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Year of the Jump Ball - Part I: Payback


“Politics, n. A strife of interests masquerading as a contest of principles.”
― Ambrose Bierce

“Right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.”
― Thucydides, The Landmark Thucydides: A Comprehensive Guide to the Peloponnesian War

In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped only to live in a world that no longer exists.
―Eric Hoffer

The year 2012 is shaping up to be the year when five decades of economic, energy, monetary, and foreign policy errors by eight successive US administrations finally catch up with us. The rise and collapse of two asset bubbles in ten years has left the US economy structurally weakened and government finances in shambles. As dwindling global oil supplies shuffle economic and political power in the Middle East, the shrinking contribution of the US and Europe to global economic output is shifting economic and political power West to East. The global political economy is reorganizing around the world's sources of oil and savings. Eastern and Middle Eastern powers are pulled together and pushed away from Western power and influence.

After decades of accumulation of risk to the steady-state political economy formed in the decades after WWII and reformed after the Cold War, in 2012 we see the potential for step function change that puts it all, or nearly all, up for grabs. On an a multi-millennial historical time line, it may happen in blink of an eye.

Call it the Year of the Jump Ball. Like a jump ball, the win goes to the quick and the strong. Who will it be and what does it mean for us as investors?

America's Five Critical Risk Factors

The US made five manageable and recoverable public policy errors in the early 1970s and 1980s. Then, as each administration failed to confront them, these once manageable and recoverable errors grew and metastasized into America's Five Critical Risk Factors. One or more of these factors may culminate in crisis in 2012 with consequences that are as difficult to predict as the timing.

The potential consequences can be traced back to the original source of each of the five risks.

Risk Factor Cause #1: Unilaterally abandoning the international gold standard to force the world onto the US Treasury dollar standard in 1971

Economist Robert Triffin and French president Charles de Gaulle warned of the consequences of currency reserve accumulation by US trade partners and of the US "going into debt for free" if global monetary system based on the currency and debt of a single sovereign nation -- the US -- persisted. The imbalances predicted by the Triffin Dilemma and the threats they pose to the international monetary system (IMS) and the global economy became apparent decades later, in the 1990s, yet Prisoner's Dilemma economics motivated all major parties in the system to perpetuate it. The cost of reform will fall largely on the monetary system's main beneficiary, the United States. Major parties to the system are in no position to press the US for reform at US expense because they depend on the US for either export demand -- dependence on the "over-consumption" growth model that Triffin warned about -- and thus domestic economic security, or military security, or both. Paradoxically, the economies of US its trade partners have over time become dependent on the global imbalances that Triffin predicted.

Triffin did not offer predictions on....(read full article and discuss it here).


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