How Many Fingers is the Government Holding Up?

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It’s not easy writing a weekly newsletter when you don’t know which countries will be using what currencies by the end of the week. Or which banks will belong to what governments… Or which central bank will light a money bomb under which economy.

So we’ll turn our attention to books, movies and songs for talking points instead.

In the hilarious jailbreak movie Two Way Stretch featuring Peter Sellers, three convicts are sent down to the quarry with their new supervisor. There isn’t much rock lying around, so the “Chief” decides to give one of the convicts a stick of dynamite to blow some rock away. Behind Chief’s back, the convicts raid the dynamite box and slip the sticks to the convict directed to blow the rock. Chief, thinking he is only blowing up one stick of dynamite, accuses the convicts of cowardice as they run for cover. Shortly after, the surrounding area is covered in debris.

The economic authorities today, whether in Europe, the US or Australia, are just as clueless as Chief. They have committed themselves to dynamite without understanding what they are dealing with, who they are dealing with or the type of destruction their tools are capable of. The gold price is the signal, like the convicts running for cover, that something bad is about to happen. The scene is just as comical as in the movie. The outcome will not be as funny.

The world will either be blown sky high with inflation, or covered in deflationary rubble.

On to the next metaphor, quoting from Wikipedia’s Hotel California entry:

In a 2009 interview, Plain Dealer music critic John Soeder asked Don Henley this about the lyrics:

On “Hotel California,” you sing: “So I called up the captain / ‘Please bring me my wine’ / He said, ‘We haven’t had that spirit here since 1969.'” I realize I’m probably not the first to bring this to your attention, but wine isn’t a spirit. Wine is fermented; spirits are distilled. Do you regret that lyric?

Henley responded,

“Thanks for the tutorial and, no, you’re not the first to bring this to my attention-and you’re not the first to completely misinterpret the lyric and miss the metaphor… My only regret would be having to explain it in detail to you, which would defeat the purpose of using literary devices in songwriting and lower the discussion to some silly and irrelevant argument about chemical processes.”

The same misunderstandings are rife today regarding economics. Politicians and pundits bicker over political and legal fixes to economic and financial problems, completely missing the point. Case in point: EU politicians keep repeating that Greece can’t leave the Euro because the European treaties don’t allow it. Hence the Hotel California lyric ‘You can check out anytime you like, but you can never leave.’ The Greek’s answer should and most likely will be, ‘Watch me leave.’ They will simply walk away. ‘Sue me!’

Politicians think that governments can redefine reality, thereby fixing the problems they created.

Orwell’s book 1984 explores this concept at painfully great length. The second half of the book essentially features the government torturer asking his victim ‘how many fingers am I holding up?’ ‘Three’ answers the man on the rack. Then the torturer tells his victim that the government has now declared three to be four. He asks his victim, ‘how many fingers?’

Only after an unknown amount of torture (and very many pages of the book) the victim gives in and genuinely believes that three is four. Just saying it wasn’t good enough for the government, the victim had to believe it.

And so the politicians continue today. ‘Greece cannot leave the EU.’ ‘The banks are not insolvent.’ ‘Deficits don’t matter.’ ‘Stimulus creates jobs.’ ‘Invading Iraq made us safer.’ ‘Wars stimulate the economy.’ ‘Italy will not default.’ And so on.

As Greg Canavan wrote in Thursday’s DR, ‘But saying so doesn’t make it so.’

Do you believe the politicians, Daily Reckoning reader? More likely, you are still on the rack, telling the government what it wants to hear just so it leaves you alone. After all, you pay taxes to support the stimulus and the wars, keep accounts at banks, line up at airports to be scanned and prodded, and hold a diversified portfolio of blue chips. If you resist the government, they will stretch you on all four limbs. More government spending, more anti-terrorist measures, less deposit insurance and no bank bailouts, a collapse in the stock market … the government has control over all aspects of life now. It can redefine your perception of reality. For a while.

Eventually, economic reality determines the outcome, not government decrees. That’s what Orwell missed and Austrian Economist Ludwig von Mises got right. People can believe central planning works, but even if the planners can redefine truth, it will fail. Three remains three. Eventually, the truth comes out and economic reality strikes. Mises explains how in his essay Socialism. Sadly, by the time reality emerged, a lot of people died in centrally planned economies of the last century.

The best way to get through the gloom in the meantime is to sing songs like Hotel California, read books like 1984 and watch movies about government nincompoopery, like Johnny English.

