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MACRO
ANALYTICS - December 2012
Red Sky at Night, Sailors Delight,
Red Sky in the Morning, Sailors take Warning!
We have a new era dawning in Global Monetary policy. It is a new day
with the monetary skies already red.
Within 90 days the captains of monetary policy have steered the world
into uncharted waters and on a course that history warns us against.
Federal
Reserve: QE3
"Unlimited" and QE4 within 90 days,
ECB: OMT
"Uncapped",
BOJ: QE
10 and the newly elected Prime Minister Abe's mandate for "Inflation at
any cost"
BOE: UK's
newly appointed BOE Governor, Mark Carney's Monetary Evan Rule targeting.
These untested and newly commissioned captains all have PhD's from the
finest Economic schools in the world, but they clearly have not studied nor
grasped the key lessons of history.
OLD LESSONS BEING RELEARNED
The following lessons, in the following sequence, should resonate with
all who are clearly watching, listening and paying attention to what is going
on around them, and not what the press 'conjures up' and the political
apparatus 'spins'.
1- It starts with LIVING WITHIN
OUR MEANS.
2- The Understanding of the Critical Importance of SOUND MONEY
“It is impossible to grasp the meaning of the idea of
sound money if one does not realize that it was devised as an instrument for
the protection of civil liberties against despotic inroads on the part of
governments. Ideologically, it belongs in the same class with political
constitutions and bills of rights.”
The
Theory of Money and Credit (1912),
Austrian economist Ludwig von Mises
3- The Maintenance of Money as a STORE
OF VALUE
"If the American people ever allow private banks to
control the issue of their currency, first by inflation, then by deflation,
the banks...will deprive the people of all property until their children
wake-up homeless on the continent their fathers conquered....
The issuing power should be taken from the banks and
restored to the people, to whom it properly belongs"
Thomas Jefferson
4- Being Aware of the MORAL DECAY
that begins to happen when we veer from these previous tenets
"When plunder becomes a way of life for a group of men
living together in society, they create for themselves, in the course of
time, a legal system that authorizes it and a moral code that glorifies it"
Frederic Bastiat
5- Knowing the UNAVOIDABLE
conclusions it leads to
“There is no means of avoiding the final
collapse of a boom brought about by credit expansion. The alternative is only
whether the crisis should come sooner as a result of a voluntary abandonment
of further credit expansion, or later as a final and total catastrophe of the
currency system involved”
Ludwig
von Mises
6- REMEMBERING the Central
Lessons of History
The
problem is WITHIN OUR SOCIETY
“A great civilization is not conquered from
without, until it has destroyed itself from within. The essential causes of
Rome's decline lay in her people, her morals, her class struggle, her failing
trade, her bureaucratic despotism, her stifling taxes, her consuming wars."
Will Durant, The Story Of Civilization III,
Epilogue, 1944
INEPTOCRACY
“A system of government where the least
capable to lead are elected by the least capable of producing, and where the
members of society least likely to sustain themselves or succeed, are
rewarded with goods and services paid for by the confiscated wealth of a
diminishing numbers of producers”.
Unknown
7- The resulting INEVITABLE ROADMAP
Not having learned these lessons, our Monetary Captains have set us on a
course of Monetary Malpractice that leads to:
· Increasing Authoritarian Control
and Central Planning,
· Crony Capitalism, Corporatocracy
which increasingly feeds off an ever expanding state, while stifling open
competitive innovation,
· Financial Repession, Moral Hazard,
Unintended Consequences and Dysfunctional Markets, and
· Statism breed through the forces of
Collectivsm and Complexity.
DOOMED MIDDLE CLASS
The engine of prosperity is SMALL
BUSINESS and a strong MIDDLE
CLASS. The economic foundation is presently under unprecedented assault.
In the last 15 years, the shift from defined to contributory benefits, a
housing collapse, exploding education costs, a crushing shrinkage in real
dispoable income, and growing 'financial insecurity', have left the US middle
class paralyzed.
GROWING SOCIAL STRESS
EQUALITY & FAIRNESS has been broken.
Whether the growing hoards of frustrated and unemployed
youth, worried retirees unable to garner any earnings on their life's
retirement savings, the increasing ranks of "part time worker" or
the squeezed employed worker with lost or reduced benefits and unmatched cost
of lving increases, there is a historic disparity between the "haves and
have nots". Corporate profits are at record levels against GDP, while
labor against GDP continues to plummet. There is a palpable sense of
inequality and unfairness?
RULE OF LAW is in jeopardy and the US
Constitution is in peril.
Our transition from more-or-less free country to police
state is accelerating.
- The NSA’s
Utah Data Mining facility,
- Ever-tighter
restrictions on offshore accounts,
- The Internet “Kill Switch”,
- The Patriot
Act’s many assaults on the Bill of Rights,
- The
Militarization of local police, (Equipment, FEMA Graduates … the
new NDAA ‘s “indefinite
detention without trial”)
- The spread
of Drones for domestic surveillance (FAA
planning for 30,000 by
2020)
- The NCTC‘s
(National Counterterrorism Center) “ Disposition
Matrix” – Kill Lists
… each has a role in the high-tech updating a very
old idea: that the state is paramount and the individual a slave to public
order and national power.
