On the eve of this evening’s US presidential debate and with two weeks to go before the election, we thought it would be fitting to publicly endorse our favorite candidate – the Realist.
The political dynamic of our time may be reduced to intense operational pragmatism posing as extreme social idealism. Election and appointment processes have become highly institutionalized and very specific in calculating odds. This explains the ever-narrowing window of acceptable public rhetoric. In this hyper self-conscious, real-time, meta social environment, public language or innuendo that threatens a generally accepted framework of expectations risks sudden castigation by society and its media… and risks political defeat.
One might argue that what was once a necessary improvement of decorum – increased political correctness by those on the public stage that influence and hopefully reflect a more aware, inclusive, and tolerant society – has morphed into a political imperative for stage management and policy setting. The business of politics, like the business of commercial enterprise, now relies very much on not surprising or upsetting a defined constituency.
Our politicians and policy makers are thus trained and instructed to play the odds, to stay on script, and to continually appeal to their bases. Only once loyalties from the low-hanging fruit are locked-in may they then try to extend support among independents – comprised in their eyes as nettlesome “brain dead” voters without the good sense to pay attention until the election draws nigh and nettlesome objective voters that don’t get the joke (those that actually pay attention to issues and do not hear enough substance during the campaigns to persuade them either way). It would be a tough course for thoughtful and courageous policy makers to navigate. So tough, in fact, that only the hyper-political need apply.
As a result, public policy and the people picked to craft and execute it have become anodyne. The impact of the consequent politically-correct policies on the disaggregated governed seems both ironic and predictable: increasing economic and social instability. Our leaders are dividing us with idealism and conquering us with vote counting. And yet… we all know it’s fake. The whole affair smacks of pro wrestling.
Be that as it may, it would seem the best bet, in fact the only logical bet for investors, is to continue wagering on the rational short-term best interests of power – not necessarily those currently in power or those that want to take it from them. Nothing else matters, practically speaking. All promises and articulated intentions not fully aligned with their short-term interests should be thought of as hollow rhetoric meant for their part-time peeps looking to wave their flags for a winning team every four years.
As it relates to US economic policy, the presidential election matters very little (as Mr. Schumer says, the Fed has become the “only game in town”). As we have written, the most politically expedient way to de-leverage banks and households so that economic activity can increase is through currency dilution, not by permitting long periods of austerity. The Fed as an institution will keep printing at the behest of politicians and major banks (its shareholders) until there is publicly recognized inflation. After all, managing inflation expectations has long been the explicit target of central bankers across all self-identifying conservative and liberal administrations.
Below we divide economic observers into two categories, Realists and Nominalists, in the current environment:
1) Realists – those who advocate for the expansion of exchange value of the aggregate money stock via an increase in the value of each monetary unit (deflationists)
2) Nominalists – those who advocate for the expansion of exchange value of the aggregate money stock via an increase in the number of monetary units (inflationists)
The great divide seems to be properly delineated on most fronts:
1) Unlevered savers, wage-earners, the 99%, etc. are all Realists (unknowingly perhaps). They benefit from a rising exchange value of the currency unit (i.e. they are structurally long the currency unit)
2) Bankers, unreserved leveragers of all stripes and those that benefit from leveraging are Nominalists. They are either monopoly producers and distributors of fiat currency or direct beneficiaries of the process as levered entities (i.e. they are structurally short the exchange value of the currency unit)
President Obama, Governor Romney and Chairman Bernanke are proven Nominalists (implying most of the electorate is unaware or indifferent as to the purchasing power of their wages and savings). This further implies that regardless of the election outcome, inflation will be the accepted manner of de-leveraging to be pursued.
A recent IMF working paper called “The Chicago Plan Revisited”1 is making its way to our in-box because it discusses a return to fully-reserved banking systems – a policy for which we have long strongly advocated. The paper discusses replacing the current monetary arrangement – using unreserved private bank system credit as money – with money directly sponsored and distributed by federal governments.
We would see such an action as an important first step towards lasting economic solvency and sustainability. We have argued formally since 2006 that unreserved bank credit inflation/deflation and the bubbles/resource misallocations it promotes are more injurious to the workings of the real economy than generally recognized. As it stands in the current regime, “money” is lent into existence by banking systems and it needs not reserves. This creates a shortage of actual money in the economy relative to the amount of credit extended and debt assumed (i.e. leverage). The imposition of rules that would require banks to lend only the media that they can source is a foundation for economic stability and efficient resource allocation, in our view.
There is a catch to this proposition however, which, if left unchecked, would ensure its demise: there would be no check on government spending. In other words, technically the fiscal agent (i.e. the federal government) could itself spend money into existence with no objective restraint. If past is prologue, this would ensure a swift end to the monetary system. We would argue there would have to be one of three restraints and/or conditions imposed to ensure ongoing credibility of the scrip:
1) Gold would need to float freely and not be taxed, as it is today, so that it offers an unadulterated safe-haven savings outlet for those who fear the eventual diminution of purchasing power (thereby acting as a natural disciplinary threat to fiscal profligacy), or;
2) A gold standard would need to be imposed and honestly maintained (perhaps using the devaluation and re-pegging we have often described), or;
3) The fiscal/monetary agent would have to suppress the flow of capital into safe-haven assets thought by nervous savers to offer better prospects for future purchasing power retention than traditional financial/leveraged assets (e.g. precious metals, scarce resources and operating utilities).
Nevertheless, the mere existence of the IMF paper seems to acknowledge that significant monetary change is likely. Perhaps that is the real takeaway?
 International Monetary Fund; “The Chicago Plan Revisited”; Jaromir Benes and Michael Kumhof; August 2012.
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Copyright © 2012 · Lee Quaintance and Paul Brodsky of QB Asset Management
Published by kind permission of the authors.
No part of this document may be reproduced in any way without the written consent of QB Asset Management Company, LLC.