Big changes loom before us; why are they invisible to most experts?

Here are some things to think about before you vote in November, more excerpts from the 7 July 2008 issue of Truth and Beauty, by Eric Kraus (an American expat living in Russia).   Why do most analysts (CIA, Wall Street, academic), let alone voters, not see the great changes looming over the world?

History repeats itself – Analysts repeat each other

The fundamental problem of most “respectable” academic analysis is not sloth or intellectual weakness; quite the opposite, many of the nontraditional analysts are more inclined to be soft in their treatment of the data. The problem instead is the almost-systematic inability of the economic establishment to accept the possibility of fundamental change – of major discontinuities and shifts in the basic model. In brief, they are extremely skilled in the assessment of continuous, stepwise shifts in the current system – but hopeless at spotting the occasional significant disruptions. 

The Decline of the West

One of our recurrent themes over the years has been the secular decline in the economic preeminence of the West due to the rapid rise of the newly emerging economies, especially of Asia. We believe that the current financial crisis marks a sharp acceleration in this process – and that by the time the crisis has past, our perceptions of the relative importance of the emergings vs. the old G7 economies will be fundamentally altered. The almost incredibly short-sighted economic policies the Bush administration will have greatly accelerated (though not caused) this process. As a major commodities producer and a re-emerging economic power, Russia will be a net beneficiary.

 Our Currency – and Now, Unexpectedly, Our Problem!

We’re strong dollar people in this administration – and have always been for the strong dollar…
President George Bush

Pigs can fly – they nearly blot out the sun!
Truth & Beauty

T&B was much amused at the spectacle of the heads of both the US Treasury and the Fed scurrying about trying to prop up the dollar. Until very recently, their statements in support of a strong dollar but also for “letting the markets work their magic” were systematically accompanied by a wink and a nudge. Official policy was to allow the dollar to weaken in order to support the flagging US economy. – No longer!

As the decline in the dollar has picked up momentum, threatening a veritable dollar crisis, the very real possibility that the greenback might forfeit its benchmark status caused a sudden reversal in US policy – and for good reason.

…A loss of reserve status would imperil both the funding of the current account and of the burgeoning budget deficit. Thus the edifying sight of US Treasury Secretary Paulson touring the Gulf States, pleading with them not to drop the dollar peg. Meanwhile, Ben Bernanke broke with longstanding Fed practice whereby it never becomes involved in dollar-policy, proclaiming the “fundamental strength” of the US currency. For once, these strong dollar statements were very much intended to be taken at face value, with even just a hint of threat of outright currency intervention – previously proscribed as unthinkable in light of their puerile, vacuous Ayn Randish free-market philosophy.

Alas, their policy options are essentially nil. The decline of the dollar could be arrested only by the expectation of a series of US rate-hikes – not currently a realistic option. Even assuming that US financial institutions are not faced with further collapse, the second dip of the recession will hit no latter than next autumn, and it will most likely be severe.

The current hiatus in the US economic downturn is attributable to a combination of extremely lax monetary and expansionary fiscal policies. Both are exhausted. The US no longer has the luxury of enjoying the decline in the dollar; further loosening of either fiscal or monetary policy would be catastrophic for the currency, accelerating its loss of reserve status, and driving commodities ballistic.

… Talk is cheap, but to actually reverse the secular loss of primacy of the US currency would require a series of painful interest rate hikes along with a restrictive fiscal policy, i.e. engineering a severe recession aimed at redressing the twin deficits. We see no signs of anything approaching the staunch political will to do so, and we can safely assume that the US administration will faithfully adhere to Oscar Wilde’s maxim that ” to regain my youth, I would do anything in the world…except, of course, take exercise, get up early, or be respectable”

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

  1. A brief note on the US Dollar. Is this like August 1914?  (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter One   (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II  (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, III – death by debt  (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn  (24 January 2008) – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession?  (18 March 208)  — More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers   (22 May 2008) — How solvent is the US government? They report the facts to us every year.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

13 thoughts on “Big changes loom before us; why are they invisible to most experts?”

  1. Much of this seems unarguable, yet future predictions are usually wrong. It seems unarguabel that China and India will soon surpass the US economy, but that might not be catastrophic for the American way of life. Let them deal with pollution for awhile; let them send troops around the world to protect their investments!

