Applied Philosophy

In my post The Magical Jet Engine and Global Monetary Disconnect I wrote how dollars printed by a Federal Reserve eager to fight deflation are accumulating into pools outside of economic flow. That was on April 28 2008 when Excess Reserves of Depository Institutions with the Federal Reserve were a meagre $1.737 billion (source St. Louis Fed), today that number stands at $1,560.231 billion. Here is what I wrote, then, about the size of these pools:

So how big are these pools? First there is a little pool of fuel, a small matter of a trillion and a half dollars, called China; followed by a smaller pool, a solitary trillion dollars, called Japan, another trillion is divided by the world: hundreds of billions in the oil-exporting countries of Arabia, seventy billions in Russia, thirty billions in Venezuela, even crumbling Iraq has stash of dollars in its central bank.

Today Total Reserves excluding Gold for China are $3.2 trillion and it has doubled its official gold reserves since that time. Japan is a distant second with $1.2 trillion. Saudi Arabia has $558.7 billion, Russia has $456.5 billion. These four countries alone hold more than $5 trillion in reserves (source St. Louis Fed). US banks hold a trillion and a half with the Federal Reserve and European banks hold about a trillion with the ECB. All added up makes it about $7.5 trillion or fifty-percent of the US GDP.

The US is still printing dollars and exporting them to the world:

The trade deficit in the U.S. widened in January to the largest since October 2008 as imports rose to a record high.

The gap increased 4.3 percent to $52.6 billion, more than forecast, from a revised $50.4 billion in December, the Commerce Department in Washington said today.

—Trade Deficit in U.S. Widens as Imports Hit High, Bloomberg March 9 2012

China on the other hand are starting to export their own dollars:

China had its largest trade deficit since at least 1989 last month as Europe’s sovereign-debt turmoil damped exports and imports rebounded after a weeklong holiday.

The shortfall was $31.5 billion, the customs bureau said yesterday. Imports rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent, the bureau said.

—China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil, Bloomberg March 10 2012

Japan is also exporting its dollars:

Japan’s yen weakened after reported a record current- account deficit, the biggest shortfall since comparable data began in 1985, undermining the currency’s haven status.

—Dollar Reaches 10-Month High as Jobs Gains Dim Outlook for More Fed Easing, Bloomberg March 10 2012

Even Australia, a commodity exporter with a strong currency, is having a trade deficit:

Australia recorded a trade deficit in January, its first in 11 months, as weaker shipments of iron ore and coal contributed to the biggest drop in total exports in almost three years. The local currency fell.

—Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports, Bloomberg March 9 2012

All this money is going after real physical wealth: natural gas, oil, gold, etc. This in turn is pushing inflation up:

Inflation is back on the European Central Bank’s radar, complicating efforts to bolster growth as the sovereign debt crisis pushes the economy toward recession.

The ECB will lift its 2012 inflation forecast above the 2 percent price-stability threshold today, limiting its ability to cut interest rates further even as it lowers the outlook for growth, economists said.

—ECB’s Inflation Radar Complicates Growth, Bloomberg March 8 2012

High inflation has not stopped the Bank of England:

While inflation eased to a 14-month low of 3.6 percent in January, that’s still above the bank’s 2 percent target. Crude- oil prices have risen about 20 percent in the past six months. The central bank sees inflation slowing to 1.9 percent by the end of this year and 1.8 percent by end-2013.

—King to Face Renewed BOE Policy Maker Rift as Dispute on Inflation Simmers, Bloomberg March 8 2012

Inflation has been above 3.6% for the last 14 months, so inflation has been at least (it was above 5% for two months) 80% above the target. Despite all this inflation the bank has not lifted its centuries low interest rate of 0.5%. In April 2008 the monthly price of gold was $909 (declined to $760 in November) and the Federal Funds Target Rate was 2.25%, today gold is about $1700 and the rate is 0.25%. Somehow I do not believe that the central banks will react to inflation soon and when they finally do they will find that their actions have little effect.

The current international set-up is coming apart. Europe is breaking up. The Arab world is changing. China can not keep exporting cheap labour. Japan must wake up from its state of suspended-animation. Australia can not enjoy the “lucky economy” for much long. The world, as we know it, is coming to an end. End by itself is not bad: pregnancy ends with birth, study ends with graduation, life ends with a eulogy. The problem is refusing to knowledge change, prepare for it and manage it when it arrives.

The leaders of China have neither the will nor the ability to guide China into a national economy independent of the US and its global economic empire. They will drive China into the ground and then bow out of history; China will rise again as it has been doing for the last two thousand years (see The Future History of China Today).

