An Exit Strategy to Nowhere


an-exit-strategy-to-nowhere

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Submitted by Steve Brown…

The panic continues to play out for now and events are moving fast, dependent upon multiple variables and unknowns, but let’s examine how future events just might play out.  It’s impossible to countenance all possible outcomes so we are dependent upon probability.

Should US share markets continue to fall and US markets remain open the Dow and S&P 500 should bottom around ½ of their Feb 12th peak value, specifically to Dow 15,000.  That’s because a reasonable aggregate anticipation of reduction in gross US output assumes a 50% devaluation in this shutdown from peak.

That 50% reduction in gross US output only applies to the real economy.  Air stocks/ FANG stocks have no production, and no intrinsic production value, so the virtual issues will still be at least 500% inflated even at DJIA 15K.[1] In other words, Wall Street’s ponzi has a long long way to play out before it gets to fair value.

Mnuchin and his quasi-criminal cohorts learned from the last crash that Americans won’t tolerate another Wall Street bail-out unless working people get a few crumbs, too. That means providing funds to the populace in light of job losses, where paying off the public gives cover to the Treasury/Fed for bail-outs to its hedge funds, dealers, asset management funds, and large corporations.

How long will the panic last? With extreme optimism, if we use China’s experience as a guide, within twelve weeks or so this disease may begin to mitigate in the US. Having been denied freedom of movement, Americans locked in their homes will either appeal for more freedom of movement or they’ll just defy the order to stay home. But much will depend on US region.

Recall that Hubei Province in China (where this disease is alleged to have originated) is only about 400 miles east-west and 300 miles north-south in geographic size. That’s quite less than the distance between New York City and Washington state, or California. Generally speaking, the prospect that the disease will have a greater impact in the United States than in China is dependent upon the geographic area concerned and the American expectation for freedom of movement.

Not particularly disciplined and skeptical of central authority, the American experience with regard to this disease might be more severe than China’s.  Regardless, we will assume that this virus is likely to decline by onset of summer. Noting that the medical consideration is only one element to the crisis.  To address the crisis overall, one must consider four essential elements: financial, medical, governmental, and political.

Finance : US dollar and Inflation

Weaponization of the US dollar means that Secretary Mnuchin has deliberately punished nations that the United States disagrees with via primary and secondary sanctions, and by politicizing the SWIFT system.  In all fairness, IndyMAC miscreant Mnuchin has simply leveraged the criminal finance actions of previous administrations.  Even so, Secretary Mnuchin is a disastrous candidate for leading the United States through this crisis in both a monetary and fiscal sense.   Mnuchin has already alienated most of the world in maintaining the US dollar as global reserve currency and Mnuchin has zero expectation to craft a reasonable exit strategy from this crisis.

The perceived wealth of the United States is quite out of balance with regard to any real useful products it produces.  Furthermore locked in a dangerous trade war, the US has placed itself to disadvantage where little benevolent trade synergy exists between major nations.

Destructive policies will manifest from the Treasury, and its actions will further place the status of the US dollar (as global reserve currency) in jeopardy. Mnuchin will use this crisis to push a debased version of Modern Monetary Theory on the public where the infinite printing press will not be accompanied by any increase in production, but a great decrease.

The US faces a quandary where segments of its industry are shutdown while the SEC keeps share and bond markets open. Bond markets cannot be closed since that is the source for production of Federal Reserve notes. As for shares, with key industries shutdown the wonder is why stocks of those industries should still be traded. Likewise the Fed/Treasury can use this crisis to convert to a cashless society.  The intent to convert has been present for many years, the question is how such a cashless plan will actually be implemented.

Prediction: US recession accompanied later by enforced inflation and eventual demise of the US dollar as global reserve currency; baseless MMT with introduction of a cashless society; particular share issues in  markets may quit trading.

Medical

Much as the United States is forced to rely on China as producer of first resort the United States is no longer able to rely on itself. Meaning the instance of disease and relative inability to treat it will be far greater in the US than in China. By that measure, the impact to the nation’s health is likely to be severe; where such an expectation has already been set by the media. So far this author can find no reports from any news service that any nation has offered medical assistance to the United States. [3] If Cuba or even Israel offered to send doctors or ventilators to the US, in Cuba’s case the help would be refused and Israel — facing its own potential crisis — is unlikely to do so.

