Have we, as a global society, gone way past the point of no return? Reading my last post again, just after the Paris counterattack by ISIS, it struck me that maybe I shouldn’t be constantly denigrating the wolves shepherding the human herd. After all, sporadic social upheavals and terrorism, can -and will- get worse. Much worse. Confronted with ISIS, or Nicolas Maduro, I’d rather have Mario Dragui and friends running the show. Recently drone defunct ISIS “John” and co, or any other radical group, might be the herd-backed alternative. Our choices are increasingly limited to picking the lesser evil. Maybe I should back them Goldmanites after all -at least they do not know how to handle a Kalashnikov.
We dissidents might be entering a time where Austrian based economic surgery is no longer an availble option. We tried hard to prevent public, government, and CB endorsing of the actual state of affairs, but nobody really listened. Let me tell you it felt lonely in the Austrian club -for endless years. But resentment is not a constructive emotion, however unfair and shortsighted Goldmanites and affiliates may have been.
That doesn’t mean I have changed my mind regarding global macroeconomic policy, though. I have no doubts that Bernanke, Krugman, Summers et al should be put to jail for their grave neglect, or at least condemned to economic ignominy. The piles of debt and layers of inequality accumulated are daunting. But, no matter how thoughtless and stupid economic policy may have been, the harm is done -and is likely beyond peaceful & orderly repair. As Ghandi used to say, an eye for an eye and we all end up blind (sorry I can’t side with the Jews, or Hollande bombing, on this). With WW III already well started, we have to remain focused on some crucial and urgent achievements.
- An economic landing as soft as possible, after the long overdue, debt write-downs.
- An economic system with a strong supply side in order to improve employment, wealth distribution, and mental health of the unemployed and underemployed.
- An efficient, and fair, distribution of generated wealth.
That’s a hell of a job, in a very short time -in the meantime let’s forget the responsibilities accrued to those implementing the economic policies that took us here in the first place.
I increasingly doubt the patient (our social tissue), would survive surgery if we cease money printing, bring about some modest interest rates, downsize public expenditure, and compel people to read and work. Without reading and working, exponentially growing parts of our population are in for morbid mental obesity (if they are not there already). Economic surgery implies short term pain, for a long term gain -and a payback to our children. These are concepts unlikely to be understood by the mob. So maybe it’s best to just keep printing money, and “nirping” away our savings, for as long as it goes.
For sure all those surgical changes, that imply giving JMK a decent but irreversible funeral (and nothing less than a total cremation will do), cannot be implemented simultaneously. No question we need some time lags, and adequate phasing of the appropriate policy. But even playing our cards deftly, over a couple of years, I doubt we can survive the ensuing social turmoil. We have stretched unfairness and inequality well past the limits. And corruption is now, for all intents and purposes, obvious to everybody.
What finally makes economic surgery an unlikely success, is the fact the world population is more and more a mob of brainless short-sighted residual leftovers from the Homo sapiens species. They would not understand that we need surgery, if we are to clean up the mess, and set up an economic infrastructure that can grow moderate and sustainably -while preventing and uprooting the constant generation of outrageous inequality. Lastly, let’s not forget, if democracy continues to play, they control the votes.
Redistributing wealth will not do the job -as a stable fix. It is not about entitlements or redistribution of incomes. It is about distributing properly from scratch. Redistribution comes at a heavy cost, because it impairs entrepreneurship and personal effort. It will take time for society to understand this. Increased taxation is not the way to go. We have to route value fairly, as it is generated, to the right economic agent. And unfortunately for anybody holding equity, the consequences of doing so, will be severe for after tax free cash flow (explanation below).
The main generators of atrocious inequality are,
- large, corrupt and inefficient governments -with their elites,
- large ultra-efficient, but ruthless large caps and multinationals and their boards of directors,
- Goldmanite politburo controlled CB’s and all those near them that profit from the Cantillon effect.
They are responsible for most of the inequalities that have surged over the last two decades. Definitely, lots of bad news in the pipeline for those groups.
Dear shareholders, I doubt EBITDA’s will be OK for at least the next decade, but after tax profits look even worse. If we distribute income correctly, equities are a secular short. Corporate taxation has to foot the bill for fiscal and social reform. You have to reformulate your company valuations seriously, with lower free cash flow estimates, and a higher discount rate.
At the same time I see peaceful change as unlikely, thinking globally, I am certain that change will have to come at some point. If this is the case, we must act at once. As Niccolo Machiavelli wrote centuries ago, “the wise man does at once what the fool does finally”.
But, is this postulate applicable to human life itself? After all, if we are afflicted with a fatal disease, is it improper to try to make the disease chronic, in order to achieve a temporary survival? We know the patient is going to die, but should we go for it direct … or try to delay things as much as we can.
It depends. It really does depend on the harm generated to the affected individual, to others, or even to society itself. If we are talking of gaining a couple of months and years of extra life for somebody who worked hard and saved for his retirement in exchange for a couple of thousand, it might be OK. Just might (we would have to fine tune that). If we have to spend ten thousand public dollars daily to do so, and we need that money to eradicate famine, we definitely should not. Resources are limited. Economics is about resource and wealth allocation in a way that produces Pareto optimal results. That includes some difficult social and human decisions. I hate to point them out, but they are pretty evident -if you want to see them.
