Cyreenik Says
The current Debt Limit Crisis is one more reason the Great Recession of the 2010's is still looking at lot like the Great Depression of the 1930's.
On April 5, 1933 FDR signed Executive Order 6102 forcing all Americans to give up gold hoarding and let the government do it for them instead. Over the next month the federal government bought up most of America's private stocks of gold for $20/ounce. That completed, it then announced it was selling gold for $35/ounce.
Umm... RHIP! Rank Hath Its Privileges! It wasn't until 1971 that the government had to give up that price. Nixon abandoned the gold standard in the Gold Shock of 1971. Ah well... that party's over. The bright side was that by 1974 American citizens could buy gold again.
These are just two chapters in the lengthy book of "Government Messing with Your Money". It's a big book. A couple of other chapters are Germany's Hyperinflation of the early 1920's and North Korea's Won Revaluation of 2009.
What "Mess with the Money" episodes all have in common is that they sock the people in the community who save money and the government in some fashion gets what they saved.
What surprises me that governments get away with this so consistently. The savers of the community are those who most favor orderliness and consistency. But governments seem to have the ability to routinely trample on them.
I guess part of it is that this is also one of the most resilient groups in the community. If they can save once, they can save again.
But... they are also a group with long memories. When this happens the government loses an important friend. Mess with the Money Time usually precedes by just a few years a substantial government change.
As the Chinese curse puts it, "We live in interesting times."
In 2001 we experienced the Mona Lisa of organized terrorist attacks, the 9-11 disaster. Now ten years later we have experienced the Mona Lisa of lone gunman attacks, the 2011 Norway attacks. On 22 July 11 Anders Behring Breivik launched both a car bomb attack on downtown Oslo, and then personally gunned down people at an island summer camp not far away. Total death toll appears to be 76. This Wikipedia article, 2011 Norway Attacks, covers the basic details.
This is another example of "it's inconceivable" thinking. Sixty eight of the deaths were caused by Breivik simply walking up to people with a gun and shooting them.
Granted, Breivik is your worst case scenario for a lone gunman terrorist -- smart, articulate, well-organized, patient, athletic... but still... Sixty eight people is a whole lot of people!
Part of the explanation for his success is that it just didn't occur to the people on that island what was happening. It was simply inconceivable.
Will it be inconceivable again? Hardly!
What preventive actions does the government need to be taking?
Well... none. This should be treated as the once-in-a-Blue-Moon aberration it is. Even if no action is taken, it won't happen again. It's now concievable.
But now we get to see what Panic Thinking and Blunders will come of this episode.
Update: This 27 Jul 11 AP article, Norway PM: Attacks response to be 'more democracy' by Ian MacDougall and Karl Ritter, has the Norway PM, Jens Stoltenberg, giving a good response. "Stoltenberg struck a defiant note Wednesday, insisting that the brutal killings would not change Norway's tolerant way of life — and would only encourage further openness. Norwegians will defend themselves by showing they are not afraid of violence and by participating more broadly in politics, he told reporters at an earlier press conference."
It's a good response, a business as usual response, and I hope the people of Norway can stick with it. Doing so will serve them well.
NOTE: THIS EVENT IS BIG
This thought is inspired by a 15 Jul 11 WSJ Heard on the Street, Markets Unmoved by Debt-Defying Standoff by David Reilly, in which Reilly talks about how little bond investors seem to have been affected by the current debt crisis. He lists some factors that probably contribute to this seemly odd behavior, "First and foremost is that investors simply can't believe the government would willingly and knowingly hurl markets and the U.S. economy into the financial abyss."
This is big. This is the Inconceivable Syndrome, and it's real.
My most vivid experience with this was when one of my dogs, Sargon, a very striking and very smart white German Shepard, had his first encounter with a skunk. He was old enough to have experienced cats, and he knew that if he charged they would run, and he loved the chase. He was careful not to catch them, but he sure loved chasing them! So when he discovered this "black cat" in the middle of a field as we walked in the hills above our home, he was expecting a fine old time.
