Bubble finance brings Australasia a new world-historical moment

You might have noticed that the mantle of Australasia’s most highly valued company has been passed from one that produces resources from out of the ground, i.e., BHP, to one that creates credit out of thin air, i.e., the Commonwealth Bank of Australia. Close on the CBA’s heels is fellow credit-creator Westpac, said to be “within a good trading session of knocking BHP out of second position.”

Just so we’re clear, this is not normal. This is historically, a very important turnaround—a new world-historical moment. The turnaround has puzzled many people, but it shouldn’t have.

Well, that’s where you can thank Dr Bernanke and the [world] banking system. For start, banks can do something mining companies can’t – banks can create money from thin air in order to create an asset.
   Mining companies however, have to beg for money from banks, other financial institutions and investors. And rather than just stamping ‘approved’ on a loan form to create an asset, resource stocks have to spend millions to obtain their assets.

Financial Services Index – blue line; Metals & Mining Index – red line
Source: Google Finance

Get the difference: mining companies have to earn money;  whereas in the “new economy” created by the central bankers, banks literally create money—and in the last few “post-financial-crisis” years of central bank rule, they’ve been told to create as much as they possibly can.

And so they have. And so we arrive at this blessed moment in time, when profits are bought not by how much value you can produce, but by how close you are to the bankers’ printing presses.

It’s the same thing powering the “record highs” in US, Japanese and European stock markets. If you think the Nikkei, the Dow  and the Dax have risen this year around 35%, 20% and 10% respectively because US, Japanese and European businesses have got 35%, 20% and 10% more profitable, then I have a bridge, some government paper, and parcel of wrapped CDOs I can sell you.

Instead, each one has ridden to new highs on the back of an avalanche of paper promises exuded by central banks like the US Federal Reserve, and extruded out of lending banks like the CBA.

The idea that a central bank can artificially stimulate an economy without side effects is naive. The 1920′s and 1930′s saw huge leaps in industrial innovation, but it didn’t stop the Great Depression and more than a decade of misery.
    One problem with central bank meddling is that it creates an uneven economy.

This problem is magnified with every profit announcement favouring money printers over money earners—and exacerbated with every investor keen to ride this new bubble to the top.

Is present monetary policy rational? Only if you think it makes sense to deliver substantial short-term windfall profits to owners of stocks, bonds, and real estate—bought at the expense of any genuine long-term prosperity.