Unprecedented times

There are often claims made about these being unprecedented times. Here's a hypothesis about times like these:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

It was actually written by Ludwig von Mises, probably in 1949, in a book called "Human Action: A treatise on economics". Now let us test the theory with regards to as many booms brought about by credit expansion as we can find and the strategies employed.

I will update this with examples over time.

Bail Faster!

Australia is now solidly joining the bailout games, with direct bailing out of commercial real estate and plans for a solid "consumer bailout". The problem is that all these bailouts are taking water from the cabin and dumping it into the engine room. Sure, your pants are going to stay dry, but the ship is still sinking and eventually the engine will fail on account of being drowned. Those who aren't watching may think that everything is better because they're no longer being flooded, but the water always comes back!

The announcement of Australia's strong balance sheet is especially troubling, given that similar statements have been made by Bear Stearns, Lehman Brothers, the USA and the UK about their financial systems. In every case it was completely misleading and the statement was only made because they were in a compromising position.

I'm now finishing selling my specuvestment unit from the times before I knew economics. Most people who weren't sufficiently wise to avoid specuvestment seem keen to hang on to their properties still - but they are probably not aware of just how much property prices are falling.

The official tally of government expenses so far is A$45 billon, or about A$2,000 per person, including children. How do you feel about your contribution to our economic planning, where Stevens (RBA governor) thought a recession was unlikely as of April 2008 and Rudd chirped about the IMF's forecast of avoiding a recession and seeing 2%+ growth for '09 as recently October.

Who actually still thinks these people have any credibility whatsoever?

More money is better!

The US government elect has decided that $750 Billion stimulus increases GDP and therefore creates jobs. Implicit in this is that more jobs is obviously good. I'm confused - if this is all true, why don't they use economic stimulus at all times?

Let me pull this apart, piece by piece. The stimulus will increase the GDP number, regardless of where the money comes from or goes into - it's adding to the system. The fallacy here is that GDP is measures productivity - it measures money flow - and the stimulus, by definition, is a flow of money, completely irrespective of any change in productivity. It's also why stimulus is "better" than tax cuts - tax cuts remove a flow of money, whereas stimulus creates one, with the true end result being equivalent.

The creation of jobs is a likely consequence of this money flow. What is not seen is the businesses and jobs not created on account of the lack of need to fix the economy. For instance, it would be a fantastic time to start a bank, if the insolvent ones weren't simply going to be bailed out, but it turns into a terrible time to start a bank if you know that your competition is going to get government money for nothing and you won't. The same misallocation will occur on an individual level with such a stimulus package... and the most likely result will simply be a fudged GDP number that is even less of a reflection of productive output. When the misallocation is stopped, on voluntarily or per force, a reversion to where things were going will occur, only now the business that would have been created for recovery will not exist - instead there will be completely different ones that were feeding on the stimulus.

So how about the whole more jobs thing? As I mention in the last post, government-created demand for hole-diggers can solve all unemployment issues. You could even increase the working week to 50 hours with all this demand for hole-digging! Most people would rather work less time for the same return, so the good here is increasing productivity, not increasing jobs. Few arguments are made for productive output being increased by stimulus, and they either rest on "GDP goes up => Productivity goes up", refuted earlier or "More people working => More productivity", which fails the hole-digger example and fails further when you consider that companies having to compete with the labour demand for hole-diggers and hole-digger admin staff and safety inspectors and all may not be able to employ as many people, so productivity will go down.

I have established that stimulus is probably a bad thing, if you consider the long-term effects on productivity or personal wealth, even if it's free. It's not free - where does the money comes from? Either it comes from debt (selling all citizens in the future into slavery) or from printing (stealing from the utility of money). Both of these are traditional, and horribly frightening when practised to a large degree. Selling too much debt makes the slavery approach absolute, as everyone works to no personal gain, and stealing too much results in devaluation as money becomes worthless, the end result of which is hyperinflation.

The governments seem to think that throwing money at the problem will make things better, a policy that has never worked in the past. The more the better, borrow or print, it's all good! We have the people sufficiently scared, they'll let us do anything, so let's live large! Why is it so difficult to learn from history?

