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So here we stand, exactly eighty years
on from the collapse of CreditAnstalt, the run on
the Danat bank, and the disastrous abrogation of
Britain of sterling’s gold status which turned and earlier stock market
setback into an enervating slough of Depression.
Here, we stand, almost forty years to the day from
Nixon’s abandonment of the dollar’s pivotal membership of the
bastardized gold-exchange standard and the horrifying decade of rampant
inflation which followed.
And here we stand, a week shy of four
years after the Fed’s first, tentative response to the looming
CDO/wholesale funding disaster which would threaten to seep away not just
those hooked up to the eyeballs in America’s grotesque sub-prime bubble
itself, but feckless borrowers and risk-insensitive lenders – both
public and private -right around the globe.
So let us take stock of what we have
wrought in the meanwhile by following mainstream economic exhortations to
emulate what we thing the hallowed FDR may have enacted or the venerable
Keynes may have ordained, were these two leading lights of cynical expedience
and willful interventionism each alive today.
With over $2 trillion in excess reserves
parked with the Fed, the ECB, and the BoE; with unsecured, interbank loans
for anything other than the shorter of terms all but impossible to obtain;
the the thirst for security sporadically driving
rates on T-bills, general collateral – even deposits – below
zero; with the benchmark LIBOR rates increasingly inoperative and their
replacement OIS rates barely standardized – with the spread between the
two varying widely and with the latter diverging from supposedly stable
official base rates which they are supposed to reflect - it is clear that
the money market is broken.
With even short-dated basis swaps
between the major currencies wandering far, far from their near-zero normal
levels, with countries like Brazil attracting peer group interest for imposing
taxes on inflows into and bets on the appreciation of its currency; with the
Swiss trying to stem a 7.8 sigma, one-in-300-trillion, two-week move in the
currency by aiming to swell sight deposits by 10% of GDP and by showering
hapless East European carrt-traders with precious
francs; with EUR-USD risk reversals at their most extreme ever, both in
absolute terms and as a percentage of underlying volatility - what can we
say but that the FX market is broken.
With the DAX – for example
– undergoing its own, 6.3 sigma, 7-in-a-billion chance, two-week move
– one only exceeded in its compressed magnitude during the Crash of
’87; with the peak five days of frantic selling seeing record volume,
thanks in part to the less-than-benign influence of the high-frequency
trading which hummed along the fibre-optic cabling
at triple the normal rate and accounted for up to 75% of overall trades,
according to the Nasdaq’s biggest execution
broker, it is no wonder the VIX doubled in only four days, a jump only
exceeded by last May’s HFT-led “flash crash.” No wonder
either that several European and Asian authorities saw fit to intervene,
either to prop up prices or to outlaw short selling, or both. The only
inference to be had -the equity market is broken.
With the ECB being forced to take
drastic – and arguably illegitimate – action to cap the 3-month,
225 bps rise in the Spanish-Bund and the concomitant 270 bps rise in the
Italy-Bund spread; with US Treasury bonds plunging amid the rout to record
low nominal and negative implied real yields, all the way out to 10-Years;
with record low mortgage rates forcing duration-hungry investors and hedgers
to receive long-dated swaps at minus-40 bps; with record levels of junk
issuance having been conducted at record low yields, before a frozen market
saw spreads explode a 5.6 sigma, 218 bps to stand 50 bps wider in just ten
days – to cite just a few instances of a widespread disruption - it
is fairly evident that the bond market is also broken.
With the ratio between the two main
oil benchmarks – WTI and Brent – having crashed from ts well-behaved, long-term, pre-crisis ratio of 1.07:1
+/-0.2, to hit 0.79:1; with gold trading to a 5% premium to platinum for only
the second time in at least the past quarter-century; with base metals showing
less and less correlation between price, curve shape, and visible inventory
as funding games and warehouse manipulations distort trading patterns; with
industrial commodities being driven more by CB inflationary-”Risk
On” considerations than by the specifics of usage and production - perhaps
we must admit that the commodity market is broken, too.
With the widespread frustration of the
masses spilling out onto the streets of the Maghreb, Egypt, the Levant, the
Gulf, Spain, Greece, Eastern Africa, Bangladesh, Chile, and others; with even
the mighty Chinese Communist Party quailing before the popular wrath excited
by the divisive symbolism of the high-speed rail crash; with 80% of surveyed
US voters saying the country is “headed down the wrong track”;
with widespread unease in Germany at the executive’s dismissal of the
citizens’ understandable reluctance to bankroll the wider EU; with the
emerging realization that three generations of an ever-encroaching,
‘tutelary deity’ welfarism have not
only sapped the vitality out of the economic organism, but have bred out all
vestige of responsibility and self-restraint from the teeming, unweanable mass of perennial dole-puppies it has whelped
- it is therefore undeniable that politics-as-usual is broken too.
With the glaring failure to predict
even the possibility – much less circumstance – of the recent
Crash and with the even more foreseeable failure of its tired old, rehashed
nostrums of ending the slump by means of an inequitable programme
of corporate welfare, inflationary “unorthodoxy”, and the
unleashing of the debt-spewing monster of the state to gorge itself upon such
things as individuals and private concerns no longer care to consumer, it
should hardly be controversial to asset that mainstream macroeconomics
– and the reputations of the many panderers to power who practice it -
are equally broken.
