Third Wave Politics: Failing Nation States and the Growing Secession Movement

Industrial age centralized governments will pave way for decentralization.

In the observation of Europe Day Sovereign Man’s Simon Black writes:   (bold mine)

But what is true is that European imperialists conjured entire nations in Africa out of thin air from their palaces in Brussels, Paris, and London.

And all of this was done without any regard for ethnic, linguistic, religious, and historical divisions among the various tribes that inhabited Africa.

But what few people realize is that Europe is no different.

Think about it—the United Kingdom consists of England, Wales, Scotland, and Northern Ireland lumped together in a political union.

Each is entirely different from the others. And secessionist movements are alive and well. 

Scotland will hold a referendum about its independence in September. And the troubles in Northern Ireland have plagued the region for decades. 

Belgium is a completely artificial country, and the Flemish are actively pursuing independence from the Walloons. 

In the late 19th century, Germany and Italy were both unified into modern countries from diverse fiefdoms and city-states with strong regional identities.

Those regional identities are still present today. Just a few weeks ago, a vote was held in Venice over independence for the wider region. 

The Basque separatist movements in Spain are stronger than ever. The Balkans were an absurd experiment. I could go on and on.

Europe is the best example that borders and countries are completely arbitrary. 

They are created to serve one purpose—consolidating authority over a piece of land and the people living upon it. 

Today just happens to be “Europe Day”, a holiday in which Europeans are supposed to commemorate the Schuman Declaration that jumpstarted today’s European Union. 

This is a continent that has a long history of constantly going to war with itself.

They slapped lines on a map, formed some new countries, and expected that everything would be OK.

Then they made those lines even broader when they consolidated everything into the European Union. And EU politicians are trying to make things even bigger.

History shows that when economic times are good, people are happy about unity. 

But when times are tough as they are now, divisions start creeping up. People look around and say “this system isn’t working”. 

They demand change. Sometimes violently. And we would be foolish to presume that this time is any different.

The immediate avenue for this conflict to play out is still through peaceful means—referendums and the rise of nationalist and Eurosceptic political parties. 

But it’s clear that the trend is to get smaller, not bigger. And for the system to change entirely. 

Like feudalism before it, the nation state is a failed experiment that will ultimately be replaced. It’s already happening. 

Pls continue to read here 

I previously noted that growing secession movements marks the “gradual confirmation of the predictions of futurist Alvin Toffler as elucidated in his highly prescient 1980 book, The Third Wave (p.317)

National governments, by contrast, find it difficult to customize their policies. Locked into Second Wave political and bureaucratic structures, they find it impossible to treat each region or city, each contending racial, religious, social, sexual or ethnic group differently, let alone treat each citizen as an individual. As conditions diversify, national decision-making remains ignorant of the fast-changing local requirements. If they try to identify these highly localized or specialized needs, they wind up deluged with overdetailed, indigestible data…

In consequence, national governments in Washington, London, Paris or Moscow continue, by and large, to impose uniform, standardized policies designed for a mass society on increasingly divergent and segment publics. Local and individual needs are forgotten or ignored causing the flames of resentment to reach white heat. As de-massification progresses, we can expect separatist or centrifugal forces to intensify dramatically and threaten the unity of many nation-states.

The Third Wave places enormous pressures on the nation-state from below.

Bursting bubbles will only compound on such trend.

Third Wave Politics: Secessionist Parties in Spain Gains Political Footing

In the information age, forces of decentralization will function as the key agents of social change.

In the realm of politics, such evolutionary transition will likely be channeled through secessionist movements.

In Spain, the secessionist parties of Catalonia may have just gotten the momentum that could trigger a potential chain of events.

From Bloomberg,

Pro-independence parties in Catalonia won a regional vote, strengthening a drive for a referendum on secession in defiance of Spanish Prime Minister Mariano Rajoy.

Catalan President Artur Mas, who called early elections to force the debate on independence, won 50 of the 135 seats in the regional assembly for his Convergencia i Unio party, down from 62, with 99 percent of the vote counted. The separatist Catalan Republican Left, known as the ERC, more than doubled its seats to 21 from 10. Two smaller parties that also back a plebiscite secured 16 seats.

Rajoy, weakened by recession and speculation that Spain needs a European bailout, says a referendum on secession is unconstitutional. Mas’s losses showed his bid for a mandate backfired, leaving him dependent on anti-austerity separatists to govern Spain’s largest regional economy.

“With a majority, Mas could have negotiated for all kinds of goodies to postpone the referendum but clearly that’s not an option anymore,” Ken Dubin, a political scientist at Carlos III University and IE business school in Madrid. “He was hoping he’d have a stronger hand to negotiate some intermediate status, but his bluff has been called.”

Rajoy’s People’s Party won 19 seats, a gain of one. The Socialists took 20 seats, down from 28.

Mas has pledged a referendum within four years. In contrast, the ERC would be willing to declare independence unilaterally in 2014.

The above developments reminds me of, and appear as gradual confirmation of the predictions of futurist Alvin Toffler as elucidated in his highly prescient 1980 book, The Third Wave (p.317)

National governments, by contrast, find it difficult to customize their policies. Locked into Second Wave political and bureaucratic structures, they find it impossible to treat each region or city, each contending racial, religious, social, sexual or ethnic group differently, let alone treat each citizen as an individual. As conditions diversify, national decision-making remains ignorant of the fast-changing local requirements. If they try to identify these highly localized or specialized needs, they wind up deluged with overdetailed, indigestible data…

In consequence, national governments in Washington, London, Paris or Moscow continue, by and large, to impose uniform, standardized policies designed for a mass society on increasingly divergent and segment publics. Local and individual needs are forgotten or ignored causing the flames of resentment to reach white heat. As de-massification progresses, we can expect separatist or centrifugal forces to intensify dramatically and threaten the unity of many nation-states.

The Third Wave places enormous pressures on the nation-state from below.

It is happening.

Will Urbanization Save China’s Capital Spending Bubble?

Mr. Stephen Roach, Chairman of Morgan Stanley Asia, writing at the Project Syndicate thinks so,

Reports of ghost cities, bridges to nowhere, and empty new airports are fueling concern among Western analysts that an unbalanced Chinese economy cannot rebound as it did in the second half of 2009. With fixed investment nearing the unprecedented threshold of 50% of GDP, they fear that another investment-led fiscal stimulus will only hasten the inevitable China-collapse scenario.

But the pessimists’ hype overlooks one of the most important drivers of China’s modernization: the greatest urbanization story the world has ever seen. In 2011, the urban share of the Chinese population surpassed 50% for the first time, reaching 51.3%, compared to less than 20% in 1980. Moreover, according to OECD projections, China’s already burgeoning urban population should expand by more than 300 million by 2030 – an increment almost equal to the current population of the United States. With rural-to-urban migration averaging 15 to 20 million people per year, today’s so-called ghost cities quickly become tomorrow’s thriving metropolitan areas.

