ashes! ashes! we all fall down

I have often been accused of imagining the Federal Reserve to be the boogeyman of the world. I have never refuted this accusation. To me, all the roads to Hell lead back to the Fed. Whether its world hunger through inflation, or world tyranny by sponsoring a militaristic government, the Fed in my view is central to all that is vile. 

I will not indulge here in an exposition of why this is my belief. My beliefs aren't as relevant. But facts are. The future is. 

My cautionary tales often seem exaggerated and hyperbolic. But i would rather err on the side of caution when the fate of so many is at stake. So humor me. 

I believe that a perfect storm of economic calamity is brewing, has been brewing for a while, and is now gathering frightening speed. I base my assertion on the following observations:

1. Bonds

For the last several years, the Federal Reserve has been keeping interest rates at near zero values, by engaging in what is popularly known as Quantitative Easing. QE is fed-speak for money printing. In its latest avatar, QE is now engaged through Fed purchase of bonds worth $85 billion a month. In the absence of this Fed bond buying scheme, market interest rates would be much higher. So the Fed has effectively been keeping bond rates low by becoming the buyer of first resort. 

At last glance, the Fed balance sheet was close to $3.5 trillion. They have painted themselves into such a tight corner, that even 'talk' of tapering back the bond buying shot up the yield on the 10-Yr Treasury note by a 100 whole basis points. If yields continue to rise, bond values will fall enough to disrupt a multitude of funds. The bond market has a massive impact on both domestic and foreign fronts. From 401Ks to mutual funds to the trillions worth of treasuries held by China and Japan, an implosion in bond market would have a devastating impact on world markets. If the world becomes a net seller, the Fed will some day become the buyer of only resort. 

2. Stocks

With the Fed keeping rates at record lows through trillion dollar a year money printing, a big chunk of that liquidity has found its way into the equities market. While the economy is still on Fed life support, the stock market has managed to find all time highs. So deep is the perversion of the capital markets, that the S&P tanks every time there is positive news on the economy. The investors know that with every good news, the chances of a Fed tapering its extraordinary easing increases. So good news is bad news for the stock market. They thrive on data that keeps the Fed inconclusive. The days when economic indicators dont show a lot of strength, or a lot of weakness, are the ones where the indexes make new tops. Even a suggestion of ending the Fed's program sends the stock market reeling. 

There was a time when stocks indices were representative of the health of the economy. Not anymore. The Fed, by fixing the price of money through interest rate manipulation, has completely distorted the old indicators. The money supply has increased manifold, and the waves of liquidity dont know where to crash. The bond bull market seems ready to finally keel over, saving cash is a losing proposition with zero bank rates and rising inflation, and the scars of the real estate market have not yet healed for many. So the Fed is forcing the citizenry as well as investors to speculate in the stock market, which is increasingly disconnected with the state of the real economy. 

3. Real Estate

After the 2008 crash, experts believed that the housing market would not recover for many years to come. And yet, we find ourselves in the midst of another mini-housing bubble, which looks suspiciously like a 'dead cat bounce'. I think a 'pump and dump' is a more apt description. Institutional investors, flush with free money, are a substantial driving force behind this 'recovery'. As opposed to the the historical average of 10%, cash investors form more than 30% of the current buyers. Once again, speculation is rife in housing, and these investors will be the first to flee with their profits when the market begins to turn sour and houses become unaffordable due to rising rates.

After the bond and the stock markets, real estate forms the 3rd leg of the economic stool that is supported by the Fed's zero interest rate policies. For these 3 markets to remain intact, the Fed needs to keep printing money, creating further distortions, and many more bubbles. It is imperative that the Fed stop its madness soon, but its clear that it cannot. All the taper talk is nonsense. The Keynesian medicine has poisoned the blood, and any effort to restore it will now only result in withdrawal symptoms unlike anything seen before. The Fed will continue printing till it all comes crashing down.

4. Unemployment

The labor participation rate has been shrinking, and 70% of the jobs that are being created are non-tradable service sector jobs. Manufacturing jobs have actually been decreasing. The corporations have been able to show steady profits by cutting cost and moving more of their jobs offshore. The high paying jobs are being moved overseas, while the earlier full time jobs are being converted into part-time jobs to avoid Obamacare mandates and other labor expenses. While restaurants, malls and fast food chains seem to be the pre-dominant employers now, since the US economy is driven by consumption rather than production, the overall consumption will continue to fall as the rotation from high paying full time jobs to low wage part time jobs continues. 

