Deflation: The New Normal.

Let’s face it, the world is getting dangerous, and those with wealth throughout the world are finding U.S. Treasuries.  Capital flows into the U.S. economy has appreciated the dollar.  This along with deflation is a very good sign for American citizen, its a relation Keynesian govmint hates.  Let me explain.

Our founders implicitly knew of the relation between solvency and liberty.  That ethical bulwark died a long time ago when the U.S. closed the gold window providing spot gold redemption for our paper.  Now the dollar isn’t convertible into anything.  But with the arrival of digital domesticated technology something interesting happened, fiat money tied to the progressive ideology has met the bulwark of autonomy.  We’re now nomads.  The ‘new’ knowledge economy returns us to a wandering nomadic state, and if we can reform the tax code, re-boot the dollar and reform our domestic political economy, we can expect a boom post 2016.  The threats to our new economy are mainly intellectual:  confiscatory taxation, depreciation, cash transfer state economies aren’t new ideas.  In fact the whole damn thing is collapsing, which brings me to deflation.

The soaring drop in prices in the early 1920’s & ’30’s were deflations resulting from finanical panics, where central banks, being wed to an archaic idea of ‘real bills doctrine‘ couldn’t or didn’t accommodate a new sudden demand for money.  Hense, deflation.

I don’t think its a good analogy to explain today’s collapse in prices.

We’ve got a ZIRP (zero bound interest rate policy) and Q.E infinity to match ample money growth with exceedingly low credit spreads.  Today’s deflation is simple to explain, people don’t trust their governments, they’re not spending!!

Why does fatboy govmint hate deflation?  Its simple, they don’t want heavy expenditures.  They want you to have cheap, worthless paper, but they cannot permit expensive high purchasing power parity!  Remember, when the sovereignty of the people is threatened, the Keynesian politico’s wake-up.

Are you sick of hearing about ‘sticky wages’?  Then unstick them with freedom of contract, less judical meddling (comparable worth/disparte impact), or discrimination suits.  How about fewer occupational license fees??

If the central bankers want headroom then have them demonstrate their worth in mandating fiscal reform.  Worried about servicing all that debt you lovingly printed??  How about a growth based economy??  The technocrats want it both ways, print/borrow truck loads of money and spend it on stimulus right???????  This is how we got stymied demand with formal institutions loving fiat money, interest rate targeting and outstanding government debt.

Here’s the most unsettling intellectual insight from all this central banker talk:  so far the central banks of the world have a lot less understanding of inflation/deflation then they think.

The zero bound worry is here to stay.  How about fiscal reform, tax reform, sound monetary rules based policy.

How about liberty.

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Arnold Toynbee Meets Putin

The ten volume set of A Study of History isn’t in print any longer, I’m told that Oxford University Press is considering reprinting the entire series, including maps and the noted final volume titled ‘Reconsiderations’, nevertheless, a classicist like Toynbee would have appreciated the recent work of Peter Pomerantsev & Michael Weiss in The Menace of Unreality:  How the Kremlin Weaponizes Information, Culture & Money.  Toynbee understood the impact superior civilizations had when they contact weaker, more dependent communities.  The less civilized social unit becomes either militarized or collapses as it borrows from a superior source.  The only other solution than mimesis is an archaic response breeding collapse.

Here’s a quote from Pomerantsev and Weiss:  “Russia has hybridized not only its actual warfare but also its informational kind.  Much of the epistemology democratic nations thought they had permanently retired after the Cold War needs to be relearned but adapted to even clever forms of propoganda and disinformation.  The wisdom of Orwell must be combined with the savy of Don Draper. . . . 

How does one fight a system that embraces Tupac and Instagram but compares Obama to a monkey and deems the internet a CIA invention?  That censors online information but provides a happy platform to the founders of Wikileaks, a self-styled purveyor of total transparancy?  The purports to disdain corporate greed and celebrates Occupy Wall Street while presiding over an economy as corrupt as Nigeria?  That casts an Anchluss of a neighboring country in the grammer of both blood and soil nationalism and anti-fascism?  This is why American social reactionaries, Australian anarchists, British anti-imperalists and Hungarian neo-Nazis all find so much to favor in the application of Putinism, at home and abroad.  Putanism is whatever they want it to be.”

