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talkingheads,whowishtoappearprofound
withouteverperformingthehardworkofactually
thinkingaboutitforthemselves,isthatthe
consumerisseventypercentoftheeconomy.
Regrettably,thisnarrowreckoningofthefateofthe
waterinthefinalpailisonlytruewithinitsown
perverseframework.Itmaywellbethecasethat in
anationasorientedastheUSonwhatweshall
henceforthcallexhaustiveconsumption(i.e.,onthat
whichputstheinvolvedresourcesbeyondall
possibilityoftheirfurtheruseinproducingother
goodsorservices)thoseengagedinwhatis,after
all,anactofdestructiontypicallyaccountforover
twothirdsofthestatisticalfictionknownasGDP,
butGDPisnotcoterminouswiththeeconomyinits
entirety.
Itcannotbeemphasisedtoostronglythatthis
misleadinganddecidedlypartialtruthusuallyobscuresoneofmuchgreaterimportand
inclusivity,namelythatMonsieur/dame
Epuisementaredirectlyresponsibleformuchless
thanaquarterofalltheexpendituresactually
beingundertakenatanyonetime,evenifour
couplessatisfactionistheultimateaimofthe
hiddentoandfrowhichtakesplaceinthat
lurking,subsurfacemassofacatallacticiceberg
wearesoconditionedtoneglect,rightuptothe
momentourmispilotedShipofHoperipsoutits
innardson
this
shadowy,
aquamarine
bulk.
Movingfromthewatercarriersofourallegorical
chaintotheconsiderationoftheproductivelinkage
ofonereal,functioningbusinesswithanother,we
shouldstraightawaybeawarethatthepurchases
eachmakesfrom andthesalesitmakesto
anotherbusinessfaroutweighthetransactions
undertakenwithexhaustivecustomersevenifthe
trueroleofthechoicesmadebythelatter(the
subjectivepreferencestheyexpressastheyspendor
savetheirincomes)isultimatelytodetermine bya
processofpriceimputationbackfromthecontents
oftheirshoppingbaskets boththescaleandthe
compositionofalltheentrepreneurialoutlays
remotefromthem(theonessaidtobeofhigher
order,inthejargon).
Moreover,asweshallshortlyshow,agoodly
proportionofthemoneypaidoutbybusinessesin
thequesttoearnanincomefortheirproprietors
endsupinthehandsofsaidexhaustiveconsumers,
whethertheybeprivateindividualsactingontheir
ownaccountorgovernmentspendingagencies
followingtheirleaderspoliticalwhimsindoling
outtheproduceofothers.
Thus,notonlyarethegreatpreponderanceof
decisionsaboutexpendituresmadebybusinesses,not
endconsumers,butthelattertendtoderivethebulk
oftheirownspendableincomesinthecourseof
thoseverysamebusinessdecisionsintheir
varyingrolesasmanagers,employees,shareholders,
creditors,publicsectorworkers,orotherrecipients
oftaxmoniesextractedfromtheformergroupings.
Itshouldbekeptattheforefrontofonesmind
thatbusinessdecisionsare,bytheirnatureamong
themostdiscretionaryofthemall,forwhileActingManasexhaustiveconsumermaynotlong
ignoretherumblingsofhisbelly,orthecriesof
histhirstychildren,ActingManasentrepreneur
hasmuchgreaterfreedomofchoice.Hemayor
maynotorderinnewstock;hemayormaynot
choosetoreplacehismachinery,movetobigger
premises,launchanewadvertisingcampaign,or
takeonextrastaff.Hemayevencutbackonthe
dividendpayabletohisshareholdersandoptto
rollover,repay,orevenreschedulehis
outstandingborrowings
each
as
he
is
persuaded
byhisintuitionaboutthelikelyprofitabilityof
theselectionsfromthemenuofchoiceswhich
continuallyconfrontshim.
Inallthis,hemusttrytogaugenotonlywhathis
owncustomeriswillingtopay,butwhattraffichis
customerscustomerfurtherdownstreamwillbear
inhisturn.Ashedoesso,hemustsimultaneously
reckononwhathissupplierandhissuppliers
supplierupstreamareseekingtoaccomplishwhat
theywillattempttocharge;whattheycandeliver
andwhen.Heisnotfinishedyet,forhemustnot
onlymakeallowancesforwhathisdirect
competitorsasmakersofsimilarproductsareupto,
hemustbesensitivetowhatthoseinwholly
unrelatedindustriesintend,fortheynotonly
compete ifnowatseveralremoves forthevery
sameendconsumersdollar,theyarealreadyvying
withhimtobuyinthenecessaryfactorsof
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productionthelabour,theequipment,theraw
materials,theland,theenergyeventhespaceon
theovernightfreightexpresstothecontainerport.
TheFruitsoftheirLabours
If
we
take
a
glance
at
what
our
man
can
hope
to
earnbyshoulderingthisheavyresponsibility,the
truemiracleofentrepreneurshipisrapidlyshown
nottobethatsomanysucceedatit,butthatso
manyarewillingtoattemptitinthefirstplace.
CollatingvariousdatafromtheBureauofCensus
QuarterlyFinancialReportsontradeand
manufacturing,theBEAsGrossOutputandNIPA
series,andtheStatisticsofIncomeBulletin
producedbytheIRS,wecanbreakdownthe
destinationofthetypicalUScompanysincome
statementintothefollowingschematic:
REVENUES 100.0 GOVT
COSTS 88.5 OwnTax(i+ii) 6.2
Labour 35.0 Others Tax(a+b+c+d) 7.3
(i) Tariffs 4.5 SubTotal 13.5
(a) Energy 2.0 OwnLabour@20% 7.0(b) Materials 20.0 Others Labour 8.3
(c) Services 25.0 SubTotal 15.3
NetInterest 1.5 OwnCapital@30% 1.2
Misc. 0.5 Others Capital 1.4
DEPRECIATION 6.0 SubTotal 2.6
PreTaxProfit 5.5 TotalTax 31.4
(ii)Tax 1.7
AfterTaxProfit 3.8
Dividends 2.6 LABOUR(AfterTax)
RetainedEarnings 1.2 Own 28.0
(d) Capex 7.2 Others 33.1
TotalLabourIncome 61.1
CAPITAL(AfterTax)
Own 2.9
Others 3.4
TotalCapitalIncome 6.3
Table1
Thereareseveralthingstonotehere.Firstly,thefact
thateachbusinessisassumedtospend54.2%ofits
revenuesontheoutputofotherbusinesses(2%on
Energy,20%onParts&Materials,25%onServices,
and7.2%inCapex)andthateachofthose
businesses,intheir,turnmaintainsthesame
proportionsinbuyingfromtheirownsuppliers.
Essentially,thismeansthat54.2% or0.542
becomestherepeatedfactorinageometricseries,
andthat,asaresult,totalrevenuesendup
Others contributionsestimatedby
assumingthesameproportionastheoriginal
firmandsolvingtheresultinggeometric
seriesupthechain
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therightwaybeforeweplotasinglelineonour
chart.
Todothis,letusfirsttakethedefinitiveIRSdatafor
businessreceiptsandnetincome(whichcovernot
justcorporatesbutalsopartnershipsandsole
proprietorships).Usingtheaccountingidentitythat
revenuesminuscostsanddepreciationequals
profits,wecanquicklyderiveabovetheline
expenditures,whiletheBEAsinvestmentnumbers
alsoallowustoaddanestimateinfortotal,below
thelinecapitalexpenditures.
Annualnumbersarereadilyavailablefortheperiod
19802006,butalittleconceptualmanoeuvringwill
allowustoretrocasttheyears197279aswellasto
projectforwardto200709.Withjustalittle
adjustment,theannualGrossDomesticOutput
series,coupledwithimportdata,helpsustoestimaterevenuesandwecancrosscheckthiswith
theCensusBureausmonthlymanufacturingand
tradesalesreleaseaswellaswithStandard&Poors
quarterlyrevenuesfortheS&P500indextoverify
thattheprojectionisasoundone.
