In his latest piece, Frank Shostak approvingly quoted Jeff Tucker’s earlier rhapsody as follows:-

But as wonderful as the daily shifts and movements are, what really inspires are the massive acts of creative destruction such as when old-line firms like Lehman and Merrill melt before our eyes, their good assets transferred to more competent hands…. This is the kind of shock and awe we should all celebrate. It is contrary to the wish of all the principal players and it accords with the will of society as a whole and the dictate of the market that waste not last and last. No matter how large, how entrenched, how exalted the institution, it is always vulnerable to being blown away by market forces — no more or less so than the lemonade stand down the street.

While I approve of the sentiments, I am forced to demur at their application. “More competent hands”? Do me a favour! More like hands privileged with more political clout, greater regulatory support and enshrouded in more opaque accounting regulations…

JPM has more risk on its books than any other (large) bank in America, both numerically and proportionately, yet it has somehow come thru’ with shining colours. Was this all due to the superlative entrepreneurial skill of its management? It hardly seems likely. Citi paid an enormous price to buy a hedge fund manager who promptly closed his old shop the minute the embarrassed departure of his ‘dancing queen’ predecessor left him in charge. BoA? Well, who knows whose mess it was they were actually covering up when they took on that nest of vipers which was Countrywide?

Nor have Merrill’s assets been ‘transferred to more competent hands’ either – they have been bailed into a more friendly fold where the same senior managers who got them into the mess (and who were probably selling much of their exposure to their new co-managers over the past few years) will still reap fabulous remuneration as the guiding lights of the new bastard offspring.

The US Govt has effectively decided that its corporatist national champions in the coming forced consolidation will be JPM, Citi, BoA and now GS and Morgan Stanley – the latter pair newly transformed into banks where the teat of succour runs more profusely and where the Fed/FDIC accounting regulations are less onerous than those of the SEC; where they can sit, jaws agape waiting, not to be explicitly bailed out from their funding difficulties, but to pick up cheap deposits from the authorities at the expense of an arbitrary denial of the contractual rights of debt and stock holders in those small fry firms who are seized the moment they totter.

I have to say this next piece of special pleading also made me involuntarily spit my Assam half way across the room, too:

‘Only a few weeks ago, we saw that the liquidation of a large bank such as Lehman Brothers and the sale of Merrill Lynch did not cause massive disruptions. In fact, the adjustment was swift and almost invisible. The reason for the smooth adjustment is that the market was allowed to do its job. If government and Fed bureaucrats had tried to intervene with bailouts, the whole process would have taken much longer and would have been very costly in terms of real resources.’

No massive disruptions?!? A ‘swift and almost invisible adjustment’? The god of the market doing its work?

We had a $200 billion run on money funds; a plunge in many commodity prices; a jump in credit risk premiums to unprecedented levels; renewed stresses at regional banks; bail outs in all of the UK, Russia, Iceland, Denmark, Belgium, Germany and, effectively, Ireland; a near global criminalisation of short selling; wild and damaging gyrations and more central bank interference in foreign exchange; what is feared will be the decimation of whole cohorts of hedge funds (many of whom have not only had their business model outlawed but had their assets frozen at Lehman, their prime broker); a further freeze of money and capital markets; the launch of government stock support schemes in Asia and, even before yesterday’s rout, what I think is now in excess of $1 trillion of global central bank injections to try – so far to no effect – to prevent the whole house of cards falling in one quick heap!

I confess that I don’t quite see where the ‘free market’ was at work in any of this. Moreover, I should well imagine that it might just prove ‘very costly in terms of real resources’, indeed, by the time its ramifications become clear. As Fritz Machlup once wrote: “the bust always starts as a monetary crisis and then becomes a real one”.

To call a spade a spade, Lehman was an ill-judged gamble at restoring a little macho credibility to a clueless team of dirigistes which has been swinging drunkenly between paying handsomely for Bear to be folded into JPM, putting FNM/FRE into ‘conservatorship’ (whatever THAT actually means in practice), semi-rescuing AIG, summarily dumping Lehman (on the ludicrous grounds that, unlike the others, the market ‘could see it coming’!), brokering a Merrill wedding, elevating Goldman to unimpeachability, expropriating WaMu debtors, then taking over Wachovia as a fictional ‘open bank’.

All of this, too, despite a long litany of expressed false optimism and prevarication, not to mention the subtle diplomatic pressure aimed at inveigling America’s long-suffering foreign creditors into pouring more money into these sumps of moral corruption and managerial ineptitude. Failing a positive response from their would-be ‘marks’ abroad, the domestic authorities have meanwhile broken every rule and violated every custom in the urge to lend to them on ever easier terms, all without once demanding that they account consistently for what is on their books as a quid pro quo.

Therefore, to add to liquidity problems, deep suspicions about the asset side of the balance sheet, and worries about the future income stream, all this flip-flopping has now engendered an even more debilitating opaqueness about the regulatory treatment of the whole legal ranking of liabilities, to the extent that proper market solutions seem, sadly, ever more remote.

In addition, the investment world has become paralysed between what it sees as a starkly binary outcome; a crushing debt deflation if the banks fail (one made inconceivably difficult to unravel thanks to the $700 TRILLION web of derivatives which enmeshes them), or a highly inflationary rebound due to the extreme fiscal and monetary overkill being committed during the rescue and surely not to be redressed any time soon thereafter. In such a world, not only is further credit expansion being precluded (Hip hooray!), but the flow of capital from savers to promising entrepreneurial prospects is also being staunched – a matter for the most intense concern, not sophomore celebration.

So while you might cheer all this, let’s not pretend that it has been serene and untroubled or else our ideological foes are going to be able to strike back to good effect by quoting such La-la land outpourings of joy when the bankers’ problems become those of a whole host of otherwise blameless enterprises and families, as they inevitably will.

In a ringing condemnation of Wall St welfare I am fourquare behind you: in singing false paeans to an impossibly Panglossian reading of events and in trying to gloss over the wrenching – if ultimately salutary – consequences of a collapse, I suggest you are being naively counterproductive.

Our enemies are on the run, so a little less hysteria and a deal more calm ratiocination and sober exegesis might prove far more profitable than all these ill-judged – and, frankly, jejune – bromides which are being loosed off willy-nilly by people who – judging from both the blog and the mailist – are in many cases not in any way current with either the institutional framework, the policy implications, or the international repercussions of what is going on and who (perhaps understandably) reveal themselves to be totally unversed in the perverse functioning of modern financial markets, for all these same commentators’ undoubted academic brilliance.