Umm... what happened next was inconceivable to him: The skunk turned tail and sprayed him! At first Sargon didn't back off, he stayed and barked (a sure fire way to get cats to start running) and got sprayed again! This time he was partly blinded and he backed off... and came to me looking for succor! It had been so much fun to watch that I didn't mind too much having to spend a couple hours getting him cleaned up and somewhat desmelled.
But, that's not the interesting part of the story. The interesting part is that a month later, as we were on a walk near home, we smelled skunk.
This time Sargon got visibly disturbed. He had learned. He did not want to repeat that encounter.
The moral for this bond episode is that the government playing chicken like this is acting inconceivably for the bond market.
But, the bond market will learn. And if this happens again the bond market will not be oblivious.
This won't be inconceivable again, and the next time the reaction will be a vigorous one.
Update: This 14 Jul 11 Fox News article, Taking Liberties: Legislator Proposes Alternative Currency in Response to the Diminished Dollar by Douglas Kennedy, gives some idea of the range of alternatives that people will consider when the "rock" of the US dollar is shaken by these games being played with it. In this case creating a state currency as an alternative to the federal currency.
Update: This 15 Jul 11 Reason article, The Failure of Quantitative Easing by James Groth & Anthony Randazzo, also warns that unhappy surprises are lurking for the bond market. "So a perfect storm brews on the horizon while the Fed looks in the wrong direction. The crippling affects from inflationary stagnation and from the recessionary onset of a busting bubble would line-up some very difficult decisions for the Fed. If both occur simultaneously, the Fed will be helpless to defend against the two-front assault on the economy. Indeed, the Fed won't even see it coming."
Update: This 23 Jul 11 WSJ Intelligent Investor article, Forget About Black Swans, the One Floating Ahead is Neon by Jason Zweig, is another article about this curious thinking. And Zweig calls it just that, curious thinking. As he points out, there is some serious rethinking coming up. From the article, "Paul LaRock, a principal at Treasury Strategies, a Chicago-based firm that helps large corporations manage their cash, 'One of the most disturbing things that we all have to get our minds around should the unthinkable happen is that the reference point for pricing securities around the globe could be lost. No one can predict what would happen worldwide.'"
Even if the unthinkable doesn't happen, people will now be thinking about it, and that will make a big, big difference over the coming years.
Even if it doesn't get screwed, the US bond has lost its virginity.
Update: This 27 Jul 11 Economist article, The Downgrade Option by Buttonwood, talks more about how the inconceivable is becoming conceivable. "Says Nordvig, 'The dollar has become negatively correlated with the slope of the US yield curve—meaning the risk premium now being priced into the long end of the US curve is also affecting the dollar negatively.' ... Now, of course, those central banks have few other places to park their money. But, even so, it is a dangerous game for the US to play."
Update: This 14 Nov 11 WSJ Abreast of the Market article, Tough Times Mean Tough Choices by E. S. Browning, talks about how even traditional money managers are now getting uncomfortable with the market's volatility. They are trying to figure out how to adapt to this New Normal. "As volatility becomes the market norm, big, conservative investment institutions that hate to make sudden market moves are being forced to adapt."
The 2007 "Great Recession" meets all the criteria for producing a Blunder:
o It was stressful
o It was scary
o It was something no one had seen for a long time, or ever
o Conventional efforts to solve the problem did not work
So what came out of efforts to fix this scary problem? The Dodd-Frank Bill -- a 2,300 page behemoth passed in 2010. This bill was passed with the best of intentions, but in the heat of the moment. The result is full of blunder scars. This 13 Jul 11 NY Times Dealbook article, Unearthing Exotic Provisions Buried in Dodd-Frank by Ben Protess, outlines some of the curious stuff that got collected into this mess... er, mass of good intentions. Curious stuff includes:
o provisions about "conflict minerals" being extracted in Africa
o payments made to foreign governments for the right to extract oil and natural gas
Remember this is a finance bill -- designed to fix finance problems, not problems of the whole world.
