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Belief in no growth – What’s a Billionaire to do? [Part II]


Pete Peterson.

Made much money on assembling bad loan bonds and then taking position that the loan bonds would drop in value.

Demonstrated both a proactive role (assembling the bonds) and a profit taking role (taking positions against the bonds).

Pete Peterson (Money) has invested $500,000,000 in austerity, deflation (cutting government) over the past 10 years. What does he expect as a return for his investment? Where is his money invested?


Earlier we suggested that our dear beloved leaders’ major influencers (paymasters) believe there is little growth possible in the world’s economy.

We now develop this idea in the light of our recent history, the “dot com” crash, the Bush Bubble, the US 21st Century Wars, and the current depression/deflationary cycle.

Let’s first state that we don’t believe this was all planned. It’s just not possible to predict or plan the future that accurately. We do believe there is much money watching events, and making plans to maximize profit by taking advantage of events as they unfold.

The “dot com” bust was a combination of “dot com” hype and Y2K remediation. Capital budgets for IT in large companies are typically 6-8% of the corporate capital budget. In the “dot com” year this rose to over 40% for equipment purchases to replace equipment that was either “out of warranty” or not “Y2K-compliant.”

In other words: the vendors raped their customers for short term gain. We saw equipment replaced (for example: LAN Hubs and switches) that could not cause failure even if they were not Y2K-compliant. Unix machines that could not possibly cause application issues, because there were no date-critical programs running on these machines. Vendors took the opportunity to sell new versions of their hardware, certifying the new versions but not the old ones, as “Y2K-compliant.” IT departments often felt forced to buy the new hardware, because if they continued using the old equipment and something – i.e. anything – went wrong, they could get blamed for not getting the ‘certified compliant’ equipment. In effect, they spent money from future budgets in order to avoid being blamed by their bosses.

The consequence of the vendors’ gluttony was that Capital Budgets were set to zero in 2002 through about 2005. If an equipment vendor did not have a healthy services revenue stream, they went out of business (for example: Nortel).

The Bush wars: Faced with a recession, what’s the best growth policy? Government Spending. What’s the Republican Growth policy (hint, it’s not social programs, nor infrastructure). Wars perhaps?

Wars are not very effective in growing the economy, because all the spending is effectively expense, with very little return on investment. The same money, invested in infrastructure, especially at recession-level prices, would have creating all manner of systems (high speed rail, non-oil based energy, etc) which could be used for the next 30 to 50 years. Bombs, bullets and guns? Expenses, yes, but, no return on the money expended.

The housing bubble. Created by the Bush administration at the highest levels to generate a “feel good” economy for Bush’s 2004 reelection. The Bush administration knew there would be a crash, and in our opinion tried to kick the can down the road for the subsequent administration. The lesson here is that chaotic events are not schedulable. One has to remain cool and collected and not rock the boat, a lesson well learned by the Obama administration.

Two points from the previous paragraph:

1. Because the housing bubble was driven top-down by the Executive part of the US government, everybody was complicit. The Executive Government Branch, all the Regulators, all members of Congress, including those who received “campaign contributions” from the Banks during the bubble, seem to have collectively felt the need to be silent as to the housing bubble’s consequences. All of them seem to have decided to “look forward not backward,” because any other decision might put them, or their friends, in a very difficult legal position.

2. “Be Calm, Cool, and Collected and don’t rock the boat,” is the Obama administration’s management style, a style which is beneficial if one wants to deflect as much blame as possible. The three-envelope joke illustrates this style very well.

The Current Depression and Austerity

We believe the monied class does not believe in much future growth for North America and Europe. Many mineral resources are close to peak production, and there is no future untapped supply of many minerals known. Moreover, we seem to be in an enormous hurry to exploit all the available resources as quickly as we can dig them up.

We don’t believe much growth is possible either. A 4% compound growth rate would double the world’s economy in 18 years. Quadruple the worlds economy in 36 years. To us, it is inconceivable that we can produce 4 times as much energy as we do today to fuel that growth. That kind of exponential growth would mean that in the next 36 years mankind would consume more energy that is has consumed since the last ice age. There simply isn’t that much energy available. We’ve hit a hard limit.

