A Bankrupt Idea Whose Time Has Gone

How do you know when something inherently unsustainable can no longer be sustained? That is the Zen-like question we begin this week’s reckoning with. It’s common sense and common knowledge that if a trend is unsustainable, sooner or later it will end. It’s the “when” that screws everyone up.

The unsustainable trend we have in mind today is the idea that you can get something for nothing. That idea is the backbone of modern politics. It’s the dirty little secret of the financial system upon which modern economies are based. And it’s an idea whose time has come and gone.

There is a limit to how much monetary absurdity the real world can take. We are rapidly reaching that limit. This is a point we made in our opening remarks at the After America conference in Sydney last month. We said that we’ve, “…reached the stage in the global economy now where the next big reaction, the next big event, won’t necessarily be financial or economic, but it will be political and social and cultural.”

Mind you, this isn’t some kind of Newtonian limit. To paraphrase the former Master of the Mint, every monetary action has a magnifying and distorting reaction in the financial markets. But at a certain point, adding trillions to the balance sheets of central banks and manipulating interest rates begins to have unintended consequences.

Those consequences are showing up now in election results. But their origin is in the belief that you can manipulate the price of money to produce painless prosperity for the masses. You start with devaluing the currency a little here and targeting inflation a little there. And before you know it, you end up at the point where you have destabilised the foundations of civilised society.

Take France, for example. Socialist Francoise Hollande leads the early election results with 28.5% of the vote. Incumbent Nikolas Sarkozy is second with 27.1%. And Marine Le Pen, the nationalist candidate, stormed home with 18.1%. This last result confounded the so-called experts. The experts predicted the socialists would route Sarkozy.

Here is an important lesson about people: what they say is not always what they do. This is especially true of voters. If a pollster asks you whether you are for or against justice, what do you think you’ll say? If you’re asked whether you support equality, what will you say?

If you’re a straight shooter and you cannot tell a lie, you’ll say exactly what you believe. If you don’t know what you believe, you’re likely to give the answer that you think will be most pleasing to the person asking, or the answer that makes you look like a thoughtful, open-minded person. What you do in the voting booth behind a closed curtain may have no correspondence with what you’ve said in public.

The experts are surprised about the results in France because the experts are, in fact, pretty stupid when it comes to human beings. France, like every other Western country, is in the throes of an economic crisis. This is a crisis of the Welfare State, which is not an affordable social arrangement in the era of globalisation. The French people are conflicted about what to expect from their government.

Most people are happy to get something for nothing, as long as it doesn’t cost them anything. This is how modern democracy works for about 50% of the people. You pay no taxes. You receive government benefits or tax deductions of some sort. Somebody else pays the bill.

Sarkozy’s party is happy with this arrangement, except they realise it is based on voodoo finance. The Socialists blame the market and human nature for France’s fiscal woes. They want even more something for nothing, especially if they don’t have to pay for it. We have no idea what the nationalists want, but suspect they only want French people to get something for nothing. If you have dark skin or worship a different god, you’ll have to pay for your something or get on the next boat back to North Africa, inshallah.

Different expectations about what to expect from the State can be managed during a period of constant credit expansion. The political elites, through their control of the currency and monetary system, can engineer a constant expansion of credit. This expansion actually reduces the stability of the currency and erodes purchasing power. But it has the appearance of growing financial wealth at the same time, through higher asset values (stocks, bonds, real estate.)

The trouble comes when the inputs to the system (cheap credit) stop or slow down. Without the constant expansion of credit, you get asset price deflation. Only then do people begin to realise, en masse, that you can’t really have something for nothing as a society. Wealth must be produced by real labour, real goods and services, and value added to raw materials.

The expansion of debt and credit to create rising asset prices is not wealth. It’s a cheap parlour trick mastered by central bankers and politicians. Their trick has been exposed to the voting public. The public is now angry. Their anger coincides with elections in France, the US, and probably Australia.

And yes, Australians have been watching this parlour trick (quite happily) for many years. The Reserve Bank of Australia (RBA) has performed it with aplomb. The parlour trick is not explicitly stated in the three mandates of the RBA as enumerated in the Reserve Bank Act in 1959. Those mandates are:

  1. the stability of the currency of Australia
  2. the maintenance of full employment in Australia
  3. the economic prosperity and welfare of the people of Australia

The commodities boom has taken care of number two for the last ten years or so. The currency has been anything but stable. But because Australians can buy more cheap goods from America over the Internet when the Aussie dollar is strong, the volatility in the currency is, for now, seen as a benefit (although not so much to manufacturers).