Japan is not a fully sovereign nation and until it become one it will not solve its problems. For a people who have never endured foreign occupation in their history until 1945, they turned out to be rather docile clients of the US economic empire. This situation made sense as long as they enjoyed economic prosperity, but since 1990 they have suffered economic stagnation. The solution to their problems is extremely easy, but impossible to implement. The people themselves have neither the drive nor the will for change.

Australia is currently dominating the region with 22.8 million inhabitants, its close neighbour, Indonesia, has 237.5 million. Australia is enjoying economic prosperity, exporting the resources of the country and then re-exporting the dollars for oil and consumer goods. With a persistent current-account deficit since 1976, little wealth remains in Australia. Australia has the obstacles against change of both China and Japan: an inadequate leadership and unwilling people.

The current international set-up looks mighty solid, but inflation is like heat slowly melting the it and turning the world into a boiling liquid.

See also:

• Flow my Dollars the Central Banker Said, on the inflation/deflation debate of 2008.
• The Printing Press is a Harsh Mistress, once you start printing you can never stop.
• Stock Valuation and Interest Rate, the valuation of the stock market is inversely proportional to the interest rate.
• Zimbabwe’s Monetary Policy, an example of monetary policy in hyperinflation.

Mario Monti

He served as a European Commissioner from 1995 to 2004, with responsibility for the Internal Market, Services, Customs and Taxation from 1995 to 1999 and then for Competition from 1999 to 2004. Monti has also been Rector and President of Bocconi University in Milan. On 12 November 2011, in the midst of a financial crisis, he was invited by Italian President Giorgio Napolitano to form a new technocratic government in Italy following the resignation of Silvio Berlusconi. Monti was sworn in as Prime Minister on 16 November 2011, just a week after having been appointed a Senator for Life.

…

Monti actively participates in several major think tanks. He is a member of the Presiderium of the Friends of Europe. He was the founding chairman of Bruegel, another European think tank, which was formed in 2005. He is also the European Chairman of the Trilateral Commission, a think tank founded in 1973 by David Rockefeller.

Monti is a leading member of the exclusive Bilderberg Group. He has also been an international advisor to Goldman Sachs and The Coca-Cola Company.

—Mario Monti, Wikipedia

• Age: 68 years.
• European Commissioner: unelected.
• Rector and President of an Italian University: unelected.
• Senator for life: unelected.
• Prime Minister: unelected.
• Major think tanks.
  • Friends of Europe.
  • Bruegel.
  • Trilateral Commission.
• Bilderberg Group: “an annual, unofficial, invitation-only conference of approximately 120 to 140 guests from North America and Western Europe, most of whom are people of influence” (from Wikipedia).
• International Advisor to multinational corporations.

Lucas Papademos

Previously, he was Governor of the Bank of Greece from 1994 to 2002 and Vice President of the European Central Bank from 2002 to 2010. He was also a visiting professor of public policy at the Kennedy School of Government at Harvard University and a Senior Fellow at the Center for Financial Studies at the University of Frankfurt.

…

In 1975, he worked with Franco Modigliani on the NAIRU concept, introduced under the term NIRU (non-inflationary rate of unemployment). He taught economics at Columbia University from 1975 until 1984, and then at the University of Athens from 1988 to 1993.

He has served as Senior Economist at the Federal Reserve Bank of Boston in 1980. He joined the Bank of Greece in 1985 as Chief Economist, rising to Deputy Governor in 1993 and Governor in 1994. During his time as Governor of the national bank, Papademos was involved in Greece’s transition from the drachma to the euro as its national currency.

After leaving the Bank of Greece in 2002, Papademos became the Vice President to Wim Duisenberg (and then Jean-Claude Trichet) at the European Central Bank from 2002 to 2010. In 2010 he left that position to serve as an advisor to Prime Minister George Papandreou.

He has been a member of the Trilateral Commission since 1998.

—Lucas Papademos, Wikipedia

• Age: 64 years.
• Professor of Economic: unelected.
• Senior economist at the Federal Reserve: unelected.
• Chief economist at the Bank of Greece: unelected.
• Involved in Greece’s transition from a national currency to a non-national currency.
• Vice president at the ECB: unelected.
• Advisor to a failed prime minister: unelected.
• Trilateral Commission.

Five hundred years ago the stone age world that existed in the Americas ended and a new age of European dominance started. Now after five hundred years of European dominance that world, in turn, is coming to an end. I will be charting the revelation of this ending in a series of posts. As I explained elsewhere this ending is not physical but rather historical.

