Still crazy, still stuck in this Bizarro-world...
SO HERE we are, drawing to the close of another year and still we struggle with the legacy of the last Boom, writes Sean Corrigan of Diapason Commodities for the Cobden Centre.
Still we search around for the macro economic Tooth-Fairy, 'liquidity' solutions to the problems caused by our earlier misallocations of capital instead of facing the fact that insolvent entities need to be liquidated and their assets put to work by people who've shown they can run their businesses successfully without a government crutch!
Thus, having started the year with gains of almost 10%, nominal total returns for MSCI World equities are off 7%, with the US flat and the Eurozone down by nearly 20% – as are the Emerging Markets in which it seems every portfolio manager (as well as a great number of real business leaders) is putting so much faith. Junk returns have been their lowest in more than eight years, barring period of the Crash itself. In commodities, Base Metals are off by a quarter; Ags by a fifth; and Energy is flat – largely thanks to the little local difficulty experienced by the dear, departed Colonel!
Only the Precious Metals show anything substantially in the plus column, being up 7%, and even that gain is due to gold alone and nothing else. So, with those flight-to-quality stalwarts, Bunds, up 17% and US Treasurys up 28% – their best showing in 13 and 26 years, respectively – it's been another bust for the 'Risk On' front-runners of global recovery ever since the Fed let its distortive, but otherwise largely ineffective QE-II programme expire in the summer.
Are things going to get any better in the near future? In answering this, we should never underestimate the efforts of all those at work in the market economy whose only honest route to material self-satisfaction is to provide a service which their fellows will value, in their turn. Diligence and determination, leavened with a soupçon of entrepreneurial insight and fuelled by the dedication of earned surpluses to capital re-accumulation is ultimately the only remedy for the ills which afflict us and it would be foolish indeed to say that this process is not ongoing, however much it is being hampered by the stupidity of the Philosopher Kings.
That said, our blind persistence with the worst kind of Rooseveltian 'experimentation' and our obsession with monetary necromancy constitute nothing less than a major inhibition of this immunological response of self-healing through thrift and innovation.
Indeed, one has to fear that the faulty signals given off by all the measures so far taken – many of them beyond even the conception of all but the most wild-eyed monetary cranks before we started down into this particular Vale of Tears – have already caused some of those same healing mechanisms to turn cancerous. Who can say how much well-intentioned effort over the past three years – however fruitful it has appeared to have been in the interim – has been misled into taking for permanent and self-sustaining what is only a short-lived artefact of a massive monetary and fiscal intervention which cannot continue indefinitely without bringing about the complete destruction of the market order – and, probably, the liberal society which it fosters?
Beside the peril this engenders for even the most perspicacious entrepreneur (a man who, no matter how well-endowed with exceptional Kirznerian vision, can never, to quote Hayek, really know his place on the complex, topological manifold which is the modern productive structure), the difficulties it throws up for us players in the sigils and ciphers of capital may seem trivial enough. Yet, it cannot be healthy for any of us when, with so much of the basic pricing mechanism in the market not functioning – whether because of accounting suspensions, bail-outs and support schemes, currency interventions, the imposition of zero interest rates, collateral squeezes, the disease of "high frequency trading" – we all have been reduced to trying to work out what constellation of data, or what political mood will next allow Bernanke or his peers to launch their helicopters, financing both public wastefulness and private denialism, and so give us all a few months' trading rally.
So perverse has this become that the market can sometimes persuade itself that, in this Bizarro-world which we inhabit, weak data is to be construed a positive since it increases the likelihood of another burst of official inanity, despite the fact that such actions as will then be taken will not only fail to address the underlying problems, but will surely add new woes to the list, every time they are undertaken.
So, for example, much has been made of the fact that, next year, the usual rotation of bottoms on seats means will we not only get an even more Dovish mix on the FOMC (sic!), but that 2012 is an election year, meaning that the Administration will be expecting the usual helpful policy settings pretty early in the spring, with the aim of producing an artificial slew of good news, right about the time people go to vote in the Fall.
What this really implies is that we have actually become conditioned to welcome the periodic alternation of the authorities' heavy-footed recourse to the accelerator and the brake, in total disregard of the damaging consequences such a hysteresis inevitably entrains.