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Eric Hoffer ‘The True Believer’

Written in 1951, it remains true today:  “There is in us a tendency to locate the shaping forces of our existence outside ourselves.  Success or failure are unavoidable related in our minds with the state of things around us.  Hence it is that people with a sense of fulfillment think it a good  world and would like to conserve it as it is, while the frustrated favor radical change.  The tendency to look for all causes outside ourselves persists even when it is clear that our state of being is a product of personal qualities such as ability, character, appearance, health and so on.  ‘If anything ail a man,’ says Thoreau, “so tht he does not perform his functions, if he have a pain in his bowels even. . . he forthwith sets about reforming the world.” 

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Draghi: Hits a Nerve

The collapse of velocity (public spending) throughout the entire European monetary union isn’t something any Central Bank can fix.  This is a structural problem best resolved by politico’s.  Having the Central Bank assume responsibility for political problems that are intrinsically fiscal has been exposed.  The panic of deflation has set in throughout the Union, and no amount of quantitative easing can resolve it.

This blog has taken the responsibility to outline why the E.U. cannot procure escape velocity; the printing of money to conjure spending (velocity).  Anyone with even a cursory knowledge of Marshall McLuhan’s studies of digtial technology would understand what hampers the E.U.  Digital technology breaks the social, political hold that center-magin based civilizations have enjoyed for centuries.  The managment of expectations is all the Central Bank can achieve now.  New monetarist schools of thought have begun to advance theories of Nominal GDP to offset the advance Milton Friedman made when he rediscovered the causal relation between money supplies and spending.  Nevertheless, what we’re witnessing now throughout Europe is political, and no amount of central bank accommodation can fix what remains structural, namely the suffocating regulatory and tax regimes that underwrite zero growth.

The great enablers have failed.  Now its time for the adults in charge to do some heavy lifting.

This is why Draghi permitted the nose-dive of M3.  Even the U.S. federal reserve has revealed that central banks around the world are being asked to do too much.  Recently the European Central Bank’s Benoit Coeure threw down the gauntlet, revealing, “talking vaguely about structural reforms, but not doing them is the worst of all worlds.  It creates uncertainty over the path of real interest rates, without in tandem raising expectations of future growth.”

Translation:  central bankers have failed and must return to classical adroit political relations that dominate the third rail of modern politics:  fiscal balance sheets, structural political reform.

Why?

Well, if politicans don’t start grappling with growth inhibiting policies, then the global Hail Mary of monetarist credibility will itself become a source of cronic instability.

When central bankers begin to look for the exit, you know the Emperor has no clothes!

Let’s see is Draghi has what it takes to speak German.

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Iraq: The Battle Plan

If I had the ear of the Joint Chiefs of Staff, this is what I would reveal about what’s favorable to any U.S. incursion in Mesopotamia.

1.  Iraq’s fragile democratic institutions have really proved quite resilient given its history and imminent challenges.  It has chosen a new president among 25 different political parties in a nation fractured along sectarian, ethnic tribal identities.   President Fouad Masoum and his Prime Minister Haider al-Abadi aren’t quite in full gear, but they resemble a functioning unit with minimum interpersonal friction.  

2.  We should remember that imposing despotic rule on Iraq will NOT be easy.  All previous post liberation Prime Ministers tried and FAILED. Although still plagued with an indigenous despotic political culture, Iraqi’s no longer view the state as completely repressive.  This will prove difficult social terrain for any Caliph to manage. 

3.  Iranian hopes of ruling Baghdad won’t be easy.  Tehran did everything it could to keep Maliki, it couldn’t.  Iran even went so far as to send Gen. Qassem Suleimani to command both men and money to secure Maliki.  They lost. 

4.  Oil rich Gulf Petro-Monarchies even tried and failed to keep decisive influence in Iraq by anointing Sunni terror groups.

5.  Having absorbed the rise of ISIS throughout Mesopotamia, Iraq is now beginning to fight back with support from Saudi Arabia and rich Gulf States in the hope of cutting off funding to shape ISIS. 

6.  Kurdish ‘Peshmerga’ (death-defiers) have killed senior ISIS commanders including Khalil al-Mufakhakhah recapturing key towns, cities. 

Going forward, Iraq will need to envelop ISIS using both Kurdish and American fire/strategic power.  As of this writing, Baghdad only has four brigades which are capable of engaging and leading.  U.S. support is critical for Kurdish engagements, for the Peshmerga aren’t as experienced as ISIS.  Having seasoned fighters counts, but its technology, air power and night fighting that proves critical.  