Havingdoneallthis,letustakethatlastyearofthe
IRSrecord,2006,bywayofanexample.Here,we
seethatwhiletheofficialNominalGDPnumber
cameinat$13.4trillion,businessspending
amountedto
more
than
$31
trillion,
around
2
1/3
timesbiggerthevastmajorityofittotally
neglectedbythemainstreamarmyofstatisticians,
blindempiricists,andunthinkingcoplottersofone
curvewithanothertowhomweunavailinglylook
forsomeskillinprediction.
USTotalEconomyExpenditures(blns)
$0
$8,500
$17,000
$25,500
$34,000
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2.05
2.45
2.85
3.25
3.65
CAPEX
BizAbovetheLine
HouseholdRE
CashGOVT
CASHPCE
Length:Width (rhs)
Figure1:ThatstheWaytheMoneyGoes
LetusnextdistiltheGDPnumbersalittlefurtherso
astomakeamoredetailedmethodological
comparison.Tobeginwith,wearekeentoshow
thattheexhaustiveendconsumptionnumbersare
notthealphaandomegaofeconomicanalysis,solet
usextractthembyconsideringonlythepersonal
consumptionandgovernmentspendingpartsof
GDP.Furthermore,wewilldisregardtheirsocalled
imputationscomponentvirtualentrieswhich
attempttoevaluatenonmonetaryservices,suchas
thefreechequebookfacilitiesofferedtodepositors
which,believeitornot,amounttoa$210billiona
yearlineitem.Wewantnostatisticalsophistry,here,
onlythingsforwhichhardcashchangeshandsin
themarketplace.
Goingbacknowto2006,wecanatlastputour
mountainous$31.3trillioninbusinessoutlaysina
betterperspectivebycomparingthemwiththelesseruplandsofthe$7.6trillionofcashpersonal
consumptionexpenditures,aswellaswiththe
foothillsofthe$2.3trillioningovernmentend
spending.Infact,overthewholeperiod,19722008,
businessestypicallyspent$4.30forevery$1.00
spentbyindividualendconsumers,and$3.20for
every$1.00spentbythemandtheirrulerscombined.
Butitisnotonlythesignificantdifferenceinsize
whichmakesthissignificant,butalsothatintheir
variability.While
the
mean
year
over
year
percentagechangebetweenthetwoisanear
indistinguishable6.5%forbusinessand6.6%forthe
exhaustivecomponent(funnilyenough,eachright
inlinewiththecontemporary6.5%averageannual
increaseinAustrianmoneysupply),thevolatility
ofthefirstis5.3anditsrangestretchesacrossno
lessthan5.7sigmas,whilethelattersvolatilityisa
muchlesser2.3andencompassesonlya3.7sigma
range.
Tounderlinethepoint,whenwelookanewat
businessspending what,withanodtoour
Hayekianvisualization,weshallcalltheLengthof
theproductivearraywecanimmediatelygetafar
bettersenseofthescaleofthecurrentcrisis,aswell
asrecognisingwherethebruntofitsimpacthas
fallen.WhereastheWidthoftheexhaustive
outlaysislikelytohaverisenbyaround2%onthe
yearwhenthefinaltallyfor2009iscomplete
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(admittedly,itsslowestnominalincreaseinthe
periodunderconsideration),theLengthofthe
processgivingrisetothemwillbeseentohave
plummetedbysomethingapproaching14%.
Putintodollarsandcents,householdsand
governmentswillhaveprobablyhavepaidout
around$240billionmorethisyearthanin2008,
whilebusinesseswillhavetrimmedamonster$4.8
trillionfromtheirbudgets,takingthembackto
wheretheywerein2005. Repeatthisexercisefor
JapanandGermanyanditwillbeseenthatthe
worldsthreebiggestdevelopedeconomies
probablyshedinexcessof$10trillioninbusiness
outlaysthisyear.Hence,theseverityofthe
recession.
Length&WidthvLabour,sigmasfrommean%
4.0
2.0
0.0
2.0
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
d[HoursWorked]
Width
Length
r2[Hours:Width]=0.11
r2[Hours:Length]=0.52
Figure2:Nevermindthequality
RatioofLengthtoWidthvHours
2.60
3.10
3.60
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
6.5
3.3
0.0
3.3
6.5
OverallRatio
d[PvteHrs]%,
r2=0.62
Figure3:feeltheLENGTH
Furtherunderliningthetrueeconomicimportance
ofthiswayofthinking,notethemuchcloserfit
betweenvariationsinproductiveLengthandthe
measureoftotalprivatehoursworked(r2=0.52)
thanbetweenthelatterandchangesinexhaustive
Width(r2=0.11).Note,too,thatthealterationsinthe
ratiobetweenLengthandWidthaconstruct
utterlybeyondtheconceptionoftheGDPjunkies
correlatestochangesinhoursworkedevenmore
closely,withanrsquaredof0.62.
Asweshallseelater,thebehaviourofthis
variablealsohasagreatbearinguponthequestion
ofhowchangesinthepaceofmoneycreationare
workingtoaccelerateactivityandhowrapidly
theywillaffectthedevelopmentofpricesin
general.Fornow,however,letusmerelystatethat,
totheextentwecantrackitsprogression,herewe
haveapowerfulgaugeofthehealth,orotherwise,
oftheeconomyandonewhichlargelygoes
unrecognisedelsewhere,toboot.
TheWormintheBud
ToanAustrian,noneofthisisunexpectedsincethe
schoolisfoundedupontheconceptsofcapital
structure,theentrepreneurshipwhichshapesand
directsit,thesavingofwhichitiscomposed,and
thewaythatmonetaryandfinancialdisturbances
largelycausedbythepresenceofnoisome,non
marketpollutants candisruptthefirstanddelude
thepracticeofthesecondwhileneedlessly
squanderingthethird.
IntheclassicalexpositionofAustrianBusiness
CycleTheoryorABCTthesecularprogressiontohigherlevelsofmaterialattainmentisoneachieved
bytheentrepreneurialtransformationofvoluntary
savingsintoinvestedcapital,thusamplifyingthe
productivityoflabour,lesseningscarcityand
therebydeepeningthepoolofavailablesavings
readyforfurtherinvestment.Thisreducedurgency
forgoodstodaymakesitselffeltinanatural
loweringofinterestrates(alowerdegreeoftime
preference)andhencesignalsthepossibilityofa
furtherintensificationoftheproportionofcapitalin
the
mix,
in
a
virtuous
circle
of
increasing
general
enrichment.
Aspartofthisdynamic,evergreaterlevelsof
specializationoffunctionareinduced,introducing
morelinksintotheproductivechain(increasing
roundaboutnessintheslightlymisleadingoriginal
phraseologyofoneoftheSchoolsfoundingfigures,
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EugenvonBoehmBawerk)andincreasingthe
Lengthofthewholeinthemannerwehave
describedabove.
Farfrombeingacurse,thereisnosocalled
ParadoxofThriftwheresuchsavingisinvolved,
forasurplusofresourcesrequiredforimmediate
use(whichiswhatconstitutessavinginthefirst
place)alsoimpliestheirexistsareadilyutilizable
sourceofmenandmatrielwithwhichtoundertake
projectswhoseultimatefruitionmay(a)be
somewhatdelayed,(b)requiretheavailabilityof
otherresources,or(c)involvetheinvestmentof
capitalindifferent,complimentaryprocessata
subsequentjuncturethislatteracrucialpoint
whichisoftenoverlookedinrivalexpositionsofthe
cycle.
Figure4:DasWohltemperierteKlavier(afterGarrison)
Thus,ifmoresavingimpliesamomentarilyreduced
exhaustiveWidth,italsofacilitatesnewadditionsto
productiveLengthandhenceaidsthetransferfrom
onefocusofactivitytoanotherwithnomorethan
frictionaloutputlossesalongtheway.Theremay
besomeslackinthemarketforexistinggoodsbut,
astheirpricesfall,themarketwillsignalthatlesseffortneedstobedevotedtotheircontinued
provision,whileencouraginginvestmentsaimedat
eitherreducingthecostofproducingthem(andso
restoringtherelevantprofitmargins),orinto
providingother,existinggoodswheredemandis
notsoobviouslywellsatisfied,orevenof
developinganentirelynovelrangeofwareswith
whichtotemptjadedconsumerappetitesinthe
future.
