COMMENTARY: OFF THE CUFF

THE MUNK DEBATE
Recently I had the pleasure of watching a lengthy debate on the subject of the North American economy. The Munk Debate motion was that “North America faces a Japan-style era of high unemployment and slow growth”. The so called ‘lost decade’ of Japan, that has been now running for 19 years. Perhaps the hosts were being polite, but ostensibly the debate was really about the USA - excluding Mexico and Canada - since the latter 2 countries are nowhere near in bad shape currently, or suffer from different illnesses. A few have since (poorly) reported the debate as being Krugman versus Summers.

In short summary, it was very well debated in spite of any preconceived opinions about the participants, or their own very publically stated economic opinions prior to this debate. Several reviews of the debate that I have read do not capture what to me were the most salient outcomes of the debate -

• All participants agreed the state of economic affairs within the USA were very dire
• None of the participants agreed on what the solution was, or what solutions were available
• Specifics of the current situation were discussed and agreed, but a solution was (or solutions were) not
• Consensus appeared briefly within the debate questioning how long it might last, the USA has already entered a stagnant period, it is not whether it ‘will’ or ‘is facing’ but more a question of how long it will last
• A conclusion by those ‘for’ was that the USA is already in a Japan style era, since much of the data since 2008 supports this
• A conclusion by those ‘against’ is that negativity becomes self-fulfilling, and hence to think of the positive outcomes

For mine, the ‘against’ argument ended up as mainly rhetorical arguments of flag waving patriots drawing lines to past (and long ended) performances of the USA. But you are only as good as your last game gentlemen, words you no doubt use within your own circles of influence. Summers “more money printing” to Bremmer’s “well where else are ya gonna go” (complete with accent) did nothing to inspire confidence that anything of substance is likely to change soon. It is not unfair to say the pro argument was the most objective, and the con argument the most subjective. This would go a long way to explaining how we got into this crisis to begin with considering the lack of substance in who’s, how’s and why’s of the GFC2008 to date.

That a consensual reality of the present showed up enough times during the pro/con discussion was reassuring in itself. They were not blind to the same things every layman around the world can see for themselves, and each brought a separate contribution to why things are not very good for the US now. Of the 4 debaters - Summers was a bulldog - tough but would tire quickly, lacked intelligence behind the bravado; Bremmer was the 1% flag waver, complete with accompanying accents (for emphasis?); Krugman was the quintessential academic economist and Rosenberg the man on the street.

The summary statements most clearly went to Rosenberg, who said with objective simplicity “I just have to look at the yield curves”. Krugman identified the pimple on your nose stalemate that is (like it or not) modern US Congress in moving forwards with meaningful transition. For those not into accepting the data, the rhetorical summaries of Summers and Bremmer promoting more for the 1% as the way out would have been caviar to the 1% palate.

There was no silver bullet answer presented, considering that was not the mandate. But curiously, it reinforced not whether the US faces a Japan style era, but how long the USA will continue to follow conditions ‘very similar’ to the Japan style era. Further reference to the already polarised and ongoing wider debate is required. Par for the course. Tomartoes tomaytoes.

HOARDERS
For many years now, we’ve had the US society of wealth wearing their financial accomplishments as a badge of honour on their chest. Now having more $billionaires (and let’s face it, there are a few $trillionaires out there) and being proud of it is missing the most obvious sign of an insane monetary policy gone bad. I refer to the comparative study of modern baseball greats to the eras of Babe Ruth and DiMaggio. To cut the story very short, the baseball study found the bell curve of the statistical samples of baseball performances from 1930-1950 had changed to those of 1990-2010. The champions of each era were comparatively great in similar measure within the sample group of each era. It showed Babe Ruth was so far to the right of a broader bell curve, that his performance was an obvious singular standout for his era (no genius needed to understand that one).

So there are 2 things that bother me with the US badge wearing flag flying 1%. The wealth bell curve has moved up several exponent orders of magnitude (10 to 1000 fold I’d say). Seriously yay for you, but one very bad sign for the economy. Secondly, the narrowing of the distribution is a sign of the uniformity in approach to how popular it is to (a) be rich in the US, and (b) make sure you hang onto those bragging rights. (a) is not the problem, (b) is.

