Insights July 2012

Something Wicked This Way Comes: Prepare Yourself for a Lower Standard of Living – A Polemic

James H. Stonehouse

[The word “health” appears seven times in this essay and so the author opines that it qualifies for this website. So be it.]

A photograph of the genial and avuncular Warren Buffett, his arm around my shoulders, takes pride of place on my office bookshelf (I tell those inquiring as to the provenance of the photo that Mr. Buffett had been asking me for investment advice to goose his Berkshire Hathaway holdings….. that isn’t quite true, but it makes for a good story). Apart from a few billion dollars (in his favour) and a few years (in my favour), there is at least one other significant difference between us:  Mr. Buffett is an aurophobe (a gold hater) and I am a chrysophilite (a gold lover).  That Mr. Buffett’s historical investment approach has been wildly successful, is an unassailable proposition – but the zeitgeist has turned, the paradigm has shifted.  Intractable macroeconomic forces now at play, inclusive of unprecedented credit expansion, will corrosively destroy private wealth (yes, importuned dear reader, I am addressing you).  

Sadly, a “normalcy bias” is well-entrenched in the populace – the mistaken belief that every day is pretty much the same, give or take, as the preceding day.  Canadians don’t seem alarmed by an unsustainable average debt-to-income ratio of 152%.  While the prevailing economic situation may be characterized as “challenging”, few see any need for fundamental behavioural change, predicated on the belief that nothing is really different.  This world-view does not square with reality.  As Ayn Rand prophetically observed:  “You can avoid reality, but you cannot avoid the consequences of avoiding reality.”  The new reality is stagflation (marked by an inflationary environment with zero or declining growth), of indefinite duration – in extremis, we are engaged in foreplay with a Depression.  A substantial reduction in everyone’s standard of living is in the offing.   This is a mathematical certainty and is unavoidable.

The economist Ludwig von Mises, of the latter-named “Austrian School of Economics,” observed in 1949:

There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.  Human Action: A Treatise on Economics

Or, as American economist Herbert Stein, more succinctly put it:  “if something cannot go on forever, it will stop.”

Nineteenth-century poet Gerard Manley Hopkins, channeling his inner-Jesuit, foresaw the parlous state of our times:

No worst, there is none.  Pitched past pitch of grief,
More pangs will, schooled at forepangs, wilder wring.
Comforter, where, where is your comforting?

The mainstream media hasn’t quite bought this dire prophecy.  Populated largely by well-coiffed chuckleheaded poseurs (spend some time watching CNBC and you’ll understand), and Panglossian-optimist scribblers (pace Voltaire’s Candide,  “hoping for the best in this, the best of all possible worlds” – despite incontrovertible evidence to the contrary) taking up space in the business dailies, the gravity of the macroeconomic challenge is glossed over, minimized, or even derided.  It is repugnant to hear them intone “recovery”, “green shoots”, “stimulus dividend” and other tendentious twaddle.  They dissemble and prevaricate.  Let us be clear:  there is no cause for macroeconomic optimism.  Unfounded optimism is akin to heroin – it is addictive and destructive.  Shakespeare descried the malignant effects of witless optimism, noting that it prompted “bison conspectuities” (bleary vision), a debilitating complacency in the face of economic perdition.

Why am I so splenetic and cynical?  Why do I feel the macroeconomic picture (which becomes, as individuals, our respective microeconomic pictures) is so irredeemably bleak, refractory to well-considered policy solutions?  There are many seismic forces shaping the world’s finances, and it is now received wisdom that “everything is inter-connected.”  By no means a comprehensive list, here are some of the depredations with which we are dealing: 

