Sunday, September 25, 2016

Why the Deep State Is Dumping Hillary

The governed are ready for a period of retrenchment, consolidation and diplomatic solutions to unwinnable conflicts, as imperfect as the peace might be to hawks.
Are you open to a somewhat unconventional perspective on this election? If so, read on. If you're absolutely confident you know all there is know about this election (good vs evil, Democrat vs. Republican, etc.), well then let's compare notes in five years and see which context provided more insight into the future.
In the context presented here, the personalities of the two candidates matter less than their perceived role in the changing of the Imperial Order. Let's start with a quick overview of the relationships between each political party and the Deep State--the unelected power centers of the central government that continue on regardless of which person or party is in elected office.
Liberal Democrats have always been uneasy bedfellows with the Deep State.Republican President Eisenhower had the political and military gravitas to put limits on the Military-Industrial wing of the Deep State, so much so that Democratic candidate John F. Kennedy claimed the U.S. had fallen behind the U.S.S.R. militarily in the 1960 presidential election (the infamous "missile gap").
Eisenhower was a cautious Cold War leader, wary of hot wars, wars of conquest, and the inevitable burden of conquest, nation-building. The military was best left sheathed in his view, and careful diplomacy was sufficient to pursue America's interests.
Kennedy entered office as a foreign policy hawk who was going to out-hawk the cautious Republicans. A brush with C.I.A. cowboys (the failed Bay of Pigs invasion of Cuba) and a taste of Imperial meddling in distant, poorly understood lands (Vietnam) increased his interest in peace and reduced his enthusiasm for foreign adventurism.
Lyndon Johnson, perhaps the most activist liberal Democrat of the era, was not about to be out-hawked by the Republicans, and so he followed an expansive Imperial agenda into the 10-year quagmire of Vietnam.
Since the immense global enterprise known as World War II had taken less than four years to win, Americans had little patience for low-intensity wars that dragged on inconclusively for years while combat deaths mounted into the tens of thousands.
Liberal Democrats could find no easy political ground between the pressure to out-hawk the Republicans and the demands of an expansive Cold War Deep State. Both liberal Democratic presidents between 1965 and 1980, Johnson and Jimmy Carter, were one-term presidents, undermined by military/foreign entanglements.
The Republicans were given a freer hand; Nixon unleashed the B-52s on Hanoi in late 1972 until the North Vietnamese ran out of Soviet-supplied SAMs (surface to air missiles). Given a choice between a brokered peace or a flattened capital, they chose peace, and Nixon was free to declare victory and pull the majority of remaining American forces out of Southeast Asia.
The disastrous defeat in Vietnam of expansive Imperial ambitions (nation-building, etc.) led to an era of retrenchment and consolidation. Other than "splendid little wars" in Grenada and Panama and supporting proxies such as the Contras, the 1980s were years not of Imperial expansion but of Cold war diplomacy.
Republican President Reagan was also given a free hand to be a peacemaker, overseeing the fatal erosion of the U.S.S.R. and the end of the long, costly Cold War. President Bush Senior was a cautious Cold War leader, careful not to alienate the post-U.S.S.R. Russians and wary of over-reach and quagmires even in the new Unipolar world of unrivaled U.S. power.
The era's one hot war, Desert Storm, restored the sovereignty of Kuwait but left Saddam Hussein in control of Iraq. Bush and his inner circle (and the Deep State they represented) were mindful of the lessons of Vietnam: Imperial over-reach led to costly, drawn-out failures of nation-building in the name of exporting democracy.
Though it was poorly understood by the public, Desert Storm played to American military strengths: a high-intensity conflict with concentrated forces, maneuver warfare with heavy armor protected by absolute air superiority, aided by proximity to allied bases and aircraft carrier groups. If you designed a war optimized to American military strengths, it would look much like Desert Storm. No wonder it was one of the most lopsided victories in history, with most American casualties resulting from random Scud missile strikes and accidents.
The end of the Cold War and victory in Iraq left the Republicans without their hawkish agenda and political raison d'etre, and Ross Perot's third-party movement in 1992 effectively delivered the presidency to Democrat Bill Clinton.
Clinton was blessed with a booming domestic economy and a peace dividend from the end of the Cold war. Though Clinton reportedly hankered for a great crisis he could exploit to burnish his place in the history books, alas none arose, and the 20th century ended with a decided absence of existential threats to the U.S. or even U.S. interests.