One other topic not discussed much at all is the hoarding of this magnified wealth – (b) above. Any increase in position within the 1% society brought about by sound strategy, greed, graft or outright criminality allows one to wear a larger badge. But the growth captured is never permitted to fall far from the tree, and furthermore techniques have been refined that this growth is plucked when fully ripe. Being within close proximity to ones wealth does not provide any flexibility to the circulation of this wealth. This is hoarding, and these massive sums of money are not circulating within the broader community in any fashion akin to the days of Henry Ford, or even as lately as Gates/Jobs.

The proof should not be too hard to realise. In a closed box, with a fixed quantity of money at any single point in time, if a larger proportion of this fixed quantity is ‘accumulating’ within a tightly confined (tightly held) space, then the amount available to the remainder is most clearly reduced. This accumulation is due to the badge wearing hoarders, and is not circulating effectively. By not circulating, it is not doing the work of the same $amounts as companies who are reinvesting within themselves, or creating expanding production.

But equally importantly, if more people are making more money (back to the baseball bell curve analogy), it is also a sign that it is much easier to be more wealthy (higher numbers, tighter bell curve) which is actually a sign of bad monetary policy and not good entrepreneurship. The badge wearing 1% say they are good entrepreneurs, I simply say they have it much easier than previous eras (in many regards, not the least being lax regulations and poor enforcement). A loose monetary policy targeted more at undisciplined financial organisations is not clever, nor is it adding to the collective pool of genetic advancement. It is quite the opposite in my view. Looking at the CHF, YEN and Hong Kong lending rates, it’s now gone global viral within the largest sectors of the money market. So suck it up and get used to it. Eat or be eaten in the cannibalistic world that is zero sum.

In response I mention the 2000/2001 IPO spinning and laddering that collapsed the tech bubble, and created the first batch of modern “entrepreneurs”. Seriously? You have not invented much at all to speak of. More accurately you have merely reinvented past US advances by the manner in which you think you have advanced yourself. Entrepreneurs more accurately describes much of the US unemployed. 2000 to 2011 should be known as the rinse and repeat era.

THE OCCUPIERS
My opinion of the Occupy movement has changed since it was first twittered that Anonymous was going to (a) wipe the NYSE off the face of the internet, and (b) was going to Occupy Wall Street. At first I thought it was a futile attempt given the magnitude of resources at the disposal of the targeted organisations. (Future tip: only when the battle fleet is positioned off the coast and within strategic striking range do you first announce war, not before). Then when the occupiers started, the apparent lack of cohesion and stated purpose was seen by many as being just that.

Having the benefit now of almost a month of watching it spread globally, the lack of cohesion within Occupy has actually become a stronger part of the overall message. The financial sector itself most obviously operates without community discipline and similarly utterly lacks cohesion. To the observant eye, a parallel can be drawn in this regard. But the Occupy Movement have not publically stated dot points of cause/reason/objection?

Since all the financial sector ever does is work with large numbers (aka collateral, either in damage mode or gain mode), the Chairman of the War Chest of Disposable $Funds only ever needs to know (a) what it is that money has to buy, and (b) how much money has to be thrown at it. Like any bad plasterer knows, where is the patch, and how much plaster has to be applied. Pandering to the financial (and media) sector with a dot point hit list would only be targeted in order of (a) derision, (b) contempt, (c) ridicule, (d) graft and finally (e)corruption (in many and various non-obvious yet creative forms). In short, say what you want to say so that it can be summarily dismissed.

Recently, William Black has proposed 3 strategic items that would form a nice starting platform from which to build. But don’t expect any to change in how the financial sector operates with complete impunity and without community discipline. The creativity by which the financial sector is permitted to dodge all and any responsibility for its own incompetence is an indictment of how pathetic “advanced” economies have become as a collective.

To the flag waving badge wearing 1%, I salute.