Signs of the Economic Apocalypse, 10-13-08

From SOTT.net:

Gold closed at 859.00 dollars an ounce Friday, up 2.2% from $840.80 for the week. The dollar closed at 0.7458 euros Friday, up 2.8% from 0.7255 at the close of the previous week. That put the euro at 1.3408 dollars compared to 1.3783 at the end of the week before. Gold in euros would be 640.66 euros an ounce, up 5.0% from 610.03 at the close of the previous week. Oil closed at 77.70 dollars a barrel Friday, down 19.82% from $93.10 at the close of the week before. Oil in euros would be 57.95 euros a barrel, down 16.6% from 67.55 for the week. The gold/oil ratio closed at 11.06 Friday, up 22.5% from 9.03 at the close of the previous week. In U.S. stocks, the Dow Jones Industrial Average closed at 8,451.19 Friday, down 22.2% from 10,325.38 at the close of the previous Friday. The NASDAQ closed at 1,649.51 Friday, down 18.1% from 1,947.39 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.87%, up 17 basis points from 3.60 at the close of the week before.

The crash we have been expecting finally happened last week and it was global in scope. The resulting recession/depression will be severe, since recent recessions have been staggered, meaning they never occurred all at once everywhere. While some national economies fell into recession, others were healthy and could pull the weak ones back up with their demand. When all economies crash at once, only governments can stimulate demand by massive deficit spending. But the United States, home to the world’s reserve currency, has been engaging in massive deficit spending throughout the last expansion, leaving it in a very weak position to do more. But do more it must, as we have seen with bailout after bailout in recent weeks, all of which will be added to the deficit and the public debt. That will increase interest rates, thereby plunging the U.S. economy further into full-scale depression. The result will most likely be a collapse in the value of the dollar and the end of the United States as a military hegemonic superpower.

Last week world stock markets finally reacted to the financial crisis:

Worst week for global markets since 1929

Barry Grey

11 October 2008

World stock markets plummeted Friday, ending a week that saw the biggest collapse in share values since 1929. The looming threat of a world depression provided the backdrop for a meeting of finance ministers from the G7 industrialized countries, who gathered in Washington for emergency talks with US Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke.

After a day of panic selling on markets from Asia to Europe and Latin America, and wild swings on the US stock market, the G7 issued a statement that pledged to place the resources of their respective countries at the disposal of the most powerful banks, but failed to outline any specific coordinated actions to stem the slide to economic disaster.

Paulson issued a statement and held a press conference following the meeting to announce that the US government would use the virtually unlimited authority granted it under the $700 billion Wall Street bailout passed one week before by the Democratic Congress to begin directly buying stock in banks and financial firms, an expansion of the government transfer of taxpayer funds to the most powerful sections of the financial aristocracy.

Major stock exchanges in Asia and Europe registered losses on Friday even greater than the 7.3 percent drop in Wall Street’s Dow Jones Industrial Average on Thursday. Japan’s Nikkei index fell 9.6 percent to its lowest level in five years. Since the start of the week, it has lost 24 percent of its value. Toyota shares dropped by 6.2 percent and a major Japanese insurance firm filed for bankruptcy.

Hong Kong’s Hang Seng Index plunged 7.2 percent. Australia’s S&P/ASX 200 index fell 8.3 percent and the broader All Ordinaries was down 8.2 percent. The Shanghai Composite Index declined 3.6 percent, leaving it 12.8 percent lower than it was a week earlier. The Indonesian stock exchange, which closed earlier in the week because of panic selling, remained suspended.

In Europe, the pan-European Dow Jones Stoxx 600 index fell 7.5 percent, which ranks among the worst one-day performances on record for the index.

London’s FTSE finished Friday down 8.9 percent. Since its last peak in June 2007, it has declined 43 percent. Friday marked the British index’s fifth consecutive losing day, during which it lost 20 percent of its value.

France’s CAC-40 index fell 6.8 percent and Germany’s DAX 30 plunged 7 percent. Trading in Italy, Russia and Austria was halted. The last of Iceland’s major banks collapsed and was taken over by the government, and all stock trading remained suspended.

Markets across Latin American were lower. The Mexican central bank was forced to auction off $6.4 billion in foreign reserves to prop up the peso.

The MSCI World Index—a measure of international share prices—was down 19 percent for the week, its worst performance since records began in 1970.
An indication that the financial crisis is now plunging the world economy into a major recession is the fact that, alongside bank stocks, shares in oil, metal and other basic resource firms fell sharply.

