Letter From America (About Capitalism, Part III)

State-Wrecked: The Corruption of Capitalism in America–Part III

 By DAVID A. STOCKMAN
New York Times

Published: March 30, 2013

. . . While the Fed fiddles, Congress burns. Self-titled fiscal hawks like Paul D. Ryan, the chairman of the House Budget Committee, are terrified of telling the truth: that the 10-year deficit is actually $15 trillion to $20 trillion, far larger than the Congressional Budget Office’s estimate of $7 trillion. Its latest forecast, which imagines 16.4 million new jobs in the next decade, compared with only 2.5 million in the last 10 years, is only one of the more extreme examples of Washington’s delusions.

Even a supposedly “bold” measure — linking the cost-of-living adjustment for Social Security payments to a different kind of inflation index — would save just $200 billion over a decade, amounting to hardly 1 percent of the problem. Mr. Ryan’s latest budget shamelessly gives Social Security and Medicare a 10-year pass, notwithstanding that a fair portion of their nearly $19 trillion cost over that decade would go to the affluent elderly. At the same time, his proposal for draconian 30 percent cuts over a decade on the $7 trillion safety net — Medicaid, food stamps and the earned-income tax credit — is another front in the G.O.P.’s war against the 99 percent. 

Without any changes, over the next decade or so, the gross federal debt, now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150 percent of gross domestic product from around 105 percent today.

Since our constitutional stasis rules out any prospect of a “grand bargain,” the nation’s fiscal collapse will play out incrementally, like a Greek/Cypriot tragedy, in carefully choreographed crises over debt ceilings, continuing resolutions and temporary budgetary patches.

The future is bleak. The greatest construction boom in recorded history — China’s money dump on infrastructure over the last 15 years — is slowing. Brazil, India, Russia, Turkey, South Africa and all the other growing middle-income nations cannot make up for the shortfall in demand. The American machinery of monetary and fiscal stimulus has reached its limits. Japan is sinking into old-age bankruptcy and Europe into welfare-state senescence. The new rulers enthroned in Beijing last year know that after two decades of wild lending, speculation and building, even they will face a day of reckoning, too. 

THE state-wreck ahead is a far cry from the “Great Moderation” proclaimed in 2004 by Mr. Bernanke, who predicted that prosperity would be everlasting because the Fed had tamed the business cycle and, as late as March 2007, testified that the impact of the subprime meltdown “seems likely to be contained.” Instead of moderation, what’s at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices — a form of inflation that the Fed fecklessly disregards in calculating inflation. 

These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net. 

All this would require drastic deflation of the realm of politics and the abolition of incumbency itself, because the machinery of the state and the machinery of re-election have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending. 

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms. 

It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism. 

That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market “recovery,” artificially propped up by the Fed’s interest-rate repression. The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is. 

David A. Stockman is a former Republican congressman from Michigan, President Ronald Reagan’s budget director from 1981 to 1985 and the author, most recently, of “The Great Deformation: The Corruption of Capitalism in America.”

Letter From America (About Capitalism, Part II)

State-Wrecked: The Corruption of Capitalism in America–Part II

 By DAVID A. STOCKMAN
New York Times

Published: March 30, 2013

The culprits (of the coming collapse of capitalism) are bipartisan, though you’d never guess that from the blather that passes for political discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry. 

Under the exigencies of World War II (which did far more to end the Depression than the New Deal did), the state got hugely bloated, but remarkably, the bloat was put into brief remission during a midcentury golden era of sound money and fiscal rectitude with Dwight D. Eisenhower in the White House and William McChesney Martin Jr. at the Fed. 

Then came Lyndon B. Johnson’s “guns and butter” excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar.

That one act — arguably a sin graver than Watergate — meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit. In effect, America underwent an internal leveraged buyout, raising our ratio of total debt (public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the American economy today.

This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply. The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987.

Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedman’s penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash. What became known as the “Greenspan put” — the implicit assumption that the Fed would step in if asset prices dropped, as they did after the 1987 stock-market crash — was reinforced by the Fed’s unforgivable 1998 bailout of the hedge fund Long-Term Capital Management. 

