BastiatsIceberg BastiatsIceberg

ADiapasonResearchReportbySeanCorrigan ADiapasonResearchReportbySeanCorrigan

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Tangible
IIIIIIdeas

Dec2009
Tangible Ideas Dec 2009
BastiatsIceberg

Tomanypeople,whotodayspeakofunprecedenteddisaster,historicprecedentisnotonlyinconclusivebutdistasteful.There
issomepracticalwisdominthisattitude,asfaratleastasitimpliesprotestagainstmisleadinganalogiesinaworldinwhich
nothingeverreproducesitselfwiththemechanicalexactnessofalaboratoryexperiment.Butrecurrentthedepressionsare
andcertainfeaturesrepeatthemselves;andtheserecurrentfeaturesaswellasthosewhicharepeculiartoanyonecrisisshow
sometruths,whichitwouldbemuchmorelaborioustoestablishwithoutsuchillustrativematerial.
JosephSchumpeter,TheEconomicsoftheRecoveryProgram,1934

Picture,ifyouwill,asceneinwhichafirebreaks
outinanisolatedlittletown,faroutinthe
countryside.Immediatelytheyarealerted,the
neighboursrushtogatherbucketsandsaucepans
andallmannerofcontainersandspontaneously
organizethemselvesintoahumanchaintocarry
waterfromthevillagepumptothesiteoftheblaze.

Oncethelinehasbeenassembled,itneedslittle
imaginationtorealizethatifthoseformingitdrop
outforanyreason,theflowalongitwillslacken,
hamperingtheeffortsofall.Astheworkprogresses
andthevolunteerfirefighterstire,ifnoonethinks
toproviderefreshmentorrelief,ifnooneisonhand
tofixthebucketswhentheirhandlesbreak,orto
ensurethatthepumphandleiswellgreased,the
fighttoextinguishtheflameswillalsobeginto
falter.

Now,supposethatagroupofmainstream
economistsandcentralbankershappenstobe
visitingthevillagewhentheoutbreakoccursandits
memberscongregate,justbeyondthecircleofheat
andsmoke,towatchtheunfoldingdrama.Their
mainpreoccupationistoestimatethevolumeof
waterbeingpouredinanygivenintervalandin
beingsofixateduponwhatliesimmediatelybefore
them,theyremainlargelyobliviouslytothechainof
volitionstretchingallthewaybacktothespring.

Ifanyofthemdoeshappentolookintotheshadows
towheremenandwomenstandsweatingand
toiling,hequicklydismissestheiractivity,telling
himselfthatthelastbucketisallthatmatters,that
therestcancelsout;thattopayheedtoitisto
engageindoublecounting.

Besides,asheconceivesofit,thechains
constituentsarenotactualpeople,widelydiverseas
toage,ability,orincentive.Theyarenotsubjectto
anyvicissitudesofcircumstance,theysufferno
competingimperatives:theyareahomogenous,
facelessarrayofreadilyinterchangeableautomata.

Thus,ifthevolumeofwaterbeingdeliveredeach
minutebeginstofall,ourobserverifnotaPlanner
himself,thensurelyanadvisortoonewillhave
thesolutionreadilytohand:moretindermustbe
thrownintotheflamesthatistosay,more
effectivedemandmustbeexercisedbyheightening
theintensityoftheconflagration!

Whileitisperhapsfortunateforallinthevicinity
thattheKrugmans,theStraussKahns,andthe
Blanchflowersarenotactuallyinchargeoftheir
hometownsrespectivefireservices,theyareeach
nonethelessculpableofpropagatingasimilarerror
ofcomprehension.Furthermore,tothedegree
anyonebasesactualpolicyupontheirrepeated
Keynesianurgings,theyareguiltyoffosteringa
greaterdestructionofpersonalwealththanifthey
werearsoniststhemselves.

So,ratherthanlisteningwithraptattentionwhen
nexttheyandtheirpeerspontificateonhowmuch
morestimulus(i.e.,burning)isneededifweareto
fixthatoverarchingentitytheyunthinkinglyrefer
toastheeconomyagross,smearedout
abstractionwhichactuallyencompassestheefforts
andaspirationsofuntoldmillionsofpeople,each
tryingtosecuretothemselvesalivelihoodwe
shouldlookupfromthesizzleandsteamofthelast
upturnedpailandspendsometimeinstead
thinkingaboutwhatittooktogetitthereinthefirst
place.

