Immoral Governments Pursuing Inflation With Gusto

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The understatement of the day comes from Dow Jones newswires. “A pandemic would deal a major blow to a world economy already suffering its worst crisis in decades, and experts say it could cost trillions of dollars.” It’s early days, but let’s hope it doesn’t get a lot worse.

Don’t ask us how it happened, but we linked to the wrong YouTube video in yesterday’s DR. We meant to link to this song from David Gray. Instead you got the Jonas brothers singing “Lovebug.” We can assure you that will never happen again.

One more housekeeping detail. At the suggestion of our web guru, we’re Twittering. It appears to be the most superficial and vacuous form of web-based communication ever invented.

Come to think of it, the modern world of telecommunications gives you so many ways to communicate instantly. But we reckon that even though there are more ways than ever to say something, people are actually saying less and less of value. There must be some hidden ratio between the content of actual communication and the number of media in which to communicate.

In any event, we will use the Twitter to communicate vital information about our publishing schedule or things like that. To follow us on Twitter go to http://twitter.com/draus.

Let’s get right to the mailbag today.

Dear Dan

You wrote that ‘Even in the middle of the Great Depression, the market was capable of staging mammoth rallies that would tempt investors back in. No doubt those were extremely tradable rallies. But they were followed by lower lows once the forces of economic and earnings reality reasserted themselves on the collective mind of the market.’

I am a regular reader and appreciate your views. Who knows (certainly not me) what myriad similarities and differences exist between now and the 1930s but I don’t think your assertion is correct. All the charts I have seen show that the low point in 1932 was never even close to being revisited – the massive depression rally from 1932 which you mention never retraced anywhere the 1932 low – i.e. the bear market from 1936 til 1942 never went anywhere near the 1932 low. So the 1932 low was very literally the buy of a lifetime!

Having said that, I am also aware that interpreting indexes as opposed to the real world is risky because bad performers are eventually removed and replaced with good ones which to some extent must account for the long term upward trend.

Cheers

Ross

You’re right Ross. We went back and looked at the S&P in the 1930’s and it never did re-test the ’32 lows. See the chart below. Some fortunes really are made in a recession!

As you point out, long-term index returns have a survivor bias. The bad companies are weeded out and new ones added. Today, you could by an index-tracking fund and simply forget about it for twenty years, if you thought the lows have been put in. You’d just have to hope that the stock market goes up faster than the rate of inflation.

Click to enlarge

Dan,

When you say ‘climate change hysteria’ have you discovered some new information that flies in the face of general scientific option, or are you just another baby boomer unwilling to make any financial sacrifice to help protect the planet for future generations?

David

Is this an ad hominem attack? Hmmn. It’s become vogue to assert that the science on climate change is settled and that unless you’re a complete moron, you can’t credibly dispute it. But that’s simply not the case. Check here and here. David Evans and Joanne Nova (both DR readers) point out that the model used by the International Panel on Climate Change is flawed and there is simply no evidence that carbon emissions from man-made industrial activity have warmed the planet.

The earth’s climate is an extremely complex and dynamic system. You would think any scientist who actually uses the empirical method would be extremely cautious about making definitive statements about a system with so many variables. It seems a little arrogant to suggest we know exactly how it all works and can say with precision that human activity is solely responsible for the warming of the earth (it’s not even warming).

When models are flawed their conclusions are worthless. Garbage in, garbage out. The IPCC model is flawed. But that doesn’t bother the people pushing the climate change agenda. In fact, the real agenda behind the climate change argument is to tax carbon and create a huge new source of government revenues. You can only raise income taxes so much before you start to kill productivity in an economy.

If you want to get philosophical, the climate change argument is also a government power grab. It’s just another excuse for the government to get right into your personal life and control the decisions you make. Climate change has been cleverly marketed as a moral issue with which you can shame people into “financial sacrifices,” which is just another word for higher taxes.

So yes, there is plenty of information that clearly disputes and refutes the idea that human beings are causing the earth to warm. We’re more than comfortable being a sceptic on this one. And no, we’re not a baby boomer.

Dan

I am a little slow on the uptake at times (can sometimes be an advantage) and I am struggling a little with how inflation is so bad for us holding wads of Australian pesos. When inflation was high (recently) so were the rates I was getting on my online savings accounts. Is it because the rate of inflation will far exceed what I can gain back with interest? Either way I am going to see my buddies at the mint. On that subject can you shed a little light on what the US government did with gold in the 30’s? I heard somewhere that they set the price of gold (at a low price), made it illegal to own gold (except for items of religious significance – constitutional hiccup for the government) and then bought it back off you at the discount rate. Love your work. Look forward to my daily chuckle from a select few who are not sheep.

Cheers

Shannon

Thanks Shannon. Inflation is a tax on cash. The longer you hold cash when inflation is soaring, the more purchasing power you lose. Just ask pensioners living off saved income. Low interest rates may be great for new home buyers. But for pensioners, interest rates below the rate of inflation have led to a decline in real income.

This is why it’s so criminal and immoral that governments are now actively pursuing inflation with greater gusto. They say it’s done to stimulate aggregate demand so the economy does not grind to a halt. But over the long-term, it makes for price instability. People can’t plan or save or invest because there is so much uncertainty about something so basic to economic life: the price and value of your money.

Pursuing inflation also shortens people’s time horizons. We’d argue this discourages businesses from making long-term plans (capital investments that might take years to depreciate and require huge investments). When you disincentive saving you get people living for today and not really doing the kind of careful long-term planning an economy needs to be productive and raise living standards over time.

And since we’re in a philosophical mood, we’d also suggest that when the value of your money is diminished, it distorts personal values as well. Having a walk down Chapel Street the other night after coming home from the footy, we saw some pretty outrageous public behaviour. You see people behaving in ugly ways which show they have no respect for other people and probably very little respect for themselves.