    The core of this argument seems to be the apparent insolvency of the US government, and the decline of the dollar. The fear of the latter is fatally attractive to people with fixed interest investments (I’m one of them and I know.) The mounting evidence for a crash, of the dollar and of the economy, seem unarguable, yet who knows? The fact that a particular group of people are particularly vulnerable to this fear gives me pause.

    I liked Doug’s comment on the previous post, that maybe the Russians and Chinese are egging us on in our profligate ways, figuring they can pick up the pieces after we crash. We can only hope that the next President has some savvy Goldman Sachs guys among his advisors who will tell him “it’s the economy, stupid!” — forget the war on terror.
    Fabius Maximus replies: “yet future predictions are usually wrong.” This cannot be too often or too strongly stated. We make projections in order to guide our current actions, with awareness that the future remains unknown — and largely unknowable.

  2. What a laugh:

    (a) The almost incredibly short-sighted economic policies the Bush administration
    It is Congress, more than the President, who sets economic policy.
    It is the Dems, more than the Reps, who refuse and have refused to fund Social Security on a sustainable basis — the current plan is to just increase taxes (and punish those who create jobs), as is the usual Dem cure-all.
    It was the Dems, more than the Reps (and certainly contrary to any Free-market types), who pushed for more power and less accountability of Fannie and Freddie.

    A responsible opposition to Bush would have been pointing out, repeatedly, the coming US financial problems. Instead, after the Dems took Congressional control in 2006, they continued to focus on losing the war in Iraq. And in complaining about Global Warming, an unproven potential catastrophe that the anti-capitalists want to use, now, to force life-style change, but cowardly fail to call for higher gas taxes and higher gas prices, the peaceful way to get behavior change.

    (b) The current hiatus in the US economic decline is actually more due to China using its dollar peg as an employment policy. Previous Fab Max posts discussed this more accurately, I think.

    The rest of the world, which has been growing pretty well the last 15 years, has been overly dependent on exports to the US for their own growth, and their central bankers do NOT want the US economy to tank. They will eat their US currency losses to reduce their export/job losses (which are US export/job gains).

    (c) And oil is a big wealth transfer issue.

    (d) My own guess is that around $100/bll oil over a mid-term horizon is enough to change behavior and generate a backstop technology (ies), which take capital and time to come on line. But wind-farm, solar, and nuclear production should all be in the planning stages — even if the US builds more nukes in India first.
    Fabius Maximus replies:

    (a) I do not believe post-WWII supports your belief that “It is Congress, more than the President, who sets economic policy.” Perhaps in theory, but not in practice.

    As for the Democratic Party’s economic management, I suspect you are correct that after a few terms we might yearn for the Bush Administration’s degree of mis-management. More importantly, however, I believe that the core of US economic policy has been consistent over many decades and is bi-partisian.

    (b) and (c) I agree, esp with (c)!

    (d) Over 2 or 3 decades, I agree absolutely. But they might be painful decades for America.

  3. All–

    Fab is out of comms for a while, which explains the lack of his acerbic rejoinders to your insightful comments. He asks, however, that you press on without him, and he will rejoin shortly.

  4. Anti-capitalists have been complaining about the terrible US economy since Bush announced his huge Tax Cuts for the middle class to reduce the Clinton bubble pop recession.

    puerile, vacuous Ayn Randish free-market philosophy spoken like a true believer in total power for the elites, with insults at the high school level of clique choosing against a pro-free market ‘them’.

    And even after the huge housing bubble pop, and despite the oil increase, the US economy stubbornly refuses to go into the recession the anti-market /pro-gov’t elite are rooting for, so as to justify more gov’t by elites for elites, in the name of the people.
    Fabius Maximus replies: I do not agree with everything Kraus says, but he is always interesting and clear — both desirable qualities. Also, his record of analysis about Russia (right when so many other experts were wrong) compels respect, IMO.

    As for the recession, I suggest greater caution in your comments. We do not know the current state of the US economy, as the data we reply upon is both unreliable and available only with lags. There is much evidence that the US economy entered a “recession” (which NBER defines rather subjectively) in the first quarter of 2008.

    Also, I find it odd that so many folks believe the US economy should jump about like a grasshopper, rather than the $13 trillion dollar GDP behemoth it is. Of course it reacts slowly. De-leveraging cycles tend to be esp slow — and both deep and long.

  5. I’m all for expressing and arguing (in an intelligent way, of course) a wide variety of positions, but this Tom Grey fellow borders on trolling, IMHO.
    Fabius Maximus replies: I disagree. All are welcomed here so long as the arguments are relevant, civil (as in “civil voice”), reasoned and supported. Tom Grey’s easily meet these criteria.

