Monday, 20 May 2013

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.


  1. Very good post.

    This is why my investment position has been ultra-conservative for the last 5 years or so (and will be for the forseeable future).

    Of the money going into my super fund, 96% goes into a cash fund. Two percent goes into a "conservative fund" with small exposure to shares, and the last two percent goes into a moderate fund with a bit more share exposure.

    If the very worst happens and the "mother of all financial meltdowns" comes along, I still have 96% of my funds in cash - damned-near untouched.

  2. Well... corporate profits aren't exactly doing badly

    And anyway, wouldn't a bank be free to create as much money as it wants under a libertarian banking system?

  3. @Sam, you asked "wouldn't a bank be free to create as much money as it wants under a libertarian banking system?"

    There are libertarians who say yes, and other libertarians who say it should be banned. (How they square that last circle, you'd have to ask them.)

    For mine, the best shortest answer was given by Ludwig Von Mises: Yes, banks should be free to create money so that no banks will want to.

    Think about it...

  4. @thor42 I Wouldn't put that much trust in so called "cash". If we are thinking in terms of decades for a super then we can almost be sure that bank deposits will be obliterated by inflation or a Cyprus style crisis, if it's not that the fiat currency hasn't straight up collapsed by then. Anyway isn't this so called cash often government bonds?

  5. Sam

    The "creation of cash" by a bank is fraud. It is a lot like selling the same property two or more times. So long as more than one of the purchasers do not come over to claim the property the fraud goes undetected. It is still a fraud. When the second purchaser comes for his property then the fraud is realised and it is all on for one and all. But is already a fraud straight from inception already.

    Would a bank be free to create as much money as it likes? The true answer is it would be as free to do that as a man would be to steal from his neighbours.


  6. Thor42
    Get out of cash. Cash is only pretty bits of paper with picturs of decaying dirt politicians and the like on them. You are accepting a present from a promise-maker who can never be trusted. It is a bit like what the neighbour's kid is saying to all the pretty girls he takes over there. He keeps making promises about respect and so on. They are always disappointed by what happens next. You can hear them get upset and the whining when it happens and when they get kicked out. Don't be one like that because when the meltdown comes and your money is either taken or becomes a pile of worthless promissory notes you will end up with a bad taste in your mouth just like the girls next door.



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