Just How Many Legs Does This Stool Have?

September 10, 2008 – The U.S. used to be a safe harbor of stability. But the “legs” that supported that stability have been systematically cut off. Where will it all lead?

By The Cerebral Aesthetic Vagabond

It seems like the people running our government and commercial apparatus are systematically and deliberately cutting the stabilizing legs off the stool we call our economy. It’s as if they are completely unaware of the inevitable consequences of their actions, which is total economic and societal collapse. Do they think they will survive such an eventuality unscathed? Do they think they will swoop in and buy all our distressed houses, lands, businesses and cars at bargain prices? Do they really want to be a part of a nation that’s reduced to third world conditions of abject poverty? Are they thinking ahead or focused on short term gratification of their insatiable greed?

For decades housing in America was a bedrock of stability, providing people with the security of a roof over their heads and a store of savings that could be passed on to their progeny. Long term residence in one house also contributed to a stable community. Thanks to encouragement and facilitation by the people running things, housing morphed from a place to live into a transient, can’t-fail “investment,” in just a few years transforming itself from a beacon of security into a ball-and-chain of debt servitude. I read recently that 9% of the nation’s mortgages are troubled! Think about that: one in eleven Americans with a mortgage is having trouble paying for their house.

U.S. Treasury bonds, which used to be “good as gold,” are being debased right and left, not even factoring in their declining value because of dollar devaluation. Today the Federal Reserve is trading treasury bonds for banks’ worthless mortgage-backed securities, tainting treasury bonds by association. The U.S. Treasury itself is now bailing out Fannie and Freddie, which I think can only harm the value of treasury bonds. Bailing out numerous more banks is a given. But then what, the automobile manufacturers and airlines? Where does it stop?

Its current irrational bounce notwithstanding, the U.S. dollar, which was once internationally accepted as “good as gold,” has been sliding downward into oblivion for years. Everything denominated in dollars has thus been covertly falling in value as well, including stocks, treasury bonds and bank accounts. Prior to the creation of the Federal Reserve a dollar retained the same value for decades. Like stocks or treasury bonds, one could dependably hold dollars as a stable store of wealth. That’s no longer true today and one is better off to spend their dollars on “real things” as soon as possible. Keeping dollars in a bank is to watch them lose 10% of their value every year. Since the creation of the Federal Reserve in 1913, 95 years ago, the dollar has lost 95% of its value, according to many experts.

The stock market, once a relatively safe and stable place to park one’s money for long periods of time, has become a treacherous sea full of hungry sharks, some of whom have the power to manipulate the markets to their advantage. Even consummate stock market enthusiast, Jim Cramer, recently implied that people should pull their money out of the stock market because it’s become too treacherous and rigged.

Precious metals, the age-old safe haven for parking one’s wealth, have perhaps been irreparably harmed by overly aggressive manipulation, which has produced some bizarre and unprecedented consequences. For example, relative to soaring demand there is a clear global shortage of physical gold and silver, yet their prices are plummeting. Furthermore, there are now several prices for these precious metals: the “paper” price, the physical dealer price and the “eBay” price. The normal price discovery mechanism of the precious metals market is broken and it’s nearly impossible to determine what the prices ought to be. Perhaps that was the goal of the recent crescendo of manipulation: to break the back of these markets and send everyone scurrying in a panic back to fiat currencies. Although many refute the notion that precious metals prices are being manipulated, attributing the sharply declining prices to “normal” market activity, I disagree. For one thing, the primary driver of the prices is the so-called “paper” futures market. Unlike other futures markets, where the buyers genuinely intend to take delivery, almost nobody buying futures contracts for precious metals intends to take delivery; and almost nobody selling futures contracts intends to deliver any metal. These markets are knowingly trading little scraps of paper that ostensibly represent physical metal, but all the parties involved know that no metal will ever change hands. Moreover, more metal is being sold via these contracts than can likely be delivered. So the futures market for precious metals is fundamentally fraudulent and therefore “manipulative,” even if manipulation is not the primary intent of some of the participants. Another interesting consequence that may arise from this bizarre disconnect between the value of precious metals and their prices is that mining companies will not be able to make a profit at current prices. That means they will go out of business. That means that the new supply of precious metals will dry up, exacerbating the price/value disconnect. It remains to be seen if mining companies really do start going belly up.

Other major sources of stability in America were its vast industrial base, which provided good jobs and generated real wealth; and its vast agricultural base, which provided meaningful employment and a resilient supply of food. Today our industrial base has been largely exported to other nations and our agricultural system is concentrated in the hands of a few giant corporations instead of distributed amongst millions of family farmers. If all else failed, at least these former family farmers could put food on the table. Today they must work – typically for some corporation – to earn money to buy food, which is sold in grocery stores and often imported from other countries.

While I’m not a fan of regulation, in an economic system like that in the U.S., which is one of government-protected monopolies rather than a free market, government regulation is the only thing that can keep companies “honest.” There is no genuine free market to perform that role. The strong regulatory tradition in the U.S., up until about 1980, was a genuine stabilizing force. It prevented drug companies from unleashing unsafe drugs on an ignorant populace; it prevented banks from engaging in risky investments, using depositors’ money; it prevented people from getting in over their heads in a house purchase; it protected consumers from predatory corporations. Today, while most of the regulations remain in place, the important Glass-Steagall act being a notable exception, the regulations are simply not enforced. I don’t know why the FDA, EPA, SEC, FTC and CFTC even exist anymore because they don’t regulate anything; today they act more like industry lobbyists. Consequently corporations have pretty much been allowed to run amok in this country, abusing their financial power and implicit government backing to cheat people, bully them, prey on them and generally leave them feeling bewildered every time they turn around.

Until recently there was a far more equitable and stabilizing distribution of wealth in this country. Today something like 1% of the population owns 50% of the nation’s wealth. And whereas forty years ago a corporate executive might have earned thirty times the salary of the average employee, today it’s like five hundred times! There are people today who earn a salary of $1,000,000,000 ($1 billion) or more per year!

One by one, the legs of our once stable political and economic system have been sawn off. As I gaze over the ravaged landscape from a bird’s eye perspective, what I see is increasing volatility and instability in both the political and economic realms. Witness the increasingly volatile moves in the financial markets. Or consider the extreme intolerance exhibited by the “authorities” at the recent political conventions, or their fervent predilection to employ tasers to deal with the slightest recalcitrance or lack of respect. One observation worth noting is that over the last three decades we’ve seen only degradations to our political and economic system, no improvements of any kind. I guess that depends on your perspective, though. If you are among the 1% at the top of the pyramid, then I guess you’ve seen only improvements; if you’re among the bottom 99% you’ve seen only degradations.

While I marvel at the acumen with which the powers-that-be have managed to maintain the illusion of normalcy and prosperity, even as they systematically amputate the system’s stabilizing legs, I can’t help but wonder how much longer they can hold the system together. Nor can I help but wonder how it will all end and where it will leave us.

Update – September 10, 2008

I just ran across this humorous piece, which couldn’t be more timely.

The End