Shanghai Pudong is the classic example of how an “empty” urban construction project in the late 1990’s quickly became a fully occupied urban center, with a population today of roughly 5.5 million. A McKinsey study estimates that by 2025 China will have more than 220 cities with populations in excess of one million, versus 125 in 2010, and that 23 mega-cities will have a population of at least five million.

China cannot afford to wait to build its new cities. Instead, investment and construction must be aligned with the future influx of urban dwellers. The “ghost city” critique misses this point entirely.

All of this is part of China’s grand plan. The producer model, which worked brilliantly for 30 years, cannot take China to the promised land of prosperity. The Chinese leadership has long known this, as Premier Wen Jiabao signaled with his famous 2007 “Four ‘Uns’” critique – warning of an “unstable, unbalanced, uncoordinated, and ultimately unsustainable” economy.

I have deep respect for Mr. Stephen Roach but I think his “urbanization” argument hardly distinguishes from the other public work projects such as infrastructure and transportation. They are all anchored on justifications of centrally planned interventions that presupposes omniscience or the superiority of knowledge of political authorities, as well as, the incontrovertibility of such trends (which for me accounts as the folly of reading past trends into the future; or “fighting the last war”).

In short, urbanization, based on government design, seems like a lipstick on a pig.

Urbanization according to Wikipedia is closely linked to modernization, industrialization, and the sociological process of rationalization.

Urbanization is characterized by, again Wikipedia.org

Cities are known to be places where money, services and wealth are centralized. Many rural inhabitants come to the city for reasons of seeking fortunes and social mobility. Businesses, which provide jobs and exchange capital are more concentrated in urban areas. Whether the source is trade or tourism, it is also through the ports or banking systems that foreign money flows into a country, commonly located in cities.

Urbanization in reality are symptoms of the 20^th century model of intertwined centralized social activities based on mass production, mass media and markets which drew development and population to urban areas that paved way for the age of urbanization.

But are we still in the industrial age or are we shifting to the information age?

While Urbanization has still been an ongoing phenomenon, signs are that current centralized trends have been shifting.

For instance in China, demographic trends show that population and development has been moving inland. This may be partly due to government projects, China’s spontaneous economic response to the unfolding events around the world and the alleged reshaping or “rebalancing” of China’s economy (The Economist)

But what mainstream seem to ignore is that mass production has been transitioning towards specialization, which is why Asia became a supply chain network.

Moreover, future trends points to home based production for simple products (3-D printing anyone?)

Chart from KPCB’s Mary Meeker

Decentralized social media via the internet has also been challenging mass media. In terms of advertising, mobile and internet have been dramatically gaining at the expense of Radio and Print. Even revenue growth from ads on TV has been stagnating.

Also, mass markets are being turned into niche or specialty markets.

Specialization of production and niche markets has led to grassroots development.

Proof?

The expansion of the booming Business Process Outsourcing has not only been within cities but to secondary cities and to rural areas as well. This applies both to India and the Philippines.

As I previously wrote,

Also business focus will increasingly be directed to specific needs (niche marketing) rather than mass production and also on where the consumers and markets are.

In the Philippines, shopping malls have sprouted not only in major cities but also in capitals of provinces or secondary cities. Take for example the largest shopping mall chain the SM Group which has 43 malls nationwide and growing. This is a noteworthy example of the deepening dispersion trends, where facilities have been mushrooming outside of mega cities.

I might add that SM has reportedly been targeting rural or provincial areas for expansion due to a booming agricultural economy and has been on a land-buying binge in Bacolod, Tacloban, Baguio, Bulacan, and Laguna, Quezon and Pangasingan.

Of course the agriculture economy has been part of the boom, but as noted above, even BPOs are headed towards rural areas. There may also be other telecommuters or home based technology businesses, aside from the large informal economy and remittance based income.

What the point?

Decentralization is bound to upend centralized based social activities of the 20th century

As the prescient Alvin Toffler wrote in Third Wave (p. 298-299)

The Third wave alters our spatial experience by dispersing rather than concentrating population. While millions of people continue to pour into urban areas in the still industrializing parts of the world, all the high technology countries are already experiencing a reversal of this flow. Tokyo, London, Zurich, Glasgow, and dozens of other major cities are all losing population while middle-sized or smaller cities are showing gains…

This redistribution of and de-concentration of population will, in due time, alter our assumption and expectations about personal as well as social space about commuting distances, about housing density and many other things.

This has gradually been happening today.

Bottom line: Urbanization will unlikely save China’s Keynesian centrally planned capital spending boom from turning into a bust.

Doug Casey: End of the Nation State

Investing guru, and anarchist philosopher Doug Casey believes that today’s nation states is on path to the dinosaur age

Mr. Casey writes at the Casey Research, (bold highlights mine)

Mankind has, so far, gone through three main stages of political organization since Day One, say 200,000 years ago, when anatomically modern men started appearing. We can call them Tribes, Kingdoms, and Nation-States.

Karl Marx had a lot of things wrong, especially his moral philosophy. But one of the acute observations he made was that the means of production are perhaps the most important determinant of how a society is structured. Based on that, so far in history, only two really important things have happened: the Agricultural Revolution and the Industrial Revolution. Everything else is just a footnote.

Let's see how these things relate.

The Agricultural Revolution and the End of Tribes

In prehistoric times, the largest political/economic group was the tribe. In that man is a social creature, it was natural enough to be loyal to the tribe. It made sense. Almost everyone in the tribe was genetically related, and the group was essential for mutual survival in the wilderness. That made them the totality of people that counted in a person's life – except for "others" from alien tribes, who were in competition for scarce resources and might want to kill you for good measure.

Tribes tend to be natural meritocracies, with the smartest and the strongest assuming leadership. But they're also natural democracies, small enough that everyone can have a say on important issues. Tribes are small enough that everybody knows everyone else, and knows what their weak and strong points are. Everyone falls into a niche of marginal advantage, doing what they do best, simply because that's necessary to survive. Bad actors are ostracized or fail to wake up, in a pool of their own blood, some morning. Tribes are socially constraining but, considering the many faults of human nature, a natural and useful form of organization in a society with primitive technology.

As people built their pool of capital and technology over many generations, however, populations grew. At the end of the last Ice Age, around 12,000 years ago, all over the world, there was a population explosion. People started living in towns and relying on agriculture as opposed to hunting and gathering. Large groups of people living together formed hierarchies, with a king of some description on top of the heap.

Those who adapted to the new agricultural technology and the new political structure accumulated the excess resources necessary for waging extended warfare against tribes still living at a subsistence level. The more evolved societies had the numbers and the weapons to completely triumph over the laggards. If you wanted to stay tribal, you'd better live in the middle of nowhere, someplace devoid of the resources others might want. Otherwise it was a sure thing that a nearby kingdom would enslave you and steal your property.