Nothing strikes me as perplexing and at the same time expected as the leadership of Europe by Angela Merkel. I will start with expected: reading history one finds always the least suited leaders at the end when crises comes to a high point and the times require a venerable Cincinnatus. Perplexing for the same reason: she is the least suited person to be the leader of Europe at this time of acute crises.

I will not review, in this post, the historical law of unsuited leaders coinciding with historical decline. I will identify the odd points in the life of Merkel. In times of social strength and historical rise a person’s background is of the most importance; Meritocracy is based on the fallacy of Individualism. This of course either persist beyond historical usefulness resulting in unqualified people in the high ranks (Europe circa 1914) or weakens considerably resulting in people like Merkel coming to the forefront of society.

let us see what Wikipedia has to say about Merkel’s background:

Merkel was born Angela Dorothea Kasner in Hamburg, West Germany, the daughter of Horst Kasner (1926–2011), a Lutheran pastor and a native of Berlin, and his wife, Herlind (born 1928 in Danzig, as Herlind Jentzsch), a teacher of English and Latin. Her mother was once a member of the Social Democratic Party of Germany. Her grandparents on her mother’s side, one of them being Masurian, lived in Elbing/Elbląg in East Prussia. Merkel stated that she is one quarter Polish in an interview with Der Spiegel in 2000.

—Angela Merkel, Wikipedia.

• She was born in WEST Germany at the time when millions where emigrating from East to West Europe.
• Her parents grew under Nazi rule and witnessed very difficult times for Germany.
• Her mother was born in Danzig in 1928. The Free City of Danzig does not exist anymore, the majority German population driven out and replaced with Polish residents.
• It seems that her mother was once an SPD district councilor (the Google translate of the article cited in Wikipedia is unclear). The time frame of this is not stated; it could have been in West Germany after 1945 or after unification.
• Her grandparents were not only Polish but Masurians! Protestant Poles: probably seen as sub-human Slavs by Germans and heretic devils by Poles.

By 1954 Merkel’s parents were in Hamburg in West Germany, this is very important as we shall see next. Growing under Nazi rule is not a problem in itself, neither growing during the Depression or World War II; any leader’s parents would have lived in the same time as Merkel’s parents. The point is that most people who came out of those times abandoned all kinds of beliefs and concentrated on material life, unlike Merkel’s father who became a Pastor. Religion is fine by me—I even think it is a prerequiste of greatness—but joining a religious institution is point in need of an answer; as a native of Berlin it could not have been conservative rural upbringing for example. Any biography of Merkel that does not answer this question is a waste of time.

Merkel is one quarter dislocated; the Masurian connection is very important as they are half way between German and Polish and have been physically dislocated from their homeland after 1945. Merkel’s parentage is not similar to most Germans.

Merkel’s father studied theology in Heidelberg and, afterwards, in Hamburg. In 1954 her father received a pastorate at the church in Quitzow (near Perleberg in Brandenburg), which then was in East Germany, and the family moved to Templin. Thus Merkel grew up in the countryside 80 km (50 mi) north of Berlin. Gerd Langguth, a former senior member of Merkel’s Christian Democratic Union, states in his book that the family’s ability to travel freely from East to West Germany during the following years, as well as their possession of two automobiles, leads to the conclusion that Merkel’s father had a “sympathetic” relationship with the communist regime, since such freedom and perquisites for a Christian pastor and his family would have been otherwise impossible in East Germany.

—Angela Merkel, Wikipedia.

• Her family moved to East Germany as millions were leaving (see above).
• Her parents are clearly from urban background but Merkel grew up in the countryside.
• I did not read Langguth’s book and whether he confirmed or denied the view of “sympathetic relationship”. The Wikipedia article does not resolve the point. The fact remains that Merkel’s family lived differently to most East Germans.

Like most pupils, Merkel was a member of the official, Socialist-led youth movement Free German Youth (FDJ). However, she did not take part in the secular coming of age ceremony Jugendweihe, which was common in East Germany, and was confirmed instead. Later, at the Academy of Sciences, she became a member of the FDJ district board and secretary for “Agitprop” (Agitation and Propaganda). Merkel herself claimed that she was secretary for culture. When Merkel’s onetime FDJ district chairman contradicted her, she insisted that: “According to my memory, I was secretary for culture. But what do I know? I believe I won’t know anything when I’m 80.” Merkel’s progress in the compulsory Marxism-Leninism course was graded only genügend (sufficient, passing grade) in 1983 and 1986.