Sadly,thereisaSerpentinthisearthlyparadise,a
Deceiverwhosespeckledhideismadeupof
dollar,pound,andeurosigns,forifthereisone
thingguaranteedtothrowthisharmonious
creationofwealthintostridentdiscord,itissoft
moneyandelasticcredit.
JustpluckaquantumofunsavedcreditfromtheTree,
hehisses,andyoucanborrowwhilebarelydisturbing
theinterestrate.Betteryet,ifyouletmeofferyouoneof
mylargestandbitterestapples,wemightevenbeableto
financeyouataloweroneandnoneedtopersuade
anyonetosavewhileyoureaboutit.
Eitherway,thosesuccumbingtothetemptationwill
bedistortingthecrucialpricesignalsabouttheavailabilityoffactorsofproductionandaboutthe
appetitefortheendconsumergoodstowhichtheir
employmentwillgiverise.Moneymarketinterest
rateswillnolongerreflecttheschedulesoftime
preferenceinthemarketforthings.Especiallyina
worldsodominatedbytheastronomically
leveragedflowswhichtakeplaceinfinancialspace
wheretheoutsideworldisoftenofnogreater
importthanisthestateofthepitch,orthecondition
oftheweather,totheplayersinasportingteam
easymoney
boosts
asset
prices,
lowering
discount
ratesandriskpremiawellnighregardlessofthe
truebalancebetweensaversandspenders,between
abstinenceandappetite.
Adamtheentrepreneurmaywellnowembarkupon
anambitiousschemeofexpansion,usingthisnew
purchasingpower,butinsteadofbringingabouta
willing,temporaryrelinquishmentofresourcesby
someonewhohaspreviouslyearnedaclaimtothem,
somewherealongtheline,$2willsoonbevyingfor
what$1usedtobuyandso,whereapeaceful
economiccoordinationofmeansandendsonce
ruled,thebrassytrumpetsofstrifewillsoon
resoundtoshatterEdenspeace.
Becauseofthis,manypriceswillbehigherthanthey
shouldbethoughthisdoesnotmeantheymustbe
lowerinabsolutetermssinceafortuitousincreasein
theirsupplymightcoincidewiththeappearanceof
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subsidingpropertypricesfromdisaster.Insuch
anenvironment,eventhatdebtwhichdoeslookas
thoughitiserectedonsolidunderpinningsmay
insteadbesecuredupontheshiftingsandsofa
businessmodelreliantonthingsneverquite
reachingthevanishingpointofvendorfinance.
Thesefirms,too,havebeenseducedintocrassly
overbuildingtheircapacitythistime,makingthe
structuretoowide,ratherthantoolongasinclassic
ABCT.Massoverconsumptionnowjoins
malinvestment fostereddissavingjostleswith
forcedsaving asawaytodissipatewealth.
Figure5:Atunelessoldjoanna
Ironically,insuchaworld,aflatteryieldcurve
evenaninvertedoneisnolongerasurefire
indicationofstress,irrespectiveofwhateverviews
thecrowdofdullempiricistsmayassertabouttheir
blindextrapolationsfromthepast.Rather,itmay
signalthatassetmarketshavebecomesosaturated
(oftenwithfundsoriginatingfromabroad)thatthe
localofficialsettersofshorttermratesmaybe
calmlydisregardedwhileanincreasinglyreckless
searchforyield combinedwithanoften
unremarked,regulation
driven
quest
for
duration
depressesbothlongerbenchmarkbondyieldsand
theirassociatedcreditspreads.
Athirdmajordifferenceisthatrightupuntillast
autumnsfrightfulness,atleast banksreserve
ratioswere,inmostjurisdictions,littlemorethanan
antediluvianrelic.Infact,bankingcapitalitselfis
ratheranephemeralconceptinthisdayandage
since,forinstitutionswhichhavenothingmuch
otherthandisembodiedmonetarysymbolsoneither
sideoftheirbalancesheets,new capital canbe
readilycreatedexnovooftenbymeansofonebank
buyinganothersdebtandthenfundingthe
purchasewiththenewlyincreasedlineofcredit
grantedexpresslyforthepurposebythegrateful
recipientofthiscapitalinfusion.(Weshallnot
venturehereintothemurkybackstreetsof
obfuscatorysecuritization,orstrayintothe
chicaneryofbuyingofwhatpurportedtobe
insurancefromsuchserialchancersastheUS
monolinesandAIG,amisdemeanourwhichtook
placeonanunprecedentedscaleinthelate
Bacchanalia,solelyinordertodisguisetrueleverage
andsotofeigncompliancewithsomerisibly
miscastprudentialregulations).
Fourthly,whileexternaldrains(betterknownnow
as currencyruns)dostilloccuraswewereagain
painfullyremindedlastyearthisdoesnottendto
beanimmediatedangerforthemajordeveloped
economies,especiallysincetheintroductionofthe
eurohashelpedthemostcoquettishofperipheral
MamsellesontheperipheryoftheContinentto
shelterbehindthepetticoatsoftheirunflinchingly
prim,Teutonic,maidenauntstobefoundatitscore
(adevelopmentwhich,bygreatlyreducingthe
numberof
alternatives,
also
accorded
the
undeservingBritishpoundsomethingofa
collectorspremiumintheeyesofthemany
mercantilistcentralbankersdesperateforwhatthey
laughinglythoughtwasatouchofforeignexchange
reservediversification).
Asaresult,eventrulyabyssaltradedeficitsoffer
fewconstraintsasaRueffianchildishgameof
marblesinsteadassuresapainlessreplenishmentof
theborrowerscoffers yetanothercasewherethe
incorporealmemoryofsomethingwhichhas
alreadybeenexhaustivelyconsumedis
miraculouslytransubstantiatedintoanassetand
soconfusedwithwealth.Thoughoneofthemain
argumentsinfavouroffloatingexchangerateswas
thattheywerethoughttointroducethefirebreaks
withwhichtoimpedethespreadofacrisisfrom
onecountrytoanotherafailingitwasfeltwas
inherentinasystemof fixedparitiesandfree
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capitalmovementsthishasinnowaydiscouraged
theperilofwholesalecrossborderborrowingbeing
conductedinthecurrencyofwhichevercountryhas
thelowestinterestratesapplicable:astratagem
whichinvariablyincreasestheinfectiousnessofthe
Bust,butalsojustasimportantly helpsheighten
thefeverintheBoomwhichprecedesit.
Sinoflation:Cheapmoney=cheapgoods
Asidefromthesemoregeneralconsiderations,in
thespecificrecentexperience,therehasbeen
anotherelementinthemix.Thisisthat,asthe
sleepingdragonofChinahasawokentoroar
unrestrainedlyfromitsfactoryfurnaceofathroat,it
hasgreatlyskewedthebalancebetweenthe
internationallytradedpricesofmanufacturedgoods
andthoseofthecommoditieswhichgointotheir
creation.
ForallthegenuineprogressmadeinChinathispast
decade,itisalsoundeniablethatthesignaleffectof
copiousamountsofcheapindustrialcredit;an
arguablyundervaluedexchangerate;preferential
accesstolandoneasyterms;domestically
subsidisedenergy;statefundedinfrastructure;an
absenceofonerousenvironmentalregulations,and
favourabletaxandtariffsettingsaddedtoalabour
forcewhoseemploymentisnotoverburdenedwith
ancillarysocialcostshasbeentofosterbothexportorientedindustries,perse,andafetishfor
physicaloutputingeneralwhichonesuspectshas
alltoooftentranscendedtheboundsofeconomic
rationality.
RelativePricesofTradedManufacturesvIMFCommoditiesagainstChinesetradeflows
30.0
55.0
80.0
105.0
130.0
Jan91
Jan93
Jan95
Jan97
Jan99
Jan01
Jan03
Jan05
Jan07
Jan09
20.0
220.0
420.0
620.0
820.0
RelativePrices(lhs)
ChineseTRD(rhs)
Figure6:Novisibleinflation=GreatModeration
TheupshotofallthatisthatChinahasbeenatonce
avoraciousandnonetoodiscerningconsumerof
commodityinputsandanovereagerdisposerofthe
resultingmanufacturedandsemimanufactured
outputsoftenfindingitselfapricetakeronboth
sidesofthetrade,asaconsequence.