The Industrial Revolution and the End of Kingdoms

From around 12,000 B.C. to roughly the mid-1600s, the world's cultures were organized under strong men, ranging from petty lords to kings, pharaohs, or emperors.

It's odd, to me at least, how much the human animal seems to like the idea of monarchy. It's mythologized, especially in a medieval context, as a system with noble kings, fair princesses, and brave knights riding out of castles on a hill to right injustices. As my friend Rick Maybury likes to point out, quite accurately, the reality differs quite a bit from the myth. The king is rarely more than a successful thug, a Tony Soprano at best, or perhaps a little Stalin. The princess was an unbathed hag in a chastity belt, the knight a hired killer, and the shining castle on the hill the headquarters of a concentration camp, with plenty of dungeons for the politically incorrect.

With kingdoms, loyalties weren't so much to the "country" – a nebulous and arbitrary concept – but to the ruler. You were the subject of a king, first and foremost. Your linguistic, ethnic, religious, and other affiliations were secondary. It's strange how, when people think of the kingdom period of history, they think only in terms of what the ruling classes did and had. Even though, if you were born then, the chances were 98% you'd be a simple peasant who owned nothing, knew nothing beyond what his betters told him, and sent most of his surplus production to his rulers. But, again, the gradual accumulation of capital and knowledge made the next step possible: the Industrial Revolution.

The Industrial Revolution and the End of the Nation-State

As the means of production changed, with the substitution of machines for muscle, the amount of wealth took a huge leap forward. The average man still might not have had much, but the possibility to do something other than beat the earth with a stick for his whole life opened up, largely as a result of the Renaissance.

Then the game changed totally with the American and French Revolutions. People no longer felt they were owned by some ruler; instead they now gave their loyalty to a new institution, the nation-state. Some innate atavism, probably dating back to before humans branched from the chimpanzees about 3 million years ago, seems to dictate the Naked Ape to give his loyalty to something bigger than himself. Which has delivered us to today's prevailing norm, the nation-state, a group of people who tend to share language, religion, and ethnicity. The idea of the nation-state is especially effective when it's organized as a "democracy," where the average person is given the illusion he has some measure of control over where the leviathan is headed.

On the plus side, by the end of the 18th century, the Industrial Revolution had provided the common man with the personal freedom, as well as the capital and technology, to improve things at a rapidly accelerating pace.

What caused the sea change?

I'll speculate it was largely due to an intellectual factor, the invention of the printing press; and a physical factor, the widespread use of gunpowder. The printing press destroyed the monopoly the elites had on knowledge; the average man could now see that they were no smarter or "better" than he was. If he was going to fight them (conflict is, after all, what politics is all about), it didn't have to be just because he was told to, but because he was motivated by an idea. And now, with gunpowder, he was on an equal footing with the ruler's knights and professional soldiers.

Right now I believe we're at the cusp of another change, at least as important as the ones that took place around 12,000 years ago and several hundred years ago. Even though things are starting to look truly grim for the individual, with collapsing economic structures and increasingly virulent governments, I suspect help is on the way from historical evolution. Just as the agricultural revolution put an end to tribalism and the industrial revolution killed the kingdom, I think we're heading for another multipronged revolution that's going to make the nation-state an anachronism. It won't happen next month, or next year. But I'll bet the pattern will start becoming clear within the lifetime of many now reading this.

What pattern am I talking about? Once again, a reference to the evil (I hate to use that word too, in that it's been so corrupted by Bush and religionists) genius Karl Marx, with his concept of the "withering away of the State." By the end of this century, I suspect the U.S. and most other nation-states will have, for all practical purposes, ceased to exist.

The Problem with the State – and Your Nation-State

Of course, while I suspect that many of you are sympathetic to that sentiment, you also think the concept is too far out, and that I'm guilty of wishful thinking. People believe the state is necessary and – generally – good. They never even question whether the institution is permanent.

My view is that the institution of the state itself is a bad thing. It's not a question of getting the right people into the government; the institution itself is hopelessly flawed and necessarily corrupts the people that compose it, as well as the people it rules. This statement invariably shocks people, who believe that government is both a necessary and permanent part of the cosmic firmament.

The problem is that government is based on coercion, and it is, at a minimum, suboptimal to base a social structure on institutionalized coercion. I'm not going to go into the details here; I've covered this ground from a number of directions in previous editions of this letter, as well as in Crisis Investing (Chap.16), Strategic Investing (Chap. 32), and, most particularly Crisis Investing for the Rest of the '90s (Chap. 34). Again, let me urge you to read the Tannehills' superb The Market for Liberty, which is available for download free here.

One of the huge changes brought by the printing press and advanced exponentially by the Internet is that people are able to readily pursue different interests and points of view. As a result, they have less and less in common: living within the same political borders is no longer enough to make them countrymen. That's a big change from pre-agricultural times when members of the same tribe had quite a bit – almost everything – in common. But this has been increasingly diluted in the times of the kingdom and the nation-state. If you're honest, you may find you have very little in common with most of your countrymen besides superficialities and trivialities.

Ponder that point for a minute. What do you have in common with your fellow countrymen? A mode of living, (perhaps) a common language, possibly some shared experiences and myths, and a common ruler. But very little of any real meaning or importance. To start with, they're more likely to be an active danger to you than the citizens of a presumed "enemy" country, say, like Iran. If you earn a good living, certainly if you own a business and have assets, your fellow Americans are the ones who actually present the clear and present danger. The average American (about 50% of them now) pays no income tax. Even if he's not actually a direct or indirect employee of the government, he's a net recipient of its largesse, which is to say your wealth, through Social Security and other welfare programs.

Over the years, I've found I have much more in common with people of my own social or economic station or occupation in France, Argentina, or Hong Kong, than with an American union worker in Detroit or a resident of the LA barrios. I suspect many of you would agree with that observation. What's actually important in relationships is shared values, principles, interests, and philosophy. Geographical proximity, and a common nationality, is meaningless – no more than an accident of birth. I have much more loyalty to a friend in the Congo – although we're different colors, have different cultures, different native languages, and different life experiences – than I do to the Americans who live down the highway in the trailer park. I see the world the same way my Congolese friend does; he's an asset to my life. I'm necessarily at odds with many of "my fellow Americans"; they're an active and growing liability.

Read the rest here.

When we follow the money, we will come to realize that the evolution of political economic dynamics have already been indicative of the impending degeneracy and forthcoming obsolescence of the incumbent nation (welfare-warfare) states.

The foundations of the industrial age political system, which operates on a modern day industrial age (top-down) platform based on modified parasitical relationship via “democracy”, is apparently being gnawed by internal structural incoherence, systemic flaws and its rigidity or failure to adjust or adopt with changes of technology, market trends, environment and time.