That Mr. Greenspan’s loose monetary policies didn’t set off inflation was only because domestic prices for goods and labor were crushed by the huge flow of imports from the factories of Asia. By offshoring America’s tradable-goods sector, the Fed kept the Consumer Price Index contained, but also permitted the excess liquidity to foster a roaring inflation in financial assets. Mr. Greenspan’s pandering incited the greatest equity boom in history, with the stock market rising fivefold between the 1987 crash and the 2000 dot-com bust. 

Soon Americans stopped saving and consumed everything they earned and all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige us. They — China and Japan above all — accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. We’ve been living on borrowed time — and spending Asians’ borrowed dimes. 

This dynamic reinforced the Reaganite shibboleth that “deficits don’t matter” and the fact that nearly $5 trillion of the nation’s $12 trillion in “publicly held” debt is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under Ronald Reagan — one reason I resigned as his budget chief in 1985 — was the greatest of his many dramatic acts. It created a template for the Republicans’ utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism — for the wealthy. 

The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable “hot money” soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.

Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Street’s gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history. 

There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear — manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it — was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved. The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding. 

Instead, the White House, Congress and the Fed, under Mr. Bush and then President Obama, made a series of desperate, reckless maneuvers that were not only unnecessary but ruinous. The auto bailouts, for example, simply shifted jobs around — particularly to the aging, electorally vital Rust Belt — rather than saving them. The “green energy” component of Mr. Obama’s stimulus was mainly a nearly $1 billion giveaway to crony capitalists, like the venture capitalist John Doerr and the self-proclaimed outer-space visionary Elon Musk, to make new toys for the affluent. 

Less than 5 percent of the $800 billion Obama stimulus went to the truly needy for food stamps, earned-income tax credits and other forms of poverty relief. The preponderant share ended up in money dumps to state and local governments, pork-barrel infrastructure projects, business tax loopholes and indiscriminate middle-class tax cuts. The Democratic Keynesians, as intellectually bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least, dinner at Red Lobster. 

But even Mr. Obama’s hopelessly glib policies could not match the audacity of the Fed, which dropped interest rates to zero and then digitally printed new money at the astounding rate of $600 million per hour. Fast-money speculators have been “purchasing” giant piles of Treasury debt and mortgage-backed securities, almost entirely by using short-term overnight money borrowed at essentially zero cost, thanks to the Fed. Uncle Ben has lined their pockets. 

If and when the Fed — which now promises to get unemployment below 6.5 percent as long as inflation doesn’t exceed 2.5 percent — even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs’ profits. Notwithstanding Mr. Bernanke’s assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making. . . .

(In Part III, Mr Stockman reviews the most recent developments and what we can expect over the next five to ten years.)

 

Letter From America (About Capitalism, Part I)

 State-Wrecked: The Corruption of Capitalism in America

 By DAVID A. STOCKMAN
New York Times

Published: March 30, 2013

The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid. 

Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans. 

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble. 

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth. 

THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy. 

As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls. 

(In Part II, David Stockman provides a brief history of US economic monetary policy over the last seventy years which brought us to the desperate situation in which we now wallow.)

 

Institutional Blinkers

Purblind Central Bankers

The causes of the Global Financial Crisis are complex and multi-valent–as expected.  One individual who shares a good deal of the blame, however, is Alan Greenspan, former chairman of the US Federal Reserve.  Greenspan deliberately kept interest rates low in the US (and thereby in much of the world) during the critical period of 2000 to 2004.  It was during this period that house prices began to inflate rapidly.

In May 2000 the US federal funds rate (set by the Federal Reserve) was 6.5 percent.  Then the dot-com crash happened.  Internet and IT companies had been a hot item on the stock market, trading well above their intrinsic value.  Suddenly, as is often the case, the mood of the market changed:

Greedy Capitalists, Venal Politicians, and Voters

 Have Some More Money

J P Morgan, the biggest bank in the US, has lost a couple of billion dollars on a bad trade.  What’s the odd billion amongst friends, eh?  Oh, no.  Gasp!  Horror.  Something must be wrong within the innards of what President Obama has described as “one of our better run banks”. 