Turningtowhatnowadayspassesforanalysis,the
mostcommonplaceobservationheardfromthe
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talkingheads,whowishtoappearprofound
withouteverperformingthehardworkofactually
thinkingaboutitforthemselves,isthatthe
consumerisseventypercentoftheeconomy.
Regrettably,thisnarrowreckoningofthefateofthe
waterinthefinalpailisonlytruewithinitsown
perverseframework.Itmaywellbethecasethatin
anationasorientedastheUSonwhatweshall
henceforthcallexhaustiveconsumption(i.e.,onthat
whichputstheinvolvedresourcesbeyondall
possibilityoftheirfurtheruseinproducingother
goodsorservices)thoseengagedinwhatis,after
all,anactofdestructiontypicallyaccountforover
twothirdsofthestatisticalfictionknownasGDP,
butGDPisnotcoterminouswiththeeconomyinits
entirety.

Itcannotbeemphasisedtoostronglythatthis
misleadinganddecidedlypartialtruthusually
obscuresoneofmuchgreaterimportand
inclusivity,namelythatMonsieur/dame
Epuisementaredirectlyresponsibleformuchless
thanaquarterofalltheexpendituresactually
beingundertakenatanyonetime,evenifour
couplessatisfactionistheultimateaimofthe
hiddentoandfrowhichtakesplaceinthat
lurking,subsurfacemassofacatallacticiceberg
wearesoconditionedtoneglect,rightuptothe
momentourmispilotedShipofHoperipsoutits
innardsonthisshadowy,aquamarinebulk.

Movingfromthewatercarriersofourallegorical
chaintotheconsiderationoftheproductivelinkage
ofonereal,functioningbusinesswithanother,we
shouldstraightawaybeawarethatthepurchases
eachmakesfromandthesalesitmakesto
anotherbusinessfaroutweighthetransactions
undertakenwithexhaustivecustomersevenifthe
trueroleofthechoicesmadebythelatter(the
subjectivepreferencestheyexpressastheyspendor
savetheirincomes)isultimatelytodeterminebya
processofpriceimputationbackfromthecontents
oftheirshoppingbasketsboththescaleandthe
compositionofalltheentrepreneurialoutlays
remotefromthem(theonessaidtobeofhigher
order,inthejargon).

Moreover,asweshallshortlyshow,agoodly
proportionofthemoneypaidoutbybusinessesin
thequesttoearnanincomefortheirproprietors
endsupinthehandsofsaidexhaustiveconsumers,
whethertheybeprivateindividualsactingontheir
ownaccountorgovernmentspendingagencies
followingtheirleaderspoliticalwhimsindoling
outtheproduceofothers.

Thus,notonlyarethegreatpreponderanceof
decisionsaboutexpendituresmadebybusinesses,not
endconsumers,butthelattertendtoderivethebulk
oftheirownspendableincomesinthecourseof
thoseverysamebusinessdecisionsintheir
varyingrolesasmanagers,employees,shareholders,
creditors,publicsectorworkers,orotherrecipients
oftaxmoniesextractedfromtheformergroupings.

Itshouldbekeptattheforefrontofonesmind
thatbusinessdecisionsare,bytheirnatureamong
themostdiscretionaryofthemall,forwhile
ActingManasexhaustiveconsumermaynotlong
ignoretherumblingsofhisbelly,orthecriesof
histhirstychildren,ActingManasentrepreneur
hasmuchgreaterfreedomofchoice.Hemayor
maynotorderinnewstock;hemayormaynot
choosetoreplacehismachinery,movetobigger
premises,launchanewadvertisingcampaign,or
takeonextrastaff.Hemayevencutbackonthe
dividendpayabletohisshareholdersandoptto
rollover,repay,orevenreschedulehis
outstandingborrowingseachasheispersuaded
byhisintuitionaboutthelikelyprofitabilityof
theselectionsfromthemenuofchoiceswhich
continuallyconfrontshim.