It seems that a sizeable faction of the Mises group has become so intoxicated at the chance of getting a date at last with the girl of its dreams, that it has dipped too deeply in the punchbowl of ‘I told you so’ and has ended up goosing her mother instead, in front of all the family. Come on guys, get real – and leave the empty hosannahs to the Collectivists!

I am sorry if this sounds abrasive, but I strongly feel that, in many instances, the rush to print is being undertaken amid a rush of blood and I fear that immoderate language and the blind quotation of Misesian scripture during what is clearly one of THE great upheavals of our irretreviably flawed monetary and political system can only be to the detriment of the cause over the longer haul.

The extraordinary powers which that champion of Corporativisimo, Hank Paulson, would like to arrogate to himself sparked the following comparison:-

‘Dictatorem(que) dici placeret qui rem perculsam restitueret, L. Quinctius Cincinnatus consensu omnium dicitur… et plebis concursus ingens fuit; sed ea nequaquam tam laeta Quinctium uidit, et imperium nimium et uirum ipso imperio uehementiorem rata’

‘And they were determined that a Dictator should be appointed to restore their embarrassed affairs, so, by universal consent, they chose Lucius Quintus Cincinnatus… There was a large gathering of the people, but, by no means, did they regard him with equal delight, considering both the extent of his authority as too great and the man vested with such authority as rather arbitrary’ Livy, History of Rome, Bk III.26

Of course, old ‘Curly’ did what he had to to rescue the Romans then went straight back to his plough, leaving the political and economic system undisturbed behind him.

I don’t suppose his smooth-headed successor is likely to be quite so obliging!

With his latest, rather forlorn call for banks to help solve the mortgage crisis by ‘forgiving’ just enough of their loans to keep people’s inability to service their full contractual obligations from triggering foreclosure proceedings, he truly has gone all the way back to Solon and his 6th century answer to Athen’s very own sub-prime crisis, the ‘seisachtheia’ - or ‘shaking off of debts’

Mind you, given that Solon also devalued the currency by 42% (from 70 drachma per silver mina to 100) as part of the stimulus package, our esteemed Chairman may have some way to go to match his predecessor: though already 35% off its 2002 trade-weighted highs, this latest woe has ‘only’ seen the greenback decline by around 14% so far. 

He and his pal Donald Kohn are not doing much to support beleagured bank stocks either: waive loans, cut dividends, and raise capital – yessir! that’s the way to boost your cartel members’ share price, boys! 

 Still, as Solon boasted:-

I removed her many boundary-posts implanted:
Ere then she was a slave, but now is free.
And many sold away did I bring home
To god-built Athens, this one sold unjustly,
That other justly; others that had fled
From dire constraint of need, uttering no more
Their Attic tongue, so widely had they wandered
And others suffering base slavery
Even here, trembling before their masters’ humours
I did set free.

With regards to the great Irish songwriter Percy French for his comic ditty (tune here) which originally concerned the conflict between the Tsar and the Ottomans – and familiar to all true rugby fans in a decidedly more ribald version – a little seasonal levity regarding the state of financial markets and the very Austrian lessons to be drawn from the current turmoil. Happy New Year to you all.

O the seekers of Profit are brash men and loud
And quite unaccustomed to fear,
But the bravest by far in Connecticut’s crowd
Was Alpha the full Bull, all geared.

To respond to a clamour to go short of gamma,
Or to buy all the debt in each tier,
To turn Two-and-Twenty to personal plenty,
Your man’s Alpha, the Bull’s Bull, all geared.

But doubts were made plain that the source of his gain
Were not the decisions he made.
The one who blamed monet’ry settings insane
Was shrewd Malcolm McSteady McStaid.

This wily old fox had seen all this before,
Had survived more than one such ‘New Era’,
Knew the end of the boom would entail certain doom
For Alpha, the Bull’s Bull, the gearer.

“The gains may come fleeter with lev’raged beta”
“And the prime broker’s sure to be paid,”
“But the winner’s true share went to tortoise, not hare,”
Cautioned Malcolm McSsteady McStaid.

Then Alpha shot back, “Poor old fool, what you lack”
“Is a grasp of why this is a doddle.”
“It’s not à la mode to cite Graham and Dodd”
“But a quant-designed, back-tested model.”

“Once you have one of those, well, then anything goes,”
“Your clients it’s easy to dazzle.”
“The costs are so meagre, for bankers are eager”
“To use you to circumvent Basel.”

The elder man snorted and brokers he shorted,
Bought bullion, the bull run to fade.
“With markets this manic, we’re primed for a panic,”
Forecast Malcolm McSteady McStaid.

Then those hedge funds of Bear all began to leak air,
And default protection got dear,
Making private banks wince at the trials of Prince
And of Alpha, the full Bull, all geared.

First the IKB shock, then a rush to the Rock,
From Rathgar to Riga a squeeze.
‘Gainst the run on the bank, Poacher-Gamekeeper Hank
Begged ex-clients their resets to freeze.

As the credit crunch spread, causing central bank dread,
Crafty Malcolm’s conviction grew clear.
It wasn’t the gospel of Herr Marcus Ospel,
Or of Alpha, the Bull’s Bull, all geared.

No, as markets got tight, pulled down high-flying Kites,
As equity buyouts decayed,
Stricken bankers implored all the sovereign hoards,
To please, forthwith, ride to their aid.

Malcolm knew what that meant, that too much had been lent
To those who could never repay.
So, with ‘vigilance’ gone and the printing press on,
Stagflation must be on the way.

“I’m cashed out, I’m ready – my nerve must be steady.”
“My plans have been carefully laid:”
“When the blood starts to flow, then a–shopping I’ll go,”
Twinkled Malcolm McSteady McStaid.

But what of that other, who’d arb out his mother,
Bold Alpha the full Bull, the gearer?
Did he once see the light, that old Malcolm was right,
That his ruin would ever come nearer?

As the boom turned to bust, did his dreams turn to dust?
Did he seek consolation in booze?
No, the beauty, you see, raking in all those fees,
Is that heads you win, tails you don’t lose!

Happy New Year to you all.

