TDOC: Silly Season

I both love and hate Facebook. Love it because it lets me keep in touch with friends. Hate it because it provides editors with another route through which to hassle me about my shameless intransigence.

I really can’t help it folks. I am a writer after all. In my opinion a big part of the bargain I struck with the world is that I’ll agree to never be financially secure in exchange for having a life. Which is a long-winded way of saying I found this comment recently on my FB page from our beloved editor Stephen Whitworth:

“Hey whatever happened to your column The Death Of Capitalism??? It died as soon as it got a logo.”

Umm… yeah… right. TDOC. I have sort of been neglecting that ugly, basement dwelling redheaded step child (I kid, I kid… I’m a ginger myself) haven’t I? But I have a list of great reasons as long as my arm! (Did I mention I’m a writer?)

I was recovering from two broken legs and the baby learned to walk before I did. Then she turned into a toddler that required me to learn to run in my own hobbling fashion. (All while shrieking “Don’t eat that!”) Then my editors at the day job what pays my mortgage informed me that they actually expected me to complete some work for them after my vacation in hospital. Apparently when they say “Gord will be working from home” they really mean that “work” part…

And of course there’s that quietly unacknowledged reality… I was already at risk of becoming that weird guy who never left his house and always wore sweats… did I really need to elevate my risk factors by fixating on the economy, monetary policy, banking cabals and other tinfoil hat territory?

But despite my ability to generate excuses that even I’m ready to believe, I have to be honest with myself. I just didn’t feel like it. Nothing had been inspiring me, it was the summer and all the financial types were out at the seashore, preening in front of others of their ilk, and nothing was happening.

I’m told that watching a financial crisis is about as boring as watching a yacht race (Not that I’d know, I’m from Carrot River. I don’t think drinking in a rubber raft qualifies.) so for someone who’s personally more into hockey fights, it was time to ignore the whole thing.

But now summer’s over. The seersucker suits and white linen trousers are safely in storage. The summer place at the Cape is shuttered tight. All the bankers are back in their boxes in the sky. And the whole thing appears, to the uninformed observer, to be gathering speed in a sickeningly sudden fashion –- which again is how I’m told these things often go.

Did you happen to hear that loud booming noise late Friday afternoon? The one that sounded like a combination sonic boom and artillery shot? Initially I thought someone was shooting at me… until I realized that it was just the long-awaited and much anticipated other shoe dropping.

You remember that real estate crisis south of the line? It would appear that, umm, well, it’s still there. Unfortunately it’s become something now known as the “foreclosure crisis.” There’s some good background info here, here, and here, if you happen to be an enormous geek like yours truly. If so I apologize profusely to your family for encouraging this habit.

If you’re not one of those types, here’s a much shorter version. Apparently the same geniuses that thought it would be a good idea to give loans to anyone with a pulse were in such an all-fired hurry that they cut more than a few corners. They failed to ensure that all the mortgage paperwork was in order while creating these mortgage backed securities. Now that they’ve blown up, the banks who aided and abetted these boiler room operations have been caught trying to further cut corners by kicking people out without having the appropriate paperwork.

This is now coming to light and as it does a whole raft of unpleasant questions are surfacing, much like the headless corpses of mob hits bobbing to the surface of a New Jersey tidal swamp. For example, are banks that have these bonds on their books now insolvent all over again? And are the banks that created these monsters now liable to the customers they defrauded? And if that’s so, what’s the solution? Won’t just going ahead with the foreclosures undermine property rights significantly? And isn’t that about the only thing that distinguishes the “advanced western economies” from being just another oligarchic hellhole where anyone with enough legal firepower can just throw you out on your keister, deed or no deed?

As this plays out over the next few weeks or months, all this will become clearer. But if it’s as bad as it looks at first glance, hang onto your hat. This could get ugly before it’s over. How ugly? Oh, if I had the answers to that, I’d be shorting Bank of America, laying on a beach somewhere lighting cigars with $100 bills and planning a rum-sodden jig to be danced on the grave of Wall Street. But alas, I just keep going to work every day, because I’m just not that smart.

Oh, and if that weren’t bad enough, governments appear poised to make our economic problems even worse.

I’m going to veer off, briefly, into an explanation of what a fiat currency is, and why they’re bad news. I do so, confident in the fact that some hairy-backed geek who never left his mom’s basement is sure to wade in to tell me I’ve got it all wrong, or at the very least that I’ve got some niggling yet crucial detail wrong. Feel free. Comments section is below. Their entire purpose is to give people like us a voice.

So back to the matter at hand. A fiat currency is one that’s backed by nothing, other than a shared believe that it’s worth something. No gold, silver, bronze or whatever stands behind it, just the promise of a government. Up until 1971, 25 per cent of the US dollar was backed by gold, which had worked just fine since WWII under something known as the “Breton Woods Accord” which was basically the agreement under which the British Empire turned the keys to the world over to the U.S.

