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?