Peak Leviathan?

The common thread with “peak theories” is that the rate of growth in something (typically output) follows a bell-shaped curve pattern over time where it ultimately runs into a natural constraint that sees this rate peak and then decline.  But, could this be the state of, well, the state itself?!

Not to confuse Mad Max (Keiser) who conflates the state with society.  Nevertheless, we see signs of peak leviathan almost everywhere.

The economy too appears to be stuck in a kind of no man’s land likely because of it.  It can’t seem to grow because the state won’t let the free market system clear those structural imbalances that have accumulated from decades of excessive inflation and the profuse growth in government expenditure, and because of the related likelihood that the pool of capital (savings) may have itself peaked under its weight.  Meanwhile, the growth in government (leviathan) also appears to have reached a PEAK due to the extended nature of public sector finances and the dearth of other plausible options to fund its further growth.

The economic structure is so tenuous that the government is having a hard time stimulating another “boom” in aggregate consumption.

Now I know what our opponents would say here.

They would argue that the state of public sector finances is bad due to the failure of the capitalist system.  That is, because government constantly has to bail out the corporations in order to save jobs and promote the general welfare, as though government were any kind of source of wealth.

But put down those Charles Dickens classics!

It just doesn’t work that way.

The market system is not an inherent source of instability; I don’t care what people like George Soros and other neoliberal socialists say.  The market system is constantly equalizing instabilities.

If it weren’t, then we would not have such a hard time finding investable opportunities myself.

FOR EXAMPLE

Rather than teaching economics here, consider the controversial issue of High Frequency Trading.

If someone thinks it is the true cause of extreme volatility then why not simply launch a new hedge fund called the HFT EQUALIZER or something in order to take advantage of the opportunity arising out of it?  The fact that someone is bound to do just this, even if it is just another HFT trader, should be enough to prove my point.  But of course it never is that simple.  For one, I’m sure someone is already doing it.  But also, I’m not really convinced that HFT is behind any real market failure because I tend to put the blame for that squarely on extra market interventions by the coercive apparatus.

Sure, HFT has changed the landscape perhaps permanently.  But the market is full of opportunity, and HFT will just create its share of opportunities.

The temptation to hate market innovations that are in direct competition with human jobs is great, and it tends to be one of the factors driving leviathan.

THERE IS NO FREE MARKET LEFT TODAY

Whether you agree or not, just so you understand where I am coming from, my model for the economy is that the boom-bust cycle is caused not by the alleged inherent instability of the free market system (since there is no such thing –on both counts), but by the coercive interventions into that system by policymakers and government.

And as you know from reading my work, I hold that the free market system does not actually exist.  Even the mixed economy is a luxury (of the sixties) in terminology compared to what exists.

Today we have what I call “state capitalism,” and even fascism.  Call it a partnership between big business and government –I emphasize the word big because in this system there is no room for the little guy.  Most industries are heavily centralized and regulated so the costs are too high for the small entrepreneur.  But our argument is that it is even worse than Jim Cramer recently quipped: you just can’t do business in America anymore.

PEAK LEVIATHAN OBVIOUS IN EUROPE

The limits of big government are most obvious in the EU today; but leviathan has reached its limits in much of the west as well now we would argue.

There are many places where taxes have become too burdensome for the territorial monopoly to deploy the policy of increasing them further.

Their problems are simply obscured by the fact that their central banks have artificially depressed interest rates, and also because capital has been fleeing the peripherals of this cancerous system -thereby buying the stronger governments time.

Indeed, the primary mode of growth in leviathan this past decade has been the overt Keynesian economic policy of stimulating aggregate demand (and the alleged animal spirits) by driving the rate of interest to artificially low levels and forcefully expanding government expenditures.

Interestingly, this way, the so-called ratchet effect has occurred despite the absence of a major world war, unless you count the war on terror.  However, we contend both fiscal and monetary policies have widely run into constraints now (economic laws).

Have we come to the point where interest rates have been pushed down more or less as much as possible, while taxes are already too high, so that the only way for Leviathan to grow, or postpone collapse, is to either take a bigger step towards totalitarianism (like as in France’s 75% tax rate) or engage in hyperinflationary policies at this point?