A phalanx of police and federal officials has descended upon the once-shining-knight, now tarnished JP Morgan to investigate what happened.  No doubt it will add to the swelling chorus for more regulation, controls, rules, and compliance that failed the last time in 2008 and have failed in their object ever since. 

The truth appears much, much more simple, yet sinister.
  But we can guarantee the root of the problems, the original cause, will not be addressed.  The reason?  The root of the cause gets far, far too close to the regime of US government itself.  It seems that Reagan’s dictum still holds true: government is not the solution to the problem, it is the problem.

Chriss W. Street has written the background piece which explains what appears to have happened in one of the “better run banks”.  Granted, it is early days yet, but his diagnosis has a ring of truth about it. 

After five years of miserable unemployment and virtually no growth, it seems clear the Federal Reserve’s $2 trillion increase in bank lending at zero interest rates has been better at expanding the international derivatives markets than expanding the American economy. The Federal Reserve owns much of the blame for this phenomenon. By keeping interest rates so low, banks were unable to make a rate of return above their cost of capital on traditional lending.

In an effort to stimulate the economy, the Fed has created out of thin air billions upon billions of dollars at near to zero cost to the wholesale borrowers.  The inane and naive idea was that these lovely banks would borrow the money from the Fed at little or no cost.  They in turn would rush out into the US heartland and on-lend that money to businesses and consumers at a low, but reasonable cost.  The end result?  Business would expand, employment would pick up, economic recovery would be underway.  The Fed has been following the classic Keynsian playbook.  When the pump is dry, to get re-started it needs to be primed with water, allowing it to turn over, which in turn creates the pump’s suction will actually start to pump “real” water.  Then away it goes.  Hey presto–an economic recovery bursts forth. 

But banks have a duty to generate a return for shareholders. This classic Keynsian play forgets one little detail.  Those that borrow billions from the Fed’s free money spigot are human beings.  They are animal spirits, with, strangely enough, an overwhelming desire to maximise returns and profits for their owners. That’s what they are paid to do, and they get paid well when they are successful.  So, instead of taking the Fed’s “free” money and thinking let’s invest in mainstreet Ohio businesses or rust-belt Detroit battlers–which is a long, risky, low-return, granular strategy–where can we get the biggest bang for the billions of bucks the Fed has just created?  We owe it to our shareholders and to our bonuses to find an answer to that question.  JP Morgan asked the question, and got an answer.

The answer was in the form of a “big macro picture”.  The world was stabilising after the global credit crunch of 2008.  Gummints were back in control.  They had removed most of the risks.  All would be well going forward.  (Doubtless the billions of new dollars floating around in the JP Morgan vaults gave strong supportive testimony to this “big picture”.)  So, interest rates were going to fall.  Particularly in Europe where the Euro was stabilising due to the sterling work of Merkel and Sarkozy and the European Central Bank.  We can make quick money off this.  Quick money beats slow, risky money every time.

Achilles Macris, J.P. Morgan’s CIO in their London office, began using the bank’s access to cheap capital from the Fed to amass a huge over-the-counter derivative gamble that high yield and sovereign debt interest rates would fall, after MF Global suffered a $1.2 billion loss on similar bets and was forced to file for bankruptcy last October 30th. Morgan’s gamble became very profitable after December 21 when the European Central Bank (ECB) began making $640 billion of three year loans at 1% interest, referred to as “Long Term Refinancing Operations” (LTROs), available to the banks of Portugal, Ireland, Italy, Greece and Spain (PIIGS). By the end of December, J.P. Morgan’s total derivative exposure was $70.2 trillion on just $1.8 trillion of bank assets, according to the U. S. Controller of the Currency.

Morgan is reported to have continued heavy derivative buying in January and February. Its profits soared again when the ECB announced LTRO2 as another $714 billion in three year low-interest loans to PIIGS banks.