The incredible success of Desert Storm and the temptations of Unipolar Power birthed an expansionist, activist Imperial doctrine (neoconservatism) and a Deep State enthusiasm for flexing America's unrivaled power. What better place to put these doctrines into practice than Iraq, a thorn in the Imperial side since Desert Storm in 1991.
Alas, Bush Junior and his clique of doctrinaire neoconservatives had little grasp of the limits and trade-offs of military tactics and strategies, and they confused the optimization of Desert Storm with universal superiority in any and all conflicts.
But as veterans of Vietnam knew, low-intensity war with diffused, irregular combatants is quite a different situation. Add in the shifting politics of Sunni and Shia, tribal allegiances, failed states and a post-colonial pot of simmering resentments and rivalries, and you get Iraq and Afghanistan, two quagmires that have already exceeded the cost and duration of the Vietnam quagmire.
A decade after the collapse of the U.S.S.R. and 25 years after Vietnam, the Deep State was once again enamored of expansion, hot wars, conquest and nation-building. Fifteen years on, despite endless neocon PR and saber-rattling, the smarter and more adept elements of the Deep State have given up on expansion, hot wars, conquest and nation-building.
Even empires eventually taste the ashes of defeat when expansion and hubris-soaked ambitions lead to over-reach, over-extended military forces, and enemies who are not just undeterred but much stronger than when the over-confident expansion began.
In my view, the current era of U.S. history shares parallels with the Roman era of A.D. 9 and beyond, when a planned expansionist invasion of the Danube region in central Europe led to military defeats and insurgencies that took years of patient warfighting and diplomacy to quell.
Which brings us to Hillary Clinton and Donald Trump. President Obama, nominally a liberal Democrat, has pursued an extension of the neocon Bush expansionism, with the key difference being Obama has relied more on proxies and drone strikes than on "boots on the ground." But the quagmires in Iraq and Afghanistan have not only persisted, they have expanded under Obama's watch into Syria and Libya.
War by drone and proxy is even more tempting than outright invasion, as American casualties are modest and the responsibilities for failure are (it is fervently hoped) easily sidestepped. Alas, fulfilling Imperial ambitions via proxies has its own set of limits and trade-offs; proxy wars only get the desired results in very specific circumstances.
The Democrats have out-hawked the Republicans for eight years, and the Deep State is in disarray. I have been writing about this for several years now:
When we speak of the Deep State, this ruling Elite is generally assumed to be monolithic: of one mind, so to speak, unified in worldview, strategy and goals.
In my view, this is an over-simplification of a constantly shifting battleground of paradigms and political power between a number of factions and alliances within the Deep State. Disagreements are not publicized, of course, but they become apparent years after the conflict was resolved, usually by one faction winning the hearts and minds of decision-makers or consolidating the Deep State's group-think around their worldview and strategy.
Even the Deep State only rules with the consent of the governed. The wiser elements of the Deep State recall how the Vietnam War split the nation in two and exacerbated social upheaval. These elements recognize America is tired of Imperial expansion, quagmires, proxy wars and doomed nation-building.
This exhaustion with over-reach shares many parallels with 1968 America.
In this long view of Imperial expansion, defeat and retrenchment, Hillary is holding down the status quo fort of failed expansionism and proxy wars. Her ability to out-hawk the Republicans is unquestioned, and that is one of her problems:
When the governed get tired of Imperial over-reach and expansion, they are willing to take chances just to get rid of the expansionist status quo. In this point in history, Hillary Clinton embodies the status quo. The differences in policy between her and the Obama administration are paper-thin: she is the status quo.
The governed are ready for a period of retrenchment, consolidation and diplomatic solutions to unwinnable conflicts, as imperfect as the peace might be to hawks.
For these reasons, the more adept elements of the Deep State have no choice but to dump Hillary. Empires fall not just from defeat in war with external enemies, but from the abandonment of expansionist Imperial burdens by the domestic populace.
Put another way: drones and proxies don't pay taxes.
My interview with Rethinking The Dollar:
My new book is #6 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book's website.

