What a relief. A day without a crisis.
Everything seems to be “in crisis”. You’ve got a credit crisis, a housing crisis, a water crisis, a climate crisis, a dollar crisis, and somewhere, a 42-year old insurance salesman with a sense that something is missing in his life out buying a Porsche or having an affair with his secretary, embracing his mid-life crisis.
The question is whether the bull-market has recovered from its own mid-August crisis. It appears that way today, with rafts of mundane news floating along the news wires. So let’s pause a moment to consider the origin of the word crisis itself. Maybe it will tell us something.
Dictionary.com tells us that our word crisis comes from the Greek “krisis”. To the Greeks it was the “turning point in a disease”. In a literal sense, it also derives from “krinein,” which means “to separate, decide, and judge”.
Well, that makes sense. The bull market in credit caused a kind of disease in financial markets, the symptoms of which were many, many bad decisions regarding risk. All that funny money created an economic fever. Then, as the fever progressed—or in economic terms, as the misallocations of capital in the boom began to be liquidated via bankruptcy, default, foreclosure, and insolvency—the Fed administered more medicine.
Or did it?
Everyone knows you starve a bubble and feed a cold. But Ben Bernanke is a doctor of economics. He has scoured the dusty pages of history books to find the cure for deflation. But we wonder if his treatment of the living, complex adaptive system that is today’s economy will not cure the patient, but kill it – or at least prolong its agony.
If a crisis is a turning point in a disease, then there seem to be only two ways to turn. Left towards the correction or right towards hyperinflation. Hit the brakes or hit the accelerator. You can get better. Or you can get worse.
Is there a third way? Can you just keep on driving and red-line it? Our old friend John Mauldin has been right for many years now that most of the time we manage to “muddle through”. That would suggest not turning at all, even when you’re at a fork in the road. That sounds like an accident waiting to happen. Buckle up.
The problem is with people as much as it is with money. We live in an age of inflated expectations. Marion Jones, a US Olympic athlete, admitted to taking steroids in an interview with the Washington Post. The performance-enhancing drugs accounted for her dominating but fraudulent performance in the Sydney Olympics in 2000.
What does this have to do with economics? Everything. We’d humbly suggest that by steadily eroding the value of money, central bankers undermine and distort many other values as well. Cheapening the currency undermines values like savings and thrift. That further undermines values like honest work, toil and effort.
In life and in lending decisions—and especially in athletics—people began to take short cuts. The result—a quick buck, a big deal, or a gold medal—becomes more important than an honest effort. The results are fleeting fame and wealth.
But in an economic sense, the consequence is far more serious. When you waste capital you waste opportunity. Money put to unproductive use is money that does not create a new job, a new factory, or a new income for a new worker in a growing economy. The term “misallocation of capital” doesn’t do justice to what’s been done. Capital wasted means someone, somewhere, lost his chance to improve his circumstances in life.
That is what’s so deceitful and insidious about what central banks do to money. They erode purchasing power and, bit by bit, people’s sense that an honest effort counts for something. Of course it’s not just the central bankers. It’s the lenders, the borrowers, and the whole zeitgeist of the age; that you can get something for nothing.
The good news is that none of this is new. It’s cyclical. People and civilizations go through phases where it seems normal to expect a five-course free lunch. We are at the apogee one of those cycles now. And after the top of the cycle? The vomitorium.
Fortunately, what comes next need not be all contraction and depression. A new kind of cycle in human expectations is beginning in China. That’s fortunate for Australia. Of course China will have a crisis or ten in the next twenty years. But there is a lot more opportunity in China’s future as well.
Markets and Money