Are we doomed to stage a re-run of QEI, QEII and the rest, only to see the cost of living go up for ordinary folks by more than their incomes; only for the whole economy to roll over again when the groundswell of complaints leads to the stimulus being temporarily withdrawn again? If so, we will inculcate two, decidedly unhelpful lessons in the public mind: one, that prices – while not immune from cyclical swings – will ratchet higher and higher at each pass; and, two, that while cost control can be relaxed if those rising prices offer some undue security of return to the producer, it is nonetheless not wise to over-commit one's resources during the initial sugar-rush for fear of being over-extended when it is next suspended.
The term for what may then result is 'stagflation'. In Europe – where the most acute dangers seem to lie at present – this may seem some way from being the case. Monetary growth has, after all, slowed to such a point that – ceteris paribus – we should expect price rises to show clear signs of slackening in the coming months unless the users and holders of the Euro lose a sufficient degree of faith in their money that they strive more anxiously to get rid of it, regardless of its objectively less ample supply. Signals will naturally be hard to unscramble here, but among the symptoms would almost certainly be a weakening of the currency's value on the foreign exchanges. The fact that this has begun to occur is by no means conclusive to the case but should nevertheless alert us to be on the look-out for other such behaviours for confirmation that this inflationary erosion of trust may be under way.
Europe's travails are being all the more drawn out because of the incomplete realisation that the scale of the vulnerabilities built up during the last 10 years', risk-dulled Rake's Progress is unlikely to respond to piecemeal solutions – certainly not to a belated reimposition of the original Stability Pact, however laudable such a Gladstonian form of finance might be. Nor is it politically reasonable to expect the populace to endure quarter after quarter of grinding 'austerity' in order to keep their debtors happy, with no prospect of any early relief from their torment.
There may, truly, be little chance that such an approach will lead to growth, as the Keynesian defenders of Big Government and unsound finance never cease to assert, but this is because theirs is a very extravagant version of 'austerity', indeed. Under this, their beloved Leviathan – even if pared of some of its ability to use debt to corrupt the elections and pervert representational accountability – must otherwise be restricted in its diet as little as possible.
Thus, it continues to commandeer scarce resources, pushing up their prices beyond the level at which some enterprising fellow could use them to expand his own business. Thus, too, the state still imposes its grossly-expanded menu of priorities on individuals thereby denied a due measure of choice in their own affairs. Worse, yet, by persuading such persons that public services (and disservices) are 'free', the state precludes a proper ordering of them in people's subjective rankings while instilling the message that they are somehow a 'right'. They are typically abused as a result, while the 'broken window' effect prevents some hidden other from taking their place and thereby increasing general satisfaction.
Given this dreadful predilection to keep the state as swollen as possible, the Keynesian parody of 'austerity' can only mean a greater proportionate diversion of a lesser stream of income to its belly. The hard-pressed citizenry not only sees its gross wage packet shrink (something which, alas, may be necessary to price them back into jobs) but the tax-take soar on its members, their prospective employers, and their would-be capital-provisioners, too.
Nor, given the implicit threat that, the minute the storm has passed, the state will go back to living out its Neo-Jacobin fantasies on credit, will the crushing burden of past debts be lifted, for any such full or partial repudiation will be deemed greatly to impair its future ability to borrow. Thus, the gluttonous jacks-in-office casually increase their call upon the living standards of today's subjects in order to preserve their future potential to alienate that of their children, once more.
No-one, of course wants to do the sensible thing: to allow for meaningful debt write-offs against the promise of budgets which are balanced by cutting expenditures to the bare, safety-net bone and only by raising taxes as a very last resort – and then on consumption, not on capital, for preference. Combine this with a broad programme of liberalisation and a decimation of the ranks of bureaucratic Nannies who so stifle self-reliance and individual endeavour and we might just encourage that so-far elusive replacement of profligate public by profitable private sector activity. Whisper it, but growth might then begin flourish among the Ozymandian ruins of the Warfare-Welfare state.
Oh, and if any of this puts banks in jeopardy, let them fail where they must and encourage the swift application of transparent judicial action to re-distribute both the deposit base and the loan book (suitably marked-down and written off necessary) among the hands of the well-capitalised and the still-solvent.