So in this sense perhaps governments have reached a crossroads…peak leviathan.

I say a crossroads because the decline can take at least two directions.  The explosion in interest rates that is inevitable will mark the peak.

This will ultimately topple leviathan.

PROPOSALS FOR MONETARY REFORM FLOOD ARENA

What is new, and maybe even surprising, in the drama is the number of proposals for monetary reforms we’ve seen lately.  Many of them outright stupid, like the idea of a pot based currency,

“Given Italy’s desperate situation, returning to the lira and backing paper with pot might be an attractive alternative to the current euro-inflation and massive debt that Italians are facing.”

Or the regurgitation of Irving Fisher’s controversial new deal banking reforms of the late 1930’s endorsed by Ambrose Evans-Pritchard here as the “Chicago plan revisited,” which happens to assume, incorrectly, that the state created money to begin with, and that if only we put the state or IMF in charge of money (rather than the privately chartered Fed) then fractional reserve banking could never exist.  And of course that nonsense sounds much the way the “end the fed” movement has been transposed into something that doesn’t abolish the Fed, but rather merely ends its private charter and puts it in the hands of Congress.

And there is of course the usual buzz about SDR’s (special drawing rights) that recurs once in a while.

For those who don’t know these latter instruments were created in the seventies as an alternative to gold.  They were originally marketed as paper gold but never got off the ground.  The general idea is that each SDR represents a basket of currencies.  The general problem is in determining a mode of weighting the basket and regulating the monetary inflation (and interest) rates between the participating governments.  How would China and the US, for instance, agree on these things?

These, and the variations of these plans, are hair-brained.  They are not worth our criticism.  There are of course also recommendations that I would favor, like the suggestion Germany should leave the EMU to launch its own gold backed currency, which I thought was a relatively naïve argument.

The reason is that the author seems to assume that the Germans were tricked into the tragedy of the commons and are the victims of plunderers.

Not only does the German government have its own interests (separate from the allegedly conservative German bankers) in joining the EU, backed by other German businessmen and union leaders, but also, the article ignores the deflationary consequences of such a decision.

Not that they should be feared since they have to be inevitably accepted in any final transition to a sounder monetary system.  Nevertheless, these consequences were definitely underplayed in the article –especially as regards the conflicts that this outcome would generate not only within Germany, but also between its neighbors who may want to go to war over it.

Finally, the idea of any government backing a state controlled currency by gold is weak in the first place – it is like letting the fox back into the hen-house, and the author naively puts too much faith in the German peoples’ memory of Weimar.

My favorite proposal that has been making the rounds –the one that most resembles the sound money policy recommended by Mises, Rothbard & many leading Austrian scholars – was actually authored by Steve Forbes earlier this month: http://www.forbes.com/sites/steveforbes/2012/10/03/gold-can-save-us-from-disaster/

What I liked about this piece was his focus on the fundamental truth missed by all the other “plans”: that the goal is not to impose a gold standard, but rather, to repeal the laws that prevent the issue of competing currencies, and the restrictions that prevent gold from filling that role.  He could have taken one more step and aimed at repealing the “legal tender” laws that uphold the central bank’s monopoly on note issue, but that is an easy enough inference to make, given the rest of what he said.  The weakness in this article is that it is far too short on elaboration.  It makes statements the average person will not understand, and probably will not even question hard enough to seek out an answer.  Some of these consist in important premises, such as this paragraph,

What the Fed is doing through its binge buying of bonds is enabling Washington to consume our national wealth. Instead of creating new wealth we are beginning to destroy that which exists. No wonder tens of millions of people feel –rightly- that their real incomes are declining & their financial situations coming under more pressure.”

Perhaps something everyone IS more able to relate to is this frank and insightful truth,

No one believes, given the finances of the U.S. government, that a ten-year Treasury bond should yield only 1.8%.”

That should underscore our point not just that this rate is artificial and unsustainable, but also should make one think about what the state of the budget is going to look like when it inevitably reverses.

