The world is upside down

“We live in an economic system in which a particularly good crop is often an economic disaster, and we restrict some of our agricultural productivity in order to ‘stabilise the market’, although there are millions of people who do not have the very things we restrict, and who need them badly.. We have a literacy above 90 per cent of the population. We have radio, television, movies, a newspaper a day for everybody. But instead of giving us the best of past and present literature and music, these media of communication, supplemented by advertising, fill the minds of men with the cheapest trash, lacking in any sense of reality, with sadistic fantasies which a halfway cultured person would be embarrassed to entertain even once in a while.. We have reduced the average working hours to about half what they were one hundred years ago. We today have more free time available than our forefathers dared to dream of. But what has happened ? We do not know how to use the newly gained free time; we try to kill the time we have saved, and are glad when another day is over.”

– Erich Fromm, ‘The Sane Society’, 1955.

The world is not flat, but upside down. How else to account for the developing world sending its capital over to the ‘affluent’ west, in the form both of government bond purchases, and banking sector rescues investments ? Perhaps the delusion was not in having higher expectations for the Doha Round, but in believing in the existence of something called global free trade in the first place. Textiles might be a special case, but as Pietra Rivoli pointed out in ‘The Travels of a T-Shirt in the Global Economy’ (Wiley, 2006), the only time in its entire existence that her Floridian t-shirt ever encountered a free market was when, as a second-hand cast-off, it entered the mitumba for-profit market in used clothing in Africa. At all other times it was at the mercy of federal price supports, trade tariffs, lobbyists and an alphabet soup of sundry protectionists.

And of course, there is precious little evidence of free markets operating in the Anglo-Saxon banking world – rather, administrations on both sides of the Atlantic seem determined to perpetuate a culture of privatising profits and socialising losses, and pulling any number of rabbits out of hats to avoid dealing with the messy reality that an extraordinary period of easy money and increasingly lax lending standards has culminated in an appalling collapse of credit, confidence and trust in the financial system. No matter how long the property bear market persists, the distrust of financial institutions will likely outlast it. The late pursuit of short-sellers of banking stocks is only the most recent manifestation of an ingrained authoritarian support for the morally indefensible. Short sellers aren’t the problem, incompetent and venally conflicted financiers are.

Charles Hugh Smith expands on this theme: has the USA, he asks, become a giant Enron ? The Houston-based energy giant, it will be recalled, was once the seventh largest corporation in the US by market capitalisation and claimed revenues of $111 billion in 2000. By late 2001 it was bankrupt, having destroyed 20,000 jobs and $2 billion in employees’ pensions. “How,” asks Charles, “is our entire financial system any different ?”

Bogus inflation numbers are the first factors Charles cites behind a financial system “based on cooked books, lies and deceptions”. Readers who like to contemplate their economic statistics from beneath a tinfoil (or tin, for that matter) helmet can use John Williams’ Shadow Government Statistics website. The US Government is not acting in isolation in ensuring its books are extensively cooked – the UK Treasury has now torn up the rule books relating to something our prime minister once referred to as prudence. And normal conditions have been suspended for the banks, which have now been given a one-year reprieve from the accountants for taking back debt assets onto the balance sheet. Widespread money illusion is now entirely understandable: as we first wrote two years ago, the good ship ‘Money’ has slipped its moorings and, unanchored by anything as troublesome as fiscal discipline, is being blown all over the harbour. Since regulatory fiat, investment banking “innovation” and accounting procedure can effectively conjure up money out of nothing, who is to say what any paper-based assets are really worth any more ? Where financial markets are allowed to trade freely without the regulatory grit of short-selling special circumstances, it is no surprise that the shares of financial companies, the recent relief rally notwithstanding, are on semi-permanent sale. Other manipulations: the unemployment rate, GDP, and the balance sheets of corporations, pension funds and government agencies which significantly understate liabilities and exaggerate assets and likely future earnings.

Of course, to truly ensure that all faith is lost in the financial superstructure, it is not enough that politicians lie. Corporate executives are also required to be evasive. Happily, there has been no shortage of equivocation there: see, for example, the completeness and transparency of the rolling write-down process as announced by Merrill Lynch over the past twelve months: $5bn on October 5th 2007, revised to $7.9bn on October 24th, with another $11.5bn on January 17th 2008, followed by $6.6bn on April 17th, with another $9.4bn on July 18th, and another $5.7bn on July 28th..

But at least US banking institutions have defenestrated the more obviously guilty accountable parties; their British counterparts are still stuck firmly in denial mode. That points to further stock market losses by the banking convoy of death.

As to the broader equity market, evidence of lower oil prices would doubtless help sentiment. Happily, there is a growing amount of the stuff, and not just the primary trend in the price itself. In a recent letter to the Financial Times, a Mr. John Holmes wrote as follows:

“Sir, the peak of every speculative bubble is always marked by some extraordinary event that demonstrates the excesses resulting from that bubble. The news that oil prices have swollen Kuwait’s national coffers so much that they are to invest $132 billion on a new city – the Silk City – and to build an international rail network linking with Damascus, Baghdad, Iran and China is the best sell signal that we could ever see for the oil price.”

Jeff Matthews sees evidence of lower oil prices to come in the cartoon strip of his local newspaper:

Guy: “The Huns are scaling the north wall.”

King: “Prepare the troops for hand-to-hand combat !”

Guy: “Shouldn’t we dump the boiling oil on them ?”

King: “Not at 140 bucks a barrel.”

“..when Congress is moved to blame the spike in oil on “speculators” in order to cover up their own miserable failings, and a comic strip uses the price of crude oil as a punch line, you know we’re at the end of a cycle.”

So the oil market may be on the point of confirming a dramatic softening – but that still leaves the ongoing deterioration in international property markets, banks and consumer spending to contemplate. An environment of widespread deleveraging on the part of financial institutions suggests that investors now anticipating the return of easy profits are likely to be disappointed. There are plenty of cheerleaders forecasting days of plenty – cheaper oil will help the market tone, but it does not cause our very real global economic problems to vanish overnight. Investors still require three attributes: patience, discipline, and a plan.

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Originally published at The Price of Everything and reproduced here with the author’s permission.