Over the past week or so your editor has been reading a book.
Yes, perhaps contrary to the opinion of some, we can read.
Actually, it’s taken us about two weeks to read it.
You may recall that several weeks ago we admitted not knowing nearly as much as we should about the Great Depression of the 1930s.
We realized we needed to brush up on it. After all, seeing as we’ve spent the last year spouting off about how government intervention making things worse, it’s might be a good idea to draw some comparisons.
I mean, it’s not that we doubted government interference is bad. We can see that with our own eyes. It’s plain – or it should be – for all to see that a government can’t solve problems.
All it can do is to make existing problems worse, and then create new problems. The effects of which it will try and postpone for as long as possible.
After all, why experience today what you can put off and make even worse next month, next year, or the year after?
It’s the “Delayed Depression” I alluded to last week.
So, after finishing off the book over this past glorious Melbourne weekend, your editor is in no doubt at all that governments here and overseas are making the same mistakes from the 1920s and 1930s they claim they were trying to avoid.
Look, I won’t go into a full review of the book, that’s not what this newsletter is about. My tip is you should read it yourself and form your own opinion.
If you’re interested, the book I’m referring to is “America’s Great Depression” by Murray N. Rothbard.
The similarities between what happened then and what’s happening now is remarkable. Of course, there’s the potential that your editor is ‘seeing’ more similarities than there are, and ignoring things that are different.
But there’s always a risk of that. That’s why I won’t spend the next seven minutes of your day giving you a book review.
What I will say is that whether you see similarities or not, there is one thing that is undeniable. And that is confirmation of what we’ve written in Money Morning during the past year.
That government does not and cannot “step in” to “help” an economy.
The experiences of the 1920s and 1930s illustrate that it was not only government intervention that helped to cause the problem, but it was government intervention that helped to prolong the problem.
And today we’re seeing exactly the same mistakes being made. Governments and central banks encouraging cheap money and excessive risk taking…
Yes, that’s right, it’s not all the capitalists, entrepreneurs or individuals who are necessarily at fault. It’s the government that has manipulated the markets for its own ends and for the benefit of its favoured special interest groups.
Once that happens, the rest of the players in the economy are forced to play by the distorted rules set by the government and its pals.
Naturally these rules lead to disaster, as we’ve seen. The response from government? Well, it denies any blame and so creates a whole bunch of new rules to make matters worse.
This is the process we’re going through now. And just like the 1930s, the initial reaction is that “it’s working.”
And that reader, is where everyone is in danger of being sucked in.
The government, having stepped in to “save” the economy, and save the “free market” gets a taste for it. It likes intervening. Ministers and public servants believe their own spin.
Actually, it’s likely they truly believe they’ve helped out. And like anyone who thinks they’ve helped, they’re keen to help some more.
The problem is they haven’t helped.
They’ve merely spent and borrowed in your name, without your permission. When you stopped spending because you thought your job could be at risk, the government continued to spend on your behalf.
When you decided to pay off a bit more debt because you were worried about having too much debt, the government borrowed more money – on your behalf.
And guess what? The government will continue to borrow and spend. And it will spend more than the money it steals from taxpayers. That means it will have lumped more debt on your shoulders.
Which brings us to another point. After polishing off “America’s Great Depression” we moved straight along to the next book on the shelf, “In Search of Shakespeare” by Michael Wood.
Tell you what, it would be nice to pick up a book and just read it for what it is. Unfortunately, almost everything we read at the moment draws parallels to what’s happening in the economy.
It’s a terrible burden!
And you can imagine how much the Sayce kids enjoy bedtime reading at the moment, “Don’t you see? Goldilocks is a squatter, she’s getting subsidized meals and accommodation from the Three Bears… They had no say in it… and because she was squatting she didn’t care about other people’s private property, etc…”
Anyway, before we even made it past the first chapter of Wood’s book, we found a parallel. He was explaining how the good people of Warwickshire, including Shakespeare’s father, would make goods and then send them once a week in a cart to London to be sold.
On the return journey, the cart would come back with fancy goods from London.
It’s a micro example of an import/export economy. If the folk of Warwickshire hadn’t produced any goods they couldn’t have ‘imported’ the products from London.
It puts to death the idea that consumption drives today’s economy. It doesn’t. It’s production that drives the economy. The only way the people of Warwickshire could have obtained the goods from London without producing anything is if they had bought them on credit.
But of course, as is obvious, even if you buy something on credit it has to be paid off at some point. And in order to pay it off there needs to be a productive, not a consumption economy.
Mainstream economists, commentators and the government don’t see it that way. They see consumption as the driver of the economy rather than production.
So it hardly seems likely that the government will cut back on expenditure. More likely is that it will continue to spend which will lead to more borrowings?
Especially now it has the taste for it. And besides, what will happen if it stops spending? What will happen to all those people employed in the construction industry? You know the ones, the guys that are building all those school rooms and hospital wings, etc…
It’s an industry that’s been propped up by the coercive theft of money from your pockets.
Well, there’s little doubt what will happen to the construction industry. It will collapse in a heap. Of course, that’s something which should have happened last year. That would have been bad enough, but when the collapse eventually happens it will be even worse.
