This interview from Matterhorn Asset Management was worth listening to. They’re part of a larger financial company with somewhere north of 5 billion CHF under management.

As a side note, I have fond memories of the real Matterhorn, and look forward to my next visit.

The general theme of the interview is the global re-alignment between Russia, China, and Europe along with the skittishness that foreign powers are feeling in relation to the US in general and the dollar in particular.

Malmgren’s sense is that influential centers like the Council on Foreign Relations seem to be discounting this more than they really ought to, even though it’s broadly understood that the US has dropped dramatically in terms of diplomatic standing in recent years.

What’s difficult for Americans, even those who have been theoretically raised to have a global outlook, is that American education is so weak even at the elite level, that most Americans don’t really have a good understanding of either themselves or how their country is seen by foreigners.

The interview subject basically tells it like it is: the US has a history going back to the revolution of defaulting on its external and internal obligations through inflationary policy. Chinese and Russian elites recognize this, and are saying “we want hard assets.” This is one of the drivers of the conflict in Ukraine. Russia acted to keep a key agricultural country within its sphere.

With the US willing to use sanctions against a major country like Russia, undermining rhetoric about global free markets, it’s no surprise that we’re seeing echoes of mercantalism show up, with these countries going after land and influence, edging away from the American-dominated international trade network.

The US subverted Ukraine without any real material motivation that made any sense at all — it was evidently driven by democratic messianism, with some gibberish about natural gas routes thrown in to enrich a few consultants here and there.

Malmgren also notes that the motivation behind austerity policies is diminishing, because all that’s really being done is that it slow the speed at which debts are accumulated, rather than addressing the root issue. She phrases it as “the social contract will need to be renegotiated,” because what people currently expect from states is not actually deliverable.

Parties like the AFD in Germany and FN in France are growing rapidly in popularity, and it’s evident that Europe is not likely to hold together. The doctor is confident that Germany and the Bundesbank have plans in place to replace the Euro with only minimal disruption to the Germany way of life.

Market participants tend to be at least moderately irritated that the markets have been tipped to financial institutions — she terms it as “the playing field is tilted” — and it’s not clear that that state of affairs can be maintained for all that long. People are confident that the markets will remain open even during a crisis, but are not confident that it will remain anything like a fair playing field in terms of purchasing power in a crisis.

What’s heartening to hear about these sorts of discussions is that people are becoming somewhat more willing to be open about what’s going on in the global markets, but only by a little. The new era that we saw come into play in the early 1970s is coming to an end. It’s going to upend a lot of common-sense assumptions about how the world works and how it’s likely going to work in the future. To put it mildly, there are going to be a lot of ‘renegotiations’ and ‘realignments’ going forward.

One of the most interesting features of post-2007 America is that despite the plummeting incomes and labor force participation across the board, many of the aesthetics and aspirations of the remnants of the middle class remain absolutely the same.

In fact, if you go through the millions of lifestyle-design-and-architecture blogs which have rushed into the void left behind by the closures of many glossy magazines in the genre, it’s as if nothing has changed in terms of the imagery and expectations of the formerly upwardly mobile classes, even though they are no longer upwardly mobile in real terms. The participation rate chart from the BLS is down and to the right.

Despite the substantial drop in wealth and work among the vast majority of the population, the images on television and in magazines become more hysterically aspirational. Part of the reason for this is because economic elites believe and teach that promoting an optimistic social mood is more important than promoting a sound currency and sound economic policy. A robust ‘consumer’ is seen as critical to spurring the popular conception of economic growth, even though production and saving must precede consumption for it to be a sustainable process.

Given that new business formation is at a historic low, but aspirational hysteria around ‘startups’ is at an all-time high, there is clearly some disconnect there between fantasy and reality.

What’s interesting about the increasing ‘virtualization’ of culture is that the physical world of reality tends to be neglected in favor of the world of screen-images. 69% of adults over 20 are overweight or obese, with a little more than half of that being obese, but you wouldn’t be able to tell from all the photos and advertisements showing a population of toned and tight Übermenschen wearing spandex workout gear, greased for the camera.

This means that a majority of the country suffers from a serious major health issue, along with all the other related health issues that flow down from being fat.

Incomes apart from those in the top segments have declined or have not kept up with price increases:

This is rather what you would expect with a small portion of the society being the beneficiary of a fully paper-money financial system and a state ideology that limits broad access to property rights, because the entire point of a paper money financial system is to violate property rights and make it more challenging for ordinary people to accumulate savings and avoid taxation.