But by the early 1970s the U.S. government had been fighting an expensive foreign entanglement for years, which was putting a real strain on their finances. Some other key players in the global economy got an inkling that the printing press at the mint had been running to pay for all this, and began redeeming their U.S. dollars in gold – mainly those cheese eating surrender monkeys from France. Nixon responded by slamming the gold window shut. He got away with it because the U.S. dollar was so firmly entrenched, but even so, oil spiked, gold spiked, the economy went into the crapper over the next few years, etc.

So now they appear to be playing that game again. The key phrase to listen for is “quantitative easing” which appears to be geek-speak for “we’re going to wear out the printing plates” except of course these days they make money with a few keystrokes.

So this is playing hell with a few things. The U.S. dollar is dropping, everything else is rising. Major dollar buyers like China are beginning to get a sinking feeling. Exporters are becoming less competitive, leading Japan to try to devalue its currency.

Why is all this important? We tried something similar before. It dramatically worsened the Great Depression and in no small part led to WWII.

“So what does all this mean?’ I can hear you saying. Lacking a crystal ball, I can only say I don’t know. Which is more honesty than you’ll get from your average economic prognosticator who tend to be overly-enamoured with their own brilliance.

But I can say that what’s happening appears to be seismic. A game-changer, if you will. So all I can tell you is that when someone tells you it’s all over now, recovery is just around the corner, blah, blah, blah… don’t believe a word they say. Probably they’re just trying to convince themselves.

4 thoughts on “TDOC: Silly Season”

  1. I’m from Carrot River too and I say drinking on a rubber raft while punting along the flooded spring ditches totally qualifies as yacht racing. :)

    Extra points if you’re drinking the rye out of a mug your mother made.

  2. I am fantastically unfit to argue with anyone about fiat money Gord but here’s a rant from a guy who would ask you why you’re siding with Glenn Beck:

    http://slog.thestranger.com/slog/archives/2010/10/12/the-gold-standard-inflation-wealth-and-economic-growth

    A very, very long quote that sums up Golob’s point:

    “Under the gold standard, the amount of money is fixed to be equal to the amount of gold in reserve. You could, at any time, exchange your crumpled dollar bill for a fixed amount of shiny metal. Therefore, the growth in amount of money was determined by how fast this one metal could be mined and refined from the earth. You can’t eat gold. You can’t make a home out of gold. And gold clothing is just tacky. The gold production rate is a poor correlate for the growth of the overall economy. The result — particularly during periods of rapid technological advancement in areas beyond metallurgy — were repeated cycles of catastrophic crashes. When an advancement dramatically increased the productive capacity of the economy, the money supply stayed relatively fixed — resulting in sharp, rapid deflation. The deflation stopped borrowing, stopping investment in new endeavors, crashing the economy over and over again. It was a terrible system, whose success depended almost entirely upon luck and faith in divine providence. Of course, [Glenn] Beck loves it.”

    Food for thought!

  3. @ CDP…. thanks, that cracked me up. To those of you not from the jewel of the northeast who consider ditch punting inferior to yachting, I say fie! See you next spring, first rye’s on me!

    @Stephen… yes, believe me, I find it easily as uncomfortable as you to find myself where I am vis-a-vis the gold bugs. But here’s the thing… when they lean back in their rocking chairs on the front porch, stroke their shotguns lovingly and make statements like “Every fiat currency that’s ever been has eventually become worthless,” there’s this uncomfortable fact that they’re right. The facts actually back them up, with the exception of the ones currently in circulation, which they argue simply haven’t been through their life cycle.

    Now is the US dollar destined for the scrap heap of history? I refer you to my remarks above about how I’m not smart enough to know. But when you put your full faith in a fiat currency you’re accepting that the politicians who are in charge of it have to be trustworthy, fiscally responsible and willing to make the hard decisions, rather than just kicking the can further down the road in the hopes of getting re-elected next time. You tell me if that describes the current crop of “leaders” — and the ones we’ve had for the past several decades.

    Seems to me that they’re more intent on governing via focus groups than anything else and hanging onto power at all costs while pushing hot buttons to whip up their bases, rather than addressing the boring, painful and utterly necessary decisions of governing.

    So it’s simply easier to make new money, rather than impose fiscal discipline. Which is why I expect the US dollar is gonna be on the floor for the next while, at the very least. If anything makes any sense anymore, commodities (oil, gold, wheat, etc.) should all increase in value as priced in US dollars, since they represent real wealth. I guess we’ll see.

    I think perhaps the best quote that sums up my feelings about currency backed by nothing but the ethics of a politician can be summed up thusly:

    “It’s like selecting a lady of the evening. The best you can do is look for the least syphilitic.”

    As for Golob’s point, between WWII and 1971, it worked just fine. It wasn’t a 100 per cent gold standard, but it certainly put a floor under the US buck. Since then it’s lost a whole lot of purchasing power. So the economy is larger in dollar terms per capita, but is it any better off, a few shiny techno gadgets aside?

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