“What we are witnessing is mass selling on a global scale due to a combination of sheer panic and fear, combined with complete uncertainty over the future of the world’s major economies,” said Martin Slaney, head of derivatives at GFT.
In the US, most stocks ended lower after the wildest intra-day swing in history. For the first time in its 112-year existence, the Dow Jones Industrial Average gyrated in a range of more than 1,000 points.

The Dow fell 696 points in the first 15 minutes, falling below the 8,000 mark. Later in the day it was up by more than 320 points, but closed with a loss of 128 points, or 1.5 percent, ending at 8,451.

That marked the eighth straight losing session for the index, which gave up more than 1,870 points, or 18.2 percent, in the course of the week. The weekly loss outstripped the week that ended July 22, 1933, in the depths of the Great Depression, which registered a 17 percent drop—at a time when there were six trading days in a week.

Since its record high a year ago, the Dow has lost 40.3 percent, wiping out $8.4 trillion in stock values.

The Standard & Poor’s 500 Index sank by 10.7 points, falling below the 900 mark to 899. The S&P 500 is down 42.5 percent from its 2007 peak. The Nasdaq Composite Index finished the day with a slight gain of 4.4 points, but was down 15 percent for the week.

It was the worst week ever for Wall Street, with both the Dow and the S&P 500 recording their biggest weekly losses in point as well as percentage terms.

Most financial stocks rose, in the expectation that the G7 and Paulson would announce new bailout measures. However, Morgan Stanley, which is widely seen as the next likely bank failure, fell 22 percent, and Goldman Sachs lost 12 percent.

Ford Motor Company stock fell another 4.33 percent and ExxonMobil ended down 8.29 percent.

The Toronto stock exchange fell 535 points.

“There is a downward spiral of fear,” said Richard Sparks, senior equities analyst at Schaeffer’s Investment Research.

The seize-up of credit markets showed no signs of lifting. Banks are hoarding their cash and refusing to lend to other banks, or charging usurious interest rates, because they have no confidence in the other banks’ solvency.

The three-month Libor rate, a key lending benchmark for inter-bank loans of US dollars, climbed to 4.82 percent, the highest in nearly ten months. The flight of capital to what is deemed the safe haven of US government debt deepened, resulting in a decline in the yields on one-month and three-month Treasury bills to nearly zero.

Hedge funds, whose previous outsized profits have turned to losses, are contributing to the panic sell-off of stocks. Many of these firms are facing redemption demands from clients as well as demands from their bank creditors for more collateral and larger margins on their borrowings, and are dumping stocks to raise cash.

Amid the market turmoil, the reality of the decay of American capitalism was summed up by the fact that General Motors felt compelled to announce that it was not contemplating filing for bankruptcy. After decades of plant closures, wage cuts and attacks on the benefits and pensions of auto workers, justified by the claim that they were necessary to restore the biggest US auto maker to profitability and enhance its competitive position, this one-time icon of American capitalism is teetering on the edge of collapse.

GM’s announcement underscores the new stage that has been reached in the economic crisis, which has moved far beyond the situation that existed even three weeks ago, when the Bush administration announced its bailout plan for the banks and insisted it was the only way to avert a market meltdown and severe recession. That supposed panacea—designed to cover the losses of the biggest banks and facilitate a further consolidation of financial power in their hands—has done nothing to stem the crisis. Nor could it, since it did not address the underlying rot in the industrial base of American capitalism.

Now, the crisis is rapidly engulfing the broader economy, heralding a wave of plant closures and cutbacks in every branch of economic life.

The Wall Street Journal reported Friday that the consensus of economists it surveyed was that the US gross domestic product would contract in the third and fourth quarters of this year, as well as in the first quarter of 2009. “This is the first time that survey forecasts for those periods have turned negative,” the newspaper wrote. “If those predictions bear out, it would mark the first time US GDP has contracted for three consecutive quarters in more than half a century.”

President Bush made another White House appearance Friday morning in a futile attempt to revive confidence in the financial markets. Aside from making clear that his administration had decided to begin buying equity stakes in order to inject more capital into US banks, he had nothing to add to his previous remarks on the crisis.

He declared that the “federal government has a comprehensive strategy” to resolve the crisis, without explaining the abject failure of his previous “strategy”—the $700 billion bailout package—to stem the financial panic.

