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The End of Something for Nothing

The last desperate throes of an idea whose time is over...

HOW CAN you tell when something inherently unsustainable can no longer be sustained? asks Dan Denning in the Daily Reckoning Australia.

That is the Zen-like question we begin this week's reckoning with. It's common sense and common knowledge that if a trend is unsustainable, sooner or later it will end. It's the "when" that screws everyone up.

The unsustainable trend we have in mind today is the idea that you can get something for nothing. That idea is the backbone of modern politics. It's the dirty little secret of the financial system upon which modern economies are based. And it's an idea whose time has come and gone.

There is a limit to how much monetary absurdity the real world can take. We are rapidly reaching that limit. We've reached the stage in the global economy now where the next big reaction, the next big event, won't necessarily be financial or economic, but it will be political and social and cultural.

Mind you, this isn't some kind of Newtonian limit. To paraphrase the former Master of the Mint, every monetary action has a magnifying and distorting reaction in the financial markets. But at a certain point, adding trillions to the balance sheets of central banks and manipulating interest rates begins to have unintended consequences.

Those consequences are showing up now in election results. But their origin is in the belief that you can manipulate the price of money to produce painless prosperity for the masses. You start with devaluing the currency a little here and targeting inflation a little there. And before you know it, you end up at the point where you have destabilized the foundations of civilized society.

Take France, for example. Socialist Francoise Hollande leads the early election results with 28.5% of the vote. Incumbent Nikolas Sarkozy is second with 27.1%. And Marine Le Pen, the nationalist candidate, stormed home with 18.1%. This last result confounded the so-called experts. The experts predicted the socialists would rout Sarkozy.

Here is an important lesson about people: what they say is not always what they do. This is especially true of voters. If a pollster asks you whether you are for or against justice, what do you think you'll say? If you're asked whether you support equality, what will you say?

If you're a straight shooter and you cannot tell a lie, you'll say exactly what you believe. If you don't know what you believe, you're likely to give the answer that you think will be most pleasing to the person asking, or the answer that makes you look like a thoughtful, open-minded person. What you do in the voting booth behind a closed curtain may have no correspondence with what you've said in public.

The experts are surprised about the results in France because the experts are, in fact, pretty stupid when it comes to human beings. France, like every other Western country, is in the throes of an economic crisis. This is a crisis of the Welfare State, which is not an affordable social arrangement in the era of globalization. The French people are conflicted about what to expect from their government.

Most people are happy to get something for nothing, as long as it doesn't cost them anything. This is how modern democracy works for about 50% of the people. You pay no taxes. You receive government benefits or tax deductions of some sort. Somebody else pays the bill.

Sarkozy's party is happy with this arrangement, except they realize it is based on voodoo finance. The Socialists blame the market and human nature for France's fiscal woes. They want even more something for nothing, especially if they don't have to pay for it. We have no idea what the nationalists want, but suspect they only want French people to get something for nothing. If you have dark skin or worship a different god, you'll have to pay for your something or get on the next boat back to North Africa.

Different expectations about what to expect from the State can be managed during a period of constant credit expansion. The political elites, through their control of the currency and monetary system, can engineer a constant expansion of credit. This expansion actually reduces the stability of the currency and erodes purchasing power. But it has the appearance of growing financial wealth at the same time, through higher asset values (stocks, bonds, real estate.)

The trouble comes when the inputs to the system (cheap credit) stop or slow down. Without the constant expansion of credit, you get asset price deflation. Only then do people begin to realize, en masse, that you can't really have something for nothing as a society. Wealth must be produced by real labor, real goods and services, and value added to raw materials.

The expansion of debt and credit to create rising asset prices is not wealth. It's a cheap parlor trick mastered by central bankers and politicians. Their trick has been exposed to the voting public. The public is now angry. Their anger coincides with elections in France, the US, and probably Australia.

And yes, Australians have been watching this parlor trick (quite happily) for many years. The Reserve Bank of Australia (RBA) has performed it with aplomb. The parlor trick is not explicitly stated in the three mandates of the RBA as enumerated in the Reserve Bank Act in 1959. Those mandates are:

  1. the stability of the currency of Australia
  2. the maintenance of full employment in Australia
  3. the economic prosperity and welfare of the people of Australia

The commodities boom has taken care of number two for the last ten years or so. The currency has been anything but stable. But because Australians can buy more cheap goods from America over the Internet when the Aussie Dollar is strong, the volatility in the currency is, for now, seen as a benefit (although not so much to manufacturers).

The third mandate of the RBA will soon be seized on by those who want to get something for nothing. They benefit the most from the current system because they get the most while doing the least. People who control the issuance of money always personally benefit from this power and always seek to expand it.

You can tell that Australia has reached the end of growth through debt by listening to the clamor for an expansion of the RBA mandate. Australian Chamber of Commerce and Industry executive Peter Anderson wants the RBA to cut interest rates in order to, "boost business confidence and increase competitiveness."

Anderson said that, "The time has come for Australia's central bank to move decisively to cut rates by a full half a per cent, and for the retail banks to immediately pass it on....A quarter of a per cent cut would not be enough to do what is required. There needs to be a significant and unambiguous signal, to support activity and to lift confidence across the next quarter."

What is required? Growth at any cost, especially if someone else is paying. You are the one who is paying if it's growth through government debt. You are the one who is paying if it's growth achieved by reducing the purchasing power of money and fuelling asset price bubbles. Activity for its own sake is growth without real demand. It's not real economics. It's busy work.

A few years ago, no one argued that the RBA needed to do something to create the appearance of activity and health. The economy hummed along fine. China boomed. Everything was fine.

But now we've reached a cross roads. Political and social pressure is being put on the RBA to engineer prosperity through monetary policy. It is the last, best, and eternal hope of people who believe you can get something for nothing. It's false hope.

The government control of money and interest rates is the instrument by which certain people build a society based on the idea that you can get something for nothing. What the political process in the Western world is about to reveal is that not everyone wants to live in a world like that. Also, there is a corollary to the idea of getting something for nothing. The corollary requires that everyone believe the same thing, politically speaking. 

Time to Buy Gold?...

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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