “If this long island story of ours is to end at last, let it end only when each one of us lies choking in his own blood upon the ground.” It's a line that even now has tears pricking my eyes. The appeasers were silenced by the sound of deeply-moved men banging their fists on the Cabinet table in agreement and applause.

My worry is that I don't see men of that calibre now. As Lord Acton said in a letter to a bishop, "Power corrupts, and absolute power corrupts absolutely". Commenting on the House of Commons after the Great War, Stanley Baldwin remarked on the presence of "A lot of hard-faced men who look as if they had done very well out of the war". Today, the faces are softer, the hair expensively dressed, the manner relaxed and affable, but behind it all one senses cold-hearted, selfish betrayal. To be charitable, it may be that our leaders and ex-leaders don't fully realize the negative consequences of all their deals, compromises and consultancies.

As our reckless debt is progessively converted into ownership, we may find out how much we took our freedom for granted. It's a lot harder to get back.

The Bible has something to say on this, too (and no, I'm not a preacher, this is to show that the issues endure throughout history): Leviticus, Chapter 25 deals with debt, buying and redeeming slaves, and how the chosen people should be treated differently from the heathens - for the latter, enslavement is perpetual.

Gold, the dollar and the Dow

Gold supporters seem to be waiting for a reprise of the heady days of 1980. I think this is another case where you need to decide whether you are a speculator or a long-term investor.


Here's a relatively recent graph of the price of gold, adjusted for inflation (admittedly, inflation can be defined in many ways):

On this chart, it looks as though gold's median price would be around $600/oz, so currently it's above trend and presumably the elevated value factors-in some economic concern.

Now, here's a chart correlating the Dow and gold:It seems harder to spot an average here, since each peak is much higher than the one before. But taking the Dow as it is now (12,606.30) and the current price of gold ($894.90), the present ratio of 14.08 ounces would be in the middle range of the variation since the mid-1920s.

So a purchase of gold now looks like a speculation, rather than a bargain.

Waves and tides

A most apposite article by the Contrarian Investor, in which he considers how all this economic information leaves us confused as to the future direction of the economy. It's like getting millimetre-accurate radar images of all the waves in the harbour, without knowing about the effect of the moon on the tides. Not that the information itself is accurate, anyway.

Stuffed

Michael Panzner hands on a piece from Naked Capitalism: expert, inside opinion is that the banks are so gorged with bad debt that America will mimic the "melancholy, long withdrawing roar" of Japan's ebb tide.

Something's gotta give

Interest on official debt in the USA runs at $430 billion for 2007, and rising steeply, according to the Treasury's own figures (htp Michael Panzner, quoting Mish's Global Economic Trend Analysis); total government debt is now c. $9.2 trillion.

It's more serious than that, of course: James Turk quotes the Comptroller General, David M Walker's estimate that total liabilities, including commitments to future social security benefits, are around $53 trillion. The government's annual revenues are only around 5% of this figure, so the credit card looks like it's pretty much fully-loaded.

However it happens, it seems something must give way under the strain. Frank Barbera reckons the Dow has plenty further to fall (and possible interim correction or not, he thinks gold looks good). Prieur du Plessis concurs, quoting Nouriel Roubini's comment that "... a lousy stock market in 2007 will look good compared to an awful stock market in 2008."

Bob Bronson thinks the downturn will be long as well as hard. He in turn quotes the chairman of the National Bureau of Economic Research: this one “could be deeper and longer than the recessions of the past.”

Boris Sobolev also looks to gold, but prefers the smaller companies because of all the money that's piled into the majors.

In case we in the UK should be tempted by schadenfreude, Ashraf Laidi predicts that sterling will accompany the US dollar's fall against other currencies. From what I read in connection with the USA, a weakening currency may provide a temporary boost to exports, but also inflate the cost of imports; so I don't suppose that our following the dollar will do us much long-term good, either.

Of course, it's possible to dismiss all this as group-think wall-of-worry stuff, but maybe that would be double-bluffing ourselves. Sometimes, things are exactly what they seem. Banks have consistently turned a profit for centuries, on the inexorability of debt.

Oil splat

"Oil crunch" doesn't sound right, although it might be appropriate to shale oil: Jeffrey Brown outlines what looks like a compelling thesis on growing domestic energy consumption by major oil exporters. He thinks that the top five producers will be using all their own supplies by around 2030, and concludes that the USA must rapidly reshape its transportation system:

In simplest terms, we are concerned that the very lifeblood of the world industrial economy—net oil export capacity—is draining away in front of our very eyes, and we believe that it is imperative that major oil importing countries like the United States launch an emergency Electrification of Transportation program--electric light rail and streetcars--combined with a crash wind power program.

That is just the tip of the iceberg, surely: residential and office heating/lighting, mechanised farming, supermarket shopping, centralised medical facilities - so much will have to be reviewed and planned.

Twang money, encore

The Contrarian Investor is also struck by the elasticity of fiat money, and how this vitiates attempts to make fair comparisons and store wealth. Gold for the long term, he thinks.

In the short term, we have this contest between credit contraction and currency expansion. I'm getting the feeling it'll be the first followed by the second, which is what Michael Panzner predicts in "Financial Armageddon".