The Great Transgression

The United States Central Bank wether it likes it or not is ultimately responsible for global monetary policy either by controlling the default risk free rate or by nature of our reserve currency.

The current Fed has responded, with little precedent and arguably appropriately during the initial phase of the 2007-2009 crisis by printing money. They have set short term rates at zero and become the central banker to the world printing trillions of additional dollars that the world can’t seem to get enough of, particularly recently. But is this course sustainable?

Conscious capitalists argue our economy should be built and run in a sustainable fashion. This doesn’t mean just making us drink wheat grass shakes, limiting 16 oz soft drinks, or putting solar panels on our house. The point of the movement, however fragmented it is, is to design and build sustainable replacements for our unsustainable and brittle physical and economic infrastructure, products, services and systems. Sustainability is more than about feeling good about a single act or product which is selfishly individual. It’s about national security, economic development, job creation, creative destruction, and ultimately the disintermediation of unsustainable products, services and systems. Sustainability is built on a tenet of scarce resources and attacks flawed technology, flawed accounting, flawed assumptions and flawed systems-level thinking. The neo-classical economic model’s definition and treatment of externalities as costless and priceless losses to society is a failed systems-level paradigm.

You cannot solve recurring problems with larger versions of the same solution. This idea is no different than asking your two year old not to throw food on the floor. When that fails some people tell then not to do it, and then yell, scream and even resort to physical intimidation or violence. Even if the physically violent response “works” what do we think we’ve imparted to that child? Does the toddler learn manners and social graces, both of which would be sustainable lessons that they would use and pass on with adults and peers? No, violence only teaches fear. Think of any bully. A toddler raised in fear grows up to be angry, you don’t need to believe in psychology at this point to have observed it. But I digress.

The Fed, in it’s early and appropriate response to the liquidity crisis after Lehman failed has created a system of free money, and worse, a systems-level thinking of free money which at its core-no text book needed-is unsustainable.

If money is free, it is worthless. If the currency is worthless then the entire economic system is broken as we are seeing in some form in Greece right now.

This is the purpose of the Fed, in their own words from their website:

“The Federal Reserve System, often referred to as the Federal Reserve or simply “the Fed,” is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.”

The Fed is failing its own mandate. Endless ZIRP policy and and unabashed money printing is NEITHER making us safer NOR creating more flexibility. Quite the contrary. The fed at the very least is digging us into an unsustainable trajectory that will ultimately end with even harder decisions than were made in 2008. I don’t believe the current Fed is evil, stupid or purely politically motivated, although I have my doubts on the last one. The biggest problem, which is similar to problems of the Bush administration is hubris and dogma.

The only way to create a safe and flexible backdrop for economic activity is to have the ability to move levers in multiple directions. This requires an extreme bias for moderate policies in any direction, something like steering an oil tanker in a narrow channel. An oil tanker responds too slowly to know exactly how far the captain is correcting the direction so he uses extreme caution and slight movements to stay centered and nimble. This philosophy and centeredness is completely lacking at the Fed today.

As we dig ourselves deeper into a position of sovereign indebtedness and take steps closer to eliminating the value of currency altogether we put ourselves closer to the patsy seat at the global poker table leaving little room for flexible strategy. A strategy defined by faith and hope is better suited for men of God, not leaders of the free world.

Obama ran on a platform of Hope. It was a powerful campaign, but Hope is not an economic strategy nor a sustainable model for success.

Bernanke is convinced that the depression could have been avoided using policy tools he has unsheathed since 2008. Let’s assume he is right. If not the Great Depression then what would we have ended up with instead?

A Great Repression? As noted by many others our current system of penalizing savers in favor of borrowers is a form of financial repression.

A Great Decession? The current status quo has seen the US slowly erode once dominant positions in global economic policy, trade policy, foreign policy, global defense policies and a host of once untouchable pole position of global power. A weak economy and a weak currency is a recipe for a slow fall from grace. A strong economy AND a strong currency make for an unusual bargaining position, just look at Germany in the context of broader Europe.

A Great Egression? The numbers of US Citizens renouncing their citizenship while small in absolute numbers is beginning to balloon in relative numbers. More and more wealthy Americans have lost interest in or confidence in an American future.

A Great Oppression? When wealth becomes concentrated by the few, regardless of their benevolence, there ensues a form of economic oppression where it grows increasingly harder for “just anyone” to amass great wealth. Simply put the super rich spend a small
fraction of their wealth and that slows the velocity of money in the system, limiting how often dollars change hands.

When all this plays out, and we look back in 80 years it would not surprise me that this difficult period is reflected upon as The Great Transgression. A period of time where the economic rules of law were totally and unilaterally transgressed at the expense of “saving the system”. A period where credit seniority only held weight IF the government or some other supra national entity did not intervene. A period where the many were led by the few further from their goals and dreams guided by fear of harder outcomes. A period of time where multiple transgressions were made possible through the growing frequency of global panics.

Bernanke may successfully lead us away from the known path of a Great Depression. But does he know where we end up if we maintain the current unsustainable course?

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