The global monetary and economic crisis has reached its next phase. With a world economy already seriously out of whack, into which the first trillion-dollar tranche of economic “stimulus” was poured without effect, Federal Reserve chairman Ben Bernanke is about to press the button to print around three trillion new paper dollars to further devalue the American currency, further dislocate a world economy out of whack (and desperately trying to recover), and potentially initiate the final destruction of the American economy.
If the first “stimulus” merely printed enough paper to keep afloat those zombie malinvestments that were built up over the boom that needed to die in the bust, this last desperate mega-printing will so dilute the American currency that it will no longer even be able to do its job internally of lubricating the division of labour it once made possible, and externally of allowing the American dollar to be virtually the world’s reserve currency.
That he will be pressing the button with the full blessing of virtually every one of the world’s mainstream economist is a measure of just how far mainstream economics is from having a clue what’s going on at this stage of the crisis, any idea of the role that the application of their theories had in causing the global monetary and economic crisis, and any figment of a notion now of any Plan B to remedy what they’ve caused.
Instead, we’re just about to get more of the same, by the truckload.
The world crisis was caused by an enormous worldwide increase in the money supply—around twenty percent year-on-year for more than a decade, compounding—which flooded into credit markets, distorting the capital structure and giving finance companies what they thought would be a never-ending spigot, and spilled over into the world’s housing market, creating the world’s most expensive and biggest-ever housing bubble.
It is being now “fixed” by nothing less than the same again—only this time on steroids. More cash pouring out of the Fed’s printing presses.
Injecting huge tranches of counterfeit capital into the economy to stimulate the boom was what initially inflated the bubble and caused all the dislocations. Injecting huge tranches of counterfeit capital was the so-called solution wheeled out in the first tranche of bailouts and “stimulus.” Now, with no Plan B even under consideration, the only call we hear from the mainstream is “the same again, only more so.”
If the first hit was like feeding a person crack, and the second hit of bailout crack was like trying to revive the patient with a bigger dose once their come-down started, then this last hit is like trying to revive a dying patient by making their heart explode.
There’s only one word for it. It’s insane.
Whether this massive emission of new money by the central bank is brought about through direct purchases from the central government (“Quantitative Easing”) or from the politically connected banks (“Credit Easing”) is immaterial. The results are exactly the same: they both involve "an expansion of the central bank's balance sheet," as Ben Bernanke himself puts it. Both engender a surge in available money and credit. Quantitative easing, again according to Mr. Bernanke, "is most common in poor countries or in countries wracked by war or natural disasters." Or, the jaded might add, in a country wracked by economic illiteracy.
There really is no Plan B being considered, you know. This bailout crack is being shovelled straight into the patient’s heart at the very same time as the economic doctors are strapping the patient to a gurney with enough financial regulation to ensure any restructuring is virtually impossible in any place—and the existing regime uncertainty is compounded.
There can only be one result. Economic destruction.
But there really is a Plan B, you know, and it’s the very opposite of the plan being followed.
The money pumping is an attempt to “fight” falling prices. But rather than pumping the money supply to attempt to make falling prices impossible, and putting in “price floors” and minimum wage laws to make falling prices illegal, economists might realise instead that in falling prices are the very seeds of recovery—opening up the very springs of profitability that will allow viable businesses to lower their own costs and get back on a profitable footing again.
And rather than the slide to regulation, and to the protectionism and economic nationalism which is the almost inevitable counter reaction to collapse (phenomena perfectly reflected in yesterday’s call locally to ban the sale of NZ farmland to foreign investors—and calls worldwide for rising protectionism and for new governmental and supranational agencies aimed at global governance of the world economy) what’s needed instead is just what Czech President Vaclav Klaus was recommending yesterday to the United Nations.