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Thursday, September 22, 2016

What If We're in a Depression But Don't Know It?

If it isn't a Depression, it's a very close relative of a Depression.
Just for the sake of argument, let's ask: what if we're in a Depression but don't know it? How could we possibly be in a Depression and not know it, you ask? Well, there are several ways we could be in a Depression and not know it:
1. The official statistics for "growth" (GDP), inflation, unemployment, and household income/ wealth have been engineered to mask the reality
2. The top 5% of households that dominate government, Corporate America, finance, the Deep State and the media have been doing extraordinarily well during the past eight years of stock market bubble (oops, I mean boom) and "recovery," and so they report that the economy is doing splendidly because they've done splendidly.
I have explained exactly how official metrics are engineered to reflect a rosy picture that is far from reality.:
I also also asked a series of questions that sought experiential evidence rather than easily gamed statistics for the notion that this "recovery" is more like a recession or Depression than an actual expansion:
Rather than accept official assurances that we're in the eighth year of a "recovery," let's look at a few charts and reach our own conclusion. Let's start with the civilian labor force participation rate--the percentage of the civilian work force that is employed (realizing that many of the jobs are low-paying gigs or part-time work).
Does the participation rate today look anything like the dot-com boom that actually raised almost everyone's boat at least a bit? Short answer: No., it doesn't. Today's labor force participation rate is a complete catastrophe that can only be described by one word: Depression.
Wages as a percentage of GDP has been in a 45-year freefall that can only be described as Depression for wage earners:
Notice what happened when the Federal Reserve started blowing serial asset bubbles in 2000: GDP went up but wages went down. Is this a recession or depression? It's your call, but if you're the recipient of the stagnating wages, it's depressing.
Meanwhile, the top 5% who own most of the assets that have been bubbling higher have been doing great. The Depression is only a phenomenon of the bottom 95%:
Look at the rocket ship of corporate profits. What happened around 2001 to send corporate profits on a rocket ride higher? The Fed happened, that's what:
Here's the Fed balance sheet: to the moon!
Free money for financiers and corporations fueled the stock market buyback boom:
Which fueled the stock market bubble:
Is the economy in a Depression? Not if you're a corporate bigwig skimming vast gains from corporate buybacks funded by the Fed's free money for financiers.
But if you're a wage earner who's seen your pay, hours and benefits cut while your healthcare costs have skyrocketed--well, if it isn't a Depression, it's a very close relative of a Depression.
Recent interviews:
Optimizing Bad Policy Guaranteed to Fail (Financial Sense Newshour podcast) (24:35 min)


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Why the Coming Wave of Defaults Will Be Devastating