As Northern Hemisphere snow cover exceeds the 10-year seasonal average, another backlash against the Carbocollectivists’ claims of consensus has been compiled, featuring more than 400 scientists, not all of whom, surely, can be secretly working for Exxon.

With UN chief panjandrum Ban-ki (Barking at the) Moon threatening members of his audience with the prospect of ‘oblivion’ if they did not willingly place the noose of forced CO2 reductions around their necks, voices of opposition are being raised, if not, thanks to the Green Salemites, in Bali itself.Open Letter to the Secretary-General of the United Nations
Dec. 13, 2007
His Excellency Ban Ki-Moon
Secretary-General, United Nations
New York, N.Y.

Dear Mr. Secretary-General,

Re: UN climate conference taking the World in entirely the wrong direction.

It is not possible to stop climate change, a natural phenomenon that has affected humanity through the ages. Geological, archaeological, oral and written histories all attest to the dramatic challenges posed to past societies from unanticipated changes in temperature, precipitation, winds and other climatic variables. We therefore need to equip nations to become resilient to the full range of these natural phenomena by promoting economic growth and wealth generation.

The United Nations Intergovernmental Panel on Climate Change (IPCC) has issued increasingly alarming conclusions about the climatic influences of human-produced carbon dioxide (CO2), a non-polluting gas that is essential to plant photosynthesis. While we understand the evidence that has led them to view CO2 emissions as harmful, the IPCC’s conclusions are quite inadequate as justification for implementing policies that will markedly diminish future prosperity. In particular, it is not established that it is possible to significantly alter global climate through cuts in human greenhouse gas emissions. On top of which, because attempts to cut emissions will slow development, the current UN approach of CO2 reduction is likely to increase human suffering from future climate change rather than to decrease it.

The IPCC Summaries for Policy Makers are the most widely read IPCC reports amongst politicians and non-scientists and are the basis for most climate change policy formulation. Yet these Summaries are prepared by a relatively small core writing team with the final drafts approved line-by-lineby ­government ­representatives. The great ­majority of IPCC contributors and ­reviewers, and the tens of thousands of other scientists who are qualified to comment on these matters, are not involved in the preparation of these documents. The summaries therefore cannot properly be represented as a consensus view among experts.

Contrary to the impression left by the IPCC Summary reports:

z Recent observations of phenomena such as glacial retreats, sea-level rise and the migration of temperature-sensitive species are not evidence for abnormal climate change, for none of these changes has been shown to lie outside the bounds of known natural variability.

z The average rate of warming of 0.1 to 0. 2 degrees Celsius per decade recorded by satellites during the late 20th century falls within known natural rates of warming and cooling over the last 10,000 years.

z Leading scientists, including some senior IPCC representatives, acknowledge that today’s computer models cannot predict climate. Consistent with this, and despite computer projections of temperature rises, there has been no net global warming since 1998. That the current temperature plateau follows a late 20th-century period of warming is consistent with the continuation today of natural multi-decadal or millennial climate cycling.

In stark contrast to the often repeated assertion that the science of climate change is “settled,” significant new peer-reviewed research has cast even more doubt on the hypothesis of dangerous human-caused global warming. But because IPCC working groups were generally instructed (see reference) to consider work published only through May, 2005, these important findings are not included in their reports; i.e., the IPCC assessment reports are already materially outdated.

The UN climate conference in Bali has been planned to take the world along a path of severe CO2 restrictions, ignoring the lessons apparent from the failure of the Kyoto Protocol, the chaotic nature of the European CO2 trading market, and the ineffectiveness of other costly initiatives to curb greenhouse gas emissions. Balanced cost/benefit analyses provide no support for the introduction of global measures to cap and reduce energy consumption for the purpose of restricting CO2 emissions. Furthermore, it is irrational to apply the “precautionary principle” because many scientists recognize that both climatic coolings and warmings are realistic possibilities over the medium-term future.

The current UN focus on “fighting climate change,” as illustrated in the Nov. 27 UN Development Programme’s Human Development Report, is distracting governments from adapting to the threat of inevitable natural climate changes, whatever forms they may take. National and international planning for such changes is needed, with a focus on helping our most vulnerable citizens adapt to conditions that lie ahead. Attempts to prevent global climate change from occurring are ultimately futile, and constitute a tragic misallocation of resources that would be better spent on humanity’s real and pressing problems.

Yours faithfully,

List of signatories

Embarassingly, it also appears that the somewhat unsual recent melting of Greenland ice may have been due to naughty old Mother Nature, not evil capitalist man.

Perhaps we should levy a tax on her, too!

In a recent press briefing given by him and his colleagues, the Deputy MD of the mission-starved IMF was positively drooling over the prospect that the next round of Climate-camouflaged tax transfers from the pockets of the developed world’s citizens will trigger a veritable host of ‘adjustment’ problems and hence offer this institutional dinosaur a whole new rationale for ill-judged economic meddling. In the Q&A which followed, one member of the audience wondered:-

You spoke about a lot of countries earning carbon credits and actually making some money out of the fact that they have tropical forests from these carbon funds. Most of these are emerging markets, you’ve got Indonesia and Africa as well.

What would you suggest that they would do with the money that they earned from those carbon funds? I mean should it be perhaps something like what oil rich countries have been doing is actually saving the money, the funds for the future. What would you say that they should be doing with that money?

The answer could not have been more clear cut: under the guise of ‘saving the planet’, Western expropriation is going to be carried out on such a scale as to swamp many such recipient countries – many of them barely functioning kleptocracies – with yet more boodles of unearned cash. Or, rather, as the IMF respondents put it:-

MR. KEEN: I think perhaps I would just say, you are right, we are talking about developing and emerging markets. But we are also talking about the developed countries as well, where proper carbon pricing schemes, whether in the form of taxation or in the form of tradable permits for which a price was charged, would have revenue implications.

MR. COLLYNS: From a macroeconomic perspective, the potential flows from payments for carbon credits could have macroeconomic implications. That is one of the things we’re going to be looking at in our chapter in our World Economic Outlook. The balance of payments implications, the exchange rate implications. One thing to be cautious about is that these revenues are well used, well directed into efficient local spending. But indeed, it’s quite possible that the best use for some of these funds will be to save them to avoid a “Dutch disease” type of problem. If you ramp up spending too quickly, it could lead to a loss of competitiveness in other parts of the economy which could have negative long term implications. So I think it is important to look at the temporal aspects of these issues when choosing how to use these funds

Don’t say you haven’t been warned: the Fabian Salemites are coming to a chimneyplace near you!

