When Prices are Propaganda

The construction phase of the mining boom may be over, but at least the production part will be kicking in. All those conveyor belts, export terminals, freight trains and truck drivers will be busy. A report by the Australian Workplace and Productivity Agency reckons about half of the 78,000 resources jobs lost from construction will show up again in production over the next four years.

Maybe. But Woodside’s two business partners for its enormous Browse LNG project say ‘maybe not’. They’ve walked away from the enormous purchasing contracts underpinning Browse. Apparently the two Japanese trading houses are less enthusiastic about importing gas these days.

We can’t guess why when Japan’s population shrunk by 244,000 last year. In Greece, things are even more dire. Wood stoves have replaced unaffordable gas heaters, creating smog over Athens. It seems civilisation is going backwards.

In other news, Australian capital city house prices are up, the manufacturing PMI is down and the Aussie dollar continues its slide. My, how things haven’t changed so far this year.

In fact, it’s the lack of change that should have you worried. We’re emerging from one of the biggest economic crises in a hundred years and the economies of the world are still barely ambling along. Why?

Well, we never allowed the crisis to run its course. Instead, the world is in the midst of government interference on an epic scale. They’re trying to keep financial markets and economies from having another heart attack. And that constrains the kind of growth you usually see in a recovery.

Everyone is asking when that growth will finally pop up. We have a different question: How long can governments keep their megalomaniac ways up before the crisis comes back?

Countries in Europe are heading for bankruptcy after having to bail out banking systems and then each other. Those governments around the world that can print money are printing money. Banking systems have grown in concentration, making ‘too big to fail’ a bigger problem than ever. And governments have taken charge of investment markets including the all important stock, bond and currency markets. That doesn’t sound like things are getting better.

So why are stocks going up? We just told you. All prices, economic indicators and affordability measures are now propaganda. The currency is too high? Talk it down. The young can’t afford houses? Give them a grant. Qantas can’t compete? Give them a government guarantee. Too much carbon? Tax it. Mortgages too expensive? Cut rates. Share prices too low? Print money.

Governments are taking over everything. And governments don’t like any of the things that make capitalism work. Their policies are compressing risk, creative destruction and instability. Without those, innovation, progress and growth don’t happen. The strange thing is, do you even feel any safer with central bankers and politicians in charge? Or by attempting to compress risk has the possibility of something going very wrong gone up?

We’re obviously thinking the latter. More on why in a moment.

First, credit where it’s due. In 2013, Bernanke and Co. pulled off something that no other central banker in the past could. They created more and more money without the experiment blowing up in their face…yet.

Instead of hyperinflation, economic destruction and the rise of a new Adolf, we got…well not much happened. 2013 was a pretty straightforward year. As we mentioned, stocks were up, house prices were up and there was hardly any inflation. Is all well, or does that sounds like 2007 to you?

Despite the seemingly sound state of things, the propagandists are feeling the need to reassure us that all is well. Why would they bother telling us not to worry if all really is well?

Columnist Wolfgang Munchau made life easy for us by saying these words in the Financial Times: ‘This time really is different.’ We don’t have to worry about bubbles any more. Phew.

His reasoning is even worse than his choice of words. First he says there is less leverage in the system. With margin debt in the USA at record highs and banks bigger than ever, we’re not sure what he means. And it’s interest rates, not just the level of debt in an economy, that trigger a crash. And rates can only go up in most of the developed world. When they do, debt borrowed at low rates will squeeze borrowers like it squeezed sub-prime borrowers.

His second reason for this time being different is that the consensus among central bankers on how to deal with financial crises has increased. Yay. Consensus is just what we need from the unaccountable, unelected and almighty rulers of our financial system. After all, their consensus has so far given us the policies that lead to one of the worst economic recoveries ever.

So yes, all this is shades of 2007, when sub-prime was ‘a tiny, tiny problem’, house prices couldn’t fall and the banking system was sound. ‘This time is different’ they probably said at the time. It was the height of the ‘Great Moderation’.

Today we live in the great immoderation. Leverage is nigh free with interest rates below inflation. Stocks are about as risk free as bonds if you believe in the power of Bernanke. The world has changed. That’s Gillian Tett’s take in the FT:

Eight decades ago, economist John Maynard Keynes reputedly remarked: “When the facts change, I change my mind; what do you do sir?” Investors might do well to consider that question as, looking back at the past five years, it is clear some of the “facts” of global finance have been overturned.

The facts have changed. That’s even better than ‘this time is different’. Next up will be, ‘You can’t handle the truth.’

As Adolf Hitler once wrote in his book Mein Kampf, if the government is going to take over, all information in a country must support government initiatives. Propaganda comes first when the government is in charge. Truth falls by the wayside. And the fact that columnists are working so hard to reassure you that all is well tells you what you need to know about how well things really are.

Of course, Adolf would be the first to tell you that all this doesn’t work for long. If he were a stock broker, he’d be short the markets.

The facts of finance that have been suspended to make this time different include the answer to one very old question. It’s the question that anarchocapitalist Hans Herman-Hoppe says we should all ask central bankers:

Explain to me how increase in paper pieces can possibly make a society richer? If that were the case, explain to me why there is still poverty in the world? Isn’t every central bank in the world capable of printing as much paper as they want? And do you then think society as a whole would be richer?

The answer to that question has something to do with debt. You see, if you’re in too much debt, having more pieces of paper flying around the economy makes that debt easier to pay. Inflation favours the debtor by transferring wealth from the creditor, not increasing it. And nobody is in more debt than the overleveraged financial sector.

So will 2014 be the year all this government intervention goes wrong? It always does eventually. But the timing is a pain in the neck. We’re not even sure how it’s going to go wrong this time. 2007 was a housing bubble because low interest rates pumped house prices. What will it be this time? The stock market is looking frothy, with margin lending at highs. And sovereign debt markets are asking for trouble too.

Take your pick and remember, the facts haven’t changed and ‘this time’ will never be different.


Nick Hubble+
for Markets and Money


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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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