Tuesday, September 28, 2010

The Fed’s new “super-stimulus” will not stimulate but destroy. UPDATE 2: “Plan A” for wealth destruction. UPDATE 3: “The US Fed has now laid its monetary cards on the table… its new mandate is to create inflation.” UPDATE 4: Bernard Hickey is a moron.

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."[1] 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.

Frankly, "Falling Prices Are Not Deflation but the Antidote to Deflation." 

And Economic Recovery Requires Capital Accumulation, Not Government 'Stimulus Packages'.

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:

  1. 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.)
  2. 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.)
  3. 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.)
  4. 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.)
  5. "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.)
  6. 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.)
  7. 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.

Fuck him.

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.

_ _ _ _ _ _

* 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.

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12 Comments:

Anonymous Simon said...

Social security, Medicare, Medicaid all that off balance sheet indexed debt that government has promised can’t be inflated away like on balance sheet debt. Printing $3 trillion is nothing.

The US economy will just be utter crap for the next 30 years it won’t be destroyed.

The Aussie property boom is interesting. Don’t see much coverage here?? CBA is going to get crushed.

People were pissed off with bailing out SCF depositors. NZ government bailing out Aussie subsidiaries should be fun.

9/28/2010 02:12:00 pm  
Blogger PC said...

@Simon: You're right on at least two counts. Almost.

1. With $110 trillion of unfunded liabilities, and counting, the very best the US can hope for is 30 years of stagnation.

2. I haven't seen the coming threat to the Aussie banks commented on locally, yet. So far, we just think we've been lucky that our Big Four are their Big Four, and we've all been okay together. But with their housing bubble ready to burst, the implications for those big banks--and for us--are huge.

9/28/2010 02:35:00 pm  
Anonymous Mark Hubbard said...

Your update 4 is spot on. But not only Bernard Hickey. Look at the comments on that thread: John Walley, and hence, the Manufacturers Federation, are cheering Hickey on. Control this, control that: I've made the point on that thread (Tribeless) there seems to be no business group in NZ with the wherewithal to understand that free markets are in their best interests (and for all of us). As you've said on a thread somewhere, blinkered pragmatism is the biggest evil of all.

There's such a philosophic (first) and economic dearth of understanding, it's no wonder the West is screwed and the Nanny State rules.

9/28/2010 04:20:00 pm  
Anonymous Pro-Capitalist said...

Commenter Ruth, made a comment on this blog some weeks ago, saying she thought Mr Hickey was just dumb, but now she (Ruth) realized that she was only half right. Mr Hickey is both dumb and dangerous.

Ruth's comment was spot-on there.

It is sad that there are lots of economics illiterate who follow Hickey's words blindly as some sort of words of God or Jesus Christ.

Part of the reason no doubt is that Hickey suffers from the pundit’s curse – the need to say something original, something different, regardless of how relevant/irrelevant.

This moron should at least try to educate himself, like updating his economics knowledge by reading tons of books in economics, but I suspect that he doesn't. He prefers suffering from pundit's curse.

9/28/2010 04:42:00 pm  
Anonymous Robert Winefield said...

"I’d recommend you do whatever you need to do to protect what you have."

Aye, and that's easier said than done. Buying Gold coin/futures/stock/mining stock is no guarantee.

As the crisis bites, Obama et al. are likely to follow another FDR stratagem and confiscate privately held gold.

Other than paying off your debts there isn't a hell of a lot else that the average bloke with $10,000 in the bank can do.

If I had some cash, I'd buy farm/forestland next to a watershed and way away from a nature sanctuary.

But seeing as I don't have the cash the only thing I can accumulate worth a damn is knowledge.

It's why I'm learning to fix my own car, bicycle & scientific instruments. I may look into gunsmithing. If it all goes to shite - that's a skill that will be in demand. And if it doesn't go to shite, at least I'll have experience in working metal.

I have a great foreboding that there is no future in researching Pharmaceuticals now that Obamacare is in the process of banning private medicine and medical research.

I feel as if wasted 12 years at University for nothing.

9/29/2010 08:26:00 am  
Anonymous Miguel said...