Unsurprisingly, the latest missive from the Doomsday cult of tax-exempt Phyllakes plays up the supposed horrors of ‘climate change’ for all it’s worth, before strongly recommending that we ‘Rich’ people bear most of the costs of their megalomania, neatly employing a weepy-eyed catchphrase – ‘Human Solidarity in a Divided World’ – which they know will appeal to anti-capitalist journos, to the MTV generation muddle-heads, the celebrity serial child-adopters, and the billionaire rock-star income-levellers among us.Most risibly of all, the piece tries to sweeten the pill (for political entrepreneurs among the carbon trading and subsidised energy crowd, at least) with an appeal to the putative “Keynesian and Schumpeterian mechanisms” which, we are told, promise “new incentives for massive investment, stimulating overall demand and creative destruction leading to innovation and productivity jumps in a wide array of sectors [sic]…”

In a previous post to the mail list, I pointed out that this latter is a key part of the spurious economic justification being advanced for ‘taking action now’. The specious idea is that, in the struggle to overcome the artificial barriers erected by the Ultraviridians to human endeavour, we will all thrive simply as a result of trying to restore our living standards to the level they were at before the Planners imperiously reduced them – it’s as if the 100m sprint could be improved by shackling the contestants’ legs together before the off!

Al Gore, Vinod Khosla, and the biofuel bandits might reap enormous rents out of this – and, of course, an army of bureaucrats will find employment for life, monitoring compliance and distributing doles – but the rest of us are likely to rue the day we ever allowed the Five Star Fabians to conflate being kind to cuddly animals with their Collectivist wish to restrict individual freedoms and to trample on property rights.

Sorry to revisit the same topic so shortly, but in that same AA edition cited in my previous post, I simply cannot praise Garrett’s piece, entitled ‘Mythologies of Reconversion’, enough.

This is not just a witheringly effective dismissal of the central planner’s and inflationist’s folies de grandeur, but one of the most evocative treatments you could wish for of what that much-misunderstood word ‘capital’ really means. He also paints a vivid picture of how stupefyingly complex are the interrelations of the modern economy and emphasises that only the individual entrepreneur, acting to secure himself an honest profit can therefore contribute to its functioning.

When you read it – as I urge you should – bear in mind that when our sage talks about the tremendous waste involved in beating swords back into ploughshares and of how exquisitely tooled pieces of equipment may become absolutely useless once long-suppressed consumer preferences are allowed to reassert themsleves, he is not just talking here of the particular circumstances of 1945, but of the painful aftermath of every mass folly of intervention-driven malinvestment.

Truly spectacular!

For a wholly unabashed defence of full-blown Collectivism, the speech reproduced under the title ‘Modern Governments Must’ in American Affairs takes some beating, incorporating, as it does, every Keynesian fallacy and ‘fatal conceit’ you could imagine, including the chilling assertion that:

Modern governments, including our own, have long since assumed a primary responsibility for the economic guidance and progress of their peoples.

And who delivered this peroration of planning? None other than that failed businessman and evangelical New Dealer, Marriner S Eccles – sometimes described as the ‘Father of the Modern Fed’ and the man after whom that Temple of Moloch which is its modern HQ is named.

In testimony before the House Committee on Financial Services, Robert Kuttner of the American Prospect, delivered a searing Philippic on the topic of the current excesses.

Like many from his part of the political spectrum, however, he missed the essential cause of the disease and so recommended the wrong treatment, as the following open letter to him tries to explain:-Mr. Kuttner,

Leftists often analyse history and highlight institutional conflicts better than purblind Rightists (after all, the whole doctrine of the former is about the clash of class interests competing for economic control), but they always fail at the juncture of true cause and effective remedy.

Though nearly all of what you have to say regarding the marrow-deep corruption of the present era is true, what you give no hint of understanding is that government itself brought this about, not a market which is therefore decidely not a ‘free’ one.

Government allowed deposit banks to function as ‘fraudulent warehouses’ in the first place. Government extended them and other corporate bodies the privileged protection of limited liability for doing wrong. Government forced its subjects to accept its IOUs as money. Government founded the Fed. Government went off gold. Government favoured debt over equity (both via preferential tax treatment and perpetual inflation). Government set up agencies to over-promote home ownership. Government instituted the next great office of ‘moral hazard’ with the FDIC of which you so approve. Government routinely bails out and reinflates all failures which repeatedly shake the gimcrack system which has been its result.

So, no, Mr Kuttner, we will not remove all conflicts and enhance stability by a return to the Depression-extending, soft tyranny of your beloved, Mussolini-inspired New Deal, but only by a return to sound money and the strict and consistent rule of law.

Banking and money are themselves the intrinsic problem. The question of whether or not the rules and regulations of the day are doing a good enough job of covering up the flaws inherent in banking’s anomalous legal and economic framework is merely a post hoc diversion from a much more fundamental issue.

Taking but a few of the present evils to which you allude, if banks were forced to obey the rules applied to all other custodians of property – and if, additionally, money were hard and therefore potentially subject to the same consequences of scarcity as any other good – highly-leveraged, destabilising speculation would be well nigh impossible (or, at worst, it would be confined to a kind of specialized, self-contained, private gambling club); inflationary booms would be precluded, and capital would be both unblinkingly supervised – lessening ‘agency problems at source’ – and scrupulously invested in genuine enterprise, not in the kind of destructive and debauched financial trickery you so correctly denounce.

Oh, and as hugely beneficial side effect, overweaning government – the true bane of our existence, as well as the ‘banksters” sword and shield – would perforce become rigorously constitutional, minutely accountable, a great deal smaller, and far less intrusive and arrogant into the bargain!

The cause of both liberty and prosperity would be enormously advanced as a consequence and artificial layers of cloying, stable-door bolting ‘regulation’ could be safely relaxed, with only the effective oversight of a watchful and self-reliant citizenry needed to restrict malfeasance and to see that malefactors receive their just desserts.