ThishascontributedgreatlytothatsameSatanic
mirthtowhichwereferredtoabove,for,iftheeffect
ofrisingcommoditypriceshasbornelittleweightin
thecounselsoftheWise sincetheywereoften
expungedaltogetherfromthepolicymakers
favouredcoreCPImeasures theresulting
suppressionoffinishedgoodspricesloomed
decidedlylargeinassuringourelectmonetary
GuardiansthattheCheshireCatversionof
inflationwhichtheyexclusivelymonitorwasstill
grinningbenignlyuponthemevenasthemadness
intensifiedallaboutthem.
OneconsequenceofChinasdeificationofGDP
tallied growth wasthatthegratefulcommodity
exporters,sufferingacompleteembarassderichesse
afteryearsofrelativepenury,atoncesetabout
launchingtheirownorgyofoverbuilding,
overconsumption,andoverlending onemadeall
themoreurgentbytheirrefusaltolettheir
currenciesappreciateasthetermsoftradeshiftedin
theirfavour. Onceagain,whatshouldhavebeena
signalof
scarcity
and
acted
as
a
dampener
came,
for
alongtime,toactasafurtherstimulant,quickening
analreadyoverrapidglobaleconomictempo.
Here,itisworthpausingtomaketheobservation
that,toacertainextent,therehasbeenasharp
geographicaldividebetweenplaceswherethemore
classicalAustrianbusinesscyclehasbeenin
evidenceandregimeswhereourmodified,modern
versionhasbeenmoredominant.
Itmaybethatthisimpliesthatoursistooparochial
aviewandthatwecouldbetterpictureourstylised
assemblylineasgirdlingtheentireglobe,notjust
spanningitsindividualpoliticalsubdivisions.This
way,wecouldsimplysay,thatjustasdosome
companies,somenationstendedtospecializein
higherordermalinvestment,othersinlowend
overconsumption.Eitherway,eachwasintimately
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tiedtothefateoftheotheranddecoupling,go
hang!
Forexample,inthelikesofChinabutalso,toa
degree,intheotherexportpowerhousessuchas
Japan,Germany,andSwitzerlandeasycreditwas
predominantlyresponsibleforpromotingtoomany
additionstotheLengthofthecapitalstructureand
wasfarlesssuccessfulinstimulatingexhaustive,
endconsumption;bycontrastitunleashedaHigh
StreetandhousingfrenzyofexcessiveWidthinthe
likesoftheUK,Spain,andtheUS.WhenLehmans
fallandAIGsperilbrieflysnappedthenexusof
vendorfinancewhichhadlinkingthetwo,the
resultswerecatastrophicadisasterwhose
aftermathwillbewithusforalongtimetocome,
despitetheconcertedeffortsofmanytoreforgethe
chainsspanningthegreatdividebetweenMakers
andTakersofgoods.
Asadirectresultofthisdivergence,the
consequencesofthebusthavealsobeenmarkedly
differentinthetwocasesrealestatebustsand
muchmoreseverefallsinautosalesinNewABCT
territoriesversusshockingplungesincapitalgoods
ordersandindustrialoutputintheClassicABCT
ones.Sadly,bothhavesincefoundoutthatthey
havedestroyedtrillionsofdollarsofwealthand
wastedbillionsofmanhoursofeffort.Thefirstwere
merrilyconsuming
their
capital
from
the
start
in
a
RakesProgressofcreditenabledoverindulgence,
yetthelatter,thoughcommendablefortheirhard
workanddiligenceinstrivingmanfullytoguide
theirfullyburthenedargosiesuponthetide,
succeedednonethelessonlyinhavingthem
smashedintomatchwoodwhentheyfellvictimto
thesamebewitchingmelody,beingtrilledfromher
fatefulrockbytheLoreleiofLooseMoney,that
beguiledtheirmostprodigalcustomerstoawatery
graveoftheirown.
Neverwasteagoodcrisis
Lastly,tocompleteourlistofchanged
circumstances,wemusttakenotethat,comparedto
theArcadiaoflaissezfairewhichobtainedwhenthe
firstAustriansweredevelopingtheirtheory,the
spaceinwhichprivatebusinesscanoperatehas
becomemuchshrunkeninthemodernpopulist,
ProviderState,aplacewheredeTocquevilles
epitaphfortheRepublic thatitwillendureuntil
thepoliticiansdiscovertheycanbribethepublic
withitsownmoneyshouldbechiselledintoevery
pavingslabandstampedoneachmetallicscrapof
itschronicallydepreciatingcoinage.
DuringwhattheRooseveltcultlikestoregardasthe
gloriousapotheosisofthepeacetimecommand
economyinthe1930s,thegovernmentcomponent
ofGDPasapercentageoftheprivatesectorresidual
ranupfromalowly,preCrash10%toapeakof
19.1%,duringwhichmetastasisthelargestannual
deficitincurredwasoneof~11%ofprivateproduct,
attainedin1934.ThiscombinationtookFederaldebt
outstandingupbyaround30%insixyearstoa
highwatermarkof47%ofpGDPin1935.
Itisthereforesomewhatchasteningtorealisethatin
onlythreeyearssinceWWII(1947,1948and1950)
hasthegovernmentshareeveragainbeenlower
than21% twopercentagepointsabovethefraction
reachedattheclimaxoftheearlieremergency.Such
isthesalutarylessonofthedifficultyinvolvedin
confiningtheevilsofgovernment,onceloosed,back
withinPandorasbox:ahardshipweshallallyet
havetoface.
USGovtDebtThenandNowas%ofPrivateGDP
0.0
50.0
100.0
150.0
200.0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
5.0
55.0
105.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
State&Local
Federal
1930s
2000s
(95.0)
(45.0)
Figure
7:
New
Deal?
Big
Deal!
Moreover,thedeficitthisyearwillclearlyexceed
12%ofpGDP(again,abovetheGreatDepression
maximumandgreaterstillifweaddinaheftystate
andlocalgovernmentshortfall,orifweconsiderthe
growthofthevariousotherliabilitiesduethe
authorities).Indeed,theaverageforthepasttwo
yearsshouldcomeinat11.7%whereitwilleasily
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surpassthemaximum8.8%recordedforthatdire
bienniumof1933/4.Asaresult,Federalmarketable
debtoutstandinghasrisen24%pointsrelativeto
pGDPinsixquartersandhasclearlynotfinishedits
ascentbyalongchalk,eventhoughitisalready
higherthanatanytimeinthemodernera,excepting
onlytheyearssurroundingWWIIandtheKorean
carryoverfromthatconflict.
Itisasorryattestationtothespiritofthetimesthat
thislongpersistenceofwhatwereinitiallyseenas
emergencypolicysettingsisnowregardedasbeing
athoroughlyroutineminimum.Whetherthetalkis
of Keynesianstabilizers or,moreworryingly,ofso
called statecapitalism (read:softfascism),itisnow
takenforgrantedthatevenmoregovernmental
interferenceisadesideratuminthestruggletomake
upforthefailuresofthatmisshapenchimeraof
public:privatemiscegenationwhichthemainstreaminsistsonconfusingwith capitalism proper.
Thatthepublicauthoritiesmighttakesomelimited
stepstoremedythemostgrievousofthemistakesto
whichtheirownactionshavegreatlycontributed
maybesomethingwhichformsthebasisofa
reasoneddebate,butseriouslytosuggestthatthe
currentcollapseoftheperverseincentivesinherent
inwhatwemighteuphemisticallyterm inflationary
corporatism somehowgivesgroundsforafurther
damagingpoliticization
of
society
is
merely
to
pile
erroruponerror.