5. Student debt

Student debt in the US is now higher than credit card debt. As students graduate into low wage service sector jobs, many are beginning to default on this debt. It is also affecting their behavior towards traditional investments/expenses that pulled the US economy : cars and houses. More and more graduates are moving in with their parents, burdened by excessive debt acquired all too easily from willing government lending programs. 

6. National Debt/Municipal Debt

Alan Greenspan and Ben Bernanke have effectively bankrolled the gambling at Wall St, as well as profligate government spending, for well over a decade. Greenspan's low rates along with Bush's populist housing policies precipitated the housing bubble, while Bernanke and Obama seem hell bent on outdoing their predecessors by creating multiple simultaneous bubbles of their own. The national debt now stands at a staggering $16.7 trillion. The interest payments on this debt could easily balloon from $250 billion to $850 billion a year, if interest rates resume their upward march towards historical averages. In an age of decreasing income revenue, this could put a tight squeeze on government spending. With food stamps, disability payments and other social handouts at an all time high, cuts in government spending will radically increase social tensions. 

Municipal debt is another ticking time bomb, waiting for the economic fundamentals to reveal the fraud perpetuated by the Federal Reserve. As rates rise, it will become harder and harder for cities to service their debt, increasing the likelihood of Detroit-like bankruptcies all over the country. Unmanaged bankruptcies have a deleterious impact on workers expecting a pension, basic government services etc.

7. Too big to fail

As capitalism was betrayed during the TARP bank bailouts, a dangerous precedent was set. Moral hazard was ignored. Risk was socialized, profits privatized. Those banks, now even more dependent on  making profits via low interest spreads, are bigger than ever. As rates rise, bonds stocks and real estate markets get knocked down one at a time, these banks will find themselves back at the government trough. 

8. Emerging markets

From China to India to Brazil, emerging markets have struggled to get their economies going. Facing currency wars arising at the Fed, most of the developing world has been forced to print money and create domestic inflation to maintain parity with the dollar and continue their export driven economies. None of these policies have worked to their benefit. China has a serious real estate bubble and shadow banking issues.  India is getting mired deeper into its socialist spending habits by guaranteeing food and employment to the poor, while ignoring the capital creation needed for such endeavors. Unlike the 2008 crisis, in the next financial collapse, there is nobody left to take up the slack. 

In the coming global reset, we are all looking at painful resolutions. This time, we all fall down. When will this reset happen? A few months from now? A few years? Who knows. But it does seem inevitable doesn't it. 

And yes, i blame the Fed. I blame the elite. I blame a system of ownership, that has decided to consume itself by not checking it's short term greed for long term ruin. A modern-day Ouroboros, oblivious of it's nature to eat itself. Human history is saturated with examples of strife during economic cataclysms, governments out of control, out of sense. We think it can't happen to us. 

It can. And it will. 

Crossing the Rubicon

When Julius Caesar marched on Rome with his legions, the Senate collectively exclaimed in shock. How could this happen? No Roman general had marched on Rome before. It was unprecedented. A direct attack on the Republic and the Constitution. It was blasphemy, treason. 

Of course, history reminds us that this was not really true. Caesar was not the first appointed dictator to turn on the Republic. Only a few decades ago, Sulla had marched on Rome as well and won handily. The purge that followed saw close to 10,000 anti-Sulla Romans massacred. The curious thing, not often seen in history, is that Sulla gave up his absolute powers and retired. Caesar, the embodiment of the hunger for power, would not make that mistake. The precedent had been set, and he would not waste it. 

It is also important to remember that when the Senate tried to correct this fatal error on the Ides of March, by slicing and dicing Caesar up on the Senate floor, they ignored the most basic tenet of life on this planet. Violence begets violence. Before they could claim the Republic restored, a civil war broke out between Marc Antony and Octavian, rendering the point of the assassination moot. Out of the ashes of Caesars pyre, was born the great Roman Empire, with Octavian transforming into the divine Emperor Augustus. 

