We won’t deny it. It’s always pleasing to see the Macquarie Group [ASX: MQG] share price take a hammering.
Yesterday the stock hit the skids following news that the company expected profit for the current half to be 25% lower than the same time last year:
The shares closed at $35.25, and today are trading another 1.5% lower, meaning the company’s shares are now trading 40% below its 52 week high from October last year. And over 60% lower than the all-time peak in early 2007.
Of course, on the bright side, if you’d bought in when the shares were trading well below $20 early last year then you would have doubled your money by today… which just goes to show there’s always good news to come from bad news.
And what better news can there be for an economy than an earthquake:
“[I]t could actually be positive for growth. You will probably see a massive lift to the construction sector, which has been dwindling in recent quarters… It’ll create tens of thousands of jobs, most of which will have to be sourced from outside of Christchurch… It should give a pretty big lift to household spending, and should have some knock-on effects throughout the economy.”
[Your editor weeps]
The above quote is attributed to Helen Kevans, economist at JP Morgan in Sydney. We’re sad because Kevans always seemed to your editor to be one of the few sane mainstream economists.
Yet the above comments have just undone all her good work. And now Kevans joins the team of other mainstream economists who we simply cast aside into the basket of Keynesian irrelevance.
You’ll have to excuse our naivety. When we wrote about the fallacies surrounding natural disasters in yesterday’s Money Morning we focused on the misplaced urge among commentators to get the government involved.
However, we didn’t mention how many people will consider the Christchurch earthquake to be a positive for the New Zealand economy. We didn’t mention it because in our naivety we’d assumed that no-one believed in that stale old chestnut anymore.
But apparently they do. Kevans at JP Morgan for one.
And Michael Janda, so-called business reporter at the ABC is another. He notes:
“[O]ver the next year or two, the earthquake looms as effectively a giant stimulus package to New Zealand’s struggling construction industry.”
Oh dear.
But Janda doesn’t leave it at that. He moves on to address a number of other economic fallacies not worthy of someone called a “business reporter”.
Take this comment, “You see, in capitalism, someone’s misfortune often registers as someone else’s gain. A company’s surging profit is usually reported as a positive, although it often comes at the expense of redundant employees, cut wages, or customer price gouging.”
Oh dear again.
Words that could only come from a poor soul who has been subjected to years of learning economics at Australia’s statist-loving universities. Probably the same economists who wrote the open letter lauding the government stimulus programmes.
In that letter they wrote:
“Just as a major corporation goes into debt to invest in its stock of capital, so does a government. Just as many householders have a debt to a band or a mortgage company, so does a government. A government has a budget deficit and a government debt, but it also has capital assets (roads, ports, better equipped schools, Broadband, etc).”
To which they should have added, none of which produces a positive cashflow to the government. Take a look at the open letter using the link above, you’ll see every one of them is a university lecturer or professor.
Not one of them we’ll guess – without having done background checks – has any experience of earning a living in the private sector, free from government grants and awards.
If they’d bothered to think just for a second, a business goes into debt because it believes the extra investment will generate additional cashflow or capital growth. A household goes into debt because of the same reason, or because they believe the debt will somehow improve their lives in other ways.
The point is, both businesses and households generate an income so they can repay the debt. Government doesn’t. Government debt is different and a burden because it is paid for by others.
Government is not a profitable enterprise. Increasing government debt does not ever lead to an increase in government “profits”. It simply means the government needs to take money away from the private sector.
For these Profs to argue that government debt is similar to private sector debt is a nonsense.
But anyway, back to Janda’s comment. While it’s true that misfortune for some can mean a gain for others, as we wrote yesterday. That’s not what you’d call the driving force of capitalism or free markets.
The reason capitalism is so successful is that, contrary to Mr. Janda’s belief, in almost all instances both sides of a voluntary transaction gain.
It’s only when a transaction in involuntary that you have winners and losers – taxation, compulsory healthcare, etc. In those instances the consumer is left with no choice. The winners are the firms and government bodies lucky enough to receive the money that has been expropriated from the consumer, while the consumer loses out.
In a voluntary exchange, both sides win. Using yesterday’s example, you buy a ham sandwich from a sandwich shop and both sides win. You get to eat, and the shop owner gets rewarded with cash for correctly anticipating that consumers desire ham sandwiches.
Janda talks of what is really a half-baked argument around the multiplier effect from spending on construction to rebuild Christchurch, yet ignores the real benefits of capitalism.
Instead Janda suggests that profitable businesses are only profitable because they sack people, enslave the remaining workforce or stitch up the consumer.
A more illiterate understanding of free market economics we’ve yet to come across.
Has it not crossed Janda’s mind that companies who pursue profitable ventures actually provide a benefit to the economy. That those companies with capitalists who are prepared to put their money on the line may actually employ more people the more profitable they become.
That workers may achieve higher wages as a result of increased skills thanks to the employment they’ve received from the capitalist.
And that the more profitable a business becomes the greater the ability for that same business to cut prices, or for competing firms to charge lower prices.