Merkel was educated in Templin and at the University of Leipzig, where she studied physics from 1973 to 1978. While a student, she participated in the reconstruction of the ruin of the Moritzbastei, a project students initiated to create their own club and recreation facility on campus. Such an initiative was unprecedented in the GDR of that period, and initially resisted by the University of Leipzig. However, with backing of the local leadership of the SED party, the project was allowed to proceed. Merkel worked and studied at the Central Institute for Physical Chemistry of the Academy of Sciences in Berlin-Adlershof from 1978 to 1990. She learned to speak Russian fluently, and earned a statewide prize for her proficiency. After being awarded a doctorate (Dr. rer. nat.) for her thesis on quantum chemistry, she worked as a researcher and published several papers.

—Angela Merkel, Wikipedia.

• I am sure the Jugendweihe ceremony was nonsensical and at least confirmation was part of German cultural history, the point is that Merkel did not participate in the social event of her age.
• She did not study at the University of Leipzig, but at the Karl-Marx-University, Leipzig. The name change is not just superficial change, it is important to separate between a German university and an Eastern block university. Leningrad is not the same city as St. Petersburg and Apple Computer is not the same company as Apple Inc.
• At university she participated in an unprecedented initiative of that period, again Merkel’s life is different than most people.
• Backing by the local governing party is at best questionable.
• After university she worked in the most important research institution of East Germany, an institute founded by Soviet Military Administration. The academy was named ‘Academy of Sciences of the GDR’ at the time when Merkel worked there.
• She became a member of the FDJ district board, even though she did not participate in the Jugendweihe. Clearly she is the kind of person who might join an institution without really believing in its ideology.

Merkel’s youth is atypical of East Germans. Clearly her life differed from the lives of West and East Germans. Her political activity at university is questionable at best. Her 12 years working for the scientific arm of a totalitarian state is never mentioned. Her lame denial of her role (and not what she actually did) is a small note on the fact that she was a member of FDJ district board and was secretary (of a committee I presume) for either culture or propaganda.

Whether she was or was not secretary of propaganda is not as important as her denial. Is it plausible that a research scientist would not have documentation of her work in the FDJ district board that could definitely resolve this point without resorting to claims of early-age dementia? In 1990 the academy was disbanded due to its role in the GDR. Merkel, a former FDJ district board member, did not suffer from the association with the academy.

I am not sure about East Germany but scientists in the Soviet Union had a room of freedom more than the average citizen. The least we know is that the academy had two dozen West German members.

In 1989, Merkel got involved in the growing democracy movement after the fall of the Berlin Wall, joining the new party Democratic Awakening. Following the first (and only) democratic election of the East German state, she became the deputy spokesperson of the new pre-unification caretaker government under Lothar de Maizière.

At the first post-reunification general election in December 1990, she was elected to the Bundestag from the constituency Stralsund – Nordvorpommern – Rügen, which is coextensive with the district of Vorpommern-Rügen. This has remained her electoral district until today. Her party merged with the west German CDU and she became Minister for Women and Youth in Helmut Kohl’s 3rd cabinet. In 1994, she was made Minister for the Environment and Nuclear Safety, which gave her greater political visibility and a platform on which to build her political career. As one of Kohl’s protégées and his youngest cabinet minister, she was referred to by Kohl as “mein Mädchen” (“my girl”).

—Angela Merkel, Wikipedia.

• Going from the ivory tower of research to politics is not so strange, giving Merkel’s history (membership in an FDJ district board) and the surge of public into politics since 1989. Becoming a member of the caretaker government is a big step, to say the least.
• Elected to parliament on the 2nd of December 1990, exactly two months after unification on the 3rd of October 1990. She has been a member of parliament for the last 19 years.
• On the 17th of January 1991 she entered the government as a minister.
• Kohl called her “mein Mädchen”, later she would be called “Mutti” a kind of an over-bearing mother.

Merkel was elected to represent Vorpommern-Rügen a district on the Baltic Sea. It is not clear whether she had any connection with this area before the elections. The Minister for Women and Youth actually has no children of her own.