"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement: and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." - George Santayana

Gyromancy Begins

Gyromancy is divination through use of circles. In the case of this blog, it refers to using cycles that are quite clearly present in the past to predict the future - only a slight stretch.

This blog is intended for considering the Australian economic situation, which is highly influenced by the global economy. The news blog is designed for news that has not been interpreted - this one may go all the way to rants. These blogs, along with the Facebook group are designed with expectation that Australia is facing a depression. A depression whose severity is in the hands of the government - and the government is in the hands of the people. If the people don't care and the government remains incompetent and/or corrupt, the depression may become the greatest that the country has ever seen.

I would rather be wrong, lose my money, and go back to my rather successful career in IT during a time of unparalleled prosperity than be right, make a fortune and watch my country slide into the depths of a depression that cannot truly be imagined by anyone who has lived in first world comfort their entire lives. If I am right and make all that money, I will not feel badly about it - I am simply employed to bring the market into a state of balance - a state it has not been in for quite some time. The market being high or low is like a lifestyle - one can live richly on credit, for a while - and it seems most people have - the market being balanced is what drives future productivity, and so is far more important.

Let us look at the situation more closely. In the past:
Massive inflation due to credit creation has been experienced in most of the world. Liquidity has been extended anywhere and everywhere. The cost of servicing this debt was artificially depressed with more liquidity and stunningly low interest rates. This inflation did not show up in CPI statistics in part due to cooked statistics, but mostly due to being present in asset classes not reflected in the CPI (housing, stocks, etc).

In addition, there was rampant fraud, some of which might not be strictly illegal, and massive unregulated betting. Leverage was allowed to reach levels of pure insanity. Anyone and everyone could make money simply by investing - no productive output was required.

A way to consider leverage with respect to dollars is to think of two poles and each dollar being a rope. Lending and leverage allows you to wrap the rope around the poles and have a different person claim ownership of the same rope by holding a different section. Increasing leverage means you wrap the rope around more times - reducing the leverage restrictions is like declaring that all ropes should be extended in length. It's all fine until someone (especially not the person holding the free end) says "I want my rope" and starts to pull his rope and they all find that they don't actually own the whole rope. Then the deflation sets in. The ones who lose this sudden tug-of-war quickly find themselves bankrupt.

The present:
Many think the crisis is over, but in truth it is only just beginning. Everything appears quiet because all the governments have backstopped their financial institutions, so the next step will be the failing of the countries. For instance, the UK economy is not actually large enough to backstop Barclays effectively, and we'll see how Switzerland goes with its backstopping UBS, an entity with assets equal to 5 times the GDP of the country.

So far we've seen at least 4 countries (Iceland, Hungary, Ukraine and Pakistan) fail in various manners supposedly resulting from this crisis. I look forward to Australia remaining off that list until 2010 at the earliest.

Of course, an institution that has lost massive amounts of money is not self-sustaining, and so not adding value to the economy. A lack of banking services would be a severe problem, but that can easily be addressed by creating new banks before the old ones are allowed to fail. A lack of credit for productive output is another problem, however that is best solved by burying all the zombie companies ASAP, since there is plenty of liquidity still around and about.

The actions of the governments are beyond puerile - the US government is in tantrum mode, yellling "I don't want to change! I don't want to work!" Their more lucid strategies involve "creating demand", "stimulating the economy" and "creating work". This is addressing the problem from the wrong side - wealth is created through improving productivity, not through stubbornly denying the fact that prior wealth has been destroyed, or even through redistribution existing wealth.

For those who think that creating or preserving jobs is a good thing, I propose that I can create as many active government-paid jobs as required with a plot of land and a shovel per person - the job's title is "hole-digger". In addition to creating as many jobs as required, it may even reduce unemployment to zero - it's brilliant! Any time you think that preserving jobs at a company going bankrupt by use of bailout is a good thing, or that any form of created work is good, consider whether or not it is better than employing them as hole-diggers.

The future:
Economies cannot recover until responsibility is established. Further, the longer the market is deliberately jammed, the less efficient the economy will become, which reduces productivity and hence overall wealth.

Transitioning to smooth, efficient, transparent operation will be exceedingly painful. It will come one way or another, through a change in policy, through revolution, or through war. I implore you, dear reader, to join with me in my attempt to see policy changed, and for the minimum pain to be taken as soon as possible.