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Special Five Things You Need to Know: The Crisis of the Real

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Inflation in the purest economic sense confiscates money, purchasing power and control.

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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Crisis of the Real

While short-term cyclical signs point to at least a short-term respite for financial markets, the long-term secular forces of debt revulsion and deflation continue to build and are showing up in social mood with increasing frequency.

One social manifestation of debt revulsion and anti-consumption is a conscious attempt to revolt against the precession of the simulacra in fashion, art and culture. We are facing what I call "The Crisis of the Real."

To understand what this crisis entails, it is useful to look at what this precession of the simulacra entails as it was outlined by Jean Baudrillard in his prescient work, Simulacra and Simulation, published in 1981.

Simulacrum, for Baudrillard, is a copy of an original that displaces the original as a sign and becomes real in its own right. In fashion, think of the way Ralph Lauren's (RL) "Double RL" label operates; largely these are reproductions of vintage wear, a commodity supplanting the original in terms of desire and authenticity. Presumably, consumers would prefer to purchase new reproductions of vintage clothing, paying a premium for the simulacra that displaces the original in authenticity, creating a new reality.


2. The Precession of the Simulacra

The precession of simulacra that Baudrillard outlined is as follows:

1) Era of the Original
2) Era of the Counterfeit
3) Era of the Produced, Mechanical Copy
4) Era of the Third Order of Simulacra, where the reproduction displaces the original

In September 2006 we looked at how this precession of simulacra applies to pricing structure in securities markets. At that time, nearly two years ago, we argued for the view that we are seeing the culmination phase in securities markets where pricing structure breaks, literally: "From the standpoint of the final phase of the image (price), we now witness securities markets that have no relation whatsoever to anything - they are solely existent as a pure simulacrum from which higher and lower are relations to something without meaning; in other words a hyperreal market."


3. Successive Phases of the Image

We can see this progression in what Baudrillard formulated as the Successive Phases of the Image. After all, securities prices begin as nothing if not representations, images, signifiers of some "thing."

Successive Phases of the Image (with price relation in parentheses)
- the image is the reflection of a profound reality (price "means" something profound with respect to the security)
- the image masks and denatures a profound reality (price disguises a profound reality - the value investor's dream)
- it image masks the absence of a profound reality (2000 Dotcom Bubble. for example)
- it has no relation to any reality whatsoever; it is its own pure simulacrum, a copy without a model (the continuous supply of credit to market participants with no underlying attachment to any "thing" real, pure transaction that supercedes the act of exchange itself).


4. Examples in the "Real" World

Two social examples come immediately to mind in this view of pricing structure.

The first is the increasing frequency with which homeowners are walking away from their homes, choosing to default on loans and embracing foreclosure. This is the final displacement of the home as a signifier of stability and family. The precession from home as signifer of stability, family, ownership, the era of the original, to the era of the counterfeit, vinyl siding, simulations of the original wood structure, faux plaster and tudor-stylings for example, to the mass produced homes in the era of mechanical production, the rise of the homebuilders, and finally, to the third order where the home is no longer a home but simply the reproduction of wealth and status, or the detritus of failed transactions. Consequently, the social transition toward debt repudiation is also a revolt against the home and the hyperreality of forever rising prices. In the end, the pricing structure of homes bore no relationship to any reality whatsoever.

The second, most obvious, example is the breakdown in price discovery itself in large portions of the financial markets; a breakdown that is, ironically, encourageed by the Federal Reserve's efforts to limit the ongoing dissolution of "trust" among financial firms. Fannie Mae (FNM) and Freddie Mac (FRE) today are interacting in the process in a vicious feedback loop as both cause and victim of this failed price discovery.


5. The Structural Deflationary Paradox

The bottom line is this is all part of a readjustment that has profound consequences for society. What does a revolt against the displacement of the "real" entail? From a consumption standpoint it suggests a shift in focus, a change in patterns of accumulation and the valuation of material objects.

The proliferation of images, reproductions, the sheer volume and excess of signs, of choices, is itself deflationary, and this secular pattern is evident in everything from clothing and textiles to automobiles, home furnishings, technology and media. This is the structural deflationary paradox where the excess of signs and choices, an inflation of everything, literally, actually creates the conditions for imposing limitations and regulations upon the chaos of apparent freedom.

Deflation is simply the market's attempt to unwind and dismantle the confiscatory dominance of the inflationary regime. Inflation in the purest economic sense confiscates money, purchasing power, control. In the philosophical and social sense, however, inflation confiscates something else that will increasingly be valued above all other concepts or materials: Time.

No positions in stocks mentioned.

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