The manifestations of which has been today’s self perpetuating financial crisis. Eventually self-fulfilling debt based collapse will likely culminate the end of the nation (welfare-warfare) state.

The deterioration of nation state will be compounded by rapid advances in technology where the information age will continue to usher in dramatic and radical changes in commerce and social lifestyles.

Where the printing press destroyed the “monopoly” of knowledge held by the elite, the advent of the internet connectivity, which has paved way for the emergence of geographically noncontiguous communication (information not limited by space or vicinity of one’s physical reach), has been neutralizing the top-down flow of communications emanating from the current construct of political institutions. That’s why centralized government have frantically been waging war with the web, desperately trying to censor and regulate the flow of information

Horizontally flow of communications has been democratizing information which should lead to the Hayekean knowledge revolution. And consequently, the knowledge revolution will provide the ideological underpinning for the transition towards decentralized societies.

The transformation may not be smooth nor peaceful, as there are multitudes of entrenched interest groups living off or benefiting from the current system. But again, unsustainable systems simply won’t last.

Along with visionary author Alvin Toffler, Professor Gary North, Professor Butler Shaffer and guru Doug Casey, I do share the view that decentralization’s ball has began rolling.

How Empires Die and the End of Centralization

Professor Gary North has a splendid article on the coming end of the empire states and of the centralized form of governments…

Death of the Empire

Empires disintegrate. This is a social law. There are no exceptions.

The first well-known social theorist to articulate this law was the prophet Daniel. He announced it to King Nebuchadnezzar. You can read his analysis in Daniel 2. Verses 44 and 45 are the key to understanding the law of empires.

The Roman Empire is the model. But there is a serious problem here. There are at least 210 theories of why it fell. There are so many that even my 1976 Ron Paul office colleague Bruce Bartlett gets credit for one of them – on Wikipedia, no less. He has made the big time!

In any case, Rome did not collapse. It wasted away over several centuries, wasting the treasure of its citizens along with it.

I suppose there were highly educated people who came to the voters in the late Roman republic and said something like this: "Unless decisive action is taken now, Rome will go bankrupt." If so, they were right. But it took a lot longer than they thought.

These days, it does not take nearly so long.

An empire grows at first almost unconsciously. No one goes to the powers that be and says, "Hey! Why don't we create an empire?" It is more like the person who says this: "I'm not greedy. All I want is to control the land contiguous to mine."

In military affairs, there are economies of scale. An army of warriors makes conquest cost-effective. There are also taxation advantages. An army of tax collectors makes tax collection cost-effective. "Hand over your money" is more effective. Pretty soon, you've got an empire.

But there is a law of bureaucracy that applies to empire. At some point, it costs more to administer the bureaucracy than the bureaucracy can generate through coercion. Then the empire begins to crack. It cannot enforce its claims.

So, the growth of empire has economics at its center: economies of scale. The fall of empire also has economics at its center: economies of scale.

I think this process is an application of the law of increasing returns. In the initial phase of the process, adding more of one factor increases total output. But, as more of it is added, another law takes over: the law of decreasing returns.

Example: water and land. Add some water to a desert, and you can grow more food. Add more water, and you can grow a lot more food. There is an accelerating rate of returns. The joint output is of greater value than the cost of adding water. But if you keep adding water, you will get a swamp. The law of decelerating returns takes over. Add more water, and the land is underwater. You might as well have a desert.

This law applies to power. Add power, and you generate more income. But if you keep adding power, expenses of the bureaucracy will begin to eat up revenues. Resistance will also increase: internal and external. The system either implodes or withers away.

With only one exception in history – the Soviet Union in 1991 – empires have not gone out of business without bloodshed.

In the case of the Soviet Union, the senior politicians privatized the whole system in December 1991. They handed over the assets to what immediately became the ultimate system of crony capitalism. They divvied up the Communist Party's money and deposited it in individual Swiss bank accounts. The suicide of the USSR was "Vladimir Lenin meets David Copperfield." Now you see it; now you don't. In the history of Marxism, no event better illustrates Marx's principle of the cash nexus. It seduced Lenin's vanguard of the proletariat.

Notice the pattern of empire. It begins slowly, building over centuries: the Roman Empire, the Russian Empire, the French Empire. Then the empire either erodes or else it is captured by revolutionaries, as was the case in France (1789-94) and Russia (1917). But this only delays the reversal. It does not overcome it.

Death of the Modern Centralized States

Economies of scale shaped the development of the modern nation-state. In 1450, the governments of Western Europe were small. They controlled little territory. They were remnants of the medieval world, which had been far more decentralized.

By 1550, this had begun to change. The beginnings of the modern nation-state were visible.

Tax revenues flowed into the centralizing kingships. Trade was growing. Revenues were increasing. Weaponry was advancing. All of this had been going on for half a millennium. But, like an exponential curve, the line began to move upward visibly around 1500.

Maritime empires grew: Spain, Portugal, England. They challenged each other on the seas. Then came the Netherlands and France. The fusion of naval power and trade monopolies lured nations into competition for trade zones. The idea of free trade was centuries away, except in the academic enclave of the school of Salamanca.

The law of increasing returns was evident in this process. It paid rulers to tax more and extend the jurisdiction of the nation-state at the expense of local governments internally and foreign governments externally. The benefits accrued mostly to the political hierarchy and its system of connected families.

Economies of scale drove the process. The division of labor favored centralization. Local units of civil government could not compete.

Let me give an example from the field of historiography. The historian of colonial America can write about lots of topics: immigration, technology, family structure, town planting, economic development, intellectual trends, and so forth. He writes about the issues of life that affected people's daily lives. He cannot write about national politics until after May of 1754: the "battle" of Jumonville Glen.

The Battle of Jumonville Glen is unknown to all historians except specialists in colonial America. This is a pity, because that battle was the most important military event in the history of the modern world. It literally launched the modern world. It led to (1) the French & Indian War (Seven Years' War), (2) the Stamp Act crisis, (3) the American Revolution, (4) the French Revolution, (5) Napoleon, (6) nationalism, (7) modern revolutionism, (8) Communism, (9) Fascism, and (10) the American Empire. It was started by Virginia militia Major George Washington, age 22.

Before the ratification of the U.S. Constitution, it is both possible and wise to write about America without tying the narrative to politics. After 1788, every textbook writer is drawn like a moth to the flame: Presidential elections. He cannot narrate the text without hinging everything on the outcome in the four-year system of national covenant renewal-ratification.

We are fast approaching a day of judgment. It has to do with economies of scale. It has to do with the law of decreasing returns.

The best account of this process is a book by Israeli military historian Martin van Creveld: The Rise and Decline of the State (Cambridge University Press, 1999). He traces the history of the Western nation-state from the late Renaissance until the late twentieth century. He argues that there will be a break-up of nation states and a return of decentralization.