Economically speaking, if we had no children, I would clearly advocate for a follow up on the same policies until inequality and the piecemeal war that emanates, wipes us out. It is always best to be massacred later. But we do have children, and every delay makes the problem worse -and will affect their lives deeper still.
So, even if an ISIS militant gives me a Kalashnikov treatment in the next restaurant I happen to visit in Barcelona, I still think we have to take bitter medicine now (not all measures simultaneously, but no feet-dragging either).
- Downsize governments, and work to implement balanced budgets in truth (not just the usual cosmetic arrangements). No more welfare states that generate migratory call effects and mentally obese segments of the population.
- Implement worldwide coordinated taxation (to pay for the necessary and essential entitlements) on the use of aggregate demand by multinationals and corporations. Corporations should be taxed for selling to people that are in fact subsidized by society to enable them to spend. We need a high global sales tax for that end (evenly distributed according to geographic sales).
- Suppress the actual corporate tax. It is useless and irrelevant if you tax them heavily to access global aggregate demand. We have to end Corporate Tax wars (sorry Ireland, I do love you ever since I spent a whole year in a County Kildare school at the tender age of nine).
- Suppress labor collateral labor side costs for employers (above 30% of nominal salaries in the european periphery). Retirement and entitlements have to be paid by those that take advantage of the aggregate demand generated by those payouts. That ought to substantially cheapen the use of labor versus the use of capital.
- Dispose of Central Bankers when legally possible, and anchor FIAT currencies (CB balance sheets) to Gross Output (see my previous two posts in spanish “un nuevo patrón monetario I and II). Prevent monetary base expansion, interest rate dilution, or plain asset pricing POMO manipulation. We have to get rid of ZIRP, NIRP, currency wars, and fake asset pricing as well.
- Work to ensure market interest rates are as near as possible to their Wicksellian level. Natural rates will slow the “D” part of R&D, dissolve excess capacity, and prevent too fast worker substitution by robotics. They will also enhance optimal resource allocation, and Schumpeterian creative destruction. No more economic zombies sustained by NIRP and money printing. Lastly, decent rates, combined with cheaper labor, will further tilt the supply side resource mix in favor of the latter.
- Recreate the rentier class demolished by JMK and acolytes -provided the rentiers have accumulated their money by plain saving and not corruption, or winner takes it all market tactics. Interest rates will increase aggregate demand, reduce inequality, and put a floor on the cost of capital (no more ghost cities in China or empty airports in Spain please).
- Go ahead and, at long last, get rid of TBTF (too big to fail). Both in the banking sector and the NFC sector. We have to make sure competitive pricing rules in all markets (particularly labor and goods markets), and that requires the effective demolition of the oligopolistic predominant market structures of today.
Whether you agree with my alternative set up or not, it is time to change. More of the same will not do. All alternatives should be looked at, but, unfortunately, the establishment on one side, and the ruthless bloody criminals from ISIS (or Al Qaeda or any other radical violent group) on the other, will not come up with something decent. If ISIS goes, a new group will emerge. We killed Bin Laden only to see others take his place. We have to focus on the roots of the problem, and this is not a religious quandary. Religions, flags, nationalisms and radical ideologies are only the mob moving vehicle for something more profound. Like unfairness and inequality.
So, what is to be done by us, the free educated thinkers in this herd driven society? There is quite a few of us. We have to read and write. Explain, and try to understand. Honestly, I am not optimistic. It is a desperate action against two forces that will not listen: those who want to carry on, and those who are working on “the final solution for our unfair society”. Final solutions are always barbaric, and more of the same is insane. In any event, we, ordinary educated people, lose. In the meantime we should try to leave a message. Like Pope Francis (for once a superb Pope, that would fit Gandhi’s criteria for an honest and intelligent man). His message underneath, is good for both sides. If you destroy other people’s dignity we begin to move backwards. We destroy value. Not only economic, but human value. Have we not destroyed the dignity of many of the members of the most radical and bloody groups?
That message is of course valid for ISIS. They go much further, they destroy not only dignity, but human life. Totally unacceptable. All my respect for this week’s victims. Unfortunately, there will be more in this piecemeal war. But the message applies to OECD countries and the G-20 as well. They don’t get it. The naive, negligent, and incredibly dumb alternative is more Syrian bombing by Hollande’s army. Resent, retaliate, kill, and wait for a reply. It is sure to come. Wash, rinse, repeat. What the hell are we doing?
No financial advice today. I do not change my mind that often. I still think the global top in equities is in. No Gold (it is a relic). Long the USD until they print (if they do). Short or flat the euro. Long SEK. Moderate duration in bonds. Long credit risk (short HY bonds). Switch from sovereign to corporate high grade. Risk off as a rule. Prices are false. The potential downside is huge. No Parisian motivation in this advice. It was my investment stance, and remains unchanged but not enhanced. Sudden events in our piecemeal war, or our insolvent debt pile, will not make me change course. And yes, I still think stagnation or a recession are in the cards. No growth pickup in the near future. More on this in a technical way, in the first week of December.