Instead of this, the establishment is shielding the banks from the consequences of their own folly, even as it is dragging them down in a drowning man's clutch by linking them ever more tightly to the fortunes of the governments whom they have already treated in far too lax a fashion. Beside this, the mooted 'fiscal union' is short-hand for more 'German Reparations' – this time, for winning the peace, not losing the war – while unrestrained ECB bond-buying is clearly a road to ruin, even if it is disguised by laundering it through the IMF, or offering 'unlimited' term funds to bond-buying banks, or setting up its own SIV in the form of a leveraged, bank-licensed ESM.
We Anglos tend chronically to underestimate the determination of the Euro nomenklatura to hold their grand project together and therefore do not always appreciate the degree of pain they are willing to endure to that end, but – really – is there any chance they will see this through without radically revising their approach? If not, ought we not to try to imagine what will give way first? The 27 as a unitary body? Frau Merkel's insistence on fiscal self-reliance? Or the ECB's self-image as a grander Bundesbank? The ramifications of each are as different as they are profound.
Finally, we come to our favourite bone of contention – China! Money supply there is growing at the slowest pace in at least fifteen years; funds seem to be leaking back out of the country as confidence in yuan appreciation wanes; property sales – on which so much finance (and, one suspects, so many 'profits') depend – have all but evaporated; SMEs are bleeding badly, squeezed between higher costs, tighter credit, and sagging external markets. Is there still room for doubt that the end of the last three years' orgy of credit expansion – that 20% a year, 40% of GDP bloating of bank assets – has brought about the inevitable 'hard landing'?
Again, the stock promoters in the West want to reassure us that China's all-knowing bosses can 'fine-tune' this – to put that horribly overworked phrase to use – and that – YAWN! – weakness now means much more stimulus next quarter, so this is only a blip – a 'buying opportunity.'
Forgive the cynicism, but your author seems to remember that Ben Bernanke thought he could 'fine tune' things back in 2007/08 about the same time that Mervyn King and his team were confident of achieving the mythical 'soft landing' in Britain. On top of that, we have the signal success of all our efforts at re-inflating a collapsing property bubble to reinforce our confidence in Beijing's abilities to do likewise.
In the circumstances, there is no danger of our being overly sanguine about the depth and seriousness of the underlying problems in China: even the key, annual central economic work conference in Beijing summed up the world situation as 'extremely grim and complex'. Remarkably, however, that same meeting declared that 'prudent' monetary and 'flexible' fiscal policy (no indiscriminate easing, but lots of tinkering with tax and subsidy) would serve to deliver a stability defined as a 'means to maintain basically steady macro-economic policy, relatively fast economic growth, stable consumer prices and social stability'.
Good luck with that, chaps! Both arising out of and then compounding all this economic disquiet we have an ongoing crisis of legitimacy in politics. We have the Tea Party and Occupy Wall Street active on the opposite ends of the US political spectrum. We have the rise of splinter groups like the 'Real Finns' in their homeland or the 'Pirate Party' in Germany. We have worries about what reaction there will be when the tyranny of 'technocratic' government by Goldman Sachs alumni really bites home. We have the Arab Spring. We have street protests in Moscow and persistent rumblings about civil unrest in China.
Not helping matters, the US and its allies are sabre-rattling in the Gulf and stirring up trouble in the South China Seas, while even comic opera Argentina seems to be sorely tempted by the chance to make another grab for 'Las Malvinas' now that the interloping Brits seem to be on their uppers.
On the one hand, a shake up of the cosy orthodoxy which led us into the dire straits in which we find ourselves is no bad thing – assuming this all stops short of bloodshed, of course – but, on the other, the pervading sense of impermanence can only add to the uncertainties faced by economic decision makers everywhere, whether entrepreneurs, managers, investors, or ordinary householders.
As we have often argued, this is only likely to dampen further the chances of generating a self-sustaining recovery – so much so, in fact, that it would almost be better for policy-making to be suspended, here, far short of any ideal formulation, so that at least everyone knows the obstacles they will have to surmount and the nature of the challenges they will face and so can set about planning to overcome them.
But to expect career bureaucrats and lifelong, professional politicians to simply cease and desist in their collectivist conceit that they and only they can fix what they simultaneously deny they first broke is, well, to expect those seasonally-fattened gallinaceous bipeds to welcome the onset of Yule!
A Merry Christmas and a Prosperous New Year to one and all!
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