This data (which is of questionable reliability, especially when ‘inflation-adjusted,’ particularly considering that the definition of ‘inflation’ is always being ‘hedonically adjusted’ by a government council, with important sectors being excluded from the calculation) is reflected by broader social mood

Because academic, governmental, and banking economists tend to be heavily Keynesian, they lack the conceptual framework to respond to this state of affairs in an effective way. They see ‘inequality’ and presume that that is itself the problem, because of ideological prior beliefs that they have redefined as wise ‘economic science.’ Having misidentified the problem, they proceed to follow up with improper treatments, usually designed to redistribute from the higher segments to the lower ones, with special efforts spent on raising up the lower half through some measure of ‘enrichment’ and welfare.

It is very hard for Americans to break out of their intellectual framework because doctrinaire nostalgia for the disastrous era of the New Deal is pervasive and unquestionable. It is next to pointless to even try to convince the average ‘far-right’ American that the New Deal was misguided, because the political faction that opposed the New Deal was suppressed, marginalized, and kept far away from the education system.

All this being said, our goal isn’t to fix America, in large part because the problem can’t be fixed. The progressive leadership class has an unshakable faith  in its beliefs and ways, and is no more amenable to persuasion than any other entrenched leadership class in a declining state is. In fact, the more that their policies tend to fail, the more fervently that they cling to their beliefs, in the face of any evidence that contradicts the ideology.

Instead, you produce something that can compete with the US — only strong competition can force it to evolve or fail. It’s important to stop thinking in terms of how you will help a country ruled by barely-updated 1930s doctrine to repair itself. They’re never going to do it. The prominent beliefs are never going to change until circumstances force it to change. When the negative characteristics of a culture begin to dominate all the positive ones, that culture often finds itself flailing at an environment that no longer supports its habitual behavior. This is the situation that the un-reformable Americans find themselves in.

If we can learn anything from history, an attempt to reform would probably be the worst thing for America, because nation-states, due to the way that they are structured (reliant on fixed institutions of ever-metastasizing growth), a mere slowdown in the rate of growth is sufficient to implode most of its critical institutions, in part owing to the ironic lack of flexibility inherent in an ‘elastic’ monetary system requiring ever-exponentially-rising issuances of new debts to support older debts.

The reason why it’s ironic is that the elastic monetary system, resting on ideas that hold that the quantity of money can be ‘insufficient’ to fuel economic growth, is supposed to be the flexible option, whereas hard-money systems are supposed to be a ‘straitjacket’ which prevents economic growth. The truth is actually inverted — a hard money system permits expansion and contraction in the economy depending on real conditions, whereas a pure paper-money system demands permanent expansion regardless of real conditions, which leads to routine collapses in activity owing to that predictably excessive enthusiasm.

Returning to the title of this post, the US is no longer young and upwardly mobile, but old and downwardly mobile, adopting many long term policies that will lead it to converge in terms of behaviors and political beliefs with the lukewarm-managed-market-Marxism of Western Europe. The response should not be to try to convince a large portion of its leadership to stop this path, which is its fate to pursue, but instead to persuade a sufficient portion of the better class of person to defect away from that order, and to make a new one which is competitive.

This is a viewpoint which most conservatives are not yet willing to take, because it involves shoving Uncle Sam down the stairs and not caring how many bones he breaks on the way down, or otherwise just letting the fellow navigate the stairs by himself, and not lifting a finger as he slips, rolls down a few flights, and collects bruises and knocks to his old noggin.

That would be a profound change in mental framework for most Americans, which most are not going to be willing to make, because changing habits and beliefs requires more energy than they can muster. Knowing that fact is to also know that the US will not desist from its doomed path, chosen decades ago.

Inflationary economic policy fuels speculative activity, tends to grant both political and cultural power to successful speculators, and tends to impoverish regular mercantile activity.

Why does this happen? Is speculation morally illegitimate? Is it at least suspect?

On the left and on the more traditionalist right, the answer tends to be ‘because speculators are evil, yes, and yes.’ This owes to a misunderstanding of the role of the speculator in economics. Surely the rise of an enormous speculating class is a sign of social problems, but they are not necessarily themselves the source of those problems. Governments especially enjoy using speculators as scapegoats, because many of them tend to succeed more from volatile prices, which people who are not skilled speculators tend to struggle to deal with.

The function that speculators perform is to re-order production through speculative buying and selling to changes in real market conditions, meaning changes in supply and demand. If there is a good harvest, then production needs to be re-ordered to take that into account — supply is stronger relative to demand. If there is a bad harvest, then conditions must change to take that into account.

Every person engages in some measure of speculative activity, even if it’s not their primary goal.

Inflationary monetary policy, meaning a policy that involves issuing more currency than is retired, tends to fuel speculative activity because it introduces a major additional variable to the way that markets work. Adding on foreign exchange between different national markets only adds to the complexity. The more shifting conditions that need to be addressed to maintain production, the greater the need there is for speculators.