Bush has come to symbolize the disarray not only in the financial markets, but also at the highest levels of government. Even as he spoke the Dow began falling, and was down more than 300 points minutes after he finished speaking.

Summing up the prevailing attitude toward Bush and other political leaders, Howard Silverblatt, senior index analyst at Standard & Poor’s, said, “People are scared. Nobody believes what is coming out of the mouths of politicians or chief executives.”

There is mounting evidence that more costly measures to prop up the banks are under consideration, including a government guarantee for hundreds of billions in bank debt and inter-bank loans and government insurance for all bank deposits.

All of the proposals to deal with the worst economic crisis since the Great Depression, whether from the Bush administration and the Democrats and Republicans in the US, or the governments of Europe and Asia, have one thing in common: They all proceed from the need to maintain and defend the interests of the financial aristocracy.

None of the measures address the social tsunami that is about to engulf the working class.

As for the multi-millionaires and billionaires who monopolize the economy and dominate the US government, they will remain as ruthlessly preoccupied with their personal enrichment as ever. As the New York Times reported on Friday, a sticking point in the government plan to purchase stock from the banks with taxpayer money is the existence of token provisions in the bailout bill imposing certain limitations on the pay of top executives. The Times wrote: “It is not clear, administration officials said, that the largest American banks would agree to this, particularly given the restrictions on executive pay.”

The events of Friday, culminating two weeks of mounting financial crisis and a flurry of measures by governments to prop up their banking systems at public expense, confront the working people of the world with the prospect of rapidly rising unemployment, poverty and social misery. They raise urgently the need for a coordinated international socialist strategy to defend the interests of the world’s people against the financial elites who are responsible for the unfolding catastrophe and are seeking to impose the burden of the crisis on the working class.

Again, past budget excesses of the United States government make any response to the financial and economic crisis that much harder:

Cost of U.S. Crisis Action Grows, Along With Debt

Matthew Benjamin

Oct. 10 (Bloomberg) -- The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger.

“I always assumed they would be asking for more money along the way if it was necessary, and it looks like it's going to be necessary,” said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington. “At the moment, there's nothing happening here that's positive for the budget. Nothing.”

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

Yields to Rise

That means a lot more borrowing by Treasury, which will push up interest rates, said Greenlaw. “The Treasury's going to be ramping up supply dramatically over the course of coming months to meet this enormous federal budget obligation,” Greenlaw told Bloomberg this week. “The supply will trigger some elevation in yields.”

Treasuries have fallen the past four days even as stocks sank, a sign investors are preparing for bigger U.S. government borrowing. Benchmark 10-year note yields rose to 3.82 percent at 7:49 a.m. in New York, from a close of 3.45 percent Oct. 6.
Payments the government allocated to keep vital companies solvent are beginning to look insufficient.

AIG, the giant insurance company that was taken over by the government in mid-September, said this week it may access $37.8 billion from the Federal Reserve Bank of New York, in addition to the $85 billion the government already loaned it to stave off bankruptcy.

“You're in for a dime, you're in for a dollar on this one,” said David Havens, a credit analyst at UBS AG.

The financial health and earnings prospects of Fannie Mae and Freddie Mac -- seized by the government on Sept. 7 to prevent them from failing -- worsened in the second and third quarters, the companies' government regulator said this week.

Price Declines

The companies and regulators are recalculating the value of all of their assets to factor in price erosion. That may mean the government will have to spend more to keep the firms solvent.

Earlier this week the Fed announced it will create a special fund to buy commercial paper, the credit that businesses use to finance payrolls and other ongoing expenses. The Treasury will deposit money into the Fed's New York district bank to help set up the new unit. A Fed official said Treasury funding for the program could be “substantial.”

California, Alabama and Massachusetts are urging the Fed and Treasury to include their securities in rescue plans designed for banks and businesses. The $2.66 trillion U.S. market for state and city bonds has been all but frozen since Lehman Brothers Holdings Inc., weighed down by losses in mortgage-backed bonds, declared history's largest bankruptcy on Sept. 15.

California has said it needs to sell as much as $7 billion in notes to maintain its schools, health system and other public services. The Bush administration said it is reviewing the states' financial positions.

Plan for Banks

Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.

Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary -- and will likely turn out to increase the measure's cost. Spending beyond the amount set in last week's bill would require further Congressional approval.