Without the stimulus of ever-rising credit, the global economy craters in a self-reinforcing cycle of defaults, deleveraging and collapsing debt-based consumption.
In an economy based on borrowing, i.e. credit a.k.a. debt, loan defaults and deleveraging (reducing leverage and debt loads) matter. Consider this chart of total credit in the U.S. Note that the relatively tiny decline in total credit in 2008 caused by subprime mortgage defaults (a.k.a. deleveraging) very nearly collapsed not just the U.S. financial system but the entire global financial system.
Every credit boom is followed by a credit bust, as uncreditworthy borrowers and highly leveraged speculators inevitably default. Homeowners with 3% down payment mortgages default when one wage earner loses their job, companies that are sliding into bankruptcy default on their bonds, and so on. This is the normal healthy credit cycle.
Bad debt is like dead wood piling up in the forest. Eventually it starts choking off new growth, and Nature's solution is a conflagration--a raging forest fire that turns all the dead wood into ash. The fire of defaults and deleveraging is the only way to open up new areas for future growth.
Unfortunately, central banks have attempted to outlaw the healthy credit cycle.In effect, central banks have piled up dead wood (debt that will never be paid back) to the tops of the trees, and this is one fundamental reason why global growth is stagnant.
The central banks put out the default/deleveraging forest fire in 2008 with a tsunami of cheap new credit. Central banks created trillions of dollars, euros, yen and yuan and flooded the major economies with this cheap credit.
They also lowered yields on savings to zero so banks could pocket profits rather than pay depositors interest. This enabled the banks to rebuild their cash and balance sheets-- at the expense of everyone with cash, of course.
Having unleashed tens of trillions of dollars in new credit since 2008, the central banks have simply increased the likelihood and scale of the coming default conflagration. Now the amount of deadwood that's piled up is many times greater than it was in 2008.
Very few observers explore what happens after defaults start cascading through the system. Defaults mean loans and bonds won't be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.
Recall that banks rarely own the debt they originate: mortgages and auto loans are bundled and sold to investors such as pension funds, insurance companies, mutual funds, etc. So banks aren't the only institutions at risk: every institutional owner of debt-based assets is at risk.
Two things happen in a default/deleveraging conflagration. One is that lenders get very wary of lending more money to anyone or any entity other than those with the lowest-risk profiles. That constricts lending to the bottom 95% who are already over-indebted.
Please note the Federal Reserve and other central banks cannot force banks to lend to uncreditworthy borrowers. Low interest rates puts additional burdens on lenders: why issue a loan to a risky borrower when the yield on the loan is so meager?
The second thing that happens is that owners of debt-based, interest-bearing assets such as mortgages and bonds not only lose the principal that will never be paid back--they also lose the future income stream. So let's say a pension fund owns $1 million in auto loans that default. The fund must book that loss on their balance sheet as a $1 million reduction in assets.
But the truly devastating hit is to future earnings. All the interest that would have been collected on those loans also vanishes. Now the fund has two losses to book: a loss in assets and a loss in future earnings.
At today's low rates around 4%, over the course of a 30-year mortgage, borrowers end up paying around 100% of the initial mortgage as interest on the original mortgage: in other words, the borrowers pay $200,000 over the 30 year period: $100,000 in interest and repaying the $100,000 principal.
So a fund doesn't just lose 100% of the loan principal--it loses all the interest income it was counting on.
Where is the fund going to find high-yielding, low-risk debt-based assets to replace the ones lost to default? There won't be any such assets available: the only debt that will be available will be zero-interest (or negative-interest) rate sovereign bonds that pay no interest at all. Since lenders have no incentive to make low-interest loans to borrowers at a high risk of default in a global recession, debt issuance dries up.
Without the stimulus of ever-rising credit, the global economy craters in a self-reinforcing cycle of defaults, deleveraging and collapsing debt-based consumption.
Recent interviews:
Optimizing Bad Policy Guaranteed to Fail (Financial Sense Newshour) (5:51 min)


If you find value here, please consider becoming a $1/month patron of my work via patreon.com.
My new book is #6 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book's website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
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Wednesday, September 21, 2016

The Three Stages of Empire

I consider it self-evident that we are in the third and final stage of self-serving Imperial decay.
Though Edward Luttwak's The Grand Strategy of the Roman Empire: From the First Century CE to the Third is not specifically on the rise and fall of empires, it does sketch out the three stages of Empire.
Here is the current context of the discussion of Imperial lifecycles: the U.S. defense budget is roughly the same size as the rest of the world's defense spending combined:
Luttwak describes the first stage of expansion thusly:
"With brutal simplicity, it might be said that with the first system the Romans of the republic conquered much to serve the interests of the few, those living in the city--and in fact still fewer, those best placed to control policy."
The second stage spread the benefits of Empire much more broadly:
"During the first century A.D., Roman ideas evolved toward a much broader and altogether more benevolent conception of empire... men born in lands far from Rome could call themselves Roman and have their claim fully allowed, and the frontiers were efficiently defended to defend the growing prosperity of all, and not merely the privileged."
The third stage is one of rising inequality:
"In the wake of the great crisis of the third century, the provision of security became an increasingly heavy charge on society, a charge unevenly distributed, which could enrich the wealthy and ruin the poor. The machinery of empire now became increasingly self-serving, with its tax collectors, administrators and soldiers of much greater use to one another than to society at large."
That line describes the American state and central bank perfectly. The burdens of an increasingly self-serving hierarchy are falling most heavily on the middle and upper-middle class, while bread and circuses (i.e. Medicaid-paid opiates) are freely distributed to the restless masses to distract them from the immense concentration of wealth and power at the top of the pyramid:
At some point, Collapse Is Cheaper and More Effective Than Reform (November 5, 2015). The third stage Luttwak describes can be broken down into a chart of the Lifecycle of Bureaucracy, for every Imperial Project is ultimately the combination of a vast concentration of wealth/power and the sclerosis of self-serving bureaucracies that serve themselves rather than society at large:
I consider it self-evident that we are in the third and final stage of self-serving Imperial decay. That said, we don't have to follow that trajectory; we can fashion a much better future outside the status quo, as I outline in A Radically Beneficial World.


If you find value here, please consider becoming a $1/month patron of my work via patreon.com.
My new book is #5 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book's website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
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