Gold News

The Homogenization of Credit, Culture and Markets

The financial is becoming political...

THINGS ARE getting interesting now, writes Dan Denning in the Daily Reckoning Australia.

Governments in Europe are toppling like sub-prime lenders in the US, circa 2007. Dutch Prime Minister Mark Rutte resigned over night. Papers report the Dutch government fell apart over an argument about austerity and fiscal policy. Smaller European political parties are gaining traction as they resist proposed spending cuts.

To be honest, we'd never even heard of Dutch Prime Minister Mark Rutte before this week. That's probably to his credit. It means he hasn't been doing anything extraordinarily stupid, like spending other people's money (people from the future, no less). And it seemed kind of quaint that he was forced to tender his resignation to Queen Beatrix. 

But this whole chain of events is part of the same phenomenon. Failed monetary and fiscal policies in Europe are now political problems. The financial crisis of the Welfare State undermines the legitimacy of the Welfare State itself. The financial becomes political.

Now financial markets have been pretty exciting the last few years. You've had Ponzi schemes of Madoffian proportion. You've had defaults, bankruptcies, flash crashes and more. But when it comes to show-stopping drama and social upheaval, nothing can match politics. And that's what scares us at night these days.

Europe's political crisis is evidence of deep structural problems in the European Union that can't be solved by more central bank liquidity. Europe went for monetary union ahead of political union when it started down this path many years ago. The common currency allowed European governments to borrow at low interest rates and run up large deficits.

The trouble now is that there's no way to impose a political solution to the economic problem. That's probably a good thing, now that we mention it. Imposing solutions from on high has not worked very well the last few years. But it does leave markets with a giant question mark hanging over them. Namely, how will this European mess end?

One option is that Europe will go the way of Japan. This is a best-case scenario. In this scenario, the authorities prevent a climax to the debt crisis by extending it out over time. We say "best case" in the sense that a long, drawn-out, crisis that turns the financial market into a Zombie may be preferable to a political and social crisis. But then, a political and social crisis seems inevitable at this point. Why wait?

This brings us back to the point we closed with yesterday. We wrote that the corollary to the "something for nothing" economic philosophy is that everyone must believe the same thing. This idea of ours is a work in progress. We're not even sure it's true. But bear with us.

In financial markets, control of the money supply via interest rates makes it possible to get something for nothing, at least for a while. Investors called this the "Greenspan Put" when Alan Greenspan ran the show at the Fed. The "Greenspan Put" was the belief that any time the market faced a crisis; the Federal Reserve would lower interest rates or otherwise provide liquidity to bail out highly-leveraged debtors.

Today, the market is so flooded with liquidity that it renders old-fashioned securities analysis moot. Why bother figuring out the intrinsic value of a company if the direction of the stock market is determined by central banks? In this market, differences of opinion about the value of securities are flattened by the tide of money unleashed by central banks.

It's this flattening of opinions in markets – or the homogenization of opinions – that interests us. We think that credit expansions have the same effect politically and culturally. That is, worldwide credit expansions tend to homogenize certain aspects of politics and culture. This is not an inevitable trend, as you'll see shortly.

In the culture, this homogenization is easy to see. Everyone tends to watch the same TV shows, go to the same movies, listen to the same music, or become fixated on some local sports team. The expansion of credit fills our lives with mostly vacuous entertainment and leisure activities. And because of globalization (or the stupefying effects of credit) we tend to consume the media and entertainment that are most widely distributed and appeal to the lowest common denominator of taste.

We're not being an elitist here. It's not a bad thing that people find meaning in the human dramas and achievements of total strangers (or sports teams). Empathy is a trait that promotes the survival of the species.

And besides, "The Voice" is a great show. We've even been known to shed a few tears watching the weigh in on "The Biggest Loser." People watch shows likes this because they contains snippets of genuine human emotion. These snippets may supplement the void of emotion many people feel in their own lives; lives that get overwhelmed by events beyond our control. We like watching the stories of real people who achieve things that matter to them. It gives us all hope.

But there are certainly downsides to this homogenization. It flattens the culture in the same way that credit flattens investment values. Everything becomes equal with everything else. And for the most part, there is a race to the bottom in aesthetic values in the same way there is a race to the bottom in currency values.

At the bottom, you find this bland, generic, vaguely political belief best summed up by Principal Skinner on The Simpsons. You get a world where, "Nobody is better than anybody else and everyone is the best." In order to sustain their control over monetary power (and sameness) political leaders must enforce a kind of "sameness" on everyone.

This sameness has certain values which we won't go into here. But we'd suggest that people don't like being the same. They like being different. It's why people get nose rings. Further, there's value in being different. It's nature's way of allowing for lots of different variations. The best adaptations survive and are amplified.

In Europe's case, the enforced sameness of the common currency is causing a backlash. The French want to be French. The Dutch want to be Dutch. The Greeks want to be Greeks. None of them want to be German. And the Germans want to stay German. All these primal, tribal, political loyalties are in conflict with the sameness and conformity required by political and monetary union. Something has to give.

If this were just a matter of the Europeans having another family feud, it would be nothing more than a sideshow. But if the political system in Europe begins to crack under the pressure of a failing fiscal and monetary system, Australia is going to be just as affected as anyone else. The world's financial system has been homogenized as well, and everything is connected to everything else. 

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

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