When the Kohl government was defeated in the 1998 general election, Merkel was named Secretary-General of the CDU. In this position, Merkel oversaw a string of Christian Democrat election victories in six out of seven state elections in 1999 alone, breaking the SPD-Green coalition’s hold on the Bundesrat, the legislative body representing the states. Following a party financing scandal, which compromised many leading figures of the CDU (most notably Kohl himself, who refused to reveal the donor of DM 2,000,000 claiming he had given his word of honour and the then party chairman Wolfgang Schäuble, Kohl’s hand-picked successor, who wasn’t cooperative either), Merkel criticized her former mentor, Kohl, and advocated a fresh start for the party without him. She was elected to replace Schäuble, becoming the first female chair of her party, on 10 April 2000. Her election surprised many observers, as her personality offered a contrast to the party she had been chosen to lead; Merkel is a Protestant, originating from predominantly Protestant northern Germany, while the CDU is a male-dominated, socially conservative party with strongholds in western and southern Germany, and the Bavarian sister party, the CSU, has deep Catholic roots.

—Angela Merkel, Wikipedia.

• Eight short years after joining the party—after joining the country for that matter—Merkel becomes the Secretary-General; two years later she became the leader.
• Merkel did not hesitate in criticizing her former mentor, leader, political father and a giant of the party and political class of Germany.
• Her personality might have been in contrast to the party, but her background was surely in contrast to the whole population: neither a typical West nor East German background.

From taking over the party Merkel was on fast path to ruling Germany.

I find it perplexing that the fate of Europe hinges on a woman who went from the ivory tower of scientific research to the bubble of federal government bypassing normal life altogether. The fate of Europe is in the hands if this childless Mutti who has never managed a business or worked in the private sector in any capacity, a woman who has never experienced the average life of a citizen in a liberal capitalistic society. The sovereignty of Germany is the hands of woman who gladly saw (and voted for) her country annexed by another to her direct benefit; would she surrender the sovereignty of Germany if she could be the president of Europe?

See Also:

• The Story of Europe

• The Catholic Empire 950-1350

The end of the third year for this blog seems an opportune moment to examine its track record and update some graphs.

Tsunami

On March 25, 2008 more than 24 months ago I posted the following graph in The Coming Unemployment Tsunami:

Forecast

The target was reached in less than a third of the forecasted duration:

Actual

Result: Predicted employment ratio correct, predicted duration wrong.

Shattered

On July 4, 2008 I posted the following graph in Shattered and announced that US banks were insolvent:

US banks are insolvent

Few months later I updated the graph in The Unemployment Tsunami Has Arrived:

reserves climb from $44 billion to $315 billion in two months

Now the situation looks like this:

Non-Borrowed reserves at $1 trillion

First the Fed kept total reserves constant by lending to the banks, the money was raised by selling treasuries and not printed. This went on from the start of the recession until Lehman went under, at which point the Fed started printing money and flooding the banks with cash.

However, “Quantitative Easing” is a very dangerous hallucinogenic drug, and quoting Santayana again, “Those who do not learn from history are doomed to repeat it.” Fed chief Ben “Bubbles” Bernanke, who strongly endorsed “Easy” Al Greenspan’s ultra-low interest rate policy earlier this decade, which was designed to inflate the commodity, housing, and sub-prime debt bubbles, is now fueling a massive Treasury market bubble, and legions of speculators are taking collective leave of their senses and succumbing to delusions of zero-percent 10-year yields.

—Beware – “Quantitative Easing” is Hallucinogenic by Gary Dorsch [my emphasis]

As newly printed money was absorbed by the banks, they started paying back the Fed. Their borrowings from the Fed steadily declining since then. The printed money did not cause inflation because the banks kept it in reserve with the Fed, but slowly the money is seeping to assets. Now the Fed is going to print $600 billion new dollars, but the reserves are not going higher.

The high reserves are like a huge body of water behind a dam and the economy is the little village at the foot of the dam. Would you sleep soundly if you knew there were cracks in that dam?

Result: The cure is worse than the disease.

Fed Balance Sheet

On May 15, 2009 I posted the following graph in Four Graphs:

Treasuries held by the Fed

First the Fed sold about $300 billion of treasuries to fund lending to the banks (see graph above). When Lehman collapsed the Fed stopped selling Treasuries and monetised the banks bad assets. Afterwards it started monetising treasury debt, but it did not buy back what it sold, as the following graph shows the Fed has sold short term treasuries and monetised long term federal debt. Treasury Bills (reddish lines) declined, while Treasury Notes and Bonds increased (green, blue and magenta lines).

The Fed's Treasury securities composition

China treasuries holdings, October 2010

When the interest rate increase the value of all these bonds will decline below what the Fed ‘paid’ for them. The Fed will most certainly not mark them to market, resulting in a balance sheet that does not reflect the truth, just like the banks that ‘suddenly’ went bust after years of profit making. The reality was that their balance sheets were not reflecting their true financial position.