  6. Tom Grey seems to be ungrammatical.

    The following quote appears to be a sentence fragment:
    “puerile, vacuous Ayn Randish free-market philosophy spoken like a true believer in total power for the elites, with insults at the high school level of clique choosing against a pro-free market ‘them’.”

    Further, I can’t figure out whom Tom Grey was accusing. Is Grey accusing Fabius of speaking the free market philosophy like a true believer?

    Further Grey seems to disapprove both of “free market” and “anti-capitalist” philosophy. Thus I have no idea if Grey despises all sides equally, or if he has another alternative.

  7. Anybody who disagrees is a troll?

    Here’s Eric’s whole sentence quote (from Fab’s longer full quote):
    For once, these strong dollar statements were very much intended to be taken at face value, with even just a hint of threat of outright currency intervention – previously proscribed as unthinkable in light of their puerile, vacuous Ayn Randish free-market philosophy.

    (I think it’s Eric, not Fab, but Fab posted it without big disagreement.)

    Since I like a lot of free market analysis, I find “puerile, vaccous” to be high-school level insults. I’m pretty free-market oriented, but my own alternative is Libertarian Paternalist (see the Brookings-AEI paper).

    I am particularly galled at rich elite who mouth free market freedoms, so as to take risk and maybe get rich, but want gov’t intervention to pay for their risky investments when those risks go bad. This is why I favor Freedom with Responsibility — and to me, that means the shareholders of Fannie Mae get zeroed out.

    Nada. They bet, they benefited (too much) in the good times, they lose it all now.

    I even want 7 year claw-back taxes on all bonuses paid to all executives of any firm that requires gov’t cash to bail it out. Civil tax penalties on unearned bonuses, not criminal trials.

    Social Security is the huge coming crises that is so well known, and so certain, that no politician seems able to discuss it. Talking about the US future finances, without some talk about how the SS mess is resolved, seems to me to be ignoring the single biggest elephant in the room — although loss of reserve currency status may seem like a much closer and more urgent hippo about to step on a lot of toes.

    And I favor forced individual retirement savings plans. Individually based, with various choices — but daddy-state required.
    Fabius Maximus replies: I post material that I find interesting and IMO deserving attention, even if I do not fully agree with it.

  8. Bummer about Fab..he is a worthy opponent.

    Guys:Here are two points to consider

    1) FICA is not a looming disaster as demographic changes already in motion will ameliorate the CBO’s doomsday scenario. Older workers are already integrating into the workforce (even in Europe). So maybe Americans profligacy will see us through the SS crisis as there aren’t enough savings to kick back with

    2) Medicare IS a looming CATASTROPHE. You want to see doomsday? The CBO’s estimate on that one is $1.2 trillion in entitlement (locked in) spending by 2030. Current spending: $400bil. Now CBO estimates are notoriously lousy but even if it is 2/3 that we are in deep doo doo. At 65 or 66 Americans can land in Medicare working or not. And their 1.5% contribution if they are working ain’t gonna be close to enough! Medicare IS the 3rd rail. But I guess it won’t matter since all the money goes to the general fund anyway for earmarked West Virginia “Robert Byrd” parks et al. So we are screwed anyway.
    Fabius Maximus replies: (1) I agree that FICA is not a looming disaster, although I see no data suggesting that older workers are inegrating into the workforce. But I believe that they will do so, forced by our low savings rate and highly skewed concentration of wealth. We will just change the terms of the deal, as we have already been doing — raising the retirement age and taxing benefits. The only major component yet missing is means-testing SS benefits, which will go through in nanoseconds once money gets tights.

    (2) Medicare is not a looming catastrophe. As with #1, we will just re-define the terms. Means-testing benefits will be the easy step.

    Limiting benefits will be the large steps that solve the problem. (a) From memory, something like 1/5 of all Medicare expenditures are within 60 days of death. Much of that is spent attempting to prevent the inevitiable, often greatly increasing the patient’s pain and suffering (e.g., my father, whose doctors wanted several rounds of more surgery long-after the end was certain).

    (b) Older patients will probably have limited access to expensive treatment. Folks will scream, but that will not change the cold equations.

    The question is HOW these changes will take place. Fast and easy? Late, after much damage to the economy? Hard, with much damage to our polity? We can only guess.

