Thursday, April 7, 2011

The Last Financial Samurai and Its Merciless Sword

A Japanese warrior may demonstrate hardened values of "honor" and "loyalty" to the members of his tribe, but he can never become a true Samurai without first learning to wield the sword with precise form and discipline. It takes years of study, practice and, most of all, an unflinching perseverance towards becoming the best warrior in your tribe.

Many claim that the last true Samurais died out with the industrialization of Japan in the mid-19th century, and perhaps with the unsuccessful Satsuma rebellion against the Japanese Imperial Government (although there are reports that those in the rebellion used modernized weaponry to fight). [1]. The Samurai tradition may have largely disappeared in its technical form, but it has continued on in a symbolic form to this day.

Our current global economic system is the last vestige of a dying art - the art of material exploitation and oppression. Every technological gain since the Industrial Revolution has come at the expense of people's lives, livelihoods and cultural values. Insightful thoughts from the likes of Henry Ford, Robert Oppenheimer or Bill Gates cannot miraculously manifest themselves into new inventions without the net energy and material resources required for the production process.

These resources are neither unlimited in quantity nor evenly spread throughout the various political entities on Earth, so one would not expect them to be voluntarily relinquished in large amounts by those who exist in their surroundings. Yet, they always seem to leave their place of origin with increasing velocity and end up in fewer and more distant locations around the world.

Indeed, where there's oil, gas and minerals, there are lakes and rivers of blood. The current global financial system is the Samurai class of the industrial warrior society; an appendage of the mechanistic state that has honed its skills of material exploitation to near perfection. If this process of exploitation is a dying art, then its practitioners are the last living members of an endangered species.

In Japan, the birthplace of the Samurai tradition, the government and central bank have been relegated to the class of bumbling warriors for some time now. The latest environmental and nuclear disasters there have merely exposed the extreme level of their incompetency at maintaining the illusion of economic stability.

There is perhaps only one seasoned practitioner of the art remaining, and its skills with the blade set it a league apart from all of the clumsy novices and decrepit old geezers - the Federal Reserve. This lethal organization is currently at war with the natural and creative forces of institutional destruction.

By all accounts from the surface of the battlefield, it is winning. The tradition of the "Samurai Fed" is best represented by the U.S. currency (debt-dollar) and the massive U.S. treasury market. Their value must be defended by the Fed at all costs, or else the wealth of global financiers evaporates and the crucial battle is lost, which, in turn, may cost it the entire war.

The Fed's sharpened steel is now nothing more than a credit-printing press and the executive authority to purchase debt assets from banks in the "open market". Private credit markets have been thoroughly neutralized by the ongoing siege of debt deflation, and national governments must therefore pump increasing amounts of liquidity into these markets to maintain global order. However, there is only so much liquidity to go around, and the funding requirements of national/local governments are only getting exponentially larger.

Many analysts point to Europe's sovereign debt crisis and the all-encompassing mess on Japan's plate as evidence that governments around the world are losing the crucial funding battle, and therefore the U.S. will soon follow in their footsteps and the Fed will lose control of the treasury market. It is important to remember, however, that all of these states involved do not necessarily belong to the same tribe of warriors.

For the right to control the flow of credit-based liquidity, perhaps still the most precious resource in our complex global economy, they are more than willing to wage battle with each other on the jagged edges of the abyss. The major weaknesses in the bond markets of Europe and Japan are strengths for the U.S. bond market, as investment capital will rapidly navigate away from perceived risk towards perceived short/medium-term safety.

While correlated stock and real estate markets around the world continue to implode, the world's largest bond market will still provide at least an iota of positive return and investment security. In addition, the Fed has already surpassed China to become the largest creditor of the U.S. government [2], and it can easily scoop up any treasury paper dumped off by countries in desperate need of cash.

None of the above is to suggest that the U.S. economy will suddenly become healthy, asset values will stabilize or that anyone will be particularly receptive to further sword play by the Fed. However, public opinion is the last thing that matters to such an institution now (or the politicians it controls), and it will most likely be willing to sacrifice both the U.S. stock and real estate market for the sake of the greater "cause".

This cause has always been to transfer productive wealth from the workers, savers, taxpayers, etc. to a select group of corporations and individuals, while protecting core structures that allow the exploitative system to continue functioning. The U.S. bond market and currency will be defended by the Fed simply because the financial elites have not yet divested themselves of their numerous debt-dollar assets, and prepared themselves for a wholesale bond market collapse.

But what price will the Fed be forced to pay for taking such a bold stand against the forces of systemic decay. The Samurai warrior lives most of his life by the merciless sword, and he is sure to die by it as well. The Bank of Japan and its government are beginning to face that inevitable fate now, as well are the various central banks of Europe. Those in "emerging market" countries such as Brazil, India and China were just starting to show off their swordsmanship, but now realize that they lack the high level of discipline and natural talent expected of the Samurai.

These warriors have struggled mightily with their systemic adversary of debt deflation, but they all have fallen to the force of its overpowering blows, or will fall soon enough. That leaves only the Fed left standing on the vast battlefield; surveying the terrain, readying its sword and preparing to make one final stand, after which it will finally lay claim to its destiny. The ensuing battle will certainly be short, but it will also be one for the ages.

1 comment:

  1. Ash - I would love to feature an occasional post like this on our site Financial Sense. Since I couldn't find any contact info for you would you mind emailing me if you're open? My email is cris @ Looking forward to hearing from you!