A default by any other name…

A lot has happened in the last few weeks. A debt “deal” was struck in the US and has already been forgotten. Europe continues to burn (in the case of London, literally). A major rating’s agency finally had the nerve to downgrade the US government’s AAA credit rating. World stock markets have fallen off of a cliff.

Raising the Roof, or is it Razing the Roof?

First, the debt deal was a sham as everyone already knows. No actual cuts are going to be made, only cuts to the rate of growth. Nobody should be surprised. This is exactly what happened in the 1980s during the Reagan Administration. What was touted as major cuts ended up, in reality, as increased government spending. The difference then was that the Internet hadn’t developed to the level it has now. These days, before the ink has even dried on new legislation it has already been unmasked as the folly it is by commentators on the Internet. The mainstream media may still be in the pocket of big government and their buddies on Wall St., but the various blogs and sites on the Internet are most certainly not. Even if this deal were a breakthrough (it isn’t) it has recently come out via Zero Hedge that the government may hit the new ceiling as early as September! Even politician’s “kick the can down the road” mentality is pathetic. In any event, there are no answers coming from Washington. They will carry on spending until bond buyers turn to bond sellers. That doesn’t look like it will happen in the near future anyway, but of course it will happen eventually. There is something disturbingly wrong in a world where one of the world’s poorest countries, China, has to bankroll one of the wealthiest, America. The fact that it won’t go on forever should be evident to anyone paying attention.

The European Disunion

The other large economic basket case are the states of Europe, collectively known as the European Union. There isn’t much union left in this project. Pretty much every government is bankrupt or close to it. Greece, Ireland, Spain and Italy are at the forefront now, but more will join them. France will soon see their rating downgraded which means they will not be able to continue bailing out the rest of Europe (unless the rules are changed). The German’s are fast realising that they are the only somewhat healthy major economy in Europe and that it will fall on them to continue bankrolling the profligacy of the rest. If the decide to stop paying, all bets are off. Past European wars were started for less. Look for EU politicians to do everything they can to keep this union together, much to the detriment of the various tribes of Europe.

On the periphery of Europe there is the United Kingdom. They aren’t quite in the EU (they’ve kept their own currency) but they aren’t quite out (most new laws in the UK come down from Brussels, not London and they have been bailing out EU members as well). They are most certainly trending towards becoming card carrying members of the EU as the three major political parties all support it. Luckily for the politicians, there are much worse things going on, such as economic stagnation and now massive riots all over the country, and they don’t have to discuss trivial things like handing sovereignty over the the EU. It’s basically a done deal, they are just waiting for the right moment.

A quick word on the massive riots now plaguing the UK. Watching the almost surreal coverage, one cannot help but question a number of things. First, what the hell do UK police get paid for? They have shown themselves incapable of protecting property or of stemming the riots at all. I know it’s easy to pick on the police, the protectors of the state, but I have to believe that if these riots were in the City of London that they would have been over quickly. If nothing else, this episode should (but probably won’t) show to UK citizens that they cannot rely on police. Perhaps its time to start thinking about letting lawful citizens protect their property and families by liberalising restrictions on firearms. It is appalling that in a supposed free country, citizens at this very moment are cowering in fear in their homes, wondering if tonight their home will be looted or set alight, unable to do anything to protect themselves.

The mainstream media coverage is quite tragic as well. First off, they start off every segment and ensure every guest they interview starts by explaining that these looters and thugs are criminals. Now that’s journalism. Of course they are thugs and criminals! We don’t need help understanding that. There seems to be an idea that if these rioters had a legitimate grievance then it would be OK to burn down buildings. Let’s be clear, no grievance, however real, gives someone the right to destroy property and threaten lives. Citizens are understandably outraged and rightfully condemn the violence, but mostly because it is happening within their own borders. The very same people who decry the violence in London see no problem with the British military regularly blowing up buildings and killing people in Afghanistan and Libya. It isn’t the violence they take issue with, it’s violence potentially directed at them. Of course, the media doesn’t show the aftermath of a British bomb being dropped on Tripoli so most of the population is wholly ignorant of the aftermath. In many cases, the people are ignorant in that they believe military operations abroad actually protect freedoms and liberty in the UK. Dark days indeed.

