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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Ralph – I’m impressed, you have an awsome gift for writing grab lines. Are you sure your not a journo or a political spin doctor?
Clearly you see the point I was making.
What is your “We saved the world” grabline? Keep these creative juices flowing. It may get ripped off by Wayne or Julia though.
CB, some very good points there.
On the topic of Pascal’s Wager, to believe or not believe in God is a matter of individual choice. My belief or non-belief in God affects only me. But when it comes to climate change, peak oil, the quality of the world’s oceans etc, we are dealing with a tragedy of the commons. So each person acting rationally does not necessarily achieve the best outcome for the whole. Hence the need for governments to act on behalf of their people, hopefully in a way that advances each country’s cause while also benefiting the world as a whole.
I don’t think anyone seriously believes climate change can be prevented. True, it has been going on as long as the planet has been in existence. I think the issue at hand is that it is supposed that humans are causing the change in climate to occur at a rate much faster than it would otherwise have occurred. I repeat, supposed. To the extent that the acceleration of a natural phenomenon with potentially dire consequences to humanity can be slowed, I think it should be attempted.
Whether the science is good, bad or indifferent, the global mood is towards taking preventative action to attempt to mitigate the effects of so-called climate change. So whether or not it’ll ever come to pass, the international community is taking it seriously enough to be getting together to discuss ways to act in concert. To that extent, it’s not a matter of whether or not the science can be defended. The world has decided it’s an issue and is starting to plan for action. Whether it’s 1, 5, 10 or 20 years away, it seems that there will be some move towards global co-operation to reduce CO2 emissions. So the best we can do is accept that and start preparing for it.
And finally, on the topic of point 10, I wholeheartedly agree. What excuse do we have not to reduce the amount of air pollution?
But my real beef is around sustainability of resource use. The world’s economy is based on the exploitation of non-renewable resources – coal, gas, oil (and uranium to a lesser extent). Once they’re gone, they’re gone. What sort of economy will we have then? (True, we’ll all be long gone by then, so it probably doesn’t really matter.) The long term future of the world economy is predicated on a move towards more renewable sources of energy. Whether climate change is real or not is a minor issue in my mind. To the extent that action towards climate change (whatever form it takes) is also a move towards a more sustainable model of energy use, I support it.
enough ?, I have just read your comment. It must have been held up in transit, for a while, lol. But you are spot on. As the legendary Gerald Celente is fond of a saying from the Bronx, “When people lose everything, they lose it.” And when that happens, there is just no way of knowing what they will do.
PF – not a journo or spin doctor, but I take a keen interest in politics.
I can’t even bring myself to construct election ads that Labor will use. The wastage of taxpayer funds disgusts me.
I actually think Labor has a tough campaign ahead of it. It can remind everyone how much was spent to save the recession. But that also highlights the amount of debt that we’re in, which is sensitive to a lot of people. I reckon they can only talk in broad terms about Oz avoiding a technical recession while the rest of the world copped it and what great economic managers they are.
The coalition will try to use interest rates (again). But I’m not sure how that will go down given that rates went to rock bottom, so where could they possibly have gone but up. The ALP can counter that with something like “Interest rates are lower than at any point under the Coalition” with a fancy graph.
I like your way of looking at the problem, Ralph. Much more, I must say, than “the sky is falling it, so quick you poor devils, give us fat cats a sh!t load of money, so that we can prevent the sky falling in on you.” For example, if they had argued that fossil fuels must be conserved for future generations who might have the misfortune of somehow losing high and advance technology, then that is something I would support as having merit, and would be willing to sacrifice for it. But that is not what they are doing and their arguments do not convince, plus their motives also stink. Fat cat interests have been lined up very nicely to benefit tremendously by the diverted money flows from the masses to them. Traders are salivating at the prospect of clipping tickets at our costs. But anyhow, we are going to have what we are going to have, and as you say, we are not going to stop it.
But if you take a narrower frame of reference of what these proposals are going to do to us in the short to medium term, vis a vis our international competitors, for example, we still have a substantial problem to grapple with as a country. The GST from hell, will be just that, and if we end up with an uncompetitive economy and a significantly lower standard of living, I am not sure how much comfort we are going to derive from the thought that we are using renewable energy.
