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America鈥檚 鈥楳odest Proposal鈥 may harm generations
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In 1729 Jonathan Swift published his satirical “A Modest Proposal,” suggesting the impoverished Irish sell their children as food to the wealthy Irish bourgeoisie, thereby easing economic problems and restoring balance to the system.
Swift mocks the ruling class, society in general and heartless attitudes toward the poor. His proposal would eliminate the burden of impoverished youth, effectively borrowing for the gratification of the current, well-off generation.
A “simple” satire, it was written to demonstrate the relative inequality and then cruelty to others of trying to “maintain the economic status quo.” We begin to understand that what Mao Zedong created was so much better, and what many would suggest was to the great modern-day benefit of China as well.
America is going in a much different direction. The recent budget battles and financial aftermath demonstrate the severity of overspending.
The US debt has increased by more than a trillion dollars in just over 12 months. We are “borrowing” — some would say “stealing” about US$100 million from each of our children and our grandchildren every single hour of every single day.
America is, just as in “A Modest Proposal,” consuming the opportunity and life’s blood of today’s children in order to maintain the status quo.
Will American banks be called upon eventually to buy what the United States Treasury can no longer be able to sell to foreign governments if quantitative easing is really stopped? We see it as inevitable.
Why the solution could be deemed “elegant” and easy:
American banks are now at a much lower leverage ratio than in much of the rest of the developed world — but this could change quickly, with a simple leverage and policy change, and perhaps not for the good.
When the world economy slows down, as it is slowing currently, banks must maintain capital ratios as depositors withdraw funds. This process creates a “need” for more collateral on a bank balance sheet to cover depositor withdrawals.
There are two choices.
Leverage more to create capital “faster” or sell bonds and other bank assets to pay for customer withdrawals.
Governments in such a scenario historically try to “stimulate their way out” of these recessionary periods.
For American banks, re-leveraging will be and has historically been the path of least resistance.
We have seen via the European debacle that when banks sell assets at the same time, bond markets collapse, just as with Spain, Ireland, Greece, and soon Italy.
Japan has only worsened its own situation by attempting the unthinkable, which is to double the currency of Japanese yen in circulation under Abe-nomics.
Bug in search of windshield
The quantitative easing there has left the international community in horror of what happens when the US$100 trillion Japanese yen bond buying binge comes to an end. At 200 percent of GDP — the debt of Japan has been called “a bug in search of a windshield” and with all of the stimulus, centrally planned results are as expected.
America through its own policies may reach the Jonathan Swift extreme, leading to a longer term Abe-nomics Solution, but first the banks will re-leverage in order to try and drive economic recovery. The problem with this bank-driven recovery is that it only serves to inflate asset prices, not restore economic balance.
In fact, given that the wealthy are the ones who own all of the assets, this inflationary solution only increases the wealth disparity through inflation.
Banks must continue to releverage themselves to accomplish the current centrally planned, “deflationary solution” by increasing their purchase of debt from the government and corporations, further driving cash into the system, but with less of a future for the end workers.
Under such a scenario, corporations and the United States government become effectively one in the same entity.
The bargaining in China and in early America that created a strong labor force came from collective bargaining driven from the factory floor to production.
The “new normal” in America could become a centrally planned government solution, which is driven from Washington, DC, to corporate CEOs who, aside from now socialized medicine and other government mandated taxes, are working toward a verticalization of the world where governments, not individual citizens, largely decide how their people will spend their productive work life.
Our children deserve more than this “Swift” solution.
With gold having declined from a recent US$1,700+ to today’s US$1,300, and with China acquiring record quantities of gold as a hedge against its truly massive US dollar and American debt holdings, we are advising clients to go where the “smart money” has been moving, following China’s example, and buying some gold as well.
Shawn Mesaros is managing director, Pacific Asset Management. Shanghai Daily condensed his article.
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