Now that more money, more resources and more people have been suckered into this “booming” sector and away from other sectors of the economy there are even more people that will suffer.
“But hang on a minute” you may say, “The government has said the debt will be smaller than projected, it isn’t going to borrow as much.”
If only that was the case. Daily Reckoning editor and the publisher of this newsletter, Dan Denning sent us a link to a story from the Dow Jones Newswires yesterday:
“The Australian government said Sunday it will expand a government lifeline for residential mortgage-backed securities by up to $8 billion, in a move designed to further revive competition in the country’s moribund securitization market.”
It went on…
“The Australian Office of Financial Management, to provide up to a further $8 billion of support to new issuances of high quality RMBS… Only a handful of RMBS transactions have taken place without government support…”
In other words, that’s about $800 every taxpayer is guaranteeing to prop up the Australian property market.
Only you haven’t been asked whether you’d like to participate, you’re just told that this is what’s happening.
It just shows you the depths that thieving politicians will go to in order to save their own bacon. In every way possible, cash is being ripped from your pocket in order to distort the economy.
In this case it’s the usual suspects – the banks and the housing market…
And boy, are the mainstream newspapers making hay with that story: “House prices hotting up” and that “The price of your home is rising, and it’s going to keep rising – by at least 5 per cent a year – for the next five years.”
“At least…” Wow! Guaranteed returns from an investment. All aboard!
But we suppose that $8 billion worth of residential mortgage backed securities should help to keep prices propped up. If you take the median house price of $500,000 then that’s 16,000 mortgages for the taxpayer to guarantee.
Not bad eh!
It’s not surprising the ANZ Bank is so keen to spruik the wonderful housing market.
A market that would be flat dead on its back if it wasn’t for you, the taxpayer keeping it alive.
In our opinion it’s all one big stinking corrupt mess. And you’re paying for it.
We’ll have more on the housing market and ANZ Bank’s spruiking later in the week.
Other Stuff on the Markets
The S&P/ASX200 slipped 0.33% on Friday, while on Wall Street the Dow Jones Industrial Average gained 78 points. In Europe the FTSE100 added 0.14% and the CAC40 dropped by 0.19%.
The price of gold in Australian dollars is trading at $1,163.15, while in US Dollars it is trading at $1,051.65. Silver in Australian dollars is $19.75 per ounce, and in US dollars is $17.85 per ounce.
The Aussie dollar advanced versus the US dollar and Japanese Yen, trading at USD$0.9048, and JPY81.13.
Crude oil closed at USD$72.43.
For the biggest movers on the market yesterday click here…
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Yes, that’s right, Ralph. Alas, the Coalition’s biggest problem seems to be a certain lack of political judgement. For example, there seem to be signs that the Nuclear Power Lobby is working away on the Coalition. If you recall, Howard, who used to be an avowed climate change sceptic changed his tune when he realised that he could use climate change fear to promote nuklear energy amongst the electorate. Big mistake. Now, it seems that Turnbull might also try to support it as an issue for discussion, which will be an even bigger mistake. So, going by the accident prone, and poor political judgement that the Coalition seems to suffer from, Labor really has to hang itself before they have any chance.
Just think of it this way: If Turnbull tries to be “open minded” about nuklear power in this country, Labor will have another field day with the coalition, especially during an election campaign. All they need to ask is this: “If those opposite want to build nuklear power plants in this country, they must tell the Australian people where they will be built.”
Once that question is popped, the Coalition’s goose will have been cooked. If they specify particular areas, they might as well not field any candidates within who knows how many hundred kilometers of those areas. And if they refuse to say where those plants will be built, then it will be even worse, as everybody will be scared that one might be built somewhere near to them, killing property prices and representing goodness knows what risks for them and their loved ones.
Anyhow, if I read this country’s attitude right, Turnbull must have rocks in his head even to appear to be entertaining the mere possibility of building nuklear power plants in this country. If he can’t see that, he would have better luck reading tea leaves the electorate.
than the electorate.
You might also be interested in “The Forgotten Man” A New History of the Great Depression by Amity Shlaes. This may change your view of F D Roosevelt and the popular perception of the value of his presidency. If the Second World War had not occurred the USA may have been in depressed economic circumstances for another decade until they elected a market economy President.
Yes, DB, there are many commentators who maintain that FDR in fact made things worse.
db – Yes he did make it worse through a policy of trying to maintain a budget surplus and protectionism. In fact FDR did call Keynes and had discussions with him, but alas FDR simply didn’t understand what Keynes was talking about (Think George Bush IQ level)
It was the war that FORCED the USA to bring down a deficit budget, and that is what eventually saved the US. In fact it was because of that experience that all informed commentators realise that budget deficits are necessary from time to time. The downside to that is politicians who are not necessarily well informed take that to mean that they can drive the budget into deficit to fund their political goals, rather than using it as a measure in times of economic need.
cb think of a business overdraft that is used in tough times but brought back into credit in good times and you will have the picture.
well wats gonna save the usa this time ’round?????????????????????????
etch – This time they had a big deficit before the GFC, and they are spending a fortune on a war. In WW2 they earned a fortune selling goods and arms to the rest of the world.
This time they are in a far worse position, so the return to normal will take a long time.
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