From the article: "'The provisions are appropriately called miscellaneous,' said Andrew J. Foley, a partner at the law firm Paul, Weiss, Rifkind, Wharton & Garrison, which represents oil, natural gas and mining companies that are subject to the rules. 'There’s no question it’s unrelated to the financial crisis.'"
The article goes on to relate how these oddities got included. And it concludes with the consequences of these good intentions, "Mr. Dean of PricewaterhouseCoopers said, 'Companies are basically in a holding pattern.'"
In my words: This is the kind of uncertainty that kills job growth.
Reflecting on historic parallels, the role of Dodd-Frank in the Great Recession is similar to the role of Smoot-Hawley in the Great Depression: Both where bills passed by Congress that started as limited in scope and designed to fix one specific problem, but by the time the panic thinking of their time was through with them, they became chock-full of exceptions and add-ons.
The impact of Smoot-Hawley is now a well-recognized part of Great Depression lore. Next we get to see if we are living through something equally legendary in Dodd-Frank.
Update: This 13 Jul 11 WSJ editorial, The Disappearing Recovery by Daniel Henninger, discusses more parallels between the current recovery and the early 1930's recovery, and the prognosis is gloomy. From the article: "Here is the lecture's [Robert Lucas] provocative final thought: 'Is it possible that by imitating European policies on labor markets, welfare and taxes, the U.S. has chosen a new, lower GDP trend? If so, it may be that the weak recovery we have had so far is all the recovery we will get.'...'Why?' The answer [for the 1930' slow growth], he says, was growth-suppressing policies, such as the Smoot-Hawley tariff, cartelization, unionization and, 'most important but hardest to measure, FDR's demonization of business.'" (Here is a .pdf of the full presentation)
Update: This 27 Jul 11 WSJ editorial, Soros's Regulatory Hedge, talks about another unintended consequence of Dodd-Frank, discouraging hedge funds from accepting outside investors.
Back in 2002 I predicted that terrorism would be America's primary worry for about a decade, and because this worry was emotion-powered we would do crazy things to cure it.
This 11 July 11 BBC News article, Pakistan: US aid cut will not harm fight against terror, indicates that, yes, terrorism as a worry is being displaced by more contemporary worries. We Americans are not willing to put up money and men as blindly as we have been in the past.
Now we are ready to get crazy about new problems. <sigh>
My other thought is: Can we get the War on Drugs to ride into the sunset soon, too? Huh? Huh? Huh?
In one of those curious juxtapositions that makes real life so delicious, we have cases concluding within a month of each other for Casey Anthony and James Ray. Casey Anthony is famous for being reviled by the cable TV and Internet community before and during her trial, but ended up being found not guilty. The Ray case is interesting because even though Ray is high-profile, and the deaths that brought the suit about were bizarre, there has been little media coverage.
Deep emotions are involved in both cases, but the flow was opposite. In the case of Anthony emotion flowed strongly against her and raised the profile into the stratosphere. In the case of Ray emotion has run in his favor and kept the profile low, so low you may not even recall what the Ray case was about.
Eh? You say? Who is Ray?
Ray is the self-help guru who crafted the grow-through-enduring "Spiritual Warrior" program that in one version killed three people out of a group of 56 who endured a nightmarish two hour session in a super-heated sweat lodge in Arizona in 2009.
Oh... That Ray, the one who showed up on talk show TV like Today Show!
Yes, that Ray.
Now... why did emotion favor submarining Ray's goof and skyrocketing Anthony's goof?
Anthony's is about baby killing and dysfunctional people acting very much like they are part of a reality TV show -- it's life imitating horrible art. This supported the Stone Age emotions of listening to gossip and exiling crazy people.
