What Have We Learned in the Past 13 Years? (January 24, 2012)
We have learned nothing since 1999 except the Central State and Central Bank will intervene in the market to bend price and risk to serve the Status Quo.
If we learn nothing, then we deserve to lose. This is not a popular concept in America at this point in its history, when monumental errors are denied, excused, rationalized or quickly absolved by those who committed them.
As a small-fry investor, when I veer away from my discipline and system, I predictably lose money. As I sift the ashes of the trade, I always remind myself: if I learn nothing from my studies and experience, then I deserve to lose.
What exactly has America learned since January 1, 1999, 13 years that included two stupendous financial/credit bubbles, two hot wars and an explosion in public and private debt? If we examine the policy changes and institutional changes since the 2008 global financial meltdown, then we have to conclude that we've learned a very few things:
1. We've learned that the way to "repair" the catastrophic damage of a financial bubble bursting is to inflate another financial bubble in another asset class.
2. Systemic incentives will be put in place for everyone to speculate in the new bubble, with two important caveats: the Financial and Political Elites will get to play the game with moral hazard, i.e. their gains will be private and their losses socialized, and second, these Elites will not be governed by the rule of law; blatant systemic fraud and embezzlement will be ignored or forgiven.
In other words, some are more equal than others when it comes to the founding precept "everyone is equal before the law."
3. The Central Bank (the private Federal Reserve in the U.S.) will sacrifice purchasing power to lower interest rates and flood the economy with liquidity, i.e. nearly-free money for Power Elite speculation and leverage to inflate the new asset/credit bubble.
4. The Central State will address all post-bubble problems by borrowing and squandering trillions of dollars to prop up the Status Quo and transfer Financial Elite losses to the public/taxpayers.
5. These "solutions" are part of a broader strategy of "problem-solving" that can be summarized as "doing more of the same." If doing more of the same doesn't work, then do even more of the same until you resolve the "problem" by bending the market to your will.
6. To create the perception that the Power Elites have actually solved the structural issues rather than just paper them over, then minor "reforms" will be passed that tweak the parameters of the Status Quo without actually changing the power structure: who owns most of the national wealth and income stream, and who controls the political process that diverts an increasing share of the national income stream to State fiefdoms and corporate cartels.
We can find an analogy to these "lessons learned" in a spoiled teenager who refuses to study and is failing but discovers that cheating can "save the day" with much less effort than actually learning. We as a nation have learned how to cheat, and now we think that learning how to cheat and create the perception that we've actually learned something can be substituted for making the necessary sacrifices to actually learn something.
When the cheating controls the marketplace to prop up asset prices and mask systemic risk, then we are in effect giving ourselves "straight As" even though we have torn up the test, i.e. how our policies work in a transparent, open marketplace.
Thirteen years of cheating have created a dangerous confidence that we can keep cheating by controlling the market forever. The problem for the Central State and Central Bank is that socializing the market via cloaked intervention is qualitatively no different than direct command-economy control as practiced by the former Soviet Union: the real market cannot be destroyed, it can only be pushed underground.
This is why the black market flourishes in command economies.
In the U.S., the market has been manipulated and suppressed but there is no black-market outlet for reality. As a result, the market will reassert itself in the one market that is allowed, overpowering the State and Central Bank manipulation.
What we have learned in the past 13 years is the market can be suppressed and controlled forever by a dominant State and Central Bank. But markets cannot be suppressed forever, any more than risk can be eradicated, and so that lesson will have to be unlearned.
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