Infinite Pains

First Published 3rd June 2003

‘Jesper Koll, from Merrill Lynch (Japan), told a Minerals Council of Australia conference that reports of the imminent collapse of the Japanese banking system were nonsense. Mr Koll said because interest rates were zero, banks were infinitely wealthy to the point they could buy a country. 

‘”If Japan wanted to buy Australia, it could buy Australia tomorrow,” he said. “With zero interest rates, Japanese banks can fund any asset, whether it’s a good asset or a bad asset. With zero interest rates and zero funding costs there cannot be a financial crisis because the banks are infinitely wealthy.”‘  Asia Pulse

Well, if this were anywhere near being true, of course, rather than taking the deeds to Australia, 3 million square miles of arid, red dust and fetid jungle with a ring of casinos on the shoreline, they might try buying up Japan (again) first.

After all, even as the estimable Mr. Koll was propagating this Mercantilist nonsense, the Asahi Shimbun was running a story relating how Japanese land prices had fallen at their fastest pace in the near 50-year record, reaching to 1982 levels overall, with land for commercial use at a 30-year low, having dropped by 45% in general, and by 73.5% in the six largest cities, since their early 1990s peak.

Nor would the Nikkei be recovering from levels 80% below the 1989 highs, having recently touched a mark first realized way back in 1981.

Why is it that, unlike the natural sciences – where progress can be admittedly hard-won and where innumerable false trails can still lead to widespread delusion about the mechanics of the Universe – economics seems to be a discipline more akin to market gardening where, for every hour expended nurturing and breeding healthier and more nutritious fruits of knowledge, another two must be spent rooting out same old weeds of error which our fathers strove so hard to eradicate?

Before he trots out such ancient paralogisms, Mr. Koll might do well to reflect that if more money and lower interest rates were the keys to ‘infinite wealth’, Alan Greenspan and his peers should be arraigned before the bar of history for leaving needless billions languishing in servitude and destitution, for, surely, the world’s most pressing problems of scarcity could otherwise have been solved by a combination of a more productive use of Governor Bernanke’s printing press and an enforcement of the Islamic and Mediaeval Christian injunctions against usury!

Though modern central banking is based on a corrupted version of John Law’s (flawed) monetary theories, the great Scots intellectual and gambler himself had the sense to note that ‘money is not the value FOR which goods are exchanged, but the value BY which they are exchanged’ – in other words, that, simply acting as a medium – a conduit, if you like – through which commerce is conducted, just enough money to avoid technical difficulties is a sufficiency beyond which no extra utility can be derived.

To see this in less abstruse terms, consider whether business in general (outside truck manufacturing and the supply of brown overalls) would be enhanced if every freight order had to be carried by law in two, not one, UPS van, or if the efficacy of global communications traffic would improve by mandate if we reduced e-mail to the byte-size associated with mobile phone SMS texting.

In every time and place of economic difficulty, the cry always goes up for more and cheaper money, but if people were really aware of the forces at play, they would quickly realize that simply by calling in all the bank notes and scribbling an extra nought at the end of the denomination – which is what they effectively want when they clamour for this – nothing would be directly achieved, except the arbitrary transfer of ownership among people bound by contracts enforceable in money terms.

Harder to convey, we might also persuade them that the true, or ‘natural’ rate of interest is the price of time, the cost of ‘waiting’ to defer enjoyment of consumption goods and services.

Thus, it is only likely to become zero when we are readmitted to Paradise, to reside eternally in a land of untrammelled plenty. In other words, that while infinite wealth (and immortality) may bring zero interest rates, to argue the converse is to believe, as certain influential members of American society seem to, that we can forcibly advance the Second Coming by staging a Hollywood rehearsal of the Apocrypha at the head of a column of Bradley fighting vehicles!

Moreover, where making such property-infringing transfers ARE the point of the Grand Illusion (transfers away from creditors and towards debtors, from ‘sticky wage’ employees to importunate employers, from savers to consumers, and from hard-working citizens to parasitical ruling elites), the Court Jesper has still forgotten one basic law of economics – that of marginal utility.

For even if the first extra unit of money could somehow do some real good, the next one would do less, and the next one less, and so on, ad infinitum, until the money, being in infinite supply, becomes a ‘free good’ and is therefore worth nothing – a process most nearly approximated in that wealth destroying pathology known as a ‘hyperinflation’.

Notwithstanding this, there will be no constituency for reducing the torrent of extra money creation and artificially-lowered interest rates anywhere inside the Beltway.

Not when our Overlords have a perpetual war to fight and not when the actuarial scale of their indebtedness is reckoned to be a cool $44 trillion even before they get started on the next member of the Axis.

