Governments Maintain Power in Different Ways

One way is by enforcing involuntary cooperation of the people via the abilities to incarcerate, impoverish, or otherwise disable the uncooperative ones. A more beneficent way in a free societies is through engendering the peoples’ confidence and trust. They will continue to abide by the government’s rules, taxation levels, and leadership decisions as long as they feel that they are reasonable, mostly-necessary, and directed more toward the general welfare than toward power-wielding and control. But once any leader, from a cub scout den mother to a company executive on-up to POTUS is seen as acting against them to serve his own interests, they will only accept that for a temporary period. Force then becomes increasingly necessary in order to maintain power.

Before this progresses to an outright standoff between the will of government enforced against the will of the bulk of the people, confidence in government gradually erodes, and people start to invent ways to fulfill their needs apart from relying on the institutions that they once trusted. Urban people now know that they cannot rely on the police to protect them and their property from violent crime so they have armed themselves, and their search for places where they can live safely has been invigorated to levels that will accelerate the exodus from our cities. Our monetary and fiscal policies have entered uncharted territory, so people are trying to concoct strategies of least-peril. This includes financial professionals who also have no experience with the environment we are in now.

Most people (over 30) are working hard just to keep their own status-quo stable while their society is in turmoil. That is all that they have energy for and a known ability to control – and they have less free time than the average ANTIFA member. They have to cope with whatever monetary, legal, and economic dislocations arise, and with whatever new limitations are imposed on their personal liberties to an extent that those working in the public sector institutions do not. This public/private divide will intensify in states whose budgets and pension systems are going bust. Politicians do not capitulate, unfortunately, until their state or nation becomes insolvent – their cure is always new regulations and higher taxation. After its 7-week COVID recess, the California State Assembly just gave itself another 3-weeks off with salary and per diem, just in time to deny itself any role in the new phase of the governor’s executive actions. They have left him enormous discretion and he is governing by executive order.

On various fronts, the ‘social contract’ appears to be breaking down: When public officials renege on their duty to provide basic public safety during mass rioting, and in some cases prefer to let existing criminals out of jail, then what use is it for citizens to pay taxes, except to avoid (more) punishment ? Or, when instead of leading to restore order during social unrest and health care crises they go on holiday ? Will the American people accept any winner of the upcoming election with unprecedented voting corruption expected from spoilers like big tech companies and the ridiculous drive for mail-in voting ? Sorry Tom Hanks, but disabled people can be enabled to vote remotely from home via the same existing method that the government provides for citizens to file their tax returns: namely electronically using their Social Security Numbers for identification (& only 1 vote per SSN). Seattle citizens and businesses are now suing the city for endorsing, enabling, and perpetuating the anarchist CHOP zone. Will the courts hold insurance companies liable to pay claims for destruction of property that the mayor allowed to occur by ordering the local police to stand-off rather than to enforce the law ?

The fed is one institution that is still showing some prudence, despite how far away from its recent norms it is behaving. It learned from its TARP program that distributing stimulus capital via the banks can result in them hoarding and trading it, rather than extending it in loans to small businesses. So its Main Street Business Lending Program will distribute about $300 Billion directly to businesses trying to recover from the COVID lockdown. A better move, since excess reserves indicate that the banks are hoarding cash once again. Its current QE program stands at about $120 billion per month but may switch to an unknown amount.

The scope of its QE asset purchases has been expanded to include commercial paper, corporate bonds, commercial mortgage-backed securities, and ETFs. Though this is a rather sharp departure from recent practice, it actually brings the central bank back in line with its original charter to directly support the economy through purchasing corporate paper in order to prevent employee layoffs during periods when banks cease to lend. This changed during World War I when congress directed the fed to buy government debt exclusively, effectively nationalizing it thereafter.

There is actually a shortage of corporate debt now due to the amount that the Fed has purchased. This signals that it is not only concerned with small business liquidity, but also with managing interest rate risk. It has also made this objective evident by announcing that it is considering implementing ‘yield curve control’ (maintaining pre-specified rate caps on treasuries of certain maturities by buying whatever unlimited amounts of them are needed to drive those yield to those levels and to hold them there). This has been in-effect in Japan for several years, without any sign that it has stimulated its economy.

What is less well-known is that the Fed is also trying to shore-up the stability of the international banking system through what are being called “coordinated swap lines” with other central banks. These include the ECB, the Bank of England the Swiss National Bank, the Bank of Japan, and the Bank of China. The fed is providing liquidity to these other central banks, and the center of weakness in the banking system is Europe. The ECB cannot raise capital, having ruined its bond markets with negative rates. It is now trapped – it holds 35% of all the Eurozone sovereign debt on its book as a results of Draghi’s enormous QE campaign, but cannot sell any of it without causing rates to rise. So while continuing to roll this frozen-in-place debt, it is now proffering CoronaBonds.

Since a formal default looks imminent, there is conjecture that the ECB may convert all the outstanding debt to perpetual annuity-like bonds that pay only coupon, never repay principal, and thus never need to be rolled in order to be held in perpetuity. To maintain the budget in the EU treaty, it appears the ECB will have to decide whether to issue new debt through a real open auction, or to print money. It is likely that the European block of nations will come to resemble a more Marxist set of states with capital controls and greater regulatory restrictions to prevent wealth from fleeing the continent, drastic increases in taxes (the World Economic Forum is proposing a 400% increase), and guaranteed basic income. GBI is already starting in Spain, whose tourism industry has been destroyed since COVID. Pan-Europe has just announced new COVID travel restrictions that include tourists and visitors from the US. Chinese visitors are still allowed for now. Amidst all the European financial and political disarray and these increasingly drastic moves to maintain order and top-down control, UN chief Guterres has followed Gordon Brown’s precedent by also calling for a one-world government, with the UN as a participant, of course. Despite the morass of problems those managing European central banking and EU governance have caused, the solution suggested by these gentlemen is more governing power and control.

When the people lose confidence in the judiciousness and financial soundness of government, it at some point becomes a credit pariah, rates ascend, and the country heads toward default. When government responds with 70% taxation rates and controls on commerce and production, entrepreneurial productivity declines, while black markets and both public and private sector corruption become more preferred means to make one’s way in life. When the people lose confidence in the rule of law and its enforcement, then crime, abuse, intimidation, bribery, and the law of the jungle become ascendant. When people succumb to the ploys to divide them tribally against one another all this becomes much easier for those who seek it to achieve. It’s happened so many times before in so many places, and it’s now happening again in Europe and the ‘United’ States of America.

Be sure that Xi Jinping is watching all this patiently with keen interest and with a reserve stock of Yuan set aside to buy-up assets and institutions of western nations when they can no longer concoct other schemes to financially sustain themselves any longer.