The Blind Spot

A pair of 210th Rescue Squadron HH-60 Pave Hawk helicopters fly over Alaska on a training mission. Photo by Master Sgt. Sean Mitchell, 210th Rescue Squadron, Alaska Air National Guard.

A pair of 210th Rescue Squadron HH-60 Pave Hawk helicopters fly over Alaska on a training mission. Photo by Master Sgt. Sean Mitchell, 210th Rescue Squadron, Alaska Air National Guard.

People desire normalcy so intensely that they frequently attempt to disregard knowledge that is disruptive to their expectations of reality.

In cases where mortal peril is involved this process is downright dangerous because paralysis sets in as assertiveness seeps away. Some refer to this process as somewhat similar as ‘going into shock’, but I prefer to call it ‘the blind spot’. This is not to say that one is completely ignorant when such situations arise. In the recesses of our minds there may be some memory, recollection, or even a detached familiarity with what is occurring. I have only experienced one such pure situation in my life – it ended, thankfully, with a military Pave Hawk helicopter whisking three families as well as mine from a raging river.

Just prior to the extraction, it was easy to listen to some members of the rafting party as they attested to the conditions as ‘not that bad’, or that it would surely improve around the next raging corner. To make that decision even more difficult, my mind kept telling me that people of my particular family history and background are not rescued! Oh how I, not to mention my pride, desired to believe that everything would work out on that river. But after growing up in an Alaskan village where many body bags were loaded out of various modes of transportation as catastrophic result of all types of remote adventures, and then having read the postmortem accident reports of said endeavors, I knew better than to be part of any group that would go back into that river. This was my expectation of reality – that under the circumstances, terrible things awaited around the next corner.

With a careful historical study of monetary (money) history firmly embedded in my mind and having actively managed money during the past tumultuous twenty years, I have mounting concerns today – that something terrible awaits around a corner, one that nears with each passing month. As mentioned above, many will not register this because their expectations of reality can not, or refuse to, detect what is happening.

About a year ago I wrote about negative economic conditions that looked to be intensifying. It was only through something akin to an orgy of money printing that allowed already grotesquely leveraged nations to keep those trends at bay. Now, with the currently scheduled printing of money not even officially concluded, April and May economic statistics show an economy on a re-intensifying decline. I’ll repeat the prior statement again, even with the scheduled money printing not concluded, the economy is showing signs of serious trouble. According to the monetary theory that many industrialized nations have been utilizing for the better part of the past century, this should not be happening.

Notably, some major governments in other areas of the planet are taking notice of what is not just a USA slowdown.

  • As I briefly wrote about last fall, the Scandinavian nations have some hard choices to make now that the European Union seems ready to unravel – something we began pointing out to clients nearly four years ago. In the article I said “Finland, on the other hand, really does have a real life ‘Jaws’ soundtrack playing in the background due to its selection of the Euro as its currency.” Well, in April elections Finnish citizens have come to recognize the debilitating economic leverage that their country is on the hook for and have elected an unprecedented number, nearly 20% of the available seats, of the fiscally conservative ‘True Finns’ party members to its unicameral parliament – enough that their voice is sure to be heard loudly and frequently when it comes to the difficult policies and compromises facing their governing body.
  • Furthermore, the Danish have just suspended their implementation to the ‘Schengen Agreement’ – an agreement that was perhaps the greatest accomplishment of the 27 nation European Union*** – which will have the effect of unilaterally closing its borders and curtailing freedom of trade and travel. This is due to the tremendous pressure felt from an influx of crime in addition to that of refugees and job seekers from North Africa as well as within Europe. France has made similar moves through the effective closing of its Italian boarder to free immigration.
  • Norway, while not part of the EU, is ceasing its monetary support of heavily indebted Greece. It does not believe that it will be paid back. Perhaps the European Central Bank, which is said to continue its support of Greece through the de facto printing of money, should take notice. Printing more money will only serve to make the issuing countries become more indebted and closer to the situation of Greece.
  • Next, Mexico which was referenced in the previous article as tending towards the adoption and monetization of silver coinage appears poised to actually attempt it – this year. According to one of Mexico’s wealthiest men, and a frequently important communicator of policy for various governmental factions, Hugo Salinas Price has provided multiple interviews where he stated that this is an issue that will be taken up when the Mexican congress reconvenes in the fall. Perhaps to reinforce this timeline, the Mexican Government has frequently surveyed its population as to their desire for silver coinage with the most recent result indicating that 81% desire this change.
  • This past winter we observed that regionalization was beginning to supplant globalization. Further evidence of this is China’s effort to utilize its own currency as their primary medium of exchange within their sphere of influence. Just six short months since we wrote about this rapidly advancing policy initiative, Hong Kong and Shanghai Banking Corporation (HSBC) estimates that China will achieve this goal sometime during 2015. We suspect that at current trends, that it may occur even sooner.
  • I also note that while not a lot of nations are openly speaking of movement to a ‘hard currency’ (backed by something more than a promise to repay) standard, there are a fair number that are following steps commonly found in this sort of a process. For example China and India have surprised many watchers by seriously adding to their holdings of precious metals. Naysayers will point out that each of the aforementioned countries holdings of these derisively so-called barbarous relics are but shadows when compared to their overall currency holdings. This is a canard. The fact is that many central banks for the world’s largest and fastest growing countries are choosing to buy more in precious metals at this time than ‘invest’ in ‘highly’ rated debts of other countries is a monumental development.
  • In a somewhat amusing act in a theater of the surreal, Zimbabwe just announced that it is also seriously studying a gold standard. Some may recall that Zimbabwe is the most recent member to the hyperinflationary club due their formerly out of control printing of money. Their former treasurer has stated multiple times since his removal that the USA and European money printing operations are ‘vindicating’ to his policies and the debasement of Zimbabwe’s former currency. We suspect that he will cease to proudly speak of this vindication at some point during the next few years.

