At the end of his chapter on inflation in Economics In One Lesson, Henry Hazlitt wrote this: "Inflation ...discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men towards desperate remedies. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse."
Could there be a better capsule description of the past four decades of rampant credit expansion and its inevitable end result? The problem is that too many people cling for far too long to what they have been taught to see as their only savior - the "cradle" of government support. For nearly four years, Americans have been listening to the same story. They have been told that they were saved by the massive financial intervention of late 2008 and the subsequent descent to the
bottom of the inflationary barrel - direct central bank monetisation of government debt - in early 2009.
The majority of people in every nation do NOT believe their government. But few of them dare to take things any further. They dread any situation in which the government does NOT
"run" the economy. They feel much safer in a situation in which government goes right on "modifying, refining and revising" their increasingly desperate policies until they finally come up with a combination which "works". They will not face up to the only REAL alternative. Either government "policies" controlling money and the economy stop being tinkered with and are REJECTED or we face Henry Hazlitt's "bitter disillusion and collapse". The choice has always been simple. Its necessity is quickly becoming clearer…
In any economy, "capital" is real wealth which has not been consumed. The production of new wealth is dependent on the supply of capital goods or factors of production - above all the tools essential to the task. A capitalist economy is impossible without a further form of capital - a medium of exchange or money. But money does not produce goods, it facilitates their exchange. Any money will do that, but SOUND money provides a still more important service. It allows for economic calculation. And without a reliable form of economic calculation, it is impossible to discover whether a given process of wealth production is viable or not. A
SOUND money allows for the reliable calculation of profit or loss in any enterprise. By doing that, it acts to minimise the loss of real wealth by directing new capital into profitable uses and diverting it from uses which do not pay their way.
This is the only process by which any nation can become prosperous. It is entirely short-circuited when the common denominator in all economic calculations - money – is produced by edict and not by effort. It has long been known that it is impossible to "create" wealth out of thin air. It has long been held that money and wealth are synonymous. It is now a tenet of market faith that when it comes to creating money out of thin air - literally anything goes. The contradiction is as glaring as it is ignored.
Today, capital is taken to be a sum of money. This nominal amount is "guaranteed" by government edict and central bank power. The purchasing power of that money is also "guaranteed" by central banks to fall over time but only in carefully controlled annual increments. This is known as "inflation management". Every central bank has its preferred rate of inflation. Every one of these rates bears no relationship whatsoever with the pace at which these same central banks are creating it out of thin air.
The economic - AND MARKET - distortions resulting from this practice have long since become incalculably huge. They have been fixed into economies everywhere. They must be corrected before any type of genuine wealth creation can once more come forth. That process will crystallise huge losses because of the huge misallocation of REAL capital that has already taken place. There is no way over, under or around this situation. The world is simply going to have to go through it. The longer the paper "capital" underpinning investment markets is preserved, the more painful this process will become.
Capital can NEVER be "guaranteed" - it can only be produced. And governments produce NOTHING.
Fostering A Terminal Confusion:
As the old saying goes: In the good times an investor is concerned with the return ON his capital - in the bad times he's concerned with the return OF his capital. But when the times get really dire, the situation spirals down another notch. When an investor sees himself has having been defrauded, he wants his money back. In the US, we are seeing that today in the class action suits being launched against those who organised the Facebook (FB) IPO less than two weeks ago. In
Europe, we are seeing the ultimate in the form of an ever increasing surge of people pulling their money out of the banks in CASH.
Neither Greece, Spain nor Italy appeared in the "top ten" of nations searching for the term "bank run" on Google. The US did, it was number three. So did the UK, Canada and Australia at numbers five, six and seven. For pretty obvious reasons, bank runs or even concern about the possibility of a bank run are a potential stake thrust into the heart of any financial "asset" market. In Europe, the fear of those withdrawing their money is palpable. But all over the world, the fear of those in charge of creating and "guaranteeing" that money is much easier to see.
If you want to see it, consider this quote from a US "director of equities trading" in the wake of the latest week of US stock market gyrations: "America is doing great, yet Europe is a real disaster. Where it ends? Who knows." Those withdrawing their money from European banks have passed the point of warding off fears. They are taking action. In the markets themselves - nobody wants to know - literally.
.Ó 2009 – The Privateer
(reproduced with permission)
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