An interesting view that’s bound to stimulate debate (but not the economy) comes from the Daily Reckoning. I think it offers an opportunity to view the current crisis and attempts by the government to stimulate the economy from a broader perspective.
Firstly, however, TB pointed out something we’ve both, as well as many others have previously and it relates to the record level of private debt we are carrying coming into this crisis :
Over-borrowing and overspending got us into this fix. It stretches the paradox of Keynesian economics to believe that even more borrowing from a less bountiful future to consume now provides the solution, even if the stimulus comes from the Government on behalf of households, rather than from households directly.
It’s also worth noting history shows that people who save and invest grow and prosper, and the others deteriorate and collapse.
The Final Frontier
The Daily Reckoning Australia
Paris, France – Melbourne, Australia
Tuesday, 10 February 2009
From Dan Denning on the Gold Coast:
–Second thoughts. After the first initial optimism that “doing something” was better than “doing nothing,” you get the sense a lot of people are having second thoughts. Are recessions really caused by a fall in aggregate demand? Or is the previous credit boom that leads to bad investments that makes recessions inevitable?
–The answer to that would matter quite a bit, especially if you were about to commit billions of dollars in money borrowed from the future to test your theory. Isn’t that just high-stakes, high-brow gambling? Have our legislators become speculators? Or are they just providing further evidence that they are morons?
–Over in the States, stocks fell. The Geithner plan-or TARP II as it’s imaginatively named-is facing second thoughts of its own. The banks will get more capital. But no one can figure out how to handle the toxic assets. The big idea is still setting up an “aggregator bank” to act as dumping ground/rehab clinic for the distressed and non-performing loans that securitise so many bank assets.
–And in Australia? Warwick McKibbin told the Senate yesterday that, in his personal view, the stimulus is just too darn big. “Australia is very well placed to withstand the shock which is currently emanating from the world economy,” he said, according to Bloomberg. “This suggests that the scale of the Australian response should be less than the world average.”
— “The current package is too large at this stage of the global economic slowdown. Given the circumstances in Australia, the package should be less than the 2 percent of GDP average stimulus recommended by the International Monetary Fund. Australia does not yet have a domestic financial crisis, but it does face a substantial reduction in exports and substantial decline in the wealth of its citizens. The first job for this package should be to help restore confidence.”
–If only it were a crisis of confidence. The crisis is not what people think about the solvency of the financial sector. The crisis is in the virtual insolvency of many large banks. No amount of cheerleading will change a balance sheet, and changed perceptions do not change the reality.
–Or, as economist Dr. Roger Garrison writes in a chapter on the Austrian theory of the business cycle, “The loss of confidence comes from the realisation that the economy is overextended, asset values cannot be supported, and decisions about how to allocate capital have been based on a false cost of capital and the false level of demand it ‘stimulated.’
–You don’t fix any of that with new stimulus.
-“The core problem for investors is financial instability,” reckons Ashok Shah, the chief investment officer at UK asset managers London & Capital. “If you look at the IMF numbers [forecasting a total $2.2 trillion loss on US bad debts], we are only halfway through the non-performing loan cycle.”
–“Governments are supplying liquidity into the system and unless they sterilize it [by issuing bonds to soak up the excess money creation] they are laying the foundations for much higher inflation for years to come. These are the things gold thrives on,” he told Reuters.
–Of course gold fell over $20 in New York, but his point is well taken.
–And this gives us a chance to make a point we’ve neglected to make it our previous statements about gold: it is the common law version of money. People ask all the time what inherent quality gold has that makes it a superior medium of exchange to salt, pepper, oxen, or bubble gum.
— Gold has at least four physical qualities which make it suitable as money. It’s durable, it’s divisible, it’s convenient, and it’s consistent, not to mention hard to counterfeit. Bars, bullion, coins, even goldsmiths notes…throughout history you could be pretty sure people were going to accept a quantity of gold in exchange for some good or service.
–And that’s really the best reason to explain gold’s historic popularity as a medium of exchange. People have accepted it as such. That makes gold, in our view, a kind of common law money. If people traditionally view gold as money, maybe there’s something to it. Maybe this whole fractional reserve paper money experiment is an historical aberration in the history of money.
–So for the record, yes; there are certain physical properties of gold that make it especially useful as money. And it’s worth nothing people have used it as such for thousands of years. It’s not that there’s any higher mystical principle behind the yellow metal as a medium of exchange. It’s just that it’s what people have accepted as money for a long time. This acceptance is noteworthy if you’re somewhat philosophical. It’s a voluntary exchange without coercion. In a perfect world, that’s the way you draw it up.
–But as we’ve said before, money is not wealth. Neither is gold. You have to trade it for something useful. And it’s better if you receive it for what you produce and then invest in it capital goods, rather than hoard it or worse, squander it. Just ask the Spanish and the Portuguese.
–It is very easy for the people of a nation to mistake money for wealth, or even commodities for wealth. But any useful theory of wealth would probably focus, at least in the material world, on the production of capital goods, and not, say, the consumption of consumer goods. There is no inherent value in anything. It’s what you produce and how useful others find and what they’re willing to exchange for it that determines value.
–The moral of today’s story: Woe to the modern economy that treats paper as wealth and fails to save or invest. We may think we have money on our hands. But paper is not metal and credit is not a substitute for saving. If things keep going the way they’re going, you may have to trade a lot of paper to get anything of substance
Over To You
Filed under: Australian Economy |