For the next 400 years, the Senate tried in vain to go back to the Republic. But the dice as Caesar famously said, had been cast. Years later, senators loyal to the republican government conspired to kill the mad Caligula, who would become the first, but not the only, emperor to be assassinated. But the Praetorian Guard would choose the 'half-wit' Claudius as their next anointed one. And so it was, the power that had been unleashed, would not be reigned back in. Not until it had completely consumed the Empire, and the quaint idea of Republicanism with it. When the Empire finally dissolved in 476 AD, freedom and liberty were dangerous ideas, not to be trifled with. The stage had been set for the onset of the Dark Ages. The Roman experiment with democracy and a people's government had led to the greatest empire the world had ever seen. 

Flash forward 2000 years, and power seems to have lost none of its potency. The American experiment  in the republic and individual liberty has once again led to the most powerful government the world has ever seen. Rule of thumb seems to be, the smaller they start, the bigger they get. Just like with Caesar and the Senate, the US Congress today seems flummoxed by the NSA revelations. How could this happen under their watch? Has the surveillance state reached the point of no return? This of course ignores the fact that the power being abused was set in motion by the Congress itself, in the form of the Patriot Act a decade ago. Americans, like their Roman pleb counterparts, seem more interested in the bread and circus routine. They seem to forget that where power exists, it will be abused. For the longest time, conservatives challenged civil libertarians in finding Patriot Act abuse. Now that the abuse has been revealed, the public seems to be hiding behind the 'i have nothing to hide, so nothing to fear' sand of self-delusion. Liberals scoff at the apprehension behind the NDAA Indefinite Detention Act, safe behind their leader's assurance that he will never use it. Of course it is only a matter of time before the power that exists, shall find hands that are willing to abuse it. 

At the height of backlash against the NSA, things stand such - Snowden has been called a traitor by the highest ranking members of the Congress on both sides of the aisle, the Amash amendment seeking to end the NSA spying on citizens has been defeated, and other agencies like the FBI and the DEA, not wanting to be left behind, are seeking their own spying infrastructure, to rival the NSA. Meanwhile, Manning faces life in prison for uploading a video of American 'soldiers' gleefully cutting to ribbons unarmed men and children through what would look like a gaming console. As if to drive home the point, the Obama administration, that paragon of transparency, has persecuted whistle blowers under the Espionage Act seven times, more than all the previous Presidents combined since 1917. 

It may seem like we are on the verge of crossing the Rubicon once again, but like in the past, that too would be a misunderstanding of events. We have already done so. The public outrage over government overreach, whether in personal lives, or economic activity, or foreign policy, is decidedly anachronistic in nature. It is out of place, out of time. The Republic is dead, the emperors behind the curtains have become adept at pulling the strings, and the dice.....it was cast long ago.

The only question that now remains, is whether we will learn anything from history at all. Will we wait, till things fall apart completely, and we are forced to resort to violence and the irrationality of it. We must remember the Senators of Rome, who for centuries tried to overthrow the Empire through assassinations, never to succeed. We must remember the French revolution, led by the goddess of Liberty herself, only to pave way for Napoleon. How about the Russian revolution of the proletariat, that led to its own empire, and its eventual bankrupt collapse. Even the contemporary violent orchestrated overthrows in Iraq, Afghanistan, Libya, Egypt scream the same lessons. Violence is not the answer. We must don the cape of peace, in all aspects of our lives - personal, social and political. Economic peace (no coercion through taxation, no Fed distortions through price fixing of rates, zero support for warfare/welfare state, personal responsibility, charity, liberty). Social peace (no coercion through federal laws enforced by the State, let gay-rights drug-rights abortion-rights and other divisive social issues be decided at the most atomic community level, live and let live). Personal peace (in spite of our innate violence, never to give in to it, especially with children. violence begets violence). 

These are difficult choices to make. But make them we must. Only individual responsibility towards peace can turn us from the course we are on. Only a philosophical change in our mindset to shun violence and coercion in all its forms, State and Individual, can prevent the unmooring of our social fabric. We must abandon moral relativism, and stand strong for the defense of individual life, liberty and property. Only then can we break away from this gory pattern of history, the endless cyclical lust for power, and those few who seek and use it against the majority.