Now the Fed’s balance sheet resemble China’s holdings of US treasuries (graph from China Sells Long-Term Bonds In October As Foreign Inflows Moderate, Fed Untouchable At Top Of US Paper Holders List at ZeroHedge.com). While banks and financial institution hold short-term debt, that must be refinanced at the new higher rate, the Fed and China are stuck with long-term debt that they can not sell without taking a loss and if they hold until maturity they will be paid with worthless dollars. For the Fed that is not a problem, for China (and everyone else)  it is a catastrophe.

Result: Federal Reserve balance sheet is going down the drain.

Euro Abattoir

On March 16, 2010 I predicted in Bear to Bear, Lehman to Lehman that after six months of Greece’s ‘bailout’ another such slaughter will take place.

On the evening of 21 November 2010, the Taoiseach Brian Cowen confirmed that Ireland had formally requested financial support from the European Union’s European Financial Stability Facility (EFSF) and the International Monetary Fund (IMF), a request which was welcomed by the European Central Bank and EU finance ministers. The request was approved in principle by the finance ministers of the eurozone countries in a telephone conference call. ….
…
On November 28, the European Union agree to a €85 billion rescue deal of which €22.5 billion from the European Financial Stability Mechanism (EFSM), €22.5 billion from the IMF, €22.5 billion from the European Financial Stability Facility (EFSF) and bilateral loans from the United Kingdom, Denmark and Sweden. The remaining €17.5 billion will come from a state contribution from the National Pension Reserve Fund (NPRF) and other domestic cash resources.
Eurogroup President Jean-Claude Juncker said that the deal includes €10 billion for bank recapitalisation, €25 billion for banking contingencies and €50 billion for financing the budget.

—2008–2010 Irish financial crisis, Wikipedia [my emphasis]

The workers’ pension fund is raided to bailout foreign creditors of private banks. Ireland is the second to enter the slaughterhouse, but it will not be the last.

Result: Prediction was accurate, but took two months longer.

Hyperinflation

Hyperinflation has been a recurring theme on this blog. People in the West have many misconception about hyperinflation, it conjectures up images of wheelbarrows and banknotes burning in the heater. The reality is that hyperinflation is more subtle than that (see Beware the Boom!) and most likely such images will not be seen in Western countries any time soon; there must first come an intermediary period of high inflation. This period will be: The Great Inflation 2011-2012.

One scenario could be: In the coming year prices of essentials will rise but those of non-essentials and wages will decline. This means that profit margins and disposable income will decrease. The year thereafter will see shortages as producers go out of business. Most of the inflation will be concentrated at the end of the second year. Afterwards the economic crisis will metamorphose into a political/social crisis. The US will enter long-term stagnation, while the EU will leave stagnation (entered a generation ago) and start to visibly decline.

Inflation is coming one way or another, gold and oil have risen respectively 24% and 8% year to date. Food cost is going up, led by wheat prices. People are starting to worry about inflation, which is the best measure of inflation.

Result: The End is Nigh.

Jersey Girl, 2004, directed by Kevin Smith, starring Ben Affleik and Raquel Castro.

The Trotsky, 2009,  directed by Jacob Tierney, starring Jay Baruchel, Jessica Paré and Ricky Mabe.

The best characters in literature are those that get transformed. Shakespeare presented one of the best and moving transformations, from Prince Harry to King Henry V, in his trilogy: Henry IV Part One, Henry IV Part Two and Henry V.

Kevin Smith tried to do the same in Jersey Girl by transforming a Public Relations guy, a person who lives by lying to the general public, to a spirited and dedicated public servant, but where Shakespeare was successful Kevin Smith fails: when it was time to present the beliefs of the character through a speech Kevin Smith has nothing to say.

Smith fails to deliver a modern day St. Crispin’s Day Speech because he does not believe in public works the way Shakespeare believed in English nationalism.

In Hollywood anything could be forgiven except believing in something and the failure of Smith was the failure of conviction:

An extended cut was shown at Kevin Smith’s private film festival Vulgarthon in 2005 (and was shown again at the 2006 festival). Cut scenes that featured in the extended version included a much longer extension of the Jennifer Lopez section of the movie that fleshed out the characters more, Ben Affleck’s full speech in the city hall, a longer ending, and some music changes.

—Jersey Girl, Wikipedia [my emphasis]

Either Smith failed to write a moving speech or hesitated when it was time to deliver the final cut.

