What Central Planners Can Never Know

Dow up again – 51 points. But bond yields rising too… the ten-year now over 1.6%.

Perhaps we have seen the bottom of the great bear market in bond yields.

“You know, if you look at a chart of yield over the last 200 years,” says Rob Marstrand, our Family Office chief analyst, “you see something remarkable. Yields have been going down almost the entire time. There was a major spike up in the ’70s… and then down again. And now, they’re at their lowest point in two centuries.”

That trend may have now come to an end, just in the last few weeks…or not.

We don’t know. We won’t know for months…

What we do know is that our leaders’ efforts to lift the economy out of its funk have failed. They claim to have ‘whatever it takes’ to make people better off.

Which is what we’ve been talking about for the last few days. “Maybe they don’t”, was our point of departure. Today, promise, we reach our destination.

First, the world’s leading economies are all slowing down. Here’s the latest from the New York Times:

The Italian economy shrank again in the second quarter, official data showed Tuesday, and orders for German machinery declined sharply, a reminder that flagging growth continued to complicate European leaders’ quest to restore confidence in the euro zone.

Italy’s gross domestic product declined 0.7 percent in the April-June period, compared with the first three months of the year, according to the country’s official statistical agency, Istat. The economy shrank 2.5 percent in the second quarter a year earlier.

The Italian economy has now contracted for four consecutive quarters, leaving it deep in recession. And with the entire euro area economy on shaky ground, analysts are pessimistic about the prospects for a near-term revival.

In Berlin, the German Economy Ministry said industrial orders fell 1.7 percent in June from May, far more than the economists surveyed by Reuters and Bloomberg News had anticipated. Factories had 7.8 percent fewer orders than a year earlier.

The Economy Ministry noted in a statement that domestic orders were weaker, “with the momentum coming from abroad.”

China, the US, Japan… are all slowing down too. The authorities think they know the way out of this mess. “Counter-cyclical stimulus” they call it. The idea is to give the market what it lacks – demand, by reducing the price and raising the availability of credit. In the simplest version, this means printing money…cash.

“That’s what’s nice about living in Argentina,” said Rob, a colleague. “Everything is so obvious. They don’t have these LTRO and the Twist programmes… They’re much more blatant… and in-your-face about it. It’s like a machine with the housing removed. You can see the gears turning. You can see how it really works.

“They literally print money. They need money to pay government workers. So they print pieces of paper. That’s why the inflation rate in Argentina is already about 35%… and it’s why the country is headed for another crisis. You can’t have inflation rates that high without destabilising the economy. It should start breaking down soon.”

Will this money printing by the Argentinians make their economy work better? Will the Argentinians be richer, happier, more prosperous as a result?

You don’t think so? What’s the matter with you? You must not have studied economics!

But today, as promised, we’re not going to focus on the errors of economists… nor on the mistakes of policymakers…

… nor on all the frauds and scams that make up modern economic policies.

Instead, as a public service… as good, earnest and helpful members of the economy of which we are part… we offer some advice on “what it really takes” to get an economy out of a debt-induced slump.

First, as we’ve said many times, instead of fighting the depression, you have to give it a chance. You have to let bankrupts be bankrupts… you have to let defaulters default… you have to let bad debt go bad and bad managers go unemployed and bad banks go belly up.

But that should only take a few months. Don’t sweat it. It’s just nature’s way of clearing out the dead wood and the hopeless situations.

After all, if you owe more than you can pay you should ‘fess up to your mistake as soon as possible and stop the losses there. “Slam on the brakes”, was F.A. Hayek’s advice to Maggie Thatcher and Ronald Reagan. That was good advice.

When you are doing something that is bad for you – such as spending more than you can afford… or inflating the currency – you should stop doing it, ASAP. Adding more credit to a debt-soaked economy is a disastrous mistake. It should be stopped forthwith.

Then, nature can take over… and correct your errors.

But you can give nature a hand, too. Here again, we turn to Rob. Instead of increasing spending, governments should cut spending… and cut taxes:

“I reckon there would be a higher chance of success if a country did three or four things:

1. Slash government spending (eg reduce government payrolls by 20% over three to five years).

2. Cut personal and business taxes (and fund the short-term shortfall with debt).

3. Slash regulation that gets in the way of business and everyday life (employment law, licensing, reporting, tax reporting, health and safety etc etc). Give existing businesses more time to focus on making money. Make it easier for new entrepreneurs to get started. Improve the chances of private sector growth.

4. Keep interest rates low while the debt burden is worked off.”

Unfortunately steps 2 and 3 are mostly or completely non-existent or even going the other way. And step 1 is non-existent in the US, which gives the illusion of a stronger economy in the short term, but the debt continues to grow at a scary rate.

The key to getting out of this global mess is private sector growth, not governments continuing to suck money out of the private domain.

Of course, governments could go further. If they wanted to eliminate unemployment they would simply abolish all the impediments between a person and a job. Namely, they would stop all forms of welfare and support for the unemployed, repeal all employment laws… including minimum wage, overtime, anti-discrimination and so forth. Employers and employees would soon come to terms that agreed with them both.

And if they wanted to spur even more private sector growth they would cut government spending even further. Government, like everything else you can mention in a family oriented publication, is subject to the law of declining marginal utility.

A little of it may be a good thing. A lot of it is a curse. The optimal level of government-directed spending – if there is such a thing – may be as low as 5% of GDP. It is more than six times that now.

The deeper insight is that an economy is merely the way in which people go about providing their wants and needs. Central planners never know what anyone wants or needs. So the more they interfere in an economy – by imposing price controls, interest rates, banking rules, pension programmes… or, whatever – the less of what people really get do they really want.

In other words, ‘whatever it takes’ to make people better off, central banks do not have it.


Bill Bonner
for Markets and Money

From the Archives…

As Draghi Drags the European Crisis On
03-08-2012 – Nick Hubble

China’s Economy – How the Devil is in the Detail
02-08-2012 – Greg Canavan

The Greatest Interest Rate Fix featuring… Mario Draghi and Friends
01-08-2012 – Bill Bonner

What the Credit Boom Left Behind
31-07-2012 – Greg Canavan

The Australian Economy: A Case Study in Weirdness
30-07-2012 – Greg Canavan

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

Be the First to Comment!

Notify of
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 letters@marketsandmoney.com.au