Read the rest here.

The transition from the decaying centralized social structures out of the law of decreasing returns is presently being compounded by the widespread adaption of massive advances from technology.

People will need ideological justifications for such transition. Remember, the world does not operate on a vacuum.

And with the democratization of knowledge through the web or the cyberspace, people’s perception, mentality and attitudes will likely adapt to favor decentralized social orders.

Futurist Alvin Toffler calls this the Third Wave. From his 1980 book,

The Third Wave thus begins a truly new era--the age of the de-massified media. A new info-sphere is emerging along-side the new techno-sphere. And this will have a far-reaching impact on the most important sphere of all, the one inside our skulls. For taken together, these changes revolutionize our images of the world and our ability to make sense of it

The Arab Spring revolts of 2011 has partly been manifestations of the combination of the law of decreasing returns on centralized social orders and of technology facilitated knowledge revolution in process.

Several welfare states in the Eurozone are in the process of a monumental collapse from a debt trap.

This will deepen overtime.

McKinsey Quarterly on the Deepening of the Information Age

In a recent study by McKinsey Quarterly Internet matters: The Net’s sweeping impact on growth, jobs, and prosperity, they find a dramatic surge in the influence of the internet on commerce and the global economy.

Their findings as follows (including charts):

-The Internet accounts for 3.4 percent of overall GDP in the 13 nations studied. More than half of that impact arises from private consumption, primarily online purchases and advertising. An additional 29 percent flows from investments by private-sector companies in servers, software, and communications equipment. The Internet economy, now larger than that of Spain, surpasses global industry sectors such as agriculture and energy.

-The Internet is a critical element of economic progress, pushing a significant portion of economic growth. Both our macroeconomic approach and our statistical approach show that in the mature countries we studied, the Internet accounted for 10 percent of GDP over the 15-year period from 1995 to 2009, and its influence is expanding. Over the last five years of that period, its contribution to GDP growth in these countries doubled, to 21 percent. If we look at the 13 countries in our scope, the Internet contributed 7 percent of growth from 1995 to 2009 and 11 percent from 2004 to 2009. In the global Net's growing ecosystem of suppliers, US companies play leading roles in key sectors. China and India rank among the fast-growing players in the Internet's global supply chain.

-Most of the economic value the Internet creates falls outside of the technology sector: companies in more traditional industries capture 75 percent of the benefits. The Internet is also a catalyst for generating jobs. Among 4,800 small and midsize enterprises surveyed, it created 2.6 of them for each lost to technology-related efficiencies.

Read the complete study here

Bottom line:

The web’s dramatic usage explosion is being reflected on the global economy. Real time connectivity has translated to vastly expanding economic value added and to immense productivity growth.

Increasing specialization could be part of the current dislocations that has led to lofty unemployment levels.

Yet those who see the world in terms of the industrial age will get things so awfully wrong.

As Alvin Toffler writes in the Revolutionary Wealth (p.12),

The developments in capital tools for knowledge expansion are like a rocket in a fueling stage, preparing to launch us toward the next phase of wealth creation. That next phase will spread the new wealth system more widely across the world.

A revolution is under way. And the challenge arising with it will challenge everything we thought we knew about wealth.

War on the Internet: G-8 Mulls Regulation of the Web

As earlier predicted, global politicians who see their turfs dramatically being eroded by the rapidly expanding flow of decentralized information, enabled and facilitated by the web, will declare an open war against the cyberspace.

The New York Times reports,

Leaders of the Group of 8 industrialized countries are set to issue a provocative call for stronger Internet regulation, a cause championed by the host of the meeting, President Nicolas Sarkozy of France, but fiercely opposed by some Internet companies and free-speech groups.

The G-8 leaders will urge the adoption of measures to protect children from online predators, to strengthen privacy rights and to crack down on digital copyright piracy, according to two people who have seen drafts of a communiqué the G-8 will issue at the end of a meeting this week in Deauville, France. At the same time, the document is expected to include a pledge to maintain openness and to support entrepreneurial, rather than government-led, development of the Internet.

This balancing act was reflected Tuesday in a speech by Mr. Sarkozy, who convened a special gathering of the global digerati in Paris on the eve of the G-8 meeting. Calling the rise of the Internet a “revolution,” Mr. Sarkozy compared its impact to that of two previous transforming episodes in global history: the age of exploration and the industrial revolution.

The Internet revolution “doesn’t have a flag, it doesn’t have a slogan, it belongs to everyone,” he said, citing the recent uprisings in the Arab world as examples of its positive effects.

These actions represent “resistance to change”, whereby politicians will try to enforce information control or censorship in the way the industrial age used to operate.

The horizontal flow of information threatens the institutional centralized frameworks built upon the industrial age economy.

As I earlier wrote,

Political and economic ideology latched on a vertical top-bottom flow of power will be on a collision course with horizontal real time flow of democratized knowledge.

This would likely result to less applicability of ideologies based on centralization, which could substantially erode its support base and shift political capital to decentralized structure of political governance that would conform with the horizontal structure of information flows.

People will know more therefore control from the top will be less an appealing idea.

But again these attempts to regulate the web are likely to fail.

Nevertheless the war on the internet accounts as part of the adjustment process away from the command and control structure of the industrial ages with the knowledge revolution taking place beyond the reach of politicians. Besides, technological advances will work around regulations.

As visionary Alvin Toffler writes (Revolutionary Wealth p.40)

As change accelerates still further, institutional crisis will not be limited to the United States. Every country in the twenty-first-century world economy—including China, India, Japan and the E.U. nations—will need to invest new style institutions and adjust the balance between synchronization and de-synchronization. Some countries may find it more difficult than the United States, whose culture, at least, smiles on change-makers.

The Economic Roots of Egypt’s Revolt

Zachary Karabell, at the Wall Street Journal, spells out the economic aspects of the ongoing revolt in Egypt.

He writes, (bold emphasis mine)

The country ranks 137 in the world in per-capita income (just behind Tonga and ahead of Kirbati), with a population in the top 20. And while GDP growth for the past few years has been respectable, averaging 4%-5% save for 2009 (when all countries suffered), even that is at best middle of the pack in a period where the more competitive dynamic nations have been surging ahead.

Egypt has long been famous for crony inefficiency. Yet Hosni Mubarak was graced with nearly $2 billion in annual U.S. aid, another $5 billion from dues from the Suez Canal, and $10 billion in tourism, so he could buy off a considerable portion of the 80 million Egyptians...

What allows China to thrive for now (and Brazil and India and Indonesia, among many others) is that its citizens believe they have some control over their material lives and a chance to turn their dreams and ambitions into reality. They have an outlet for their passions that is not determined for them, and an increasing degree of economic freedom.

