President Obama’s Asian Problem

By Karl Denninger, The Market Ticker

William Pesek opines:

Barack Obama sure has lots to discuss on his maiden voyage to Asia as U.S. president. Yet all this is just conversation compared with the real issue on Asia’s mind: a wobbly dollar that’s putting the region’s money at risk.

Think of this trip as a visit to America’s banker, and an unpleasant one. Asia wants assurances that the U.S. can repay its fast-mounting debt and prevent a dollar crash. The reality dawning on Asia is that Obama can’t offer them such a pledge — not with U.S. borrowing so out of control.

Unfortunately this sort of misdiagnosis is common – that The US is borrowing in an “out of control” fashion on its own initiative.

Nope.

America could not dream of borrowing $2 trillion a year in new commitment, and meeting the debt service on $14 trillion (current + next year’s deficit), if interest rates were at 10%.

This simple fact puts the lie to any claim that we have an “independent central bank.”  We have no such thing, and as a consequence all the whining and crying about “Audit The Fed” bills is not just misplaced – it is an outright misdirection and scam.

The Fed has never truly been independent, save once – under Paul Volcker.  Never before or since has The Fed acted without due regard – on its knees if you will – before Congress and The Administration.

Volcker did it because despite the heat he knew he would take (and he did) it was necessary.  This is where the much-vaunted “independence” claim has arisen from.

But that was one man, not a structure.

It was one person with conviction and willpower, not the pantywaists that now infest The Fed.

I have often opined that the issue is not now and never has been a gold standard or lack thereof.  Hard money monetary systems have been subject to the same “boom and bust” nonsense that we have experienced since the 1970s, and in fact, they were just as common and often more damaging.  1873, for example.  Or Tulip Mania.  South Seas bubble?  Asian Tiger?

The problem is always the same – what I call “The Wimpy Syndrome”.  Left to their own devices, politicians, when confronted by a desire to spend money they don’t have, will always resort to eating the hamburger today and trying to pay next Tuesday.

The theory behind an “independent” central bank is that it is supposed to be immune to The Wimpy Syndrome, in that it can control borrowing costs through liquidity actions.

That’s a mighty big knob they got….

No, not the monetary policy one.  The other one – attached to Dodd, Frank, Obama, Ways and Means, Pelosi (well ok, not Pelosi) and Reid.

Since Volcker’s time at The Fed the executive and legislative branches have willingly turned a blind eye to the scam machine known as “Wall Street.”  Oh sure, Wall Street has legitimate functions – capital formation is important, as is floating bond sales.  No problems there.  The issue comes about when the 50 basis points is no longer enough and greed starts to press people to look for 55, then 60, then 100 – and the only way to do it is to lie, cheat and steal.  The campaign coffers fill up and the byzantine world of Federal Law and Regulation come out to protect the cheaters, even if only by obfuscation.

Likewise when the politicians want to spend more money.  Normally you’d have to tax more to spend more, but that’s not politically acceptable.  So we float some more bonds, claim everything is ok, and off we go spending money we don’t have. “Deficits don’t matter” becomes the mantra, and despite the fact that many Democrats bemoaned Dick Cheney mouthing those words, President Obama and Pelosi’s House have done nothing to change that viewpoint.  Instead they have accelerated the unsupportable spending – full throttle.

What is supposed to happen to scammers is that when they get caught they go to pound-you-in-the-butt Federal Prison (not the “Club Fed” golf outing style) and the companies they run lose their corporate charter, as (effectively) did Arthur Andersen. 

What is supposed to happen to the government when it tries to spend more than it makes is that the “Bond Market Vigilantes” show up.  That is, to fund ever-rising debt the bond market will ordinary demand more and more coupon (interest), thereby serving as a brake on unsustainable government spending trends.

This presumes The Fed doesn’t interfere in the latter, and the crooks don’t manage to find the means (legal or not) to get The Federal Government to ignore their scams.

That’s a very nice fantasy you see there Mr. Magoo.

So let’s cut the crap.  If the Asians don’t like us borrowing so much money stop lending it to us.  Cut the crap with the circle-jerk mentality that mercantilist political schemes are in some way compatible with honest and fair dealing.  They’re not, any more than the vendors in Shanghai hawking software .et.al. are all selling “fully licensed and legal copies.”

This nonsense about the dollar ever having been ”safe” is a bad joke.  Certainly the corrupt politicians in China, Japan and elsewhere are well-aware of the principle of seigniorage – that is, the “value” of money less the cost of printing it.  Why would they believe our political machine wouldn’t exploit the very tool they have used themselves?  Such hubris.

At the same time if The Fed and its members are “concerned” about the destruction of the only thing they have to sell (dollar-based credit) then pull the system liquidity down until rates move higher.  A lot higher.  Keep doing it until the crap stops – until Congress either stops spending or the auctions fail and they’re forced to cut it out and the carry trade is made unprofitable and thus is unwound.

The issue is not now and never was about the economy.  When I ran MCSNet I could have grown the company 10x faster by using leverage – that is, debt – than operating on a cash basis.  I refused, because while I might have wound up with 10 times as much money, I might have also wound up with a big smoking hole in the ground where my firm once was.  Debt is not necessary, other than self-liquidating trade credit, in the operation of a firm, and indefinite geometric growth is not possible in any space of finite resource – like this rock of finite size we all live on.

That doesn’t mean there aren’t responsible uses of debt.  There are.  But playing Wimpy writ large to the tune of $12 trillion dollars isn’t one of them, nor is operating a financial institution at 20, 30 or 40:1 leverage (that is, with just over $2 in capital for every $100 in “assets”.)  The latter only makes sense if you have reason to believe that if you blow it (remember, as little as a 3% loss in such a situation wipes you out!) the taxpayers will step in and “save” you.

That’s exactly what they both expected and got for the most part, right?

Economic contraction isn’t necessarily bad, nor is deflation.  Both can be, but both squeeze out the bad actors – the scam artists and those who simply promised the impossible – and make them pay through bankrupting them.  That’s exactly what is supposed to happen on a somewhat-regular basis, and in fact it is necessary to have a sustainable economy – the scammers and imprudent need to be flushed on a regular basis or they crowd out all the legitimate business people (after all, you can always make more money stealing!) until only the scammers are left!

Until either Asia or Bernanke grow a pair, shut their jawboning, lying yaps about “concerns” and act we will see no meaningful change – or reform. 

That is, you, the average American, will continue to be asset-stripped, you will see your real standard of living decline, and ultimately, you will be tossed into the street and onto the public dole, until that too collapses under its own weight.

Welcome to reality.

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