Some people believe that Romney is going to change all that, if he wins.

This is also a naïve position in our view.

However, if he did, it would still make our main argument about peak leviathan correct.

GRASPING FOR MEANING:
THE NATIVES ARE RESTLESS

The next crisis will probably come when the government (and central bank) fails to hold interest rates down -say, because prices start rising too fast and/or the government’s solvency comes under more serious scrutiny.

Hence I find it interesting that we have come to this point where proposals for monetary reform are coming out of the woodwork.  Almost all of these reforms are aimed at checking the sources of funding (for leviathan), which shows that at least the public’s diagnosis is coming close, even if its prescriptions still leave much to be desired.

In the end, they consist in none that haven’t failed before.  The problem with its prescriptions is that most people still believe the central banks work for the banksters alone.  That is already less than half the truth these days anyway, but it still shows how far we are from honest money.

It draws my attention to the fact that most people are unaware of just how centralized and over-regulated the banking system currently is, among other things.  We just don’t have “free banking”.

And no one will allow it in my lifetime.

It is precisely because the financial system is so centralized that it keeps failing, and that is why it is on precarious ground still today.

Moreover, as you know, economic policy today is guided by the dangerous and mistaken view – propagated by Friedman and others – that the great depression was brought about by the failure of the central bank and government to do more!

This is just a myth, and again, a dangerous one: but one that is literally behind our crisis.  It is precisely because public opinion has ignored the truth about such things that we have arrived here.

So the proposals tend to reflect this ignorance.

And yet they also reflect a growing yearning for change.  People want reform.  They are becoming restless because of the stasis of leviathan.

WHAT BEATS QE-INFINITY-EXTREMITIS

To underscore this point, note the latest buzz about Fed officials contemplating an expansion of QE3. See: http://finance.yahoo.com/news/fed-considering-upping-qe3-size-180412234.html

Recall in a recent publication when I asked what would happen if the markets started caving and the perception grew QE-infinity wasn’t enough?

Specifically, earlier this month I wrote,

“What if we get a 10% correction in stock prices now and the Fed panics?  I mean really panics?  If it announced QE-infinity with stock prices at record highs what will it do if they turn down and the bears dominate the headlines with ominous predictions?  Or what if the Treasury bond starts to collapse now?”

READY TO BACK UP THE TRUCK?

Disappointing earnings, news about Apple’s new products, and the prospect of a Romney victory have been at the front lines of catalyzing the correction in stock and gold prices this week.

But these are distractions from the main story, which is the coming collapse of leviathan in the years ahead.  Most likely, the easy money will be made in shorting government securities going forward.  When this trend starts it will last for some time so don’t be in a hurry to jump on board yet.

Wait until it is obvious that continued attempts to bolster the value of the US Treasury bond fail despite increasing interventions.  Wait until you see the whites of their eyes in other words.

[Wait until the downtrend becomes visible]

The proposals for monetary reforms suggest some consensus is developing about the cause of the crisis that has gripped the world since 2008, or at least its identity –fractional reserve banking.

They reflect an acknowledgement that change is needed, and concern about the potential collapse of the dollar empire.  The actions of Fed officials appear increasingly desperate as a result. I can’t see anything that could relieve us of the vicious cycle I see developing. As the inflations get more intense, the scarcity of money will intensify itself –especially when the value of the dollar begins to fall faster than the growth in its supply.  This is the part where the dog starts chasing its tail.

We are already at the point where policymakers confuse cause and effect so that with every downturn they magnify the impetus that produced the last unsustainable boom.  But when these policies start producing significant purchasing power declines, not only will the authorities find it difficult to stop, the political pressures to keep adding liquidity will also intensify.  And this is the more so if we have reached peak leviathan.

Thus after this brief period of flirtation with various monetary reforms is over, and perhaps at the same time that Americans realize O’Romney is not that different from O’bomber, I suspect we’ll be off to the races in gold.  The Fed is not likely to do anything at this point unless the market scares it into action, which is possible and even likely; but it is unlikely to un-nerve gold or gold stock investors because it only reaffirms their convictions.

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