The young in Egypt—two-thirds of the population is under the age of 30—believe that they have no future, and in many ways they are correct. Under Mr. Mubarak, their food and housing is subsidized and they are placed in jobs or left in unemployed limbo, not starving but without any hope of anything but years of numbing sameness.

These realities alone don't cause revolution. Many countries are poor and quiet. But Egypt has had all the marks of a tinderbox. The future could bring worse, with radical regimes or chaos. But for millions who have concluded that their dreams for a better life would expire unfulfilled, nothing could be worse than the present.

My comments:

1. The welfare state strips out the self-worthiness or self esteem of people, as the public’s sense of achievement from trade and production has been limited to a few. Web connectivity may have reinforced this perception and incited for this seemingly widespread clamor for political change.

2. Since economics drive politics, the imbalances from a closed system or state (crony) capitalism eventually gets vented on politics. What is unsustainable won’t last.

3. Political systems built around the industrial age (Second Wave) are feeling the strains of the transition towards the information age (Third Wave)

Today the elites can no longer predict the outcomes of their actions. The political systems through which they operate are so antiquated and creaky, so outraced by events that even when closely “controlled” by the elites for their own benefit, the results often backfire.

This does not mean, one hastens to add, that the power lost by the elites has accrued to the rest of society. Power is not transferred; it is increasingly randomized, so that no one knows from moment to moment who is responsible for what, who has real (as distinct from nominal) authority, or how long that authority will last. In this seething semi-anarchy, ordinary people grow bitterly cynical not merely about their own “representatives” but—more ominously—about the very possibility of being represented at all.

From the underrated but highly prescient author Alvin Toffler in his 1990 book The Third Wave.

The Web Is Changing The Global Political Order

Here is futurist Alvin Toffler as interviewed by the Gartner fellows in 2006: (bold emphasis mine)

I also think there's going to be a great boom when we stop thinking about companies and start thinking about restructuring governments - and completely restructuring these gigantic pyramidal bureaucracies that we rely on and that no longer function. So I think that there's going to be a huge market for software in new kinds of organizations. Now, I'm not sure whether it'll still be called software or what, but as you no doubt read in the book, I expect to see one big institution after another collapse just like the Katrina experience with FEMA and the government and so on. That our corporate structures are designed for the industrial age - and that made sense then and Max Weber wrote about it in 1910 and so forth and so on - but they're clearly inappropriate to the systems that are now growing up, economic, social, cultural and all the rest.

The web became an instrumental tool in uprooting Tunisia’s dictatorship as shown here and here.

Sensing the same fate that might befall the 30 year authoritarian regime, Egypt’s President Hosni Mubarak swiftly orders communications cut as riots has escalated.

From Business Insider

From the New York Times

For the first time since the 1980s, Mr. Mubarak felt compelled to call the military into the streets of the major cities to restore order and enforce a national 6 p.m. curfew. He also ordered that Egypt be essentially severed from the global Internet and telecommunications systems. Even so, videos from Cairo and other major cities showed protesters openly defying the curfew and few efforts being made to enforce it. (emphasis mine)

Old political structures designed for the Industrial era appear to be crumbling exactly as Mr. Toffler predicted. This is only part of the ongoing adjustment towards the “knowledge economy”.

Update:

I’d like to add that the transition to the knowledge economy is being fed by the forces of decentralization brought about by connectivity and information dissemination. And this is what governments are afraid of.

Of course, another major factor that contributes to this societal discontent has been inflationism- seen through rising politically sensitive commodity prices.

As we have long been saying, these are two major forces in collision.

QE 2.0: It’s All About The US Banking System

``But the administration does not want to stop inflation. It does not want to endanger its popularity with the voters by collecting, through taxation, all it wants to spend. It prefers to mislead the people by resorting to the seemingly non-onerous method of increasing the supply of money and credit. Yet, whatever system of financing may be adopted, whether taxation, borrowing, or inflation, the full incidence of the government's expenditures must fall upon the public.” Ludwig von Mises

It’s time for a little gloating.

Last week we noted how global financial markets would likely respond to two major events that just took place in the US this week.

Globalization Versus Inflationism

We noted that while the outcome of the US elections would matter, it would be subordinate to the US Federal Reserve’s formal announcement of the second phase of the Quantitative Easing or QE 2.0.

Nevertheless we mentioned that in terms of the US Midterm Elections, still the odds greatly favoured a rebalancing of power from a lopsided stranglehold by left leaning Democrats towards the conservative-libertarian right that could result to what mainstream calls as “political gridlock”.

Such stalemate would thereby reduce the chances of government interventionism, which should have positive implications for both the markets and the US economy[1].

Figure 1: The Drubbing Of Keynesian Policies (USA Today[2])

Of course, what the surveys earlier conveyed had been merely translated into actual votes-Americans largely repudiated the highhanded Keynesian spend and tax policies adapted by the Obama administration. This also signifies as a decisive defeat for President Obama’s illusory “Change we can believe in”.

Except for the Senate which had only 37 seats, out of the 100, contested, Republicans swept the House (239-188) and the Governorship position (29-18). Yet, even in the Senate, the chasm in the balance of power held by the Democrats had been significantly narrowed (from 57-41 to 51-46).

To rub salt into the wound, even President Obama’s former seat at Illinois was won by a GOP candidate[3], Mark Kirk.

The burgeoning revolt against interventionist Keynesian policies has likewise been an ongoing development in Europe[4].

And as we have repeatedly been pointing out, two major forces have been in a collision course: technology buttressed globalization (represented by dispersion of knowledge and the deepening specialization expressed through free trade) and inflationism (concentration of political power).

The rising tide against Keynesianism, which translates to a backlash from these two grinding forces, can be equally construed as a manifestation of an evolving institutional crisis or strains from traditional socio-political structures adjusting to a new reality.

As Alvin and Heidi Toffler presciently wrote[5],

``Bureaucracy, clogged courts, legislative myopia, regulatory gridlock and pathological incrementalism cannot but take their toll. Something, it would appear will have to give...

``All across the board –at the level of families firms industries national economies and the global system itself—we are now making the most sweeping transformation ever in the links between wealth creation and the deep fundamental of time itself. (italics mine)

For now, the forces of globalization appear to be the more influential trend.

Validated Anew: QE 2.0 Is About Asset Price Support

However, as we also noted, Keynesianism hasn’t entirely been vanquished[6]. They remain deeply embedded in most of the political institutions represented as unelected officials in the bureaucratic world. Importantly, they are personified as stewards of our monetary system.

Here is what I wrote last week[7],

``The QE 2.0, in my analysis, is NOT about ‘bolstering employment or exports’, via a weak dollar or the currency valve, from which mainstream insights have been built upon, but about inflating the balance sheets of the US banking system whose survival greatly depends on levitated asset prices.

