The Same Old Mindless Mantras

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Now, it doesn’t take a degree in economics to be aware that whenever you open a newspaper, or listen to some post-teenage scribbler pontificating on TV and radio about the state of play in the world of business, we always hear the same old mantras being mindlessly repeated.

If business slows, interest rates must be cut and more credit granted.

If possible the currency must be manipulated lower in value to provide a tacit form of export subsidy and to impose a subtle kind of import tariff, at the visible expense of our business partners and commercial counterparts abroad, but also at the often overlooked one of our shoppers (and non-exporting business owners) at home who have to pay more for everything as a result.

Then, if consumers can’t actually EARN any more money through hard work and application, they must borrow it and spend it anyway. After all, the more people save, the poorer they get — at least according to Keynes’ infamous and highly erroneous concept of a u2018paradox of thrift’.

Next, the central bank must do all it can to prevent prices falling, for that is the evil of u2018deflation’ as it is loosely — and wrongly — termed.

If all else fails, the government should spend more money than it can thieve from your pocket (never TOO much of a hardship for the office-hungry politicos eager to look important and to buy votes). Nor should it be too fussy about what it spends the money on, as long as it the money is spent.

All of this — though unthinkingly accepted by the vast majority of pundits and policy makers today — is wrong, wrong, wrong — as any housewife balancing her family budget, or any small business owner trying to make ends meet would agree if we moved this discussion out of the realm of that indefinable and often unfathomable concept of the u2018Economy’ with a large, aggregated u2018E’ and actually applied a little basic arithmetic and a smattering of clear logic to their own individual experiences.

Among the many faults of this approach, it assumes consuming is more important than producing, as if the rats in the barn do us a favour by making sure we don’t have any surplus corn left over with which to plant an extra field or to feed an extra plough horse.

It also confuses mere money with real wealth and it argues that the heavy hand of the State has a right to subvert our freely made choices about how much we save, rather than spend, and that it also has the right to spend our money for us, in order to shower benefits on some mythical Collective.

So what if we were to show you that, here and now, over the fifteen months since the Spring of 2002, there is a real life example — not just some theoretical argument — to show that today’s orthodoxy might just be a busted flush?

Consider the case of the statistic called Gross Domestic Product — or GDP — which is so widely bandied about (and often given the misleading short-hand of u2018growth’, as if simply ringing a cash register more frequently meant anything was actually being done about improving our lot in life)

Well, in poor, benighted Europe, the proportion of GDP which results from private activity has only edged up 0.7% since March 2002 — and, as the headlines never cease to remind us, governments there have not exactly been slow in spending money their citizens don’t have, especially in the bigger (and sicker) economies.

As you might also be aware, short-term interest rates in Europe have been cut to 2% — barely positive at all, after you allow for the impact of generalized price rises on the value of Jacques’, Hans’ and Jan’s money and to what must seem like a waking dream to Juan, Fabio, Dimitri and Domingo.

Even in the US, this private GDP datum has only risen 2% in these same five quarters (if you trust the rather suspicious price-and-quality adjustment factors) and then partly because the population will have grown by around 1pct in the same interval, meaning bread-per-mouth probably only went up by a dismal 1%—1% in that time.

Again, a cursory glance at the newspapers will tell you that borrowing has not been restrained there, either, in the Land of the Free Credit, thanks to a Federal Reserve which has slashed rates to generational lows of 1% — well beneath the ongoing rate of erosion in Hank’s money!

Check again and you will see much hand-wringing and gnashing of teeth, too, about the size of the budget deficit being run up by Dubya-Dubya III and his minions, a true accounting of which shows that they are presently overspending by close to two typical ANNUAL family incomes for EVERY SECOND of the working day!

Over here in the UK, our 130 billion personal borrowing spree and the besmirching of Public Prudence’s honour by that music hall villain, Chancellor Culpability Brown, has seen a gain of just over 2% recorded since last March, similar in degree to our American suzerain’s performance

But if you want to know which country has been leaving the three of these in the dust, it has been that fallen giant, Japan, where non-government GDP has risen just a smidgeon under 6%, nearly 2 times as fast as America and the UK and a long street ahead of Europe.

Moreover, this growth will have been shared by very few extra people, since Japan’s population is, if anything falling — a phenomenon widely bemoaned, but surely a blessing in that overcrowded archipelago.

This means that ricecakes-per-mouth may well have advanced more than four times as fast as bagels-per-mouth, stretching the gap across the Pacific even further.

Now, given that:

  • the trade-weighted value of the Yen is unchanged over that period (there has been no currency devaluation)
  • that money supply growth there is the slowest of the four and that bank lending is indeed contracting (little extra credit is being created)
  • that the people there save money — and lots of it, the anti-social HOARDERS!
  • that prices have FALLEN (Gasp! Deflation!)
  • and that government spending has actually gone DOWN (Yes, I know — in Japan, of all places!)

Do you think that perhaps there’s a lesson here to be drawn by Keynesians everywhere?

Would you like to bet a croissant to a Courvoisier that none of them do?

Sean Corrigan [send him mail] writes from London on the financial markets, and edits the daily Capital Letter and the Website Capital Insight. He is co-manager of the Bermuda-based Edelweiss Fund.

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