Observations from the 2008 Agora Financial Investment Symposium


How about we take advantage of today’s lull in markets to pass on a few observations from last week’s Agora Financial Investment Symposium in Vancouver? There are three points worth passing on, mulling over, and sorting out.

First, the debt deflationists reared their collective head. The argument, in a nutshell, is that falling values on financial assets (homes, shares, mortgages) lead to a reduction in aggregate consumer wealth and thus demand and a general slowdown. People spend less, slowing down the economy, production, and wages.

The result, the argument goes, is a fall in the general level of prices. It begins with the bust in financial asset values, but works its way, eventually, into the real economy through slower consumer spending and final demand. It is one reason the debt deflationists given for falling commodity prices, including gold.

It’s worth thinking about. But the trouble is, so far as we can see, that debt deflation is nearly impossible when you have a modern central bank willing to expand the money supply by any means necessary. Not that Ben Bernanke is the Malcolm X of Central Banking. But you take the point, we hope.

The point is, as our old friend Gary North pointed out today, the Fed may let regional banks fail. But it will never let big banks fail (they own the Fed). And it will be the buyer of last resort for things like U.S. Treasury bonds, should it ever come to that. That’s an important point, being the buyer of last resort.

What it practically means is that the Fed can create new money out of thin air and trade it for debt-backed assets owned by the banks or issued by the government. It can even buy shares in public companies (or Fannie and Freddie.) In the world of modern central banking, the Fed can always exchange cash for debt or impaired assets. And if that doesn’t work, the government can always use fiscal policy to just mail people checks which they’ll have to spend.

It’s not falling prices we reckon you should worry about. If the world’s fiat money system utterly collapses, then yes, we’ll see a general decline in the price level. But until then, inflation is the bug-bear to worry about. Anything can be monetized by the central bank, and before this whole perverse period in financial history is over, many things will.

Another point from Vancouver? The rise in per-capita incomes in the developing world is what’s driving commodity demand at the margin (the Bowen Basin in Queensland, the Pilbara in WA). The question everyone wants to know the answer to is how vulnerable the emerging markets are to a slowdown in U.S. consumer demand.

That is, can emerging market savers and consumers survive the period between the decline of the U.S. as the global growth engine and what comes next? What comes next is emerging markets driving global growth through their own domestic demand. But they aren’t ready to do that, at least not at the same level the debt-fuelled U.S. consumer manages.

Per capita incomes in the developed West range from US$25,000 to US$44,000. In the developing world (China and India) because they have so much larger populations, it will be awhile before per capita incomes even hit US$5,000 per year. But when they do, it kicks off a new phase of demand for resources as discretionary incomes rise.

Our take? Commodity demand in emerging markets is just now entering its most resource intensive phase. But the credit crisis and high energy prices will take some steam out of the emerging markets. They will still emerge. But it might take longer…and the transition to a post-American consumer driven world will be bumpy.

Finally, the best quote of the conference came from Doug Casey. “America is turning into the kind of place where everything that isn’t banned is compulsory.” It probably goes for Australia too.

There is a long list of things you can’t do or say anymore. But no one really learns anything by being told what they can or can’t do. You don’t make people healthier, smarter, or more moral by making them less free to make and learn from their own mistakes.

Take trans fat. Will California really make people healthier by banning it? Or will they just make people even more stupid and childish and dependent on the government? You can’t make people healthy. They have to want to be healthy and have healthy habits. What’s surprising about the world we live in is how many people are willing to be told what to do by someone, anyone. And just how afraid some people are of being accountable for their own actions, or just being truly free.

In the markets, NAB threw CEO John Stewart under the bus after last Friday’s shocking result. Heads must always roll when mistakes are made.

Still, it looks like the banks will get a bit of breather today. Wall Street rallied overnight. Oil fell. This, plus the lack of any explicit earnings disasters, gave stocks room to breathe and to rally.

By the way, not that we’re crowing about it, but it looks like we may have been pretty close when we called the oil top at $145. Granted, it went a couple of bucks higher. But these things ebb and flow. And oil’s price flowed higher than anyone expected, at least for now. It’s time for some ebbing.

The only other news worth nothing is that the government of WA gave the nod to locally backed project for building the port (and eventually rail) infrastructure to open up the iron ore province in the Midwest. We’re headed out that way in a few weeks to speak in Geraldton.

What was interesting about yesterday’s decision by the WA government is that it favoured a local consortium, with Japanese backing, over a Chinese-backed project. The decision prevents a mine-to-port control of the Midwest by Chinese interests. But where does it leave things?

In this our Asian century, many Aussie projects won’t get doing without foreign JV partners. The same is true in the Midwest. But will those partners be Chinese, Japanese, or both? We reckon if the Midwest is going to become Pilbara Jr., it will have to be both. But nobody really knows the endgame yet.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. Some observations:

    “… the flawed view of the Fed’s role in the Great Depression: If only the Fed had created $5bn and recapitalized the banking system. More money, so they believe, would have provided a (“mopping up”) remedy for disastrous boom-time excesses. It wouldn’t have worked.

    “The issue then, as it is today, is not some finite amount of liquidity to keep the banks solvent and markets liquid, but instead the enormous ongoing Credit Creation and Intermediation necessary to sustain levitated asset prices, incomes, corporate earnings and government receipts” (Doug Noland, Money Market Issues, prudentbear.com, August 24, 2007).