The third mandate of the RBA will soon be seized on by those who want to get something for nothing. They benefit the most from the current system because they get the most while doing the least. People who control the issuance of money always personally benefit from this power and always seek to expand it.

You can tell that Australia has reached the end of growth through debt by listening to the clamour for an expansion of the RBA mandate. Australian Chamber of Commerce and Industry executive Peter Anderson wants the RBA to cut interest rates in order to, “boost business confidence and increase competitiveness.”

Anderson said that, “The time has come for Australia’s central bank to move decisively to cut rates by a full half a per cent, and for the retail banks to immediately pass it on….A quarter of a per cent cut would not be enough to do what is required. There needs to be a significant and unambiguous signal, to support activity and to lift confidence across the next quarter.”

What is required? Growth at any cost, especially if someone else is paying. You are the one who is paying if it’s growth through government debt. You are the one who is paying if it’s growth achieved by reducing the purchasing power of money and fuelling asset price bubbles. Activity for its own sake is growth without real demand. It’s not real economics. It’s busy work.

A few years ago, no one argued that the RBA needed to do something to create the appearance of activity and health. The economy hummed along fine. China boomed. Everything was fine.

But now we’ve reached a cross roads. Political and social pressure is being put on the RBA to engineer prosperity through monetary policy. It is the last, best, and eternal hope of people who believe you can get something for nothing. It’s false hope.

The government control of money and interest rates is the instrument by which certain people build a society based on the idea that you can get something for nothing. What the political process in the Western world is about to reveal is that not everyone wants to live in a world like that. Also, there is a corollary to the idea of getting something for nothing. The corollary requires that everyone believe the same thing, politically speaking. More on this tomorrow.


Dan Denning
for Markets and Money

From the Archives…

A Sub-prime Crisis State of Mind
2012-04-20 – Bill Bonner

How The Belief in Australian Property Will Go With the Generational Wind
2012-04-19 – Greg Canavan

Chinese Communism and the Human Cost of the Cultural Revolution
2012-04-18 – Dan Denning

Lifting the Curtain on the Chinese Communist Party
2012-04-17 – Dan Denning

How Empires Really Work
2012-04-16 – Paul Craig Roberts

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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10 Comments on "A Bankrupt Idea Whose Time Has Gone"

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DD: “…eternal hope of people who believe you can get something for nothing…”

Like a 50% discount on an Aussie home you mean, Dan? ;)

Nick Conidi

A fine essay both pertinent and eloquent.
I really enjoyed reading it.
Keep up the good work.
Thanks, Nick
PS Sometimes you do get something for nothing!


Hope springs eternal!~ :D :D :D

Theft is ever constant in human history. When you have no skills, no knowledge, no work ethic, no motivation, it is better to join the thieves than to be the victim. Thus we see that once the thieves numbers grow such that they are the majority, the process continues until the entire system collapses. “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy… Read more »

There ya go, King X!~

Five stars for contributing something positive to a debate. ;)


lol Biker.
“… majority discovers it can vote itself largess out of the public treasury.”

That’s you and your children, sucking down tax breaks and subsidies from the public treasury.

“”Growth at any cost, especially if someone else is paying.”” Well written Dan, however I’m of the view that we are at the end of “Growth” and in the decades to come it will be a rude word. Indeed, only a term the uninformed would use. The elephant in the room is the “Anthropocene” – perhaps even a holy grail for answers in the decades to come. Sort of a big picture explanation for the travails we are facing right now. Perhaps start here, then work sideways until a spot is found in this jigsaw for the global money game.… Read more »

King X: “”… majority discovers it can vote itself largess out of the public treasury. That’s you and your children, sucking down tax breaks and subsidies from the public treasury.”

Jeez, fancy you getting TWO in a row right, son! :D

Another five stars!~


Ooops… You goofed here, genius!~

Your comment is awaiting moderation.

King X: “…we got 7% inflation for 5 years,and gold rose 70% per year for 3 years….”

_I_ dig myself into a deeper hole each post? :D
Did you graduate from primary school? ;)

>> Jeez, fancy you getting TWO in a row right, son! I already know you and your children are robbing the public treasury, you boasted about your thieving long ago. You also have some fantasy that the cost of your stealing is not borne by anyone else, or Australian society as a whole. That this magic money just magically appears out of nowhere. In reality the money you are the recipient of comes from taxes on the productive. As you have never been in that category (productive) I can see how the fantasy arose in your mind about how theft… Read more »
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