"The Broken Cycle: Paradigm Shift"
by Jim Willie CB
www.GoldenJackass.com
January 12, 2004
financialsense.com
the leading paragraphs as excerpt before main body:
Everything has changed. Nothing is the same. Much talk has centered on the business cycle and the radical stimulus to kick it into gear. Popular expectations are linked closely to events unfolding in a prescribed manner, according to the past cycles. Stimulus during this cycle has advanced a monumental degree of speculation, rather than business investment. The trend within the US Economy over the last two decades has been toward massive speculation in both financial markets and residential real estate. Loose money accessible at low interest rates, the earmark of past cycle stimulus, has built new bigger bubbles. Resolution of past bubbles has in no way take place. Instead it has allowed massive refinances of mortgage, extending home equity debt so as to sustain consumption. Mainstream household spending has been supported in the process. Regrettably, stimulus has led to every imbalance becoming more dangerously out of kilter.
This cycle is not producing the expected outcomes during the recovery. The delay in the arrival of jobs has become the most visible missing element in the recovery so far. Jobs are not being created in volume like in past cycles. Recent jobs reports are packed with the same old small business assumptions of questionable nature. While nothing is similar with past cycles, expectations remain firmly held according “to the business cycle.” However, the business cycle has been severely altered by globalization, by debt burdens, by foreign dependence, and by technology itself. The high valuation of the USDollar has resulted in systemic lack of competitiveness. This is not your father’s business cycle anymore.
BROKEN BUSINESS CYCLE SYMPTOMS:
- globalization paradigm shift
- service sector outsourcing
- absent pent-up demand
part #2 upcoming:
- reflation curve ball / profit squeeze
- intervention must be permanent
- debt fills the consumption / production gap
- spinning the credit gears
- real economy distortion & structural deformation
part #3 upcoming:
- stripped mental gears
- the bond dam cracks
- implications to gold & energy
Our entire economy has undergone such radical change that it bears no resemblance to a properly functioning system that builds things, fixes things, employs our people, and elicits checks & balances on credit. Debts in excess are not punished at the national level, as Asians eagerly recycle vast trade surpluses in order to retain their export prices abroad. The economy has dysfunctional structural features in almost every corner and pocket. A fiat currency, financial speculation, globalization, outsourcing, credit abuse, and addictive spending have rendered the economy a structural nightmare with no easy remedy. An effective correction to the imbalances, sufficient to right the structural deviations, would require a recession if not a depression, and a considerable period of time to bring order to the entire debt composition. All natural market forces working toward adjustment are resisted. Now more dangerously extreme imbalances threaten the entire world economy. Observers note the changes to sectors within the economy, without recording any significant modifications to their overall cyclical expectations. Therein lies the basis for wholly incorrect and faulty economic forecasts. The much heralded recovery will hardly proceed according to any past established pattern. The power of aggressive monetary policy has been thoroughly exhausted. Structural dislocations have not been addressed, let alone reversed. Next comes desperate official policy as the broken cycle screeches in futility.
Most if not all of the distortions we must deal with originate from untethered money and loose credit, fully permitted by fiat currency. Nowhere is this more evident than with the USDollar. The ability to print money and extend credit appeals to the darkest chambers of humanity, greed and the desire for power. The United States has caused turmoil with exported paper money of dubious value worldwide for over 30 years, exporting financial cancer while putting forth an innocent face. The Japanese stock, real estate, and bank debacle was the first major disaster in 1989. The Asian Meltdown in 1997 was the next major fallout. The US tech-telecom stock bust in 2000 followed as the latest major victim, a full round-trip around the globe. Blame is slowly coming to the US doorstep by world ministers. As the process has de-evolved, the world economy has become horribly imbalanced.
The US Economy has itself de-evolved into a queer distended obese malnourished disfigured beast, whose mechanisms and functions are no longer even remotely healthy. The cycle of expansion and contraction used to be volatile but predictable, with stimulus followed by belt tightening. Now it has become outright broken. The source of the problem is the monetary system and its undisciplined issuance of credit, aggravated by central bank steroid-driven printing of money. Von Mises claimed that once fiat money entered the world economy, competing currency devaluation would proceed until one by one, economies would be killed off. Japan and Argentina are the most visible victims. The tragic decline of the United States is in progress. Despite the denial, we are seeing exactly what he preached. Aristotle had this to say about fiat money back in 340 B.C.
"In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and god-like intelligence for kings."
Stimulus from both the banking system and the federal government has been unprecedented. The reflation initiative is underway. Residential housing gains have supported the economy. Household spending has revived. Corporate earnings appear to have revived. Capital investment seems to have begun anew. National aggregate statistics indicate some degree of recovery, despite exaggeration. Job loss bleeding continues, even as new job creation proceeds at a slower than required pace. A lower USDollar has allowed exporters to more capably compete abroad. Productivity is strong. The US Economy is growing again. Can we attribute a supposed recovery to the business cycle kicking into gear? Or should we give full credit to the “cloistered greenhouse of government fiat” (a clever term by another author) as it prints money, issues debt, encourages more speculation, and finds creditors to take the inherent risk? The economic benefits of the greatest coordinated monetary inflation in the history of mankind is meager at best, and a dismal failure at worst. The US money supply has been purposefully expanded by 32% since 2000. Debt levels in every corner of America are worse in than that watershed year. Three years later, we have some tepid growth in the economy, but continued loss of jobs. We are spinning our gears, as new money pours into the economy in futility, only to be discharged to Asia.
An image comes to mind. Uncle Sam is struggling under a huge debt burden, even as his subjects struggle under similar huge debt burdens. His legs render him awkwardly able to bear the weight, incapable of walking in a straight line, due to a badly twisted spinal column. Under the influence of extreme doses of pure oxygen and amphetamines, he rises after a painful fall in the year 2000. Since that tumble, he has lost a considerable amount of blood. Now he walks, despite continued loss of blood in what has become a dangerous hemorrhage. His steps are irregular, clumsy, and uneven. Govt statisticians view his gait through an absurdly distorted lens, which wildly amplifies the size, strength, even the direction of his movements. That same lens fortunately provides snapshots, which make his movement appear steady. The children he pulls along are Asian workers, not our own. Every step is borrowed from our new Asian masters, who are now either anxious or angry. With crimped income sources, American subjects watch as their jobs are abandoned and sold out to foreign lands. Globalization has backfired on Uncle Sam, and inflicted perhaps mortal wounds. Our manufacturing base was first to forfeit. Now our vital service sector is in the process of abandonment. As he attempts to walk, what used to be simple headwinds in past cycles are now fierce gale-force squall winds in this cycle, which make balance impossible.
/ jim |
