Fixing the credit bubble by force-feeding more cheap money into the economy...
THE BLAME for today's ongoing credit crunch has landed squarely on the big Western banks, with government and the monetary authorities leading the jeering.
This seems a bit rich. Because government and the central banks were chief architects of the world's current difficulties.
As usual, their reaction to this crisis is just as wrong-headed as their reaction to the last crisis. It's also certain to make the next crisis worse still.
Unfortunately for Britain, Gordon Brown is too convinced a socialist to see the truth of this. There he sits, Canute-like before a sea of economic reality, and he truly believes he has the power to command the tide.
After all, this was how he responded from 2001-2005, urging the Bank of England to supply money to the big banks and mortgage lenders at very low rates of interest. Thus he encouraged all those "unbroken years of growth" he still loves to brag about. To perpetuate the feel-good factor, Brown continued pumping the UK economy with cheap money while preaching sanctimoniously about prudence.
And my, how he bragged! During the good times, Britain's unbroken growth all came down to Gordon's brilliance.
Funny, isn't it, how the downturn is now somebody else's fault?
But in economics, as in life, the hangover reflects the party. Creating artificial demand is sure to create exactly the situation we're in today.
So let's spell it out and see if Gordon can get it, before he and his wretched textbooks destroy the wealth of cautious savers and their children once more.
Whenever and wherever you find a surfeit of money, bankers will face a choice:
- Take the money and lend it; or
- Refuse the money and lose out.
The problem for banks – as for all financial companies during a bubble in money – is keeping up with the game. If they don't take the cheap money on offer, they will under-perform their competitors, and that will end in a take-over.
Another bank – making bigger profits by taking the cheap money – will buy out the laggard. That's how cautious banks caught playing it safe, rather than joining the fun, are dragged to the party regardless. Their kicking and screaming is drowned out by the clamor for "total shareholder returns".
So the reason the banks you now see around you all look like incautious buffoons is that, between 2001 and 2005, the US and European authorities created conditions in which only the incautious could prosper. Government killed off the cautious by pouring cheap money down the throats of the most aggressive banks.
Socialists and central planners just don't understand that you cannot command an economy onto such an unnatural path without later paying the price. Cheap money destroys caution and nurtures speculation. When the world is awash with it, banks must take ever bigger and bigger risks, or they will wither and die – it's as simple as that.
And if Gordon Brown's big British rescue works this time (and let's hope it doesn't) then no British bank will fail, and the message will echo round the City of London that you simply must take all the cheap money on offer and punt it straight out to consumers and business.
By 2012 – if not before – we could find the Bank of England effectively bankrupt, sitting on a pile of "quality" mortgages as collateral as house prices tumble from even higher peaks than last summer's top.
And the big banks in London? They will be pitching for a fresh rescue from their next over-priced speculation. Wind-swept farmland? Ocean-floor mining? High-orbit solar panels...? Who knows what fresh nonsense the banks will be forced to finance in the government's scramble for un-ending growth.
Who can guess at how much the banks – and then us - will lose as a result. Such a slow-motion disaster, however, is baked in the crust when those in power subvert the economy to their own over-inflated egos.
Witness Argentina, Turkey and Zimbabwe already this decade. Now thanks to Gordon Brown's self-belief in his personal, hands-on management of the economy, the UK is thoroughly addicted to monetary stimulants.
The United States, of course, is strung out on Ben Bernanke's junk, first peddled by Alan Greenspan when Bill Clinton's White House proclaimed "It's the economy, stupid!" As in the UK, breaking this habit will hurt; the banks themselves warn of outright depression if taxpayers don't front up today.
But cold turkey, according to Keith Richards at least, is just five days of climbing the walls. (And the Stones' guitarist should know!) Whereas, if we stick with our habit, then soon it could be our turn to queue in the streets bearing armfuls of cash, fighting over the last loaf of bread in the shop.
The great private antidote to the Browns and Bernankes of this world remains Gold. Those people owning it over the last couple of years now stand unaffected by the losses sweeping through financial markets.
Yes, it's come a little off the boil since mid-March, but the fundamentals remain stacked in gold's favor.
- Flat-to-falling production worldwide;
- Money creation still running amok;
- Growing investment demand from a very low base (particularly in the Far East);
- Rising inflation in your cost of living;
- Control-freaks running government; yes-men in charge of monetary policy.
It's always painful, of course, to buy something at twice the price it was just two and a half years ago. But markets – like gold mines – don't easily give up their riches.
What's hardest to do can often prove the best course; this current lull in the Gold Price might just be your best chance.