Debunking War-nomics

Just a quick Money Morning today.  We’re getting stuck into the January issue of Australian Small-Cap Investigator.

And seeing as it’s Friday, we’ll wrap up an old topic.  Rather than start a new one.

Let’s be honest.  We can’t blame the mainstream economists for claiming the Queensland floods will stimulate the economy.

I mean, they’re just spouting on what university taught them.

And what were they taught?

For a start, they’ve been told the best example of economic stimulus was… the Second World War!

I’m sure you’ve heard the muppets on TV talk about the post-war boom and how fast the economy grew.

How the pre-war world economy was dire.  What with all that Depression stuff going on.

But then, like a bolt from the blue, the Second World War came along and stimulated the world to recovery.

And boy what a boom that was.  If only we can repeat it, we’ll be laughing all the way to economic nirvana.

Let’s compare a few numbers…

So far in the Queensland floods, an estimated fifteen people have died… now compare that to around 70 million who died in World War 2.

In Queensland it’s estimated 12,000 homes have been damaged by floods.  World War 2 wiped out millions of homes.  Not to mention the thousands or hundreds of thousands of work places.

Must try harder Queensland.  There’s just not enough stimulating going on.

We touched on this silly subject last September after the Christchurch earthquake:

“Why Creative Destruction is Good, and Destructive Destruction is Bad”

In it we wrote:

“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.”

It seems strange to make an economically positive event out of a natural disaster.  And to then compare it to the Second World War… a non-natural disaster event.

In all our searching of the Interweb, we’re yet to find anyone say the First World War or American Civil War stimulated the economy.

That can only mean one thing.  The Second World War fits nicely into the theory about government spending and economic growth.  Whereas the other two wars don’t.  They say the Second World War is an example of economic stimulus working… but they ignore the other two.

Mainstream economists have taken one data point and used it as the basis for their entire theories.  That’s a mistake according to Sherlock Holmes.

Over the summer holidays we’ve read the adventures of the pipe-smoking and cocaine-injecting sleuth.  In the short story, A Scandal in Bohemia, Holmes tells Watson:

“It is a capital mistake to theorize before you have all the evidence.  It biases the judgment.”

I’m sure your editor has been guilty to this “capital mistake”… but we’ll ignore that! [wink].  We’ll ignore it because we like the quote anyway.

I mean, if the Second World War caused an economic boom, what about the First World War?  Did that stimulate the economy?

Our friends over at Wikipedia tell us:

“The post-World War I recession was an economic recession that hit much of the world in the aftermath of World War I… After the war ended… the global economy began to decline.  In the United States 1918-1919 saw a modest economic retreat, but the next year saw a mild recovery.  A more severe recession hit the United States in 1920 and 1921 when the global economy fell very sharply.”

Hmmm… so much for war stimulating the economy.

These war-mongering economists ignore is that public sector war spending stops the private sector growing.

War sucks resources away from the private sector.  Resources that could be used to make cars and appliances and homes.  Instead the state uses the resources to make fighter planes, tanks and bombs.

War doesn’t stimulate an economy.  In fact, after the First World War it took longer for the economy to recover than it did after the Second World War.

In other words, wars don’t stimulate the economy at all.  Rather, they sedate it.  They delay economic growth.  Which isn’t surprising… I mean, there was a war going on!

Without the wars, the economy would have recovered sooner.  Without the First World War the economy would probably have recovered by the late 1910s.  And without the Second World War the economy would probably have recovered by the early 1940s.

Of course, we can’t prove that.  But we can confidently make the claim.

And in the same way, the floods in Queensland delay economic growth too.

Business that would have happened last week and today, isn’t possible.  The local grocer can’t sell groceries because his or her shop is under ten feet of water.

The local bicycle shop can’t sell any bikes because they’ve washed away.

And the local hairdresser can’t cut anyone’s hair because, well, having a nice “do” isn’t on many people’s mind right now.  Getting to the hairdresser might be a bit tricky too.

Anyway, we checked on the Interweb to see how the Christchurch earthquake has helped stimulate the New Zealand economy.  Turns out it hasn’t.  Funny that.

According to the National Business Review: “Another recession for NZ still a strong possibility – economist”.

Of course, that’s according to a mainstream economist.  So we should take what they’ve said with a grain of salt.  Even so, these are the same mainstream economists that thought the earthquake would boost the economy… yet it hasn’t happened…

And it won’t happen.

Remember: just because an economist says something it doesn’t mean it’s true.

To test this yourself, stop and think about it logically.  If thinking about the impact of a large-scale economic event is too daunting, scale it down a bit.

If mainstream economists are right about economic destruction providing a boost to the economy, just consider how economic destruction in your own home affects you.