Ray's was about something just as powerful, but not so public. The emotion here is about stroking us-versus-them tribal mentality into creating a cult. The curious part is that this was no cult of impoverished losers, this was a high-priced cult of successful-but-uncertain winners! The people who joined this Spiritual Warrior program were already successful and paid a lot of money to undergo this experience.
But the result was a cult, with strong us-versus-them thinking. There is an anecdote about what happened in the sweat lodge that gives a good feeling for how extreme the "us" feeling was in that session. From Wikipedia, "...and print media began reporting that Mr. Ray conducted a conference call with some victims, one of which recorded this call and provided it to the AP. During this call, a self-described channeler said that they had communicated with the dead and said they 'were having so much fun' out of their bodies that they didn't want to return."
...Whew! It's certainly impressive how context can change human thinking. The people involved in this Spiritual Warrior disaster did not feel much outrage -- they were swimming in a lot of powerful "us" thinking generated by this program they had experienced and strongly comforted by that. It was relatives of those who died that first brought suit, not the experiencers.
And that's perhaps the most important lesson of this comparison. Both of these situations are swirling in powerful emotional thinking. But the emotional flow in the two cases is dramatically different.
For more information on this, here is an 8 Jul 11 WSJ editorial on the Ray case, When Spirituality Kills by Mitch Horowitz, and a Wikipedia article on James Arthur Ray.
Some community members love gossiping about a juicy situation.
The Casey Anthony Trail has demonstrated that very human phenomenon once again, and now we are experiencing the high tech version with cable TV and Internet providing lots of outlets for opinions and spreading those opinions world wide.
Another truth is that once these gossipers have made up their mind what the truth is, they get deeply outraged when they are crossed. This is a deeply emotional reaction, so fact has little play in what is being felt. This 8 Jul 11 AP article, States weigh 'Caylee's Law' in verdict aftermath by Brent Kallestad, talks about the outcry for Caylee Laws.
The problem comes when these powerful emotions translate into actions -- those actions will be blunders.
The call for "Caylee Laws" is a textbook example of strong emotion leading to actions that will be expensive in the long-run and solve nothing in the short run.
This is a blunder in progress. What we can hope for is that the checks and balances system will delay action long enough for cool heads to prevail and the blunder will be avoided. Avoiding hot-headed blunders is one of the biggest benefits of having a checks and balances governing system.
This essay was inspired by a 5 Jul 11 Reason article, The Pernicious Perp Walk by Gene Healy, in which Healy discusses the evolution of the Dominique Strauss-Kahn (DSK) rape case that started in May of this year with DSK being pulled off a plane and paraded in handcuffs before the media -- a Perp Walk as the handcuff-and-media event is now called.
Perp Walks are high profile and a thrill for ambitious prosecutors and media people looking for a quick, high-emotion story, but they fly in the face of the Rule of Law concept that a person is innocent until proven guilty. As this DSK case is showing, that business about proving someone guilty can be a lot trickier than just finding them and an accuser.
As the article points out, this is far from the first time a prosecutor as Perp Walked someone who later was found innocent, or was never placed on trial at all because the evidence turned out to be too flimsy.
Does the prosecutor suffer when this happens? A little, they get egg on their face, but that is often a short-lived problem. Witness the fate of Rudy Giuliani who used this tactic a lot in NYC in the eighties, and had goofs, but then went on to become mayor.
What does suffer a lot is Rule of Law, and with it enfranchisement. Perp Walk is too close to mob law, something capricious and arbitrary. Capricious and arbitrary are not the characteristics of enfranchising Rule of Law, they are characteristics of deeply disenfranchising Reign of Terror.
We Americans need to become more aware that the concept of innocent until proven guilty was not a capricious choice. The founding fathers included it because they had experienced abuses similar to Perp Walks in the legal procedures of 18th century England, pre-Revolutionary France and colonial America, and they knew what problems those abuses caused. We also need to be aware that these days most other developed countries do a lot more to protect the reputations and media exposure of the accused than America currently does. And, once again, this is done for the good reason that these people are only accused, not guilty.
-- The End --