Tosumup,thoughweneedtobecognisantofits
differenceswhentryingtoanalysetheinvestment
backdrop,thisnewgenusofABCTstillsprings
fromthesamefamilyasitsclassicantecedentin
thatitisatheorywhichdealswiththedreadful
resultsemanatingfromawidespreadfalsification
ofthecrucialsignalssentbyprices,bothbetween
goodsandacrosstime.Itcannot,however,betoo
stronglyemphasisedthattogarblethesesignals
onanationwide,ifnotapanglobal,scale andso
tomisleadsomanywellintentionedindividuals
intocontributingunwittinglytotheirownruin
canonlybedonewithinaframeworkwhichhas
nothingatalltodowiththe freemarket and
everythingtodowithstateinterventionism.
Theprimary, mutuallyreinforcingevilstowhich
thelatterhasgivenrisearecentralbanksupported,
fractionalreserve,fiatmoneybankingandthe
perniciousrotofwhatJanosKornai(frombitter,
personalexperience)hasmemorablytermedthe
phenomenonof softbudgets.Bythislatterwe
meanthecapacityoflossmaking,statesponsored
(orstatesheltered)entitiestoignoreaccounting
realitiesforaslongasthewealthofotherscanbe
transferredintothem,whetherbluntlythrough
taxation,licensing,andacompulsiontousetheir
services;moresubtlyviasubsidiesandpreferential
treatment;orinsidiouslyviainflation.
Thelatter,ofcourse,isthedefaultsetting,forsoft
budgetsandsoftmoneyareofteninextricably
linkedinthedestructionofapeoplescapital.
Reallocatelabour,
reallocate
stocks,
reallocaterealestate
Evenamongthescantremnantwhoarewillingto
grantthattheAustrianshavesomethingusefulto
sayabouteconomics,therearethosewho
reflexivelychargethatwhatMises,etal,have
elucidatedisnonethelessapartialtheoryinthatit
dealswellenoughwiththeBoomandtheBust,but
thenhaspreciouslittletosayabouttheprocessof
recovery.Itsmanyinfluentialenemiesamongthe
variouscabalsofPlannerstakethisvilificationmuchfurther,spittingvenomouslythatitsdevotees
arenaughtbutspitefulLiquidationists.
Likeallgoodjibesthishasjustakerneloftruth,but,
likeallgrosscalumnies,italsoarchlyleavesout
morethanitsays.ToanAustrian,theBoomand
Bustisataleoftheultimatecollapseofasustained,
governmentsanctioned,thoroughlyCanutian
attemptatviolatingthelawsofeconomics.Justas
anavoidanceofsuchattemptswouldunderthis
construction precludethe
inception
of
the
cycle
itself,so,too,doesrecoverycallforaprocessof
holistic,entrepreneurialrecuperationnotmore
Politburotinkering.
AsevenSchumpeter(onlyanAustrianbybirth,
notbyintellectualpedigree)rightlypointedout:
mostofwhatwouldbeeffectiveinremedyinga
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depressionwouldbeequallyeffectiveinpreventingthis
adjustment[tochange].Hewentontoadd:thisis
especiallytrueofinflationwhichwould undoubtedly
turndepressionintotheshamprosperitysofamiliarfrom
Europeanpostwarexperience,butwhich ledtoa
collapseworsethantheoneitwascalledintoremedy.
Yes,weareliquidationistsinthesensethatwe
believethataswiftandrigorousprocessof
bankruptcywouldmostreadilyclearthedecksof
thedebilitatingclutterofirrecoverablesunkcosts
andthusallowforeitheraresumptionofuse,ora
reallocationoftheremainingphysicalcapitalstock
inwayssuitabletothegreatlychangedeconomic
matrixofthepostCrashworldandthereforeat
pricesnewlyremunerativewithinit.Thisisnotto
saythatweareardentDeflationists,muchless
moralSamsonswhowantthetemplepulleddown
aroundussothatsinnerseverywherecanreceivetheirjustdesserts.
Miseshimselfwasatpainstocontrastthedesirable
actofabstainingfromfurtherinflation however
painfulthewithdrawalsymptomsinherentinsuch
anabnegation withtheinadvisabilityofa
deliberatepolicyofdeflation,cautioningagainstthe
latterinnouncertaintermsandexcoriatingthe
Britishforattemptingitin1925byclassifyingitasa
displayofinexcusableignoranceofeconomicsaswellas
ofmonetary
history.
The
idea,
then
as
now,
is
to
let
pricesadjustasrapidlyaspossibletoastable
supplyofmoney,regardlessofhowlargethathas
becomeintheboom.Thatway,weletchangesin
therealvalueofthemoneystocktaketheplaceof
forcedalterations(ineitherdirection)ofitsnotional
one.
Bycontrast,Hayekparticularlyinhislateryears
wasfoolhardyenoughtogofurther,suggestingthat
itwasthemoneyflowwhichshouldbestabilized,
thoughatleasthewasstillconsistentenoughto
confessthattoeffectthisinpracticenotonly
contravenedmuchofhisownphilosophisingabout
thelimitsofknowledgebutalsoriskedintroducing
moreoftheverydistortionshewassoanxiousto
avoid.Alas,thisisnotahumilitysharedbytodays
centralbankchiefswhowilltryanydegreeof
pecuniaryCPRinordertogetLazarustopickuphis
bedandwalk.
Certainly,comparedtothesoftbudget
pharmacopoeiasoftheStiglitzesandtheKameis,
theAustrianmedicalbagmustseemdispiritingly
emptyofpatentcures,itsprescriptionsboiling
downtothebareHippocraticinjunction,Dono
harm,whilerecommendingthatanythingwhich
addstotheemployerscostsorreduceshis
flexibility(folliesespeciallyprevalentwithrespect
tonominalwagetaboos)shouldbeeschewedtothe
utmostdegree.
Nonetheless,thereisagreat,overlookedmeritin
suchstudiedminimalism notleasttheavoidance
ofunintendedconsequencesofadeeplynegative
kindandthechanceitofferstodeescalatean
alreadyheightenedsenseofuneaseamongpeople
tryingtocometotermswithaharsh,butyetnot
totallyhopelessnewreality.Dothevociferous
proponentsofoverwhelmingforceindealingwiththecrisisnotseeitsisludicroustoexpectthe
wouldbearchitectsofabrighterTomorrowtostart
buildinguponsuchviolentlyshiftingsandsastheir
policieswouldperpetuate?
Itisclearthatoneofthemainaggravatingfactorsin
theGreatDepressionwasexactlythatwhilenew
moneycouldreadilybecreated especiallywhen
theinconstantdisciplineofthebantlinggold
exchangestandardwasabandonedandcurrencies
werefreely
floated
(i.e.,
scuttled
with
all
hands)
theforedoomedbattletorestorethestatusquoante
meantthatdoorstoentrepreneurialendeavourkept
onslammingshutinsteadofbeingprised
determinedlyopenandsothenewlymintedmoney
wasnotaspowerfulastimulantasitmighthave
been.Itwasnotjustthetariffbarriers,butthe
cartelisationoftheNRA(seethethoughtsofLee
OhanianatUCLAifyouwillnottakeanAustrians
wordforthis);themandatory,scorchedearthfollies
oftheAAA;theabdicationtotheextortionismof
organizedlabourinethWagnerAct;the
monopolisationofmarketsbythelikesoftheTVA;
thequixoticchangesinthevalueofthedollar;and
theattackonprofitsthatsoutterlystultifiedprivate
business.
Worsethananyoftheseimpedimentstakensingly
substantialasmanyofthemwereitwasthesheer
inconsistencyoftheirannouncement,application,
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and(often)theirarbitraryabandonmentaspolitical
cronyismandelectoralopportunismtooktheplace
ofgenuineconsumerpreferenceandcommercial
acumenindecidingwhatgotdoneandwhogot
paid.Onetellingsignoftheparalysisthisinflicted
upondecisionmakersoutsidetheprecinctsofthe
capaciousStateorphanagewasthatthecurrentcost
averageageofprivateequipmentrosesharplyfrom
7.2yearsin1925toa74yearsamplehighof10.1in
1935.