    “… debt deflation is a particularly malign economic beast, which emerges when people curb their spending in an effort to pay off their debts. Those very spending cuts cause prices to drop, and force up the real value of debts, creating a vicious spiral. As the experience of America in the 1930s and Japan in the 1990s shows, central banks can do little about this, because they cannot set interest rates lower than zero” (The Economist, Inflated expectations, July 3, 2004, p.68).

    “”The Federal Reserve policy of cheapening credit through the purchase of government bonds has been unable to make a dent in the conservatism of borrower or bank lender, in short, every anti-deflationary effort has yet to provide positive results”” (Editorial, Barron’s, July 11, 1932, quoted by Bob Hoye, How a currency can fight the Fed, prudentbear.com, March 31, 2004).

    “Cheap money made no difference – the Federal discount rate was never more than 1.5 percent after 1935 – but they kept on hoping that “confidence” would return” (Harold Evans, “The American Century”, p.225).

    The contraction [1929-1933] shattered the long-held belief, which had been strengthened during the 1920s, that monetary forces were important elements in the cyclical process and that monetary policy was a potent instrument for promoting economic stability. Opinion shifted almost to the opposite extreme, that “money does not matter”; that it is a passive force which chiefly reflects the effects of other forces; and that monetary policy is of extremely limited value in promoting stability” (Milton Friedman & Anna Jacobson Schwartz, A Monetary History of the United States (Princeton: Princeton University Press, 1963), p.300).

    Friedman was summing up a view that he disagreed with; Friedman was wrong and his disciple Ben Bernanke, the present Federal Reserve Board Chairman, will soon find this out for himself).

    “In spite of what Bernanke says, the Fed does not “print” money. It must loan it into existence, but this requires willing borrowers” (Michael Nystrom, The Specter of Deflation, bullnotbull.com, December 28, 2006).

    “Personally, I was never a spender. I guess it’s because I come from a different world, the world of the Great Depression – this was the world in which a dollar was hard to come by and a good dinner cost 75 hard-earned cents. It’s difficult to break old habits, and I’m talking about habits like turning off leaky faucets or making sure all the lights are out before you go to bed. I never could get used to spending more than I was earning or taking out loans on a car or buying a house with a mortgage attached” (Richard Russell, The creature from another world, 321gold.com, July 12, 2006).

  2. Watcher7, could you clarify your statement “Friedman was wrong”?

    You have compiled an impressive selection of quotes that hangs well together. One that I find in part unimpressive is the Economist’s statement regarding Japan and “negative interest rates”. Japan did in fact have negative “real rates” for a long period and that is all that is fundamental in carrying the overall argument and your contention.

  3. Response from Ambrose Evans-Pritchard, UK Telegraph to me – July 2007:

    In some ways I agree with you. But there are certain things one cannot write in a family newspaper. A depression is to `rich’, so I had to dance around it.

    I blame Friedman & Schwartz for the near universally accepted view that monetary stimulus could have prevented the Depression. (That quote you sent was not the “Friedman view”, it was him summing up a view he disagreed with). Recent scholarship has rather debunked the Friedman line, and he even began to recant before his death.

    It was the Freidman theory that beguiled Greenspan into thinking that asset booms could be allowed to run their course.

    Still, I think Bernanke will blitz the money supply. We get 70s stagflation for a while, then real trouble.

    “Money supply itself actually never contracted in Japan. Instead, it grew very slowly for quite some time. However, bank credit outstanding contracted for 60 months in a row. Clearly there was a credit contraction. How did money supply still manage to grow? Fiscal deficits were ramped up immensely, roads to nowhere were built, and the Bank of Japan monetized all of it…” (Michael Shedlock, Inflation Monster Captured, globaleconomicanalysis.blogspot.com, December 19, 2005).

    “It is often remarked that Japan is a rich country, whose citizens have greater wealth than any other. At first sight this is entirely true. Japanese households have a wealth to income ratio which is 100% greater than that of any other G5 economy. Unfortunately this wealth largely represents the debts of the corporate and government sectors and is thus largely illusory.

    “A country is not wealthy when one half owes debts to the other half that it can never repay” (Andrew Smithers, Japan’s Past Decade – Bad Luck or Policy, smithers.co.uk, December 22, 2003).

    “Economically, Roosevelt’s massive government borrowing/spending scheme – the same sort of ‘solution’ that many people are advocating today – was a total flop, for the reasons that anyone with even a basic understanding of economics would appreciate. For example, during Roosevelt’s first 6 years in office the Federal Government’s debt ballooned astronomically in response to government spending on an unprecedented scale, and yet the number of unemployed in America was higher in 1938 than it had been when Roosevelt was first elected President in 1932. The grandiose spending was, however, a political success, and thus fulfilled its primary objective” (Steve Saville, “The difference between good money and bad money”, 321gold.com, July 29, 2008).

    “Federal Reserve cut the short-term nominal interest rate from 5 percent in 1929 to ½ percent in late 1932. However, inflation fell even faster. Consequently, the real interest rate – the difference between the nominal interest rate and the inflation rate – actually increased, rising from 3½ percent in the spring of 1929 to a peak of 15 percent in late 1931 and early 1932. Monetary policy was, effectively, becoming tighter and tighter in the early 1930s, rather than easier and easier.

    “As a result, industrial output fell by a whopping 50 percent relative to trend…” (Evan F. Koenig & Jim Dolmas, “Monetary Policy in a Zero-Interest Rate Economy”, dallasfed.org).



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