“Quick! Get more sour cream and butter for the fat guy, stat! And bring some guacamole and extra cheese too!”
Nothing broke in the world economy over night. The Aussie market is at a 12-month high. The dollar is marching on the greenback with parity (and beyond) the ultimate objective. But we’re going to put all the bullishness from the fake balance sheet recovery aside for a moment and talk about bad medicine.
Your editor spent last night in a discussion with a querulous and drunk Aussie over the stimulus. “It looks like it worked to me,” he said. “Only world economy still growing. GDP up. We’ve got China. Looks like Ruddy and Swanny know what they’re doing. You’re just a hack. You’ve never run a country. And you’re a Yank!”
“Let me put it to you this way. Say you’ve got a guy in the hospital with a bad ticker. He’s a smoker, a drinker, and a fried chicken eater. His arteries are clogged. He’s got a belly like a hippo. He eats like Nero and drinks like Caligula. And say, for the sake of argument, he’s gonna die if he doesn’t change his nutritional habits. How do you treat him?”
“You tell him to quit being a fat @%$#!”
“Talk therapy. That’s good. But let’s talk medicine. What do you prescribe? More food? Do you say what I said before? Quick! Get the fat guy more calories.”
“I suppose not.”
“Of course not. The problem isn’t that the guy is starving and needs to be fed. The problem is that his diet is garbage and he needs to change his living habits. But if the doctor diagnoses the problem incorrectly, the medicine isn’t going to help at all. And as the Dean says, ‘Fat, drunk and stupid is no way to go through life, son.”
We’ll spare you the rest of the conversation. But here is our diagnosis of the Australian body politic: Wayne Swann is a bad doctor. His Keynesian prescription for the Australian economy is based on the assumption that aggregate demand must be supported in recession. But then, the Keynesian approach to monetary policy focuses on demand, not on production.
Don’t take our word for it. Swanny said over the weekend, that “Weakness in hours worked remains a potent sign of insufficient aggregate demand in the economy.” This is why, he says, it’s too early to take away the stimulus. “To entirely remove the fiscal support from the economy at once, would reduce growth by 2 per cent in 2010. That would risk stalling growth in our economy before a self-sustaining recovery in private activity has taken hold.”
Would it be so bad to lose a few pounds? Would it be so bad to reduce the amount of debt that supports toxic levels of consumption? Would it be so bad to let people build up their savings, reduce consumption, and restore the health of the household balance sheet? Or must we keep them fat, drunk and stupid at all costs?
Australian taxpayers are going to pay for today’s deficits for years on end because the Treasurer and the Prime Minister (and apparently everyone in the opposition too) is using a flawed theory on how to manage an economy during a recession. The Treasurer would have been better off thanking China for restocking its commodity inventories and left it at that.
But there are votes to buy! Supporting “aggregate demand” or firms that are “too big to fail” is another way of saying you must reward those who contribute to your campaigns or whose votes you need to keep you in power and in your privileged position. From an investment perspective, the relevant question is which industries benefit (or lose) the most from the government siphoning off money from the private sector and direct it whichever way it chooses.
Obviously bankers and builders will do well. What about everyone else? It’s tough to say. But you could be forgiven if you think that the ultimate objective of all this is to put average Aussies deeper in debt (housing and credit cards) and more in thrall to their banking overlords.
By the way, this is how governments pick winners (banks) and force everyone else to speculate. The injection of cash into the economy distorts asset values and makes good old securities analysis (Graham and Dodd style) useless. The free money and relatively low cost of capital favour the speculators over the investors, turning the stock market from a weighing machine into a one-armed bandit.
There is only one hitch in the plan for the public sector to replace the private sector as the main source of spending, though. The banks may refuse to play their part in peddling new money. Remember, the transmission of the credit crisis from the financial sector to the real economy took place via the banks. When the banks faced credit write downs, they cut off the extension of credit to small businesses and some households (although the government continues to underwrite speculative mortgage origination through subsidising non-bank lenders).
The stimulus and the FHOG were one quick way to get money directly into the hands of Australians without directly involving the banks. That’s why it led to an increase in GDP (which measures economic busyness rather than real value creation). But if the banks are still tight with credit (excepting the housing market) how else can the government keep people spending money they don’t have?
This may not be as big a problem here in Australia since there is now a minor disagreement between the Government and the Reserve Bank. But here’s a prediction: look for national governments to becoming increasingly creative (and brazen) in given direct handouts to people in order to “support aggregate demand.” The government will become a direct lender (through tax credits or the outright nationalisation of things like housing and auto finance).
Figuring out your investment strategy in this climate is tricky. But it’s not anything new. The late Harry Browne used to say that markets go in cycles from Propserity to Inflation to Deflation to Recession. Harry recommended a basic asset allocation strategy that matched the right asset class with the right cycle. You changed your weightings between stocks, bonds, real estate, and gold depending on which cycle you were in.
In “The Fourth Turning,” authors William Strauss and Neil Howe tell us that history is worth studying. “The reward of the historian is to locate patterns that recur over time and to discover the natural rhythms of social experience. In fact, the core of modern history lies in this remarkable pattern: Over the past five centuries, Anglo-American society has entered a new era – a new turning every two decades or so.”
“At the start of each turning, people change how they feel about themselves, the culture, the nation, and the future. Turnings come in cycles of four. Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history’s seasonal rhythm of growth, maturation, entropy, and destruction.”
We’ll have more on the turnings tomorrow and how Australia might be in a different season than America. Actually, that’s already true. Its spring here and late fall there. But the historical question is whether Australia’s economy and its future are now correlated to Asia and not “Anglo-American society.” This has massive implications for the economy, but also how Australians feel about themselves, “the culture, the nation, and the future.”
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