Inallthis,hemusttrytogaugenotonlywhathis
owncustomeriswillingtopay,butwhattraffichis
customerscustomerfurtherdownstreamwillbear
inhisturn.Ashedoesso,hemustsimultaneously
reckononwhathissupplierandhissuppliers
supplierupstreamareseekingtoaccomplishwhat
theywillattempttocharge;whattheycandeliver
andwhen.Heisnotfinishedyet,forhemustnot
onlymakeallowancesforwhathisdirect
competitorsasmakersofsimilarproductsareupto,
hemustbesensitivetowhatthoseinwholly
unrelatedindustriesintend,fortheynotonly
competeifnowatseveralremovesforthevery
sameendconsumersdollar,theyarealreadyvying
withhimtobuyinthenecessaryfactorsof
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productionthelabour,theequipment,theraw
materials,theland,theenergyeventhespaceon
theovernightfreightexpresstothecontainerport.

TheFruitsoftheirLabours

Ifwetakeaglanceatwhatourmancanhopeto
earnbyshoulderingthisheavyresponsibility,the
truemiracleofentrepreneurshipisrapidlyshown
nottobethatsomanysucceedatit,butthatso
manyarewillingtoattemptitinthefirstplace.

CollatingvariousdatafromtheBureauofCensus
QuarterlyFinancialReportsontradeand
manufacturing,theBEAsGrossOutputandNIPA
series,andtheStatisticsofIncomeBulletin
producedbytheIRS,wecanbreakdownthe
destinationofthetypicalUScompanysincome
statementintothefollowingschematic:

REVENUES 100.0 GOVT
COSTS 88.5 OwnTax(i+ii) 6.2
Labour 35.0 OthersTax(a+b+c+d) 7.3
(i)Tariffs 4.5 SubTotal 13.5
(a)Energy 2.0 OwnLabour@20% 7.0
(b)Materials 20.0 OthersLabour 8.3
(c)Services 25.0 SubTotal 15.3
NetInterest 1.5 OwnCapital@30% 1.2
Misc. 0.5 OthersCapital 1.4
DEPRECIATION 6.0 SubTotal 2.6
PreTaxProfit 5.5 TotalTax 31.4
(ii)Tax 1.7
AfterTaxProfit 3.8
Dividends 2.6 LABOUR(AfterTax)
RetainedEarnings 1.2 Own 28.0
(d)Capex 7.2 Others 33.1
TotalLabourIncome 61.1

CAPITAL(AfterTax)
Own 2.9
Others 3.4
TotalCapitalIncome 6.3

Table1

Thereareseveralthingstonotehere.Firstly,thefact
thateachbusinessisassumedtospend54.2%ofits
revenuesontheoutputofotherbusinesses(2%on
Energy,20%onParts&Materials,25%onServices,
and7.2%inCapex)andthateachofthose
businesses,intheir,turnmaintainsthesame
proportionsinbuyingfromtheirownsuppliers.
Essentially,thismeansthat54.2%or0.542
becomestherepeatedfactorinageometricseries,
andthat,asaresult,totalrevenuesendup
Otherscontributionsestimatedby
assumingthesameproportionastheoriginal
firmandsolvingtheresultinggeometric
seriesupthechain
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somewhereintheregionof220%oftheoriginal100
received.Ifweaddthesimplificationthatthisvery
first,100unitbusinesshasamonopolyonsellingto
end,exhaustiveconsumers,wecanlooselyequate
itsnumberstothosecontainedintheGDPreport
andsodeterminejustwhoenjoyswhatportionof
finalincomeafterallthateffort,aslaidoutinthe
accompanyingtable.

Notethat,whenallissaidanddone,whilelabour
bagsthreefifthsofthegainswiththeState
grabbingnolessthanthreequartersofanything
leftovertheaveragebusinessmakesaprofitof
onlyaround5%oftotalsalesandthenretains
barelymorethanafifthofthatafterrendering
untobothCaesarandCrassus(i.e.afterpaying
bothtaxestotheformeranddividendstothe
latter).Observenextthatroutinecapital
investmentneedstypicallyabsorbthewholeof
thissmall,residualsliver,togetherwiththescanty
~6%depreciationallowancegrantedbythetaxman,
andthetrue,precariousnatureof
entrepreneurshipshouldbynowhavebecome
painfullyevident.

Ingamblingterms,ourmanisacceptingoddsof
closeto13/1onandthenhavingtopayoutallhis
winningsonthecabridetothetrack.Notmany
punterswouldbeinterestedbackingthatparticular
pony,eveniftheyhadtraineditandwereallowed
torideitthemselves.

