Playing ball

The bureaucracy versus you

by D. Schlichter

The global finance bureaucracy is clueless. Its policies are failing. Yet, the bureaucracy is not giving up. The same tired and idiotic explanations for what is wrong with the economy and what the economy needs are regurgitated with numbness-inducing persistency: The economy is in need of more, wait for it, “demand”. Not necessarily your demand or my demand. In fact, any demand will do. And since you and me are obviously failing to produce the demand that the economy demands the required demand has to come from the state. It can come from government spending, preferably debt-financed, or from the central bank printing more money and handing it to the banks. And the wider public – those easily manipulated monkeys that the bureaucracy obviously thinks we are – will willingly spend, borrow, and consume, and invest, and consume more.

Is anybody still taking this tiresome nonsense seriously? Does anybody really believe that the economy is just some tired old mule that is simply in need of a kick in the backside to get going again? Or, when you wake up on a Monday morning and feel a bit sleepy and you are longing for a strong cup of coffee – is that how the economy feels? Does it just need a bit of –stimulus?

I tell you what is wrong with the global economy: the global bureaucracy. That is what is wrong. Decades of rising taxation, increasing regulation, and persistent redistribution have fundamentally and structurally weakened the major economies of the world. Underneath the glittering razzmatazz of modern technology lies a society that has been sapped of its capitalist juices. For decades we have been eating into our capital stock.

To make matters worse, this persistent structural decline has been masked and indeed furthered by another evil the bureaucracy has bestowed on us: a constantly expanding supply of fiat money, astutely channelled through the banks and wider financial industry. For decades this has helped project an illusion of savings availability while it has simultaneously weakened the all-important propensity to save and to create lasting capital. A constantly expanding money supply, artificially low rates and cheap credit have encouraged borrowing, leverage and debt-accumulation on a gigantic scale, and have fed various asset bubbles, which in turn have further enhanced the illusion of wealth while diverting resources away from where they could have generated real prosperity. At the same time, a new generation has been raised on the belief that wealth comes from consumption, not saving and production, and that you can vote for it.

The bureaucracy is the problem

Ludwig von Mises and Friedrich August von Hayek demonstrated two generations ago that EVERY money-induced credit boom must end in a bust. Their theory was developed at times when even state paper money was still anchored to gold. Their theory was considered a business cycles theory, which to modern ears sounds quite innocuous. In the olden days it explained the ups and downs of the economy. What that term doesn’t fully encapsulate but what the theory nevertheless explains very well are the much larger dynamics that have been unleashed since 1971, when the last connection between state paper money and gold was severed and the entire world was put on a system of fully elastic, constantly expanding fiat money under central bank control. Say hello to the credit mega cycle!

Remember, the last time high real interest rates were allowed to cleanse the U.S. economy of the distortions of administratively cheapened credit was in 1979/1980 when Fed chairman Volcker – for a short time only – stopped the printing press. Since then, and until about 2007, we had been in a three-decade long relentless credit-expansion. The credit boom was beyond anything Mises, Hayek or anybody else of that generation could have envisioned – sadly, so is the coming bust.

The dislocations (weak banks, excessive levels of debt, distorted asset markets) are palpable everywhere. The credit boom has now ended. The bust has arrived. And thanks to decades of interventionism in other fields – regulation, taxation, redistribution – the real economy that is emerging from underneath the credit-funded spectacle that diverted attention from it for so long looks quite ugly. High unemployment and near-zero growth? Who can be surprised if half of most major economies now consists of government spending and the other half is severely hobbled by ever-increasing regulation and bureaucratic meddling.

The economic disaster that is now upon us is entirely the result of misguided policy and bad theory. The political class and their economic advisors are responsible and they should abdicate but like all political authority they are clinging desperately to their seats. And, of course, they still enjoy the unwavering support of their cheerleaders in the media: the likes of Paul Krugman of the New York Times, and Martin Wolf and Clive Cook of the Financial Times who always see the solution to policy-induced disaster in new policies, and ironically, policies of the same ilk as those who got us into this mess in the first place: If only the bureaucracy printed a few additional trillions of paper money and monetized a few more dodgy bank assets, or if only it spent a few trillion more on various government programs – the old charade could be erected again! Fat chance.

If only the public believed again…

But you know what the real problem is according to the bureaucratic elite? It is you. The public. Because some of you naughty little children have finally dared to look behind the curtain and discovered that there is no Santa Claus. The emperor has no clothes. In fact, the bureaucracy has been spending your money, your taxes, your savings, your future income, and now they can only keep the show on the road for as long as you keep accepting the paper money that will have to be printed in ever larger quantities to support the ever-growing number of assets that you, the public, are no longer willing to support. And the bet of the bureaucracy is that you will keep accepting that paper money at face value ad infinitum. After all, it is the bureaucracy’s final policy tool, the last arrow in their quiver.

This is the problem for the bureaucracy: You, the public, are no longer playing ball. You are selling or, at any rate, not buying with your hard-earned savings the bonds of Italy, Greece, and Portugal because you realized that these countries would never repay. So the bureaucrats in the ECB have no choice but to use the printing press to correct this failure of yours. And because you have woken up to the problems in the bloated banking sector and are selling the bonds and stocks of banks, the bureaucracy has to support the banks even more adamantly. And U.S. real estate. And U.S. mortgage bonds. After all, the bureaucracy knows best. Specifically, it knows what is best for you, the public, and it must therefore protect you from your own mistakes – such as getting all cautious with your pathetic little savings and not spending enough. So the bureaucracy has to spend it for you.