I am afraid we are moving in a wrong direction. The anti-crisis measures that have been proposed and already partly implemented follow from the assumption that the crisis was a failure of markets and that the right way out is more regulation of markets. This is a mistaken assumption. [“A big increase in financial regulation...will only prolong the recession,” he earlier told the Financial Times. “The best thing to do now would be temporarily to weaken, if not repeal, various labour, environmental, social, health and other 'standards,' because they block rational human activity more than anything else."] It is not possible to prevent any future crisis by implementing substantial, market-damaging macroeconomic and regulatory government intervention as it is the case now. It is only possible to destroy the markets and together with them the chances for economic growth and prosperity in both developed and developing countries.
The solution to this or any other crisis does not lie in rising protectionism [Can you hear that, Bill English?] … The solution doesn’t lie in “more bureaucracy” either, in creating new governmental and supranational agencies, or in aiming at global governance of the world economy. On the contrary, this is the time for international organizations, including the United Nations, to reduce their expenditures [and] make their administrations thinner…
Sadly, there is less than no chance of any Plan B along these lines being adopted anywhere outside the Czech Republic. Which means that the process of rapid economic and capital destruction is now under way.
I’d recommend you do whatever you need to do to protect what you have.
UPDATE 1: Did I say mention the worldwide housing bubble the central banks created? Australians are still in denial about their housing bubble—a bubble fuelled by their Reserve Bank’s irresponsible credit expansion—a bubble they still refuse to recognise, but which is nearly about to pop.
As said above, I’d recommend you do whatever you need to do to protect what you have.
UPDATE 2: In a more rational world, one in which there was a rational Plan B, the world would have been out of economic depression in February last year.
instead, we’ve had the same Plan A used by the likes of Hoover and Roosevelt to extend the 1929 correction for another fifteen years of crisis—the same remedies I was warning back in October 2008, before the last election, would be responsible for extending this one.
If you were devising a Plan to ensure that when markets need to correct, they can’t; that when real savings are being consumed on malinvestments that urgently need to be extinguished, they won’t be; that when an economy needs to be restructured, it won’t be; then this is the plan you’d come up with to extend the collapse and make sure the necessary correction won't happen, just as the Hoover-Roosevelt Plan A did in the thirties:
- Prevent or delay liquidation by propping up shaky businesses and shaky credit positions. (Better to flush out the malinvestments quickly, so recovery can get under way.)
- Further inflate the money supply, creating more malinvestments and delaying the necessary correction. (Better to maintain the the purchasing power in your pocket rather than dilute it.)
- Keep wage rates up --or keep money wages constant when prices start falling (which amounts to the same thing) -- which in the face of falling business demand is a sure recipe for unemployment. (Better to take your cut now, and give your business a chance to restructure.)
- Keep prices up (by means of the likes of green-plated building regulations) or add new costs to struggling businesses (such as the dopey Emissions Tax Scam), delaying the necessary corrections that will make businesses profitable again. (Better to let prices fall to the new level they need to post-crash. Trying to help recovery by artificially re-inflating prices is like backing over someone you’ve run over in your car, hoping that it will make the patient better.)
- "Stimulate" demand by spending on "infrastructure" projects just to make it look like the government is doing something -- when what that something actually does is to take money from profitable businesses and bid resources away from struggling businesses. (Better if government cuts its coat according to its new cloth, without competing with struggling businesses and raising the prices of now-much-scarcer resources.)
- Discourage saving and investment by increasing government spending (all of which is consumption spending) and maintaining high tax rates. (Better if government cuts its coat according to its new cloth, without taking now-much-scarcer resources away from struggling businesses.)
- Subsidise unemployment with make-work schemes paid out of money from profitable businesses that will bid resources away from those struggling businesses, delaying the shift of workers to fields where genuine jobs would otherwise be available. (Better to abolish all minimum-wage laws, so everybody who wants to work can work—and work in a job that pays its own way.)
As Murray Rothbard points out in America's Great Depression (from which I draw the above seven points) when you list logically the various ways that government could hamper market adjustments and hobble the adjustment process, you find that you have precisely listed the favourite "anti-depression" arsenal of government policy.
And you’ve listed the “Plan A” that they’re still following. They have no Plan B.