The plan was working.  Now at this point, we need to dismiss as utterly fabricated the notion that a few rogue traders were at fault.  There is no way that such a huge exposure would be kept hidden from executives.  The bank’s internal regulations, risk management, reporting and controls would make that impossible.  We have no doubt that the senior executives would be up to this to their eyeballs.  They were booking the profit of the strategy to their accounts daily–as all the investment banks do. Their behaviour at the time lends weight to this:

The stock of J.P. Morgan vaulted from $29 per share in December to $45 a share in March as rumors swirled that Achilles Macris and his London team of 6 had already made $2-3 billion as high yield and sovereign debt interest rates continued to fall. A jubilant Jamie Dimon announced that J.P. Morgan would increase its dividend and buy back $15 billion of its stock.

But the problem with “big macro picture” strategies is that they always oversimplify reality.  In the oversimplification, risk becomes far more concentrated.  So, when a few uppity Greek voters began to make it clear they thought their government had taken austerity a step too far, suddenly risk returned to the debt markets in Europe.  Interest rates began to rise. 

Everything seemed rainbows and unicorns for J.P. Morgan until two weeks ago, when France and Greece elected hardcore leftist candidates who want to abandon austerity spending cuts and increase social welfare spending. Interest rates on the PIIGS sovereign debt shot back up and J.P. Morgan appears to have suffered a $4-5 billion loss. It also appears the bank has been unable to limit its losses to $2 billion by selling out of their enormous derivative positions.

The Fed provided the easy money capital for US investment banks once again to speculate at will.  Worse, the provision of this easy money confirmed the “big macro picture” which they developed as quick a money making strategy. 

Jamie Dimon tried to dismiss the losses by promising heads will roll, but Congressional hearings will soon illuminate to American taxpayers that the Fed has provided the capital that has allowed America’s three largest banks to engage in $173 trillion in leveraged derivative speculation:

JP Morgan Chase Bank
Derivative Position $70,1517,56,000,000
Total Assets $1,811,678,000,000
Leverage Ratio 38.5

Citibank National Bank
Derivative Position $52,102,260,000,000
Total Assets $1,288,658,000,000
Leverage Ratio 40.3

Bank of America
Derivative Position $50,102,260,000,000
Total Assets $1,451,890,000,000
Leverage Ratio 33.4

Of course the Fed’s “free money” was itself leveraged up many, many times over to create gargantuan derivative positions.

The derivative exposure of these three banks alone exceeds 11 times the American economy and 2.7 times the economies of all the nations on earth. On December 30th, the derivatives leverage ratio of these three banks stood at 37 times. Menacingly, this leverage ratio exceeds the average leverage ratio of 32 times assets for Lehman Brothers, Bear Stearns and Merrill Lynch, shortly before the shock of their collapse instigated the start of the Great Recession in 2008.  (Emphasis, ours)

Have these investment banks not learnt, we hear you ask?  Nonsense.  Of course they have learnt very well the lessons of 2008 and 2009.  They have learnt that in the end the bigger you are, the more you become sacrosanct to the state–too big to fail.  The Treasury and the Fed will always come to the party and bail you out–that’s the real lesson, and they have learned it all too well.  Meanwhile the Fed happily continues to throw money at them, pouring gasoline on the smouldering fire of animal spirits.

Kansas City Federal Reserve Bank President Thomas Hoenig in a recent interview warned that an extended period of ultra-low interest rates invites speculative behavior: “When you have zero rates that go on indefinitely, you are inviting future problems.” The recent J.P. Morgan derivatives fiasco has demonstrated that the Fed’s zero interest rate policy has encouraged risky financial speculation that is highly dangerous and potentially destructive.

The fundamental, systemic problem here is not the investment banks.  It is those governments which give them billions upon billions of cheap, easy, electronic money, zero cost money to play with with the ultimate protection of a government bailout.  All in a vain, completely discredited Keynsian attempt to get the economy moving again. 

Reagan was right: virtually without exception the gummint is the problem, or at best, it makes the problem far, far worse. 

