Economy

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – The Transition to a Post-Friction Economy

In Part I, we pursued the idea that much of the US economy is, in essence, unproductive friction that is overcome with vast borrowing — itself a form of friction — and the importing of fossil fuels. We also noted that the Central State/cartel “capitalism” partnership has greatly expanded the unproductive, uncompetitive “friction” segments of the economy and has limited consumer “choice” to purposely-selected menus designed to appear like a “free market” while benefiting State fiefdoms and private-sector cartels.

Entrenched Interests Keep Our Markets From Being Free

Looking at the sources and costs of friction gives us some insight into issues that are often seen as political — for example, the costs and benefits of borrowing trillions of dollars into existence every year and the costs/benefits of State regulation. Once we recognize how rising systemic friction will eventually freeze the system, then we also recognize that the path we’re on is unsustainable, and the political “rightness” or “wrongness” of increasing debt to fund the forces of friction becomes irrelevant.

The same can be said of State regulation. Given that one of the purposes of government is to protect the nation’s “commons” — air, water, public lands, and other shared resources — then some regulation is necessary to limit exploitation and predation of the commons by either private parties or the State itself. 

But we have confused productive regulation with regulation that achieves little beyond diverting funds to unproductive segments of the economy. There are hundreds, if not thousands of examples in every sector from criminal justice to farm subsidies to health care.

How about the enormous expense of the “war on drugs” and the resulting prison complex and criminal justice system? Are the benefits being reaped — marginal, or even counterproductive, in many analyses — worth the expense? Those employed in these systems naturally feel the benefits far exceed the costs. But self-interest is simply not an accurate measure of friction; ultimately, only a free market of free citizens can make that assessment.

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – How The Coming Decline with Play Out

Understanding The Economics Driving Energy Transition

Robert Allen of Oxford University has done some of the best work on the Industrial Revolution but he has also helped us understand the historic energy transition from Wood to Coal, in England. Along with the work of Vaclav Smil, Allen has shown that energy transitions are long, drawn out affairs that do not comport with the faith in efficiency that defines contemporary economic theory. This chart of BTU prices shows that natural gas is being offered each day in the bargain bin to the economy, but the economy is so inextricably tied to oil (liquids) that its existing infrastructure cannot take advantage of the opportunity.

Contributing editor Charles Hugh Smith notes that markets are at an important inflection point. The direction things take from here may likely be apparent within the next few days.

As I noted in my previous exploration of the U.S. dollar and the technical evidence for a long-term uptrend in the dollar index DXY, global markets for stocks, commodities and currencies are on a simple see-saw: On one end is the U.S. dollar, and on the other are all other major currencies, global stock markets, commodities, etc.

The U.S. stock market has been recently surging on hopes of a comprehensive settlement to the European debt/banking/euro crisis. Technically, this surge exceeds the recent trading range, and thus is seen by many traders as a valid breakout; i.e., the signal a new Bull market is underway.

This aligns with the views of many experienced technical analysts, who expect a strong rally to start from here and last into early March.  The reasons many expect such a rally, despite the headwinds of global recession, are seasonal and cyclical: Stocks almost always rally strongly in Nov.-Dec., and the third year of the presidential cycle (2011) is generally positive for stocks. In addition, various timing tools and indicators can be interpreted as supportive of a major rally from this point.

A much smaller number of analysts (including Chris) see increasing probabilities of a global stock market crash.

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II – The Flashing Market Indicators To Watch For

Custody Account Holdings Fall

In Step #1 (in Part I), the first thing I am watching for is a decrease in central bank holdings of Treasury debt. The easiest way to track this trend is through the custody account at the Fed, which is where most of the official holdings of US government securities held by foreign central banks are stored. In this custody account are both Treasury and Agency debt; luckily, they are reported independently.