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“The falling oil price is good for the budget in Japan.
It’s also positive for consumer spending, so perhaps we could see some light
at the end of the tunnel as a result... But of course, it could put the
inflation targets of the BOJ under pressure. You’re looking at potentially
more stimulus next year. That is what some analysts are talking about...”
—
Squawk Box Europe
That
just happened to be on in the background a few days ago, causing me to stop
what I was doing and hit rewind on the PVR just to write it down for you.
After
all, how much more stimulus can even the most resilient economy endure?
You’d
think there has been enough of it already, with the US central bank finishing
year six of “ZIRP”, following in the footsteps of the Bank of Japan, which
has pursued that policy for decades.
If
you’re stimulating and within a short time of stopping realize that you need
more stimulating there's got to be something wrong with the whole idea.
In
truth, policymakers are
killing jobs every day they stimulate – proving only that they have no idea where jobs come from.
The
word “stimulus” is a euphemism for a wasteful redistribution through fiscal
policy (government borrows and spends) and/or monetary policy (government
counterfeits the currency and suppresses interest rates), usually both. It is
the product of the general idea of interventionism brought to you by your
progressive neighbour, the dogmatic superstition that government can and
should fix anything.
The Keynesians
and neoclassical establishmentarians categorize it as a “stabilization
policy”, as Wikipedia describes it,
implying that it does something more than simply reshuffle the deck chairs,
as though it catalyzed growth, or softened a bust. Any empirical study of
market history can disprove that latter claim in particular. The problem with
most (Fed paid) economists is that they stubbornly hold to the myth that the
free market system is inherently unstable and government is the key to
patching it up.
If it
weren’t for Roosevelt, they say, the banking system would have gone to hell
and free market capitalism with it in 1933! That’s your standard history. As
if, without the government’s oversight and stabilization policies, the
capitalist system would be prone to recurrent business depressions like then!
Imagine
that. A world with recurrent business depressions! Good thing we don’t have
free market capitalism running rampant or else we’d have a lot of
depressions. Or as Keynes put it in his how-to guide for central planning in
a totalitarian society, the unhampered capitalist economy would get stuck in
a liquidity trap, with prices
falling, interest rates at zero, plus or minus, and growth stagnant.
Unfortunately
for the progressive historian, that’s a moot point now!
We do
not have a purely free market economy and arguably never really had. But,
surely the government has been regulating, hampering, and increasingly
subsidizing the capitalist system since at least 1913. That’s when it created the Fed, the income tax act,
and adopted other progressive measures, thereby
turning the constitution of limited government into unlimited government.
[If you
don’t believe that these things ultimately led to the great depression, then
at least since the Roosevelt era! Right!?]
How
well have their stabilization policies worked? How much time, how much
computing power, do bureau-rats, with all their supposed sophistication about
society, need to stabilize inherently unstable capitalism? Their intellectual
supporters continue to blame the free market system when things go wrong,
which is is easy to do if you stop the analysis before getting to the
ultimate cause of the evil.
Most
people, moreover, don’t like to think beyond the next sentence coming out of
their mouths.
But
what if it’s the other way around. What if the progressives have it wrong?
Heck, what if Marx was wrong after all dammit and the free market system is
not actually unstable, and the true cause of financial crises and business
depressions all along was the state-sponsored interventionism?
What if
everything really did happen for a reason, a real one, not a metaphysical
Geist.
Indeed,
how much intervention does it take to get the sheeoples to see it is
intervention that is to blame, not the market mechanism? None of this is
really original. Nor is it an idea that has been refuted.
It is
just ignored, systematically and preferentially. In his outstanding treatise,
planned chaos, in which Ludwig
von Mises argued how interventionism and socialism can only lead to chaos, he
wrote how:
“Anti-capitalistic policies sabotage the operation of
the capitalist system of the market economy...All those evils which the
self-styled "progressives" interpret as evidence of the failure of
capitalism are the outcome of their allegedly beneficial interference with
the market. Only the ignorant, wrongly identifying interventionism and
capitalism, believe that the remedy for these evils is socialism.”
(i.e.: or more interventionism.)
What a
remarkably novel concept: government produces chaos, not free markets?? If
only people knew!
Like
any intervention, stimulus
undermines and misallocates capital (and labor) - by directing it to
unsustainable and unproductive activities. If it is supporting an
uncompetitive enterprise it is doing so at the expense of a more productive
one. When the intervention means suppressing interest rates below their
natural level (thereby ignoring their free market function), it overrides
free market incentives for saving and investment, supplanting savings with
pure money creation instead, and then directing that.