  9. Tom Grey

    Social Security is the huge coming crises that is so well known, and so certain, that no politician seems able to discuss it. Talking about the US future finances, without some talk about how the SS mess is resolved, seems to me to be ignoring the single biggest elephant in the room — although loss of reserve currency status may seem like a much closer and more urgent hippo about to step on a lot of toes.

    Tom, you’re being optimistic. Medicare is already operating at a considerable loss. I don’t have reliable figures at hand but last year I think they operated at a $100 billion loss. This year was expected to be far worse but I can’t find any reliable numbers on short notice. Bush proposed a 10% cut on Medicare payouts but was overridden by a Congress driven to spend the last dime to keep the voters happy. To make matters worse, Medicare’s anticipated debt-load for the boomers is 2-3x that of Social Security.
    Fabius Maximus replies: I disagree. We have much more serious — far more difficult to solve — problems. Such as how we pay the massive debts already on the books. We have borrowed with no thought of repayment, an ominous indication of moral weakness. For good reason Adam Smith wrote “A theory of Moral Sentiments” before “Weath of Nations.”

  10. Firstly I have never agreed with the idea the ‘decline of the West’. It is more that others have caught up. This is natural proicess and is not a threat or a worry, rather a great opportunity. Despote declines, especially in the Anglo-Saxon west, in scientific and technical education and training, despite lack of investment in innovation, etc, we still have massive resources of skills and knowledge to enable us to be competitive.

    Two sayings:

    “The only source of wealth is between the ears” and “Let us all stop the race to the bottom, let us start a race to the top”.

    The real wealth of a Nation is not its mineral resources, its military .. it is the collective skills and knowledge of its people, applied properly.

    It is only failure of imagination and fear (“keep everything going on the same”) that stops Australia, UK, US, etc being competitive and generating huge amounts of real wealth (not the ponzi debt wealth recently created). Global warming …. an opportunity to make huge amounts of money from non fossil fuel energy. Peak oil, ditto, plus the ability to make whole new transportation systems. Look what the US did in the late 1800’s in building a vast railway netwrok.

    Now many countries can see this and are so obviously positioning themselves. I mean for gods sake Russia is positioning itself nicely for exports of fully assembled nuclear reactors. Iran positioning itself to extend its ‘peak export oil’ position and becoming the regional nuclear power expert .. and yes, Saudia Arabia, etc will all go nuclear and solar in a big way within the next 10-15 years .. they will have to, otherwise they will have no free oil or gas to expert. Germany is going to be the solar expert, with Spain trailing behind. France will win big time as its nuclear expertise will sought all over .. note they all ready have full capacity in meeting their current order books for new reactors around the world.

    Now you have to ask why the US can’t compete in this, or have too many of its experts been sucked into building ‘ponzi’ planes (ah la F35) or other rediculous weapons. Or why the UK, originally the most advanced nuclear powered country in the World has had its hopes for a lot of new nuclear plants dashed, because a takeover of the last remaining rump of its deliberately wound down nuclear industry was NOT taken up by the French.
    Fabius Maximus replies: Everyone has different preferences for explanations. IMO “It is only failure of imagination and fear” tells us little about causes of these problems. These are just symptoms.

  11. On the other point “experts”. Here is how it works. Tell your boss the Truth, and it is not what he wants to hear … bye. Since most bosses these days are sociopathic political W***k*rs …then do I need to say anymore? Politics, business, ‘think tanks’. Watch an ‘economist” on TV, he works for a company (here in Oz there are all from banks). If he says anything that is critical of banks he will be fired. ‘Think tanks’ are all paid by someone to push for a political or business line. Don’t do it .. fired and someone else will be found to ‘say the right thing’.

    The real experts, e.g. scientists, historians, people like Lind or Beer, etc (even semi- amatuers like the “war Nerd”), are marginalised. I unfortunately don’t think the collapse of science in the US/UK/Oz/etc is ‘natural’ I think it is a natural reaction by the SW (sociopathic w***k*rs) to consolidate their power. What happened to the real analysts in to DOD, CIA, etc before Iraq is instructive (ref: Micael Scheur, Karen Kwiatkowski, et al). In my own small way I have suffered exactly the same thing.

    The Sovietisation of the US? Or the ‘revenge of the Commissars’ as I call it.

    Unfortunately, as the USSR found out: “For a successful technology, reality must take precedence over public relations, for nature cannot be fooled” (Richard P Feynman). You can substiture “society”, “economics” or “strategy” for “technology” and you get the idea.

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