Several uncertainties must be fixed going forward:  Obama’s studied ambiguity must end, team Obama needs to find its moral framework so as to shape the policy convictions of Muslim clerics throughout the world in the hope of countering propaganda.  Daesh’s financial resources must be drained, it continues to pay global jihadi’s U.S. currency for missions, this endless financing must be identified by Treasury and defeated. 

Here’s the battle plan:  Unambiguous moral condemnation, drain its finances and build/field joint Iraqi command centers.

Let’s Roll.

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The Post Maliki Iraq Strategy

The entire White House Press Corp hyped the execution of U.S. journalist Foley to the detriment of American foreign policy as witnessed in team Obama’s latest excursion to limit the demands of the press in shaping policy outcomes.  Yesterday’s press conference revealed a president at odds with his main cheerleading squad, the U.S. White House Press Corp.  

Asked about U.S. strategy to defeat ISIS emerging throughout the Levant and Mesopotamia, he demurred to soft-pedaling any intervention.  Simply put, team Obama has no strategy and is bereft of having to lead.  

Instead of squeezing Assad (an Iranian proxy) and formally annexing Baghdad effectively fixing U.S. strategic posture throughout the Near East; we’re naval-gazing. 

Others more self-reliant and forceful will shape the ground for an imminent future.

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An Israeli Victory: Un-finished Business

Everyone knows how Clauswitz viewed war as politics by ‘other means’.  He understood that war must have political objectives.  The Israeli’s are used to being in a state of near permanent war.  The defeat of Hamas permits Jerusalem time to view its positioning synoptically among emerging geopolitical threats.

While ISIS emerges throughout Syria, Iraq, it’s reach is beginning to be felt in northern Israel and Jordan.  Even with nearly 60% of Hamas’ rockets destroyed, Israel moved forward to assassinate its number 2 and 3rd in command, Mohammed Deif along with Izz ad-Din al Qassam Brigades.  Both are now gone.  Even the destruction of Gaza’s war infrastructure created nearly 100,000 homeless and blocks of destruction.  Hamas’ own people know that responsibility lays with Hamas.  It agreed to identical terms proposed by Israel on July 15.  Hamas has lost both its prestige, its weaponry and its tactical advantages.

Here’s the bad news.  The Israeli Prime Minister’s poll numbers are down to 38%, this is dangerous in a Parliamentary system.  Team Obama seeks to constrain and humiliate Israel.  It is isolated, but for the American citizen!

Israel’s only advantage in having hurt, degraded Hamas is that it exposed team Obama to wage a diplomatic public relations campaign that HE LOST!  By exposing Obama as anti-Israeli, Netanyahu permitted Israel’s only advantage to proceed un-interrupted:  The American Citizen.

Team Obama must now wage anti-Israeli diplomatic initiatives isolated from the American citizen.  He’s exposed now, with mounting crisis’ from Beijing to Baghdad.

My monies on Israel backed by the American citizen.

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Israel: New Diplomatic Minefield w/o U.S. Ally

News reports are leaking that Petro Monarchies are putting together another Gaza flotilla to embarass the Israeili’s is building.  This isn’t good news for Israel’s main political ally, the U.S. continues to send broad public messages of its distain for Israel.  All signs point to an impending diplomatic catastrophe.  

The minefield that could envelop Israel has two components, one tactical, another ideological. 

Hamas wants to open the Rafah crossing into Egypt.  This is Gaza’s connection to the Arab world.  It has been shut by Gen. Abdel Fatah al Sisi who seeks the destruction of the Muslim Brotherhood, the parent organization of Hamas.  

The pretext for the opening of Rafah is ‘development’!  Try not to laugh, its true.  Hamas is seeking humanitarian commodities like cement to solidify its control and rebuild.  The I.D.F’s chief of staff, Lt. Gen.  Benny Ganz continues to provide Gazan citizens with material support.  

Hamas was formally defeated by the Israeli’s.  Nearly 60% of Hamas’ rockets were destroyed, most of its tunnels and formal combat infantry decimated.  However, Israel may well find itself surrounded as Daesh threatens to add Lebanon, Libya, Somalia & Yemen.  Europe has already been peeled off by Iranian agitation.  Geopolitically, the Israeli neighborhood is deteriorating. 

It is my firm belief that the Israeli Navy can counter and interdict the imminent tactical advance of another flotilla.  

How should the Israeli’s go forward:  disarm the beligerents by force, prevent them from rearming and split off Arab citizens seeking a better life. 

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Federal Reserve: Out of Ammo, AGAIN.