Thereismore,fornaturallynoteveryentrepreneur
willwineachwagerhetakesagainstthedarkforces
ofignorance,consumercapriciousness,centralbank
folly,andgovernmentinterference.Infact,the
officialstatisticsshowthat,overthequartercentury
stretchfrom1980to2004,inclusive,forevery$1of
positivenetincomeearned,therewere30oflosses
incurredalegacyoffailedaspirationwhich
swelledtoasmuchas50per$1intheworst
economicperiods.

Dearbornvs.Agathon

Tovisualizewhatisatworkhere,imaginethatthe
wholesystemworkslikeagiantassemblylineina
vast,verticallyintegratedcompany,diggingtheore
outofthegroundandsmeltingthemetaltherein;
drillingforandrefiningtheoilandpetrochemicals
itneeds;fashioningtoolswithwhichtomakemore
toolswithwhichtomakeparts,and,finally,fixing
themtogethertomakeafunctionalwholewhichis
destinedforfinalsaletoacustomerwhowillderive
thewherewithaltopurchasesuchgoodsby
contributingeitherhispresentlabourorhispast
labour,intheformofhissavings,somewherealong
thelineleadingtotheirproduction.

Nowimaginethatanewteamtakesoverinthe
boardroomandstartshivingoffthevariousunits
intodistinctentities,spinningoffthemachinetool
makersintoastandalonefirm;encouragingthe
accountingdepartmenttoundertakeabuyout;
removingthepackagingdesignersfromthepayroll,
whilestillcontractingtousetheirservicesinmuch
thesamemannerasbefore.

Astheshakeupreachesitsculmination,whereonce
wehadabureaucratizedbehemothwithinwhich
trueaccountingofthecostsandbenefitsaccruingat
eachstagewasexceedinglydifficulttoachieveand
wherethescopeforinitiativeandinnovationwas
becomingfossilized,wehaveadecentralized,
flexible,loosenetworkofindividuallyspecialized
actors,everyoneofthemnowempoweredto
exercisehisownentrepreneurialjudgementabout
whathecanmakeforthelowestcostandsellforthe
highestpricetoeachoftheothermembersofthe
network,elsetotheend,exhaustivecustomersupon
whosedesiresallthiseffortisultimatelypredicated.

Ithastobefacedthatwhentalkingaboutthenew
meninchargebreakingupoureconomywide
conglomerate,yourauthorcannotbutappear
sympathetictotheiraims,butthisapprobationwill
decidedlynotbesharedbythemembersofthat
sinister,allpervasive,Wellsianopenconspiracy,the
Planners,whowillseethischangeasadistinctly
retrogradestep.Thisisbecauseitistheirfatal
conceitistobuildmonoliths,nottofragmentthem,
thebettertoregimenttheirfellowcitizensandthe
easiertosubstitutetheirown,privilegedjudgement
fortheworkingoftheblindmultitudeinthemarket.
Thisarrogationofchoice,sotheyaver,isneededin
ordertoreducewhattheyconceiveofasthe
wastefulnessandirrationalityofaproductive
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structurewhich,intheirjaundicedview,isnotonly
inequitable,discoordinated,andinefficient,butis
unlikelytorewardthem,thePlanners,withthe
rewardstheyfeelaretheirdue.

IntheirOlympiandisdainforthelittlemanwhose
verybreaththeynonethelessnowyearnto
regulate,theyarecongenitallyoblivioustothe
truththattheWorldcanthrivewithoutthem:that,
absenttheirheavyhandedinterference,itsformis
highlyarticulated,intrinsicallyadaptableand
yespartlyredundant,butthereforegratifyingly
robust.

ThesePlannerswhosoplagueourmodernlivesare
all,atroot,chteaugenerals,arrayingtheircoloured
countersintextbookfashioninthesandbox;
serenelyisolatedfromthemudandgoreatthe
front;disastrouslybehindhandintheirdecisions;
hopelesslydivorcedfromtheharshrealitiesofthe
frayallfailingswhich,ofcourse,donot
discouragethemintheleastintheirpretenceat
decidingthedestiniesofthemany.

