Why the Mainstream Media Still Doesn’t Get It

Your editor has a big agenda to cope with this week. But we’re not complaining. It just means we’ve got more to write than the space the emails provide.

So, barring any unforeseen events – which can’t be completely discounted – this week we’ll cover off a few questions prompted by last week’s Money Morning’s.

As it happens, our guest essayist, Mark Thompson, has inadvertently answered one of the questions with his latest installment on inflation. Money Morning reader Justin, had this comment:

“My wife and I were discussing our grocery bill the other night. ‘Do you know what shits me of late’ said my wife who is always angry after going shopping, ‘They are making the size of food smaller yet they are charging me the same price. So to make a cake or anything, I have to buy 2 of the item and measure it all out, instead of just adding the one can that the recipe asks for.’ I agreed with her as a good sensible husband always does. But it made me think: Could it be possible that our inflation figures are lower because food sizes are smaller? Instead of bumping up the price, they just make items smaller and make the consumer buy it twice. So their basket of goods isn’t a true reflection of our basket of goods.”

You can read Mark’s comments on this below.

But today, we continue to be amazed at the economic fallacies continually presented in the mainstream media.

Three articles in the weekend edition of the Australian Financial Review (AFR) highlight just how wide of the mark the mainstream media has been with understanding the reasons behind the economic events of the last eighteen months or so.

For a start, they seem to believe the problems are contained to events within that timeframe. They’ve failed to acknowledge the real causes for the problems. But we won’t go into all those details today.

Anyway, back to the articles…

The AFRs Robert Guy writes, “Watch this, with interest.” Well, it’s only taken them nearly eight months to realize it, but the penny (which isn’t worth what it used to be) has finally dropped. The realization that billions of dollars worth of unnecessary government debt creation will have an upward impact on interest rates:

“The Australian 10-year bond yield is hovering at 5.7 per cent after advancing from 4 per cent at the start of the year.”

However, don’t blame governments for issuing the debt, blame the “bond market vigilantes.” It is because of these faceless bond traders that “a few keystrokes and the bark of an order by a bond trader in a far-flung financial capital can reverberate across suburbia.”

Talk about ’shooting the messenger.’ Yet again, the pricing mechanism of markets is blamed when it is the irresponsible actions of governments and central banks that are at fault.

It is their actions in distorting the economy that leads market participants (not just the bond trader, but you, me, your neighbour, and everyone else) to try and take advantage of these distortions for our own benefit.

Trying to prevent people from taking advantage only creates more distortions. The correct step is not to distort the market in the first place. Unfortunately, politicians and central bankers are incapable of keeping their greasy fingers out of the till. They have to interfere – we think it could be part of their breeding!

The second article was Geoff Winestock’s “Infrastructure worth the price.” Not surprisingly, Winestock is head-over-heels in love with the infrastructure spending plans because it will be spent on “stuff like dams, hospitals, railways and power stations, which will create jobs and boost their [Queensland and NSW] economies.”

But the mad logic doesn’t end there, he continues with:

“If Australia escapes with only a few bruises from the global recession, the fortuitous decisions by state governments to ramp up spending just before the crisis will be one of our saving graces.”

Time for a deep breath… Is he serious? Is it really good news to have spent all the cash only to realize later that your income (tax revenue) has been slashed?

Picture it, imagine how happy you’d be if you’ve just bought a brand new car, only to be told the next day by your boss that you’re fired.

Would that be a ’saving grace’ to know you’ve bought that new car just in time? Just before you’ve been fired?

How fortuitous that would be. You’d be in debt with no way of paying it off unless you borrowed more money, which you can’t afford – because you’ve lost your job. But at least you’ve got the car to cheer you up!

To highlight the madness of this approach we can turn to a book published 53-years ago. It explains perfectly how the idea of “creating jobs” through government spending and borrowing is nothing short of… well, a lie.

The book is Henry Hazlitt’s “Economics in One Lesson.” The subtitle of the book states it’s “The shortest and surest way to understand basic economics.” We couldn’t agree more. In fact, if Money Morning had an Oprah-style reading list, this book would be number one.

In a two-page chapter titled “The Broken Window,” Hazlitt exposes the myth of spending to “create jobs.” The argument goes something like this…

A baker’s window is broken by a boy who runs away. A crowd gathers and after initially being concerned, they all consider the positives to this action. That it has created work for the town glazier. Not only that, but the $250 the glazier receives will be spent on products from other merchants.

Therefore, the broken window – the vandalism by the young lad – has benefited the economy. Without the broken window the glazier would not have had work.

Sound crazy? It is precisely the same argument we’ve heard from policy makers and mainstream economists over the last nine months.

It’s the same for the “dams, hospitals,” etc that Winestock says will be built as a result of government spending. Jobs are being created where jobs would not otherwise have been.

Surely that is good for the economy.

But look at “The Broken Window” example again. Can it really be good for an economy to have windows broken just so a job is created? No, of course not. It is the same for the billions of dollars in public works that are underway or ’shovel ready’ at the moment.

The reason is simple. The public works do not create new jobs at all. They merely distort the economy by misallocating resources from elsewhere. In the case of the broken window, the baker has clearly lost out. He’s had to spend $250 on buying a new window.

As Hazlitt explains, this means he was unable to spend $250 on the suit he wanted, so the tailor misses out.

It’s the same with all the money being spent on dams, hospitals and schools. Money spent there and employment “created” there means other businesses will lose out.

And because the money is being borrowed, it means the effects may not be experienced today, but rather the impact will be felt in the coming months and years. Because money that may have been spent in the future by consumers and businesses cannot then be spent.

It cannot be spent because it was spent in prior years on dams, hospitals, schools and bridges. In future months and years we’ll be paying off that expenditure through higher taxes, instead of spending or saving on items we want or need.

But at least we’ll have a lovely dam to look at.

Finally, another pet topic of ours is the unending search for growth. According to the AFRs Glenn Mumford, a reduction in the rate of growth is “scary stuff.”

No it isn’t.

Trying to prop up the credit fuelled growth of recent years is where the real scariness is. Even more amazingly, Mumford turns to US Federal Reserve governor Kevin Warsh for advice.

Apparently, Warsh was speaking at a meeting of the Institute of International Bankers. An event you’d think would be convening to apologize for causing the economic mess, and then missing the warning signs about its collapse. Instead, they believe they’ve all the answers to get things working again.

In a nutshell, Warsh is worried about too much government intervention putting constraints on trade and markets.

Funny how he and most others didn’t seem too bothered by government intervention last year as US investment banking firms were falling left, right and center. But that’s probably because Warsh is an ex-Morgan Stanley investment banker.

He knows which side his bread is buttered on.

We’ll see more of this in coming months. Those that begged and pleaded for a government bailout, now complaining there is too much government.

The trouble is that government has it’s teeth well and truly sunk into private enterprise and it will be very reluctant to let go. When or if it does you can guarantee the results will lead to another bubble created by market distortions, and a revival of the current economic madness will be on us again.

Other Stuff on the Markets

The S&P/ASX200 gained 0.19% on Friday, while Wall Street ended lower with the Dow Jones Industrial Average losing 15.87 points.

Meanwhile, in Europe the FTSE100 added 1.52%.

The price of gold in Australian dollars gained slightly to $1,164.14, while in US Dollars it lost ground to USD$934.23.

The Aussie dollar picked up ground, trading this morning at USD$0.8030 and JPY77.52.

Crude oil dropped over the weekend, trading at USD$66.80.

Biggest movers on the market yesterday were…

On the economic calendar today we have new motor vehicle sales – utes included!

Cheers.

Kris.