“We have to recapitalize the banks,” Phelps told Bloomberg Television this week. “I don't imagine that there's enough money in the first Paulson plan to be able to do all that needs to be done in that direction.”

The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.

Debt Limit

Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government's debt limit to more than $11.3 trillion from $10.6 trillion.

On top of all that, budget watchdogs say the sheer size of the interventions is making Washington more profligate than usual. To attract votes in Congress, leaders added several costly items to the $700 billion rescue, including extensions of some tax credits and tax breaks for makers of wooden arrows and stock- car racetrack owners.

Under normal circumstances, there would have been more resistance to such expenses, said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog.

The rescue legislation “creates a mask for all sorts of fiscal irresponsibility,” said Bixby. “It covers up a multitude of sins.”

How did we get here? There are various answers to that question, depending on how far back and how deep you want to go.

Going far back, lending money at interest, usury, or fractional reserve lending, would seem to lead inexorably to where we’re at now. Ran Prieur explains:

You might have heard the thought experiment where we're all on an island using a fixed number of coconuts for money, and if we start lending coconuts at interest, we create imaginary coconuts so it's impossible for all the debts to be repaid. To make the simplest possible example, if there's only one coconut, and I lend it to you on the condition that you pay me back two, we now have two imaginary coconuts and only one real coconut. You can't pay me back two, so instead you pay me back one and become my slave. Now, I could give you the coconut as wages and you could give it back to me, but it's much better for me if I loan it to you again and create more debt, and that's what happens in the real world.Multiply that by billions, and it's still not as bad as the real situation, because once we have a system where someone can make money merely by lending, we get predatory institutions that don't just lend the money they have, but money they don't have. The really big fake money is not created as interest, but as fake principal to enable the creation of more debt/slavery. Inevitably, the lending institutions grow like cancers to consume the whole economy, and the supply of real stuff cannot match the exponential growth of money/debt, and the system collapses. And the foundation of the whole nightmare is the rule that if you loan someone money, they have to pay you back more…

I came up with another island-coconut story that makes the point better: Imagine an island with three people, Morgan, Chase, and you. Each of you has ten coconuts. Morgan and Chase agree to hold each other's coconuts and pay interest to each other, and you think that's silly and just keep your coconuts under your bed. Eventually, through compound interest, they have accounts worth hundreds of coconuts, while you still have only ten. Of course, if they try to withdraw their coconuts, the system collapses, so to make it more stable, they use pieces of paper that represent coconuts, and later they don't even use paper, but just keep a ledger of how many coconuts everyone supposedly owns. They agree to rules where they can lend each other even more coconuts than they have in paper money, so they can grow their money faster, until there are tens of thousands of symbolic coconuts. Meanwhile you still have only ten, and now if you want to buy stuff, it's going to cost more than it did before. Probably you will have to sell your actual coconuts to Morgan and Chase to afford to eat.

Certainly the last thirty years of deregulation spearheaded by the United States and Great Britain can be blamed. Here is the blogger “Badtux” on the Reagan “revolution”:

The toxic legacy of Ronald Reagan

Twenty-eight years. That is how long ago it was when Ronald Reagan burst upon the scene and changed American politics forever. Twenty-eight years. Reagan, like FDR, was a giant who changed politics for long after he departed from the political scene. His influence over the nation for these past twenty-eight years has been almost incalculable. Whether you are Democrat or Republican, liberal or conservative, you must admit that the shadow of Ronald Reagan has loomed over every man who has held office from the smallest town to the Presidency ever since then.

And what has happened in those twenty-eight years?

Well, a lot of things. Okay. Manufacturing employment: Down from 24% of the population to under 14% of the population. Ship construction: Down by 83% since 1980. There are now only six shipyards in the entire United States capable of building large vessels and all of them are naval shipyards. Personal debt: The size of the total consumer debt grew from $355 billion in 1980 to $2.6 trillion in 2008. Gross federal debt: In 1980, the federal debt was 33.3% of GDP. In 2007, the federal debt was 65.5% of GDP, or twice as much debt. Trade deficit: In 1980, the trade deficit was $19,407 and in 2007 $700,258. Debtor/creditor nation status: In 1980, the United States was a net creditor nation, owning 7% of the world GDP abroad. In 2007 the United States was a net debtor nation, with more than 21% of US GDP in hock to overseas.

