Waiting for the Crisis

-- Posted Tuesday, 1 July 2003 | Digg This Article Digg It!

July 1: We are going to fight them and impose our will on them and we will capture or... kill them until we have imposed law and order on this country. We dominate the scene and we will continue to impose our will on this country. - Paul Bremer, US Administrator of Iraq

Welcome to Q3 2003, for those vendors servicing the State of California, it may be time to shift to a cash only basis. I spent a fair bit of time over the past 24 hours researching the ends to which inflationist means tend to aim, despite the best intentions of the inflationists. These included the fall of the Weimar Republic and subsequent rise of Hitler's National Socialists. I thought to spend a bit of time on the political ramifications of collapsing economies to shed some light on the fear that drives the seemingly odd policy choices which aim to keep the inflationist bubble alive.

	US Economic Calendar	EST
Mon	NAPM-Chi	10:00
Tues	ISM (nee NAPM)	10:00
	Construction Spending	10:00
Wed	Factory Orders	10:00
Thurs	Employment	8:30
	ISM non-MFG	10:00
Fri	US Market Holiday

	@ 10:25AM	% chg
Gold	352	1.73%
Euro	1.16	0.78%
$/Jpy	119.3	-0.25%
USDX	94.34	-0.41%
US 10 Yr	3.46
3M Libor	1.11
DJ Stoxx 50	2357	-1.63%
N225	9278	2.15%
Oil	30.03	-0.53%

I was somewhat shocked while revisiting William Shirer's The Rise and Fall of the Third Reich, to find this quote attributed to Hitler; "The government goes on printing these scraps of paper because, if it stopped, it would be the end of government.....Believe me, our misery will increase. The scoundrel will get by. The reason: because the State itself has become the biggest swindler and crook. A robber state!" I was shocked in the sense that the anti-inflationist sentiments expressed don't veer far from my own, although the aims of the speaker, i.e. revolution, differ wildly from my own, i.e. self-directed change within current forms.

*source: replicated visually from Governor's Budget Report

*source US BEA

CALIFORNIA'S WORLD RANKING
2001 GROSS PRODUCT

Rank	Countries		($ billions)

1		UNITED STATES	$10,171
2		Japan	4,245
3		Germany	1,874
4		United Kingdom	1,406
5		CALIFORNIA	1,359
6		France	1,303
7		China (excluding Hong Kong)	1,159
8		Italy	1,091
9		Canada	677
10		Mexico	618

*source World Bank


One of the reasons I write is to agitate thought, hoping that my small contribution to the free market process in ideas will lead to some change before the end of the road is reached. Far better, I believe, to bite the bullet and fix the mess before a truly intractable crisis appears. For it is during these periods of crisis that the people, in their confusion and depression at being deceived sometimes vest the wrong people with the power of the state. In part, one of the reasons behind the creation of the IMF was to forestall just such events. OK, so let's just go back to the Gold standard. Well, it isn't, I think, that easy. A shift back to some hard money standard would dash the dreams of millions whose expectations of future prosperity are based on the illusion of inflationist finance. This is one of the key problems with the temptation of inflationist finance, it seduces both ruler and ruled until the bill, successfully obscured by the lagged effects of debt service, begins to come due. Then the search is on to find some way to fill the gap and make the paper good. It is an unfortunate fact that inflationist finance works because a critical mass confuse paper for money and only discover their error painfully. Conditioning my critique of the Fed with this understanding, I hope they are trying to allow some mini crisis to occur, perhaps in California, in order to clear the ground for change. My fear, however, is that far riskier foreign policy initiatives have hijacked economic stability concerns, risking a far more intractable crisis. Turning from the international to the regional, and given that the State of California, by some measures, is officially broke today, I though to take a deeper look at the, according to the World Bank, 5th largest economy in the world. Press reports suggest		that the state faces a deficit of $38B, or roughly 3% of GSP, Gross State Product. The problem, as today's first chart hopes to make clear, is that the state confused the temporary increase in capital gains related tax revenue with a more permanent condition. Since the crash of the "dot com" bubble, the state has relied, for growth, on the other bubble, real estate. One needn't walk too far down memory lane to recall a similar set of circumstances as the 80s slid into the 90s with the mid 80s stock market boom and crash followed by the real estate boom and eventual crash. Given that the real estate sector, which accounts for roughly 16% of GSP, accounted for almost 38% of GSP growth, you can extrapolate the problems flowing from the eventual bust of this last gasp. Thus the problems in Sacramento. The $38B gap will require politically painful tax increases or expenditure cuts either of which will weigh on growth, which in turn will put more strain on the budget. Nothing like a bust to teach the wisdom of bolting the barn door, before the horses escape. So we wait for a crisis to induce the requisite change in collective awareness necessary to fix what ails us, like the smoker awaits that first bloody cough to quit smoking. Given the absence of any rebound in manufacturing evident in the latest ISM report on Business, hopes for a rebound rest on the consumption multiplier of government stimulus. With manufacturing prices paid, according to the same report, back on the rise and with Crude still hanging about $30, hopes for a second half rebound seem to rest on flimsy foundations. A crisis of some sort seems to be an almost certainty, how large, and how motivating to economic agents and policy makers remains to be seen.


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