Friday, 19 September 2008

$250 billion worth of panic.

The world's central banks are in a panic this morning, and the extent of their panic can be measured: $250 billion worth of panic.  That's how much they're quaking.  That's the amount of money six of the world's central bankers are printing up right now to spray over the world's markets in another vain attempt to prop up the system that all their high-strung economic theories told them was impregnable.

$250 billion worth of further inflation that we're all going to have to pay for, on top of all the other "credit injections" and bailout money dropped on world markets like manna from a non-existent heaven.

$250 billion manufactured out of thin air.

$250 billion that will do nothing to make bad loans magically disappear.

$250 billion worth of counterfeit capital that will have to be paid for, inescapably, out of real savings, yours and mine.

$250 billion that will do precisely nothing to allay the profound structural imbalances that government meddling, government regulation and government central banks have made to the structure of the world's capital, because while government central bankers tinker with the effects of the "secondary depression" -- the turmoil in the markets that is currently making headlines and causing politicians everywhere to blame capitalism for the damage they and their central banks have done to it -- the "primary depression" which is the cause of all the turmoil is still unaddressed -- and until it is, says Antony Mueller in today's Mises Daily article, the chickens of failed economic theory will keep coming home to roost.  This is not a "cyclical adjustment" he argues, "The current economic disaster is the result of the combination of negligence, hubris, and wrong economic theory":

     For decades, an economic and monetary policy has been practiced based on the illusion of, "It doesn't matter." At first it was, "Deficits don't matter." From that, the policy of "it doesn't matter" got extended to money creation, the credit expansion, the stock-market bubble, and the housing boom. Now, we're being told that buying financial junk by the central bank to beef up banks and brokerages also doesn't matter.
As a byproduct of this mindless economic and monetary policy, financial market operators, too, have lost their heads. Trusting the official cheerleaders, investors hold on in the trenches until they will have lost their last shirt. Economic weakness is spreading around the globe. There is no new spurt of economic growth in sight. Yet many investors stay put because they have been conditioned to believe that government will bail them out.
The current financial crisis is not of a cyclical nature. The financial turmoil is the symptom of the structural imbalances in the real economy. Over decades, expansive monetary policy has gone hand in hand with implicit and explicit bailout guarantees, and this has distorted the process of capital allocation. Under such perverted conditions, those investors will win most who cast away the restraints of prudence. It is a game that can go on for a long time — up to the point when the irrationality has become systemic...

A profound restructuring of global capital has become unavoidable. Such a process is quite different from a recession in the traditional sense. In contrast to a sharp and typically short-lived recession, when, after the rupture, business as usual can go on, the restructuring of a distorted capital structure will require time to play out. Rebalancing the distorted capital structure of an economy requires enduring nitty-gritty entrepreneurial piecemeal work. This can only be done under the guidance of the discovery process of competition, as it is inherent in the workings of the price system of the unhampered market.
Anticyclical fiscal and monetary policies are of no help when it comes to the daily toil in business to work towards reestablishing a balanced capital structure. The so-called income multiplier won't work, and lower interest rates won't stimulate spending. On the contrary: these policy measures only make the task of the entrepreneur harder.
    The difficulties ahead arise from the problem that business as usual cannot go on under conditions of a credit crunch, which has its roots in the distortions of the economy's capital structure. Thus, even if the financial market turmoil were to settle, there won't be the simple resumption of the old ways of doing business. The belief that, after the financial crisis is over, the real economy can reemerge unscathed, is probably the greatest error that many investors share with the policymakers.
As a result of the bailouts and the socialization of the mortgage agencies, the financial system is now fully infected with moral hazard. The disastrous effects of these government interventions will show up soon. The major task of bringing the capital structure in order is still ahead and more pain is in the waiting...

The pain will continue as long as the primary causes are left unaddressed, and will be exacerbated severely if misunderstood as the result of "deregulation," a nonsense only a presidential candidate would be dumb enough to suggest, and if applied can only delay the necessary "nitty-gritty entrepreneurial piecemeal work" required to restructure the world's capital markets to reflect real price signals in an unhampered market.

UPDATE: The good chaps at NZ's Foundation for Economic Growth tot up the total bill:

    The USA has now pushed nearly US$1 Trillion out of the helicopter to stop the economy from failing. $168 Billion refund to taxpayers, $85 Billion to AIG, $100 Billion to each of Fannie and Freddie and $29 Billion to Bear Stearns - pity about poor old Lehmans. Plus who knows how many billions into the various stressed banks around the country.
    Where does all this money come from. Is the Federal Reserve really worth that much that it can just parcel up $1 Trillion and hand it out.
    Of course not. This is just more debt on which taxpayers of the future will have to pay interest...

And of course, this is US$1 Trillion plus the overnight bill. That's a lot of corporate welfare.

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Anonymous Mr Dennis said...

I am certainly no expert in economics, but the more of this sort of carry-on I see, the more I wonder why on earth the gold standard was abandoned in the first place, it just seems far more logical to my simple mind than the current mess. People traded in gold and silver for thousands of years, then abandoned it in favour of hot air, and over the past century we have seen many messes like the current one. Would we be better off with the gold standard, or am I talking a load of nonsense?

19 Sep 2008, 12:59:00  
Anonymous B. Hallward said...

People traded in gold and silver for thousands of years, then abandoned it in favour of hot air,

"People" didn't abandon it. Governments forced it out, because that allows them to inflate more.

19 Sep 2008, 14:18:00  
Anonymous Anonymous said...

The root of the problem is socialism: the root of socialism is the abandonment of the property qualification for franchise.

resolve that problem - if say in NZ, an individual had to have clear title to say NZD500,000 of liquid assets and the problems would vanish.

20 Sep 2008, 15:23:00  
Anonymous LGM said...

"...resolve that problem - if say in NZ, an individual had to have clear title to say NZD500,000 of liquid assets and the problems would vanish."

How so? How would that qualification for a vote fix the problems of central banking, fiat money and fractional reserve banking?


20 Sep 2008, 15:37:00  
Anonymous LGM said...

Mr Dennis

You ask, "Would we be better off with the gold standard?"

The answer to your question is well covered in "Capitalism" by George Reisman. Not only does he answer that question, he explains the reason for the answer and explains the derivation. You should take a look. Get the book.


20 Sep 2008, 15:39:00  
Blogger tommie said...

Hi this is tomcruise from Alaska. I am certainly no expert in economics, but the more of this sort of carry-on I see, the more I wonder why on earth the gold standard was abandoned in the first place, it just seems far more logical to my simple mind.

Credit Card Debt

15 Oct 2008, 16:30:00  

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