Currentcostaveragedageofprivateequipment&softwareinyears
6.0
7.0
8.0
9.0
10.0
1925
1935
1945
1955
1965
1975
1985
1995
2005
Figure8:Amountainoferrors
Ofcourse,todayspolicymakerswillnotdinefrom
exactlythesamemenuofstupiditiesasdidtheir
reveredpredecessorsinoffice,but,evenifwetend
todownplaythechancesofsufferingsuchself
inflictedwoundsasareversiontonaked
protectionism,westillfacetheprospectofthemanyzombiefirmswhichhavearisensuckingupvital
oxygenwhilebeingusedbothassocialpropsand
nakedvotegenerators(GM,forexample);oflabour
costsbeingartificiallyboostedbysuchmeasuresas
Obamasilltimeduniversalhealthcareprogramme;
andofthehockeystickbrandishingGreen
CommissarsofHolyMotherGaiaburstingforth
fromthatneopaganCouncilofTrenttakingplacein
Copenhagen,allzealoustoaddgreatlytothecost
baseofstrugglingcompanieseverywhere.
ToanAustrian,itisonlythroughan
encouragementofanactive,diversified,adaptable
entrepreneurialismthatthepresentwoescanbe
overcomeandfreshopportunitiesexploitedamid
theOzymandianruinofyesterdaysdreams.The
Austrianalsoinsiststhatthiscanonlytakeplace
byusingthoseresourcesrecentlyfreedupeither
byfailureorfatigueinwaysnarrowlyfocusedon
makingprofitsandsoreplenishingabadly
depletedpoolofcapital.Thisispreciselythe
reasonwhythevampiricpresenceofsomanyof
theCorporateUndeadisdecidedlydetrimentalto
theprospectsofachievingalastingrecovery.
Noneofthisistodenytheimpactofmonetary
policy,butonlytocautionthatitseffectsmaybe
ratherdifferentfromthosetheinflationistshad
hopedfor.
EscapeVelocity
Wewrotealongpieceearlierthisyear(Septembers
ResourceRuminations:ShowmetheMoney)inwhich
wetriedtomakecleartheseparatequalitiesof
moneyandcredit,thoughmanywouldargue,
alongwithHayekhimself,thatthedemarcationline
isnotonlyablurredone,butthatshiftsinwhereit
fallsareoneofthecharacteristicsoftheBoomBust
cycle.Indeed,hislatestagemusingsthat
interventionshouldbetargetedatoffsettingthe
evaporatingmoneynessofmanycredit
instrumentswhichtakesplaceduringtheCrash
couldevenbetakentojustifytheextraordinary
QuantitativeandQualitativeEasingprogrammesof
todayscentralbanks.Here,wewouldstrongly
demur.
Certainly,itistruethatcreditcanseemtoactlike
moneythatitcanstretchormultiplyitsefficacy
andnevermoresothanintheBoom.Buttheplain
factisthatcreditisanagreementtodeferfinal
settlementanactforwhichaculminatingtransfer
ofmoneyisasinequanon.Conversely,thosetrading
inandoutoftheBoomare,inthemainpart,
swappingoneformofdeferralforanother:moneyis
thelastthingwithwhichtheywishtobesaddled!
This
should
be
particularly
evident
if
we
consider
thatonlyatriflingminorityofthetradesconducted
acrossthemajorstockandfuturesexchangesdonot
endupbeingnettedoutbetweencounterparties.
OTCderivatives,too,areoftennovatedorcleared
viaaprimebrokerwhomayautomaticallyfundhis
clientforthebalancedue;whileasellerofasecurity
mayofteninvestthefundsduetohiminarepo
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whicheffectivelypaysforthesale.Noneofthis
involvesmuchinthewayofmoney.
However,whatisalltoooftenoverlooked,isthatit
isthestockofmoneyproper(orgnesiomoney,as
weshallrefertoithereafter)whichdetermineshow
muchofanetwithdrawalhowlargeafinal
settlement canbeachievedatanyonetime.What
themarketlooselycallsliquidity; i.e.,theease
withwhichpositionscanbeswappedinsidethe
circleofplayersisnottobeconfusedwiththe
amountthatcanbesimultaneouslyliquidated.
Naturally,duringtheupswing,fewdowishtocash
out,orliquidate,sotheinvertedpyramidofcredit
canbecomeevermoretopheavyifyouwill,a
Ponzischemecanpredominatewhereincredit
increasinglypaysforcredit(aconceptwhichtheoft
quotedMinskymayhavepopularised,butwhichhe
hardlyoriginated).Thisthenwhirlsonandon,withinflatedpricesboostingcollateralisationandso
cultivatingmoreinflation,untilthemarketfinally
breaks,thesauvequipeutbegins andbemused
tradersrediscover,totheircost,Cantillonssobering
dictumthatsilver[gnesiomoney]isthesinewsof
circulation.
ItisnotentirelycleartothisAustrianthatthereisa
casetobemadeforfacilitatingthetransmutationof
thispyramidofmisplacedhopeintohardmoney
upondemand,
only
for
trying
to
ensure
that,
in
a
worldwheremuchofthatmoneyisprincipallyboth
calledintoexistenceandextinguishedbychangesin
thevolumeofcredit,thatitsstockisheldreasonably
steadysothatthestabilizingfeedbackofitsreal
worthincreasingaspricesfalldoesnotbecometoo
viciouslyshortcircuited.
Withthatunderstood,wecanalsolookanewatthe
interlinkagesbetweendevelopmentsinthesupply
ofmoneyandchangesinthebusinessrevenues
whichmarkitscirculation.Giventhecardinal
importanceofthelatterwhichwehavehopefully
demonstratedabove,itishere,ifanywhere,thatwe
findthepivotaldegreetowhicheconomicdecision
makerschoosetospendthemoneywhichcomesinto
theirhandsorholditforitsownsakeastheultimate
inriskinsurance;asakindofeconomicoption
straddlewhosepremiumistheopportunitycostof
notholdinganearningassetinstead.
Wecanthinkofthisasshowingupinthebehaviour
ofmoneyvelocityandconsiderwhatimpactsit
mightbehavingonthewidereconomy.
Todigressforamoment,theveryideaofvelocity
isactuallyatouchproblematicaltoanAustrian
sinceitisthequotientofonewronglyapplied,
aggregativeentity(nominalGDP,notoverallsales)
dividedbyanother,thewronglyemployedM2or
M3(whicharelargelycredit,notmoneymeasures)
inthetautologicalequationofexchange.Even
beyondthis,weAustrianshaveanepistemological
issue,since,tous,macroaggregatesarenomore
thanexercisesinaconvenient,confirmatory,
statisticalshorthandwhichgiveafeelforthesum
totalofcountlessmillionsofmicroeconomic
decisionsbeingtakenbyindividualsaccordingto
theiruniquesubjectivepreferences.Theythus
provideasnapshotofresults,notcauses,nowheremoresothanintheusetowhichmoneyisbeingput
atanygivenmoment.
Thefirsthintthatattitudeshavechangedinthe
recessionisthatUSnonfinancialcompanies
themselvesnowholdmorequasimoney(thereal
thingplusforeigndeposits,time&savingdeposits,
andmoneymarketfundshares),bothindollar
termsandasapercentageofnetworth,thanever
before,havingseenthefirstincreaseby25%since
2006to
$2.3
trillion
and
the
latter
rise
from
the
cycle
lowpointof8.5%to12.8%atthelatestcount.
QuasimoneyonUSNonfinancialbusinessbalancesheets
$0
$1,000
$2,000
$3,000
Mar52
Mar60
Mar68
Mar76
Mar84
Mar92
Mar00
Mar08
0.0
6.5
13.0
Level,blns(lhs)
%ofNetWorth(rhs)
6.5
Figure9:Buyingthemselvesanoption
Next,althoughitisclearthattherateofincreaseof
realmoneyinthevarioussystemsprovidesagood
leadingindicatorforthelikesoftheISMPurchasing
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managersreport,theGermanIfOindex,Japanese
smallbusinesssurveycashflows,theTankan,the
ShanghaiComposite,Chineseindustrialproduction
andelectricityuse,itisalsoevidentthat,inthis
particularcrisis,actualbusinessturnoverhasbeen
verysluggishtorespondtothevastinfusionsof
gnesiomoneywhichhavetakenplacevelocity(if
youinsist)hasfallensharply.