Note that none of this has to do with how much cheap Chinese cr*p you can buy, the size of your television screen, or anything like that. I am talking about the fundamental underpinnings of a modern economy. These past 28 years have ripped the guts out of our economy until we're a nation of real estate salesmen selling each other the same overpriced homes over and over again. Well, at least that was the case until this year. BOOM. The whole house is falling down. Well, that's what happens when you rip the guts out of an economy. A hollow economy simply can't continue standing forever, it's like when they go back into a mine and pull out the pillars to get the last of the gold or silver or etc. out of it, pretty soon the whole mountain comes crunching down kaboom!

The problem is that the whole point of Reaganism was something for nothing. Reagan told us that we could have tax cuts *AND* a bigger military. The result was gigantic deficits -- bigger as a percentage of GDP than the Bush deficits (until this year). But Reagan had no problem with spending money he didn't have on fancy toys for the military. He just ran up the government's credit card bill! And no matter what Reagan might have said, that was the role model he set for the entire country. Reagan said, via his actions, "hey, don't worry about tomorrow, borrow, borrow, borrow, and live it up today!". And we did. Until now we're the world's biggest debtor nation. And the bill is coming due...

In 1980, we didn't know any of this. After the dismal Carter years, Reaganism seemed like a good idea. And maybe it was a good idea if Reagan himself had lived by the conservative values that he espoused. He didn't. He was like a middle class couple who run up a gigantic debt buying a house and junk to put in it that they don't need. He proved to America that "hey, you don't need to live within your means, you can always just borrow, borrow, borrow!" to the point where Dick Cheney said about the Bush deficits, "Ronald Reagan proved that deficits don't matter." But here's a secret Reagan did not tell you: there is no free lunch. He lied to you. He told you that we could have the greatest nation on the planet, and not have to pay for it.

A smaller less intrusive government would be nice. But Reaganism, by saying "hey, you don't have to live within your means!" inherently makes government bloat up because hey, if you don't have to pay for it, why not have big government? And Reaganism, by saying "hey, you don't have to work hard and wait for the good stuff in life, you can just charge it to your credit card!" inherently urges people to not do the constructive stuff that makes an economy strong but, rather, to spend their money on cheap Chinese crap from Wal-Mart and big-screen TV's and other junk like that which adds nothing to the economy, it's just like FDR paying one group of people to dig holes and paying another group of people to fill the holes back in all over again. Except with a Republican twist.

In short, Reagan sold us a bill of goods, and we thought it was golden. Until the hollowed-out shell left by decades of borrow, borrow, spend, spend started collapsing. The only good thing about this -- the only good thing -- is that perhaps Reaganism as a political philosophy is going to finally fall out of favor. Everybody over the past 25+ years has had that five thousand pound wrecking ball hanging over their heads. Now that it's fallen to earth, maybe folks will notice that hey, maybe Reaganism (the philosophy as practiced, not the soothing words) wasn't such a great idea after all.

Or maybe not. After all, few people want to admit it when they've been conned. And it was a con -- Reagan told us that everything had a simple answer that we wanted to believe, Reagan told us we could get something for nothing, and that's the hallmark of any good con, it's so good that you want it to be true. Yet even after twenty-eight years have shown that Reaganism is a hollow fraud that has destroyed our nation, people still want to believe. There is none so blind as the man who refuses to see. And there are an awful lot of blind men out there today...

Wishful thinking will get you every time! As will willful ignoring of reality. “Badtux” again:

The crown princess of the Ignorati

Ah yes, the ignorati. The great unwashed of American politics. Dim-witted, proudly ignorant, suspicious of anything they view as being dismissive or disdainful of their dim selves, eager to accept any politician who, in their view, is just as stupid as they are. Commonly associated with the term "I want a President that I can have a beer with."

In recent years the ignorati have been quite influential, having elected the President for six of the last seven elections. And I will say this: Ignore the polls saying that Obama is ahead. Because 50% of Americans are below average. And "average" ain't so smart, given the dumbing down of education over the past thirty years. Any rational, reasoning man could see that Barack Obama is a clearly the superior candidate compared to Cranky McDepends and his sidekick Caribou "Dinosaurs walked the earth with Man 6,000 years ago" Barbie. But if we had a rational, reasoning electorate... (shrug).

