Sleepwalking to oblivion

“..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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Comments

[peter s]

At last someone mentions Mises and Rothbard. What the government and the big interests are not telling us is "how much more are they willing to pump into keeping the big banks afloat?"

The situation we are faced with is like lending to a junkie. He keeps asking for more and getting it by telling you that he will be killed if he does not pay his supplier. For how long will government continue to be mugs at the expense of the tax paying public ?

People and government must realise that we cannot hope to rescucitate yesterday's failed paradigms and continue as if nothing happened.

[Ed]

Dear Tim,

You are a bit hard on economics degrees. Mine, 30 years ago taught me lots of useful stuff. i.e. policy economics was made up by economists "paid for" either directly by govt or else in academia and had little or nothing to do with any viable economic theory of any school. Witness recent use of Keynes name attached to policies he wouldn't recognise for a minute. Economic history was probably the most useful subject I studied throughout my entire schooldays as it revealed so completely how little humans change through the millennia which leads to these strange repeating outcomes.

Obviously Mises is getting a lot more coverage these days, I just wish that some of the proponents recognised that even the Austrians understood that at the end of the credit expansion you could either undergo a very rapid adjustment with consequent enormous social upheaval and possible failure of the political system, Hitler anybody? Or you could have a long drawn out process where you resisted the inevitable contraction each step of the way. 20 years of Japan?
There is a slightly unpleasant streak in the liquidationists. "I saw this coming and am all in cash, the rest of you can burn in social collapse just so I can be proved correct and buy some cheap assets. I have to admit I used to be in this camp myself but I am starting to have doubts.

[timprice]

The criticism of economics degrees is in large part down to the mismatch between expectations ("will enable me to be a better trader") and reality ("has no practical benefit whatever"). This in the context of a Cambridge Economics degree. If an economics degree doesn't help in a dealing room, when and where on earth does it ? I take your point about the liquidationist stance. But I also have sympathy for utterly blameless savers. That sympathy will be multiplied if we end up burning in a hyperinflationary hell, and that no longer looks like an idle fear.

[disability insurance]

Very nice article! You proved there is NOT "a broad consensus – among economists and market observers – that there is no alternative" - and it's not only Austrian school (but they are the leaders for sure. As I know P.Schiff is Austrian school fan too) who offer alternatives.
The problem is simple - voters expect their governments to do "something". But if you were a politician - can you imagine you would answer:"Ï am sorry, only think we can do is to work hard and let the recession to fade away!"???
Regards,
Lorne

[timprice]

It will certainly be interesting to see how the current crisis ends up affecting people's views about the role and value of government full stop. "Full stop" may be the pertinent phrase here. Continually relying on platitudes and what seems to be the path of least resistance may be the easy policy response, but I foresee a real possibility of social unrest as unemployment rolls swell and the tax burden grows like a weed. How long before bankers start getting mobbed in the street, whether they deserve it or not ?

[Kristine]

Thanks for bringing some sound perspectives into the debate. Unfortunately, most people seem to have made up their minds, especially in Iceland, that it's the free marketeers that are to blame for the crisis

As for the usefulness of Economics degrees, I'm not so sure any academic degree is all that useful in the real world, though I found intellectual history stimulating and wish I'd done more philosophy. Other than that, I've also done political science and journalism, it seemed one long excercise in roadlearning. I guess City Uni was useful for networking purposes, but in termes of the craft I'd been better off spending that year in a newsroom.

[SeamusAndrewMurphy]

I'm always puzzled when the Austrian School is brought up as an answer to the situation we face today.
It isn't that I disagree with the analysis, but that the attempts to prop up the failed paradigm, the Keynesian stimulus, and the pleading turn towards government are looked upon, haughtily, as mere foolishness.

The reality is that an enormous portion of the population, the FIRE sector, and the government are looking at the impossibility of having to pay for yesterday's excess in an environment of deflation. It is literally going to be impossible for these people, corporations, and institutions to meet their obligations. That is the tension that is driving this desire for intervention. To dismiss this tension and to glibly suggest that something akin to Schumpeter's creative destruction as the only obvious answer is to blind one's self to what that destruction may indeed look like.

In full disclosure, I am among those that will be the punished. I am a saver. I live a sparse lifestyle, have instilled it to my children, and God knows, have forced them to go without in order to not incur debt. I have driven my immediate family nuts in anticipation of an economic collapse. We're debt free, and don't have a number of the conveniences that most Americans consider necessities. I even walk to work daily, an hour each way, rather than incur the expense of a second automobile. Still, I fully appreciate what a seemingly unending downward spiral will look like.

I am also disgusted with the distorted sense of purpose that the banking industry and their legislative and appointed servants claim on the public purse. It is a travesty, but that line about the “...the labour unions to prevent or to delay this adjustment merely prolongs the stagnation “ is too much. As if labor in the majority of industries had collective power. Cripe, the vast majority of people have seen their purchasing power disappear in the last ten years. Now they're facing 5-10 % across the board pay reductions, elimination of retirement contributions, and shorter working hours, and their very real, very desperate status is dismissed in that throwaway line?

Fine, liquidate then, and reap what comes afterward.

It's too simple a model for the situation we all face.

[timprice]

The contrast between the Austrian "solution" and the current mess is, indeed, stark. One difference between our current situation and that of the 1930s, for example, is the existence of a welfare state in the, erm, "developed" world, which at least helps to address the desperation to which you allude. Beyond that, our best hope would be that a new breed of politicians - people that understand the very real issues and that can be trusted - replaces the current mob. That seems like wishful thinking. But otherwise the only real choice would seem to be whether we get a firestorm that lasts for years, or one that burns intensely for a short period and is then extinguished. What concerns me most is that politicians are not the answer, but people seem to have abandoned hope in virtually everything else.

[fussball]

Gute Arbeit hier! Gute Inhalte.

[Vinyl Banners]

This a good post.
Nice insight!