Friday, 5 February 2010

Keynes and Hayek (Accompanied by General Ramblings)

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
John Maynard Keynes
The General Theory of Employment, Interest and Money

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
F A Hayek
The Fatal Conceit

Both quotes above are taken from the recent econstories rap video that has been showing up all around the Internet which can be viewed here. A very lucid video crammed with factual information, so don't be put off by it's format as a rap song. As we start a new decade, more people will see the ill's of our economic system and formats such as this will help inform people on all levels, as I realise many people find history and economics a very dry and boring subject.

The video contains many subtle messages. The receptionist not recognising Hayek, Keynes book in place of the bible in the hotel room, a party at the FED - the old alcoholic analogy along with "Tim" and "Ben" as the bar tenders. It compares our current solutions to nothing more than the 'hair of the dog', painting a clear picture of what needs to be done. The video is not biased either, with a fair representation of Keynesian economics.

Back in the real world Greece finds itself on the ropes once more, the bond vigilante's are turning up the heat sending rates upwards meaning rollover default is becoming a real danger. As quick as the pansy states will be able to cut their budgets, the rates on their bonds will rise over the long term negating all of the spending cuts. Portugal was thrown in the same gladiatorial arena, as the med club cousin found it couldn't find buyers for some of its bonds. Who's next - Spain, Italy, Japan, the UK, the landscapes getting ugly as distress in the bond bubble is on display for all to see. The Euro fell, but the Germans seem to be having no Southern Shenanigans. Staunchly opposed to any bailouts instead demanding nations begin to get their house in order as their Bunds still look as solid as any other government debt instrument out there. Could the Chinese bail the Greeks out? Yu Yongding doesn't believe so declaring the assets as unsafe.

What seems to have surprised many is the speed of events and how the Greek economy has fallen into the abyss. Well this is what happens when a government runs out of bullets, the market always catches up with you. It took near 80 years for it to catch up with Communist Russia but when it did, it fell in spectacular fashion. The decades of decay are still there for all to see.

Pimcos Bill Gross has given a big no, no on UK Government Gilts as he sees not only real rates of return as an issue but the devaluation dilemma. When the UK politicians still have access to devalue, investors wisen up and realise its not just the interest rate you need to worry about, its a question of will the currency still be worth the same 10 years down the line? Italians used to perform this form of default when the basket case lira was around, nonetheless international money gets smart and knew not to trust an Italian Government. Similar to their driving, reckless.

In Britain it goes from bad to quite simply awful. Over in America Obama has felt the peoples backlash of late, with all the Wall Street bailouts and excessive government intervention coming back to bite him. Meanwhile the 'Great' British public reward Gordon Brown, increasing his bounce in the polls, even though the current Labour government are doing all they can to make the fundamentals worse. That's the British for you, we believe in the free lunch and that Government can solve the issues of the day. We like illusions, inflation, governments and think there's not enough spending on public services despite our gigantic deficit. Americans talk of dollar death, they should think about coming over to Europe and see how to really mess things up! Sorry Peter Schiff, its not just America that's the 'Caboose', its pretty much the whole of the West.

Japan has been in the news a fair amount lately, with many commentators declaring default could occur there first. While Japan is a basket case, their savings rate is not what it was and they are all getting a lot older, they still have a lot of currency reserves, second only to China. They will sell these first to pay for the latest Government who are following Keynes advice just like the previous Government did for the past 20 years. They will also stop buying US Treasuries at some point, which they still seem to have an appetite for, instead buying their domestic bonds. Of course they will go pop at some point. You don't build up 200% of government debt and not pay for it. Any slight move in rates would be fatal, therefore expect the above actions to be taken first.

Switching gears, Shells profits collapsed forcing the sale of its assets and job losses for the oil giant due to oils lower price. You always hear about price rises in the media, but never hear about the falls. When oil was around $148 a barrel, it was the 'evil' oil companies that was causing the price to rise, profiteering at the expense of the public. When it collapsed, the same reasoning didn't add up as the same companies were scrambling to mend their books. 'Why didn't the price of oil fall at the pump substantially when its price fell from $148 to $40' - simple its hedged. The free market insulates consumers from the volatility in the commodities markets by using futures contracts to hedge against price spikes and dips. Hence the price at the pump stays fairly stable in comparison. The only reason the price rises over the long term is from Government Monetary mismanagement. Of course the government likes to blame speculators, oil companies, Arabs and the public generally buys the lies. Against gold of course oils price doesn't really move anywhere over the long term, but enough on minor details such as these.

Reports again come out detailing inequality is larger than it was thirty years ago. As Milton Friedman once said "We all start the race from the same point, but each one of us has a different finishing line". Markets enable us all to prosper and follow our own goals, using our available talents. Governments are the ones who ensure further inequality. The monopoly on money ensures the currency is inflated, enriching the asset rich at the expense of the asset poor. Lower incomes are also crushed further as a larger chunk of money is used to buy everyday goods, food, energy and so forth. The Government welfare state has meant the 'why work?' culture further expands creating an increased disillusioned underclass stuck in a vicious circle. Charity starts at home and the only way to help people is to allow them to help themselves. Who says the free market can't run a social welfare system? They already exist in the form of voluntary organisations who gain donations or Church organisations. People are more reluctant to claim if they can see the people providing the handouts, rather than some faceless factory system, where the government churns out the public's money. Of course we only get widespread unemployment when the free market tries to correct the governments wrong doings. Otherwise shocks to the whole system wouldn't occur, outside of a natural disaster of course.

Coming full circle back to Hayek and Keynes, I always find history is full of interesting stories. One such story is before Keynes wrote his famous book in 1936 becoming the de-facto textbook in economics, Hayek had critiqued Keynes previous works. In Keynes previous work, Hayek had done such a good job that Keynes declared to him that he no longer believed in what he wrote and had gone back to the drawing board to write his famous general theories. When this later book was released Hayek decided not to critique it as he didn't wish to waste his time again and felt everyone would see it to be as flawed as his previous works. The rest, they say, is history.