Imagine smashing your TV with a hammer.  Sure, it’ll provide a boost to the TV store because you’ll need to buy a TV.  But it’s a drain on your bank account because you’re drawing down on savings.

Simple eh?

Well, it’s exactly the same for the broader economy.

The fact is economies don’t grow due to mindless destruction.  They grow through Creative Destruction.

That’s where new ideas and new technologies improve lives.  Where something new provides a better alternative to something old – like computers replacing typewriters… or cars replacing the horse and cart.

But the destroying a perfectly decent road and replacing it with a similar road isn’t good for the economy.  Just as destroying a home and replacing it with an almost identical home isn’t a boost either.

Both result in a waste of resources.  Resources that could otherwise be used elsewhere.

Get the picture?  I think you do.

Just remember that if something said by the know-it-alls in the mainstream media sounds rubbish, then odds are it is.

If we’re honest, the same could be said for your editor… if you think we’re not making sense just drop us a line to the Money Morning mailbag at or post a comment at the Money Morning website.

Anyway, we’ve said just about all we can on this matter.  Time to get stuck in to the January issue of Australian Small-Cap Investigator.


Kris Sayce
For Money Morning Australia

Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

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WWII shifted Germany and Japan into economic powerhouses.

Not the destruction itself, rather the act of war.

Rest of editorial is spot on.

Apart from the 50k Lance is donating. What would he do with it otherwise? Roll around in it with podium girls and lines of coke (ok, I am just joking about the coke bit). I suppose the case could be made it sits in the bank which the banks can use as a deposit base to lend to small business. Oh wait. I meant the housing market, coz that’s more productive, isn’t it? Isn’t it? Chris Joye? No? Nobody?

I think the economic situation is slightly more complex than you make out. What you don’t factor in is government debt, ie from the private sector POV this event can essentially become a free ride if reconstruction is largely subsidised by the public sector taking on more debt (in one form or another). Think about it from say a tradies POV… a few months ago that were looking at a building down turn and would have been struggling to make ends meet. Now suddenly they are in high demand, will have a large income, and will be confident to start… Read more »
michael francis

If we blew up the banks and real estate industry, that would be pave the way to prosperity for all to enjoy.


The same rubbish was spouted after the Christchurch earthquake. The ‘boom’ has not arrived; neither will it. It will take years and untold money that we as a country can ill afford, to overcome the destructive forces of nature. In fact in the latest Quotable Values property report, this week, Christchurch and surrounds were ‘left out’ due to the uncertainty surrounding the property sale statistics ( read that as :’It didn’t suit the report to show the value of any transactions, as they might distort the national median!)

Tim@1 I think that Germany and Japan became post-war economic powerhouses because they shifted their productive efforts away from war and territorial expansion. They were able to focus their competitive advantages on building economies that weren’t focused entirely on war. I’m actually skeptical of Japan’s success because the U.S. had much to do in restructuring markets, etc. Nevertheless, I think Japan and Germany owe their success to productivity, self-sacrifice, and savings. In Japan’s case, the lack of any creative destruction has meant that their economy has struggled. Whether or not they could have been anything besides a manufacturer is unclear.… Read more »
Neil Campbell
JC, you miss the point, the German & Japanese economic miracles were made true by the USA Marshall Plan – that is the massive cash injections to rebuild those nations and yes, they couldn’t rebuild militarily. Kris that was the difference between ww1 & ww2; the huge cash investments into the defeated nations to rebuild and to stop another Tojo or Hitler from taking advantage of the vulnerability & economic uncertainty. Mind you, the USA hastened the destruction of the UK, with it’s Lend lease program. The Commonwealth & State Governments will increase their ‘deficits’ to cover the Queensland flood… Read more »

You could have made a much shorter post by quoting Henry Hazlitt.

This is about the millionth time the old broken window fallacy has reappeared ever since he wrote Economics in One Lesson back in 1946.

As Hazlitt put it, it is wrong to think that a broken window creates economic growth, by focusing only on the money paid to a window-repairer. As usual with economics, what is unseen is just as important as what is seen.

— That money could have been used to employ somebody else.
— That window repairer could have used his limited time to fix other windows.


MF @ 3 – Spot on. What is the difference between currency created by the bankers and lent into the economy at interest, and currency created by the government and lent into the economy interest free?

Can anyone spot the scam? And the source of all this problem with debt?

I only joined Money Morning this week to get a perspective on real estate prices in Australia. Whilst finding some of Kris’s opinions agreeable, I am disgusted with the portrayal of the Qld floods. No compassion whatsoever shown for the thousands of victims, emergency workers and volunteers who are facing scenes not witnessed before in Australia on such a scale. I can appreciate that his offerings are investment opinions but money alone does not make one wealthy! As a Queenslander I find these articles offensive. Yes, I am very interested in what the floods will do to our economy. I… Read more »