Procapitalist, I agree that Bernard Hickey is an economic illiterate dumbfuck. What a shame that that only writers and so called experts, with their economics opinions are being exposed to the uneducated public are themselves dumbfucks. Imagine if Mr Creswell had the high profile that Mr Hickey has? The general public would be more informed about economics facts rather than consuming bullshits from the likes of economic illiterate as Mr Hickey.

Everytime I see this oracle Hickey on TV, I reached for the remote control and switched the channel.

9/29/2010 09:46:00 am  
Blogger Ruth said...

My opinion of Hickey improved for a bit after I said that, Capitalist. Then this comes down the pike...

I suspect Hickey has political ambitions - it's a populist move for sure and most on the right and left will agree with him.

9/29/2010 12:56:00 pm  
Anonymous Falafulu Fisi said...

Bernard Hickey has a similar article at the NZ Herald's site.

The free market god doesn't exist

I don't know if Hickey can point to any empirical evidence about the claim in the title of his article? I bet that he won't cite a single one. He may cite some online/newspaper opinions but those are not counted as peer review evidence.

I can show Hickey some evidence (in peer review publications) that the free-market exists, so I think that misinformed commentators such as Hickey, simply haven't read enough.

He frequently cited Taleb Nashim, but I seriously doubt that Hickey fully understands the theoretical arguments made by Taleb. Taleb, simplifies his arguments for the general public in his book, Black-Swan, where the problem of induction is exposed, but it has been known in the last 1 and a half decades or so ago, that, those flawed inductions were based purely on axioms and not on well grounded empirical evidence. Empirical evidence did show up around in the mid 1990s, but then the whole economic profession/academic weren't ready to abandon those popular market efficiency/equilibrium theories being taught in economic schools around the world.

Taleb stressed that the Gaussian/equilibrium severely underestimated the risks. Risk underestimation of risks is just how the free market works. Make the wrong move by under evaluating risks and you're out. Make the right choices and you're still in the game to compete another day. So, Taleb's rant about risk under evaluation is a misconception, so reporters like Hickey, just jumped the bandwagon and said that the free market doesn't work.

9/29/2010 06:20:00 pm  
Blogger Lee S. said...

Here's a worldwide currency depreciation chart you won't see in any mainstream publication:

http://www.fame.org/HTM/Currency%20Destruction.htm

9/29/2010 06:27:00 pm  
Anonymous SylviaM said...

PC, excellent article and I have only started reading about economics recently, where as before, I wasn't interested at all, since I never had any formal training on the subject.

Definitely I have learnt a lot about new (economics) topics/facts just from reading your economics blog posts alone since I started visiting this blog over the last month or so, than from our print media (Herald) or TV news (TVNZ, TV3,...). To the best of my knowledge (in my 58 years on this planet), the issues that you have consistently raised on this blog about economics, have never been critiqued or addressed properly in our MSM or from our so called economics experts. Either both our local journalists and economics experts have been severely undertrained, that is, they hardly want to veer off from their comfort mainstream economics’ views to learn about other views (as you highlighted on this blog) or may be, they choose to be ignorant.

Keep those good posts coming? I don't learn the depth of knowledge I gained from reading your blog, than from other local blog, even the Kiwiblog.

Thanx.

9/30/2010 09:07:00 am  
Blogger Ruth said...

Fisi there is Taleb's book "Fooled By Randomness" as well.

Here are the chances of success with Taleb’s example investment over different timescales:

Scale – Probability
1 year – 93%
1 quarter – 77%
1 month – 67%
1 day – 54%
1 hour – 51.3%
1 minute – 50.17%
1 second – 50.02%

I would be inclined to suggest that those who say the 'free market' doesn't work are simply losers who couldn't make 50c on their investments.

9/30/2010 04:14:00 pm  
Anonymous Tanmedia said...

"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."

Nonsense. Hickey has long been critical of money printing, and he understanding it in the context of NZ as a target for the borrowing of cheap funding for the housing bubble.
So while his solutions of interference show his lack of any ideology, your only real argument against him is "no more big govt" and less central bank meddling. Is that it? Do you have anything empirical to add or is that it?
So while I support your bagging of Hickey, I agree with Pro-Capitalist that he has some kind of pundit's disease. He's not a dumb-fuck for upping the understanding of what's happening in the economic world (his top 10s are usually a good source) for the real dumb-fucks such as myself and the assortment of nutters who live in his comments page.

10/06/2010 04:05:00 pm  

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