We’d suggest this kind of behaviour is a symptom of a culture in which values are eroded by the instability of the financial system, and that all begins with sound money. If you have unsound money, you’ll get an unsound culture and all the problems that come with personal behaviour that’s influenced by abundant credit. Credit excess becomes behavioural excess.

By the way, the government did confiscate gold in the 1930s as you point out. The Feds didn’t want any competition for their own money product. They knew that the only way to prevent people from preferring gold to the dollar was to make owning gold illegal. Ever since then, there’s been a war on gold for the threat it poses to the planned path of regular inflation. It’s no wonder we’re in such a mess today.

One final letter.

One question for the team which has me a tad bemuddled. If all currencies devalue by say 40% equally, then why does devaluation matter? I concur that the best protection of wealth is precious metals, base metals, real income producing assets which income is variable on demand, but as far as currencies go – who cares unless you are a player of the currency markets?

Another matter, I have always used the conventional balance sheet method of analysing economics. A standard profit and loss statement [for Australia the nation] should be:

Income

Mining

Manufacturing

Agriculture (export)

Less Cost of sales

Transport

Communications

Research

Labour

Defence

Infrastructure

Result = Gross Profit

Less Overheads and expenses

Banking, Finance

Interest on Capital loans

Health & Social Security

Private Housing for employees

Immigration & other benevolent departments

Result = Net Profit

As a guide, the world consumes base resources, like food and base materials. These will always survive a downturn providing they are not exposed to poor health, bad bankers or devious governments.

Any comments?

Just a few. Bankers have been pretty bad lately. And governments are always devious. But your point is well taken regarding national income. Would you include government in your cost of sales? We would.

That’s one reason rising government spending as a percentage of GDP is so worrying. The government doesn’t really add any productivity to the economy. It just gets involved in a lot of transactions so it can generate revenue for itself which it then redistributes to favoured constituencies.

A big question for the Australian economy how well national income holds up if the global recession lasts a lot longer. At the household level, you have a lot of people with a lot of debt who face lower real incomes (adjusted for inflation). At the government level, unemployment and the correction in commodity prices have blown a big hole in government revenues. The government hasn’t really adjusted its spending plans yet to reflect lower revenues. They never do of course. Spending always increases.

As to competitive devaluation, your point is also well taken. What you have, though, is a race to the bottom in which everyone is getting poorer at an accelerating rate. On a relative basis, it might not look like much has changed. You’re all falling at the same pace. But on an absolute basis, debasing the currency triggers a host other financial consequences. We’d argue that adds up to a lower standard of living, which is why we’re against it. Hitting the bottom is no fun.

Dan Denning
for 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.
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7 Comments on "Immoral Governments Pursuing Inflation With Gusto"

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brc
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for David : why are people so convinced by the IPCC? Because it is intergovernmental and full of scientists? So many people can see the inherent conflict of interest of, say, the Federal Reserve, or the IMF or the World Bank, but somehow the IPCC is above scrutiny. I’m not saying that they are all intentionally corrupt, but of course they are going to find and present evidence to support their own agenda. They wouldn’t be rational humans otherwise. Already we see panic among members that they aren’t being taken seriously and that the worst-case scenarios are always the ones… Read more »
Greg Atkinson
Guest

brc you are right on the money! Try getting a government grant if you want to do research that shows the planet is not warming or that emissions trading schemes are a waste of time! Science has never been about consensus, it is about facts.

Joe
Guest
On climate change. I recall the time that I came to the decision, not that Climate change would kill us all, but that, there must be something in this climate change malarchy. I was driving (laugh) in the U.K along the A11 in Norfolk heading towards Cambridge having come from culturally interesting Norwich. As I sat in my car (listening to Rush again more than likely) waiting for the nose to tail traffic to edge a few yards nearer to my intended destination, I noted the great queue of traffic not only ahead of me, not only behind me, but… Read more »
Pete
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Joe: An interesting story. I am not particularly for or against climate change theories (probably leaning more towards ‘for’ actually), but I did notice something when you said: “…an hour in your car engine running locked in your garage would be night night time.” Why would it be night night time? The answer to that question brings up another question: Can that be scaled up to earth-size? What are the differences between a garage and our atmosphere, such as ratio of cars to gas compared to car to garage? But ultimately my main point there is that the Carbon Monoxide… Read more »
brc
Guest
Joe : it’s quaint that someone in England would get a disprportionate view of the amount of pollution being emiited by cars. South East England is probably one of the most traffic congested places on earth, and not a good place to form a reliable view on the rest of the planet, which is unimaginably large when compared with the paltry distances between English towns and cities. There’s probably only a 10th as many cars on the planet as there are pine trees in Siberia, and that’s before you add in the forests of North America. Fly over a deserted… Read more »
Joe
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Sorry boys, To not extrapolate a trend is to ignore it. I am not arguing for climate change, it is just that I don’t think you can justifiably deny it. We know many things will happen in the future without being able to prove that it will happen. Intuitive logic allows us to make the leap of faith in predicting correctly, that analytical logic can not. brc, The South East of England is not the most densely populated concentration of cars in the World. Close but not the most, and the real scary point is that the rest of the… Read more »
Ivor
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Never before in the history of mankind has the global environment been so permanently and continuously measured. From satellites, terrestrial and oceanic temperature sensors to ice core and species study. Not to mention palaeontology, geology and anthropology etc. The amount of data has never been larger and with the advent of increasing technology it be comes more accurate and efficient just like ones iphone or PC. Added to what is already known and some sort of knowledge surely will emerge? To ignore the possibility that human kind could one day reach the Malthusians ceiling of misery is like driving down… Read more »
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