Or just read the news drunk. Here are some highlights:

From the Australian:

‘OPTUS has promised not to criticise the National Broadband Network in key regions for 15 years under a deal that raises new warnings the $36 billion project will stifle competition… The provision, designed to help shore up the number of customers using the NBN, stops Optus from being “expressly critical of” or making “any express adverse statement” about the performance of the network.’

(emphasis is mine)

From the Telegraph, regarding sovereign bonds expected to default:

‘How come European banks have got so much of the stuff? Well ironically, this is one lending decision gone wrong that the banks cannot be blamed for. In response to the original banking crisis, regulators ordered banks substantially to increase their liquidity buffers. Government bonds are generally viewed as the most liquid and least risky assets to hold, so that’s where the money went.

‘That these regulatory obligations also helped governments fund their ever growing deficits is by the by. In any case, nowhere is the law of unintended consequences more in evidence than in financial regulation. By seeking to address the last crisis with greater liquidity buffers, regulators succeeded only in sowing the seeds for the next one. A banking crisis that transmogrified into a sovereign debt crisis now shows every sign of transmogrifying back into another banking crisis.’

Central banks are now attempting to cover up the mess for their politician buddies by handing out cash to banks.

From Reason.com comes something so disgusting and absurd about the American economic stimulus efforts that your mind will not allow you to understand the explanation first time around:

‘Here’s the problem: Those CBO reports don’t definitively prove anything about the real-world effect of the stimulus. That’s because in order to produce those reports, the CBO effectively re-runs the same models that it used to estimate the effects of the stimulus before it started.

‘The reports aren’t based on a detailed measurement of real-world output. Instead, they’re based on measuring the input (how much money was spent), and then using models to project how big the multiplier effect has been.’

In other words, how was the US stimulus effort’s success measured? Using the models that forecast its success. It works like this: You create an economic model that forecasts how many jobs will be created from stimulus. Then you do the stimulus. Then you run how much stimulus was done by the models and they tell you how many jobs were created. How many were actually created is irrelevant.

And just like in 1984, the government’s lies are 100% open and available to see.

‘Indeed, CBO director Doug Elmendorf has explicitly made this point, agreeing at a speech earlier this year that that “if the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis.”‘

The fact that the government specifically hires people who come up with data that makes those models predict what the government wants them to predict is clear.

The fact that we would have been much better off without all this government intervention in the first place isn’t a popular point to make. ‘It’s too late for that, we’re in this mess now.’ The fact that the argument against government intervention has always existed and continues to apply is considered irrelevant. According to governments, people need nanny states to look after them. The irony is that the nanny states of the world now need looking after. They are out of money. And who should they turn to but the country emerging out of nanny-statehood – China.

Yes, according to some, Europe will be turning to the human rights abusers for their latest bailout. But this too is government rearranging the truth. China thinks it needs to keep its currency down to maintain economic growth. How does it do that? By printing Yuan and buying foreign bonds. As Cullen Roche puts it on PragCap.com ‘what happens when China commits to buy Eurozone debt is that they are actually targeting the exchange rate.’ It has little to do with any White Knight benevolence and all to do with more government manipulation that hurts Europe in the first place.

As the crisis hots up again, do not give in to government’s attempts to redefine truth for you. Instead, when they ask you ‘how many fingers am I holding up?’, simply raise one finger and ask ‘How many am I holding up?’

Nickolai Hubble.
The Daily Reckoning Weekend Edition

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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Comments

  1. Well done Nick, we should give them ALL the one fingered salute, for mucking up our lives.
    Now; when’s the next election, federal that is?.

    shortchanged
    September 19, 2011
    Reply
  2. My late father who was born in the Soviet Union used to say he swapped one mindless COMMUNIST ideology for another mindless CAPITALIST ideology!
    Both produced favoured elites who lived apart from the others producing models that had little or no relationship with reality.

    Alexander Malejew
    September 19, 2011
    Reply
  3. Your late father was right Alexander Malejew, ones as bad as another, but what can we do about it?.We are stuck with a system we can’t change.They say one thing then do another, doing deals that suits their own factions, so as to stay in a job that without any qualifications, they are well paid, have perks and benefits paid for by us, the taxpayers, and retire with a superannuation second to none, again paid for by us taxpayers. Maybe its time for a revolution, myself President for life.I’ll be good, i promise!!.

    shortchanged
    September 20, 2011
    Reply

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