Slavoj Žižek wrote a book, On Belief, which discussed the need to believe in something to change the world, he presents Lenin, leader of the Bolsheviks, as an  example of someone acting on his belief even though Žižek personally does not agree with the beliefs. The interested reader can read the book and evalute the arguments for himself, but I like the short judgement given by Hegel: Nothing great in the world has ever been accomplished without passion (see Weekly Lesson (2)).

Jacob Tierney,another writer-director, fails to deliver a transforming character, his protagonist has passionate beliefs  from the first until the last frame of the film. Tierney does deliver the speech, the School Sucks Speech, but prefers to let a secondary character delivers it and then have him add that he doesn’t really believe in it, but he will put deeds before beliefs.

Modern artists are unable to observe society and can only express solipsist views, I suspect that Tierney hesitated to let the protagonist of his film, i.e. his avatar, express his views in a compelling speech, but by doing so he gave the best expression for the students’ “revolt” of the sixties: young students following ideas they do not really believe in without any adult leadership, except for a few fellow travellers cheering from a safe distant. This lack of belief, of passion, explains why the students used to take exams in the morning and riot in the evening; they also put deeds before beliefs and one does not sacrifice his future for deeds alone.

This lack of belief is present in every artistic expression of modern society, from the cheapest action film to the historical epic, it seems that there are no more Bolsheviks in modern Western society.

[This is not a speculation on what might happen, rather a general description of what will happen. The future is unknown by definition, but like the next line in a poem it follows the rhythm of the whole and rhymes with what comes before it.]

1919— 1948

“In fact, the protracted history of the Chinese socialist revolution started 90 years ago in 1919 on May 4, when 5000 students from Beijing University and twelve other schools held a political demonstration in front of Tiananmen, the focal point of what is today known as Tiananmen Square.  The demonstration sparked what came to be known in history as the May Fourth Movement of 1919-21, an anti-imperialism movement rising out of patriotic reactions to China’s then war lord government’s dishonorable foreign relations that led to unjust treatment by Western powers at the Versailles Peace Conference. May Fourth was a political landmark that turned China towards the path of modern socialism through Marxist-Leninism.”

—The Socialist Revolution Started 90 Years Ago in China (Part 1) by Henry C. K. Liu

The seed for a new empire was planted, a new kind of empire. This one was not based on peasant armies or a foreign clan, this was based on an idea; the idea was simple: the only way for China to regain its world position was to apply the latest ideas from the West, whether they were tested or not. In 1919 the latest idea from the West was communism.

1949—1978

“The Mao era lasted from the founding of the People’s Republic on October 1, 1949 to Deng Xiaoping’s grip onto power and policy reversal at the Third Plenum of the 11th Party Congress on December 22, 1978.”

—History of the People’s Republic of China (1949–1976)

In 1949 the People Liberation’s Army took over the government, their first act was to split the population into two parts: city and country. The PLO spread out its rule: East Turkistan in 1949, Tibet in 1950. The Americans sucked the Chinese into the Korean war and helped drain their energy out.

Ten years later the ruling elite were quite ready to jettison communism, but Mao had other ideas and exploited the city/country divide to delay the transition for another ten years.

1979—2008

“The power transition from Hua to Deng was confirmed in December 1978, at the Third Plenum of the Central Committee of the Eleventh National Party Congress, a turning point in China’s history. The course was laid for the party to move the world’s most populous nation toward the ambitious targets of the Four Modernizations.”

—History of the People’s Republic of China (1976–1989)

Communism, which was ultra-modern in 1919, had become a stale idea in 1979. The empire returned to its raison d’etre: apply the most modern Western ideas whether they are tested or not. The fashion in 1979 was: free market, deregulation, tax cut, et cetera.

“Chinese economic reform has been undertaken through a series of phased reforms. Generally, these reforms were not the results of a grand strategy, but as immediate responses to pressing problems. In some cases, such as the closing of state enterprises, the government has been forced by events and economic circumstances to do things that it did not want to do. As of 2005, 70% of China’s GDP is in the private sector. The relatively small public sector is dominated by about 200 large state enterprises concentrating mostly in utilities, heavy industries, and energy resources.”

—Economic reform in the People’s Republic of China [my emphasis]

Adopting ideas without a sound philosophical foundation is not really a good strategy even if the idea is an old test one, let alone adopting crazy ideas coming from either intellectuals or think tanks.

