All things are subject to the law of cause and effect. This great principle knows no exception. Carl Menger (1840 â 1921)
Karmaisking has the following qualifications B.Com(Hons), LL.B(Hons), MA, LL.M. and is currently in hiding from the banking and government zealot-zombies, due to his strong advocacy of the heretical Austrian School of economics. He believes the zealot-zombies relentlessly search for - and then destroy - anyone with either gold or a brain. He has both, and therefore lives in perpetual fear. He works as a commercial lawyer by day and writes on the machinations of the global financial system by night on his blog 2020 Speculator. A sample of his writing is below, for your amusement:
Investing on the Ledge Above the Ninth Circle of Hell
Danteâs Inferno is a fun and informative read on losing your soul to Satan, but for some strange reason itâs rarely if ever recommended by economists or financial advisors to their clients. I suspect thatâs because they are themselves all members of Satanâs Spawn and donât what to reveal family secrets, but I leave that for you to decide.
As a panicked coward fatalistically convinced we are well on the road to monetary Hell, I find myself coming back to Dante to obtain insights into the future. If this seems strange, you have not kept track of the pathetic advice given by mainstream economists and financial advisors.
Turning to Danteâs Inferno, I find it an uncanny predictor of our financial future. Weâve had the Lust and Greed of the 1990s. Weâve had the Violence of two major (failed?) wars and numerous acts of terrorism and bloodshed. Weâve had the financial Fraud, on a scale never before seen in modern times. Weâve seen pass by in recent years the Hypocrites (Blair, BushâŚ every politician in the Western world), the False Prophets (Greenspan? Bernanke?), the Pimps and Seducers (ask Tiger Woods) and the thieves (too many to name, take your pick).
According to Danteâs roadmap to Hell, weâre just about near the Ninth Circle â Betrayal. The Ninth Circle is ringed by massive overbearing giants - which I interpret to mean the blood-sucking, parasitic âToo Big To Failâ behemoth banks. These ugly giants apparently symbolise pride and the other spiritual flaws that lie behind acts of treachery. Dante got that one spot on, I say.
The giants stand on a ledge above the Ninth Circle of Hell and on this ledge the lying traitors are distinguished from the "merely" fraudulent in that their acts involve betraying a special relationship of some kind. There are four layers of traitors, each layer more treacherous than the last. First, there are the mortgage originators. Then there are the investment banks. Then there are the ratings agencies. And finally there is the corrupt government, sycophantically buying up every piece of rotting paper the TBTF banks want to unload onto the sucker taxpayer.
How is this nightmare going to end? Fire or Ice?
Well, Dante apparently opts for a deflationary depression (Ice) and I think his choice was inspired. I too tend to think weâre more likely to face the chilly winds of a deflationary depression than the roasting Hell of a Weimar inflationary inferno. Antal E. Fekete, another apocalyptic Austrian, similarly opts for Ice, not Fire.
The key point to note is that after the biggest build up of private and public debt in human civilization, the least likely outcome is a return to stable single digit growth. The âbell curveâ that the whole of the mainstream economics profession uses to calibrate risk in financial markets has become a farcical fabrication.
The unprecedented simultaneous debt binge has caused the bell curve to bifurcate. We are on the ledge above the Ninth Circle of Hell. It will be Fire or Ice.
For Ice, get out of debt and keep your savings in short term treasuries or safe government debt and have around 10% of your savings in physical gold.
For Fire, buy soft commodities, farmland, gold and guns. Burn your fiat paper trash for warmth or spend it now on the real goods youâll need in a Financial Armageddon.
Take your pick.
What causes inflation?
Inflation is simply debasement of the currency, or increases in the money supply. Whenever you get more money injected into an economy, prices go up where the money squirts out.
Imagine a natural spring. Those close to the spring pick up the mineral water first. They cart it off to the city and make a margin on the product when they sell it. Those closest to the fountain get âwetâ first. Similarly, imagine where money comes from. It comes from banks making loans (mostly). Where does that money go? Thatâs where the inflation will first appear.
Now the curious thing about this recession is that the money supply is increasing but prices as measured by the CPI donât seem to be rising. Whatâs going on?
Inflation is occurring, just not where you expect it. Itâs occurring in government pork and government employee numbers and in government contractors making big bucks off government spending.