You never know, Mr. Kuttner, but if enough of your fellow Americans come both to endorse your indictment and yet to reject your prescriptions, we might be afforded the chance to put the above assertions to the test. I say this for the inescapable conclusion is that, in all good conscience, they could only then vote for the one true alternative to the yelping pack of hidebound, statist, self-serving political jackals vying to secure their own four years as Ozymandias in your upcoming Presidential elections – namely the estimable Ron Paul.

For those who like their environmental gloom’n'doom spread with a thick dollop of Utopian totalitarianism and garnished with a slice of Galtonian pseudo-science, the Association for the Study of Peak Oil & Gas holds its sixth annual conference in Ireland this coming week.

Present will be the usual motley of silk-suited Carbohypocrites – each avidly promoting their tax-eating, alternative-energy start-ups – a gang of anti-capitalist activists, a squawk of sensescent members of the political elite, and a whole Bronze Age roundhouse of associated Gaia worshippers.

A flavour of what will be on offer can be had from this excerpt from one Nate Hagens of the Vermont-based Gund Institute of Ecological Economics (sic):-

The economic system that has ruled the planet while populations have grown will have to choose different ends on a full planet, which implies different means. Supply will gradually become inelastic in a world constrained by energy and power density, temporally and spatially diffuse alternative energy options, and increasing limitations to non-energy inputs such as soil, GHGs, land and particularly water. But perhaps more importantly, demand is inelastic too. We have evolved particular neural mechanisms through 250,000+ generations as hominids, and millions of generations as mammals that a)cause us to compete for resources, b)allow our systems to by hijacked by novelty and c) cause us to focus our attention on the present, rather than the future. The talk will discuss habituation, addiction, hedonic adaptation and other recent neuroscience research showing that homo economicus fails at its most basic assumption — that man is rational. But where we cannot change the way we are wired, we can change what the metric is. Sociological research already shows that we are not happy with more pecuniary accumulation, but are happier with more social interactions, friends and community. Politics is genetic. Economics is cultural. We have to work on changing this cultural carrot, which will then dictate how best to use the remaining high quality fossil fuels.

In their eagerness to keep the pot boiling somehow, somewhere, many finanical pundits are spinning the line that Emerging Markets now offer a form of ‘safe haven’ from the problems affecting Western credit markets – an angle that finds an immediate resonance with the many who have been seduced by the sheer magnitude of the numbers involved in any description of China’s recent rise.

Some of those numbers do not bear such close scrutiny, however, suggesting as they do that a violent credit expansion – one made worse by pervasive government interference in the nascent market – may be nearing its inevitable conclusion.

Those interested might like to visit this link for more details.

A little clarification of the confusion surrounding the recent massive central bank intervention in the markets might be in order.

Yes, multi-billion cash injections have been taking place: no, this does not mean a return to the 1920s – not yet, anyway – since the bulk of these extra funds have already been withdrawn in the subsequent money operations undertaken as the original loans (strictly, repurchase agreements) have expired.

Of course, the CBs now face the nice problem of weaning a (rightly) fearful and vastly overstretched market off the dripfeed on a more permanent basis and, granted, this has greatly reduced the possibility of a more restrictive policy being implemented in the near future, but that is still not to say that we can take the sum of announced liquidity injections and immediately construct some scary multiple of new M2 or M3 which will be the enduring result of their recent actions.

They are therefore attempting to stop a bank run (strictly, a NON-bank run) at present, not running the printing presses in any sustained fashion.

The turmoil in financial markets is eliciting the usual response from the central bankers, all up there in their Hueys, ‘Die Walkuere’ blasting out of their beat boxes. But the fixation on the ‘sub-prime’ angle and on the Fed’s role in isolation only tells part of the storyWhile wholly in agreement with the overall thesis of a credit expansion gone wrong as the root of our current woes, I think some treatments of the mechanism are a little too classical and narrow.

For a start, among its peers, the Fed’s balance sheet has expanded by a much lesser amount that that of the larger ECB, while the Bank of Japan’s policy of maintaining rates at or near zero for all these yeas has also exerted an undeniably malign influence on prices.

Add to this the fact that broad money in the so-called BRIC nations (Brazil, Russia, India and China) is now almost as large as US M2 and is expanding at 20%+ a year, and that the major oil exporters are running surpluses of up to $500 billion a year which they recycle ‘without tears’, in true Rueffian fashion, and we can see that the global inflation does not have its roots entirely in the Marriner Eccles building.

Moreover, the picture of a Fed deliberately adding banking reserves, which are then expanded by a factor of ten or so, is somewhat anachronistic. Thanks to reduced reserve requirements and technological innovations (such as sweep accounts), US banks actually support $1.3 trillion of M1 and $7.2 trillion of M2 on a reserve base of just $40 or so billion – a superabundance of which is furnished by the bank notes which they routinely hold in their vaults or ATMs.

To the extent that banks today are subject to any effective restraints upon balance sheet expansion, it is to those capital ratios enshrined in the so-called Basel accords. Sadly, the fact that bank ‘capital’ itself can be instantly generated with the aid of another bank (and so is a somewhat ephemeral concept) has escaped the framers of this system.

Further, its methodology of ‘risk-weighting’ bank assets means the arbitrage between, say, holding an asset on its own balance sheet and granting perhaps 90% of the finance a pet hedge fund needs to do the same is enormous. Add to this the ability of a second hedge fund to assume further magnitudes of effective economic leverage by buying, not the asset itself, but a derivative built around it, and you can see that the Fed’s six-weekly decisions on short-term interest rates have, perforce, lost much of their direct importance to the mania.

Moreover, this bubble has really been a credit bubble, not a money bubble, albeit that we must allow that this was triggered by the central banks’ rush to set historically low nominal and real official rates in the wake of the tech bubble and than (a fact largely unremarked by the Punditry) greatly extended by their desire not to ‘surprise’ the market when they re-adjusted these rates and so allowed speculators a near-exact calculation of the future trajectory of basic funding costs to persist for far too long after the first reversal.

No, far from being CB reserve-led, the real dynamic has been the result of an unprecedented boot-strapping between private equity funds; their investment and commercial bank (and now governmental) sponsors; the unparalleled profusion of hedge funds whom the latter also avidly support and promote; and the more traditional institutions who have been partly seduced (by the prevailing low yield environment), partly forced (by post-Tech crash, government regulatory insistence upon a more stringent matching of assets and liabilities) to buy the devilishly repackaged derivative structures created out of this maelstrom of leverage.

