The central bankers print. The governments spend. But the economy stumbles. And only those rich enough to own shares get richer.
What’s gone wrong? Why haven’t record low interest rates, indefinite money printing, bailouts, record deficits and targeted stimulus spending worked to get the world out of its economic slump?
Europe struggles with record high unemployment. America’s jobless recovery still isn’t even much of a recovery. China’s growth is slowing. Japan’s trade position recently got worse despite a tumbling Yen. And Australia’s budget deficit crept up behind Wayne Swan and yelled ‘boo!’
Economists told us exactly how fast unemployment would fall, exactly how fast GDP would grow, exactly how big the surplus would be and exactly how to get back on the road to prosperity. And yet, the world struggles on, well below par.
The answer to our failures lies in Cargo Cult Science.
During World War 2, while the Americans were island hopping across the pacific, they built air bases. These bases would unload, and sometimes drop, vast amounts of resources onto islands to supply troops. The locals often ended up with the surplus and abandoned goods.
But when the war ended, the planes stopped coming. The food, technology and supplies stopped dropping out of the sky. And the locals didn’t like the effect this had on their lives one bit. So they decided to do something about their new found lack of consumption.
But how do you entice the giant birds back to your island? Well, you mimic how they turned up last time. Remembering what happened when the birds came the first time, the islanders decided to build a runway.
But for some reason, the birds didn’t come back. The island tribes were undeterred. They built empty ‘radio sheds’, empty hangars, and all sorts of imitation modern infrastructure around the runways.
Still no birds.
If something doesn’t work, you just need more of it. So the tribes made earphones out of wood, and antennas out of bamboo. Pretty soon, everything a giant bird bringing goodies could possibly need was sitting around the runway. Someone even put on the earphones and manned the radio shed.
Still no birds. And no goodies. In fact, there was a shortage of other necessities because everyone was busy building stuff to entice the birds back. That made the offerings to the birds even more important.
Islanders are a tough bunch and don’t give up. Even today, examples of cargo cults exist around the world.
Cargo Cult Science
In a famous speech, the legendary physicist Richer Feynman created the term Cargo Cult Science. It’s all about applying the cargo cult mentality to scientific questions. Economics is a prime example.
Paul Krugman, a Nobel laureate, would be quick to point out the mistake the islanders were making in their attempts to bring back their free lunch from the skies above. They weren’t taking their mimicking far enough when it came to enticing the birds back again.
They’d missed a crucial factor. The birds came down from the sky in a time of war. That’s what they needed — a war.
That might sound ridiculous, but it’s an example taken from real life. Pointing out that the Great Depression ended with World War 2, Krugman advocated the world declare war. But on who?
‘Paul Krugman: Fake Alien Invasion Would End Economic Slump’ CNN explained.
Of course it was the end of the war, millions of unemployed soldiers returning to the workforce and dramatic cuts in defence spending that allowed a recovery to happen after the Great Depression.
Preparing for an alien invasion would be a waste of resources in the same way the cargo cult islanders wasted resources building wooden planes:
As our grandparents on both sides of the English Channel noted, spending on war reduces what is available to consumers in other areas…like food. It doesn’t enrich them. It teaches people to eat the entire apple, including the core.
Krugman’s partner in crime has a slightly different solution. Federal Reserve Chairman Ben Bernanke reckons dropping money from a helicopter is a much better way to stimulate the economy. Who needs planes dropping resources when you can drop money from a helicopter for free?
No doubt a bunch of cargo cult islanders wouldn’t have trouble seeing through this little fraud. But the rest of the world is currently hooked on the idea that counterfeiting creates wealth.
And that is the state the world finds itself in today. Can you guess how it will end?
Ignore the Cult and Collect Coconuts
So while everyone who can pumps their savings into shares and property, what do you do if you’re not a member of the cult? (Whether you got thrown out or took a hike doesn’t matter.)
Well, just like the islanders who collected coconuts instead of building radio huts, you might want to go about acquiring real assets. Rather than taking your money and trying to multiply it in the stock market, why not invest in something you can touch, use and rely on?
One kind of investment we focused on in the month’s issue of The Money for Life Letter is a kind of productive asset that is very close to home. It saves you money, produces something you need, and improves your day to day life. Actually, there are two of them.
Apart from that, at the moment, our end of the new office has no heating, and the water boiler blew up on Thursday, so there was no water either. And builders are fixing the roof, which leaked.
Investing in a new heater, water system and roof might provide better and far more certain returns than the stock market at the moment. While the Cargo Cult is in charge, opt out of the financial world and find something better to do with your money.
Kris Sayce takes the opposite view. He reckons this is a speculator’s paradise, if you can find the right stocks to take advantage of the chaos. Find out exactly how he thinks you should be opportunistic here.
Markets and Money Weekend Edition
About the author: having escaped from academia, Nick decided to drop his tights (the required attire of a trapeze artist) and join Port Phillip Publishing. Instead of telling everyone about the Markets and Money, he now spends his time writing for the weekend edition.
ALSO THIS WEEK in Markets and Money…
A Simple Interpretation on Gold for Times of Monetary Madness
By Greg Canavan
Today, we are in a similar state of market euphoria. Everyone is jumping on the central bank bandwagon. They’re making bets that can’t lose. Downside risk has central bank protection (the Bernanke put) and the upside is unlimited. What could possible go wrong?
Your Forefathers’ Pain Can Be Your Gain
By Vern Gowdie
You get conditioned to growth after 67 years of exponential credit expansion. We are wired to believe ‘normal transmission’ will return anytime soon. Central bankers have developed an aura of omnipotence. We are constantly told, ‘Don’t fight the Fed’…But what if the market develops immunity to the Fed’s cures and fights back?
Dr. Bernankenstein Created a Monster, Not a Normal Economy
By Bill Bonner
When a man is up to no good, it doesn’t help that he gets lucky. A fellow goes to rob your house. He finds the door unlocked. He enters without breaking. He steals everything. Mission accomplished. Later on, he is arrested for robbing a bank. He gets 10 years in the slammer. He would have been better off if he had found the door locked tight… and gave up!
The Warning Signs for Australia’s Economy
By Greg Canavan
The point of our (and Garnaut’s) warnings is that Australia’s economic future will be very much unlike its past. Our largest trading partner is undergoing a dangerous economic rebalancing which will mean much less demand for our raw materials…Times are changing!