  • The world is awash in debt; sovereign, corporate and personal.  This is a solvency crisis of the highest order, not a liquidity crisis.  G10 debt stands at around $70 trillion USD.  The stark reality is that most nations are borrowing to cover their borrowing costs on previously borrowed money.  This is unsustainable and admits two solutions:  declaration of default or balance sheet expansion through quantitative easing or similar accommodative monetary policy.  The former solution is politically untenable, the latter preferred but destructive.  The cost of the latter is the massive amplification of the debt burden for future generations, coupled with a hyperinflationary no-growth environment.  The world is, quite literally, endeavouring to drink itself sober.  The world has passed the “Minsky Moment” (named after the late American economist, Hyman Minsky, denoting the point at which the productive capacity of any economy cannot service its debt obligations).  Countries most ill-equipped to meet their debt obligations, therefore representing the greatest risk to holders of their debt, experience higher borrowing costs (illustrated by higher 10 year bond yields, as one notable marker, with unsustainable yields verging 5% or higher) and countries which can print their own money (ie, the US) can do so and lower their borrowing costs (but induce, in short order, hyperinflation);
  • with a few notable exceptions, global GDP growth is flat-lined or negative.  As difficult as it may be to polish a turd, employment data (especially US data) is consistently fabricated and “spun”, by an administration intent upon re-election, to convey a rosier picture than the empirical data would ever allow (“official” non-farm US unemployment data is often represented between 8 – 9% whereas the actual unemployment figure, applicable to all work-eligible Americans, is in the order of 22%).  Almost 15% of Americans are enrolled in, and rely upon, the Food Stamp Program.  European unemployment data in the “club Med” countries (Spain, Portugal, Italy, Greece, etc.) is beyond abysmal with absolutely no tangible evidence of recovery at hand.  The global “engines” of China, India, Germany, Brazil and select Asia-Pacific nations are throttling back (notwithstanding the institution of new monetary easing  practices that have been tried and found wanting, as growth inducement options, in most western nations);
  • Seldom referenced in the mainstream media, but a development that will further destabilize the global economy, is the deracination of the US dollar as the world’s “reserve currency.”  Quietly, massive currency swaps and trade deals are being settled in renminbi, ruples, rupees, and rand (note that these currency units all start with the letter “r”, the first letter of “reserve”, as in “hey, hey USA, there’s a new reserve currency on the block.”).  Recent trade deals conducted between oil-rich Middle Eastern nations, Russia, certain South American nations, and Asia- Pacific nations have been denominated in new synthetic currency “baskets” alongside gold bullion in partial or full payment for oil and other commodity trades.  So, you may say, what does any of this matter?  It matters when the relative value of the US $ plummets against other currencies (aided and abetted by further monetary easing, which is a given), thus destroying wealth for all Americans – and Canadians – but that’s a longer technical story).  The end of the hegemony of the US $ will confound most observers as, on any given day, the descent of the Euro is punctuated by temporary increases in the US $.  Be assured this “flight to safety” (increased global purchases of the US $ and Treasuries) is a flight to nowhere in the intermediate to longer term.  An important footnote to this currency devaluation:  no fiat currency has ever lasted in the history of the world.  This reality is not going to change now.  I believe it inevitable that currencies will be gradually reset to a new gold standard.  Again, China’s central bank, with no fanfare, is   taking the lead on this front by holding virtually all domestic gold production and quietly importing unprecedented quantities of bullion at a furious pace.  The People’s Bank of China is not doing this for shits and giggles.  They know exactly where things are going;
  • Canada’s banks may have their challenges, but they are paragons of virtue compared to their international counterparts, and have rightly set a standard of business probity envied by the world.  However, looking outside Canada, we bear witness to the daisy chain of flatigitious fecklessness demonstrated by global banks.  Overleveraged, undercapitalized and intermingled with the machinations of sovereign central banks, the banks play fast and loose with deposits, playing all sides of the trade to their own advantage.  The banksters quomodocunquize (make money any way possible).  Outrageous bonus schemes incent corrupt behaviours, from LIBOR fixing (interbank rate setting) to gold manipulation, equity market rigging, through to the packaging of rehypothecated derivatives ($1,200 trillion, to be exact, or 20 times the total world economy) so complex, and so inherently risky, that stymied regulators are bamboozled and marginalized. International banks bestride the world with diplomatic immunity.  We bear witness to the sight of taxpayers bailing out banks in the face of surreally munificent compensation largesse being extended to the executives of those banks.  If one is keeping score, since 2008:  Occupy Wall Street protestors, mortgage defaultees and other bankrupted victims of the banking Ponzi scheme incarcerated:  thousands (I’m not exonerating them of their own personal culpability in either breaking the law or overreaching in their personal financial affairs);  banksters incarcerated:  zero.