At present, it is this pyramid which is collapsing and while sub-prime may have been the occasion for the first cries of “Sauve qui peut!”, it is hardly the largest problem the markets now face, nor the real cause for the latest batch of morally-hazardous intervention on the part of the central banks.

For a further treatment of this topic, please go to:-

http://www.lewrockwell.com/corrigan/corrigan87.html

NB we can perform a similar exercise for the 51st state, dear old Gulag UK, too Download file

A recent article suggested that the ‘doomsayers’ were wrong to argue that the US trade deficit was not sustainable since there was no evidence that it was not being used to increase the wealth of the recipient country and hence the imported ‘capital’ (arguably the fruits of inflation, not saving) would service itself to the benefit of all involved.

However, a simple, first-level disaggregation of the relevant flows – albeit here presented Download file
as something of a caricature – strongly suggests that this is indeed far from the truth and that capital consumption is writ large here in multi-trillion dollar form.

Seventy-odd years ago, Patrick Barrington penned a humorous debunking of Keynesian mythology (presumably while the General Theory was still being given its final polish).

Today, at the tail end of one of the most spectacular and widespread credit expansions ever experienced, attitudes are a little different, though human fallibilities remain the same. From the Depression…

‘And what do you mean to be?’
The kind old Bishop said
As he took the boy on his ample knee
And patted his curly head.
‘We should all of us choose a calling
To help Society’s plan;
Then what do you mean to be, my boy,
When you grow to be a man?’..
..’I want to be a Consumer
And live in a useful way;
For that’s the thing that’s needed most,
‘I’ve heard the Economists say.
There are too many people working
And too many things are made.
I want to be a Consumer, Sir,
And help to further Trade.’

Patrick Barrington, Punch, April 1934

…to the Bubble…

‘And what do you mean to be?’
The kind old Bishop said
As he took the next boy on his knee
And patted his curly head.
‘You, too, should be choosing a calling
To help Society’s plan;
So what do you mean to be, my boy,
When you grow to be a man?’…
…’I want to work for a hedge fund
“unbundling risk” all day.
“Alpha’s” the thing that’s needed most,
I’ve heard Pension Consultants say.
There are too many Chinese working
for less than I wish to be paid,
so rather than be a Producer:
I want to earn fees as I trade.’

Sean Corrigan, May 2007

The following thoughts on the current economic and financial environment formed part of a recent commentary sent to our firm’s clients. Users of the blog may find them of general interest.

In the Austrian description of the trade cycle, the lack of any generalized rise in the price of final consumption goods is never – repeat, never – to be taken as a sign of economic health or as a guide to the long-term viability of the upswing.

This is because the mere fact of such an absence tells us little or nothing about whether it might be masking the natural tendency for the productivity improvements we would expect during a period of entrepreneurial advance to lower the price of these goods, were it not for the overriding tendency of a widespread credit expansion to cancel this out.

That this is not an academic abstraction should be evident if we consider the case of, say, the technology sector where we find that the sticker attached to the first batch of any new gizmo generally contains a premium which only the most insistent status-seeker will be willing to pay. Thereafter, it is generally safe to assume that a subsequent increase in production volumes – as well as the workings of competitive imitation – will tend to deliver the same service at successively lower prices to the less impatient of us, once the hype associated with the launch subsides.

In the general case, therefore, when we try to value the enterprise which gives rise to such goods, we should build this schedule of decline into our estimates and we should therefore conclude that even the bare maintenance of profitability will require the delivery of one or all of the following: an ongoing lowering of costs, an expansion of sales volumes, or a steady stream of newly monetizable innovations.

Plainly, each of these would represent an economically beneficial outcome both for the producers and for the consumers of such goods.

Theoretically, too, in a world where new investment could only be financed out of genuine saving (whether this fund originated externally with an unconnected individual or internally in the form of the firm’s retained earnings) the corollary that such savings would be economically scarce in a way they emphatically are not today would combine with the fact of benignly falling prices to curb the wilder fantasies of both the entrepreneur and his prospective backers, engendering a healthy discipline in the first and reinforcing a more prudent mindset among the second. It would thus severely curtail the opportunity for the contagion of the boom ever to take hold.

But, once we allow for the provision of an elastic bank credit which is subject to few practical restraints – and in spades if we then underwrite this laxity with a slavish central bank orthodoxy which regards falling prices as utter anathema, irrespective of the cause – the virtuous circle we have just described will soon be sundered in a thousand places.

No more will savings require a conscious decision to provide more for the future and to indulge ourselves less fully in the present for the gushing wellspring of credit will instead be able to conjure up the illusion of having our cake and eating it, too.

Moreover, the entrepreneur will soon realize – if often in an unarticulated fashion – that a concerted policy of monetary malfeasance has meant that final goods prices will no longer tend to fall as he and his peers perform their true function of earning profits by contributing most effectively to the ordered satisfaction of consumers’ most insistently expressed desires. He will then become aware that his unending struggle to combat such a reduction by economising better (that is, by producing more and more service for less and less input) has started to reap him hitherto unlooked-for monetary gains, a windfall which is bound to stimulate his ambition to expand more rapidly. To do this, he will naturally have recourse to the very same, freely-available credit with which policy-makers intend to hold up the level of overall prices. Worse still, he may even begin to relax that struggle itself and instead come to rely upon the simple wager that his costs will rise less rapidly than will his selling prices.

The formerly virtuous circle will now have turned thoroughly vicious.

Already, here, we see the glimmerings of a system built upon the uncertain foundations of a fraud which does not consist of a violation of contract of the petty kind occasionally undertaken by a few unethical individuals, but rather of one rooted in the universal deceit of not trading like for like – one which, regretfully, even the most upright is unwittingly forced to practice when the calculus of exchange becomes perverted in this manner.

Though the resulting cycle may start out well enough – and certainly with enough promise to satisfy a politician’s amoral sense of self-interest – it will deteriorate progressively from Alberich’s first seizure of our own true gold to the economic Goetterdaemmerung which inevitably ensues from that theft.

Since genuine saving has fallen well short of releasing sufficient men and matériel to supply the needs of the investment boom, a struggle over such means soon becomes all too manifest. In this, the influx of credit can well be thought of as a crazed, command economy commissar issuing wholly incompatible orders willy-nilly and brooking no objections to his whim. The signalling ability of the price mechanism thus begins to be swamped and all sign of the relative degree of insistency of demand and scarcity of supply becomes obliterated, depriving entrepreneurs and investors of any means of navigation.

