Saturday, 21 March 2009

Dr. Doom

As the worlds leaders continue to make mistakes and economies continue their decline I found the following video of particular interest.



For people not aware of who Marc Faber is, he is known for his bearish views on Western economies and how the problems began with Black Monday of 1987 from which point the Central banks embarked on expansive monetary policies and would not let the free market function. You could dismiss the above video as economic thespian commentary. After all high inflation only happens in distant lands, with historically weak economies. Argentina and Zimbabwe used to be economic giants in their respective regions, with prosperous living standards for their people, yet economic crisis came and ruined their peoples way of life. Some of the points in the video are very interesting:
  • "The Fed will never raise interest rates to real levels" - Meaning they will give up on their currency. In the event of inflation running at 10% they will have rates at 1%. They won't even bother trying to bring the money supply under control and will just give up on the currency to keep inflating to pay government and societies debts. Of course this isn't free. It ruins the economy, but still this is what Central banks think will solve the credit crunch. When something goes wrong print (tech bubble pops - interest rates to 1%), when something else goes wrong print (housing bubble pops - interest rates to 0% and QE implemented).
  • "We are a while from high inflation" - Dr Faber is precisely correct on this point. Inflation doesn't happen immediately. It's a gradual process. All examples of serious inflation have taken time to work through, even while calls about deflation were being made. The final chapter of fiat money is always destruction. There are still many chapters to go, but we are getting through the book at an alarming rate.
  • "Totalitarian State?" - More state control along with less individual decisions in the economy signals the beginning of government control as it crowds out the private sector. Further Government debts are being imposed on its citizens without their consent. We still have the ballot box, so are a long way from succumbing to totalitarianism although it is perfectly plausible in the long run.
The video sums up the irresponsible stance institutions and Governments have taken in recent years. The debt burden can not be paid. The only way to not default physically on the debt is default by the printing press - the governments most dangerous weapon. Not 'A Step into the unknown' or 'will it work?' or 'Just enough to move the credit markets' - just plain debasement. Destroying genuine capital and saving that is so desperately needed at this current time to assist with the recovery.

It really was a historic week. The Federal Reserve have announced they plan to buy Treasuries by printing money, not real savings, but with fictitious money. The history books of the future will illustrate this event as a milestone, a turning point where the great credit crunch of 2007 got a whole lot worse. Ben Bernanke has now openly admitted that they are printing money, no swapping of assets, parking of securities just printing new money, to buy government debt. This is always how it begins. As public speakers continue talking of moral hazards they miss the biggest moral hazard of all, that of fiat money. A money with unlimited supply means governments can inflate and bail out everything, with no immediate cost. Perpetuating the irresponsible behaviour from reckless individuals, squandering societies scarce resources.

Budget Deficits are rising, seemingly by the week. A latest forecast for Britain has come in at 12.5% for next year, with the IMF saying Britain has the worst fiscal position in the Western World. Unemployment relentlessly carries on rising, with forecasts of 3.3 million or even as high as 4 million people out of work, putting further downward pressure on economic activity and increasing public spending to cover those out of work. As the private sector reacts to the market forces correctly by reducing pay and redeploying labor, public jobs are sheltered in the governments own wonderland, thus further crippling the private sector, the real engine of human prosperity. As state spending increases it is not only consuming scarce capital that could be used by the productive private sector, but labor. Private sector talent heads into the public sector as conditions worsen, thus stifling innovation and future economic growth. Trade figures deepen as international markets further dry up, meaning more firms cutting jobs.

It will be interesting to witness the coming budget report form Alistair Darling. Will he have a credible fiscal framework (as though there is one now, as the BoE buys government bonds with printed money)? People are still not with the program. The public are still talking about property, stocks, a recovery, the bottom of this market, the bottom of that. The inevitable bull moves in these great bear markets will no doubt fool many into a false bottom. People still don't appreciate the severity of the issues we face.

The FSA has recently begun to look into setting limits against income multiples to be lent against houses. 3.5x salary is being proposed, with suggestions of a 15% minimum deposit. If the above is the case, I can't see many people buying homes. Most British people don't have the discipline to save, never mind save the huge sums required for a house. Why do we have regulators? Why do we have regulatory institutions such as the FSA and the ratings agencies? So after the crisis has hit, they can come up with the regulatory framework. It's similar to a civil engineer not putting supports into a bridge that gets used by the public, and when a disaster occurs admitting that they should have put supports in place as the bridge never stood a chance. Will the new framework work? Of course it won't. The market is smarter than any bureaucratic institution. Regulation doesn't get to the root problem, as true free markets regulate themselves.

Religion was seen for centuries as an institution of wisdom, a beacon of light, defending people against invisible evil forces. As time passed, the enlightenment, the progression of science, slowly religion became exposed for what it was, a mass cult following of stories passed down from generation to generation with no real rational basis. Rather than religion being the saviour, it was indeed part of the problem. Catholic and Protestant divisions in Ireland, Hindu and Muslim tensions in India, centuries of pogroms in central and eastern Europe against the Jews. It became a convenient means to segregate and persecute people. When Fascism rose, Catholicism praised it for its opposition towards Communist and Socialist parties. Movements that believed in equality. Just like religion, Central Banks are just an institution run by a select few, who are not the solution to 'market failure' but are part of the problem. Dr Doom may be viewed as a 'non-believer', just like atheism was demonised during religions dominance. Dr Faber knows the cause of the problems we see, and thus what problems these policies will create further down the road. Back in 2002 Ben Bernanke made a speech entitled "Deflation: Making Sure "It" Doesn't Happen Here", in which he now seems to be implementing the very policies he proposed 7 years ago.

"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt ... Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. "
Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, 2002

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