Yes, unfortunately, the Coalition seems toast for the next election. But, as they say, no antidote to success like success itself. Labour will have enough rope to hang themselves, and by the looks of it, they are well on the way to do it. It will take a couple of cycles, probably, for the massive misallocations of resources to start biting in a serious way.
Especially if we suffer a significant disadvantage relative to our trading partners and international competition as a a result of an ETS, Labor’s goose will be cooked faster than we might currently anticipate. Rising rates while taking on still more debt has already started the process, but the GST from hell, which Rudd seems to be so keen to implement, will come back to hit Labor like a freight train as surely as my name is not Kev.
I fully agree, CB.
The way the ETS argument has been conducted is disgraceful. It’s become a horse trading exercise where the government and the big polluters can tickle each other’s bellies while pretending to care about doing something noble for the environment. Whatever the ETS hoped to achieve has long since been watered down to practically nothing, even with a global agreement. I’m afraid that it is little more than a GST from hell. I think it’s time that they scrapped it and started from scratch.
I think the whole climate change thing would have been much better received if sold as energy resource sustainability. I reckon the environmentalists have f*ckd up there. People can accept that coal, oil, gas and uranium are finite resources that are essential to the economy but will eventually run out. Take peak oil – a much more serious threat in my mind, but governments are too spooked to even mention it out loud. Same goes for the mountains of debt that the economy is built on. We can’t mention that too loudly either or everyone will lose confidence and the whole thing will collapse.
Probably the only way for the Coalition to win from here would be for there to be a 20%+ crash in house prices. Then the coalition could try on the election grab that I suggested earlier to paint Labor as not looking after the battlers’ interests in the form of high house prices. But we’ve already outlined well and truly that the chances of Kev letting that happen are almost nil.
Barring some calamity where Kev falls flat on his face (could always happen), I reckon the Coalition’s best bet is to try to get through the upcoming election with as little damage as possible and build for the next election.
Hi All, On the topic of ETS and “climate change” here is an article to ponder on. Also a couple of years ago the “fad” was “the hole in the ozone layer”. What happened to that? why was it only over Ausatralia (20 million people ) not the northern hemisphere where billions live?
Why are there government adds on TV telling us to “go vegitarian” so as to reduce the number of livestock “which are contributing to the “global warming”??? Meanwhile the Chinese are using our lands to raise their beef?? Why should I turn off alight bulb for an hour to “save the planet”?? If the polititians halve their travel (especially dear old Kevin) and use video confencing, this would save more than I could in two lifetimes. Besides, with all the worldwide downturn in production, freight, etc. surely the world had been “forced” to reduce carbon emissions by a significant facto, rendering all the efforts of the pollies totally a waste of time. But hey, its not about saving the planet or there would have been an equally balanced debate allowing BOTH sides of the argument to be heard. Its all about robbing us blind!!!
COPENHAGEN CLIMATE TREATY IS DUE TO BE SIGNED AT THE END OF 2009
The article in the NY Times Science section on July 21, 2009 titled “Is the Sun Missing its Spots” points out that many solar meteorologists and astronomers believe that we will be undergoing a minimal sunspot activity over the next 11 year sunspot cycle, which could lead to colder temperatures worldwide. This follows an eleven year cycle that just concluded where the world cooled from its high temperatures set in the mid 1990’s.
We would like to suggest to politicians and their staff who may read this letter, that they discourage the U.S. and other western governments from signing the Copenhagen treaty. The signers may be decreasing their country’s ability to provide jobs for their populace and increase the cost of producing goods within their country. These agreements and their costs could be a big mistake. China, India and other highly carbon emitting countries will certainly not sign them, and the costs of complying may guarantee that China and India far outstrip the rest of the world in corporate profits over the next few decades.
Further, there is strong evidence that the world is cooling due to decreased sunspot activity and cooler temperatures lie ahead. Could this be another situation where by the time the government gets around to fixing a perceived problem, it is no longer a problem…and the solution is far more debilitating than the problem?
Well said, Nick. Unfortunately, big and powerful interests cannot wait for the climate change gravy train to leave the station. Counterarguments like yours will not be given a hearing, because the whole thing is a ruse. We will be very lucky to escape the scam being pulled off.
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