Friday, 13 February 2015

How to create a bust

Back in the day, a quip that used to be popular was this:

Q:  How do you make a small business?
A: You give a large business to Hugh Fletcher and wait ten years.

We might try a quip along similar lines that has much wider implications:

Q: How do you get an economy-wide bust?
A: You give an economy to a central banker and tell him (or her) to fix it.

You might notice that this quip is not funny. That’s because it isn’t funny. Not funny at all. Not for anyone, except perhaps for those first in line for the central bankers’ money.

Of course, post-2009 when the central bankers were spinning counterfeit capital out of their rear ends, everyone but everyone was punting for safety. Those safety punts are the proximate cause of the next bust to consume the counterfeit capital and more. The primary cause, never forget, is the central banks themselves.

As the man says, Spot the credit-based mal-investment boom:

One of these things is a non-financialised index of real transaction costs in the real world... and the other is an index of assets that are heavily financialised.
   
It appears the artificially-inflated financialised 'boom' has busted...

Keith Weiner explains briefly what went wrong:

Post-2009, people believed that:
    1) central banks were "printing" money
    2) printing would lead to higher prices of commodities
    3) besides, commodities were going up
    4) so they bought commodities
This had the effect, among other ill effects, of incentivising
malinvestment in commodity production.
    The overhang of excess capacity will be with us for a long time, crushing profitability in commodity production and refining, crushing bank balance sheets with badly performing loans, burdening the unemployment rolls, and of course having deprived sectors which could have used the resources from having been able to grow.

Just thank those central bankers.

3 comments:

Chaz said...

Oh noes, but just a while ago you said this: "That after-effect of stimulunacy (sic) has serious historical hyperinflationary implications." So what exactly is the problem? Where's the hyperinflation? What should I do with all my gold now?

Anonymous said...

Keep it. Physical gold is still just as effective in protecting purchasing power in a deflation as compared to an inflation.

Peter Cresswell said...

@Chaz: "A while ago" was 2009, which is why it took me a while to find that. I'm flattered you keep my quotes pinned up on your wall so long.

Full context:
That after-effect of stimulunacy has serious historical hyperinflationary implications. How serious?

“There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980… [T]he 12 largest episodes of hyperinflations … were caused by financing huge public budget deficits through money creation … the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures…Projections by the US Office of Management and Budget, for example, “imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what [the US] government is spending has to be borrowed…”


So, was I wrong to raise the serious historical hyperinflationary implications of unprecedented monetary inflationism? Well, we got the monetary inflationism, we have the Fed and ECB and BoJ monetising debt unsustainably, and we also got a (temporary) sequester, and now (as commodity prices clearly suggest) we have what looks like rampant malinvestment in the early stage capital goods markets, just as you'd expect with rampant gobs of counterfeit capital entering the system.

So, really, "oh noes"? Really?