Theshrewdcommanderofthestormtroop,by
contrast,iseveralerttothefactthatthewantofa
nailisemblematicofmilitaryfailureandso
remainsconsciousoftheimportanceoflogisticsof
thenecessityforthesmoothfunctioningofthat
extensiverearareaTail(analogoustoournon
GDPLength)tothedeliveryofcombatpowerby
thearmedTeethinthebattlezone.Healsolivesby
thedictumcontainedinvonMoltkeslapidary
phrasethatnoplansurvivesfirstcontactwiththe
enemyandsoknowsthatthereisalwaysaneedfor
handsonofficership,forwhatwemightusefully
callanentrepreneurshipofwar.

IfeventhestarchyJunkersofthePrussianarmy
couldlearntodelegateasmuchresponsibilityas
possiblerightdowntomenwiththeirnosesinthe
dirtadoctrineknownasAuftragstaktikwhyisit
that,incivilianlife,adrearilyintrusiveeconomic
prescriptivismhasbeenabletolivesofarbeyondits
manyfailuresinthecrucibleofhistory?

Glanceback,ifyouwillatourassemblyline
concept.Beforeourbrightnewmanagementgurus
gottowork,wewereconfrontedwithamonstrous,
arthriticCollectivewhichcreakedandrattledand
sputteredtoahaltifadrillbitshearedoffatthe
wellhead;orifheforemancalledinsickandthose
forgingboltsunderhissupervisiontooktoolonga
lunchbreak;oriftheChiefPlannerforgotthathe
couldusethesteelhehadorderedforthefactory
roof,orforautomobilefenders,orforalightfitting
atthefillingstation,butnotforallthreeatonce.

Initsplacehasbeencraftedaspontaneously
orderedmutuality,inwhichanevolving
entrepreneurialfitnesswillbecometheonlygauge
ofwhoprospersandwhodoesnotandwherethe
entrepreneursbenignlyspeculativeattemptsto
makeaprofitwillemployfactors(i.e.,means)which
arerelativelyundervaluedinordertoturntheminto
goods(ends)whicharerelativelyhighlyvalued.In
otherwords,inthisUtopia,theentrepreneur
becomesanarbitrageurofscarcityandtheprofit
mechanismamarvellousadaptivesearchforthe
bestpracticeinaconstantlychanginglandscape.

Here,thematerialrewardsofsuccessaccruenotjust
totheindividualbuttothewholecommonwealthas
thestagnantpoolsofrelativesurplusare
progressivelydrainedandafresh,revivifyingliquid
pouredoutoverthearidwastesofrelativedearth,
wherevertheycanbeidentified.

[PleaseseeAppendix1attheendofthispaperfora
diagrammatictreatmentofthisapproach]

Doubleentryaccountingversusdouble
counting

Somuchforthetheory,butisthereanyevidence
thatthishasanycounterpartintherealworldand,
ifdoes,whatdoesitaddtoouranalysisingeneral
andforthepresentinvestmentbackdropin
particular?

Well,firstly,letusseeifwecandiscoverjustwhat
arethesizeandscaleofbusinessoutlaysintheUS
andthenletuscomparethemtotheexhaustive
spendingoverwhichthemainstreamobsessesso
much.Afterall,ifwearetodosomeMacroofour
own,atleastletusmakesurewearegoingaboutit
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therightwaybeforeweplotasinglelineonour
chart.

Todothis,letusfirsttakethedefinitiveIRSdatafor
businessreceiptsandnetincome(whichcovernot
justcorporatesbutalsopartnershipsandsole
proprietorships).Usingtheaccountingidentitythat
revenuesminuscostsanddepreciationequals
profits,wecanquicklyderiveabovetheline
expenditures,whiletheBEAsinvestmentnumbers
alsoallowustoaddanestimateinfortotal,below
thelinecapitalexpenditures.

Annualnumbersarereadilyavailablefortheperiod
19802006,butalittleconceptualmanoeuvringwill
allowustoretrocasttheyears197279aswellasto
projectforwardto200709.Withjustalittle
adjustment,theannualGrossDomesticOutput
series,coupledwithimportdata,helpsusto
estimaterevenuesandwecancrosscheckthiswith
theCensusBureausmonthlymanufacturingand
tradesalesreleaseaswellaswithStandard&Poors
quarterlyrevenuesfortheS&P500indextoverify
thattheprojectionisasoundone.