Now, the self-organizing harmony of the free market gives way to discord and strife. Those whose own productive efforts earn the other goods they wish to acquire come into conflict with those who can merely borrow the money for their purchase; while the entrepreneur no longer has to persuade cautious savers to risk their nest-eggs with him, but has only to surmount the trifling hurdle of completing the formalities with a banker who is all too eager to beat his competitors to the draw and create the necessary ‘capital’ out of thin air.

Annoyingly for the technocrats, the basic Keynesian con of tricking workers into selling their labour too cheaply (because are supposed not to comprehend that their money wages are rapidly depreciating) is, in practice, quickly rumbled by a hoi polloi far more savvy than the patronising, Bloomsbury set prescription assumes. Thus, the only part of the specious merit of inflationism which remains in force is exactly this mechanism for artificially fostering investment at the expense of end consumption via the first-use advantage of newly-created and selectively-granted credit – a phenomenon known (after Hayek) as ‘forced saving’.

To reiterate the point, under such conditions, big-borrowing businesses can unfairly commandeer resources in quantities and at prices which do not genuinely reflect the particular allotment which would have followed had their distribution been solely reliant upon voluntary consumer preferences being faithfully transmitted up along the chain of production.

To take an extreme example of what this implies, consider the poor babushka queuing stoically for a few mouldy heads of cabbage while the Soviet planners who lord it over her boastfully unveil yet another new blast furnace, heedless of the truth that what the proletariat really wants is more investment in farm equipment, more frozen food factories and more efficient distribution networks. Again, think of what happens when the wartime economy forcibly harnesses the creative genius of a Henry Ford to churn out only engines of death rather than allowing him to thrive by offering more enablers of the better life.

Even if we draw back from such radical instances of collectivist compulsion, we should still be led to conclude that a policy of inflation is doomed to fail because, in extremis, the hungry man will gladly hand over his hammer in exchange for a hamburger and swap his shovel for a scoop from the stew pot. Though matters rarely come to this sorry pass in a modern, peacetime economy, the axiom still holds that the demand for consumer staples will always come to trump that for any other kind of good and when this long-suppressed drive reasserts itself – Take cover! – the storm clouds lowering over those running businesses far-removed from the immediate satisfaction of such wants are about to break and the coming deluge will sweep many of them away before it subsides.

We started this commentary by saying that an absence of increases in consumer goods prices should not be taken as carte blanche to continue heedlessly inflating. Conversely, however, the archetypal sign that this drearily repeated tragedy – this hubris and nemesis of boom and bust – is again nearing its ruinous culmination is when the prices of final consumer goods do, at last, start to rise more rapidly than those of higher order – intermediate, crude, or capital – goods. Once this juncture is reached, only a sufficiently large and unforeseen injection of new credit can give overstretched and inappropriately-positioned entrepreneurs the means to forestall a drain of resources into the short-term ramping up of the production of such pricier goods and so afford them some prospect of seeing their unduly longer-horizon projects through to completion, albeit that they are still acting in defiance of the principal of ‘consumer sovereignty’.

If, however, the bankers have simultaneously become alarmed at the rise in consumer prices, this inflationary annealing may not be forthcoming. The urgent monetary stringency which follows (and which is often characterised by a negative yield curve) will then reveal that the buckling and twisting of the whole structure through ‘forced saving’ has multiplied and entangled a myriad dislocations in its matrix, leaving the fatally embrittled Boom susceptible at any moment to a catastrophic failure.

Being founded on nothing more than misplaced credulity and speculative self-delusion, once it does crack, the ‘liquidity’ born of easy money turns instantly from a sly Pandarus into a vengeful and eyeless Samson, pulling the whole temple of false prosperity down about its own ears in its dying spasm of retribution.

It is not inconceivable that this is the scenario with which we find ourselves confronted today, even though China’s dominance of the key nexus of that productive upsurge we call ‘globalisation’ has long forestalled its full development, thanks to the Middle Kingdom’s peculiar elevation of ‘forced saving’ to near godhead and to the lack of basic accounting rigour informing its investment choices. Not entirely fortuitously, the chronic, local imbalances which this spawned have long formed a precarious bridge between the sizeable, but complementary discrepancies which have simultaneously come to separate the two ends of the productive structure in the rest of the consuming world. Any narrowing of the former, therefore, will inevitably lead to a widening of the latter.

Because of this we must be attuned to the news that, in addition to the threat posed to further cheap Western imports by China’s rising labour costs, its strengthening currency, its still-tentative central bank tightening, and its tweaking of export tax incentives – not to mention by the spectre of home-grown protectionism – Beijing may be about to reduce its runaway generation of forced savings much more directly than before.

If they are actually followed up (a conditional decidedly not to be underestimated), the latest announcements that state-owned enterprises will have their enormous retained earnings reduced through having to pay dividends to the various proprietary governments will not only make central bank policy more effective (since external funding will attain a greater relevance in corporate decision-making), but it will presumably divert funds away from the more sub-marginal kinds of what passes for investment and into that other sinkhole of exhaustive consumption which is public welfare. If so, a programme which has done so much to supercharge commodity prices and depress final goods prices will be much less dynamic in its operation from here on in.

Whatever China does or does not, it remains the case that as this credit boom – like every other of its type – reaches an inflexion point, the range of choices facing policy makers will run the following gamut:

• to attempt to truncate the approaching peak in the hope that this might lower the height of the precipice toward which the economy appears to be heading;
• to shore up the crumbling edifice of emerging entrepreneurial error with a further dose of inflation (a course only effective if labour does not manage to secure the majority of the proceeds to itself, as in the ‘stagflationary’ 1970s);
• to allow the boom to collapse under the weight of its own contradictions and only afterwards to attempt to alleviate the patient’s suffering with a post hoc burst of further inflation;
• to stand back with Olympian detachment and let system purge itself of its worst excesses, however painful the experience.

Taking these options in reverse order, the fact that the last full-blown instance of the laissez-faire course being followed was arguably during the short, sharp Harding recession of 1920-21 shows how far we should weight our bets against it being pursued again today.

