So Much For The Planned Economy

Life in any household goes on, even while siblings and spouses argue amongst each other. Such is the case today in financial markets. Europe’s quarrels are like a quiet murmur in the living room while the kids eat dinner in the dining room. Everyone knows the domestic bliss has been shattered, but you still have to eat.

Aussie stocks are travelling nicely this morning. We’re a bit surprised, given that Spanish government bond yields set a 13-year high overnight. The $125 billion rescue deal for Spanish banks, as we pointed out yesterday, has failed to ‘decouple’ the banking system from the government balance sheet. The rise in yields is the bond market’s way of saying ‘fail’.

Then again, how many people spend any time worrying about Spanish bond yields? Financial markets have become so interconnected and complex that investors are reacting the way we reacted in freshman year algebra: first with confusion, later with indifference.

We nearly failed algebra. It took one pair of new prescription lenses and several months of weekends with a tutor to get us over the line. The solution to Spain’s debt problems — indeed to all of the world’s debt problems — is not so clear. Hard work won’t do the trick. Debt reduction might.

In the meantime, real people have to make real decisions about how matter-of-fact you can afford to be in the face of a persistent banking crisis. It’s hard to keep calm and carry on when you see things like this.

Governments impose capital controls when people lose confidence in paper money. There’s a spectrum of mechanisms that affect how much and what kind of cash you can get your hands on. The whole point is to prevent savers from withdrawing their money from the banking system (a bank run) or exchanging one currency for another.

What are the methods? Bank (and ATM) withdrawals can be limited or suspended. You may not be able to send money to an overseas bank or engage in a foreign exchange transaction. The ownership of precious metals can be made illegal. Your savings can be confiscated or converted into a new currency or you may be made to purchase government bonds.

We’re not making these things up. All of them have happened during past monetary crises and ‘exchange events’. Bankrupt governments don’t have any reason to be bashful. It’s a matter of self-preservation.

But if you’re a politician or a banker and want to avoid being hung from a lamppost, you’d prefer to avoid a monetary crisis that forces you to confiscate the savings of the middle class. Politically speaking, debt default and/or inflation are a lot easier. That’s probably Europe’s ‘Plan B’, or should be. It doesn’t seem like there is a Plan A right now, much less a Plan B. So much for the planned economy!

An Expert Opinion on the Economy

Let’s ask a real authority on the economy what he thinks. Dr Copper! As you well know, copper is a proxy for economic growth. It’s used in residential and commercial construction. A growing world uses more copper. A shrinking world uses less. Copper is a good diagnostic tool for the health of the economy, hence its honorary degree in medicine.

The chart below shows that the spot copper price is coming off its lows for the year. The relative strength index (RSI) near 30 suggests copper could be at the bottom of a short-term range. And though we’re no chartist, it would probably be bullish if the 10-day moving average turns up and crosses the 30-day moving average sometime soon.

Source: StockCharts

We’ll have to ask Slipstream Trader Murray Dawes what he reckons. Murray says the copper price can be useful when analysing the Aussie stock market. In a ‘strategy session’ we recorded with him a few weeks ago, he broke down a 7-year copper chart and identified the key levels. That ‘strategy session,’ by the way, is the first in a new series of reports/interviews/roundtables we’re making available to anyone who subscribes to any of our publications.

Abracadabra Economic Policy

What might lead to a copper price rally? Well, it probably won’t be the resolution of the European debt crisis, at least not this week. A positive outcome to the Greek election on June 17th would help. But our guess is some big burly new stimulus package from China would do the trick.

By ‘do the trick’ we mean it would lead to a short-term rally in ‘risk-on’ assets. But one thing you’ll have noticed recently is that contrived rallies are getting shorter and weaker. Investors are not as easily fooled as they were a few years ago. Lower interest rates, more quantitative easing, more stimulus…these don’t solve a debt problem. They just create more money and spending.

Some people are so locked in their little mental boxes that they cannot see how futile focusing on ‘policy’ is. The best thing any government could do — and the only thing all of them should do — is provide a stable legal framework in which people can make long-term economic decisions. Policy stability might lead to something like the ‘rule of law’.

Economics is the study of the decisions people make with their money over time. The more the government screws with the money and the more public finances are intermingled with banks, the harder it is for ordinary people to make plans. The money-tampering leads to bubbles. Bubbles destroy bank balance sheets. The disease spreads to the government and to the economy.

Yet the gullible and the dull are sucked into the day-to-day analysis of this policy initiative or that new rescue plan. The government doesn’t create wealth, jobs, investment, or prosperity. Ever. It only takes from one party and gives to another.

Until we get past this cognitive impairment — believing that the right policy will solve the problem — the problem will metastasize. But you know that already, or you’ve read it here before and are either tired of it or agree with it, so we’ll shut up about it.


Dan Denning
for Markets and Money

From the Archives…

The Avalanche and the Phase Transition of the Financial System
2012-06-08 – Greg Canavan

A Financial Crisis that Repels Private Capital
2012-06-07 – Eric Fry

Floating Towards Japan’s Economy on a Sea of Bad Debt
2012-06-06 – Bill Bonner

Pirate Politics to Save the European Union
2012-06-05 – Nick Hubble

China’s Economy… Where All is Not As It Seems
2012-06-04 – Greg Canavan

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "So Much For The Planned Economy"

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Chris Schlegel TFC

This is great article about Planned Economy. Article is full of information for all reader. This is really helpful and useful. I Like this article. Thanks for sharing.


If they go fully Weimar (expect some new Greenspan/Bernanke useful idiot being pulled up to prattle on about best first use of newly printed money) then expect another one of these ….

and they will say, see how we learned our lesson .. trust us.

I am curious as to just who is putting up these 100B euros and how many shares of the Spanish banks this entitles them to receive. Surely, governments, as representatives of their citizens, are entitled to receive SOMETHING for all this money… aren’t they? If not, then it becomes all the more clear that governments understand banking less than they understand the basic nature of money; which is to say not very much at all. Look for this sort of nonsense to continue until it collapses the current banking and political systems. This is what happens when the unsustainable is… Read more »
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