Clear Cutting Ahead

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If it were a commodity, consumer confidence would clearly be a sell. Having spent nearly a year oscillating around the mid point of the long climb from the 1991 slough of despond to the July 2000 peak of the mania, the index of current conditions has just crashed through to hit an 9 year low.

If you could trade it on Chicago, the pit would be a frenzied vortex of selling, as panicked longs fought to liquidate losing positions and sharp-toothed hedge funds sought to exploit weakness by driving the market even lower.

But, unfortunately, you can only trade consumer confidence as a synthetic, meaning you buy the beejaysus out of T-Bonds and you dump all those equities which you told yourself for the fifteenth time were actually going to build a real, sustainable rally, this time, honest.

The employment diffusion index (jobs deemed easy, less jobs hard, to find) has dipped to minus 12.5, while net business conditions have dropped to minus 12, the first measure 58, the second 51, full points off their late Summer 2000 peaks.

Isn’t it amazing what a 2-year bear market can do, not just to your self-esteem, but also to your perception of your economic status.

Now, remember that, according to one branch of theory, tax cuts were supposed to have revived the economy by now. Uh-uh.

According to another, public sector deficit spending was supposed to have been an u2018automatic stabilizer’ and revived the economy by now. Uh-uh.

According to the most widely held myth of all, aggressive interest rate cuts and an encouragement of private sector deficit spending was supposed to have ensured u2018effective demand’ (hopefully lowering labour costs for businesses through their dumb workers’ money illusion) and revived the economy by now. Uh-uh.

So, if Greenspan and O’Neill, or McCulley and Roach, were at bat, these three strikes would presumably have sent them crashing out of the World Series and hopefully off to the Bush leagues (Ooops! Did we really say that?)

Unfortunately, the way this is going, all we will be left with is the most damaging misapprehension of all — that war was what ended the Great Depression. I bet you Saddam’s private economist, along with the rest of the Axis of Evil, was fervently hoping the u2018footfall’ would hold up in the malls of suburbia this holiday season

But why didn’t any of this work?

Partly because solutions one and two were run together and so just got in each others’ way.

For tax cuts to be effective, they need to be large, sustained, targeted at making saving, not consumption, attractive and fully balanced by offsetting spending reductions. It would also help if they were leavened with a widespread regulatory repeal to aid the wealth creators in their task of enriching us all.

In order to do any good, when Keynesian Corporatism (not true capitalism!) founders in its own contradictions, you have to refloat it with a large dose of free market, Manchester liberalism, not weigh it down with the ballast of voodoo economic nostrums and the anchor-chain of State titanism.

Hiking appropriations for the Crusader weapons system (however delicious its name sounds to the Strangeloves on the Defense Policy Board) is not the way to enhance entrepreneurialism: nor is the subsidizing of sauropod steel magnates likely to foster a burgeoning of small business start-ups.

But, if the prevalent half-reasoning will grudgingly accept that the first two applications may well weaken, rather than invigorate, the patient, it clings much more tenaciously to the third treatment, for it is still much easier to persuade people that a transfer of resources and economic decision making to government is likely to do harm, than it is to get them to see money is not wealth and that credit is not capital, much less that a superabundance of the first of each pair can only further deplete what remains of the last after the depredations of the Boom.

All along we have argued that the Fed’s best policy response back in 2000, after it had finally slowed that violent inflation of monetary aggregates and financial asset prices which it had previously done so much to procure, would have been to have sat with rates at 6 percent and to have let the Boom liquidate itself.

But, sadly, no government or quasi-government agency will ever just sit there doing nothing — for in that event, we might notice government promotes the public good best through exactly such masterly inactivity and then where would all the bureaucrats and court lackeys and power brokers be?

Simultaneously, the Fed should have been on hand to buttress any u2018systemic’ weakness such as might have erupted when the instabilities at the heart of our deeply corrupting financial practices were revealed — though not without exercising a rigorous and disinterested practice of triage on the wounded as it did.

Of course, any such ruptures would then have presumably been all the less threatening, since they would then have involved around $5.5 trillion less in outstanding debt in the US alone, as well as some $33 trillion fewer OTC and exchange-traded derivatives, and over $1 trillion less untested credit derivatives, globally.

But, as they say on the Merc, we can’t broke backwards, and they can only make us more broke going forwards, so it seems instead that we are now just one less-than-robust series of economic numbers away from another futile 50bps Fed easing.

Much good may it do us — other than to provide a minor mitigation of the cash flow drain of debt service to those with the best credit ratings, or with a book the most reliant on short-term funding. Much good may it do us — other than to jeopardize our Asian suppliers’ faith in our credit and risk our currency’s decline.

Let us forget any more fundamental analysis, but simply let’s ask ourselves the following:

Do we believe that Japan needs to bite the bullet and to provide a realistic — if long overdue — reckoning of assets and liabilities, of genuine profit and hidden loss, and then to ruthlessly extirpate the diseased saplings it finds, such that the forest may flourish once more as the survivors exploit the sunlit and soil now freed for them?

Very few will answer, u2018No’, to that, I guess, so the second question is this:

Why do we have to get ourselves into a Japanese style situation before such evident common sense becomes a matter of policy for us, too?

Do we think that because the State keeps issuing us with logging permits, while exhorting us to make sure our huts and halls are fully heated all through the winter, that it can make more healthy trees appear in the copse, or persuade the rotten boughs of the damaged to burn more brightly?

No. All it can do is encourage us to aggravate the scarcity which confronts us.

All it can do is make worse the shortage to which our bad practices of forestry have already given rise — a dearth encouraged by the effect of too many State permits in issue at planting time, something which had the effect of allowing the credulous (and the crooked) to take up too much suitable land, and to plant too many of the wrong species, in the first instance.

What we should do in such a case is to conserve what fuel we do have and then to sacrifice a few extra degrees of comfort, in order to supply those who have what seem like reasonable hopes of helping us avoid these straits in the future, either by increasing the yield of next year’s felling, or by building us less draughty accommodation, or by making tools with which to spin us warmer clothing.

But, no, the Fed and its peers have instead encouraged us to cut down trees to make our dwellings even larger and less well insulated, or to build elaborate sleighs with which to canter down the forest paths. Worse, some of the Emperor’s men have plans to instigate a huge Bonfire on which to immolate his father’s foes.

So, here we are. Coming to the solstice with the winds turning bitter, and the woodland is already a bare stubble of stumps amid a carpet of sawdust. It makes us shiver just to look at it.

No wonder confidence is also freezing over.

Soon, however, an optimistic messenger will arrive from the palace with yet another batch of logging permits, enjoining us that all will be well as long as we use them freely.

And it is true: they may have their uses even now. They may not substitute for a cord or two of good, sweet wood, but they might yet bring our huddled children cheer — by giving off a momentary flame when we burn them in our hearths, thankful that there seem to be no limits to the number of these that can be produced….

Sean Corrigan [send him mail] writes from London on the financial markets, and edits the daily Capital Letter and the Website Capital Insight.

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