It is clear to most of us that we are living in perilous times. There is a sense, amplified by the behavior of the "experts", that we are in uncharted territory when it comes to our economic straits. (Is this a period of structural change in the economy? Is our understanding of how the economy works no longer operative? Does anyone understand how to get out of this depression/recession?) A recent poll suggests Americans believe we are now losing the war on terror, which is now another source of heightened anxiety. We are told daily that the war in Afghanistan (the "good war") is not going well, that our military has developed a strategy for winning that requires more troops and that our President must decide on a new strategy, yet he has time to meet with the head of the SEIU over 20 times but no time to come to a decision about Afghanistan. There appears to be a drift in foreign affairs (and in foreign affairs, vacuums of leadership do not last for long) and a drift on the economic front. The Stimulus was too small (according to Paul Krugman) yet we see little evidence we have gotten anything from the $787 billion we have had to borrow. All of this is a prescription for Societal Anxiety and its evil twin, Societal Regression.
Yesterday Nouriel Roubini suggested that the reason the Stock Market has risen so high (along with commodities) is that we are in a bubble fueled by a weakening dollar:
Mother of all carry trades faces an inevitable bust
Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
John Crudele takes a different angle on the problem but arrives at a similar conclusion:
The Federal Reserve's Open Market Committee will meet this Tuesday and Wednesday and it will issue the usual communiqué afterwards -- growth picked up some places, not in others, inflation low -- blah, blah and blah.
But even though most of the wording will be ordinary, you should pay very close attention to two things.
First, will Fed Chairman Ben Bernanke change the wording on his interest rate intentions?
If Bernanke doesn't say he plans to keep rates low for an extended period of time, the financial markets could get very bothered.
Longer-term interest rates could go up without the approval of the Fed. And they have been.
But the words Bernanke utters on this matter are still important.
Second, the Fed has supposedly ended one portion of its quantitative easing program -- meaning the program under which it was printing money so it could act as its own shill in buying Treasury securities.
It's still buying mortgage-backed securities in this way, but the ending of quantitative easing will make both the stock and bond markets tense.
Nobody knows why stock prices declined so much last Friday when the Dow fell 249 points.
But the bubble in stocks that started last March is largely being caused by liquidity, not valuation. Translation: It wasn't that stocks were such a great value.
The bubble inflated because the Fed has been pumping so much money that people had to put it to work.
When the Fed stops printing money that could be a big problem for Wall Street.
Bubbles always pop and bills always come due. John Crudele adds:
Here's how the economy is broken, and why.
Yesterday President Obama said the US economy is "back from the brink" But he added that the US must "get serious" about reducing debt.
Problem one: The more the president says that the economy was near the brink, the more he reminds people how scared they should have been. Not good for confidence.
Problem two: Under normal circumstances, it's much too early to talk about reducing the US debt level.
But Washington has to do it because we are borrowing so much from very nervous foreigners and that's causing the value of the US dollar to collapse.
Problem three: it's hard for President Obama to be a budget cutter when he's trying to spend a lot of money on health care reform.
Spending on something new just doesn't seem like reducing spending to most rational adults.
It sounds to me as if our only way out of this is to thread the needle between precipitating a deeper abyss by tightening already tight credit or terrifying everyone with cheap money as far as the eye can see, which will cause the dollar to collapse. We are not getting out of this pain-free.
I have quoted more than is my wont on economics; there is a reason for my focus on the economy today. Economic distress has historically been the most powerful generator of Societal Regression and there are many reasons to believe it is driving some of the regressed behavior of our elites. On Sunday Frank Rich wrote a column that would be risible if it did not reflex some part of elite conventional wisdom. Peter Wehner summarizes:
Here’s a stunning development: the New York Times’s theater-critic-turned-political-columnist Frank Rich is foot-stompin’ mad. The cause for Mr. Rich’s latest outburst is the race in New York’s 23rd District, in which the liberal Republican Dede Scozzafava was challenged by the Conservative party’s Doug Hoffman, forcing Scozzafava to withdraw. (She subsequently endorsed the Democrat Bill Owens.) For most people, this is an interesting intra-party skirmish with some potentially important political ramifications. But for Mr. Rich, it’s so much more than that. It’s going to set off a “riotous and bloody national G.O.P. civil war.” The northern district in New York “could become a G.O.P. killing field.” What’s going on there is evidence that “the right has devolved into a wacky, paranoid cult that is as eager to eat its own as it is to destroy Obama.” And conservatives are “Jacobins” who are “re-enacting Stalinism in full purge mode.” And in case that was too subtle, they are “the Stalinists of the right.”
