Authored by Peter Diekmeyer via Mises. Org
A decade ago, Ian Bremmer, president of Eurasia Group, launched one of the geopolitical world’s greatest marketing coups: an annual list of key global risks.
2018 version is finely balanced to generate maximum interest among the consultancy’s global banking, defence and government sector clients. China, Russia, North Korea and Iran all figure highly, as do terrorism, Islamic- and cyber- threats.
Naturally, it has made Bremmer a favorite among the plutocracy and Bilderberg set. But what would the list look like if it targeted the needs of ordinary Americans?
Following are our suggestions:
- The Krugman con
The biggest threat to America (and the rest of the world) is the coming implosion of the Krugman Con . This “con” gets its name from the Nobel Prize-winning economist and New York Times columnist who (like most of the economics profession) has spent decades advocating the continuous growth of government spending, taxation, borrowing and money-printing at a pace that is faster than economic growth.
The policies—camouflaged in terms like “fiscal stimulus,” “multiplier effect” and “Phillips curve”—are worse than a Ponzi scheme. They are a Ponzi scheme any grade 10 student can understand.
- Governments, businesses and ordinary Americans powerless to act.
A couple of years back, McKinsey group published a study which showed that global government, business and private sector debts had reached 289% of GDP. However, few public-sector officials have grasped the implications of this key statistic: if everyone is strapped, there is no one left to bail anyone out. That means even the slightest tremor could bring down the entire system.
A couple of examples suffice. First, economists say that things could never get as bad as in Japan, now capping two “lost decades” of economic growth. In fact, things could get much worse, because Japan’s “lost” two decades were cushioned by massive exports to still-growing US and European economies.
In a similar fashion, China helped prop up the rest of the global economy following the 2008 global financial crisis by borrowing and printing tens of trillions of dollars and importing a lot of stuff—a move that created jobs both in China and elsewhere. But if the entire global economy goes down together, there won’t be any Martians who will boost their imports to bail us out.
- Free markets are dead, but will be blamed for the coming crisis
As the late Murray Rothbard pointed out in his magisterial work America’s Great Depression , the US government and the Federal Reserve largely fueled the 1929 stock market bubble, crash and ensuing depression through massive monetary expansion. But free markets got blamed.
The same thing is happening right now with the Krugman con . The Federal Reserve’s low interest rate policies have sparked “everything” bubbles in stocks, bonds and real estate. Worse, the US public sector, juiced by free printed money, now controls more than half the economy (particularly when you include the hidden $2.4 trillion Powell Tax ).
When the inevitable collapse occurs, politicians, bureaucrats and regulators will duck responsibility. They will instead blame capitalism and ask for more powers. If past is prologue, they will get them.
- Faulty signals
Massive central bank interventions have butchered price discovery to the point that Americans can no longer make effective economic and financial decisions.
Why have stock prices tripled since 2009? Should you borrow to go back to school or to buy an overpriced house? Is it better to save, spend or pay down debt? What is the true cost of government?
The US Federal Reserve’s money-printing has so skewered economic signals—ranging from GDP to inflation and business earnings data—that Americans have no good metrics they can use to effectively answer these questions. It’s like driving around New York with a GPS map of Botswana.
By now, Americans have forgotten all about the seven Muslim countries that the Trump Administration bombed in the three months after the last US election. But the families of the tens of thousands of civilians killed by those bombs have not.
The CIA has a term for the damage those survivors could cause: Blowback. If the US eventually gets hit with a sizable “terrorist” response from its bombing victims, average Americans will never know what caused it. The US government will thus be able to blame any enemy it chooses.
- Trump picks on the wrong guy
The US government has distracted the American public from its economic hardships by attacking various “enemies” for so long, it’s hard to remember a time when it was not the case.
The big challenge facing the Trump Administration is that Americans are no longer distracted by small wars, in which the US Air Force annihilates the enemy with drone strikes from afar. Therefore, there is a huge threat that President Trump, in his quest for a good newsworthy opponent, might pick on the wrong guy.
North Korea, for example, which Trump has been trash-talking lately, just might have the tools to defend itself. Worse, China has quietly drawn a red line and said it would come to North Korea’s defence if that country is attacked.
- Trump’s “yes men”
One of the most fascinating aspects of the Trump Presidency is the obsequiousness he demands from his aides, who have been forced to smile, stand by and thus tacitly endorse racist, misogynist and borderline psychopathic rhetoric. The upshot is that most of Trump’s closest staff is comprised of either family, generals and … “yes men.”
This is particularly dangerous during an Imperial Presidency in which the Oval Office has acquired increasing powers. If Trump ever does veer off course, don’t expect his advisors to contain him.
- Complex societies and clueless experts
Warren Buffet’s golden rule is: never invest in a company you don’t understand. Taking that example, a step further, who would invest in the US dollar, when government actions have made American monetary policy impossible to comprehend?
One example suffices. As hard as it is to believe, the US government has printed so much money, it does not know how much is out there. As a result, the Federal Reserve does not publish conclusive statistics about the total money supply (M1 and M2 are only base estimates).
Innovations such as fractional reserve banking, the financial stability board, derivatives, the Fed’s secret trading desk—which we know exists, but government officials won’t fully disclose its activities—and the Euro dollar market mean a variety of players can expand or contract the money supply.
Like Bitcoin and other crypto-currencies (which can fork and expand effortlessly), the US dollar is fraught with huge risks because holders can’t value the asset if they don’t know how much of it exists.
More broadly: the fact that Buffet is heavily invested in the US dollar (even though he almost certainly understands the risks) should provide huge cause for concern about the valuations of all other asset classes.
- Derivatives and interconnected markets
Foreign exchange, interest rate and equity-linked derivatives are the most complex, opaque and sizeable markets. Yet few American experts (let alone politicians, media and ordinary folk) know what they are, how big they are, or understand the risks involved—despite the fact that the failure of a derivatives player, AIG, caused the last global financial crisis.
The Bank for International Settlements recently estimated the total notional value of over-the-counter derivatives at $542 trillion—roughly eight times global GDP. But the market is actually larger because much of the trading was done off the books.
There are only two things you can be sure about derivatives:
- A failure in any one of the major counterparties will bring the entire system down, and
- Because AIG clients were bailed out last time, there were no incentives to remove bad actors and faulty practices.
- An unaccountable accounting profession
US and global corporate financial statements run hundreds of pages. But experts neither understand nor trust them. Current rules enable corporations to massage profits and hide much of their debts off the balance sheets—making it impossible to assess operational performance.
The wealthy would never trust a corporate financial statement. They always hire their own experts to perform due diligence prior to investing serious money in a firm. Despite this, politicians allow US accountants to publish more, and increasingly complex, rules—so they can charge ever-greater fees to interpret them.
The problem is larger than it appears. The fact that Americans can’t trust or rely upon corporate data means they can’t trust the CEOs who run those businesses, either.
Therefore, when politicians blame the private sector (and capitalism) following the coming crisis, there will be few CEOs with any credibility left to defend it.
A final note. While risks abound, there are some short-term positives. Public officials can mitigate or deal with many of the threats listed above if they muster the courage or the political will.
Furthermore, while the US and global economies are being run as quasi-Ponzi schemes, the hedging community has been warning of the risks for more than two decades. While an implosion is inevitable, it is by no means imminent.
That said, the “Krugman con” Ponzi is a like a “sword of Damocles,” which—while not always visible—hangs over the actions of all states, businesses and individuals.
The risk of loss in the trading of stocks, options, futures, foreign exchanges, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and foreign exchanges involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.