The fact that the world is billions of years old and that the dinosaurs died roughly 60 million years before the first human being walked the world are matters of science, verifiable via experiments and observation. Palin may have faith that the world is only 6,000 years old and that dinosaurs co-existed with man. But the only way she can maintain that faith is by rejecting science and all of its benefits, such as this computer that you and I are communicating with. Frankly, that is a scary thought to me, because we have already experimented with having a President who believes in faith rather than observable objective reality as the mechanism for organizing government, and it hasn't worked out very well...

So now we have the clear chance of having a President within the next four years who rejects modern science, who rejects objective reality in favor of superstition. Forty years ago, scientists and engineers and people who dealt with observable reality were respected here in the United States. Today, they are reviled as "atheistic" and "elitist", made fun of as "nerds" and "geeks", and our young people flock to become mortgage bankers and real estate salesmen rather than scientists and engineers. This also corresponds with the decline of the United States as the leader of the free world and an economic superpower, to the point where the US can't even build ocean liners and cargo vessels any more. Coincidence? Nope. That's what happens to a nation that rejects observable objective reality and decides to base itself on faith instead. When our nation was led by practical pragmatic reality-oriented people, it thrived. Now, dominated by the ignorati who view those practical pragmatic reality-oriented people as heretics and "elitists", it declines. Coincidence? Nope.

Personally, I am not too eager to meet my new Chinese overlords, but meet them I shall. Did you know that China's president is an engineer? Maybe that explains why China is growing and thriving while the United States is declining. The U.S. elects people who reject science and objective reality. China selects people who do not. I don't think I'll like living under Chinese rule, it is a harsh and unforgiving rule, but that's what is going to happen if the U.S. keeps electing people who reject science and objective reality. I'll laugh and laugh and laugh, but it'll be more of a gallows laugh because it will be the end of a once-promising dream, the dream of a nation built upon freedom and liberty... but what can I say. Democracy is the theory that the common people know what they want and deserve to get it good and hard. This situation is, apparently, what the common people want. Getting it good and hard yet?

That commentator puts his finger on two aspects of the ponerization of the United States: what Andrew Lobaczewski, in Political Ponerology calls hysteria, or the “hysteroidal cycle” and what he identifies as the downfall of the psychopaths who take control of a society with insufficient defenses: their lack of basic competence and view of objective reality.

During good times, people progressively lose sight of the need for profound reflection, introspection, knowledge of others, and an understanding of life’s complicated laws…

Perception of the truth about the real environment, especially an understanding of the human personality and its values ceases to be a virture during the so-called “happy” times; thoughthful doubters are decried as meddlers who cannot leave well enough alone. This, in turn, leads to an impoverishment of psychological knowledge, the capacity of differentiating the properties of human nature and personality, and the ability to mold minds creatively. The cult of power thus supplants those mental values so essential for maintaining law and order by peaceful means. A nation’s enrichment or involution regarding its psychological world view could be considered an indicator or whether its future will be good or bad.

During “good” times, the search for truth becomes uncomfortable because it reveals inconvenient facts. It is better to think about easier and more pleasant things…

Catastrophe waits in the wings. In such times, the capacity for logical and disciplined thought, born of necessity during difficult times, begins to fade. When communities lose the capacity for psychological reason and moral criticism, the processes of the generation of evil are intensified at every social scale, whether individual or macrosocial, until everything reverts to “bad” times. (Political Ponerology, pp. 85-6)

Since the bad times are now here, Lobaczewski points the way to hope.

When bad times arrive and people are overwhelmed by an excess of evil, they must gather all their physical and mental strength to fight for existence and protect human reason. The search for some way out of the difficulties and dangers rekindles long-buried powers of discretion…

Slowly and laboriously… they discover the advantages conferred by mental effort; improved understanding of the psychological situation in particular, better differentiation of human characters and personalities, and, finally, comprehension of one’s adversaries. During such times, virtues which former generations relegated to literary motifs regain their real and useful substance and become prized for their value. A wise person capable of furnishing sound advice is highly respected…

Difficult and laborious times give rise to values which finally conquer evil and produce better times. The succinct and accurate analysis of phenomena, made possible thanks to the conquest of the expendable emotions and egotism characterizing self-satisfied people, opens the door to causative behavior…(Ibid., p. 88)

William Pfaff says the same thing in a different way, that the seeming lack of any constraint on American power after the Cold War, led to a hysterical cut-off from reality-based reasoning and will lead to the end of U.S. hyperpower:

The Threat of a Pentagon Crash

William Pfaff

October 2, 2008

Paris - The nuclear physicist Leo Szilard once remarked that the fall of the Soviet system would eventually lead to the fall of the American system. He said that in a two-element structure the interrelationship and interdependence are such that the one cannot survive without the other.