Of course, the bureaucracy cannot talk about a failure of the public. Whenever they want to criticize the public they call it “the market”. And with the help of their adulators in the media they can weave a new fairy tale in which the villain is “the market” and the bureaucracy is doing all it can to save you, “the public”, from evil market forces.

Everywhere, the central bankers now have to correct “wrong” market prices. The Fed had to print trillions to prop up the prices of mortgage-backed securities and to openly manipulate the market for Treasury-securities. The ECB is printing Euros every day for the sole purpose of lowering the funding costs for selected governments because “the market” fails to fund these states at “appropriate” levels of interest rates.

Do any of these moves by “the market” really look strange? Do they not simply result from the entirely rational behaviour of wealth-holders who have finally woken up to what’s going on and who simply try to protect their assets? In my view it is entirely rational that people reduce their exposure to bloated banks and hopelessly profligate governments. Protecting your wealth increasingly requires strategies that go against the attempts of the political class to sustain a little bit longer the unsustainable structures that are entirely the result of their policies. Make no mistake. If you are trying to protect your wealth you are increasingly an enemy of the policy bureaucracy.

We need to talk about Switzerland

Let’s take Switzerland as an example. Here is a country that by the degraded standard of modern mass democracies has been run prudently. No need here to print the local fiat money in excess in order to keep government spending going. So, it was quite rational for those who were seeking a safe home for their cash to park it there. Understandable but ultimately still a mistake. Every fiat money is a creation of the state and is thus used for political purposes. Independent central banks are a logical impossibility. Switzerland has an export industry that would appreciate a weaker Swiss franc right now, and that industry has political clout. Then there are the big Swiss banks which lent gazillions of Swiss francs to borrowers in nearby countries, such as Hungary, to whom the low Swiss rates were so deceptively appealing, and who are now being annihilated by the exchange rate squeeze thus providing the prospect of substantial losses to the Swiss banks. It was certainly in the interest of the big banks that the Swiss National Bank would come out and put a lid on the rise of the Swiss franc.

In a way, it was inevitable. But I admit that even I was a bit surprised that the Swiss bureaucracy would steep so low as to adopt the pathetic rhetoric of their counterparts in other central banks and finance ministries to mask its politically motivated maneuvers. Of course, “the market” got it wrong. It was “over-valuing” the Swiss currency, and such an “overvaluation” was no longer to be tolerated. And by the way, ”the market” should not “underestimate our resolve” to set it right.

Thus, in the global race to the bottom among the major paper currencies of the world, Switzerland will no longer stand on the sidelines. The hard-working Swiss people, so the top echelon of the Alpine republic’s finance bureaucracy has decided, will no longer be deprived of the various and obvious advantages of currency debasement which are already being reaped in abundance by the populations of the United States, the United Kingdom and the not-yet-unified Eurozone.

The Swiss episode has clearly exposed the fallacy of currency competition. For the wealth-holder, choice of state paper money largely means the choice of which bureaucracy is going to rob you.

In turn, the Swiss will over time reap the “benefits” of their strategy in the form of more debt, distorted asset markets (such as the one for real estate) and misdirected economic activity. Inflation is the endgame. To think that lasting prosperity and sustainable employment will result from money printing is the type of wide-spread idiocy that until last week we considered beyond the pale for the clever Swiss.

I think that those who try to protect their wealth are presently making another mistake. Many still seem to consider the sovereign bonds issued by the U.S. government and the German government as safe havens. This involves a gigantic error of judgement. That the U.S. is already caught in some inescapable fiscal death trap should not require much explanation: $ 1.5 trillion deficits as far as the eye can see! In the case of Germany it is bizarre how the European debt crisis has somehow bestowed on Germany the image of economic powerhouse. Fact is that Germany is structurally weak and fiscally unsound. It doesn’t have the money needed to bail out the other countries. What it does have presently is better borrowing capacity on international markets. As part of the coming fiscal and transfer union, others will borrow on Germany’s credit – or what will be left of it.

At below two percent yield on 10-year Treasuries and 10-year Bunds, both are the short of the century. Mark my words.

Not so Stark.

A final word on the resignation of Juergen Stark, the German bureaucrat who was chief economist of the ECB and resigned last Friday, officially for personal reasons and unofficially over objection to the ECB’s bond buying program. Mr. Stark was a career bureaucrat who was used to making political compromises throughout his career. Supporting the EasyB’s new role as lender-of-last resort to European governments was one compromise that – toward the end of his career – he chose not to make. However commendable you might think this is it doesn’t matter one bit. He will soon be forgotten. The German policy elite has already found a new career bureaucrat in the Social Democrat Herr Asmussen who will probably not have Herr Stark’s reservations. Does anybody remember Karl-Otto Poehl, the Bundesbank president who resigned out of protest over Chancellor Kohl’s disastrous unification policy? He was right on the economics but the political elite moved on regardless. Today Herr Poehl is a footnote.

Also remember that once Spain and Italy are about to go bust the claims on German transfers or the fallout for German banks will be substantial enough for the German bureaucracy to sign off on further debt monetization from the ECB.

Attempts to protect your wealth by finding the “right” paper money or the “right” government bond market appear futile to me. I still believe that gold (and maybe silver) is your ultimate self-defence asset. But here, too, the bureaucracy is itching to get in your way. Since September 1, it is illegal for precious metal dealers in France to sell you metal for cash. One thing has to be said for Switzerland, it still seems to be a decent place to store your gold.

In the meantime, the debasement of paper money continues.