The monetization of dishonesty

Stirling Newberry coined a brilliant phrase a few years ago: “A bubble is the monetization of stupidity.” Looking at the growing evidence of a financial meltdown in the US economy, I would argue for a broader assertion: recent American prosperity has been based on the monetization of dishonesty. Ever since the savings and loan scandal of the Reagan years, large-scale financial corruption seems to have become endemic to the US economy. This diary lists some of the evidence and addresses the unpleasant conclusions.

Here, in no particular order of magnitude, is a list of evidence of the pervasiveness of institutionalized dishonesty as a source of American economic “prosperity.”

1. Dishonesty of private sector monitors of business activity. The biggest audit firms have been involved in enormous acts of malfeasance. Arthur Andersen was put out of business for attempting to conceal its enabling role in the Enron debacle, and KPMG is still being prosecuted for a huge tax-cheating scheme it sold to its clients. The main private bond rating agencies appear to have traded favorable bond ratings for unsound mortgage-backed securities for fees paid by the securities firms.

2. Dishonesty of government economic reporting. Strange “adjustments” have been creeping into the economic statistics published by the US government. These adjustments often undermine the “good news” that was reported when politicians were eager to show evidence of a strong economy. Reporting of the M3 money supply statistic was halted just as the Fed began injecting huge amounts of dollars into the economy. Inflation (core) has been redefined to exclude food and energy costs, although these costs are certain to impact most other prices. The employment statistics regularly omit “discouraged” job seekers, who simply disappear from the ranks of the unemployed if they remain jobless for more than a few months.

3. Dishonesty among major marketplace participants accounts for the huge losses reported by most major financial institutions, as they learn that the risk characteristics of huge amounts of securities were not honestly stated. Nobody really knows the dimensions of the current credit crisis, because the securities in question were carefully designed to conceal their defects.

4. Dishonesty in acknowledging the enormous threat of petroleum depletion, which appears to be a near-term issue rather than a distant concern. Each day brings higher oil prices and increasing evidence of declining output at the world’s biggest oil fields, yet the conventional wisdom remains that there is no problem, and that we will have plenty of oil for the foreseeable future. Oil powers the world economy. If oil production drops significantly, economic output will drop significantly.

5. Dishonesty in the business press, which keeps looking for rays of sunshine in an increasingly cloudy and ominous picture. Not content with distorting political reporting to favor an authoritarian US government. Rupert Murdoch has launched a “business news” network to propagandize business reporting. But other business publications are now largely controlled by their advertisers, who prefer cheerful and optimistic coverage of everything from CEO salaries to global warming. A random sampling of business journalism would lead you to believe that we are in an era of boundless prosperity.

6. Dishonesty regarding the results of globalization. Globalization is not reducing world poverty. Super-slums, huge cities of millions of desperately poor people, are growing all over the world, right next to tiny enclaves of newly-affluent globalized workers who are enjoying the fruits of off-shoring from high-wage countries. Meanwhile, the former high-salaried workers whose jobs have been outsourced are sliding down the economic ladder.

7. Dishonesty in the academic sector, where MBA programs produce thousands of graduates who are told that the corporations who will hire them value efficiency and productivity, but do not tell them that bribery, intimidation, and deception are considered even more important tools of management.

We are beginning to see the cumulative results of an American economy that is full of shit. At some point, the stench cannot be contained, and the mess becomes a public nuisance. It is an open question whether the economic corruption of America is reversible, or if we will sink into the permanent malaise of a once-great nation brought low by greed and stupidity.

Honest people who wish to protect themselves within this rotting culture have few options, but here are some tactics for minimizing the pain:

1. Avoid indebtedness. Job losses and other financial hardships will become increasingly common as the crooked casino starts to shut down. You don’t want to owe a lot of money when the economy tanks.

2. Invest in personal skills. As conventional assets become untrustworthy, you can make yourself an investment asset. Add skills of durable value to your portfolio of abilities. Your skills may be the only currency you have to trade in a time of financial collapse.

3. Avoid uninsured investments. Anything other than government-guaranteed debt may evaporate as the spreading awareness of dishonest financial activity undermines conventional investment funds.

4. Put some money in gold or sound foreign currencies. At the worst end of down-side scenarios is a major devaluation of the dollar, or partial repudiation of US Government debt. Owning gold or hard-currency investments will shield you from such catastrophic events.

5. Find trusted sources of financial information. Stop listening to known institutional liars and use independent web-based sources of trusted financial advice.

The house of lies is starting to crumble, and we are all going to suffer from the collapse. All we can do is minimize the damage and try to keep sociopathic liars out of leadership positions in the future. Good luck.