Fascist America

The issue of high flying Washington spending as the balance of the economy crashes and burns is one which is only just beginning to speak to the issue of confidence. If the dollar broke to record lows between 2002 and mid-2008 (with the exception of 2005) on an abundance of supply, then the next source of disruption for currency value – when it hits – will be abundant supply and plummeting confidence. The promises made by Obama are going up in smoke and the wreckage he’s about to leave behind will result in greater carnage than if the credit cycle bust were allowed to fulfill its economic function without federal interference. In fact, we’d go so far as to say Obama’s spending is so perverse and extensive; his foreign policy so amateurish; his economic policies so fascist[1]; his staff and cabinet so filled with jaded political hacks; his acts, policies and colleagues represent, in real and figurative terms, terrorist acts of an economic nature against American and global citizens alike. The future of the American economy could not be bleaker than if Osama bin Laden was chairman of the SEC, secretary of the Treasury and chief economic advisor all rolled into one. But the U.S. doesn’t need a high profile terrorist such as bin Laden when it has Barak Hussein Obama. It is more than a little interesting to note that, while most people (particularly Obama) like to compare his reaction to the credit crisis as something akin to FDR’s less than constructive reaction to the Great Depression[2], in reality Obama’s work more closely mirrors Mussolini’s fascist Italy. Mussolini rose to power by convincing the masses he had all the answers to their socio-economic and political ills in the wake of WWI. There are some basic tenets of fascism that deserve address: Belief in violence; disbelief in the legal process; and rabid nationalism but, perhaps primarily, a complete and utter lack of respect for the individual, among other things. Mussolini’s reaction to the post-WWI depression was to halt the involvement of national syndicates in the domestic economy and to expand the direct role of the state[3]; “…rationalization, reorganization and cartelization were encouraged in industry.”[4] “The first major instrument of state intervention was creation of the [Italian Assets Institute] in 1931 as a state corporation to buy up shares of failing banks, beginning a process by which the state would directly or indirectly control most Italian banking assets.”[5] Mussolini’s government was equally fond of large-scale infrastructure projects. They were one of the first initiatives introduced coincident with bank takeovers. By 1933, the government had created a state-run entity that infused capital into failing industrial enterprises. The state came to control the banking system. This should all be starting to seem eerily familiar for Americans. By the mid-30s, Mussolini was given to saying Italians should prepare for the coming struggles and learn to eat and sleep less. By 1939, the government had acquired 21.5% of all the capital in every joint-stock company in Italy resulting in the government owning a controlling interest in every major economic sector and a greater ownership interest in the national economy than any other government west of Moscow. The lira was de-coupled from the gold standard in 1936. The currency plummeted in value. Taxes rose precipitously, and price controls were pervasive. Mussolini’s tactics sound a lot more like those employed by Washington today, than anything FDR undertook, though we have no great respect for the latter’s efforts either. Because there has been no link between gold and the dollar since 1971, the U.S. is far more vulnerable to currency collapse than Mussolini’s Italy was in the 1930s. The U.S. has had more than a generation in which to engage in unfettered money supply growth. It has had far more than a generation to accustom people to the sense of growing wealth, even as their purchasing power declined, making resistance to unreasonable and empty promises that much more difficult to muster. The end of Italian fascism came only when the people rose up against consequences that included rising unemployment, the resurrection of a truthful and trustworthy media amid growing resentment toward the wealthy and powerful few. It came as confidence in the fascist ‘ideal’ was shattered along with the value of the currency. Confidence in the U.S. government is growing so thin that, prior to Hilary Clinton's recent trip to China, unconfirmed reports posited that Clinton planned to offer China the right of eminent domain over U.S. real assets in a bid to get the Asian giant to continue investing in U.S. debt. In advance of, and subsequent to, Clinton’s trip China made noise about its desire for some sort of guarantee relative to returns on its investments in U.S. securities; China doesn’t want to get repaid with worthless dollars. If reports of Clinton’s proposal proved accurate, there would be no further room for debate over Washington’s view of the value of the individual. It would, as if more evidence were required, offer proof positive that individual rights have no place in the Obama administration. It would be an enormous blow to the already shaky confidence of Americans and those nations which still exhibit some degree of belief in the country. It would, presumably, hasten