Each of these seemingly anecdotal (I could go on and on) items highlight a common, yet salient point – every nation mentioned above that is taking various steps to adjust their economy to the current environment has experienced at least one bout of the ravages of deleveraging or very high rates of inflation in just the past 30 years. Unfortunately, the USA and a lot of Europe are facing both of these scenarios at the same time. In short, the collective memory in the countries detailed above appears strong enough to cause alarm and a calling in of rescue helicopters. Of course the helicopter I referenced at the beginning of this piece is to extract the people in danger. The helicopter that the central banks of this world are electing to utilize is merely for the distribution of increasingly devalued money. The former saves the system, the latter tries to prop up the entities who run the system – a remarkable difference.

Finally, those nations that appear to have no recollection of the challenges of deleveraging or high inflationary processes are engaging in a peculiar and disappointing deconstruction of their own. This process is not at all similar to the recent Scandinavian citizen initiated attempts to extract themselves from the European Union and its tentacles. This process is the destruction of the systems that enabled open markets to spread the world over during the past 150 years. According to a series of papers by the much lauded Peruvian economist Hernando de Soto, over the past 20 years, Americans and Europeans have quietly gone about destroying the systems involved in perfecting ownership. Without clear title there is no integrity in a system – and without integrity, its son equity can not be conceived.  The title and supporting systems that took well more than a century to build are now purposefully being eroded. Mortgages have been recklessly recorded in ways such that in many instances property owners or banks can not prove who owns a property. Even worse, the so called shadow financing markets, which include the derivatives that nearly sank the world in the fall of 2008, have been allowed by various governments to grow to an unimaginable size of more than US$600 trillion (for reference, the USA economy was estimated to be between 14 and 15 trillion in size during 2010).

Recently, while in the Normandy region of France I was reminded of what Winston Churchill said in the few remaining days leading up to D-Day “Don’t argue the matter. The difficulties will argue for themselves.” In short that is where about half of the nations and their currencies of this world are now. This is the point where the difficulties will begin arguing for themselves. Those that recognize this will not be surprised by a ‘blind spot’. And these same people will not be calling for helicopters to deliver more devalued currency or even to engage in an extraction.

So, in closing, those who believe that they are in ‘safe’ certificates of deposit or money market funds need to consider whether or not a decline of the dollar, or any other currency with similar attributes, will impact their standard of living (with few exceptions, it will). Further, as was mused about some months ago, inflation is just now rearing it’s ugly head – and is likely to accelerate as effects from the money printing at the Federal Reserve fully manifest over the coming quarters, even if they actually do stop the printing of money for good. Together the effect of a weakened dollar – perhaps magnified by inflationary pressures – will create an environment where it is difficult to preserve purchasing power that money market and certificates of deposit traditionally protected against. It is not that it is different this time, it is that it is exactly the same. Only short term or incomplete memories will tend to indicate that this time really is different.

*** The European Commission is the the European Union’s executive arm. The European Union is an economic and political association of certain European countries with internal free trade and common external tariffs. It consists of 27 member states, 16 of which use the common currency unit, the euro.