Financial Planning in a Neo-Feudalistic World

Toto, I don’t think we’re in Disneyland anymore.

Indeed, we are not.  And, this term “neo-feudalism” (along with neo-colonialism) serves reasonably well to describe the state of the financial realm in this modern age, as aptly detailed by Charles Hugh Smith in a recent post.

In a nutshell: “peripheral nations…are effectively neocolonial debtors of the Core countries’ banks, and the taxpayers of the Core nations are now feudal serfs whose labor is devoted to making good on any bank loans to the periphery that go bad.”  In either circumstance, serfs pay tribute to their financial masters either through direct taxation or through indirect devaluation of the currency, the now de rigueur manner of extracting payment ad libitum, which is to say, in this instance, without your consent. 

While we might ponder the morality of such a system (as others have more ably done), I am more concerned today with the rather more mundane and practical implications of surviving the imminent collapse of – if not the system itself – then, more certainly, the mistaken illusion that – like Disneyland – it somehow works for our (i.e. “the people’s)  benefit.  But, then again, if your own theme park (or Las Vegas) excursions tend to end in some combination of dysphoric bloat and impoverishment, perhaps it is all too similar.  As always, your mileage may vary.

Regardless, the fundamental trick of this system has always been – and continues to be – the management of debt (or, rather, of leverage), in the course of converting or exchanging paper assets for real assets and vice versa.   Paper (or promissory) assets, you see, are the nominal coin of the realm, and are only useful to the extent that they may be converted to actual things or, otherwise, serve as a store of future purchases.  Since ALL such promissory assets are debt instruments, their convertibility (and, hence, their value) will always and everywhere be a directly reflection of the risk of their repayment.

So, really, I don’t care whether we’re talking about insurance, annuities, stocks, bonds, or actual cash, both digital and actual paper.  All such instruments – and their “value” – depends wholly on the viability of the debtor to repay.  Since all such assets (not to mention your personal tax liabilities) reflect notional valuations in dollar terms, at the end of the day, it is really only the dollar that concerns us here.

And, the fundamental truth of the neo-feudalistic dollar is simply this: it is really hard (for the serfs at least) to get and even harder to keep, meanwhile being rather cheaply produced in infinite quantities by and for those who control the printing press.  And, while cheap credit has baited many onto the hook of debt servitude, it has been the primary food source in our pond for many decades.   And, as with any contraction of credit, we are now living in a pond with very little real food.

In most economic circles, this condition is known as a recession or, alternatively, a depression, depending on the metrics you apply.  All those who argue otherwise must still concede that any nominal growth that is now occurring depends utterly on the devaluation/dilution of the debt-backed dollar and it’s distribution through federal deficit spending and various (mostly banking system) bailout schemes.   It is not, in my humble opinion, hyperbole to characterize this as the mass cannibalization of any and all financial instruments and, thus, of the notional value of virtually all (but not entirely all) asset classes.

The conundrum pondered by many analysts in recent years has been focussed in the debate over inflation and deflation.  Revisiting this subject recently, Keith Weiner of the New Austrian School of Economics, references one of the more useful – and now somewhat prescient – theoretical discussions of Antal Fekete from 2007, which considered – among other things – the impact of the negative discount rate and the inverted Exeter pyramid, as depicted below.

For the uninitiated, the concept here is really quite simple.  In effect, the notional value of any financial instrument is a function of the confidence or trust imparted to the payer.  Thus, the inverted pyramid depicts not only the risk of default, but – typically, also the relative supply of each class of instrument.  As Weiner (and Fekete) asserts, when interest rates “go negative”, what the market is saying is that they’d really rather have cash than any kind of promise to repay the obligation in the future.

Classically, this condition presents quite a dilemma for investors.  The more typical encouragement to take on debt is amped up in the face of rising default risk.  At the same time, saving is strongly discouraged.  Caught in the middle, the average investor (presumably those remaining yet with available capital) must then choose between steadily losing ground (only somewhat, perhaps only temporarily without risk) or gambling big on much riskier assets.

It must also be noted that the backdrop for all of this is the continuing evolution of what amounts to a global currency war (see the this earlier post’s interview with Jim Rickards).  In this war, our monetary masters have devoted themselves, of necessity now, to devalue and inflate away the massive debt obligations at all levels of the economy.  This goal, unfortunately, reflects a target that is in constant motion as our competitors also devalue, a process that has the tendency to get quite “nasty”, as Rickards notes, and one which has the potential to utterly destroy most, if not all, paper instruments in the end.

Which, more or less, brings us to the present day….what some might characterize as having achieved global terminal velocity in the end-game of this process.  (For a more developed view of how this “Stage 5” bond bubble is progressing, I highly recommend Grant Williams recent take on the subject.)

In the end, any financial planning that can be managed in such an environment will necessarily require the eventual repudiation of all paper instruments (held as assets, certainly)  in favor of harder (and/or more utilitarian) assets.  Depending on your economic circumstances, that may be food stores, tools, a fuel-efficient car, a smaller home, a rented home, farmland, and, yes, gold and silver.

Conversations with many others (including my wife) about the handling of mortgage debt have led me to a new position on “the housing question”, which I’d like to explore in more detail in a later post.  Suffice it to say, for now, that we ought to look at our housing finance parameters merely as a way of managing a long-term lease or, for the wealthier among us, a chance to achieve a 3% yield on a, likely, depreciating asset.  Only you know if you’re wealthy enough to afford such a luxury.

The final (and really most important) challenge…something we all ought to have been thinking very diligently about over the past four years….is what we might do to enhance our ability to preserve, enhance, and protect the value of our labor….yet another topic for another day.  – HT


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