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Thursday, March 15, 2012

The Ides of March Redux

Two thousand and fifty-six years ago, on March 15, 44 B.C., Julius Caesar -- the most powerful man in the world -- was stabbed to death, in fulfillment of a soothsayer's prophesy: "beware the ides of March."  One notable ringleader, one Marcus Junius Brutus the Younger (of "et tu Brute?" fame) was a former enemy whom Caesar had forgiven and brought into Rome's inner circle.  It is said that when Caesar saw Brutus among his attackers, he covered his face with his toga and resigned himself to his fate.

Brutus' mother was one of Caesar's mistresses and some speculate that Caesar himself was Brutus' true father -- meaning, of course, that Brutus may have committed the unspeakable sin of killing the goose that might have laid many golden eggs for him.  But, he was persuaded by his fellow conservative senators that Caesar threatened the elite's power and prestige, and thus had to go.

Needless to say, it wasn't the smartest move the lad ever made.  Although the Senate hastily granted amnesty to its homicidal members, the plebeians were less forgiving.  Brutus found himself haunted and hunted and, after losing a battle of epic proportions, took his own life.  It marked the beginning of the end for the Republic.  Could'a, should'a, would'a.

Ben Bernanke, arguably the most powerful man in the financial world, has found himself in the crosshairs more than a few times lately.  Although hired by Bush as his chief economist and later Fed Chairman, Republicans have been leading the assault.  In turns, the bearded one has been accused of being too conservative, too aggressive, too dovish, too accommodative, too political, too aloof, too stilted, too talkative and...of course, too hairy.

Ron Paul proudly refers to himself as the thorn in Bernanke's side.  Rick Perry warns that Bernanke will be "treated ugly" in Texas if he continues to print money so recklessly (not sure what that means, but I think it involves a pickup truck and 50 feet of chain.)  On the other side of the political spectrum, Paul Krugman faults Bernanke for "wimping out" and Maxine Waters wants him examined for signs of demonic possession.  Even yours truly has disparaged the guy.

What the politicians all seem to have forgotten is that Bernanke, for all his faults, is their golden goose.  He and his spawn are the only people on Earth willing and able to perpetuate the ponzi scheme that's preventing them from being lynched.  Bernanke's no great fan of the American body politic.  In fact, he lays the blame for the financial crisis squarely at politicians' feet.  But, he understands that failing to keep the music playing will reveal the fundamental flaw in the way the economy has been run for the past, oh, sixty years.

In short, we industrialized nations have made too much money.  In a world where billions work for less than a dollar a day, we've paid ourselves too handsomely.  America, as keeper of the world's reserve currency, has particularly benefited.  And, our financial system is spectacular at funneling excess liquidity into needy ventures -- whether or not they make good economic sense.

Unfortunately, as we've learned from the South Sea Bubble, the Dutch Tulip Mania, the Dot Com debacle and the Housing Crisis, the system isn't so great at turning off the spigot.  And our political leaders, whose continued employment is made possible through the largesse of those profiting most from needy ventures, aren't about to stop the music.

And, so, we're left with bubbles -- both popped and in need of popping.   To put it simply, the world can't afford cars, clothing or electronics made in the USA.  So, those Americans employed in the making of things are, by and large, part of a bubble.  Many of our services, crops and natural resources are, likewise, overpriced in a global economy.  And, thanks to the wizards of Wall Street, assets in this country are burdened with debt in excess of their ability to service it.

The only viable solution is the Big Red Reset Button -- only, no one's got the nerve to press it.  Politicians?  Forget it.  The financial establishment?  Only if suicide somehow became profitable.  The Fed?  Bernanke's a self-acclaimed expert on all things Depression.  Read his treatise on the Japanese problem, or his famous helicopter speech and you'll see how deathly afraid of deflation he is.

And, so, on we go -- creating out of thin air the trillions needed to fool people into believing the economy is doing just fine.  With the national debt at $15.5 trillion and interest rates around 3%, we'll only pay about $474 billion this year in interest ($241B net.)  The CBO says that'll hit $846B ($562B net) in 2016 at 5.2% interest rates.  But, if the 10-year returns to its 50-year mean of about 7%, that $846B is more like $1.1 trillion -- as much as we now spend on defense and medicare combined.  At 1980's rates, it'll exceed those two and social security combined.  Americans approaching retirement who value their health and their borders are likely to be disappointed.

Bernanke knows how, if not when, this will end.  We're out of wiggle room.  Because, whether it's $20 trillion, $30 trillion or $50 trillion, there will come a point of recognition when those we count on to finance our deficits will find other bubbles in which to invest.  In other words, the music will stop. Runaway inflation, crushing deflation, currency wars, soaring interest rates -- they're all on the table.  The politicians will need someone to blame.  And, so, the man who let it happen will draw his toga across his face and quietly await his fate.

~ sequere pecuniam ~