FRB,ECB&BOEExcessreservebalances(blns)
$0
$350
$700
$1,050
$1,400
Ma r
0 8
Ma y
0 8
Jul0 8
S e p
0 8
Nov
0 8
Ja n
0
9
Ma r
0 9
Ma y
0 9
Jul
0 9
S e p
0 9
Nov
0 9
FRB ECB BOE
Figure10:Bah,Humbug!
Incidentally,thisshouldhavebeenratherdifficultto
bringaboutinasystemwheretheamountofmoney
heldinphysicalbanknotesisarelativelyminor
fractionoftheoverallmoneysupply,for,oncethe
restisplacedinabankasademanddeposit,the
banksshouldhavelittlealternativebuttolenditor
spenditandsobeginanewtheclassic,fractional
spiralofmoneybegettingmoney.
Thegreatironyis,then,thatbyencouragingthe
bankstoparkvastexcessesofreservesontheir
balancesheets andsoallowingmoneyto leak out
ofactivecirculation thecentralbanksmaywell
havehelpedwindowdresscommercialbank
balancesheetsandboostsecuritiesprices,butthey
havealsopartlyneutralisedtheirownfranticefforts
tokickstartthesystem.Itmaybe,ofcourse,that
theywerewiseenoughtorealisethiswouldbethe
caseexante,calculatingthatitenabledthemtomeettheincreaseddemandformoneyoccasionedbythe
crisiswithoutriskinganimmediateinflationary
overshoot,but,giventheiravowedreadinesstotake
thewildestofmeasuresimaginableinorderto
stimulatetheswiftestgrowthofcreditaggregates
withtheleastpossibledelay,onecannotbutsuspect
thatitmayalsohavebeenasomewhatcomical(if
fortuitous)misstep.
Bethatasitmay,theinferenceisthatifthebiggest
ofallspendersbusinesses,notexhaustive
consumersarenoteagerlyplayingpasstheparcel
soastoparlaycashintogoodsasrapidlyaspossible,
thenthosepricesstillmostlysetintherealworld
(andnotacrossthegamingtablesofthereenthused
capitalmarkets)shouldnotbesubjecttomuchin
thewayofupwardpressure.Empirically,wecan
demonstratethisbyplottingbusinesssalesover
gnesiomoneyagainstchangesintheCPIindex.The
fit,asyoucansee,isagoodone.
GermanBusinessRevenueVelocity vCPI
32.5
22.5
12.5
2.5
0.5
7.5
Mar91
Mar93
Mar95
Mar97
Mar99
Mar01
Mar03
Mar05
Mar07
Mar09
0.5
1.5
2.5
3.5
dVELO(lhs)
CPI(rhs)
SweepAdjustedUSAMSVelocityvCPIYOY%(6mma)
30.0
20.0
10.0
1.5
0.0
10.0
May83
May87
May91
May95
May99
May03
May07
0.5
2.5
4.5
6.5
YOY(lhs)
CPIYOY(rhs)
Figure11:DieSchildkrteandtheTortoise
Misesalreadyknewthisyearsago,ofcourse,
thoughwedoubttheGedankenmastereverdrewa
graphinthewholeofhislongandfruitfulcareer.
Onlywhentherecoverybeginstotakeshapedoesthe
changeinthemoneyrelation,aseffectedbytheincrease
inthequantityoffiduciarymedia,begintomanifestitself
inthestructureofprices,ishowhephrasedit.
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Translated,thismeansthatonceentrepreneurial
activitypassesthethresholdwherethosefirms
newlyexpandingoutweighthosecontracting,allthe
extramoneywhichhasbeencreatedwillbeginvery
muchtomatter.Giventhatwhatwehavebeen
experiencingthispastyearorsoiswhatMises
calleda simpleinflation i.e.,onewherecentral
banksandgovernmentsspendmoneystraightinto
existence ratherthanaproductivestructure
altering creditexpansion,thisislikelytofeedall
themorerapidlythroughintodisconcertinglyrapid
pricerisesforallkindsofgoodsandservices.
Shouldthathappen,centralbankpolicymakerswill
besetsomethingofachallengeandnowhereisthis
morelikelytohappeninfairlyshortorderthanina
Chinawherebanksmaybedysfunctionalintheir
ownway,butwheretheyhavenotyetbecomeas
functionallyimpairedashavethoseintheWest.NorareChinesebusinessmennotablyshyabout
drinkingtheirfillatthegovernmentfaucet,evenif
theirOccidentalcounterpartsremainalittlemore
circumspectthanistheirwont.
Thus,whilethefocusofmosthasbeenontheloose
relationshipbetweencreditexpansionandoutput
growth,whathasbeenoverlookedistherather
tighteronewhichobtainsbetweenmoneygrowth
andheadlineCPI.Thislatterstronglysuggeststhat
wemight
be
in
for
a
rather
nasty
surprise
by
the
end
ofthefirsthalfof2010.
ChineseCPI(t+9)vRealM1YOY
10.0
5.0
0.0
5.0
10.0
Mar97
Mar00
Mar03
Mar06
Mar09
3.0
10.5
18.0
25.5
33.0
CPIt+9(lhs)
d2CPIt+6(lhs)
RM1(rhs)
Figure12:THEsinglebiggestriskfor2010
QEorQED?
Aswehavenoted,however, quantitativeeasing
has asplanned actedtoboostsecurityprices.It
hasdonethisnotonlybyrelievingthemarketof
someofitsexistingholdingsofpaperandby
absorbing
some
of
the
torrent
of
government
paper
floodingintothemarketnowtheshadeofKeynes
hasbeensummonedupfromtheEighthCircleof
theInferno,butalsobyplacingmoregnesiomoney
inthehandsofnonbankfinancialinstitutionssuch
asinsurersandpensionfunds.Thishassparkedits
ownkindoffractionalreservewhirligigaseachhas
triedtodisencumberhimselfofthismostclosely
dentallyinspectedofgifthorses.
Thishasbeeneffectiveevenuntothesecondpower
sincetheabhorrenceofhavinganythingbutthe
mostexiguoussmatteringof liquidassets inthe
portfoliohasgrowninlockstepwiththeriseinthe
priceofstocksandbonds.Thesocalled smart
money mayhavegoneovertheAngelFallsfully
investedlastyear,butHeavenforbidthattheynow
havethewitorthemoralcouragetotellthoseto
whomtheyhaveafiduciarydutythattheyhave
learnedalittleprudencefromtheordeal notwhen
theyhaveabenchmarktochaseandfeestoearn.
Thus,forexample,thepercentageofsuchassets
heldbyUSstockmutualfunds havingrisenbyonlyafewpercentagepointsduringtherout(partly,
onesuspects,asthepriceofeverythingelse
tumbled) arealreadybacktowithinawhiskerof
theirlowesteverlevels.
ICIUSStockmutualfundliquidassetratio%
3.5
4.5
5.5
6.5
Jun97
Sep98
Dec99
Mar01
Jun02
Sep03
Dec04
Mar06
Jun07
Sep08
Dec09
Figure13:MutualfundsGoingallin
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Itshouldalsobenotedthat,forallthemuchbruited
endeavoursofindividualsandnonfinancial
businessestoweanthemselvesoffdebt(whetherby
redemptionorrepudiation!),thecountervailing
thrustoftheSoftBudgetsectorsgovernmental
aggrandizersandstatesponsoredbanking
speculatorshasbeenenoughtonegatemuchin
thewayofanoverallreductionofleverage.
TheevilBanksterswontlendtous,crythesmall
businessmenwithwhosesalvationtheyare
supposedlyentrusted.Tooright!Whygotothe
effortandexpenseofperformingthediligenceon
andlatermonitoringofwhatamountstoamere
microcredittooneofthesurvivingBehemothswhen
thereareahostofsour,oldpositionstobenursed,a
plethoraoflucrative,newmarketgamblestobe
taken,andatorrentofsteepyieldcurve,zerorisk
weightedsovereignpapertoabsorb,eachatalmostnochargeandatwhatseemslikeverylittlerisk?
