Interview: Sean Corrigan - Diapason Commodities „Pity the poor saver in such a world!“

Governments and Central Banks are playing monopoly throwing trillions of Dollars into the markets. Will it help? Sean Corrigan, Chief Investment Officer of Diapason Commodities has some doubts.

If you want a swift return to free enterprise and the efficient allocation of private capital in the service of human needs, you can only view this as a kind of Goetterdaemmerung - a rebuilding of the Berlin Wall around us all, he explains.

Financial- & commodity markets are nervous, the real economy is contracting: What is going on out here?

The credit cycle IS the business cycle and we went through one of the biggest such booms ever, hence why the ensuing bust has been so terrifyingly all-encompassing.

Governments and Central Banks are playing monopoly throwing trillions of Dollars (guarantees, equity, stimuli etc.) into the markets. Will it help?

It depends what you mean by ‘help'. If a gross expansion of the Versorgungsstaat is what you want, then, yes, it will help. If you want a swift return to free enterprise and the efficient allocation of private capital in the service of human needs, you can only view this as a kind of Goetterdaemmerung - a rebuilding of the Berlin Wall around us all.

Though there are many who trot out the canard that loose policy will end up ‘pushing on a string' if no-one is willing to borrow, the truth is that money can always be spent into the system. If necessary, the finance ministry and the central bank between them can spend any amount they wish into existence and bypass commercial banks entirely - at least in the larger countries or blocs where the proportion of debt denominated in foreign currencies is not a major consideration.

Central banks have been engaged mainly in ‘firefighting' up to now and politicians have been typically slow to stir, but a new phase is beginning with the Fed's latest moves, with the changes enacted by the PBOC, and with the large spending programmes being polished up everywhere you look.

Leverage is the name of the game: Firstly the consumers, secondly many companies, thirdly a wild hoard of investors and lately governments as well as central banks - all of them are stretching their balance sheet extremely. Where will it end finally?

The credit bubble - which was really the culmination of 25 years of increasing excess - has led to an enormous amount of hard-won physical capital being misallocated - whether holiday apartments in Spain, toy factories in Guangdong, container ships being laid down in Korea, dockside restaurants in the UK, or corn ethanol refineries in the American Midwest. Too much debt has been built up on the basis of real assets which were never going to throw off sufficient income to service and discharge it all.

Misplaced Keynesian attempts to ‘replace' the unsustainable levels of spending which have been allowed to build up cannot repair such a loss, only change its distribution, altering on whom it falls, over what period it is recognised, and by what collectivist and inherently arbitrary method this will be achieved.

Pity the poor saver in such a world!

Does it make sense to revive a system that was based on easy money, on low interest rates, on greed, on leverage and on huge disequilibria (asymmetric incentives, manipulated exchange rates …)?

Absolutely not! By attempting to ensure that no-one fails, the politicians and bureaucrats (especially the central bankers) may well end up ensuring that everyone fails as productivity falls, profits dry up, protectionism and mutual animosity increased and the new debts become unpayable in their turn. The risk is that they will freeze too many failures in place and so stultify the efforts of those who could help us back to prosperity more rapidly.

What would a sound economic and financial system look like?

Banks would be restricted to taking in deposits. Only term deposits would be lent out, largely for matched periods along with their own capital. In addition they would, of course, provide certain essential services such as the transmission of payments for a fee. What they would not be is state-sponsored, fractional reserve generators of instability and the engine room of ill-judged speculation.

Therefore, they would have no official backing. They would be ‘free' banks, forced to stand and fall on their own merits with no central banks or deposit guarantees to encourage their irresponsibility. Investment banking would be a distinct business of helping viable companies raise long term funds from savers through managing the issue of securities. It would not be a casino of its own, packed with football-field sized dealing rooms of proprietary gamblers. Wealth managers would form a separate class again, thus minimising the horrendous conflicts of interest which currently exist inside ‘full-service' financial institutions.

Money would be hard and totally depoliticized. In an ideal world, it would consist of a 100% reserve, specie gold standard in near-universal use, so that dollars and pounds would not so much be separate currencies as local names for specified weights of metal.

As well as stabilizing the financial system and drastically curtailing the potential for further destructive episodes of boom and bust, governments would thus be pruned back hard in both size and scale. They would have to approach the voters honestly for every scheme they cooked up, laying out the full cost in taxation of every proposed expenditure.

Buying votes with irredeemable claims on the future - knowing that the printing press could always be used to give the illusion of meeting them - would be impossible. Politics would be far more boring and decidedly less all-pervading - and that would be all to the good!

Today's would-be Kaisers and Bonapartes would, in such a future, have to earn their place in the history books doing something useful in the field of business, science, or the arts instead!

How should investors behave?

With caution and a much more sober realism, if they have learned anything at all from the current debacle.

With governments taking the lead role, inefficiencies will abound, court influence will count for more than cool entrepreneurship and spending will be concentrated on goods, not assets. The fact that spending will be undertaken largely for its make-work possibilities - and not with an eye to earning a meaningful return on capital invested - means that far too many of these goods will be wastefully used or simply given away to favoured interests far below cost, as an electoral bribe. This will mean the coming inflation will be focused much more on material things than on financial, as it was in the recent past. Commodities will not languish long at these depressed levels once this becomes more widely appreciated.

While equities will initially enjoy a significant rise (at least in nominal terms) once the re-inflation makes its effects felt and optimism is rediscovered, this will be an environment in which too many business men will not really be owners but merely outsourced state apparatchiks.

The whole nightmare of policy inconsistency, of a contempt for profit, and of a confusion of directives and programmes which made the upswing from 1933 so sickly in Roosevelt's America could be repeated on a grand scale. President-elect Obama's appointment of a rather incompatible mix of big-name ‘experts' and fixers, each clamouring to have his or her own solutions to the crisis adopted, smacks worryingly of the infamous and thoroughly counter-productive ‘Brain Trust' of his illustrious predecessor.

It will be a long time, indeed, until we learn that there is no remedy for current ills in the repetition of old mistakes.