Spoiler alert! We’re going to reveal the plot of Atlas Shrugged in today’s Markets and Money, including the crucial twist. Because you face the very same twist in your own personal financial life at the hands of government intervention. You’re going to have to decide on whether to go on strike, continue plodding along, or go on the offensive. Your very wealth is at stake.
The book Atlas Shrugged is about how America will look when it reaches the point that Europe is already at. When the welfare state has strangled innovation and commerce so much that the welfare state itself goes bust. The parasite kills the host. One by one, America’s key productive people start disappearing.
The oil barons, the steel producers, the miners, the railroad pioneers, they all begin to drop off one by one, vanishing in to thin air. Meanwhile, some refuse to give up the fight for innovation and production. Hank Rearden invents Rearden Metal and Dagny Taggart uses it in her new railway line. They have to fight unions, regulators and anti-competitive railroads to do it. But they manage to in the end.
Not that the new railroad solves the national crisis. Dagny eventually figures out that the nation’s productive people have decided to go on strike. They’ve decided to keep themselves busy somewhere in the mountains of Colorado. They invent new things and convince others to join their rather productive hiatus away from an unproductive society.
Some of the industrialists, inventors and artists take convincing, but pretty much everyone signs up after they are individually targeted by a law making it illegal for them to disappear. (A bit like the law Obama is considering after one of Facebook’s founders emigrated to Singapore with his takings, much to the detriment of the American tax base.)
Meanwhile Ragnar Danneskjöld — the bogeyman of unproductive America — is gallivanting around causing trouble for the powers that be. He’s an odd combination of Zorro and Robin Hood — stealing from the thieving government. That’s his solution to the declining opportunities of an America full of bureaucrats, government departments and government department plans. He makes a nuisance of himself in a profitable way.
So there you have the three ways of dealing with a government run amok, inspired by the characters of Atlas Shrugged. Keep on being productive no matter how hard it gets, pick a fight and steal back what would have been yours, or go and hide somewhere the government won’t find you. (There’s a fourth way, which is to do what the government tells you to, thereby completely destroying the entire economy, but we’ll leave that for another day.)
What Should You Do in a World of Government Intervention?
We’re not suggesting you go and hide in Springbrook National Park and hope the Carbon Tax won’t get you, and it’s probably not a good idea to rob the Reserve Bank of Australia to recover the wealth it has inflated away. But it is a good idea to make some preparations for how Australia will change when we finally get what’s coming — one heck of a recession. Because when it does come, government won’t waste the opportunity. It will stimulate, regulate, bail out, and repay all the campaign contributions from wealthy business men.
So what do you do? Fight or flight? Or neither, and just keep doing what you’ve been doing?
If you haven’t got any qualms about profiting from government largesse, you’ll want to try and ride the wave of economic stimulus and government intervention. Why would you have any qualms? Well, the government takes, by threat of force, what it spends on welfare and expenses. If people don’t fork over their taxes, they go to jail. Not everyone’s moral compass allows them to participate in that kind of theft, even if they are just the beneficiaries and the stealing is outsourced to the Australian Tax Office. If you don’t mind reaping what others sow, you can join in on the government’s gravy train.
How? Government contracts for infrastructure construction are bound to flow once Australian GDP goes negative. Companies like Leighton Holdings (LEI) would benefit if spending is directed to big ‘shovel ready’ projects. But for how long? And are you able to get the timing right? It would be a bad idea to buy Leighton before a recession.
Government Intervention and ‘Rent Seeking’
Trying to siphon off profits from the government gravy train could be tricky for a retail investor. You’ve got to be a full time pirate and part time genius like Ragnar Danneskjöld, or things could go wrong. One of the reasons that things often do go wrong for investors chasing government created business opportunities is called ‘rent seeking’ by economists.
Unfortunately our favourite rent seeking example has nothing to do with the government. But it’s easy to remember. Many of you will be reminded of it every morning if you keep reading (fair warning). The example is about fair trade coffee, and it’s based on documented studies.
By paying a little more per cup, fair trade coffee sellers claim you are ensuring that coffee farmers are getting their fair share of the wealth. Just ignore for a moment that most of the extra dollars you pay don’t make it as far as the coffee farmer. Imagine they do get that far. What happens is that the people with banana farms see their coffee-farming neighbours buying Rolexes down at the village market. They quickly figure out that it’s a lot more profitable to switch their banana crop to coffee beans.
But not everyone deals in the fair trade priced coffee. Some farmers are left with the normal market price. Not every consumer of coffee is willing to spend the extra money to ensure the farmer’s income is higher. So some coffee farmers get paid a premium, while the formerly well to do banana farmers face a sudden glut of coffee beans. Which reduces their income. They’ve fallen for the rent seeking trap.
It shouldn’t surprise you that messing about with prices leads to bad consequences. Everything the government does interferes with prices, which is why everything the government does has bad consequences. Don’t get caught up in a rent seeking trap with your investments. Just because your neighbour is getting rich by insulating houses under the government’s home insulation scheme, doesn’t mean it’s a good idea for you to start a home insulation business.
So that takes care of the first of our three investment options in the face of an expanding government — joining the rort by getting some of your own loot. Next up is the flight in ‘fight or flight’. Is it time to move to Switzerland?
Capital Flight and Government Intervention
Oddly enough, your editor would have grown up there if it wasn’t for the lures of Queensland. There are other ways to ‘hide’ your wealth from government meddling than hiding in the mountains. Overseas investments, or just bank accounts, are a good way to start. The trick here is to be well ahead of the curve and to pick the right places. We’re working on a report which shortlists those places now.