Straight from the horse’s mouth, in a recent Op-Ed column[8] Federal Reserve Chair Bernanke justifies the Fed’s QE 2.0,

``This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion. (bold highlights mine)

Once again I have been validated.

The path dependency of Ben Bernanke’s policies has NOT been different[9] from his perspective as a professor at Princeton University in 2000 when he wrote along the same theme.

``There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse. (bold emphasis mine)

Figure 2: stockcharts.com: Global Equity Markets Explode!

The net effect of QE 2.0 has been almost surreal.

Global equity markets (DJW), as expected, skyrocketed to the upside from the higher than expected $600 billion or $75 billion a month (for 8 months) of US treasury long term security purchases that the Federal Reserve will be conducting with new digital dollars. Markets reportedly estimated the QE program at $500 billion[10].

And the Federal Reserve made sure in their announcement that $600 billion will not be a limiting condition. The FOMC said that they “will adjust the program as needed to best foster maximum employment and price stability”[11].

It’s simply amazing how the Fed’s QE 2.0 transmission mechanism has been worldwide. Whether in Asia (P1DOW-Dow Jones Asia), Europe (E1DOW-Dow Jones Europe) or Emerging markets (EEM-iShares MSCI Emerging Markets Index), the story has all been the same—markets breaking out to the upside.

I’d like to add that such bubble blowing policies has NOT been limited to the Federal Reserve.

Immediately after the Fed’s announcement, the Bank of Japan voted unanimously to support the domestic stock market by engaging on their own version of QE that would include “exchange-trade funds linked to the Topix index and Nikkei Stock Average, and Japanese real-estate investment trusts rated at least AA, the bank said. It said it would begin buying Japanese government bonds under its new program next week.[12]” (bold emphasis mine)

Add to these the inflation of global central banks international reserve position to the tune of $ 1.5 trillion over the past 12 months[13].

Hence the consequences of massive inflationism are likely to be fully felt yet in the markets.

The False Premise: Aggregate Demand Story

The substantiation of our analysis isn’t limited to Bernanke’s statements alone. Markets have likewise bidded up the major beneficiaries of the QE 2.0 program—the banks and the financial industry (see figure 3).

Figure 3: Financial Industry: From Laggards to Leaders (charts from US global Investors and stockcharts.com)

The mainstream wisdom goes this way: Money printing does not create inflation. With low inflation, printing money is, therefore, needed to generate demand that would spur inflation. This form of circular reasoning[14], which characterizes Keynesian economics, is what is sold to public as rationalization for the current policy. The mainstream sees it as an aggregate demand problem that can only be addressed by money printing.

The mainstream fails to see that there is NO such thing as a free lunch or that prosperity cannot be conjured or summoned by the magic wand of the printing presses.

All these so-called technocratic experts refuse to learn from history or deliberately distort its lessons, where debasing money has always been meant to accommodate for the political goals or interests of the ruling class.

Yet monetary inflation eventually crumbles to nature’s laws of scarcity for the simple reason that it is unsustainable. Printing of money does NOT equate anywhere to the same degree as producing goods and services. Printing of money can be limitless, while production of goods and services are limited to the available scarce resources.

Unknown to many, printing of money is subject to the law of diminishing returns (getting less for every extra output or a law affirming that to continue after a certain level of performance has been reached will result in a decline in effectiveness[15]) and law of diminishing marginal utility (general decrease in the utility of a product, as more units of it are consumed[16]).

And it is why repeated experiments with paper money throughout the ages of human affairs have repeatedly failed[17]. And I don’t see why the grand US dollar standard experiment today as likely to succeed either. The QE programs fundamentally reflect on the same symptoms of any degenerating or festering de facto money regime. We should expect more QE programs to happen.

Yet the aggregate demand story is basically premised on debt. To promote aggregate demand is to promote debt. Debts either incurred by the private sector or by governments in lieu of the private sector. While productive debt and consumption debt are hardly distinguished, consumption debt is promoted. Savings are disparaged as economically harmful. And the promotion of debt is the essential or critical element to fostering bubbles.

Figure 4: World Bank: Banking Crisis Since the 1970s

Hasn’t it been a wonder that since the closing of the Bretton Woods gold-dollar window in 1971, bubbles became a permanent fixture worldwide?

Yet, the public hardly can see through who the major beneficiaries from the debt based aggregate demand story. Obviously, it is the banking and the financial industry as they represent as the major funding intermediaries or financiers to both the private sector and importantly to the government.

And the banking system had been structurally incented to hold (or buy or finance) government debts into their balance sheets as they have been classified as less risky assets and thus requires less capital in accordance to the Basel Accord[18].

During the last crisis the unholy alliance of the central banking-banking industry cartel had been exposed as seen by the trillions worth of bailouts by the US Federal Reserve[19].

Yet the politicized nature of central banking (everywhere) obviously leads to cartel structured relationships, as survivability depends not on profitability based on market forces, but from the privileged conditions bestowed upon by the political strata.

And the QE 2.0, which I argued as having been unmoored from the prospects of the US or global economy, but rather aimed at safeguarding the balance sheets of the banking system has successfully boosted the prices of financial equity benchmarks, such as S&P Bank Index (BIX), the Dow Jones Mortgage Finance Index (DJUSMF), the S&P Insurance (IUX) and the Dow Jones US General Financial Index (DJUSGF), all along the lines of Bernanke’s design.

The industry that had miserably lagged[20] the recent stock market recovery in the US has in one week suddenly outclassed the rest.

Of course people who argue about the success or failure of policies frequently look at the effects depending on the time frame that support their bias.

For instance, policies that induce bubbles will benefit some participants, during its heydays. Hence, policy supporters will claim of its ‘success’ seen on a temporary basis as the bubble inflates. Yet overtime, an implosion of such bubbles would result to a net loss to the economy and to the markets. The overall picture is ignored.

And the same aspects would also apply to those arguing that the Fed’s rescue of the banking system has been worthwhile. They’re not. The benefits of a temporary reprieve from the recent crisis envisages greater risks of a monumental systemic blowup. If Fed policies had been successful, then why the need for QE 2.0?

So for biased people, the measure of success is seen from current activities than from the intertemporal tradeoffs between the short term and long term consequences of policies.

In other words, yes, the QE 2.0, which constitutes the continuing bailout of the US banking industry, seems to successfully inflate bubbles, mostly overseas. But at the end of the day, these bubbles will result to net capital consumption, if not the destruction of the concurrent monetary regime.

The next time a major bubble implodes there won’t likely be free lunch rescues as these will be limited by today’s massive debt overhang.

The Effects of QE 2.0: Promotes Poverty And A Shift To A New Monetary Order

Of course while the equity price performance of the US financial industry stole the limelight the next best performers have been the Energy and the Materials Index.

