The fundamental error behind central planning is being repeated in China. Wen Jiabao leaves office telling his colleagues that, ‘Unbalanced, uncoordinated and unsustainable development remains a prominent problem.’ China’s planners are past caring, though. And as our colleague Greg Canavan has said all along, China’s real estate bubble could be the biggest and most damaging yet.
But a good apparatchik never lets objective reality get in the way of an inflexible theory. In Japan, the man at the head of Bank of Japan has vowed to take ‘action’ on deflation. Haruhiko Kuroda told law-makers that, ‘If I were appointed as governor…I would do everything possible to get out of deflation.’ His plan is to have the Bank of Japan buy government bonds with maturities longer than three years, and buy a lot of them.
Mr Kuroda, like Mr Bernanke, seems to think that by limiting the choice investors have with cash, you will set them free. That is, if you force people into stocks by lowering interest rates, you will somehow make them spend more money. And the most important belief in this world-view is that more spending is the key to greater wealth. If you stimulate demand, the world will become richer!
One trouble with this belief – other than that it’s wrong – is that Japan has defined deflation in terms of falling consumer prices. The deflation we all think about when we think of the Great Depression came about because of a collapse in the global banking system.
As banks fell, credit creation fell and the money supply shrank. Consumer prices fell because the money supply contracted. This lead to the vicious cycle where cash became so valuable no one wanted to spend it or invest it.
But falling consumer prices alone are not an economic evil. In Japan’s case, we suspect that the falling level of consumer prices has to do with productivity, technology, and demographics. Things ought to get cheaper the more efficiently you use energy and the better technology gets. Commodification is all about lower prices.
And in demographic terms, you’d expect that people who get older spend their money on different things not measured by CPI indices. An older population spends a lot more on healthcare and a lot less on day care. If Japan has a spending problem, it’s because Japan has a demographic problem: it’s old.
But all of these nuances fall on deaf ears when it comes to those who would destroy deflation. In the global empire of fiat money, deflation must always be destroyed. ‘Furthermore,’ Cato the Elder was reputed to say at the end of all his speeches in the Senate, ‘it is my opinion that Carthage must be destroyed.’ In Latin, that roughly translates to, ‘Carthago delenda est.’
By the end of the Third Punic War, the Romans finally did destroy Carthage. Their cross-Mediterranean rival was subjected to the normal treatment of a conquering empire. The population, some 50,000 prisoners by the end of the war, was sold into slavery and the rich farmlands surrounding the City were distributed amongst citizens of the Empire.
For central bankers, deflation means stock prices that don’t rise. If stock prices don’t rise, the public will no longer believe that unorthodox monetary policies are effective, or even designed for their benefit. To perpetuate confidence in fiat money, it is necessary for prices to always rise, because rising prices are often confused with growing wealth.
Yes. Deflation must be destroyed. Even if it means destroying the middle class, wiping out their savings, and unleashing a new era of rising prices, high unemployment, and social instability.
for Markets and Money
From the Archives…
Why China’s Economy is Flashing Red
1-03-13 – Greg Canavan
Heroes and History
28-02-13 – Bill Bonner
Bitcoin: Get Rich or Die Mining
27-02-13 – Joel Bowman
Why Italy’s Gold Hoard Tells You the Precious Metal is Ridiculously Cheap
26-02-13 – Greg Canavan
Stock Prices Are Not What You Think They Are
25-02-13 – Greg Canavan
Download this free report now and discover:
- Why the gold ‘bear’ is set to bite again: What goes down, must go…down. As Jason explains, the gold crunch that kicked off in 2011 may not be over after all. In fact, gold’s plunge may be about to ramp up again. Find out why the precious metal could fall well below US$1,000 in the months ahead.
- The uncut truth on gold: Despite what you might hear, the supply and demand story for gold remains gloomy. But not for much longer. As you’ll see, one specific signals points to a potential bump in demand for the precious metal.
- Patience the key to big gold gains in 2017: Gold and gold stocks will eventually bounce back. But not right now. Jason reveals when you should jump back into gold, and why patience could pay off big time in the next few years.
To download your copy of Why You Should Wait to Buy Gold Stocks in 2017, take out your free subscription to Markets & Money. Simply enter your email address in the box below and click ‘Send My Free Report’.
You can cancel your subscription at any time.