(Postscript: some will point out that big investment banks were allowed to fail in 2008,9 and their shareholders and bondholders took not just a haircut, but a scalping.  True.  Then the government lost its nerve and recommenced the big bailout.  President Obama ran up 6 trillion dollars of debt, and the Fed exploded its liabilities in an historic manner to accomplish it.  The result?  The big investment banks that survived are even more of an oligopoly than before, risk is more concentrated, and the systemic problem has worsened.)

>The Idols Lie Broken in the Temple of Baal

>The Ben Bernank

We posted recently on the folly of quantitative easing, as now being carried out by the Federal Reserve in the US. It is an example of how we move from folly to folly, endless booms to busts. It is part of God’s judgement and discipline upon Western society because it lives to vaunt itself against God.

A hilarious animation has been produced which holds the entire modern monetary system and the current Fed policy up to ridicule. Enjoy. Some things are just so stupid that laughter is the best medicine.

It is the fool who has said in his heart, there is no God (Psalm 14:1). Our modern Western culture has become the parody of an asylum run by inmates. Even so, come quickly Lord Jesus. Deliver us from our folly and return us to You. If You do not come to us, we are without hope. Our leaders are idolaters, and our wise are as serpents. Our teachers are false prophets, and the people lie in great darkness. In Your justice, remember mercy.

>Of Iron Bars and Foolish Men

> “Helicopter Ben” Provides an Object Lesson for the Wise

Ah, the foolish pride of fallen man.  Civil government is a vital institution, appointed by God, for the good of man.  But when cultures and governments seek to cast off the restraints of God and make a name for themselves instead, bad consequences always follow.  God carries an iron bar, with which He smashes arrogant nations (Psalm 2:9).  Therefore, God says that kings and magistrates are to be warned, and they must show discernment.  They must tremble.  They must bow before the Son.  They must take refuge in Him, not vaunt themselves beyond their duties and stations. 

Now, we know full well that any government in our modern world which proclaims its limitedness and inability and incompetence to fix every problem does not last long at the ballot box.  The people need a god, and government is the deity of the age.  So, responsibility for the minatory divine iron bar hovering over our soon-to-be-smashed pots rests not just with our governors, but with us, the governed, who slavishly genuflect before that which we have taken as our deity.

When governments breach their God-ordained boundaries and go beyond, bad consequences always follow.  These bad consequences are God’s iron bar at work.  God is laughing at us and mocking us for our arrogance and pride (Psalm 2:4)–we who have proudly boasted that we will cast of God’s fetters and cut His cords.

Here is a case study–at which all of God’s people will join our Heavenly Father and grimly laugh at the idiocy of Unbelieving man. When governments manipulate currency, speculative bubbles, which subsequently burst to the pain of many are the result.  So, we in the Western world are in the midst of working through the consequences of a burst residential housing bubble which threatened to bring the entire global monetary system down.  While the causes of the international housing bubble were multilateral, without doubt one of the most damaging drivers was the US Federal Reserve, which, in an attempt to recover from the tech crash of 2002, kept interest rates low through easy monetary policies for years.  The result: another bubble rapidly formed–cheap money flowed into residential housing, pushing up prices and encouraging speculative activity–until that bubble burst in 2008.

Pain everywhere.  Bankruptcies, foreclosures, unemployment, businesses going bust, shattered lives, vast extensions of crushing national debt.  God’s iron bar has been busy amongst the broken pots.  But do they learn?  No.  Government and its agencies are competent.  They are to be trusted.  They know what they are doing.  Everyone desperately wants to believe this because they have put their faith in government as their god.

Now the Federal Reserve is doubling down.  Having caused the latest crash with its easy money policies throughout the decade, it is now creating more easy money than ever before in a vain attempt to climb out of the recession it had indirectly caused in the first place.  The result: easy money is flooding into new speculative bubbles.  More crashes, more ruination, more smashed potsherds on the way.  A recent article in Bloomberg tells the story. As a result of the actions of the Fed, the US and the rest of the world has started the mother-of-all carry trades. A “carry trade” is essentially buying something where it is cheap and “carrying it” to where you can sell it for a higher price.