Banks are lending massive amounts of new money â to governments around the world. They are the only entities the banks can find who will pay them back (even if it has to be in worthless paper currency). Therefore, the âdeâ-flation that we should have seen occur to âcureâ the credit bubble has been deferred â by way of an increase in brain-dead government employees!
This is unlikely to âcoverâ for the loss in private sector activity because government spending is generally unsustainable and therefore has a lower âvelocity of moneyâ than genuine private sector investment. However, these ridiculous âheroin stimulus packagesâ do cover up (temporarily and only to some degree) the deflation we should have had, coming out of the âcredit boomâ years.
Because of the massive distortions and misallocations caused by (1) the classic ABCT credit-fuelled Ponzi-boom and (2) now the ridiculous unsustainable government spending, crowding out the private sectorâs access to cheap capital for real sustainable projects that the public actually wants, we are now going to get (at the end of the day) much higher unemployment.
Higher unemployment is baked into the cake because of the massive stimulus spending. Take any specific âstimulusâ measure, be it âCash for Clunkersâ in the US or the âFirst Home Buyerâs Grantâ or incentives for home insulation or solar panels. Now, simply ask yourself: What happens when the âstimulus spendingâ stops?
Most of the âstimulus spendingâ simply brings forward future consumption patterns - it re-allocates inter-temporal spending patterns, but doesnât actually increase the total consumption over time. I see the balance of the forces being slight deflation rather than hyperinflation, but the dynamics are the same. I see possible inflation (possible hyperinflation) in 2013-2015, but thatâs a long way off â and I mightnât even be alive then (hereâs hoping!).
Only Austrians such as the brilliant Peter Schiff understand that you can have very high inflation and very high unemployment because of preceding bad investments and unsustainable economic activity, leading to an economic dead-end rather than to ongoing economic activity. When you build on Ponzi-quicksands, you fall into Ponzi-quicksands.
The Austrian Schoolâs 7 Commandments Amended
As quoted from Jim Sinclairâs website:
The Austrian free-market economists use common sense principles:
1. You cannot spend your way out of a recession.
2. You cannot regulate the economy into oblivion and expect it to function.
3. You cannot tax people and businesses to the point of near slavery and expect them to keep producing.
4. You cannot create an abundance of money out of thin air without making all that paper worthless.
5. The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever.
6. You cannot live beyond your means indefinitely.
7. The economy must actually produce something others are willing to buy.
I myself would add an additional 3 Commandments, to get to the obligatory 10:
8. Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: âFirst, do no harm!â
9. Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10. Gold is Godâs money.
The motivating madness of government fascism
People donât see crises coming because they believe in the rationality of government. They donât see the dynamic inherent in a coercive rent seeking entity that necessarily compels governments worldwide towards madness again and again and again.
WWI was madness. The Great Depression was madness. WWII was madness. Hiroshima was madness. The Cold War was madness. Chernobyl was madness. The deliberate death of the Aral Sea was madness. The destruction of arable land worldwide to convert this precious fertile land into low-density residential development is complete madness. Deliberate and government-supported over-fishing worldwide is unsustainable madness. The GFC was predictable madness. The continued presence of the West in Afghanistan is madness.
Why do governments the world over act with such apparent suicidal, manic-depressive blind stupidity, such venal short-termism, such environmental destruction, such barbarity?
Because very simple incentive structures built up over time around the coercive activities of government compel it towards destructive barbaric madness. Simple.
Those contractors supplying government make money out of what government does. Government (originally) was developed to provide a limited range of essential services â law and order and defence. Suppliers to government have a natural incentive to try to convince government to spend more, to make government bigger. Itâs an easy gig because governments can print to finance their own spending habits (unlike the private sector).
Governments then get bigger doing things they shouldnât do. And because there is no appeal process beyond government (all you can do is appeal to another agent of government), government has a natural tendency to get bigger because nothing can stop it short of complete anarchy. So it keeps growing until chaos really does ensue.
This happens again and again throughout history and every time people are âshockedâ by the chaos, by the suddenness of the social breakdown. The Soviet Union, Iran, the US in the â60s, Cambodia, the former Yugoslavia, Europe after WWIâŚ all these regions experienced government-induced chaos, government supported madness.
The US will experience exactly the same social breakdown, the same insane bankruptcy, the same comic-tragic stupidity. Why? Because the dynamics of government compel the country towards this inevitable denouement.