“China’s growth has been so rapid that virtually every household has benefited significantly, fueling the steep drop in poverty. However, different people have benefited to very different extents, so that inequality has risen during the reform period. This is true for inequality in household income or consumption, as well as for inequality in important social outcomes such as health status or educational attainment. Concerning household consumption, the Gini measure of inequality increased from 0.31 at the beginning of reform to 0.45 in 2004. To some extent this rise in inequality is the natural result of the market forces that have generated the strong growth; but to some extent it is “artificial” in the sense that various government policies exacerbate the tendencies toward higher inequality, rather than mitigate them. Changes to some policies could halt or even reverse the increasing inequality.”

—Poverty in China [my emphasis]

And so China started to open up, granting economic and social freedoms but holding back political power.

2009—2038

“To say that China’s one-child family policy has been a disaster is an understatement. A report released earlier this month by the nation’s top think tank – the Communist Government’s Chinese Academy of Social Sciences (CASS) – says that the policy has created a huge gender imbalance with significant implications for future social stability.”

—China’s Cassandra prophecy [my emphasis]

The single worst idea adopted in 1979 was population control. The pyramids of Giza might appear mighty but all three rest on the plateau of Giza and their combined weight, millions of tonnes, hardly moved it an inch. The Chinese government might appear mighty but it rests no the Chinese people.

“The sex ratio at birth (between male and female births) in mainland China reached 117:100 in the year 2000, substantially higher than the natural baseline, which ranges between 103:100 and 107:100. It had risen from 108:100 in 1981—at the boundary of the natural baseline—to 111:100 in 1990. According to a report by the State Population and Family Planning Commission, there will be 30 million more men than women in 2020, potentially leading to social instability. The correlation between the increase of sex ratio disparity on birth and the deployment of one child policy would appear to have been caused by the one-child policy.”

—One-child policy [my emphasis]

2039 will be the last year of this central  government, the empire lasted exactly 120 years divided into four generations of thirty years each: germination, growth, glory and decline.

See also:

• The 3 by 3 Rule — Part One
• Non-linear Historical Development
• The Story of Europe
• Dynasties in Chinese history from Wikipedia

Introduction

Today I would like to re-visit a subject that I have already covered twice. In When Gold is Worthless and Hyperinflation and Gold Bugs I argued that gold is not really the safe haven that some advertise it to be. My concern here is historical rather than economic, I am not interested in investment or wealth management; what concerns me is society and the ability of the economy to benefit all members of society.

There is a strong egotistical streak hidden behind the mask of Individualism, the predominate philosophy of gold bugs and those interested in preserving their wealth from the approaching hyperinflationary storm. Egotism is a shortsighted stance that eventually costs more at the end than what it promises at the beginning. Those who recognise that the system of fiat money is doomed are duty bound to do something about it, trying to save only themselves by buying gold is an egotistical solution that will fail at the moment it is most needed.
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I recently heard, on a web-cast, a gold bug saying that the coming hyperinflation-due to the $700 billion Paulson plan-will be beneficial to those who have gold. Is that correct? The answer is a resounding NO.

Inflation does not increase the value of bullion it just changes its price in fiat currency. The price of a house in the US measured in gold is about the same it was in 1970, while in dollars the price has multiplied. The value of gold remained the same while the price increased twenty times.
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[NOTE: the announced break is still in effect, this post is the last before I go off-line for a while.]

I was recently asked to give my opinion on The Archdruid Report, a blog by John Michael Greer. Reading the posts on the main page I found some interesting stuff and some points that I don’t exactly agree with. This post will discuss some points that I don’t agree with in brief; despite my objections the blog is still worth reading and I found the little facts about American life in the forties and fifties very interesting.

“The difference between the fantasy of sudden collapse and the reality of one more localized jolt piling additional burdens on a stumbling society is well worth keeping in mind.”

-The Post-Petroleum Job Ads

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“Buy agricultural land.”

-Nicole Elliott, Mizuho Corporate Bank-Speaking on CNBC

When I heard the senior technical analyst of an investment bank suggests buying agricultural land I almost fell off my chair, not because of the strangeness of the advice but rather because of the strangeness of the messenger. People who work in the financial world never advise you to take your money out of the system. It is worth noting that Nicole Elliot is a foreign exchange analyst and she is well aware of the real value of fiat currencies, namely none. Others are saying similar things:
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Two Lines

The following graph is from St. Louis Federal Reserve Bank:

Click to view

Blue line: ‘Total Borrowings of Depository Institutions from the Federal Reserve’

Red line: ‘Non-Borrowed Reserves of Depository Institutions’

From the red line we concluded that US banks are insolvent, from the blue we concluded that the Fed (Federal Reserve) has assumed their liabilities. The result will be a terminal decline of the dollar (to zero) causing hyperinflation. Read the rest of this entry »