Rotten to the Core

Brexit and financial markets’ subsequent reactions expose the corruption at the heart of the world’s socio-political systems.

Guest post by Robert Gore at Straight Line Logic

Coercion is inseparable from corruption. When a group coerces with impunity, it steals from, lies to, defrauds, and enslaves the subjugated. The dominant group invariably develops a morally comforting ideology of its superiority and the subjugated’s inferiority. Such relationships are the essence of corruption.

Every square inch on the planet is subject to the jurisdiction of one or more coercive regimes, with their attendant corruption and fraud. Trillions of dollars, euros, pounds, and yen, et al., are extracted from the productive and diverted to governments, who buy political support. Trillions more are borrowed. Central banks issue fiat debt units backed only by laws mandating their acceptance and extract funding for governments via the hidden tax of debt depreciation and the hidden theft of debt monetization and interest rate suppression. Regulation allows governments to reward cronies and extort and terrorize the unfavored. Perpetual wars benefit militaries and those who supply the armaments, with part of their profits recycled to those championing war. This is pervasive, legal corruption. One can only guess at the extent of sub rosa criminality, which may dwarf it.

Last week’s Brexit vote, in particular financial markets’ reaction, underscore the corruption and fraud, and the inevitability of its failure. Brexit is a victory for Britain’s honest producers; those who work in districts far removed from The City, London’s financial precinct. They will be freed from onerous European Union mismanagement, bureaucracy, regulations, and taxes that have contributed to Europe’s economic stagnation, dearth of innovation, and persistently high unemployment, especially among its youth. The European Central Bank’s debt monetization and negative interest rates, while obscuring the sorry state of the European economy, have only made it sorrier. Chronic debt issuance has left many European governments, and their banks, which own much of that debt, one economic or financial crisis away from insolvency.

British voters chose to free themselves from the EU albatross, although they will still be plagued by numerous home-grown albatrosses. The pound, euro, equity markets, and oil plunged, while perceived safe havens gold, the dollar, yen, and US Treasury debt rose. (The yen is not really a safe haven, but much of the world’s “carry” trades—borrowing to fund nominally higher yielding, but risky speculations—are funded at low Japanese interest rates. When those highly leveraged trades go south, margin calls create a demand for yen to repay the underlying loans.) There were telling details amidst the carnage. Continental equity markets, particularly those of Spain and Italy and their banks, suffered far larger percentage drops than the British stock market. The British, were they to remain in the EU, would be expected to help support the Europe’s southern tier.

When the high and mighty sing the same tune—Great Britain needs the EU more than the EU needs the British—the opposite is assuredly true. The British economy has outperformed most of Europe’s sluggards. Trying to get a fix on large banks is always a crap shoot—their financial statements are usually next to useless—but it appears that British banks and their regulators took more steps to address the problems exposed by the last financial crisis than their continental counterparts and may better withstand the coming stresses. Then again, British banks were hit just as hard as continental ones in the two days after the vote.

Never underestimate the petulance of humiliated Eurocrats, or other poobahs for that matter. What terrifies the Eurocrats is the virtual certainty that the British economy will outperform Europe’s after the Brexit. They may cut off their constituents’ noses to spite their own faces, erecting trade barriers against British goods and services, for which Europe’s consumers will pay the price. However, trade barriers are a two-way street. Britain is an important export market, especially for the de facto leader of the EU, Germany, so cooler heads may prevail, a hope expressed by Nigel Farage in a remarkable speech to the European Parliament.

Can anything be more corrupt than the desire to gratuitously harm another to preserve one’s power? Such corruption is the rotten core of the global economic and financial system. Its pilots are determined to fly it into a mountain, but will fight to the death any attempt to wrest away the controls. The financial markets’ reaction to Brexit has been appropriate, but anyone expecting asset prices to take one-way rides down or up in the directions they were pushed by Brexit will be disappointed.

Global finance and global statism are Siamese twins joined at the brain, a fact made abundantly clear during the last financial crisis. Heavily indebted governments depend on the machinations of central banks and the acquiescence of markets to perpetuate their economic misrule. Governments, in turn, coddle and succor their indispensable allies. Too big to fail, bail outs, and deposit insurance are their backstops for the inherent risks of fractional reserve banking, turning it into a heads-we-win, tails-the-taxpayers-lose proposition. Central banks provide emergency fiat liquidity on preferential terms—financial market “puts”; promote cartelization, and serve the constituent banks they were meant to regulate, acting as the banks’ agents within governments.

Brexit is a shot across the bow, but it is only a shot across the bow. Financial asset prices will continue to be supported or suppressed as the powers see fit. There is not one price in the entire firmament of markets and finance that is not pegged to continuing regimes of corruption and fraud. To transact based on such prices is a bet that a rigged game will stay rigged.

The belief that it will is understandable, but a house of cards must fall. Political winds—Brexit and what’s sure to follow—may blow this one over; it may collapse due to its structural deficiencies, or, most likely, some combination of the two will render it rubble. The important point is that rotten-to-the-core economies and finances, resting on foundations of coercion, corruption, and fraud, have to be rendered rubble before freer, more honest, and more durable structures can be erected.