  • The grand dirigiste scheme called the Eurozone is all over, finished, but for the crying.  The Euro currency was, and is, built upon a confection of lies.  The differential rates of productivity, taxation, debt and deficit amongst the 17 Eurozone members of the 27nation European Union conspire against a grand federal scheme (essentially concocted to syphon money from Northern Europe to Southern Europe).  The debt burden is so onerous, and the solutions so insipid, that the collapse of this Frankensteinian monstrosity is all but certain.  In getting to this collapse, as will be the case in the US, unbounded quantitative easing will happen first (essentially throwing good money after bad), which will be accompanied by doomed-to-fail “austerity” fiscal regimes, which will then be followed by sovereign abrogation of the terms of bail-out, which will then be followed by departure from the diminishing Eurozone and reinstatement of the departee’s legacy currency, devalued by 50 – 60%, and unspeakable poverty and social dislocation (if you can get past the retsina, Greece will represent a terrific vacation value as long as you’re not fussy about armed insurrection and devastated infrastructure).  Overleveraged European banks are frantic to keep the Eurozone intact, as they have no hope of recovering loans made to the wastrel countries should they depart, default and reset.  The European Central Bank (ECB) has limited firepower to bail out the banks, and Germany cannot (and should not) rescue Europe.  The dominoes are set to fall and time has run out;
  • As proof positive that the concept of shame has become outmoded and quaint, one need have a conspectus no more egregiously baleful than the US presidential electoral campaign between Obama and Romney.  Calumny, self-aggrandizement and prevarication reign in this jumped-up, jive-assed, clapped-out  crucible of mountebanks, both promising what neither can deliver.  Federal debt (around $16 trillion USD, growing by the minute) and unfunded state, municipal and federal entitlement obligations (good for another $100 trillion or so – a figure so Brobdingnagian as not to be comprehended) are cynically overlooked and superciliously dismissed as “scare-mongering.”  As the two mugwump candidates give utterance to a floodtide of suborned inanities, America lurches from crisis to meltdown with entrenched partisanship stalemating any serious attempt at fiscal reform.  Wall Street’s buoyancy has come to be interpreted as a proxy for Main Street’s health, and nothing could be further from the truth.  As November approaches, take it as an article of faith that Obama will mysteriously cause the Federal Reserve to “let loose the dogs of war” and prestidigitate a fresh round of money printing (quantitative easing, monetary accommodation, Treasury long bond purchases….the euphemisms just pile up).  Political spin-doctors, pundits and nabobs will be working overtime to put lipstick on a pig, propping up the delusion of a robust American economy.  All such palaver amounts to mendacious political point-scoring and technicolour holograms.  The tough decisions and the confrontation of truly awful news will be deferred (thus intensifying the problem) until after November, leading directly into the already legislated package of tax increases and spending cuts known as the “fiscal cliff” starting at the end of 2012 and into January, 2013.  As a pilot on a stricken aircraft must declare:  “brace, brace, brace!”; 
  • And along came the “black swan”…… Provision must be made for the unknowable catastrophic event.  Brinkmanship among and between some combination of Iran/Israel/Iraq/Russia/United States/Syria figures prominently, and the prevailing bellicose spirit bodes poorly for peaceful resolution.  Sabre-rattling within the Gulf of Hormuz, threatening to halt a goodly portion of the world’s oil supply, is sufficient to send oil prices soaring overnight, representing another headwind for a flagging global economy.  Accelerated “weather events” (half of the arable land in the US, as this is written, is in drought), natural catastrophes (seismic activity has intensified in the last decade), the outbreak of a highly virulent and deadly communicable disease epidemic, and the prospect of mass civic insurrection and disorder have profound adverse consequences.