Myths die hard in America.  So it goes with the idea of the ‘Phillips Curve’ and the belief that an institution can control both labor market activity and inflation simultaneously.  Even though Reagan & Volcker killed this ideological behemoth, the institutions that teach economics, especially post-graduate monolithic institutions, continue to keep it alive.

As of this writing, the Fed. has not been able to effect labor markets.  It has damaged asset prices, which continue to spike.  Asset infation is the new price spike.

With Jackson Hole wrapped up, I’d like to offer a few thoughts about going forward toward ‘normalization’, meaning policy briefs that permit markets to allocate/destroy.  In a word:  capitalism!  Instead, American capital markets suffer from politically allocated forms of credit masking Fed. dependency.  Will we ever return to normal?

Going forward, we need to do the following:  get rid of ‘ZIRP’ (zero interest rate policy), return the Fed’s traditional mechanism of federal funds rate BACK into its indigenous portfolio.   This means that the traditional mechanism used by the Fed is NO longer operational.  It must be brought back to life IF capitalism is to survive.  This over-night lending among banks to balance their reserves in compliance with the Fed’s capital ratio’s is a must.  Macro-prudential oversight is a myth; its called crony capitalism.  It’s what they do throughout Asian markets to build dominant market share.  Dump Q.E.  The Fed withdrew liquidity by selling T’bills to the banks; it increased it by buying T’bills.  The reality of ‘high-powered’ money was always negligible.  The Fed never really did ‘just print money’, it exchanged equal ratio’s of debt for cash.  The absence of traditional interest rate control mechanism must be restored IF the Fed is to get a handle on money creation/inflation.

Instead, what the Fed has sought is the regulation of baseline money through payment of higher interest on excess reserves on deposit at the Fed.  In reality, this is not a viable policy.  Here the Fed seeks to persuade banks to tighten credit by bribing them with higher returns.  This could dangerously wipe out the Fed’s own capital base.  Remember, it only had $80 billion to return to Treasury, hardly enough to finance the kind of largess imaged by FOMC members. By making credit more expensive, the Fed would need to pay out to foreign owned institutions.  How do you think that’s gonna play out domestically?  And just why does the Fed wish to destory its own earnings?

Overnight borrowing by the Fed is called REPO.  Its utterly laughable to think the Fed could manipulate so broad a market as the r.e.p.o. market.  It would entail possessing knowledge of foreign capital markets as well as dominant foreign players like Russia, foreign commodities or sovergn funds like the House of Saud.

The Joint Chiefs have a saying:  Mission Creep.  The Fed possesses it now in spades.

It began when Fannie/Freddie received a dispensation from Treasury to dump their portfolio at the Fed’s door step.  We still haven’t had a market sell-off of morgaged backed securites.  We need one.

Here’s a thought George Melloan had:  “If the Fed cannot control interest rates or the money supply or inflation, why does it think it can rule by fiat macro-prudentially?”

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Fallacy of Western Collectivism & Moral Superiority

The west’s moral crisis is similar to Islam’s.  Both need to re-discover the role of reason.  Secular fanaticism is just as real as theological fanaticism.  Remember the definition of a fanatic?  Its someone who refuses to distinguish between ends & means. 

What is the origin of this fallacy?  

Secular fanatics believe in a dualism, they believe that the basic components of reality are binary.  Since the Enlightenment, the west believed that reality was an indissoluble unity, it was for Einstein as he grabbled with the components of a unified theory.  For those with a synoptic education, science was always a justification for sound philosophy.  Nevertheless, secular fanatics always believed that reality is composed of a dualism.  We witness it everyday in major news media throughout the west as we witness that world opinion is a wellspring of great moral authority.

Did you get that?

A philosophy of pure immanence provides the foundation for moral norms.

Secular fanatics believe that this component of reality is self executing?  No need for political institutions right!!

Are sentiments alone sufficient?

Remember Dr. Martin Luther King Jr?  Remember how he spoke that the arc of the moral universe is long, but it bends toward justice!!

Is this the secret from ‘leading from behind’?

From North Korea, to the Iranian Gulag we continue to witness an evil we remain unwilling to confront.  

In THE real moral universe, political institutions are needed to execute strategy to create, if not force, the creation of Judeo-Christian norms.  For the secular fanatic, the sentiment alone suffices.

Team Obama cannot anticipate that his secular humanism of sufficient sentimentality provides a license for fanatics across the globe.  

Here in the west, we ardently believe in a philosophy of time that unites ethics and progress.  

Theological fanatics know differently. 

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