In contrast, the ‘mopping-up’ policy is exactly the kind of indulgent parenthood most notoriously practiced by Alan Greenspan throughout the course of the Tech bubble and while his tenure still overlapped with the developing phase of the subsequent housing fiasco. As these recent examples should themselves make plain, however, this is only really practicable when dealing with an asset boom (widely, but erroneously regarded as ‘good’ inflation). It is much less applicable to a fine, old-fashioned rise in end-consumer prices – a condition for whose prolongation there is typically much less popular support.

These same two examples should also show how pernicious the ‘hair of the dog’ approach can turn out to be, for few would argue that the threat of mass household bankruptcy across the Western world has its roots anywhere but in the panicky, post-Tech monetary relaxation. As Albert Hahn once remarked: “there is nothing so dangerous as inflation without ‘inflation’”.

If we can here adopt the (slightly sniffy) stance that the second of our choices – the administration of ever-increasing doses of stimulus to the point that the currency itself disappears into a vortex of worthlessness – is the sort of thing which nowadays only a despot like Mugabe, or some desperado of a Latin American Presidente would hazard, then we can quickly move on to the first case, that of a prophylactic central bank pre-emption.

The cynic might here argue that the experience of the last four years has ruled this out in practice in no less convincing a fashion than the others we have already discounted. But this would not be entirely fair for, by their own narrow prescriptions, central banks have not, thus far, had much of the necessary grist to begin the contentious business of turning their monetary mill. In general, indices of final goods prices have, after all, been moderately well-behaved (at least, by our lowered standards) – a happenstance we can partly ascribe to the China phenomenon explained above.

Remember that the prevailing central bank orthodoxy is that both food and energy prices should be ignored when setting short-term interest rates. Bear in mind also that central bankers insist on misapplying the term ‘inflation’ to its effect (higher prices) rather than to its cause (too much money) and that they then choose to disregard whole swathes of those prices when they do rise – even if these are the very ones which tend to hit the forgotten man’s pocket the hardest. Given this, it is not a cause for wonder that the standard recipe they follow does tend to diminish the chances that they will be called upon to take any timely steps whatsoever.

Insulated in this way, the bankers can remain ‘vigilant’ and issue regular, stern declarations of anti-inflationary resolve while still avoiding the need to do something concretely unpopular now in the hope of achieving what can only be an unquantifiable increment to well-being sometime in an uncertain future.

But here we come to a possibly crucial irony for commodity investors, for the prices of final goods are currently showing clear signs of upward pressure in any number of countries and one of the key factors here has been the upward spike in food prices. That spike is, of course, not just due to the fabled enrichment of Asian diets, but also because of the endemic degree of extra scarcity occasioned by the largely political biofuel factor – an influence whose potency has this year spread from bioethanol (primarily affecting corn) to biodiesel (and hence is being felt by various oilseed crops as well).

Adding to this has been an expressed reluctance on the part of the oil producers and refiners to commit even more tens of billions of dollars to removing the worst of today’s price-raising bottlenecks in an environment of rapidly spiralling construction estimates (a link to rising metals prices, among others) and when Washington, Brussels, and Beijing are insisting that, henceforward, we reduce the potential market for the new plants’ output by burning food instead of fossils in ever greater proportions, irrespective of the economic, or even the energetic, rationale behind that decision.

Faced with all this, one gets the distinct impression that some central bank council members are becoming a little hot under the collar as the awareness dawns that their much-vaunted ‘credibility’ will be irredeemably challenged if they ignore all of rampant credit growth, indiscriminately soaring asset prices, rising fuel prices and rising food prices.

Add in the possibility we have mooted that, one way or another, the cost of goods sourced in Asia may also start to increase and this discomfort is likely to resolve itself in a much more determined pull on the reins before too long.

As Bundesbank chief, Axel Weber, warned readers of the FT in May:

“The sources of inflation risks have shifted from the external side to the domestic side. In a situation where we see some endogenous upwards dynamics [in] inflation due to excess demand in the economy, we cannot give the all-clear on monetary policy. If necessary we also have to move into a territory that is portrayed as being restrictive if that is needed to control inflation.”

If all the changes we have considered do come to pass – if China really edges away from ‘wild investment’ and towards greater domestic consumption; if final goods prices continue to rise more rapidly in the West; and if this induces a belated burst of central bank activism – it is likely to trigger an archetypally Austrian, producer-led bust.

Then, once the central banks have finally succeeded in upsetting the applecart – and after the ensuing period of turmoil – all thoughts will again turn to the question of how long it will be before they respond to the spillage by issuing copious reams of newly-printed payment orders, each made out to those whose job it will be to restack the fruit in the shortest possible order.

At that point, the cycle can begin anew – different in its specifics, no doubt, but also horribly familiar in its overall form.

Giving the lie once more to the canard that ALL scientists (at least, all those not in the pay of Big Oil) share the IPCC orthodoxy, here is a very impressive review of the case for a solar mechanism.Though a highly technical article, p99, et seq, are intelligible enough to a layman.

Ultraviridian carbophobes are not going to like this one, as can be seen from this brief excerpt:- Could it be that the signals, or at least the quasi-100 000-year component, are not driven by orbital parameters? Could internal terrestrial phenomena (e.g. GHG) or external celestial causes (e.g. varying solar activity and/or cosmic ray flux) be the ultimate climate drivers on at least some of these time scales?

At first glance, the GHG proposition squares well with the Antarctic (Petit et al., 1999; Siegenthaler et al., 2005; Spahni et al., 2005) ice core data. The correlations between δ18 O and δD of ice (climate proxies) and the concentrations of CO2 and CH4 in enclosed air bubbles are impressive (Figure 52).

However, these correlations are discernible only if viewed at resolutions in excess of 1 000 years. Higher resolution records for all seven glacial terminations studied to this day show that the rise in CO2 postdates the warming by several hundred to 2 800 years (Fischer et al., 1999; Monnin et al., 2001; Mudelsee, 2001; Caillon et al., 2003; Vakulenko et al., 2004; Siegenthaler et al., 2005).

Consequently, CO2 is likely a product of the ≈100 000-year climate oscillations, not their cause.

PS It apears the paper was completed before Henrik Svensmark produced an experimental verification of his detailed cosmic ray-cloud mechanism (announced, with great irony, in the proceedings of the VERY green Royal Society), so any residual doubts expressed by the authors may already have been greatly alleviated