Friday, October 26, 2012

Politics, economic meltdown and social disruption

I've been writing about our (and the world's) parlous economic situation for a long time.  I've also warned of ongoing social deterioration and disruption.  Now comes a very insightful newsletter that links these phenomena in a very clear, understandable way.  John Mauldin, in his latest weekly 'Outside The Box' newsletter (link is to an Adobe Acrobat document in .PDF format), provides an assessment by Société Générale analyst Dylan Grice.  I'm going to reproduce a few excerpts here (from the 16-page newsletter).

I am more worried than I have ever been about the clouds gathering today ... I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations.
. . .

I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer? Inflation of the CPI might be a consequence both seen and measurable. A broad inflation of asset prices might be a consequence seen, though not measurable. But what about the consequences that are unseen but unmeasurable – and are all the more destructive for it? I feel queasy about the enthusiasm with which our wise economists play games with something about which we have such a poor understanding.

. . .

If the authorities raise taxes explicitly and openly, voters know exactly why they have less spending power. They also know how much less spending power they have. But if the authorities instead raise money by simply printing it, they raise the revenue by stealth. No one knows upon whom the burden falls. People notice only that they can’t afford the things they used to be able to afford, or they can’t afford the things which everyone else can afford. They know that something is wrong, but they just don’t know what, why, or who is to blame. So inevitably they look for someone to blame.

The dynamic is similar to that found in the well-worn plot line in which a group of strangers are initially brought together in happier circumstances, such as a cruise, a long train journey or a weekend away. In the beginning, spirits are high. The strangers exchange jokes and get to know one another as the journey begins. Then some crime is committed. They know it must be one of them, but they don’t know who. A great suspicion ensues. All trust between them is broken down and the infighting begins....

So it is with monetary debasement, as Keynes understood deeply (so deeply, in fact, that it’s ironic so many of today’s crude Keynesians support QE so enthusiastically). In 1921 he said:

“By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some …. Those to whom the system brings windfalls …. become “profiteers” who are the object of the hatred … the process of wealth-getting degenerates into a gamble and a lottery ... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

History is replete with Great Disorders in which currency debasement has coincided with social infighting and scapegoating.

. . .

Central banks provided cheap money to banks, the cheap money artificially inflated asset prices, artificially inflated asset prices made anyone connected to those assets rich as we became a nation of speculators, those riches were achieved at everyone else’s expense, and ‘everyone else’ has now realized what has happened and is understandably enraged ... as Keynes explained, “Those to whom the system brings windfalls ... are the object of the hatred."

And now the social debasement is clear for all to see. The 99% blame the 1%, the 1% blame the 47%, the private sector blames the public sector, the public sector returns the sentiment ... the young blame the old, everyone blames the rich ... yet few question the ideas behind government or central banks ...

I’d feel a whole lot better if central banks stopped playing games with money. But I can’t see that happening anytime soon. The ECB has thrown the towel in, following the SNB last year in committing effectively to print unlimited amounts of money for the greater good. The BoE and the Fed have long since made a virtue of what was once considered a necessity, with what was once the unconventional conventional.

. . .

All I see is more of the same - more money debasement, more unintended consequences and more social disorder.

There's much more at the link.  Important, even essential reading for anyone concerned about our economic prospects and the decay of our society.

Kudos to Mr. Mauldin for bringing Mr. Grice's very trenchant analysis to a wider audience.  If you haven't already subscribed to his free newsletters, may I suggest you click the link to do so?  I find them invaluable.



Anonymous said...

Science fiction authors have been wondering for years what will happen when our technology advances far enough that there are no longer enough jobs to go around, due to advances like automation removing the need for human labor.

I'm looking at the current economic situation myself, and wondering if that process has already begun. What will we be doing with the excess-to-economic-need segment of the population? Can the current economy support these people, without them having a productive purpose or role in society?

trailbee said...

MANY months ago you ran a John Mauldin article, which prompted me to investigate, then sign up for his weekly letters. I have learned a ton about investing and our national financial debt/crisis since then. Thank you for posting his letters, also those from Casey Research!