Smart corporations around the world have worked out that it is now ridiculously cheap to borrow money in the US (thanks to Ben Bernanke) and invest it in higher growth areas. They are rushing to get some of Ben’s freshly printed money, with virtually zero interest rates attached, then returning to their home jurisdictions, selling the American dollars for local currency (thereby pushing down the value of the US dollar still further), investing it, getting a reasonable return, then eventually paying back the US in depreciated US dollars. The trade is a no-brainer.

Foreign companies also are tapping U.S. markets for cheap cash, selling $605.9 billion in debt through Nov. 15 compared with $371.8 billion for all of 2007, before the Fed cut the overnight bank-lending rate to a range of zero to 0.25 percent.

Sinochem Group, the Beijing-based petroleum, fertilizer and chemicals producer, sold $2 billion of 10- and 30-year bonds on Nov. 4. Two days earlier, state-owned Korea National Oil Corp., based south of Seoul in Gyeonggi, sold $700 million of five-year senior unsecured notes, according to data compiled by Bloomberg.

Corporate cash sloshing across U.S. borders is an unavoidable consequence of the Fed’s low-rate strategy, Wood said. Export Development Canada, the government agency that provides financing help for Canadian exporters, last month tapped the U.S. market for $1 billion in 1.25 percent notes. Those funds also will be available to support companies’ domestic activities, following a two-year expansion of the agency’s mission in 2009 to help businesses navigate the credit crunch.

Then follows the understatement of the week:

“I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an Oct. 19 speech.

Yuh thunk?

And the same carry trade is now well underway amongst American companies with offshore business interests.

U.S. corporations’ overseas investment in the first half of 2010 exceeded the amount that foreign firms spent in the U.S. on factories and acquisitions at an annual rate of almost $220 billion, according to the Commerce Department. In the first half of 2006, the last year before the financial crisis, the net flow favored the U.S. at an annual rate of about $30 billion.

More than half of outbound investment this year landed in Europe, Commerce data show. In April, Valmont Industries Inc., which manufactures light poles and communication towers, issued $300 million in 10-year notes. The Omaha-based company said it would use the proceeds to help fund its $439 million acquisition of Delta PLC, a London-based maker of similar products. . . .

There’s no mystery behind corporations’ interest in foreign markets. As the U.S. struggles to recover from the deepest recession since World War II, business prospects in other countries are brighter. The International Monetary Fund predicts the U.S. economy will grow at an annual rate of 2.3 percent next year, compared with 9.6 percent in China, 8.4 percent in India and 6 percent in Chile.

 So, an iron bar has just smashed into Ben Bernanke’s money helicopter.  He launched it to help the US economy recover–in particular, to reduce unemployment, so as to help prevent all those housing foreclosures.  Instead, the money is rapidly moving offshore because carry trades appear to offer good, low-risk returns.  Meanwhile, bubbles begin to form and grow.  We already have one in commodities and raw materials well underway.  US corporations will inevitably over-invest offshore (the carry trade obscures the risks and makes speculative investment appear relatively secure).  That bubble will burst eventually as well, leading to billions being wiped off US corporate balance sheets yet again, causing yet more stress–including to banks, who will have been risking their balance sheets to help fund US corporate offshore expansions. 

Lingering stagflation is now the most likely outcome in the US.  Year of low, dribbling domestic economic growth, coupled with rising prices due to higher commodity prices and higher imported goods costs. 

God’s iron bar at work amongst the potsherds. 

The antidote, we hear you ask?  There is none–as long as Unbelief continues to deny God, and looks to government instead.  Well, actually the antidote is simple.  Don’t create money out of nothing.  Let the market set the price of money (interest rates).  Invigilate over fraud, false representation, incomplete disclosure, conflicts of interest, and acting in bad faith.  Let business failures fall where they may. 

We are, however, absolutely certain that this antidote will not be considered for a moment–any more than a heroin addict will give up simply because he is asked to stop using.  The people will not let their government apply the antidote–until the day comes when what is printed on US currency is true–that indeed, the nation overwhelmingly actually does place its trust in the Living God, and not in government. 

Until that time, God’s bar will continue to lay devastation down.