Prediction: Higher US death toll than China; disease will persist in US longer if present course maintained

Governmental

So far the government has taken a ‘free market’ [2] approach that the private sector can address the medical needs of a sick population going forward.  That the faith-based ‘free market’ can rise to the occasion of such a major crisis is highly unlikely.  And yet the federal government has never seen a global crisis it didn’t like, to use that crisis to its own advantage.

Whether 911 or the financial collapse of 2008-2009 the central government has used every major catastrophe to expand its powers.  The federal government is already considering massive expansion of powers if illness is experienced among Elites, or civil unrest occurs.

Since most Americans already receive a government check in some form, the populace has been relatively docile and law-abiding so far. A true worry among Elites must be that a long-term enforced COVID curfew, unemployment (reminiscent of the 1930’s) and lack of timely or expanded SNAP/EBT benefits might lead to unrest in the more depressed regions of the country. Major riots involving more than several thousand people have not occurred in the US for fifty years, so the prospect may seem remote but the potential for unrest will expand in an extended crisis.

Prediction: US freedom of movement restricted until May; Government expansion of powers; pursuit of socialist policies should the disease not mitigate; potential for civil unrest.  

Political

US campaigning will of course be affected by the lockdown.  Depite Mr Trump’s embarrassment re initially mishandling this crisis, only the president has the political podium now. If the crisis carries on, Mr Biden will be an enforced no-show and an also-ran.  Apparently, Mr Biden is already a no-show.

The virus outbreak is embarrassing to “free market” [2] conservatives and Neoliberals alike. China was able to mitigate the crisis there in relatively short order by its efficiency and efficient use of resources. US oligarchs in control of the western media apparently wish to deny China’s accomplishment and stress that the United States will handle this crisis better. Based on structural and systemic issues the foregoing is exceedingly unlikely.

Ironically the general public is clamoring for a concerted and coordinated governmental response reminiscent of socialism.  Embarrassed by socialist parallels and ideals, the president is stressing that medical solutions must come from the private sector.  And when the Fed pumps trillions in liquidity into markets, that’s a private sector affair since all Fed banks are privately owned.  So, induced liquidity at the public’s expense will further privatize profit while socializing loss. Funds doled out to the public will be meager by comparison.

Prediction: Trump will be re-elected; the US will be on its own;  Congress will bail-out its friends; Congress will pursue fascist policy in the form of State-controlled capitalism if shutdown is maintained; pubic will suffer disproportionately.  

Exit Strategy

The greater point is that these elements, governmental, medical, finance, and political must work together to provide realistic answers to this crisis, and to the rest of the world. The prospect that all four elements will work together constructively and effectively is exceedingly remote.

Above all, there is no exit strategy because the financial and political impact of the pandemic is still unknown.  Instead, as after the collapse of 2008-2009, the goal is to simply re-inflate the ‘everything bubble’ that has once again burst with little other consideration.

The elephant in the room is when the “cure” becomes worse than the disease. That is, the point where statistics show that the disease has spiraled out of control and cannot be contained in the United States.  Then relying on so-called herd immunity will become an enforced measure.  Unable to contain the disease, the result is that the United States (or any nation that cannot contain it) could endanger the rest of the world’s population and possibly infect populations that managed to previously mitigate the disease.

Regardless of outcome, whether boom or bust, illness or health, it is common to believe that such a state will manifest itself forever. That is never true.  Consider that all panics come to an end – including this one.  The worst of the 2001 panic in Argentina lasted only four months. The financial collapse of 2008 – 2009 spanned a period of approximately nine months from May of 2008 to March of 2009, when the Dow index lost fully one-half its value.  Charles Albert Collman wrote in his 1931 book, Our Mysterious Panics:

“All things come to an end, even panics, after they have taken their toll from the gamblers and adventurers who produced them. Men do not make panics deliberately, for they are their unconscious agents.”

But ninety years on, we now face a unique confluence of events.  Besides the largely malign trajectory of the west for at least seventy years, the accelerated spread of this illness may perhaps alert us to the fact that there is a deeper malaise in our relation to each other and to the globalized world. Enforced Buddhism is of course a non-starter. But perhaps we would do well to reflect on the fact that man is not the master of any world – especially not his or her own.

The change we are bound to see will certainly reinforce the change that needs to occur.  To simply ignore this calamity and hope to retreat to a dream world of yesterday is not an option, even if that is what our leaders entreat.

[1] Verifiable by comparing book value versus market value

[2] Where “free market” means the freedom to conglomerate, consolidate, monopolize and engage in anti-competitive practices

[3] correction appreciated


Follow Steve Brown on twitter:  @newsypaperz

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The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Duran.

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