This is what passes for stylish and temperate discourse on the Left — references to the Civil War and to Cambodian genocide, to the French Revolution and to one of the greatest mass murders in history – all in the context of a congressional race in New York’s 23rd District, mind you.
This also comes from a man who in August wrote a column — without irony — warning about the rise of what Richard Hofstadter called “The Paranoid Style in American Politics” and who earlier this summer castigated conservatives for their “toxic” rhetoric that is “getting louder each day of the Obama presidency.” It could lead, Rich has warned several times, to political violence. Conservatives, you see, are so terribly uncivil and so terribly indecent in their rhetoric. Coming from Rich, it is all rather comical.
Again, this is comical only in proportion to its irrelevance; there are enough in the MSM and in the leadership of the Democratic party who in extremis believe this nonsense, which in and of itself is not grounds for concern. The concerns depend upon the leader of the Democratic party; consider these elements of large group regression, from Terror and Societal Regression:
1) Rallying around the leader.
12) The narcissism of minor differences.
14) Heightened importance of the leader's personality. When a large group is regressed, the personality organization of the leader becomes extremely influential, as he or she can tame or inflame the regression. Contrast Slobodan Milosevic's use of violence and terror with Nelson Mandela's use of nonviolent means.
With his ideas under fire, there is a natural tendency for Democrats to rally around Barack Obama. There is nothing sinister about this but it is worth watching since there is often a tendency among the most fervent, and less intact, supporters to see fantasied dangers where none exist and to believe they need to take actions to support their leader which can go over the border toward violence. We have seen this in the Union thug who assaulted the older black tea party protester some months ago. Again, isolated incidents do not speak to Societal Regression, but a pattern of incidents would raise concerns.
The narcissism of minor differences is an important point here because it does reflect concerns about Obama's style of leadership. He has acted, since becoming President as if the gravest dangers to our country arose from his domestic political opponents rather than from foreign societies inimical to our interests. This can just as well be the result of his inculcation in the "Chicago way" as to any deeply held political ideology or character traits. His difficulty in recognizing that the most Conservative Republican has more in common with the most fervent liberal than with either has in common with Islamic radicals or "Soviet" commissars is deeply troubling. By elevating the smaller distinctions between Republicans and Democrats to a greater level than they deserve he has emphasized the narcissism of small differences. It is important to keep in mind that when such small differences become exaggerated the easy path to devaluation of the opponent (No. 3) and dehumanization (No. 10) often follow.
Finally, the President is in an unique position. By recognizing the danger of Societal Regression, he can avoid behavior that worsens the downward spiral. By reminding his supporters that his opponents are not evil or racist but merely disagree he could do much to defuse some of the tension int he current political debates. When he joins in the easy demagoguery (by demonizing Fox news, for example) he fans the flames and risks unleashing forces that he would have difficulty controlling.
Since I believe we are living through dangerous times and there are significant risks of Societal Regression (though I continue to believe that Americans' native good sense will prevent us from descending too far down the road; I am less sanguine about Europe and other at-risk societies) I plan on starting a Societal Regression Watch. I plan on scanning for evidence of regression and will periodically discuss such evidence here. Clearly I am much more likely to notice signs of Societal Regression that occur on the left side of the political divide, but it should be obvious that the left has no monopoly on regressive tendencies. (The fact that the Democrats control the Executive and both houses of Congress measn that their regressive tendencies are more dangerous than any such tendecnies among Republicans and this is an additional reason for greater concentration ont he left.) Since there are many liberals who read my blog I would ask that if they see an item that suggests conservative or right wing regression to please send it to me for inclusion. We all have an interest in maintaining rationality in the face of danger.
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