I said in 2008 all these variants of stimulunacy would be used, and would fail, just as they did in the First Great Depression. They have, and they are. So fasten your seatbelts, because their use now, on steroids, will be responsible for creating the Second Great Depression.
UPDATE 3: Buy gold? Watch talking heads including Peter Schiff on The Kudlow Report:
“You’re seeing currency destruction going on around the world… The one currency you can’t print more of is gold.”
“The US Fed has now laid its monetary cards on the table… its new mandate is to create inflation. The old mandate was to create ‘price stability,’ but the Fed now views stable prices as a problem that its’ gonna cure by creating inflation.”
“If you’re an American citizen and you own US currency, you’ve got a bullseye on your back and you’re in Ben Bernanke’s cross-hairs.”
UPDATE 4: Bernard Hickey has contrived not to notice that the government’s own central banks have been front and central in pumping up the boom; that their flawed and relentless pursuit of bogus price stability is at root responsible for both boom and collapse; and he’s now abandoning what he calls the “free market orthodoxy” and plumping instead for protectionism, nationalism and braindead big governmentism.
He’s an easy read of how bad economic education leads to dire economic reporting.
He rightly derides our high debt, and the fact NZers did so little productively with it in the boom years. Yet he is oblivious to the place wherein the vast majority of that credit was created: the world’s central banks.
He says we need “measures to control our currency.” Hasn’t he noticed that the Reserve Bank has been pumping and un-pumping our currency for the last decade? With what measure of success we can already see.
He seems to have bought wholesale the idea advanced by Alan Greenspan and elaborated by Ben Bernanke that what was actually responsible for the bubble was an excess of global saving—an “excess” from which Bernard now thinks we should wall ourselves off from. But as George Reisman pointed out when Greenspan and Bernanke advanced this alibi to distract from their own culpability, “the very notion of a saving glut is absurd, practically on its face.”
And he seems to have bought the idea that for the last decades we have had “completely free markets and capital flows” Free markets! What is he smoking! This hot-shot economics reporters is apparently blind to the fact that in the markets of the last decade there is virtually no price or profit relationship left untouched. You think the age of Muldoonist price controls and interference with profits are dead? In the last few decades the “orthodoxy” worldwide has overseen:
- interest rates controlled by an economic dictator with powers Muldoon would have killed for;
- specific interest rates, such as home mortgages, manipulated through subsidies as well as price controls;
- indirect currency controls virtually everywhere;
- direct government manipulation of the gold market by both world govts and the IMF;
- asset price floors—in addition to the ‘Greenspan put,’ we’ve had money printed and “toxic” assets bought, anything to keep asset values raised ;
- wage floors, essentially a guarantee of widespread unemployment in a downturn;
- wage ceilings, especially for executives;
- direct price controls, especially in medicine and education;
- good old-fashioned protectionism—not just currency manipulation, but outright tariff and non-tariff barriers;
- the dismissal of business bankruptcy and liquidation as “old-fashioned”;
- pumping up illusory profits by inflating the money supply, creating an inflationary illusion of profitability and prosperity;
- the grant of virtual monopoly powers to the very credit agencies that didn’t know a bad thing even when it was held right under their nose.*
These are just a few of the means by which govts ran price controls and interference with profits in recent decades—and still are. But Bernard, and hundred of thousands of others trained to view all this as part of a “free market” are too braindead to see them for what they are, and now with the failure of this system of control calls instead for the controls to be tightened!
He has the frankly braindead notion that somehow the people in govt responsible for creating, overseeing and extending this economic disaster need to take back the reins. He has apparently either lost the brains he once had, or has now reached the point (as it has with most educated in mainstream economics) where the real world has now outstripped his learning, so has resorted to the siren cry of the braindead everywhere: “Bring me more big government! Now!!”
Bernard Hickey is a fucking moron. That’s all that’s left to be said.
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* This list comes from Hunter Lewis’s book Where Keynes Went Wrong: And Why Governments Keep Creating Inflation, Bubbles and Busts. It’s exactly the sort of book that braindead fools like Hickey should be reading, but don’t. Or won’t.