Thursday, November 17, 2011

The Interests of Global Elites Are Diverging

We are entering a period of profound political disunity as the interests of various Elites that were recently convergent are now diverging.

I have no "proof" of this conjecture, but there is increasingly abundant evidence that the interests of various global Elites are diverging. Like many other observers, I have tended to lump Power Elites into one class of convergent if not identical interests. But reality is looking more complicated now as the global financial system that has enabled and enriched all the various global Power Elites has fractured. As a result, convergence has reversed into divergence.

There are few neat delineations in this divergence, but we can draw some preliminary, speculative conclusions from the fracturing that is underway. Up through 2009 or so, the global Power Elites shared the common goal of reinflating the financial system with low interest rates, massive Central State stimulus, the purchase of depreciating private assets by Central Banks and abundant liquidity provided by the loyal apparatchiks in the Central Banks.

This was the shared goal of the People's Bank of China (PBoC), the U.S. Federal Reserve (the Fed), the European Central Bank (ECB) and various ancillary central states and banks controlled or influenced by the Power Elites.

The destruction of the U.S. dollar by the Fed was perhaps the first wedge that caused the interests of the U.S. Elites and China's Elites to diverge. Since the renminbi is pegged to the dollar, then its decline versus the yen and euro actually enhanced China's global competitiveness. So far so good: convergent interests.

But the Power Elite in China was split by the weakening dollar, as one group saw the decline in the value of China's vast stash of U.S. Treasuries as a loss of face internationally: the decline made China look like a chump, never mind the positive impact on China's competitiveness of the sagging dollar.

All of that was on the back burner, so to speak, until the eurozone's overindebtedness exploded into the global awareness in May 2010. Suddenly the liquidity/low interest rate/reinflate convergence of Elites split into camps with radically divergent interests.

The Fed/Politico camp that was counting on a depreciating dollar to revive exports and goose the "risk trade" flight to equities that powered the "stock market is rising, so everything's great" perception-management so beloved by politicos and Fed lackeys is now in full panic mode as the dollar rises and equities tank: bad news, indeed, for those bent on inflating equities by destroying the dollar.

The "Old Money" Anglo-American camp is not so-secretly delighted by the euro's implosion, as that leaves the yen, the dollar and even the pound as alternatives. And despite what the Fed/Politico camp believes, the Old Money knows that a strong currency is the backbone of global dominance, as that strength enables the owner of the currency to buy assets on the cheap when blood is running in the streets.

Japan's Elite is being crunched by two equally negative trends: the strengthening yen is decimating Japan's most profitable sector, the export/mercantilist corporations, while unfavorable demographics are eating away at the captive domestic pool of buyers of low-interest bonds. A stronger dollar would be manna from Heaven to this Elite, and they have made no secret about their willingness to intervene. Hey, it worked for the Swiss....

The Eurozone Elites are being balkanized along entirely predictable lines, with the "reflate at any cost to save my wealth and power" crowd running into the Panzer divisions of those wise enough to see that destruction of purchasing power and credibility is a death spiral for any Elite foolish enough to pursue that course.

Elites make mistakes, too; after all, they're not gods, they're human, and more prone to self-destructive hubris than the average Mark I model homo sapien sapien.

Various salvage operations are already underway, with Eurocrats being fitted for concrete boots to hasten their trip to Davy Jones Locker; the lifeboat only has room for a few, after all, and the Old Money now sees the entire euro contraption as a liability to be unwound or dumped overboard at the earliest possible convenience.

The New Power Elite that built its fortunes on the back of the eurozone are in full panic mode, and the absurd demand that sovereign nations relinquish their gold to the New Euro Power Elites was evidence of their desperation.

The gold stays put and the Old Money is in the process of shifting their remaining euro-based assets to other currencies. No wonder the yen is suddenly so mighty, and the universally loathed U.S. dollar has caught a bid.

While most assume the Fed is anxious to rescue its European brethren, that faith in confluence of interests might be misplaced. The Anglo-American Old Money that values the dominance that comes with a stronger dollar has little use for the academic toadies of the Fed, though they are happy to have the discount window open for carry trades and other amusements. That may be one reason why the Fed is acting spooked now, suddenly reticient in its grandiosity. It may be facing resistance from forces far beyond Ron Paul.

We may have to cede the Anglo-American Old Money their cloaked chortle. The Russian-Iranian-Chinese currency (or whatever mix-and-match is currently in favor) that was supposed to topple the dollar has been revealed as a fantasy, and Old Europe's bid for dominance is now a smouldering ruin of epic malinvestment and overindebtedness.

China's emerging Elite is splintering as well, as those seeking hegemony via an unpegged yuan are suddenly backpedaling as China's imploding housing/credit bubble has sparked a massive reversal of "hot money" out of China. That peg now seems like reasonable insurance to the less belligerent, more cautious camp. The grand irony, of course, is that the much-maligned stash of U.S. Treasuries may well gain in value.

China's various Elites do retain one convergent interest, of course: securing a bug-out route out of China to a compound in Canada or the U.S. and a second passport for their spoiled-rotten offspring. I suspect Europe has fallen out of favor recently, with the exception of every despot's favorite hideaway, Switzerland.

To the victor go the spoils, and the divergence of Elites' interests will leave some camps marginalized and others ascendent. Old Money has always loved land, rentier incomes and gold, of course, but global political dominance flows from a strong global currency. If there is an historical example of a global Elite gaining (or regaining) dominance with a rapidly depreciating currency, I have never come across it. On the other side of the ledger, history is replete with Empires built on stable, strong currencies that enable the purchase of real assets on the cheap, especially in unstable times.

Nobody knows the future, but I suspect those who are convinced the Anglo-American Elites will somehow benefit if the dollar plummets toward zero while the euro regains its footing or a free-floating yuan rises to dominance might not grasp the convergence of Elites, global Empire, banking and a strong currency. Grand alliances and dreams of dominance both fracture when the interests of Elites diverge.

Elites and currencies both rise and decline. While some would argue that we will always have Elites, the composition of those Elites changes. And Elites are not immune to the erosion of the nation-states or Empires that enable their power; when Rome fell, so too did its numerous Elites. Life goes on, but some who reckoned that their wealth and power were permanent will find that nothing is permanent.

My "On the Edge" interview with Max Keiser is now online. Fortunately for me, Max keeps the ball rolling and succinctly summarizes my rambling. Good fun in Paris--thank you, Max and Stacy, for the opportunity to spend some time with you.

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