Now it's not just Europe where formerly-fringe candidates are suddenly vying
for power. The US presidential primaries, which were supposed to be coronations
for the latest Bush/Clinton snoozfest, have turned interesting and in some
cases surreal, as Donald
Trump, who a few short months ago was viewed as a kind of circus clown
by most Republicans, and Bernie
Sanders, an honest, straight-shooting avowed socialist, are drawing
the biggest crowds and creating the most excitement.
But far from being a surprise, this is exactly the kind of thing an over-indebted
and therefore ungovernable society should expect. From Chapter 14 of The
Money Bubble: What To Do Before It Pops (January 2014):
The Political Bubble Bursts
Just based on the numbers, the global financial system should have collapsed
long ago. That it hasn't has less to do with economics than with politics.
The people in charge have arranged things so that they can keep borrowing,
spending and printing into the indefinite future - as long as they can
agree on "compromises" that give each faction most of what it wants.
That's how US military spending can soar (thus keeping the right happy)
while entitlement programs can simultaneously spread to every corner
of American life (keeping the left happy). As long as the resulting deficits
can be financed and the bond, currency and precious metals markets tamed
with repeated government interventions and newly-printed currency, then
the game can continue.
But if this log-rolling political consensus breaks down, all bets are
off. And there are signs that this is indeed beginning to happen. An
entire book could be written about the political turmoil that was roiling
the world of 2013, but since we have just a few pages, we'll present
the juiciest European example and then focus on the US, which is emblematic
of what's happening everywhere.
In October 2013 Marine
Le Pen's eurosceptic National Front party won a local French
election and for the first time ever took the lead in a national
poll. As she famously told London's Daily Telegraph before the election,
the European Union "is just a great bluff. On one side there is the
immense power of sovereign peoples, and on the other side are a few
technocrats."
Generally portrayed by the two major (center-right, center-left) parties
as racist or neo-fascist, the National Front's public goals of limiting
immigration, especially from Africa and the Middle East, and withdrawing
from the eurozone and going back to the French franc were beginning to
resonate with voters exhausted by the feeling that recent immigrants
aren't assimilating and the PIIGS countries aren't managing their own
affairs. And the French experience is being replicated in numerous other
eurozone countries, where anti-euro parties once on the fringe are drawing
serious support. Greece in particular has actual neo-Nazis and communists
contesting major elections.
In the US, the late-2013 battle over the debt ceiling has exposed similar,
equally colorful fault lines. Within the Republican party, the mainstream
(log-rolling, back-scratching) career politicians wanted, as the October
default deadline approached, to cut a deal to keep the government up
and borrowing. But a small band of Tea Party-affiliated conservatives
and libertarians were having none of it, and forced a dramatic game of
chicken in which neither side, for a while, was willing to blink until
a day before the Treasury was due to default on its bond interest payments.
This was more than simple political brinksmanship. There seemed to be,
gasp, actual principles beyond career longevity involved, and it presages
both more turmoil between Republicans and Democrats and very possibly
the birth of an influential third party, currently within the Republican
tent but soon to be outside of it. It will be semi-coherently anti-debt
and pro-small government - and it might, like France's National Front,
attract enough support to gum up the borrow-and-print consensus, perhaps
forcing real choices.
Why does this matter? Because the markets by late 2013 had come to believe
that political turmoil is always followed by a deal that feeds more currency
into the hands of banks and consumers, thus supporting asset prices.
Looked at this way, the American political system is a bubble of unrealistic
expectations, just as certainly as were dot-coms in 1999 and home prices
in 2006.
The complacency engendered by this political bubble is exactly why the
ending of political consensus matters. With bonds, stocks, houses and
pretty much everything else "priced for perfection" in the expectation
that newly-created money will always save the day, any interruption in
that flow - or perception that it might be interrupted in the future
- would cause a broad-based re-pricing (i.e., a bear market) that could
easily spin out of control - especially with a government grid-locked
by incompatible ideas about how to proceed.
This asset re-pricing would be global, and would include Treasury bonds
and the dollar itself, which would lose its reserve currency luster if
the US was seen as no longer willing or able to automatically finance
its deficits. In that circumstance, the Long Wave would return with a
vengeance, taking the US and the rest of the world from the unreal (paper
currency) into the surreal (hyperinflation, complex system catastrophic
failure, and authoritarian government). And it would happen suddenly,
when a spending bill fails, or an anti-Fed party has a surprisingly good
election, or a debt ceiling extension just can't be sold to Congress,
bringing an immediate end to the easy-money gravy train.
The examples in the above excerpt are a bit dated but the sentiment is becoming
more relevant every day. The credibility breakdown of the political class
is opening the door to candidates who wouldn't have gotten 5% in most previous
elections, either because they're buffoons (Trump) or because they won't
play ball with the ruling bank/government/corporate CEO coalition (Sanders).
The closer someone like this gets to actual power, the greater the possibility
of gridlock that makes the next implementation of the Greenspan put less
of a sure thing. And once the markets suspect that financial assets might
soon be priced realistically, it's game over.
