I was just watching an infomercial for Time Life's collection of ultimate rock ballads. the tightly produced sound and slick harmonies of REO Speedwagon, Styx and Air Supply reminded me of my childhood in the 1980s, when the USA was the unquestioned dominant force in the world. it grows increasingly clear that era is ending as I write these very words, as our feeble-minded politicians debate this lame $700bln bailout proposal.
I am feeling an increasing sense of urgency to write as we head into the elections. things are coming to a head quickly and we may face some REAL problems.
first, I have to say the stock market is going lower -- in a hurry as well. the sp-500 double-topped on an intraday basis around 1220 today, sept. 25, and tuesday. that comes after it failed to break the 50day moving average on the big rally last friday, sept. 19, when Charlie Gasparino of CNBC reported hank paulson was working on an RTC-like plan.
now that scheme is going down in flames, shot full with intellectual holes by dozens of economists and other wise folk. I never knew much about it, but it never did make much sense to me why we're looking to buy up bad mortgage assets. why aren't we addressing the problem directly by trying to halt the decline in home prices? why isnt the government ordering an end to foreclosures. why isn't the Fed telling banks if they seize homes, they will be denied access to the overnight market. when people like david einhorn correctly identified the errors at lehman, why didn't ben bernanke threaten to revoke the firm's status as a primary dealer if they didn't fix their accounting?
for many years I have worried about the inefficacy of the US government. many people blame the republicans, which is easy to do, but it misses the point that our entire "democratic" system has become an unworkable mess. I have long lamented our turning away from the constitution and the way we perverted the intent of our Founding Fathers to accomplish short-term political goals. after years of governing with deceipt, lying to voters, to each other and to themselves, our politcal class is incapable of acting effectively.
what do I mean? how does the constitution have anything to do with this?
it's pretty simple... this country is not, and never has been a democracy. no variant of the word democracy (such as "democratic") appears anywhere in the constitution. it was designed as a republic, with divided powers and clearly defined duties for different branches of government.
we started breaking it almost as soon as it was created... for instance the framers of the constitution were careful to prevent the direct election of the president, so they created the electoral college. that means that each state legislature decides who gets the state's electoral votes. by the early 19th century, states allowed citizens to vote in polls for the president and then the state legislature rubber-stamped the results.
over time, this violation of the founders' principles increased and Americans came to believe they lived in a democracy. that made it easy to really ruin the entire system in 1913, when they gave people the right to vote for US senators (rather than state legislatures) and created the income tax.
these two innovations utterly transformed the country's power system and significantly weakened the founders' design for a decentralized republic. the end result of this system was that state governments lost all power over washington. they could not control the senate and they could not control the purse strings.. previously, the federal government had to collect money from the states, which raised it in their own way. because the state governments controlled the US senate and collected the revenue, they had much more power.
after the change happened, states became powerless, and the federal government became the unquestioned, supreme power. it has the ability to collect tax money directly from the citizens, funding itself, and then sends that money back to the states in the form of earmarks with thousands of strings attached -- this is how everything from medicare to no child left behind works.
the federal leviathan got even worse after 1937, then the supreme court decided that one line in the constitution -- "congress shall have the power ... to regulate commerce .. among the several states" -- essentially gave DC a blank check to regulate everything everywhere at any level desired. by the 1980s, this law was being used to mandate things like the americans with disabilities act, and even was contrued somehow to affect things like endangered species and people growing marijuana for their own consumption.
on top of that, the supreme court inverted the meaning of the bill of rights so that it allowed the federal courts to control the actions of state and local government -- even though the bill of rights was explicitly meant to protect the states again federal intrusion.
all of this might sound crazy and seem to have nothing to do with the bailout. but it has much to do with the bailout. for years as americans, we have lied to ourselves about our own country. we have played games, deliberately ignoring the truth. politicians took oaths to uphold the constitution, then immediately sought to pervert its every word for their own selfish goals. instead of voting them out of office, we tolerated the lies and relished the deception.
well, I've got news for you america: as de tocqueville said, people get the government they deserve. we are a country that's unworthy of the republic we were given. we would take pains to follow the nuances of a business contract or feel obligated to pay our debts as people, but we take the constitution -- the most important document in the entire land -- much less seriously.
at this point, after years of a dishonest lying government, this is what we get... a bunch of fumbling morons who will be incapable of rescuing us from this financial mess. they have made careers of doing nothing and winning votes (which is exactly why the Founders didn't make this a "democracy" -- they knew it was a bad form of government by itself).
I could go on forever about the constitution and how we have abused it. my point is just that we've spent years liars as our leaders. how can we now expect them to act responsibly to solve our problems?
this is what I see happening. I feel the need to record it because I think the urgency is mounting:
an ineffectual congress will fail to deal with anything
the credit market will freeze up massively and companies will go bankrupt because they won't be able to refinance debt.
the government will try to fix it with deficit spending, which will cause foreigners to start dumping Treasuries, causing a collapse of the dollar and inflation hell.
I think Treasuries are already in a major bubble -- here's how it looks like other bubbles:
1-the trend is bullish... yields on the 10yr have been falling since the early 1980s.
2- the trend recently made its final move and failed to break up resistence levels around 3.3%
3- it's considered a logical "safe" asset -- like real estate in 2003-7 -- after all, houses seemed terribly sensible after the tech bubble burst.
4- the fundamentals are terrible -- they yield less than inflation now
5- more supply is coming
that means it's a bubble ... all bubbles must break.
I return to my earlier scenario, mentioned in this entry... we will see devaluation, inflation, economic stagnation and a decline of financial intermediation. I am still trying to find a good way to represent this intermediation... one economist I met in venezuela looked at something like the value of financial asset as a % of GDP. I wish I remembered his name.
it essentially showed how financial intermediation had declined in the venezuelan economy, which reduced its ability to grow. well the USA has had too much financial intermediation of late.. for instance, financial-sector debt has more than doubled as a % of GDP since 1995 alone.
all of this needs to be undone, and is in the process of being undone. this is what it looks like. this is how the american century, which really started with the destruction of europe's might in WWI, is now drawing to a close. it was fun, but it's over.