At least that’s the number whose broaching may have cost Paul O’Neill his job after he commissioned a team, led by Jagadeesh Gokhale, a Federal Reserve senior economist, and Kent Smetters, then deputy assistant secretary for economic policy at the Treasury, to work out a net present value for the government’s future liabilities using conservative (sic) assumptions regarding future longevity, the growth in federal health expenditures and discretionary spending, and likely labour productivity.

Gokhale and Smetters also calculated how much would taxes have to be raised – or, har-di-har!, expenditures be cut – on an immediate and permanent basis to close this gap and came up with a politically unpalatable menu of (A) raising federal income tax collections by 69 per cent; (B) raising payroll tax collections by 95 percent; or (C) cutting Social Security and Medicare benefits by 56 percent.

Choice (D) was not just politically difficult, but mathematically so, too: cutting federal discretionary spending by more than 100 per cent, though a shut-down of all but the barest, most irreducible minimum of government, followed by a comprehensive privatization of all its assets might, in fact, accomplish just that feat, to our lasting benefit.

(Incidentally, no-one seems to have mentioned that the Cost of Empire – all those troops exciting global animus by manning ‘750 bases in three-quarters of the countries of the earth’ as Niall Ferguson put it – is roughly the same as that incurred by Social Security each year)

Add to this the dire states-level picture, where tax revenue fell 5.6 percent across all states last year, ‘the worst revenue performance we’ve seen,’ according to the compilers of these numbers at the Rockefeller Institute of Government, who also indicated that the tax take has been flat so far during fiscal year 2003.

This shortfall, compounding the effects of long years of prodigality during the Boom, means that ‘more than 30 US states’ face long-term budget shortfalls, according to another study filed with the National Bureau of Economic Research last year and updated for the Financial Times.

‘Only 13 out of the 50 US states’ – comprising only around a fifth of the total population – ‘are in a fiscally sustainable situation,’ said one of its co-authors Daniel Bensendorf.

Thus, with the upcoming retirement of the Baby Boomers – which will soon begin a process of doubling those eligible for welfare payments and thus of crushing the estimated 15% larger working population beneath the car of this grey juggernaut – it is clear the US needs some combination of the generation of more revenues, the lesser payment of beneficiaries and an increase in the scale and ability of the workforce, and it needs it fast.

The peaceful and sustainable means to achieve this is to encourage a sense of realism among the populace about their true status and then to inculcate a sense of personal thrift and responsibility as a remedy, thereby allowing government to bow out of the old age business, while releasing extra real capital resources with which to effect the needed genuine enhancement of the productivity of the labour force.

Unfortunately, that has as much chance of happening as Paul Wolfowitz has of joining the next Haj.

The dishonest means – and the one whose practice is now a reinforced objective of current monetary policy – is to reduce real ‘entitlements’ and to hide the tax and debt burden through a process of inflation and dollar depreciation, whether this impacts wage rates or asset prices, and hence income returns or capital gains receipts.

All in all, another case of infinite money meaning infinite, if concealed, penury.

With even more rapid immigration an unlikely panacea for the shrinking relative size of the workforce, given the inevitable frictions this would entrain, as well as its impact on the self-fuelling paranoia of the Festung Amerika crowd at the AEI/PNAC, this means the indentured workforce must remain abroad even as more are yoked to its plough.

For methods two and three not to conflict, this means that all other nations must be induced into prostituting their own currencies at a rate commensurate with the process at work in the US, so that the dollar’s debasement does not become too objectionable by comparison, else foreign workers will not continue to squander their savings on pampering the Western gerontocracy and their over-consumptive offspring.

There are, indeed, hints that the upshot of the G8 summit – as contained in the various central bank submissions to the ongoing International Monetary Conference in Berlin this week – is that, fearful of the pointed threat of a unilateral dollar devaluation, exactly such a policy will indeed be prosecuted in the coming months.

However, if this relatively non-violent, but no less profound, aggression against individual property rights fails to take hold, further resort will have to be made, by this, as by all previous economically impaired Empires in history, when their characteristic inflation has destroyed their middle-class productive base, to ultima ratio regium – and that which cannot be gained by voluntary exchange will be taken as booty by force of arms.

Infinite money will equate, as ever, to infinite mischief.

Disclaimer: This document is sent from Capital Insight Ltd solely for information purposes and does not constitute any recommendation to buy or sell any security or derivative. The data contained in this report is derived from sources we deem reliable, but we do not accept responsibility for its accuracy, completeness or reliability. 

Monthly Insight & Strategy –  January 2003

Four Headings and a Funeral

1 Willy Chocolate’s Wonky Factory

All the Dads in Bourneville make confectionery and, as a result, all the boys and girls in the village have the best sweet shop in the world in which to spend their pocket money.

Every day you can see them, their smiling faces pressed up against its panes, shrouding its wonders in the fog of their eager breath against the glass.

