How did the G20 ever let anything go wrong in the first place?

Well, that’s good to know. What else were they going to do…admit to helplessness and cluelessness? The good news to come out of the Sydney G20 summit is that all the countries have agreed to boost growth. Here’s the relevant bit from the communique:

‘We will develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2 per cent above the trajectory implied by current policies over the coming 5 years.

‘This is over $US2 trillion more in real terms and will lead to significant additional jobs.

To achieve this we will take concrete actions across the G20, including to increase investment, lift employment and participation, enhance trade and promote competition, in addition to macroeconomic policies.’

The bad news is they have no chance of pulling off such an ambitious target, or any target at all. If it was just a case of announce and achieve, they would have done it years ago.

The reality is that these ‘global elites’ need to tell the world how hard they’ve been working and how indispensable they are for the wellbeing of the rest of us. Without them and they’re policies, we’d be down US$2 trillion in real terms over the next five years. We need these guys!

Targets like this are completely meaningless. They’re simply set to justify an unwieldy and pompous group’s existence. Reading through the communique, it’s frankly surprising how the G20 let anything go wrong in the first place…they appear to have everything covered!

There are a number of references to boosting investment, while also recognising the need to maintain ultra-low monetary policy. But in reality it’s difficult to achieve both things. Why? Well, we seem to recall from our economics textbooks that savings equals investment. So, in order to boost investment you need to boost savings.

How do you boost savings? Setting interest rates reasonably close to the ‘natural rate’ would be a good start. When real interest rates are negative, people tend not to save. They speculate instead. So increasing interest rates would be a good thing, in that it would boost saving rates and provide the fuel for an investment boom.

But in the short term it would cause a nasty recession while the global economy rids itself of speculative excess and adjusts to a more normal interest rate regime. Of course, there is no way the G20 would endorse such a policy. They simply want to avoid interest rate normalisation and go straight to the good bits, like increasing investment and lowering unemployment. In the world of the G20, there is gain without pain.

But as you know, dear reader, it doesn’t work like that in the real world. The G20 have committed to grow strongly over the next five years by targeting structural reform rather than just firing off a few more fiscal or monetary policy missiles and hope for the best. Structural reform though is tough work. It takes time for the benefits to flow and good reform is usually politically unpopular. It’s not an easy sell like lower interest rates and QE.

If they get on with it, it will go a long way toward improving the prospects for the global economy. But they are dreaming if they think it will result in a collective lift in GDP of 2% above the ‘trajectory implied by current policies‘.

–Meanwhile, the Financial Review is positively star struck today, announcing Mark Carney and Raghuram Rajan as ‘central bank superstars’. If you don’t know who these guys are you need to get out more. Respectively, they head the Bank of England and the Reserve Bank of India. And just for good measure, Australia’s business paper tells us that new Fed chief Janet Yellen ‘immediately‘ grasped the implications of the collapse of Lehman back in 2008. Are we meant to be reassured by that?

All this fawning reminds us of the praise French society once heaped on the world’s first ‘modern’ central banker, John Law. We wrote about him in our last issue of Sound Money. Sound Investments. Law sauntered into 18th century France with a plan to rid the government of its debilitating debt pile.

The plan was simple. Print money backed with nothing more than confidence and promises. Law provided confidence by stating that any banker who issued notes unbacked by precious metals should receive the death penalty. He then proceeded to issue money unbacked by precious metals.

In the early years his inflationary policies worked a treat. After the corrupt and confidence sapping rule of Loius XIV, Law’s ideas seemed like magic. They were revolutionary. Everyone loved him. He was a super star.

But Law lost control. The Duc d’Orleans (Law’s benefactor) abused the money printing privilege and soon the money emitted by the Banque Royale lost its value. It ruined the French middle class and Law became reviled.

There are parallels to today. The term ‘money’ has lost all meaning. Central banks around the world create it on a greater scale than ever before. What gives this money value is the subjective viewpoint that it actually has value. Confidence in its issuers and confidence in its utility ensure that money retains value.

But where is the tipping point? When is so much ‘money’ created that people begin to question these superstars and lose confidence in their ability to manage the situation? We don’t know, but we think the day is slowly creeping towards us. The monetary system that has been in effect since the end of the Second World War, with the US dollar at the centre, is becoming increasingly fragile.

The US Federal Reserve’s continued policy of ‘tapering’ will prove that point in the coming months. It will suck capital out of peripheral economies and then feed back into the major economies via lower demand. The next crisis will sneak up on those who think our central bank superstars have it all under control.

It’s all related to the abuse of money. Which is why the subject of money is the focus of our upcoming conference in Melbourne. Over two days, we’ll be discussing traditional money, digital money, monetary systems and currency wars. And of course we’ll be trying to figure out what it all means for your investments in the years ahead.


Greg Canavan+
for Markets and Money


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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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