Trusted Advice From a Conflicted Interest

–Taking advice from bankers on how to solve your financial problems is like asking a bar tender how to quit drinking. There’s a conflict of interest that makes the quality of the advice suspect. But if you’re discussing the advice over your third glass of wine, you may not notice the conflict.

–We’re returning to the claim by the global elites from the Davos Forum that what the world really needs is $100 trillion in new credit to usher in a third great global cycle of prosperity.  To be honest, it sounds more like an effort to put as many people into as much debt for as long as possible.

–But that is a simplistic and emotional response to a serious question: how much credit is right for an economy? Or more exactly, what is the mechanism for determining the supply of credit available at any given time to businesses and households?

–We can imagine what our venerable mentor in France, the late Dr. Kurt Richebacher might have said. He might have said credit ought not to exceed available savings. And that a society produces savings when it produces more than it consumes or increases its productivity. These savings become the loanable funds of the banking system. And the business cycle is determined by business investment from available savings.

–He probably would have pounded the table while he explained it, as he did the few times we met with him in Paris when he travelled up from Cannes. But the good doctor was not opposed to debt in all forms. He was opposed to credit creation, which primarily went to finance a consumption boom. It produced, he argued, dead-end fictitious GDP growth, not real wealth.

–This must be what the Davos crowd have in mind. Or something like it. Frankly we are deeply suspicious of their motives. But it’s not fair to cast aspersions until we’ve done a bit more research into the parallels between the growth of credit and the expansion of the Welfare State.

–In more pedestrian matters, the Aussie market is quiet this week as the nation prepares to celebrate Australia Day. And don’t let high prices interfere with your celebrations.  Higher food prices may LOOK and FEEL like a real problem when you’re at the grocery store buying your fruit and veg. But just grit your teeth and get on with it.

–According to the Australian Bureau of Statistics, core consumer prices rose by just 0.4% in the last three months of last year. That takes the official annual inflation rate to 2.7%, which is just enough to notice but not enough to get up in arms about yet. Yet.

–Of less concern—but potentially more profit—to Australian investors are copper and tin prices. While gold and silver have copped it on the chin so far this year, tin hit a record closing high of $28,190 on the London Metals Exchange. Copper is off its high of $9,781 per tonne. But not by much. It closed at $9,529.

–These metals prices make Dr. Alex Cowie look like a genius and make a mockery of your editor’s gloomy forecasts. But hey, that’s what makes a market! Alex correctly identified the supply-side shortages in copper and tin last year while your editor banged on about the demand side collapsing. Perhaps we will both be right by the end of the year, just not at the same time.

–But as we alluded to yesterday, if expanding credit well in excess of available savings accelerates the depletion of scarce resources, then sooner or later your attempts to produce a credit-backed global utopia are going to run smack into the idea of depletion.

–Or, if you prefer a little physics with your economics: energy. Where’s all the oil going to come from? And what’s going to happen to oil prices in the meantime? Stay tuned.

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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2 Comments on "Trusted Advice From a Conflicted Interest"

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Fine article and worthy attention draws.


“what is the mechanism for determining the supply of credit available at any given time to businesses and households?”

A: Projected population.

Print now, enslave adinfinitum.

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