But, if you look closely, you will see – a little way back from his friends – the forlorn figure of a boy, his face glum, hands thrust deep in his pockets, kicking listlessly at the tin can lying at his feet.

If you were to ask him, he would tell you he is sad because he, alone of all the children in the village, cannot buy any sweets because he doesn’t have any money and that the reason he has no money is that his poor father does not make enough to spare on such trifles.

Enquire further and you will find that the reason his father is so indigent is that he makes sweets which very few are willing to buy, so he, in turn, has very little to spend – especially after buying his sugar and flavourings, his packaging, and the oil for his cooking stove, not to mention the sum he must find for the wages of Jake, his helper, or the rates he must pay to the Town Council for his little shop.

Being a kindly soul you seek to console the child. Now, now, you say to the boy, ruffling his hair with your hand. Don’t be so downhearted, I have an idea which will enable you to buy all the sweets you want in no time. Take me to your father at once.

There, you explain that you are an eminent economist. Indeed, you declare, with just a hint of pomposity, your pronouncements on the subject have been carried in the pages of the New York Times itself. Thus you can instantly diagnose the problem and almost as quickly effect a cure.

What is wrong, you say, what is preventing your son from being able to enjoy his sweets like all the other children, is the lack of something you term ‘final demand’.

But, no fear! you exclaim. Together, we can soon rectify this harmful shortfall!

Firstly, we must persuade the other parents that they are giving their children too little pocket money and, then, you yourself might think to borrow some cash – pledging your shop as security perhaps – in order to allow your unfortunate son the rare pleasures of an exercise of ‘purchasing power’.

Don’t worry about the debt, you say, for all that extra spending money passing across the shopkeeper’s counter will mean your sweets will soon begin to sell and shortly you will not only have paid off the debt, but you will be making a steady living, into the bargain.

A week or so later, your business (actually, being a Times columnist, this is just as likely to be someone else’s business) takes you back to Bourneville and, as you stroll into the town’s precincts, you anticipate the welcome you will receive from your new friend, the boy, now that he can have sweets just like all the other children.

That being so, you are a little disconcerted when you hail the lad from across the road, only for him to frown at you in recognition, stick out his tongue and run away!

You are still pondering upon the inveterate bad manners of youth when there, in the very spot where the child used to mope, stands his father, in seemingly no better a frame of mind that that which used to afflict his son.

Here he comes, Mr. I’m-an-Economist, the fellow sneers and, choking back a remonstrance against this discourtesy, you notice he looks shaven and unkempt, as if he hasn’t seen soap or hot water for a while.

Asking him what ails him, you are surprised to hear that he has lost his business and his home. How? you press him uncomprehendingly. Did you not do as I bid you?

Oh, yes! We did that all right, the man replies. Pocket money was doubled and I borrowed several weeks’ worth against the value of my house – my workshop only being rented, you understand.

At first things looked fine, more money was spent in the sweet shop and my sales even increased a little.

Unfortunately, since no-one actually liked my wares anymore than they did before all this rigmarole, nearly all the extra money went on others’ products.

Worse still, all the other confectioners started paying more for sugar and oil and the like, while the sweetshop owner offered my landlord more rent if he’d turn my workshop over to him so he could expand, and the landlord insisted upon a raise from me if I wanted to stay. Before long I was worse off than I had ever been!

Finally, I had to ask my trusty assistant Jake if he’d accept a wage cut so I could afford to keep him on, but he refused point blank. In fact, he said, the old boy who ran the existing sweet shop was looking for a hard-working young man like him to run his new outlet and was willing to increase his salary to tempt him away, an offer he was minded very much to accept.

When my son asked me for pocket money that week, I had to tell him not only would there be no pocket money, but no bread either, most likely, and that I’d had to sell his toys and his books to try to delay the bailiffs from repossessing our home, since we now had no reliable source of income – only what little I could get from the errands I was running from the affluent sweet shop owner.

I told the boy we must be suffering another failure of ‘final demand’, like you’d explained before, but my son looked at me strangely and shook his head at that.

But, Dad, he said, I never did quite understand that idea.

I thought all that was messing us up was just that you were making the wrong sort of sweets to sell, but your economist friend seemed to think that the problem was that we children had totally satisfied our appetite for all sweets and chocolates.

Hasn’t he ever been into Mr Fernyhough’s Candy Wonderland?

Moral of the Story: Inflating your way out of a slump is, as Mises said, like trying to undo a traffic accident by reversing back over the victim.

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Legal Disclaimer: This document is sent from Capital Insight Ltd solely for information purposes and does not constitute any recommendation to buy or sell any security or derivative. The data contained in this report are derived from sources we deem reliable, but we do not accept responsibility for its accuracy, completeness or reliability.