the decline in the dollar which is ultimately doomed due to excessive money supply growth and an industrial infrastructure so bereft of capital investment that price inflation, as a consequence of shortages in the supplies of everything from basic raw materials to finished products, is insured in the years to come whether economic recovery takes place or not. (We are of the position that Obama will eventually impose price controls. They will prove to be as fruitless as those imposed by Nixon and the ultimate lifting of price caps will result in volcanic price explosions.) Because of the incredibly shrinking U.S. manufacturing base (accounting for no more than 11% of U.S. GDP in 2008 and a number sure to decline substantially in 2009) and government’s insistence on the freeing up of credit markets (to further the debt standard under which the U.S. economy has operated for the past forty years) there can be no economic recovery. Even communist China has figured out that production is critical to economic growth. Production is the means by which China emerged from the dark, economic shadow of Mao, making slow but steady progress over the past thirty years. A country that makes nothing and has nothing of value to sell to interior or exterior markets cannot realize employment growth, cannot fund its deficits without excessive taxation and borrowing (and at current levels, even with excessive taxation, U.S. deficit reductions are impossible despite Obama’s claims to the contrary) and cannot hope to avoid the wrath of the governed once confidence has been shattered. What’s more, Americans live in a culture which, with the speed of advancement having accelerated over the past generation, has become an instant gratification society. Following Obama’s speech to Congress, 41% of Americans said they were more confident about the future of the economy. All things being equal, that still means 59% of Americans – more than half – are not confident. In other words, Obama’s exorbitant spending better yield quick results or the 41% who helped boost his ratings from their post-inauguration low (in advance of the address) will be tipping the scales even farther in favor of the pessimists. As indicated somewhere (way) back at the beginning of this commentary, we noted that the banking crisis is intensifying. There is more than growth in FDIC takeovers to substantiate that comment. In recent reporting of bank reserves and the monetary base, both total reserves and the monetary base rose, but the growth was in excess reserves, while required reserves fell. In the two weeks ended 25 February, year-to-year change in the St. Louis Fed’s Adjusted Monetary Base (seasonally adjusted) rose to 88.4%, versus 81.9% in the prior two-week period. Annual growth in required reserves (not seasonally adjusted), however, slowed to 27.8% from 58.7% in the prior period.[6] Decreases in required reserves suggest more bank failures are on the way. Between dismal (at best) economic news relative to jobs, housing, the auto sector and banking and government’s extreme over-reach in making promises and spending capital that defy reason the confidence of U.S. consumers – already having exhibited record-breaking declines vis-à-vis Census Bureau data – is on the brink of wholesale collapse. Since confidence is the only thing holding up the value of the currency, the U.S. can no more afford deteriorating confidence than it can Obama’s nearly $4.0 trillion budget. We see April as critical in terms of timing for a resumption of the disastrous 2007 debt market peak (represented by the top in the S&P/Case-Schiller home price index). The U.S. dollar has been hinting at efforts to turn lower of late, only to turn around and rally against the euro. It’s worth mentioning, however, that only the EU was slow to match interest rate cuts imposed by the Fed, the BOE and other central banks. We are not fans of fiat currencies, but do believe fiscal restraint – even if only in relative terms – not to mention the likelihood for growth in interest rate risk premiums will ultimately support the euro over the dollar. If the greenback manages to maintain rally mode into April, we suspect mid-month could mark its peak. In the end, however, we believe that nothing will fare better than gold. The market recently declined on profit-taking after a rally to record highs. It appears set, at present, to move into more sustainable bull territory.
[1] In the words of Benito Mussolini, ”Another word for fascism is corporatism”. Make no mistake: Obama is not interested in socializing America as many would claim, neither is he the ‘communist’ Alan Keyes recently accused him of being. His interest is in corporate-government alliances; the partial and/or controlling interest in corporations by government.
[2] We happen to agree with the argument that FDR’s intervention in the economy prolonged the depression, worsened people’s economic prospects and did little to lift the country out of its catastrophic state. It was, instead, the onset of WWII that caused the economy to resume some degree of growth and that was wholly the result of the restarting of factories for the production of armaments, ammunition, equipment, etc.
[3] “A History of Fascism 1919-1945” by Stanley G. Payne p225, pp1
[4] IBID
[5] IBID
[6] Shadow Government Statistics, John Williams, 27 February 2009