Friday, March 11, 2011

Propaganda and Paradise

‎"By the skillful and sustained use of propaganda, one can make a people see even heaven as hell or an extremely wretched life as paradise." - Adolf Hitler

Japan, the world's third largest economy, gets hit by a record-breaking Earthquake, Tsuanmi and a critical nuclear meltdown situation, the Eurozone is continuing to crumble (Greek 2-year bonds trading near all-time high 17% yield [1]), U.S. consumer credit markets are continuing to break down [2] and... the U.S. equity markets are surging (Friday, March 11)! Why? It is most likely because a few big players are speculating on the prospect of QE3 with unspeakable leverage, and this propsect is primarily premised on the fact that shadow and conventional banking liabilities plunged by $440B in Q4 of 2010. [3] How does any of this make sense?

Well, it is a combination of profound ignorance and malicious propaganda. There was a time when the ponzi-racket U.S. stock market kept itself afloat by convincing investors that strategic investments in the "right" companies will produce phenomenal returns, as those companies expand and rake in profits from sales. Now, the average investor is too afraid and incredulous to accept that narrative, so the ponzi-runners are cleverly exploiting that fear to take the game into overtime. Readers, it is time to willfully suspend your  disbelief.

The economy/markets are obviously facing the propsect of massive deflation and price drops, and the Fed's monetary policy is the only thing that can prevent this otherwise inevitable outcome. This latter fact is evidenced by the market rally in 2009 after the implementation of QE1, but economic data continued to deteriorate in 2009-10 because it wasn't quite enough, and the financial troubles of pesky foreign countries also interfered with our recovery. Hence, we needed to implement QE Lite and QE2 throughout 2010. Double overtime.

For a little while there, the markets put forth a strong rally and some offically-published economic data showed improvement, including a slight uptick in shadow banking liabilities, which are really the most important ingredients of our credit-driven economy. Alas, the most recent reports show that consumer and banking deleveraging is still in full force, the housing market is in fraudulent shambles, the jobs markets barely exists anymore and, oh yeah, the rest of the world is randomly falling apart.

See, didn't we tell you that deflation was a threat?? There is one, and only one, solution to these problems - more legally-sanctioned th... sorry, quantative easing. When asked about food/gas price inflation in Queens, NY today (Friday, March 11th), Bill Dudley from the Fed countered the inflation concerns with the following comment [4]:

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful..."
The people in the audience did not react so kindly to that callous remark, and one person observed that he couldn't "eat an iPad".

"No", thought Dudley to himself, "but you can look like a fool when all of those prices come crashing down".

See, we told you that deflation was the threat! Now, we must embark on a QE program the likes of which the world has never witnessed before. Triple overtime. The eyes of hedge fund managers, leveraged to the gills, light up like Christmas trees, as they speculate that heaven has finally arrived on Earth. All of those long bets will surely pay off as the markets once again take off on expectations of QE and the backs of  major prop desks around the world. Every last drop of juice will be squeezed out of this Orange and into our bank accounts.

Not so fast, cautions the wise investor. The markets are getting sick and tired of this game, which has already gone on for way too long. People are literally dying across the world because of your leverage, and the rest of them may decide not to sit still for their scheduled executions. "That's it", they say, "no more". We're calling the game on account of a tsunami. You big-shot players may be Ph.D.s (doctors of propaganda), but you lack common sense. When you rig the game and steal everything away from the people, they have nothing to left to play for; nothing left to lose. There are no more profits to be extracted. Your proposal of QE3 will fall flat before it barely gets off the ground, and even if it does become official policy, the markets will sell the news in a hurry.

On the other hand, maybe I'm just too eager to see this wretched world tranform into a modest paradise.


  1. Nice post Ashvin.

    There is a singular axiom in economics that should be the basis of all human action. Well, it is the basis but today's policy makers violate this very basic axiom. They think they'r smarter and can playe God with the economy.

    This axiom is "Value does not exist outside the consciousness of mankind".

    Applying this axiom in a self-similar fashion (fractal nature of human action) results in the beautiful concept of marginal utility.

    When will the powers that be realize that they are not God?

  2. Very insightful and thought out - Both author and commenter ^