The downgrade heard ’round the world and then quickly forgotten

Everyone knew it was coming. It shouldn’t have taken this long, but finally a major Western rating agency downgraded the US government from AAA to AA+, with more downgrades likely. What does this mean for the average person? Probably nothing. None of these rating’s agencies have any credibility left anyway, but it sure is fun to watch the politicians and big banking types squirm and lash out at the “irresponsible” S&P. The downgrade did help send world stock market’s down the toilet. The cynic and conspiracy theorist in me smells a rat. The S&P has proven to be the lapdog of the government and its Wall St. buddies, so why now do they downgrade? Have they seen the light and are now going about doing the work of a true and honest credit rating agency? Again, I smell a rat.

Now begins the slow process of downgrading everything the US government touches. Fannie and Freddie, somehow still in operation, were downgraded. States and local governments could be next. Again, what this means to the average person is probably very little for the time being. The government will still spend your money, will probably raise taxes and then default eventually anyway. The yields on government bonds (that is how much they have to pay to borrow) have actually fallen in the wake of the downgrade. Somehow people are still willing to lend to the United States government even though they have made it very clear they will continue paying in devalued dollars. No less an authority than Alan “Bubbles” Greenspan said as much this past weekend when he boldly declared the US will never default because they can just print endless dollars. If this doesn’t shock the confidence of bond holders (looking at you China) then may they enjoy their journey down the debt toilet.

Please: Do not feed the bears

With so much fiat debt sloshing around the world markets it’s no wonder that they have all turned into a casino of sorts. They certainly aren’t performing their traditional function as a place for sound businesses to raise capital (actual capital, not freshly printed dollars) in the hopes of improving their business. These days you makes your bets and you takes your chances. It will be interesting to see if this is the beginning of The Great Correction that was never allowed 3 years ago and that we so desperately need, or if it will be used as justification to do what Keynesian central bankers do best; print!

There are basically three schools of thought on what the Fed will do next, none of them are pretty. The first school believes that not enough was done during the previous recession. The government should have spent more which would have allowed the economy to gain traction and stimulated consumer demand. They believe that the only way out of this mess is for the government to raise taxes, increase spending and stimulate demand that way.

The location of this school of thought is squarely outside of the little place I like to call reality, their mayor is NYT columnist and embarrassment to the Nobel Prize committee, Paul Krugman. Not only did the government blowing up its balance sheet not get us out of the mess, but firmly entrenched us further in it. The government has literally spent trillions of dollars in the hopes of giving the economy “traction.” Now we are told by the Krugman’s of the world that the government didn’t spend enough?!? As Ron Paul (and many other sane people) has said time and again, if debt is the problem, how can adding more of it be the solution? Not to mention that this increased spending that the NYT and Krugman advocate would most definitely go onto the balance sheets of major banks, big business and foreign entities, and this from a newspaper that claims to care about poor people! It is safe to say that this school of thought has no legitimacy left outside of the dwindling number of people who actually read the NYT.

The two other school’s of thought are similar in many ways. They can be called “a rock” and “a hard place.” Both of these schools understand what’s going on. They know debt is the problem. They realise that the correction has yet to come. Both know the only solution is the liquidation of bad assets and debt. One side believes politicians and the Fed will never let this happen until far too late. They believe the printing presses will be cranked once again giving world markets a quick boost of adrenaline. When that wears off, they will do it again and again until there is hyperinflation.

The other believes The Great Correction is here. Finally, the liquidation of debt will occur. It will be painful and things will get a lot worse before they get better. Unemployment will rise even higher, people will want blood. At the end of the tunnel, though, is light. The correction will place the economy on a sounder footing, jobs will come back, savings will return and real investment will be able to take place once again.

The cynical side of me agrees with the hyperinflationists. He knows this is exactly what the politicians will do because it is the easiest option. By the time hyperinflation comes (or so they think) they will long be out of office and it will be someone else’s problem. With everything that has happened in the last few years, there is a distinct possibility this is what will occur. The other side of me, perhaps the rational optimist (based on the book I just read by Matt Ridley) just cannot see hyperinflation happening in the US and believes finally the correction is here. Which side is right will be borne out in time, but let it be said that Cynical Tyler has rarely been made a fool of.


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