CHAOS-ONOMIC: Strangely Attracted to the Truth
chaos-onomics.com
Apr 10
The Iraq problem was also put on the UN Security Council's agenda and the United
States used this procedure as a pretext for unleashing military operations against
Iraq.
DPRK (N Korea) Embassy Report
Few events capture the attention of the world like War in the post-modern era, perhaps because it is all so sterile when viewed on the TV. Then again, perhaps I shouldn't underestimate the allure of death and destruction to our animal leanings, after all, the Romans were quite fond of battle recreations in the Coliseum. Regardless, after a few words on Iraq's Hamid Karzai, I thought to catch up on a few items today, particularly the SARS epidemic.
It has been a long wait for Ahmed Chalabi, who may be the "proof" of the old saying "it isn't what you know, it's who you know." Having kicked around Washington for a decade and apparently mis-accounted for some few million dollars as head of the Iraqi National Congress, remember the guys who promised a popular uprising once the tanks started to roll into Iraq, Mr. Chalabi is the Pentagon's front-runner for head of the new and improved Iraqi government. What are his credentials for such an important job? Mr. Chalabi used to be a banker of some repute in Jordan. Unfortunately, Chalabi's bank, Petra Bank, then the second largest in Jordan, collapsed in 1989. In 1992 a Jordanian court sentenced him to 22 years in prison, at hard labor no less. If I didn't know any better, I might start to think that the Pentagon is trying to get the Arab world riled up. Imagine Ken Lay or Bernie Ebbers being imposed on, say, Canada and you get the drift. At least we can all rest assured that Iraqi oil revenues will be used for the Iraqi people. On a less facetious note, Chalabi is not a favorite of Powell's State Department so this is a good test of current influence. If Chalabi is 'our' man in Iraq, the Pentagon is still calling the shots.
John R. Bolton, U.S. undersecretary of state for arms control and international security offered these words of wisdom to the world, "With respect to the issue of the proliferation of weapons of mass destruction in the post-conflict period, we are hopeful that a number of regimes will draw the appropriate lesson from Iraq that the pursuit of weapons of mass destruction is not in their national interest." As the quote above amply demonstrates, the N Koreans appear to be a quick study. Trying to peer beyond the chest thumping machismo, I wonder why the US is engaged in this bull in a china shop routine. Currently I'm mystified at this display of raw power, which goes against the grain of the more sober but no less pugnacious musings of Teddy Roosevelt, "speak softly, but carry a big stick."
The SARS virus story has managed to stay, in large part, under the radar screen in the West but in Asia it fills the media. The rapid spread of the disease has consulates refusing visas, ASEAN Finance Ministers' conferences being postponed, travel advisories being issued, schools being closed, work being disrupted, etc. etc. It has also led to the obligatory state denials of severity when it suits as per this FT article on a possible cover-up in China. The most germane historical precedent I can find for this is the influenza pandemic of 1918, at least in an extreme sense of what might happen. According to this site, some 20-40 million people died from the disease which, unlike the SARS virus, killed more people aged 15-35 than either the very young or very old. Hopefully the relevant authorities will contain the disease as I can imagine few things that would chill the global economy more than a pandemic.
On the topic of catching a cold, it appears something has affected the equity markets which failed to rise and salute the fall of Saddam instead choosing to just wave in passing before dipping. Whether this is a function of fear that the War isn't over, recognition that the battles with more financial impact have yet to be fought, or simply a sign that the hedge fund community is stuck with the post-War short Gold, Long US$, long US equity trade remains to be seen. It brought to mind an old trading technique, when the news is wildly bullish (and that coverage of Saddam's statue qualifies in my mind) and the market doesn't go up, something is very wrong.
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Closing Pandora's Box: a case for hard money
With the sound and the fury of the Iraq War hopefully fading from our TV screens, and War's most immediate effects on financial markets following, the case for hard money seems stronger now than ever. Yet, such has been the case ever since the fall of the USSR and still Gold as official monetary standard remains taboo. Perhaps the powers that be are finding that closing Pandora's Box is much more difficult than opening it. Fortunately, history suggests that while painful, a return to hard money is the best means to restore stability to a financial system and consequently durability to a political system.
One of the triumphs of economic liberalism in the 18th and 19th centuries was empirical evidence of the enormous benefits of honest weights and measures, particularly hard money, on resource allocation within a society and conversely damning evidence of the distortions caused by fiat money. As Chairman Greenspan said last year, "Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800." Sadly, those same centuries also provided evidence of the huge initial competitive advantage provided by a switch to elastic money prior to the eventual collapse. The Continentals of the America Revolution, backed supposedly by the future tax revenues of the hoped for state, the Assignats of the French Revolution and the Greenbacks of the American War between the States all gave way to honest money once the War was over, or when the inflationary pressures became too great to bear.
Perhaps one goal of those who instituted the Federal Reserve was the ability to "turn on" the credit machine if necessary, especially in the face of the then yet untested organizational skills of the communists. From that frame of reference, the collapse of the USSR should have ushered in a return to hard money and in a sense it has. Gold has, with few exceptions traded around the $300-350 level since the early 90s, using even more liberal criteria, one could say that gold has been in a reasonably tight range since the early 80s. However, due, in my view, to a reluctance to officially go back to an explicit monetary standard, credit creation has run amok making rationalization of the financial system with the production methods in use ever more difficult. In more colorful language, instead of getting back to business and heading for the warmer climes of hard money after the fall of communism, we have been rearranging the deck chairs on the Titanic.
Eventually, John Law was run out of Paris, although not until he fertilized Louis XIV's seeds of economic destruction which precipitated the revolution. Our current holder of the John Law seat of Fiat-conomics, Chairman Greenspan, has thus far, used, in his words, "a prudent monetary policy maintained over a protracted period" to "contain the forces of inflation." However, the ability to contain these forces, in my view, was due in no small part to the massive reorganization of resources during the 90s, not the wisdom of Central Bankers. Not only did the USSR collapse and China opt for the free market but the Asian Tigers came on line raising global production significantly. It is difficult to imagine a greater capitulation to the American model of political economy over the next 10 years than we have already seen in the previous decade, barring a secret society of Martian socialists. To paraphrase Nixon, "we're all capitalists now". That suggests to me a painful rationalization ahead, one that will only gain impetus from further stagnation of equity values and rising raw materials prices.
This rationalization will either take the form of a debt deflation or a monetary inflation, either of which benefits the holder of Gold albeit in different ways. In the former, your assets in the from of Gold are held outside the imploding system safe from default, while the latter benefits are more easily seen as a change in price less general inflation. I suspect that international policy circle members over the past few years have been scratching their heads trying to turn Lead into Gold or more accurately, apportion the mounting debts in a way amenable to all. In that regard, the situation in Iraq bears close watch in that the financial markets have not responded positively. Without the ebullience of an economic boom to hide the debt bomb, the need for rationalization grows and the prognostications of the fiat money faithful look more and more like hot air. Now more than ever, its time to close Pandora's Box and return to hard money. The War is over, it's time for peace. |
