The New World Order

By Todd Harrison  JAN 21, 2009 7:45 AM

It's time to stand together as one and affect positive change.

 


“Got to pay your dues if you wanna sing the blues and you know it don’t come easy.” --Ringo Starr

A new dawn has arrived, full of promises, hope and a fair amount of fear.

Barack Obama was sworn in yesterday as the 44th President of the United States of America. In the storied history of democracy, there has never been a transfer of power where the fortunes of so many were pinned to the lapel of one man.

I’ve traditionally avoided the perception of political affiliation -- as a financial columnist, my motivation is to offer an unbiased assessment of the global landscape -- but I will share that I support this administration. Sobering socioeconomic seeds were sown long ago and the specter of unified change is our single best hope as we find our way through this process of price discovery.

After years of reckless spending, conspicuous consumption and mismanaged policy, we, the people, must offer a collective “mea culpa” if we hope to regain respectability on a global stage. There aren’t any magic pills, mind you, but humility, diplomacy and cooperative intelligence are intuitive starting points on the road to redemption.

It won’t come easy. The incoming President inherits a fragile geopolitical landscape, record budget deficits and massive Treasury debt, more than half of which is held by foreigners whose patience wore thin long ago. Indeed, the single greatest risk to the system—and our world—is entirely more profound than trade imbalances or profit margins.

We’re at a societal inflection point, one where each of us must be accountable for what we do and how we do it. While many of us weren’t responsible for the hole we find ourselves in, pointing fingers and placing blame will do little to dig us out of it. As we’re apt to say in Minyanville, if you’re not part of the solution, you’re likely part of the problem.

Challenging Popular Perception

The news flow of late has been staggering. An additional $350 billion in TARP funds, the $825 billion stimulus package, another $20 billion for Bank America (BAC) and Merrill Lynch (MER) and the systematic dismantling of once-venerable institutions such as Citigroup (C).

Conventional wisdom dictates that the only solution is to induce fresh spending with fertile credit, a last ditch effort to shock the economy out of its coma and pave the way to better days. That is a fundamentally flawed assumption, for sustainable growth will arrive by way of debt destruction rather than credit creation.

Interest rates on bank deposits are near zero and the Federal Reserve guided them there for a reason: they want to remove incentive to save and jumpstart the spending cycle. While saving is an intuitive individual solution, it’s the death knell of an economic ecosystem measured by the sum of its parts and reliant on the velocity of money.

What we’re witnessing isn’t a garden-variety one-and-done recession; it’s the cumulative comeuppance of a massive credit bubble rooted in faulty monetary policy aimed at avoiding small, corrective recessions. Conventional wisdom has been wrong about what's been happening the last 20 years so shame on us if we rely on the same people who never saw the bubble building in the first place to guide us through it.

The answer to a debt bubble isn’t to create more debt. That’s as absurd as saying we should have created more technology stocks in 2000 or more homes in 2006. As it stands, we’ll be adding another $2 trillion to the national debt this year, an obligation that will invariably be passed to future generations.

Our current course has ominous ramifications for the dollar. As the greenback is the world reserve currency, those implications extend throughout the global landscape. A currency holds a nation together and the economy—perhaps society at large—assumes more, not less, risk as a function of the path of our attempted fix.

Focusing on Solutions

While efforts at job creation will result in more cash in people’s pockets, that cash will be worth less as the government borrows more. Sustainable and realistic solutions require an overall reduction of government influence as we take our free market medicine of time and price. That is, if the free market capital structure is to survive.

The underlying problem is that we have no savings to support sound lending. In their desperate attempt to fix the problem, the Federal Reserve created more imbalances and prolonged the inevitable. They are shifting private debt into public debt but their only end game is to print more currency.

A balanced economy needs a savings pool commensurate with its debt pool. Any solution that deviates from that equilibrium will lower the standard of living for our children. It took years to deplete our collective fortunes and it will take years of saving, coupled with painful debt destruction, to establish a stable foundation for economic growth.

Our new leadership should encourage people to save money while rewarding productivity in the private sector. This includes allowing interest rates to rise (rewarding savers), drastically reducing government spending, investing tax dollars in education and passing tax cuts that rebuild the socioeconomic system from the inside out.

While this approach would be a bitter pill to swallow—most medicine is—it is the only path that will prove sustainable. Remember, we’re at a critical crossroads, one that will leave an indelible impression on world history.

It’s not often you get a second chance at making a first impression. Given how high the stakes are, the onus is on us to stand together as one and affect that positive change.

One step at a time.

R.P.
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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