In other words, as I have long been predicting, the accelerating traction of the inflation transmission channels are presently being manifested in surging prices of commodities and commodity related equity assets aside from global equity markets.

While this should benefit equity owners and producers of commodity related enterprises, aside from the financial sector, those who claim that inflationism is justifiable and a moral policy response to the current conditions are just plain wrong. Such redistributive policies to the benefit of the banking sector come at the expense of the underprivileged.

What is hardly apparent or seen is that the current government structured inflation indices have been vastly underreporting inflation.

Yet surging agricultural and food prices would not only harm a significant percentage of financially underprivileged by reducing their money’s purchasing power but also promote poverty in the US and elsewhere.

Figure 5: Food Expenditures By Income Level

Tyler Durden of Zero Hedge quotes a JP Morgan study[21], (bold emphasis mine)

When the Fed considers the possible consequences of a falling dollar resulting from QE2, it should perhaps focus on food and energy prices as much as on traditionally computed core inflation. First, the food/energy exposures of the lower 2 income quintiles are quite high (see chart). Second, the core CPI has a massive weight to “owner’s equivalent rent”, which suggests that the imputed cost of home occupancy has gone down. Unfortunately, this is not true for families living in homes that are underwater, and cannot move to take advantage of it (unless they choose to default and bear the consequences of doing so). Due to the housing mess, there has perhaps never been a time when traditionally computed core inflation as a way of measuring changes in the cost of things means less than it does right now.

Figure 6: ADB[22] Asia’s Share of Food Expenditure to Total Expenditure

And as said above the effects are likely to hurt the underprivileged of the emerging markets more than the US.

So inflationism or QE 2.0 poses as a major risk to global poverty alleviation and prosperity, a blame that should be laid squarely on these policymakers and their supporters.

Of course as the ramifications of inflationary policies worsen, the subsequent scenario would be for political trends to shift towards holding the private sector responsible for elevated prices and for ‘greed’ in order to institute more government control and inflationism.

As the great Ludwig von Mises once wrote[23],

``They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices. While the [the government] is busy annoying sellers as well as consumers by a flood of decrees and regulations, the only effect of which is scarcity, the Treasury [and the Fed] go on with inflation”

Here free trade will likely give way to protectionism; that is if public remains ignorant of true causes of inflation and if the world would stubbornly stick by the US dollar as preferred global medium of exchange.

Of course Asian nations were hardly receptive to the unilateral actions by the Federal Reserve. The conventional recourse in dealing with QE 2.0 has been via currency appreciation, tightening of domestic liquidity by raising bank reserves or increase policy rates or lastly ‘temporary’ capital controls. So far some countries as South Korea have threatened to impose some variation of capital controls.

Yet we should expect the world to shift out of the US dollar regime once inflationism becomes rampant enough to pose as a meaningful hurdle to national economic development and global trade. The Bloomberg quotes China’s Central Bank adviser Xia Bin[24],

``China should counter the U.S. through regional currency alliances, speeding international use of the yuan and seeking stability in exchange rates through the Group of 20, which holds a summit next week”

A currency from a political economy that engages in significantly less inflationism, has deep and developed sophisticated markets, has a convertible currency and hefty geopolitical exposure is likely to challenge the US dollar hegemony, whether this would be the yuan (which for the moment is unlikely) or the Euro, only time will tell.

Of course, we can’t discount gold’s role in possibly being integrated anew in the reform of the monetary architectural system.

Figure 7: Virtual Metals[25]: Central Bank Gold Holdings and Sales

Global Central banks appears to be rediscovering gold as possibly reclaiming its role as money in a new monetary order. A new monetary order is not question about an if, but a when.

Once as net sellers, central banks seem to be transitioning into potential net buyers.

So again, our peripheral insight seems being validated with the ongoing process of shifting expectations by authorities on the functions of gold.

As I pointed out last year[26], gold is presently seen by an ECB official as a form of economic security, risk diversification, a confidence factor and an insurance against tail risks. Once these factors become well entrenched, a store of value role would likely be the next step. And more QE’s would only serve to push gold towards such a path.

Those who obstinately relish the bias that gold is nothing but a barbaric relic will likewise suffer from taking on the wrong positions. But they eventually will succumb to the shifting expectations as with many monetary authorities today. The reflexive process of having prices influence fundamentals has clearly been taking shape.

With gold prices at $1,390 mainstream economists like celebrity Nouriel Roubini[27], who last year debated savvy investor Jim Rogers and declared “Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense”, must be squirming on his seat for the likelihood to be proven wrong once again.

---

[1] See US Midterm Elections: Rebalancing Political Power And Possible Implications To The Financial Markets, October 31, 2010

[2] USA Today, 2010 Elections: Live Results

[3] Politico.com Roland Burris will serve in November, November 5, 2010

[4] See An Overextended Phisix, Keynesians On Retreat And Interest Rate Sensitive Bubbles, October 25, 2010

[5] Toffler, Alvin and Toffler, Heidi Revolutionary Wealth Random House p.40

[6] See Trick Or Treat: The Federal Reserve’s Expected QE Announcement, October 31, 2010

[7] Ibid

[8] Bernanke, Ben What the Fed did and why: supporting the recovery and sustaining price stability, Washington Post, November 4, 2010

[9] Bernanke, Ben A Crash Course for Central Bankers, Foreign Policy.com or wikiquote Ben Bernanke

[10] Macau Daily Times Asian markets rise, dollar falls, November 5, 2011

[11] Board of Governors of the Federal Reserve System, November 3, 2010 Press Release

[12] Marketwatch.com Bank of Japan holds steady, details asset plans, November 4, 2010

[13] Noland, Doug QE2 Credit Bubble Bulletin, Prudent Bear.com

[14] See Thought Of The Day: The Keynesian Circular Thought Process, June 22, 2010

[15] Wordnetweb.princeton.edu law of diminishing returns

[16] Wiktionary.org law of diminishing marginal utility

[17] See Surging Gold Prices Reveals Strain In The US Dollar Standard-Paper Money System, November 1, 2010

[18] See The Myth Of Risk Free Government Bonds, June 9, 2010

[19] See $23.7 Trillion Worth Of Bailouts?, July 29 2010

[20] See The Possible Implications Of The Next Phase Of US Monetary Easing, October 17, 2010

[21] Durden Tyler, How Ben Bernanke Sentenced The Poorest 20% Of The Population To A Cold, Hungry Winter, Zerohedge.com November 5, 2010

[22] Asian Development Bank: Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End? April 2008

[23] Mises, Ludwig von The Truth About Inflation

[24] Bloomberg.com Asians Gird for Bubble Threat, Criticize Fed Move November 4, 2010

[25] Virtualmetals.co.uk The Yellow Book September 2010

[26] See Is Gold In A Bubble? November 22, 2009

[27] See Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble, November 5, 2009