ThatpithyseeroftheUnseen,FrdricBastiat,must
bespinningfuriouslyinhisgrave!
BISBankAssets(exSecurities)plusOutstandingDebtSecurities($blns)
$35,000
$55,000
$75,000
$95,000
$115,000
Dec95
Dec97
Dec99
Dec01
Dec03
Dec05
Dec07
Dec09
USDTotal
USDTWIadjusted
What Globaldeleveraging?
Figure14:GlobalCreditRelax,Irving!
Here,therefore,wefindamajorfailingofthecentral
policyofreinflation:namelythatithasinstigated
another,potentiallydisastrous,tsunamiof
speculationin
assets,
increasingly
divorcing
their
pricesfromtheharshrealityoftheearningpotential
ofthefirmsandindividualsunderlyingthem.This
hascomeaboutbecause,farfrombeingsupported
bymeasurestosmooththetransitionofcapital
awayfromaproductivearraylockedinto
assumptionsaboutascaleandcompositionof
demandwhichnolongerholdgood,ithashelped
financeallmannerofexpensivepoliticalexpedients
designedtopinitfirmlyinplace.
Examplesofthesearealmosttoonumeroustolist,
butamongthemaretheringingEuropean
declarationofeconomicinsanitythatALLofthe
Euroraumsbanksare strategic andhencecannotbe
allowedtofail;thenudgenudge,winkwinkof
regulators,happytocolludeingrossviolationsof
accountingprinciples;theschemestobringforward
purchasesofhousesanddurablegoods(mainly
cars);theprogrammeswhichkeepsadlyredundant
labourturningupformakeworkattheirnow
flounderingemployers;theunimaginative two
massesforthedead nonsenseofinfrastructure
spendingconductedforitsownsake,and perhaps
mostspectacularlyofall Chinasworldwide
welfareinitiativeforthesupportofcommodity
producerseverywhereviaitspurchases bothdirectandbyproxy ofstockpilesof,e.g.,aluminium,
copper,steel,andironore aswellasofthecars
andotherwaresintowhichtheyarewrought.
DCIpriceindexvCRUSteel&SandyBargeCoaldivergence(100xSigmas)
(200.0)
(100.0)
0.0
100.0
200.0
Dec97
Jun99
Dec00
Jun02
Dec03
Jun05
Dec06
Jun08
Dec09
DCI/Steel
DCI/Coal
Figure15:ValuevPrice Guesswhichtradesmost
AstheheadofChaseNational,WinthropAldrich,
toldaWiseMonkeymeetingoftheSenate(ina
testimonynodoubtghostedbyhisestimablechief
economist,BenjaminAnderson)aspartofahearing
intothecausesandremediesofthenascentGreat
Depressionin1933:
Theneteffectofthese[valorisation]effortstomaintain
thepriceofwheatwasmerelytodeferthefacingoffacts.
Productionheldupmorethanitwouldotherwisehave
heldup...surpluswasaccumulated...
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Plusachange,youmightthink.
But,believeitornot,youcannotfoolallofthe
entrepreneurs,allofthetime,andsotheurgetocut
costsandtobuttressthebalancesheetasameansto
adapttowhatmightbealonglastingloweringof
revenuesisnottobedeniedbyanastutebreedof
menandwomenwhoaresubjecttojustifiable,if
oftenunarticulated,fearsabouttheunwelcome
sideeffectsofstateintervention,Someoftheseare
centredontheamountoffavouritismlikelytobe
showntotheotherwiseuncompetitivezombiesto
whomLeviathanmustcontinuetofunnelboth
resourcesandordersfortheresultingoutput:some
relatetotheuncertaintyaboutwhichparticular
stimulusprogrammewillendwhen andso
collapsethevariouspocketsofartificiallyelevated
demand.Perhapsmostworryingofall,theyare
profoundlyconcernedaboutthesizeofthefuturetaxbillandabouttheviciousnessoftheassaulton
capitalwhichmustresultwhentheShepherd
eventuallydecidesthatallthisexpensivehusbandry
mustbepaidfor,bothinfleecesand,inextremis,in
lambcutlets,too.
Allthisremainsinfluxatthemomentandits
determinationisthereforetheobjectofanavid
enquiryacrossthewholespectrumofpoliticaland
economicopinion.Aswehaveargued,however,
fartoo
many
of
the
seekers
after
truth
are
peering
intothewrongendofthetelescopelookingonly
forsignsthatendconsumershavebeenmagically
touchedoncemorewiththeKeynesianfairydust
ofconfidence.Wehopetohavepersuadedyou
here,DearReader,tostopyourearstotheir
incantationsand,puttingthehorsefirmlybackin
theshaftsaheadofthecart,tofocusonwhat
businessesaredoinginstead.
Pickacardanycard
Inthatsameaddresstowhichwealludedabove,
oneironicallydeliveredbythesonoftheoneofthe
meninstrumentalinsettinguptheFederalReserve
duringthedisquietingpauseofferedbefore
Rooseveltsfreneticallyharmfulexpansionof
executivepowerbyhisselfishlyaloofinterregnum,
Aldrichcontinuedthus:
Thevolumeofbankcreditdoesnotdependaloneon
thevolumeofbankreserves[but]onthetemperofthe
businesscommunity,andonthemovementofgoodsand
onthepricesatwhichthegoodsmove.Giventhe
restorationoftheexporttradeandrevivalofraw
materialprices,creditwillexpandrapidly.Thereisno
usetryingfurthertoforceitfromtheotherendbyan
artificialincreaseinbankreserves
Everythingwehavesetoutinthepagesabovetends
totheexactsameconclusion:letushopethatthe
ignoratioelenchitowhichthisincontrovertible
reasoningisnonethelessalmostuniversallysubject
doesnotleadtothesamesorryoutcomeasitdidin
Aldrichsday.
Inthemeanwhile,acertainamountofcautionis
warrantedthankstothefactthattheprovisionof
whathasturnedouttobeanotiosesuperabundanceofmoneyhasledustoinveigleourselvesintoa
situationwherethemarketispricinginapaceanda
magnitudeofrecoverywhichmaynever,infact,
materialise.Accordingly,thebreak,ifitcomes,will
beallthemoreviolentandtheresulting
disappointmentrisksbeinghorriblyself
aggravating,notonlythroughtheshocktoafragile
confidenceitwouldimpose,butbecauseitcould
shatterwhateversimplefaithpeoplemayhavein
thecapabilitiesofthePlanners.Afterall,the
conjurorcan
only
produce
a
penny
from
behind
yourearjustsomanytimesbeforeyouwearyofthe
illusionandbegintoentertaindoubtsaboutbothhis
repertoireandhiscompetence.
Itmaybethat,inthecomingyear,theaudience
quitsthetheatre,itsmembershappyfortheirhour
ofdiversionandeagernowtobeabouttheirown
affairsoncemore.Iftheydo,thatparticularexample
ofanexitneedstoberigorouslyfollowedupbythe
kindsoliberallypromisedbyourlegionofpump
primers,orvelocitywillriseastransactionspick
upandexcessmoneywillfeedstraightbackinto
disruptivelyhigherprices.
Conversely,however,ifthethoughtofthegalestill
howlingoutsidekeepsmostofthehousesittingin
theirseatsforanencore,theymayrapidlyturn
restiveatseeingthesame,tired,oldtricksbeing
performed,eveniftheaccompanyingdrumrolls
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andcymbalcrashesswelltoadesperatecrescendo
inanhystericalbidtoretaintheirinterest.
Eitherway,asthecurtainfallson2009,hemaybe
revellingintheapplause,but2010mightjustbethe
yearwhentheGreatMarvofindshimselfbooed
roundlyoffthestage,nothubristicallyfeaturedon
thecoverofTimeMagazine.
SeanCorrigan,
ChiefInvestmentStrategist,
AppendixI
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pec a st ap ta oo ssuppliers can be thoughtof as outside yet attached
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Resource Ruminations Oct 2007
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