“..any collectivist system is necessarily self-defeating no
matter what its specific policies or leaders. After all, if Johnny is in your
group and he can’t read or write very well, you’ll be getting Johnny’s grades.”
-
Karen De Coster, Groupthink and You.
Someone close to me once
confessed that their Economics degree, taken prior to a successful career as a
bond trader, had been a complete waste of time. Beyond an awareness of the inviolable
laws of supply and demand, and of the somewhat more subjective but no less critical
market attributes of greed and fear, the contents of the course had, my source
suggested, offered no practical value within the context of a dealing room.
As every year passes, the
futility of an Economics degree in the face of a career in finance seems less
and less of a surprise. My own choice of degree course (English language and
literature, for the record) has not obviously hindered my investment career,
nor my original role as a bond salesman. But one can at least make something of
a special case for the bond market, in that it does appear to be a more broadly
logical and rational arena for investment and speculation, governed in large
part by the macro factors of inflation, monetary policy and economic
“fundamentals”, compared to the Gothic bazaar that is the stock market, where
tips, rumours, stories, the flimsiest of opinions, and all strata of pond life
hold uneasy sway.
But what fills me with growing
concern is the suspicion that there is a broad consensus – among economists and
market observers – that there is no alternative to the gargantuan bail-outs
being granted to the western financial system. Indeed, there seems to be a
growing clamour for more and yet more of the same, to an even broader
constituency of obviously specially unique economic interest groups. Nor, for
that matter, does there seem to be overmuch questioning at the wisdom of deploying
all sorts of fiscal materiel to suppress the prospect of imminent recession. Nor
at the increasingly tokenistic and saver-impoverishing rate cuts, like this
week’s from the Bank of England, despite the well-acknowledged fact that what
matters is not the price of credit but its availability.
Diapason Commodities Management
strategist Sean Corrigan has a nice line in criticising the authorities’
unwillingness (or inability ?) to liquidate bad banks. This would have had the
benefit of reducing over-capacity in a systemically and not to say horrifically
over-leveraged industry,
“But rather than encouraging full
and early disclosure of each [banking] entity’s true status and then applying a
rigorous practice of triage – thereby
making room for the remaining healthy banks to continue to serve sound
borrowers at an economic rate of interest – the authorities have so contrived
it that almost the entire industry has now come to be dependent upon the public
purse and / or the central bank printing press, with regulators also conniving in
a relaxation of reporting standards and capital adequacy testing at precisely
the moment when the cancer of distrust – of discredit,
if you will – is poisoning the system, to the detriment of all. The only
purpose this seems to be serving is that of keeping the plague victims alive
for just long enough to pass the infection on to the healthy.”
Corrigan also cites the notable
economist and philosopher Ludwig von
Mises, whose ‘Human Action’ of 1949 reads like a road map to the parlous
state we seem to be destined for:
“The dearth of credit which marks
the crisis is caused not by contraction, but by the abstention from further
credit expansion. It hurts all enterprises – not only those which are doomed at
any rate, but no less those whose business is sound and could flourish if
appropriate credit were available. As the outstanding debts are not paid back,
the banks lack the means to grant credits even to the most solid firms. The
crisis becomes general and forces all branches of business and all firms to
restrict the scope of their activities. But there is no means of avoiding these
secondary consequences of the preceding boom.
“As soon as the depression
appears, there is a general lament over deflation and people clamour for a
continuation of the expansionist policy.. entrepreneurs enlarge their cash
holding because they abstain from buying goods and hiring workers as long as
the structure of prices and wages is not adjusted to the real state of the
market data. Thus any attempt of the government or the labour unions to prevent or to
delay this adjustment merely prolongs the stagnation.”
And yet both the financial and
political worlds have collectively swarmed, almost as one, to the Keynesian
interventionist and pump-priming banner. One wonders whether the spirit of
Keynes has already won the battle, but the likelihood is that the spirit of
Mises will “win”, albeit in pyrrhic manner, the depression – because the damage,
not least in the form of an unnecessarily protracted and grievous economic
slowdown, will have been well and truly done by then.
That slowdown is likely to
involve much higher tax rates and much higher unemployment. Both straitened
workers and the new unemployed will cut outgoings, thus amplifying the negative
impact on the economy and on consumer spending (roughly 70% of Anglo-American
GDP) – Baugur will not be the last retail business to collapse. And it is not
just Iceland that faces a slide into irrelevance. Near namesake Ireland has,
according to Bedlam Asset Management, a ratio of banking assets to budgeted
government revenue of 26 times. The equivalent figures for the UK and US are
5.3 and 5.9 respectively. Staggeringly, the ratio of Ireland’s banking assets
to foreign reserves is 3,117 times. So how much is that bank guarantee really
worth ? It is probably premature to regard equity markets as cheap – because it
is only those businesses whose franchises are bullet-proof even in a consumer
slowdown that are worthy of consideration for an absolute return investor. Having
little or no indebtedness will naturally help. And staying with the topic of
debt, few could argue with the thesis that whereas the story for government
paper is starting to look a little frayed, the backdrop for high quality
corporate paper is altogether more constructive. (Corporate spreads are at
record highs relative to government paper.)
Perhaps the last word should go
to another economist and philosopher we find increasingly worthy of citation –
Murray Rothbard, also of the Austrian school (the Austrians are to Economics
what Value Investors are to Investment. Discuss.) -
“It is no crime to be ignorant of
economics, which is, after all, a specialized discipline and one that most
people consider to be a ‘dismal science’. But it is totally irresponsible to
have a loud and vociferous opinion on economic subjects while remaining in this
state of ignorance.”
After a recent commentary
criticising the extent and ultimate value of the UK government’s support for
the banking system, and the danger that the scale of the economic bailout might
actually exacerbate rather than prevent a serious depression, a reader suggested
that I email my MP to share those thoughts. I duly dispatched a brief message
to one Glenda Jackson. I have yet to hear a response.
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