This comment has been relayed by a friend, and as Szilard has passed to his reward I am in no position to explain his meaning, but it is possible to restate it in political terms, and we are seeing the result in finance and in war. I think that Szilard was implying what a very intelligent opponent of the United States also said when the cold war ended. Georgi Arbatov, former head of the U.S.A. and Canada Institute of the Soviet Union, said to an American interlocutor: we are about to do something truly terrible to you. We are going to deprive you of your enemy.

Without the enemy, the machinery of power begins to race, with nothing to resist it; megalomania sets in. The end of the cold war coincided with the beginning in the United States of globalized finance, launched under the Clinton administration. It operated with ever more dazzling and daring gambles in which the constraints and tension of the cold war were replaced by the psychology of greed and excess.

The economic crisis that has now overtaken the United States can be interpreted as the logical result of a financial system that had reached the point where there was no limit to what you could take out of it even when you were incapable of understanding the transactions taking place.

Less apparent to most people but just as real are the signs of an impending crash of an American military system in which, since the end of the cold war, Pentagon dysfunction has metastasized so uncontrollably as to scandalize both the man who was Defense Secretary when the so-called war on terror began, and the current Secretary, Robert M. Gates, the man now in charge as that war mutates into the "Long War…"

I think that what Leo Szilard was saying is that a system cut free from the opposition that kept it honest, passes into hubris, otherwise known as irrational exuberance, and after hubris, comes the fall.

Kevin Depew, like Lobaczewski, says bad times can be healthy when they burn away illusion:

Secular Forces of Deflation... Explosion of Simulacra... The Crisis of the Real... The Precession of the Simulacra... What Next?

The long-term secular forces of debt revulsion and deflation continue to build and are showing up in social mood with increasing frequency. The question is what do these forces mean for our everyday lives, how will they manifest in popular culture and lifestyle?

In Tuesday's New York Times, in the Science section of all places, was an intriguing story asking the question, "Are Bad Times Healthy?"

Most people are worried about the health of the economy. But does the economy also affect your health?

On the one hand, economic growth can lead to both advances in medicine and treatment of disease as well as to improvement in a population's overall economic health. But what about long-term economic stagnation or economic declines? Do people get sicker if the economy fails? The conclusions the article reaches about these questions may seem surprising, but they fit squarely within the hypothesis that social mood drives social change, not vice versa, and underscore the psychological shift a darkening social mood brings in attitudes toward consumption, money and time.

“The value of time is higher during good economic times,” said Grant Miller, an assistant professor of medicine at Stanford. “So people work more and do less of the things that are good for them, like cooking at home and exercising; and people experience more stress due to the rigors of hard work during booms.”

“When coffee prices suddenly rise, people work harder on their coffee plots and spend less time doing things around the home, including things that are good for their children,” he said.

This is a rather straightforward manifestation of how society copes with more challenging economic times; by seeking a positive outcome from less work and less consumption, and by challenging the boom hypothesis that hard work is both critical to economic success and something worth valuing above time spent at home with family and children.

Yet another social manifestation of debt revulsion and anti-consumption preceding the breakdown of a debt bubble is the conscious attempt to revolt against the explosion of simulacra that the fiat currency-based debt bubble inevitably produces; simulacra in finance, food, fashion, art and culture.

Explosion of Simulacra

Plato, in his dialogue, The Sophist, portrayed the distinction between two types of images; those that try to faithfully reproduce the original, and another, more insidious image that is intentionally distorted in a manner to make the reproduction itself appear real to those who see it.

Theaetus: Stranger, can I describe an image except assomething fashioned in the likeness of the true?

Plato presented two types of images; a faithful one, and a simulacra, or a distortion that was asserted to be reality. Later, Jean Baudrillard expanded upon the Platonic duality of images to assert four stages of imagery.

To understand where we are at this historic juncture in finance, it is helpful to see our currency system in terms of Baudrillard's imagery and precession of simulacra.

After all, currency is nothing but a representation of value, a paper dollar simply an image that is intended to mean something between two parties in order to execute a transaction.

