Hic Sunt Dracones: Here Be Dragons
European cartographers in the middle ages often represented far away lands or distant oceans as inhabited by strange and terrifying creatures. Dragons worked as a convenient shorthand for the fear and anxiety of the unknown. While there are few truly unexplored and unmapped geographical areas anymore – the ocean deeps being about the only real example I can think of – that doesn’t mean there’s nothing new under the sun.
Of course, history is replete with speculative bubbles, global recessions, deflation, international trade collapses, and heavily indebted households. But those periods have always passed, indeed our political and economic betters are almost sanguine about the great recession because, hey, deeper the recession the faster the bounce back. But they’re wrong, and as anyone who has read this blog knows I don’t think much of the economic “recovery,” not only are the GDP and employment numbers truly pathetic for any kind of v-shaped recovery, but the stimulus – primarily in the form of attempting to artificially prop up financial asset prices – means that the price signals have become totally disconnected from reality.
Put simply, what we have never before seen is a globally-interconnected financial system and financial elite, where even relatively small fluctuations in prices can set off global panics, turbocharged with HFT systems and their triggers amplifying what historically might have been localized financial panics. Because of the globally-interconnected financial system, and the same small group pulling the levers of political power in just about every economically relevant country in the world, we end up with a massive and globally coordinated effort to 1) minimize wage inflation everywhere, while simultaneously 2) prop up financial asset prices. That’s why Wall Street and the global elites are back in the game, while everyone else suffers from declining wages, increasingly harsh limitations on bankruptcy, and price increases on commodities that are widely traded in financial circles, e.g. oil, food, precious metals, etc.
And a situation like this is unique in history. Wage inflation is being throttled to prevent even a minimal decline in the value of financial assets, which means debts can’t be paid back, except through government guarantees. But the government guarantees and the “liquidity support” initiatives kill any actual and accurate realignment of prices between what people can afford to pay in a declining wage environment, and what the commodities are worth to traders playing with government money.
China is building empty cities, here in the U.S. the government is giving people money to buy cars and houses and guaranteeing everything under the sun rather than letting prices fall to a more natural level, Europe is about to bail out Greece’s creditors (not, actually, Greece, natch) with the rest of Club Med on the horizon. Thrice screwed is the taxpaying wage slave – once by their declining income (thanks to the Fed defining inflation primarily in terms of wages), twice by bailing out creditors whenever something goes wrong, and yet again by the persistence and increasing value of their debt obligations in real terms. If you can think of a historical analogue to this state of affairs globally, I’d love to hear it – even the great depression really only lasted from 1929-1933, with a with a relapse from 1938 until WWII kicked into gear.
So here we are, in uncharted territory. Even leaving aside wildcards like peak oil, global warming, nuclear terrorism, or a host of other possible black swans, the question is: is there a way out? And, if there is, I don’t see it. The amount of debt at all levels sloshing around the world, household, small business, sovereign, is astronomical, and can only, only be paid back through massive inflation. But inflation is not some magical pony, it actually needs to pass through to wage earners and small businesses before they can pay off their debt, and pay taxes on it to relieve sovereign debt burdens, but that is not being permitted.
In fact, we’re possibly only months away from wage deflation at the average level, and are likely already there at the median level:
And outside the financial sector, pricing power is a complete joke:
As David Rosenberg put it:
Moreover, the price deflator for the corporate sector was a mere +0.6% at annual rate in Q1 and +0.1% on a YoY basis. In other words, the corporate sector, notwithstanding the profits rebound, which has been centered more in financials than in industrials, is 10 basis points shy of outright deflation.
The inflation is limited to the financial elites and their financial market speculations. It is not only not doing real people any good, it is actually harming them by driving up commodity prices. Economics is not driving this. This is an economic nightmare of epic proportions, because the governments of the world have been completely captured by a small and incredibly powerful economic elite that that is pulling the levers of governmental power to enrich themselves, and screw you.
I’m not one for conspiracy theories, but we’re seeing it happen in real time. It should not be permitted to continue.