Automatic Earth
There may be no better example to express our upcoming reality than the fact that the Bank of England simultaneously 1) begins to roll down quantitative easing measures (by lowering or even halting its government bond purchases), and 2) warns the British population that living standards are about to take a major hit. In the US, the Federal Reserve is about to quit buying up mortgage-backed securities (all $1.25 trillion of which were steeped in insanity, if you ask me, just watch what happens next), but it hasn't issued a similar austerity warning. It’s probably just less politically palatable in America to say these things; and that's the only difference.
There are suggestions floating out there that private capital is ready to jump back into the MBS market. Makes you wonder what all that capital has been waiting for. It's impossible from where I'm sitting to be sure what plans, if any, exist to prop up the housing finance markets once the Fed retreats, and there's no way I’d ne surprised to see more of the same -flavor of- insanity. Are we going to see Fannie and Freddie sit on their own securities? Remember, they have a bottomless mandate since Christmas Eve 2009. Will the Federal Home Loan Banks step in? That would certainly add another -and higher- level of insanity to the mix. The reason I use the word insane is that it's been clear from the get-go that home prices supported -only- by taxpayer money are doomed to crumble; the only things achieved by the Fed's $1.25 trillion purchases are a temporary delay in home price plunges, and another giant transfer of bank and lender losses to the state (re: the population). If only for this reason the Fed would do well to warn the American people that hard times are a-coming.
Tim Geithner and Christina Romer tried to paint another rosy economic picture in front of the House Appropriations Committee ("there's progress, though it's challenging"), but even their own fellow Democrats don't buy into it anymore. American politics as a system has ceased to function, because the system has gone from representing people to representing money. And that is something that can only go well as long as the people have at least some of that money. Now that they're increasingly shut out, the system shuts down; it's inevitable. Which is why even rating agency Moody's comes with an at first glance curious warning: even the credit raters now predict pitchforks.
We've seen tear gas in Athens recently, and that was just a little taste. As you may know, I’m spending some time in France right now, and it's not hard to predict what will happen here if and when the government starts slashing salaries (as it must soon). The French simply won't understand what's happening, and mass protests will be the result, some peaceful, some violent. It’s every democratic politician's ultimate conundrum: if you don’t tell people the truth, they'll turn against you down the line; if you do tell them, they'll turn against you right away. That makes it obvious to figure out which politicians actually do get elected. Where the government is left, it will swing right, and vice versa, in ever more extreme denominations.
And yet, it's all just a prologue. There's nothing easier for politicians than to play people against each other, in order to divert -negative- attention away from themselves. And so they will.
We have a baby boomer generation that has just about all the money that's left in our societies. Their children, though, have nothing. Except for some hand-outs from their parents (I’m not talking individuals here). Unemployment among young people in many countries is downright scary, often in the 40%-50% range. No jobs, no money, no prospects. In times and places throughout history, this has brought populist dictators to the foreground, and pitchforks and torches into the streets, and there is no reason why it won't now. Today's political power is firmly in the hands of the 40-year and older crowd; they have elected incumbent politicians, and more importantly, they have the money and thus the power. The younger generation has no money and no power, but they also have nothing left to lose.
That is a dangerous combination, and how we deal with it will be what decides our futures. Our societies, already barely able to survive current debt and deficit loads, are slowly -though increasingly faster- being eaten up by the monster of unfunded liabilities: healthcare and pensions. Be it the US Medicare, Medicaid and Social Security varieties, or their European and Japanese counterparts, we're looking at ticking explosives counting down the hours, days and years. Down here at the Automatic Earth we've long said that nobody presently under 50 (and planning to retire at 65) will ever see a penny from pensions or government retirement plans (well, perhaps that one penny).
The world's pension plans have lost fortunes in the 2008/9 crash, and they will lose more going forward (they're playing double or nothing now to make up the losses). Your private pensions have entered the casino, and they ain’t never coming out again. Government obligations will not be honored, because the younger generation must and will at some time take over, through elections or otherwise, and vote themselves (again, through elections or otherwise) an ever bigger piece of the pie. And the pie will have gotten a lot smaller to boot. If time is money, and money is power, than time will be power too at some point: the young have the final advantage.
Most people are far too complacent when it comes to the consequences of a shrinking economic system. Many claim that we can easily downsize to smaller homes and smaller lives, since there's so much we don't really need anyway, that we will move in together and return to "good" conversations, growing our own tomatoes and all that. But that's just not going to happen voluntarily, not on a large and wide scale. The human mind has no reverse. It doesn't even have a steering wheel. We are built for one of two things: go forward or crash. It looks like there's no forward left before a major crash happens first. It also looks like there's not a whole lot of people who realize this.
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