But is this a bit over the top? No. Who knows what sort of ridiculous policies the Australian government will come up with when capital flight takes over? Spain has already come up with some shockers, including a maximum transaction limit for cash, so that transactions can be tracked. America is working on some tax laws that will make it difficult to leave.
And if someone in the world starts a war, which tends to happen when governments are running out of money, you can guarantee the Aussies will join in. They always do. So if you have connections with anywhere outside Australia, it’s time to renew them. As your editor’s dad recently put it, ‘time to renew that German passport.’
Germany might be a good place to go for two reasons. Economic and war scars run a little deeper than in most places. The Germans have a smaller army than Greece. (Once you factor in admin staff, it’s much smaller.) And bombing a German city would primarily wipe out, well, non-Germans.
On the economic side, there is the Weimar hyperinflation and the Wirtschaftwunder (economic wonder) of economic growth once the government got out of the way. The Germans, you’d hope, know what to do and what not to do. So that’s one option for your editor if things get messy here in Australia. We’d ask you about your hidey-hole, but telling everyone would sort of defeat the purpose of having one. Wait…oops.
Chances are, you will implement neither of our fight or flight recommendations. You’ll keep plodding along. Sorry, you’ll keep ‘Aussie battling’. And good on you for it! After all, Hank Rearden and Dagny Taggart are two of the heroes of Atlas Shrugged.
They kept innovating and producing in the face of a country that didn’t want them to. And in the face of great risk to themselves and their wealth. You might not be a steel mill or railroad owner (let’s hope not, given China’s economic slowdown), but your hard work and innovation is a true virtue.
Trust Your Enemies
No doubt you’ll need some cheering up as the government closes in on you and your wealth over coming years though. Our friend Mark Tier has just the thing. His book Trust Your Enemies is available for the same price as the Markets and Money for just a few hours longer on Amazon, if you have a Kindle. We had to pay for our version. Although that was in keeping with how the characters in Atlas Shrugged expressed their respect for each other and each other’s work.
Trust Your Enemies is about many of the same issues as Atlas Shrugged, but thrashed out on Australian soil. And with a little more subtlety. If you do read it, we’d like to know which of the key characters you associate with. Are you the well-meaning, ambitious political enthusiast, the innovating business man who bears the burden of government, or the inquisitive, penetrating reporter?
We’ve thrown in a rather topical excerpt from the book below. It’s less subtle than much of the book, but just as thoughtful. If fiction isn’t your thing, we’ve got sad news for you. Neville Kennard recently passed away. This excellent obituary will make you realise what Markets and Money readers have lost.
Now on to a conversation Neville would have enjoyed reading, courtesy of his former co-conspirator at the Workers Party, Mark Tier:
“You’re impossible,” she grinned. “It’s one thing to take potshots at politicians—and God knows, some of them deserve it. But this latest series, pushing drug legalization, that’s just too much.”
“How can you ignore the terrible damage drugs cause?” Alison stood, her muscles tense, leaning over Olsson, her eyes ablaze. “The lives destroyed. Pushers turning young kids into addicts — who end up as petty criminals and prostitutes just to make money for these murderous, soul-destroying thugs. It’s got to be stamped out, not made freely available for anyone to try. Your so-called cure is worse than the disease.”
“All these drugs were legal once, and —”
“I’ve read all your arguments,” she snapped.
“Drugs are illegal all around the world. Yet, wherever you go, they’re easy to get — despite the decades-long ‘War on Drugs.’ Another government program that’s been a screaming success. Why? Because drugs are illegal they’re extremely profitable. That money corrupts the police and the courts which are supposed to protect us from criminals, not co-operate with them. That’s the real scourge, Alison.”
“You’re starting to sound like that Karla Preston woman,” she spat.
“Maybe,” he said thoughtfully. “She certainly makes a lot of sense. And there’s no doubt that I’ve come to despise government and everything it stands for. Remember my Golden Rule, as you call it? No violence — except in self-defence? The foundation of government — every government — is based on breaking that rule every day of the week. It’s obvious in places like Thailand and the Philippines. There, government is simply the means for politicians and their cronies to steal money from the people to line their pockets — and everybody knows it.”
“Not here? You should know better than that, Alison. What do you think a licence is, for, say, a casino or a TV station, but the monopoly grant of a stream of cash, protected by a government threatening violence to any would-be competitor willing to compete on a free and open market. What are lobbyists except groups trying to get special favors from the government? Which the government can only give by denying those same rights to everyone else? What is corruption if it’s not an under-the-table, unofficial licence for an exemption from the law that’s enforced against everyone else?”
Tears in her eyes, Alison protested, “But government is a force for good.”
Olsson shrugged. “Sure, it can do good things. But the Mafia has its own welfare program you know — does that turn them into saints?”
“Don’t be ridiculous. How can you compare government with the Mafia?”
“How can you not? They both have the same foundation: violence. How many taxes would be paid if they weren’t backed up by the threat of being thrown into jail? How many of your ‘good works’ could the government do if it didn’t, first, extort the money at gunpoint to pay for them? At least the criminal is more honest: when he steals your wallet he doesn’t try to make you believe he’s doing it for your own good.”
Trust Your Enemies by Mark Tier is available on Kindle for free here until this evening.
for Markets and Money
From the Archives…
When Capital Comes A Knocking
2012-06-01 – Greg Canavan
When the Pain From Spain Moves Across the Plain
2012-05-31 – Greg Canavan
Greek Game Theory: Default, Devaluation, Austerity, Deliverance?
2012-05-30 – Nick Hubble
Desperate Stock Market Traders Waiting To Be Made Whole
2012-05-29 – Murray Dawes
Greek Elections: The Fear of Uncertainty
2012-04-28 – Dan Denning