By
discouraging private saving they are effectively taking over the investment
function -its direction!
Now how
can that go wrong?? Hint: shortfall of saving trips up investment at some
point.
To sum
up: an investment boom
driven by “stimulus” is the antithesis of the concept of economic growth,
which can only be sustained by real savings-backed investment.
There
is no shortcut. You can’t turn stone into bread.
Only
the real abstention from consumption (saving) can sustain sound investment,
and deliver economic growth. The forced saving through money creation
(government controlled monetary policy) that results in subsidized investment
booms only stretches the available resources of the economy, eventually
undermining capital, which in the final analysis supports jobs, consumption
and growth.
The
artificial boom comes at the expense of saving and is thus a tax on capital.
It is a burden on progress and growth. The only reason it seems like
prosperity is because the stimulating
policy encourages people to consume their wealth rather than create it -in
the expectation that consuming drives growth. It goes without saying, of
course, if you decrease saving rates and believe that will make you
wealthier, it’s just a delusion. But more consumption can feel like
prosperity because that’s where growth eventually leads.
The Fed
tries to replace those savings it compels you to squander with money
creation, thereby producing the boom-bust cycle, effectively fueling the
delusion. Now that may all be abstract to you but the inevitable economic
downturns destroy countless lives, as well as many potential jobs and wealth.
What a
surreal world it is, to watch pompous pundits puzzle over various social or
economic problems, always to ask the same bloody question: What should the
government do about it? Whether it is poverty, inequality, unfairness,
price-gouging, climate change, war - name your injustice - the solution to
every problem always and inevitably requires some act of coercion by the
state apparatus to right a wrong.
In
spite of the multitude of solutions employed by them in their everyday lives
without having to resort to the use of force or coercion, people are simply
conditioned in this narrow minded response. So be it.
If
people want stimulus, as Mencken might say if he lived today, they deserve to
get it good and hard.
Gold Trade Continues Under Pressure
The oil
price collapse and a no vote for sounder money in Switzerland weighed heavily
on gold.
The
gold price is off $50 in two days, back to $1150.
After a
retracement bounce in gold prices back up to resistance levels last week, a
plunge in oil and copper prices - mostly on supply side dynamics in my
opinion - unnerved precious metals’ bulls again, resulting in another sell
off in the metals as well as the equities of the producers who extract them.
Weak
commodity prices have been a drag on the gold trade since summer, after a
promising first half rally failed. But now the CRB is making new 4-5 year
lows while the USD is making new 4-5 year highs.
In
addition, the collapse in oil and gasoline prices is likely to give financial
markets a boost because of the usual expected effect of those declines on
consumer spending and manufacturing profits (mining is also sensitive to
energy costs btw), as well as inflation expectations, in turn continuing to
cap bond yields while simultaneously stoking concerns of a coming deflation
shock – a double negative for gold.
Nothing
is easy is it?
You’d
think that a situation where people are begging for more stimulus when we
have already had a record amount of intervention in money and interest rates,
and an unbearable amount of public debt, would have given gold more support.
But the absence of inflationary fallout while stock prices keep roaring
higher has destroyed confidence in the precious metals. The fundamentals are
as strong as ever, even stronger than ever, but none of it matters if the
narrative isn’t producing inflation and instability.
In this
narrative, the fall in oil is just another reason to sell gold – especially
combined with the no vote in the Swiss referendum this weekend – in a
psychologically weak market. But it is a net positive if it is stoking the
progressive impulse to inflate, and lulling policymakers into a further false
sense of security.
The Bust Hypothesis
While
the oil price decline might buy the bulls a bit more time, recall that we
have been arguing recently how the declining trend in money growth in the
leading economic hubs may be about to undermine the boom. What if the oil
price decline is somewhat of a canary-in-the-coal mine omen that Wall Street
bulls ignore in their exuberance about the latest data from auto sales and
consumer spending over Christmas?
In other
words, what if the oil price is falling because of the slower rate of growth
in money in the US, EU, Japan, and China?? There may be some fundamental
supply side factors contributing to oil’s decline but to the extent that it
is part of a broader decline in commodity prices, the culprit responsible is
most likely monetary. In other words, maybe the declining oil price is
confirming our bust thesis: that we are heading towards a bust -with stock
and bond (financial) markets way too far ahead of an expected QE in Europe
and Japan, and far too overvalued and reliant on Fed support in the US and
Canada. However, given the way attitudes are today, the risk is we get a
premature over reaction from monetary policy. It is very unlikely we
will see a deflationary policy, not until people understand the benefits of
sound money -which not even the Swiss want.
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