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Monday, December 6, 2010

The Barbarous Relic At The Gates…

Back in the time of the Roman Empire around the 5th century, the structure began to unravel and the “barbarians” started to acquire more of the territory once ruled by Rome.  The “Barbarians” were those cultures outside of the Empire that were not of Roman extraction or culture; in fact in many respects the Barbarians were considered subhuman, brutal and criminal.  Initially there was much trade between the Empire and the Barbarians and the Barbarians provided many labor services to occupying Roman armies ranging from food production and daily living service to providing female companionship. The Roman Empire also struggled with civil war and required additional military personnel, so Barbarians were actually recruited in to the military. Time marched on and it became fairly common that the members of the military up to the generals had Barbarian ancestry as well.  As the Empire declined the Barbarians some of whom were former Roman military leaders in turn wrested control of more and more land from the empire. The Empire went into  decline as a result of overextension, increasing government regulation and continually increasing taxes which drove its citizens to seek refuge from the policies and leadership of Rome. The crushing directives and punitive taxes dictated by Rome convinced many Romans living near the Barbarian territories that they might prosper better under and be protected by Barbarian rule. The net result was that more and more lands came under Barbarian control and the taxing ability of Rome to sustain its wild spending and prop up its “World” empire imploded.

Now granted there was much more in play during the decline of the Roman Empire and the reasons mentioned above were not the only factors that lead to the downfall, but this is a bird’s eye view of the cause. Dear reader, you must be asking yourself where is your correspondent going with this, has he just lost it yet again; hopefully I can paint a clear picture for you in the writing that follows.

In the world of today we don’t have the Roman Empire and there are no great armies occupying the US, Europe, China, Russia or any countries. Save your emails I don’t consider US Military operations in Afghanistan or Iraq to be on par with the Roman Empire nor are the awful contained conflicts that occur with too much regularity in Africa or other “hot spots” in the world. Instead I would contend that in today’s modern era the Empire is more that of currency, monetary and economic regime and the Roman Empire of today is for all intents and purposes the US. The US has enjoyed its superpower status and leveraged it economically for the past 65 or so years; please understand dear reader I am a proud American and have also reaped the rewards of America’s power and prowess. In this article that I am putting forward for your review, my intent is not bash America but to hopefully provoke you in to thinking for yourself, to remove the blinders as to what is transpiring to our great country.

You see dear reader as I write this the US is still the Roman Empire, although as I said we are not out occupying great swaths of the world militarily we are doing it economically. If we were to put the US in terms of the Roman Empire than most people would view Obama as the Caesar, but it is greater than just one man because of the way our system is structured. Instead it is the combination of two of the three legs of our government the Executive and the legislative that has brought us to this point in our history. We must add to this volatile mix the catalyst of the FED and their misguided attempts to “manage” the economy.  Like the Romans before us the size and scope of government continues to grow and spend and to maintain the house of cards requires ever greater amounts of funds or taxes. Just as in Rome the government and military became so large and the taxes so onerous that it choked off the private sector with regulation, taxes and intervention in an effort to serve the perceived public good; it did not work then and it doesn’t work now.

Mind you dear reader this is not a phenomenon that is limited to just the United States, all one needs to do is look across the pond to Euroland and one can see the time tested result of overregulation and excessive tax rates. I had already discussed in earlier posts that the Euro was flawed from the beginning since the ECB was trying to impose a one size fits all economy across a disparate collection of people with strong national identities and non-complimentary economies; this is doomed to fail in my opinion because of the lack of cultural homogeneity found in an economy like the US.

Back in the USS of A we are marching down the same path as our European cousins with our big government and entitlement society requiring ever increasing deficits that are expanding at rates faster than taxes could ever keep up with. Of course that won’t stop the government from trying to solve its problems by taxing rather than the difficult choices of cutting or even reneging on unaffordable options a case and point of this is from the President’s own deficit commission who came up with several ideas including restructuring the overly complicated tax code and immediately the lobbyists and special interests went in to overdrive to protect their pieces of the pie; this means that either nothing substantial or far less than what is needed will be implemented and we will fall woefully short of the mark.

In the meantime dear reader you are already aware regarding my feelings about the FED and their profligate money printing. It came out over the past week through FOIA (Freedom of information act) requests that were stonewalled for 2 years that the FED bailed out not just banks but foreigners all with money that is yours and mine as US taxpayers. Upon release of this information I found it fascinating that two views came to the fore; first was the view that if the FED did not bail out foreigen entities that it was a form of protectionism and second was the announcement that companies like Ford and GE received money from the FED in 2008. Starting with the protectionist notion I would respond that it is sheer and utter nonsense that if the FED did not lend to foreigners that it would constitute financial protectionism; where is it in the FED’s charter or dual mandate stated that they have the duty let alone authority to use US taxpayer money as they see fit let alone outside the US. Of course dear reader they are doing it again as they back stop the ECB as it deals with the Euroland mess soon to be obvious to all as Qeuro (quantitative euro). As for the FED loaning money to US entities like Ford this not even remotely close to the bailout that was given to AIG, Fannie Mae, Freddy Mac or GM; instead it was a period of high credit stress where the credit markets had locked and companies like Ford utilize the credit markets on a regular basis to meet business expenses ranging from payroll to accounts payable.  The second instance I believe that the FED did what it had to to keep the markets moving and it was the right decision, on the other hand I completely disagree with the FED’s bailout policies as they just perpetuate the problem and continue the moral hazard.

The events that we as Americans have witnessed in the government and markets should be enough to allow even the dimmest amongst us to see that things are not normal and there has been a paradigm shift especially since all the assurances that the old remedies will put us back on the straight and narrow have failed to do so.

Back to our Roman analogy, who is the barbarian today I would contend that the tangibles in the market place, being lead by gold it’s five star general, are threatening the existing market rule.  John Maynard Keynes, the father of Keynesism, once called gold the barbarous relic deriding its usefulness as a store of value and its place in monetary policy. Today due to the FED’s policies of unnaturally low interest rates and QE saver’s are being punished as they can neither earn sufficient return in interest as well as their purchasing power is being eroded so they are increasingly turning to the “barbarian” for protection and shelter from the current storm.  Moreover, it is not just here in the USS of A that the Barbarian is making inroads but around the world as well. As it becomes more apparent that the ECB will grudgingly move to Quero and the FED is also busily pumping billions and possibly future trillions in to Euroland more people around the globe are suspect of paper currencies, which is reflected in the “barbarous relics” (and all its cousins) rise in currencies worldwide. Furthermore in an ironic twist central banks around the world are adding to their metal reserves as gold is about to log its 10th year of gains after spending prior decades dishoarding their stockpiles; although the US whose monetary policy supposedly is divorced from gold still retains the largest hoard, which begs the question if it is so useless why store it? The government like all others around the world store gold because it is of value even though they bloviate around the world that it is a “barbarous relic”.  If you want proof then I would say a picture or in thicase a chart is worth a thousand words…… Bottom line is that unless we enter a parallel universe due to an experiment with the CERN particle accelerator gold and tangibles are going higher...usual corrections apply no straight lines!

Chart Images obtained from galmarley.com a site that has a number of great charts including the ones below…

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