One Country, Two Economies

Dear Reader,

Just when you thought 2020 couldn’t be any worse/weirder/dystopian, welcome to the summer of American rebellion. Peaceful protests and violent protests broke out in major cities cross the US over the weekend. The immediate cause was the murder of George Floyd in the US city of Minneapolis.

Floyd was a black man killed by a white cop. Race (and institutional racism in US law enforcement) is undoubtedly a major part of the story. But the media is not going to tell you the other part. What’s the other part of the story? We’ll get back to that in a moment.

A big week for the economy and the stock market

First, it’s a big week for the economy and the stock market as ‘lockdown’ ends for many. The Aussie stock market is up over 30% since the lows on 23 March. The market ‘priced in’ a huge blow to second quarter GDP. And then it ‘looked past’ the crisis to a recovery in the third and fourth quarter.

That recovery is supposed to begin today. Many elements of the nationwide lockdown are due to be lifted this week. You can go to a pub, café, or restaurant and have a meal (and a pint or two) with your mates (or even total strangers). Libraries, art galleries and beauty salons are scheduled to reopen to.

The optimistic case (for the bulls) is that a great deal of pent up consumer demand will be unleashed as lockdown lifts. Animal spirits will revive. Wallets will open. Tills will overflow with rivers of consumer cash. Businesses will rehire furloughed staff, GDP will grow and ‘the economy’ will once again breathe the free air.

That’s the future. Maybe. This week’s price action may be driven more by the past. Due out is data on second quarter GDP and retail trade. It’s going to be ugly.

But then the Reserve Bank of Australia meets on Tuesday. The RBA is unlikely to move the cash rate from its current level of 0.25%. But everyone will be paying attention to what it says about the economy and how monetary policy may support Australia’s emergence from lockdown.

By the way, not everyone is coming out of lockdown. The People’s Republic of Victoria, led by Chairman Daniel Andrews, is actually getting more stringent. The ‘work from home’ advisory has become a work from home order, punishable by fines up to $100,000 if businesses are found in violation of the order. The measure (not passed by parliament as far as we can tell) will last throughout all of June.

A charitable reading of the order is that the government (or at least Andrews, who appears to be acting like a one-man government) wants to prevent a ‘second wave’ of c-virus infections. Keeping workers away from public transport would be one way to do it. Keeping every worker deemed non-essential locked down indefinitely is another way.

A political reading of the order is that it’s hard to imagine a politician having more contempt for free enterprise or the Rule of Law than Dan Andrews. He now seems determined to take full advantage of this public health emergency to increase to scope and size of government in private life. He’s treating small businesses and workers worse than government employees (all of whom, apparently, are essential).

But we digress. The question for this week is whether the share market has gotten ahead of itself. Will renewed US-China tension over China’s crackdown on Hong Kong sour the investment mood? And is Australia itself susceptible to the same kind of social discord erupting in the US? That brings us back to the other part of the rebellion story.

The monetary system is to blame

The other part is that you don’t get major unrest in civil society unless pressure has been building for a long time. That pressure can be political, when people feel like there are two sets of laws (one for the elites, one for the rest of us). But it’s also economic.

And here’s the part that most people will miss entirely. The monetary system is to blame. A monetary system which encourages debt, allows for huge government deficits, and rewards speculation and short-term profit maximisation is the chief culprit of the social mess we’re in. Not only does it alter incentives in a negative way, it distorts values. And not just monetary values.

We have a feudal economic system that’s disguised as free market capitalism. It’s anything but win-win voluntary and mutually beneficial trade (real capitalism). It’s a system where control of the money (through central banking and politics) leads to wealth inequality. People who own financial assets benefit. Most people on a wage or fixed income are left behind to deal with inflation and declining real wages.

What you see in the streets of the US is a profound frustration with that system. It hits hardest in urban areas which are predominantly occupied by minorities. These are the most left behind by the current system. They have the have the least to lose because, economically, they don’t have much to begin with.

When you don’t have much left to lose, and when you’ve been locked down and robbed of your ability to improve your life economically (or told your job isn’t essential, even if it’s how you feed your family), you’re going to be upset. And then when you see that a militarised police force can deal out death and brutality with impunity?

Well, that’s where we are right now, socially. Yet despite this toxic cauldron now on the boil, the stock market seems utterly divorced from economic reality. And that’s by design. Liquidity reigns.

Nearly all of the emergency liquidity provided by central banks since the beginning of this crisis has gone to support stock prices or the bonds of heavily indebted corporations. It’s worked like a charm. The losses were reversed. And now?

Now we find out if you can have one country and two economic systems in places like the UK, the US, and Australia. Can you have a monetary and financial system which rewards a narrow slice of the work force and the population? And can you keep the rest of the people pacified with free money from the government? Failing that, can you keep them from assembling in the street to protest to burn the whole thing down?

Stay tuned…

Dan Denning,
Editor, The Rum Rebellion

PS: There is one major upside to the instability in the world’s monetary system: it’s great news for Australian gold producers. Gold is at or near all-time highs in many currencies. Rising government deficits and general fear contribute to the demand for gold. And Australian gold miners contribute to the supply.

Australia is set to overtake China as the world’s largest gold producer, according to Bloomberg News. Big gold mines out West are producing. But the rising gold price is also driving exploration. That’s good news for the smaller exploration firms AND the bigger firms with cash enough to acquire them.

To learn how to pick winning gold stocks, check out my colleague Greg Canavan’s free report here. Greg details how to spot spot potential winners in the high-risk and high-reward land of gold explorers, along with how to spot them solid companies in their development stage.

PPS: Still think ‘contact tracing’ is just for pandemics? Minnesota officials revealed that they’ve used ‘contact tracing’ from the mobile phones of protestors to build a profile of who is starting or encouraging violent protest and the destruction of private property. Analysis of the data is disputed, though. It’s not clear if it’s locals causing the damage or outside agitators who’ve arrived to make things look worse.

Either way, contact tracing goes all the way back to the efforts of the US Army to suppress a counterinsurgency in the Philippines during the US conquest in 1898. The technology of surveillance is obviously different. But the aim is the same: build a profile of the networks resisting authority by creating a picture of how people are connected. Then attack and disrupt those networks with force and violence.

Technology makes building a picture of networks far easier today. And at a meta-level — that is at a global level — Australia is a major part of the ‘Five Eyes’ global mass surveillance network. Five Eyes is run by the US, Canada, the UK, New Zealand, and Australia. Key facilities in that global network are located at Geraldton in WA, Pine Gap in the NT, and in Canberra. The growth of this mass surveillance state is an issue we’ve written about with our co-author Bill Bonner in The Bonner-Denning Letter.

The Rum Rebellion