Why is this happening now, rather than in 1950? ANSWER:
We’re reaping the whirlwind that always accompanies fiat currency. We
created a central bank in 1913 and freed it from the constraint of gold in
1971. Give the government or the large banks the power to create money out of
thin air and you eventually create a dictatorship.
“Eventually”
just happens to be now.
SOCIAL CONTRACT is breaking down
The Political Foundation of the status quo in America is
based on a Grand Bargain of Complicity between the top 25% who pay
approximately 90% of the taxes, and the bottom 50% who draw on the benefits
that stem from government. James Madison, in the "Federalist
Papers", outlined this complicity in the "Tyranny of the Majority".
What is becoming painfully evident is that the political elite in America
have falsely over-promised on the entitlements that can be delivered, which
is now surfacing in the political turmoil of the Fiscal Cliff negotiations
and has the potential to quickly lead towards a constitutional crisis.
This Grand Bargain is now rapidly fraying as 75 million
baly boomers begin retirement and find that the promises made to everyone
cannot possibly be met. As the Fiscal Cliff crisis is highlighting, for those
who can read between the carefully crafted lines, funding for Social
Security, Medicare/Medicaid, National Security and Interest on the debt is
consuming more than can be realistically raised through taxation.
To collect enough tax revenue to avoid deeper debt levels
would require over $8 trillion in tax collections annually. Expropriating the
entire income of the top 25% of households that pay almost 90% of the tax and
all corporate taxes would only bring in $6.7 trillion.
“The actual liabilities of the federal government—including
Social Security, Medicare, and federal employees' future retirement
benefits—already exceed $86.8 trillion, or 550% of GDP. For the year
ending Dec. 31, 2011, the annual accrued expense of Medicare and Social
Security was $7 trillion”.
Chris Cox and Bill Archer, Former
Congressmen - WSJ 11-26-12
Claims on welfare and disability programs are skyrocketing
at the same time that the demographics of an aging populace are causing
10,000 people a day to enter Social Security and Medicare, the two costliest
government programs. Meanwhile, the upper-middle class that pays most of the
taxes has been slammed with lower income and a devastating drop in their
housing-based net worth. Compounding this is the fact that the disillusioned
wealthy have slowed dramatically their invested CAPEX (Capital Expenditures)
in productive assets in the US.
The 2008 Financial Crisis which quickly morphed into a Global Economic
crisis is now entering the Political instability phase, where the broken
grand bargain and social contract is going to greatly impact the attempts by
the global Captains of Monetary, Fiscal and Public Policy to steer a safe
course.
FINANCIAL > ECONOMIC > POLITICAL = SOCIAL CONTRACT
 
UNGOVERNABLE DEMOCRACIES
As a larger percentage of the public becomes dependent on government
entitlements, transfer payments and employment, the helm will be pulled from
the Policy Captains' hands.
Austerity only works conceptually and as long as it doesn't impact
anyone directly. Obviously, this cannot be the case. UK's Prime Minsiter
Cameron was elected on a platform of austerity. When it came to
implementation, it became quite a different matter. He is not alone.
The Democratic system becomes ungovernable when unsound money is
sustained for any period of time. It is the virus that silently cripples it.
THE LOOMING ADJUSTMENT
To any sane person, who has a grasp of what is presently occurring, it
is obvious that the current state of affairs is unsustainable. The question
is how long can the Monetary Captains' misguided policies keep us off the
shoals of our economic destruction. How long can policies of "Extend and
Pretend", Kick the Can Down the Road" or "Fake it Until You
Make It" continue? The answer is likely unknowable, the certainty of it
ending badly is not.
The Globalization Catalyst: FRAGILITY AND COMPLEXITY
The financialization, securitization and rehtpothecation of
almost all our systems, the explosion of an unregulated, offshore, off
balance sheet, off exchange and opaque $639 Trillion SWAPS markets, along
with a $67 Trillion Sahdow Banking System on a $70 Trillion global conomy
should beg some questions.
The complexity of the interwined and interdependent global
Financial systems gives us a clue to what lies ahead.
All these systems are fragile and not robust. They have
never been stress tested. They were never designed, but rather evolved in
Darwinian fashion. Minor set backs and adjustments simply allowed for more
layers of complexity to be rapidly and randomly added. So far, there has not
been a catastrophic collapse. The probability of this not occurring is
diminishing exponentially.
It will occur. It is only a matter of time. The internet
and potential cyber attacks almost guarantee a triggering event.
MARKET SIGNALS ARE "BRIGHT RED"
STORM FORECAST
2012: Calm
Before the Storm
2013-2015: A
Market Clearing Event
2016: Sorting
through the Debris
The charts are clear
about what lies ahead based on our current path. Eventually, all this will
end badly.
History is very clear that when something is UNSUSTAINABLE it is INEVITABLE that it will end.
TIME is the only unknown.
It is better to be way too early than one minute too
late!
Sign Up for
our FREE 2013 Thesis Report. To
read more, go to GordonTLong.com
Gordon T. Long
Tipping Points
Mr. Long is a former senior group
executive with IBM & Motorola, a principle in a high tech public start-up
and founder of a private venture capital fund. He is presently involved in
private equity placements internationally along with proprietary trading
involving the development & application of Chaos Theory and Mandelbrot
Generator algorithms.
Gordon T Long is not a
registered advisor and does not give investment advice. His comments are an
expression of opinion only and should not be construed in any manner
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© Copyright 2010 Gordon T Long. The information herein was
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