In that scenario, what’s a person with money to do?

We believe that money will choose to do two things:

1. Prepare for deflation (inflation requires growth)
2. Influence our leaders to get policies that are deflationary.

Let’s test this a little, for we too are skeptical, and do not like “conspiracy theories.” The scientific method is to create a hypothesis, then test it. Let’s first develop a test scenario, then we’ll discuss the actual test itself.

First (until the Greeks and France rocked the boat, and we will have to wait to determine the outcomes of these recent elections) there appears to be amazing unanimity on “Austerity” being the only path forward. Second, there has been little mention of Growth. Third, the message of Modern Monetary Theory was completely ignored (it does not appear in discussions among ‘the good and the great’) which leads to the impression that is is not discussed because of some degree of active denial (aka: “We do not want to hear that. Shoot the messenger.”)

We suspect a common influence. We postulate that it’s money seeking the best return.

If the monied class does not believe in future growth, return of money (fear of loss) becomes more important than return on money (profit). Fear of loss is the greatest motivation for those who have something to lose, and the more there is to lose the greater the fear, becoming a paranoia eventually. Money can relieve some problems, but all humans are capable of becoming unbalanced and making bad decisions. The rich are not immune to human frailty merely because of their money. We also know there is no correlation between increasing wealth and increasing intelligence.

Thus, the question becomes: “What can one do to protect the purchasing power of their wealth?” Or, what does not depreciate, especially is deflationary times? Answer: Debt. Especially Sovereign (Government issued) debt or in Modern Monetary Theory Terms, interest paying money.

You give your money to the Government, and the Government is most likely to honor the debt, and pay you interest. In addition in deflationary times, this debt increase in face value, not only is interest paid, but the debt consumes the assets of the debtors (the people), which are surrendered to the money at a discount to service the debt. You get wealth preservation and wealth increase, in the same package. All you have to do is ensure that the government accedes to your desires, and that the government does not change or go bankrupt. Of course, these two caveats may be difficult to overcome. You have to make some really difficult choices, and you have to live with the results.

So, how could you do this? Let’s think about this for a minute. What policy famously causes deflation? Austerity. In a difficult economic climate, governmental austerity compounds the problems. It puts people out of work, causes small businesses to fail, and the resulting social money shortages causes deflation as people who become unemployed try to sell things of value (such as houses) in a market where many don’t have enough money to buy them. That drives prices down further, which causes more (small) business failures and higher unemployment, which causes affected people to try to sell their assets, driving prices down in a market where there are more sellers than buyers. Austerity causes a downward spiral. If your government is preaching austerity, check who they are really working for.

If a wealthy person has bet their wealth on austerity as a means of surviving and increasing their money, what is the worst scenario for them? Inflation (especially growth-driven inflation) as it results in loss of purchasing power due to inflation, and loss of earnings because their money is not invested in growth. They’ve bet all their chips that the economy will collapse, due to austerity and its downward pressure on prices, wages, and jobs.

OK, that’s the hypothesis. Now let’s discuss a test (Others also apply, we’d be very interested in an analysis of billionaires current investment plans):

Pete Peterson.

Made much money on assembling bad loan bonds and then taking position that the loan bonds would drop in value.

Demonstrated both a proactive role (assembling the bonds) and a profit taking role (taking positions against the bonds).

Pete Peterson (Money) has invested $500,000,000 in austerity, deflation (cutting government) over the past 10 years. What does he expect as a return for his investment? Where is his money invested?

Others who could be examined:

The Koch brothers.
Sheldon Adelson.
John Paulson

What are they doing with their money?

Our test methodology is to look at the biggest supporters of austerity – billionaires – and ask: How will they get both a return of capital and a return on capital with the policy they espouse?

Forget the politicians, they will do what they are paid to do.

When planning for deflation, austerity is the plan.

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