Yet you read the arguments by Janda and others and they seem to believe the only way to economic growth is through destruction – and I don’t mean Creative Destruction either, that’s where new technologies or new ways of doing business result in an improvement of product or service to the consumer.
Creative destruction is a positive for an economy.
But what Kevans and Janda are referring to is what can only be described as the opposite to Creative Destruction, and that is Destructive Destruction. And if you’re an English language expert, we’re aware of the tautology – if that’s what it is…
Anyway, not only are they lauding the earthquake as a boom to the New Zealand economy, but as can only be expected, a reference is drawn to what the Keynesians seem to believe is the greatest economic stimulus of all time – World War 2:
“Perhaps the greatest historical example of tragic economic stimulus is the Second World War, which many economic historians credit far more than Roosevelt’s New Deal for lifting the US out of the Great Depression.”
It’s an argument we’ve seen repeated on countless occasions. So Janda isn’t the only economic amateur to get it wrong.
The Second World War was no more of a positive economic stimulus to America or anyone else, than is the current Iraq War or Afghanistan War or the Vietnam War or the First World War or the American Civil War.
We only wonder why the Second World War that is championed as the saviour of the American economy. Why not the other wars? If war is an economic booster then surely that would be the case for all wars.
You only have to look at current US defence spending and the mess they’ve created for themselves in the middle east to see how war is anything but a an economic booster.
So let’s get something straight. Destructive Destruction isn’t a positive for any economy. Destruction is only positive when it’s creative. An earthquake and a war most certainly aren’t creative.
The fallacy of it can easily be compared to an individual household. If you accept that WW2 was a great stimulus for the broader economy, then you must also accept that if you smash your television, DVD player and stereo to bits with a hammer then it must be great news for your household economy.
The reality is it isn’t is it? Because now if you want to enjoy the same level of entertainment you’ve got to use your savings to buy a new television, DVD player and stereo.
Sure the likes of Harvey Norman or Dick Smith might benefit from this destructive destruction, but you lose out. You lose out because you now have fewer saving. Savings that you may otherwise have spent elsewhere.
It’s exactly the same principle with the so-called ‘War Stimulus’. Building things in order to destroy them or use them to destroy other things isn’t a positive stimulus to an economy.
As several posters to Janda’s article suggest, a reading of Frederic Bastiat wouldn’t do him any harm in understanding the “broken window” fallacy.
Anyway, this kind of destructive destruction merely takes scarce resources from other industries that may need them in order to build bombs, tanks or fighter planes.
Just ask anyone who lived in Britain during the Second World War whether they thought that the war was a stimulus. Sure the economy produced a whole bunch of stuff, but it also starved the economy and the consumer of things they really wanted – such as food and clothing.
While resources were being tied up with fighting off the Hun, resources couldn’t be used elsewhere.
Being issued with ration books so that you can only eat as much as the government tells you to eat is hardly the sign of a flourishing economy.
Perhaps Janda would prefer a life without capitalism and see how that looks. If he’s lucky he could try out Venezuela where president Hugo Chavez plans to introduce what he calls a “Good Life Card”.
According to the Miami Herald, Chavez said:
“‘I have called it a Good Life Card so far,’ Chávez said in a brief statement made on the government television channel. ‘It’s a card for you to purchase what you are going to take and they keep deducting. It’s to buy what you need, not to promote communism, but to buy what just what you need.’”
You buy what you need based on what the shopkeepers are told to stock.
We’re pretty sure that Venezuela is an economy where private companies aren’t making the kind of surging profits Janda bemoans.
We may grumble about the government encroaching more and more into the lives of Australians (you noticed have you?), but at least for now Australia still operates a broadly market-based economy.
How much longer that will be the case is anyone’s guess.
But with the foolish Keynesian economic viewpoint appearing to gain more ground by the day, and the impotent mainstream press prepared to cheer for more not less government intervention in the economy, Australia is most certainly on a slippery slope to socialism.
Cheers.
Kris Sayce
For Money Morning Australia
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wats $400,000,000 divide by $80k= average $50k? lost?
Etch…the Greenies will be happy!!!
yeah they’ll sell their “love” instead
What I would like to know about Bob Brown and his club is this:
As we reduce our food production and return everything to nature as she had it, will they be the first to start eating sand? If not, why not?
Etch – Yes, starting with hugging some trees that they propose starving of atmospheric CO2. It will be lose – lose all around, but plenty of love.
All planet saving activities are totally useless .unless something can be done about the plague of humans.
The second world war expenditure created research projects that quickly turned into productive goods when the war ended. Penicillin, Radar, Communications Equipment, New High-Strength Metals, Jet Engines, The Cavity Magnatron, Synthetic Rubber.
These were brand new industries. They paid for all the printed money for the war. It also made Americans richer than they had ever been before. Unfortunately they spent the riches on helping a bankrupt Britain to become a socialist state with Marshall Plan money, and protecting Europeans from Russians, and then the Vietnam war, which made them print money again.
WW2 was a one-off stimulus package that worked because it CREATED new wealth…once.
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