The Crisis of the Real

A significant consequence of the massive debt bubble we have experienced is the inevitable explosion in simulacra, of which derivatives are a prime example; the dissection of financial assets into increasingly discrete objects, or instruments, that ultimately displace the reality of the underlying asset and assume their own reality that exists separate and apart from the very thing upon which they were based. Thanks, in part, to extreme leverage, this new reality supersedes the original in both importance, and also fragility, attaining the ability to actually destroy the very asset upon which the derivative was based.

We have reached the tipping point where that ability to destroy the original is now at hand. This tipping point is what I call "The Crisis of the Real."

To understand what this crisis entails, it is useful to look at what this precession of the simulacra entails as it was outlined by Jean Baudrillard in his prescient work, Simulacra and Simulation, published in 1981.

Simulacrum, for Baudrillard, is a copy of an original that displaces the original as a sign and becomes real in its own right.

The Precession of the Simulacra

The precession of simulacra that Baudrillard outlined is as follows:

1) Era of the Original

2) Era of the Counterfeit

3) Era of the Produced, Mechanical Copy

4) Era of the Third Order of Simulacra, where the reproduction displaces the original

In September 2006 I looked at how this precession of simulacra applies to pricing structure in securities markets.

At that time, I argued for the view that we are seeing the culmination phase in securities markets where pricing structure breaks, literally: "From the standpoint of the final phase of the image (price), we now witness securities markets that have no relation whatsoever to anything - they are solely existent as a pure simulacrum from which higher and lower are relations to something without meaning; in other words a hyperreal market."

We can see this progression in what Baudrillard formulated as the Successive Phases of the Image. After all, securities prices begin as nothing if not representations, images, signifiers of some "thing."

Successive Phases of the Image (with price relation in parentheses)
- the image is the reflection of a profound reality (price "means" something profound with respect to the security)
- the image masks and denatures a profound reality (price disguises a profound reality - the value investor's dream)
- it image masks the absence of a profound reality (2000 Dotcom Bubble. for example)
- it has no relation to any reality whatsoever; it is its own pure simulacrum, a copy without a model (the continuous supply of credit to market participants with no underlying attachment to any "thing" real, pure transaction that supersedes the act of exchange itself).

What Next?

This debt revulsion and structural deflation demands a readjustment that has profound consequences for society. What does a revolt against the displacement of the "real" entail?

First, from a consumption standpoint, it entails a shift in focus, a change in patterns of accumulation and the valuation of material objects. Going back to the New York Times article on "Are Bad Times Healthy?", it means the revaluation of time spent at home, or among friends, and an overall attitude involving less "doing" and more "being."

The proliferation of images, reproductions, the sheer volume and excess of signs, of choices, is itself deflationary, and this secular pattern is evident in everything from clothing and textiles to automobiles, home furnishings, technology and media.

This is the structural deflationary paradox where the excess of signs and choices, an inflation of everything, literally, actually creates the conditions for imposing limitations and regulations upon the chaos of apparent freedom.

Deflation is simply the market's attempt to unwind and dismantle the confiscatory dominance of the inflationary regime. Inflation, in the purest sense, confiscates money, purchasing power, control. In the philosophical and social sense, however, inflation confiscates something else that will increasingly be revalued among all other concepts and materials: Time away from production.

I understand there are those who disagree with structural deflation and who believe that central banks worldwide, in coordination with fiscal policy, will be able to intervene and resurrect banking and production. The outcome, it is asserted, will be inflation, or hyperinflation.

But again, if we see that "The Crisis of the Real" is really a crisis of reproduction, then we can also see that the very mechanisms of reproduction - fiat currency, fractional reserve banking, leverage - are broken, perhaps permanently so. In order for inflation or hyperinflation to displace this ongoing debt deflation, the mechanisms that facilitate reproduction and currency velocity must be intact. The last vestige of bull market hope is the hope, too, that the monetary velocity triggers are functional. They are not, and there is a significant probability that we may never again return to that place where they were.

Ultimately, the question of where we are going is less an economic question than a philosophical one. If you could ask the aggregate what this change might mean, the answer would probably be something along the lines of an "impossible to conceive" fear and dread. Indeed, it is very difficult to imagine such a profound change in the aggregate. However, I suspect that if you ask one individual at a time what it means, the answer would be filled with the certainty of purpose, dedication to survival and even optimism that something good will eventually emerge from this transition…

So here is hope, real hope, not the false hope of hysteria and wishful thinking