09-12-15 Tangible Ideas - Bastiats Iceberg

8/13/2019 09-12-15 Tangible Ideas - Bastiats Iceberg

1/24

BastiatsIcebergBastiatsIceberg

ADiapasonResearchReportbySeanCorriganADiapasonResearchReportbySeanCorrigan

_____________________________________________________________________

Diapason Commodities Management

Lausanne & London

Tangible

IIIIIIdeas

Dec2009


2/24


3/24

Tangible Ideas Dec2009

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

_____________________________________________________________________


Lausanne & London2


4/24


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

_____________________________________________________________________


Lausanne & London3


5/24


6/24


7/24


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

_____________________________________________________________________


Lausanne & London6


8/24


(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,

_____________________________________________________________________


Lausanne & London7


9/24


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

_____________________________________________________________________


Lausanne & London8


10/24


11/24


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

_____________________________________________________________________


Lausanne & London10


12/24


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

_____________________________________________________________________


Lausanne & London11


13/24


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

_____________________________________________________________________


Lausanne & London12


14/24


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

_____________________________________________________________________


Lausanne & London13


15/24


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,

_____________________________________________________________________


Lausanne & London14


16/24


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

_____________________________________________________________________


Lausanne & London15


17/24


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

_____________________________________________________________________


Lausanne & London16


18/24


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.

_____________________________________________________________________


Lausanne & London17


19/24


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

_____________________________________________________________________


Lausanne & London18


20/24


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...

_____________________________________________________________________


Lausanne & London19


21/24


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

_____________________________________________________________________


Lausanne & London20


22/24


andcymbalcrashesswelltoadesperatecrescendo

inanhystericalbidtoretaintheirinterest.

Eitherway,asthecurtainfallson2009,hemaybe

revellingintheapplause,but2010mightjustbethe

yearwhentheGreatMarvofindshimselfbooed

roundlyoffthestage,nothubristicallyfeaturedon

thecoverofTimeMagazine.

SeanCorrigan,

ChiefInvestmentStrategist,

[email protected]

AppendixI

_____________________________________________________________________


Lausanne & London21


23/24


_____________________________________________________________________


Lausanne & London22

pec a st ap ta oo ssuppliers can be thoughtof as outside yet attached

o the chain


24/24

Resource Ruminations Oct 2007

DIAPASONCOMMODITIESMANAGEMENTS.A.

MalleyLumieres,CheminduViaduc1,

POBox225,CH1000Lausanne16,Suisse

Tel: +41(0)216211340

Fax: +41(0)216211301

Email: [email protected]:www.diapasoncm.com

DiapasonCommoditiesManagementSA2009

Anydisclosure,copy,reproductionbyanymeans,distributionorotheractioninrelianceonthecontentsof

thisdocumentwithoutthepriorwrittenconsentofDiapasonisstrictlyprohibitedandcouldleadtolegal

action.

Disclaimer

Thisdocumentisnotanofferorasolicitationtopurchaseorsellanyinvestmentandisissuedforinformation

only.Anoffercanbemadeonlybytheapprovedofferingmemorandum.Theinvestmentsdescribedhereinare

notpubliclydistributed.Thisdocumentisconfidentialandsubmittedtoselectedrecipientsonly.Itmaynotbe

reproducednorpassedtononqualifyingpersonsortoanonprofessionalaudience.Fordistributionpurposesin

theUSA,thisdocumentisonlyintendedforpersonswhocanbedefinedasMajorInstitutionalInvestorsunder

U.S.regulations.AnyU.S.personreceivingthisreportandwishingtoeffectatransactioninanysecurity

discussedherein,mustdosothroughaU.S.registeredbrokerdealer.Theinvestmentdescribedhereincarries

substantialrisksandpotentialinvestorsshouldhavetherequisiteknowledgeandexperiencetoassessthe

characteristicsandrisksassociatedtherewith.Accordingly,theyaredeemedtounderstandandaccepttheterms,

conditionsandrisksassociatedtherewithandaredeemedtoactfortheirownaccount,tohavemadetheirown

independentdecisionandtodeclarethatsuchtransactionisappropriateorproperforthem,basedupontheirownjudgmentanduponadvicefromsuchadvisersastheyhavedeemednecessaryandwhichtheyareurgedto

consult.Diapasondisclaimsallliabilitytoanypartyforallexpenses,lostprofitsorindirect,punitive,specialor

consequentialdamagesorlosses,whichmaybeincurredasaresultoftheinformationbeinginaccurateor

incompleteinanyway,andforanyreason.Diapason,itsdirectors,officersandemployeesmayhaveorhavehad

interestsorlongorshortpositionsinfinancialproductsdiscussedherein,andmayatanytimemakepurchases

and/orsalesasprincipaloragent.

_____________________________________________________________________


Documents

09-12-15 Tangible Ideas - Bastiats Iceberg