What we see in an inflationary economy is the creation of a parallel structure of production to the previous one which existed before the great inflation. This is often articulated as the creation of a ‘new economy’ using new methods, with new people who are closest to the institutions that provide the new money and credit. According to all the reasonable metrics, this creates the appearance of an economic boom. It can be around railroads, software, farm settlement, war materials, or whatever industry that the state wishes to promote first, at the expense of the preexisting economic structures.

The shiny new railroad company gets pumped full of investment to build tracks to nowhere, while the existing canal company moving a greater quantity of freight finds it difficult to continue operations — the redistribution inherent in the inflationary process changes the structure of production. That the railroad goes bankrupt once the monetary expansion slows down, while the canal company also goes bankrupt due to the earlier policy, shows the pointlessness of inflationary monetary policy at least from the perspective of the broader society.

This is what is confusing about the usual definition of ‘inflation’ as a general increase in the price level, rather than referring to the expansion of the money supply. First, there is no objective definition of the ‘price level,’ and can never be, because the data set is too large (being nearly infinite) to draw anything but inferences from. Second, the increase in prices is only a lower order effect of inflationary monetary policy. It just happens to be the effect that tends to topple governments due to mass rebellion.

When the people are crying for bread at a lower price, your government’s days are probably numbered, because it’s an easy justification for a coup.

Prices are also rarely correlated in a general fashion. If you create special lending facilities for, say, racial minority home ownership, you are going to provide a lot of purchasing power to racial minorities, having a disproportionate impact on the price level of homes in the areas where they are buying them. If this lending facility is more profuse than others, it will have a disproportionate impact on prices in the areas where it is used.

Similarly, special lending facilities for certain investment banks or for entire nations prop up prices for the goods, securities, and services that those beneficiaries of inflation buy first, to a disproportionate, non-correlated degree, at least until the new money has worked its way throughout the broader economic system.

This explains ‘ghost city’ phenomena — credit is extended to a new development on a speculative basis (there is no financial history for economic development on a barren patch of land — only manipulable comparisons can justify it). The construction happens, producing apparent economic activity (‘GDP growth’). When the development proves to be uneconomical, the development is abandoned, and it does not produce anything for anyone anymore, because the project was untenable.

 

In such an environment, the speculators find easy opportunities in correcting the prices continually because of the issuance of new money. It creates volatility where there would otherwise be stability and predictability.

The ‘class of degenerate speculators’ that historians typically observe in these environments tend to succeed because they call the bluff of the inflationary policy, see that the projects being funded are shams that will not survive, and ride the spikes and short the collapses, because it’s much more profitable to capture the monetary spread than it is to actually do productive work. Speculation makes production possible, but it is not production itself.

When you learn to spot this type of character, you tend to spot them over and over in both the historical context and the contemporary one. In the modern US, the speculative type — and their political enablers — dominate the business press, earn the adulation of the people, and enjoy popularity among politicians. They seem to exude a numina which would not exist absent the monetary policy that provides them with their privileges.

In terms of politics, the speculators tend to be in favor of the continuation of inflationary policy, because, as a class, most of them can only survive in an easy money environment. They are like a type of fish that explodes in population when ocean temperature rises above a certain threshold (in America, this is sometimes called the ‘financialization‘ of the economy, noting the mass increase in employment in the Finance, Insurance, and Real Estate industries [FIRE] after 1971).

Normal people see this and feel resentful about the state of affairs — they see that honest labor is not rewarded as it once was. The reason why it is not rewarded as it once was is because loose monetary policy leads to a continuous economic restructuring — routine systematic errors (the boom/bust cycle) shake workers out of companies and dissolve those companies regularly, because these fixed economic structures are not very liquid — it takes time to strip a factory of equipment and sell it, but it takes picoseconds to sell a financial position.

Inflation also tends to have corrosive impacts on social mores. The hard worker suffers because his long-term orientation shackles him to doomed companies or even entire industries, while the speculator can move his capital from one burning building to another, blithe to what happens to the people living and working within those buildings.

In general, when society has departed from sound money principles, it’s difficult to revert to the previous state of affairs without war. Napoleon returned France, at least as far as the state was concerned, to stringent hard monetary policy, following the financial depredations of the revolution.

The funny thing about this mode of political degeneration is that rhetoric almost never works. It can sometimes be halted by bureaucrats or strong leaders that see the value of instituting a wise but unpopular policy. It’s more typically ended by coup, revolution, or invasion, because the long term effects of this monetary policy is a hollowing-out of the previously existing social structure, temporarily strengthening the hand of the state, but destroying the body of the people.