This jeremiad is written, in the main, for a health care management audience generally not given to obsessing about macroeconomic themes.  But, as was animadverted earlier, macro gives way to micro – and that’s when people sit up and take notice, when personal net worth is eroded.  In the jurisdiction within which I write, Ontario, the majority of hospital employees, and numerous other health care employees, are beneficiaries of a first-rate pension plan, the Healthcare of Ontario Pension Plan (in fact, it is one of the best-managed defined benefit pension plans in North America).  Other Canadian jurisdictions also have soundly managed plans. While income from one or more of  these plans may be a cornerstone of one’s retirement planning, people need to assume personal responsibility for both generating and preserving wealth in times that are rebarbative to such otherwise prudent actions.  My contention is that, notwithstanding your best efforts to nurture and enhance your net worth, your finances will be overtaken by the dark forces mentioned in the body of this essay – but that doesn’t mean you shouldn’t take appropriate steps to fortify your assets to minimize wealth destruction.  As the great American basketball coach John Wooden said, “Failing to prepare, is preparing to fail.”

  1. Spend within your means;
  2. Eschew debt, except for investing in carefully thought-through, serviceable investments;
  3. Be a disciplined saver;
  4. Diversify your investments made with those savings; and
  5. Acquire gold bullion and related equities, as a significant and growing portion of your portfolio, as partial indemnification from  and insulation against the depredations mentioned above.

I started this invective referencing Mr. Buffett’s aversion to gold (I concede that he likes Cherry Coke, which is redemptive but doesn’t confer apotheosis).  I have written elsewhere about my healthy infatuation/engouement with the lustrous rare metal (see “Rocks ‘n Docs:  A Life in Health Care and Precious Metals Investing” in the Longwoods archives).   I would counsel you to give short shrift to gold’s detractors.  The intensity and annoying shrillness of their broadsides will increase in the days to come because the ascent of gold is a reflexive binary to the descent of currencies.  Gold’s ascendancy is the repudiation of fiat currency and the “establishment” (perniciously rigging the system in favour of the bankster and political elites).  Gold speaks truth to power.  Gold will not ascend in a straight line, but, the trend is your friend.  I would urge any interested reader to acquire Ronald-Peter Stoeferle’s excellent “Gold Report 2012 – In Gold We Trust,” prepared under the auspices of Vienna’s venerable Erste Bank.  Mr. Stoeferle’s trenchant and incisive work leaves nothing to the imagination.

As a sidenote, the Bank of Canada, showing its true Keynesian colours, exults in having 3.4 tonnes of gold (only 0.3% of all the country’s foreign reserves account, totalling $68 billion-mostly held in US$). A succession of Governors have sold off our gold, over 650 tonnes, from 1980-2002.  This isn’t good. Canada’s central bank gold reserves confer upon us the rank of 80th in the world (we are nestled between Mongolia at 79th and Slovenia at 81st).

In the classical tradition, great thinkers such as Epictetus, Epicurus, and  Marcus Aurelius all counselled that peace of mind was best achieved through seeing life clearly, by accepting things as they are, not as you wish them to be.  Nostrums and bromides of unfounded optimism, usually peddled by people with ulterior self-interested motives, serve to distort your vision and injure your interests.  When confronted by “feel good” hucksters, assume the attitude of  Jack Nicholson’s curmudgeonly  character in As Good As It Gets, who says to a hapless and innocent housekeeper, “Sell crazy someplace else; we’re all stocked up here.”    The macroeconomic issues mentioned above are real, inevitable and intractable.  Energy should not be spent pretending otherwise.  Energy should be spent on coping with these realities.  As the old adage goes, “you can’t change the wind, but you can adjust your sails.”  


About the Author(s)

James H. Stonehouse is a Partner at Four Corners Group and leads the Health Care and Public Enterprise Practice. The opinions expressed in this essay are solely Mr. Stonehouse’s.


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