Keynes V Hayek

— ‘Don’t waste the mining boom: IMF’ says today’s front page headline in The Australian.

— Wouldn’t it be great to be a part of the IMF? Just waltz around the world, pop into countries and provide advice so obvious that it’s worthless? The IMF’s little gem for Australia is to establish a sovereign wealth fund to ensure future generations share in the mining boom.

— But over at the Financial Review we read ‘Blow out in budget deficit to $50 billion’. Where hast thou mining spoils gone?

— Well the past and present spoils of the mining boom have gone to: the homeowners who sold out to those sucked in by the first-home owner’s bribe; the manufacturers and other beneficiaries of home insulation products; and to the thousands of tradespeople (not to mention the big building companies) who have apparently built an education revolution over the past few years.

— Meanwhile, Australia’s struggling non-resource economy is not providing the tax receipts the government was expecting. So we’re looking at a near $50 billion deficit this year (2010–11). According to the Treasury, the deficit will shrink to around $16 billion next financial year, which represents a decent fiscal contraction. Along with an outrageously strong dollar and a bias for tighter monetary policy, it’s little wonder the equity market is struggling.

— The performance of the Aussie market might appear to be in stark contrast to the US markets but it’s all money illusion over there. It’s Alice in Wonderland stuff. The worse things get, the higher the market goes. It’s melt up time in the US as commodities, precious metals, equities and bonds all rise in price.

— Fundamentally, such price action makes no sense but in a world of monetary madness, individuals are doing what they can to preserve their wealth. When there is not even a semblance of a sound monetary foundation, price action will be all over the shop.

— The US system of finance is corrupt to its core. Bernanke may state that a strong US dollar is good for the global economy, but it is an Orwellian statement and one he has no intention of following through on. Bernanke is an extreme Keynesian. He may have a big intellect but he has a bigger ego and what’s worse, not an ounce of wisdom.

— Unbelievably, Bernanke is still feted by the media and, consequently, the general public. People still think this bloke has some idea about what he is doing. The Keynesians have the upper hand in the policy debate because they control the debate. Keynesianism and statism go hand in hand. When the state provides for you, you provide for the state.

— In case you don’t notice, the bloke walking through the security doors at the start is Bernanke…he pops up in the background on a few occasions, in full support of Keynes’ statements.

— Here’s one of ‘Hayek’s’ best lines (among many choices) in the intellectual rap:

‘Spending’s not free, that’s the heart of the matter.

Too much is wasted as cronies get fatter.

The economy’s not a car, there’s no engine to stall,

No expert can fix it, there’s no ‘it’ at all.

The economy is us, we don’t need a mechanic,

Put away the wrenches the economy’s organic.

— The lure of Keynesian thinking, and why it remains so popular despite being constantly discredited, is that it offers ‘help’. Help by the government or a central bank. This sounds compassionate and progressive. Only a hard right conservative would look down on the idea, right?

— But the government can only ever provide a short-term boost. They can lead the horse to water, but the horse won’t drink it if it has been fouled by past actions.

— Here’s what the real Hayek had to say about the issue in ‘The Constitution of Liberty.’

There is perhaps nothing more disheartening than the fact that there are still so many intelligent and informed people who in most other respects will defend freedom and yet are induced by the immediate benefit of an expansionist policy to support what, in the long run must destroy the foundations of a free society.

— And that is exactly what Bernanke and Co is doing, while the media hang on to every word and portray meaningless press conferences as adding to transparency to monetary policy. Perhaps they need to read 1984 again, assuming they’ve read it in the first place.

— The flipside of Bernanke’s weak dollar policy is the soaring Australian dollar. With the ASX200 down around 50 points at the time of writing, it looks like the market is finally starting to realise that such a rapidly appreciating currency is not good for the economy or for profits.

— The US’s attempts to inflate are having an impact on the rest of the world in varied ways. For a country like Australia, which has a sensible interest rate setting, our currency is soaring beyond what could be considered reasonable. A policy of currency depreciation doesn’t create more demand. It just steals it from somewhere else.

— That demand theft is arbitrary and it occurs via exchange rates, which set prices for Australia’s imports and exports.

— The US is really trying to take a bigger share of Asia’s demand, or more accurately it’s trying to increase the purchasing power of Asian households, by increasing the value of their currency relative to the US dollar.  But the region isn’t playing along. They are still trying to control the rise of their currencies to maintain their export sectors. Consequently, low capital control countries like Australia are suffering.

— Something must give soon though. Failure to contain inflation in China will probably lead to a boom/bust scenario there. This could see a rally in the US dollar as the punt on Asian currency revaluation unwinds.

— Then we’ll be back to roughly where we started…

— Before we sign off today just a quick post-script on the ANZAC Day Special. Cheers to everyone who wrote in with their stories and thanks. One theme of the responses was ANZAC Day has been celebrated at the town of Villers-Bretonneux for many years prior to 2008. We stated 2008 was the inaugural ceremony. According to one response some diggers returned there as early as the 1960s and 70s. The local communities recognise ANZAC Day on each year on the closest Saturday.

— The 2008 service was a special one to commemorate the 90th Anniversary of the 1918 battles and its popularity meant subsequent official ceremonies were organised.

Greg Canavan
Markets and Money Australia

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

Leave a Reply

5 Comments on "Keynes V Hayek"

Notify of
Sort by:   newest | oldest | most voted

A literary thou or thy
is neither fish nor foul nor fly
THY mining spoils is what you seek
If KJV THOU _Will_ speak…


A fowl, a foul, I’m p*ssed of course
I meant a foal, a junior horse
and if neighsayers are hoof-hearted
the scents is gone; I am outsmarted!

* Blame the Tiger Beer Co.

Biker, what has come over you? A horse methinks! Now what is the game changer on the AUD carry trade? Was it Swanny and Glenn rolling over and saying “*&%# us all you like, we’re not doing capital controls” (of coarse the shonky little Aussie bleeder executive playing at being so-called puritans have most of their noteworthy exports priced in USD). Maybe, but what we have seen is something that Hayek might have sniffed out immediately …. The correlation of mass printing to AUD gains are absolute. ps: and you thought all those Japanese housewives were at home with… Read more »

A light-hearted comment on the standard of proofing (shot-to-pieces, lately)
Ross. Product of extended drinking on my part, ‘of coarse’.

(What’s your excuse? ;) )


my excuse for levity? none at all, it was Friday.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to