Breaking the mold [or Datta. Dayadhvam. Damyata]
Whatever our individual
pre-occupations with the specifics of this collapse, we must bear in mind
that, amid all the wreckage, there are countless millions of hard-pressed
souls, each trying to earn an honest living by first identifying and then
satisfying the needs of their fellow men in the best, most cost-competitive
manner they can accomplish. In the attempt to do so, the overwhelming
majority of these strivers cannot fail to provide a living to others, too
– whether by employing their labor directly in their own factories and
offices, or indirectly, by buying in the goods and services these latter work
to supply at the workbenches and computer docks of other hirers of their
effort.
In their constant struggle to peer
into an uncertain future so as to estimate whether anyone will buy their
output and, if so, at what price; and then to decide what they can afford to
pay in turn for the necessary means to meet this potential market, they
cannot in any way be assisted by the ramification of all the multiple breakages
outlined above.
If they cannot trust the signals being
sent to them about the cost of inputs or the acceptable charge for outputs;
if they cannot assume a certain stability in the rent and availability of
working capital, or rely on the calculus of securing longer-term funding; if
they and everyone with whom they deal are being subject to wild swings in
currency rates and commodity prices; if there is no clarity about the
framework of regulation, the structure of legislation, or the outlook for taxation
– but only a well-founded pessimism that none of these are likely to
change for the better;if they begin to
see themselves as the targets both of material expropriation and pseudo-moral
condemnation – are they then likely to gove
full reign to their innate spirit of enterprise, to fully express their
characteristic get-up-and-go and, by so doing, give the rest of us a greater
opportunity to sell our wares in the marketplace for skill and sweat?
Hardly, and therein lies the rub. For if we
are to pull ourselves out of the quagmire into which we have stumbled, it
will be to little purpose to take three short, backward steps before hurling
ourselves deeper int the morass, not just with
renewed energy, byt while carrying the growing
weight of mud which clings to our clothes as the result of each previous
failed attempt.
Debt cannot be the cure for over
indebtedness, nor a more rapidly debased currency
the antidote to its ongoing debasement. We must forgo the intellectual
conceit that we can impose some higher order on the seeming chaos of the
world and instead we must simply smooth the way so that its own emergent
properties can seek out a better constellation of interconnections, all by
itself.
We must recognize that there are no workablemacroeconomic solutions which can
be laid down: that everything is a matter of functioning microeconomics building
things up; that the diamond takes on its lustrous geometry, atom by
atom; that the masterpiece hanging in the Louvre came into being brushstroke
by painstaking brushstroke.
Only get the microeconomics right and
all else will follow.
Make labor once more affordable and
its terms no longer and indentured servitude for the employer. Ensure
that entrepreneurship is no more risky than it has to be and that it reaps
the full fruits of its success – as well as seeing that it bears the
full responsibility for its failure – by clarifying law, minimizing red
tape, and, once this is achieved, by resisting the bureaucratic urge to
tinker any further.
Set prices free to perform their
function, insist that markets are able to clear, and see to it that titles to
property are both secure and simple to transfer. Under such circumstances, we
will each help to build a lasting recovery for the other, one job and one
company at a time, much more certain of our success – however much
patience will be required in its achievement -than if we were to heed the
thundering decree of some sweeping, Collectivist Five-Year Plan emanating
from the mouths of the tin gods who frequent the Platonic centers of world
power.
Financial markets may be broken,
politics and mainstream economics may be broken, but, fortunately the economy
of men is a robust, highly redundant network, furnished with its own immune
system and self-help mechanism, consisting of unhampered entrepreneurial
search and action.
As Adam Smith famously remarked,
“there’s a lot of ruin in a country” – though,
contrary to what our present rulers seem to believe, he was not issuing a
challenge to them to seek to quantify its limits.
If we are to avoid that final ruin, if
we are to properly rectify much of what is broken and not merely smother it
in inflationary balm and patch it over with a plaster of false accounting for
a further, brief, electoral, half-life, there are three things which we could
and should usefully add to the list of the downcast and destroyed.
These are, namely: that unsound money
which is truly the root of all evil; the unfunded mountains of government
debt with which such bad money engages in a poisonous symbiosis of executive
tyranny and political corruption; the duty-free but rights-encrusted Provider
State which waxes fat on that unholy alliance of illusory finance and which
not only robs Peter piecemeal to pay Paul, but empowers Pericles to oversee
the theft, and so suffuses the commonwealth with a miasma of perverse
incentives, ethical degeneracy, and irreconcilable conflicts of interest.
What lies broken, we can surely fix,
but only if we break in turn the habits of mind and the tyranny of the
man-made institutions which we first allowed to break the things we value
– our freedom of association, our independence of action, and our
individual chance of prosperity.
Sean
Corrigan
Copyright © 2006 - Copyright © Diapason Commodities
Management - Sean Corrigan
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