Havingdoneallthis,letustakethatlastyearofthe
IRSrecord,2006,bywayofanexample.Here,we
seethatwhiletheofficialNominalGDPnumber
cameinat$13.4trillion,businessspending
amountedtomorethan$31trillion,around21/3
timesbiggerthevastmajorityofittotally
neglectedbythemainstreamarmyofstatisticians,
blindempiricists,andunthinkingcoplottersofone
curvewithanothertowhomweunavailinglylook
forsomeskillinprediction.

USTotalEconomyExpenditures(blns)
$0
$8,500
$17,000
$25,500
$34,000
1
9
7
2
1
9
7
5
1
9
7
8
1
9
8
1
1
9
8
4
1
9
8
7
1
9
9
0
1
9
9
3
1
9
9
6
1
9
9
9
2
0
0
2
2
0
0
5
2
0
0
8
2.05
2.45
2.85
3.25
3.65
CAPEX
BizAbovethe Line
HouseholdRE
CashGOVT
CASHPCE
Length:Width (rhs)

Figure1:ThatstheWaytheMoneyGoes
LetusnextdistiltheGDPnumbersalittlefurtherso
astomakeamoredetailedmethodological
comparison.Tobeginwith,wearekeentoshow
thattheexhaustiveendconsumptionnumbersare
notthealphaandomegaofeconomicanalysis,solet
usextractthembyconsideringonlythepersonal
consumptionandgovernmentspendingpartsof
GDP.Furthermore,wewilldisregardtheirsocalled
imputationscomponentvirtualentrieswhich
attempttoevaluatenonmonetaryservices,suchas
thefreechequebookfacilitiesofferedtodepositors
which,believeitornot,amounttoa$210billiona
yearlineitem.Wewantnostatisticalsophistry,here,
onlythingsforwhichhardcashchangeshandsin
themarketplace.

Goingbacknowto2006,wecanatlastputour
mountainous$31.3trillioninbusinessoutlaysina
betterperspectivebycomparingthemwiththe
lesseruplandsofthe$7.6trillionofcashpersonal
consumptionexpenditures,aswellaswiththe
foothillsofthe$2.3trillioningovernmentend
spending.Infact,overthewholeperiod,19722008,
businessestypicallyspent$4.30forevery$1.00
spentbyindividualendconsumers,and$3.20for
every$1.00spentbythemandtheirrulerscombined.

Butitisnotonlythesignificantdifferenceinsize
whichmakesthissignificant,butalsothatintheir
variability.Whilethemeanyearoveryear
percentagechangebetweenthetwoisanear
indistinguishable6.5%forbusinessand6.6%forthe
exhaustivecomponent(funnilyenough,eachright
inlinewiththecontemporary6.5%averageannual
increaseinAustrianmoneysupply),thevolatility
ofthefirstis5.3anditsrangestretchesacrossno
lessthan5.7sigmas,whilethelattersvolatilityisa
muchlesser2.3andencompassesonlya3.7sigma
range.

Tounderlinethepoint,whenwelookanewat
businessspendingwhat,withanodtoour
Hayekianvisualization,weshallcalltheLengthof
theproductivearraywecanimmediatelygetafar
bettersenseofthescaleofthecurrentcrisis,aswell
asrecognisingwherethebruntofitsimpacthas
fallen.WhereastheWidthoftheexhaustive
outlaysislikelytohaverisenbyaround2%onthe
yearwhenthefinaltallyfor2009iscomplete
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(admittedly,itsslowestnominalincreaseinthe
periodunderconsideration),theLengthofthe
processgivingrisetothemwillbeseentohave
plummetedbysomethingapproaching14%.

Putintodollarsandcents,householdsand
governmentswillhaveprobablyhavepaidout
around$240billionmorethisyearthanin2008,
whilebusinesseswillhavetrimmedamonster$4.8
trillionfromtheirbudgets,takingthembackto
wheretheywerein2005.Repeatthisexercisefor
JapanandGermanyanditwillbeseenthatthe
worldsthreebiggestdevelopedeconomies
probablyshedinexcessof$10trillioninbusiness
outlaysthisyear.Hence,theseverityofthe
recession.

Length&WidthvLabour,sigmasfrommean%
4.0
2.0
0.0
2.0
1
9
7
3
1
9
7
6
1
9
7
9
1
9
8
2
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
d[Hours Worked]
Width
Length
r2[Hours:Width] =0.11
r2[Hours:Length] =0.52

Figure2:Nevermindthequality
RatioofLengthtoWidthvHours
2.60
3.10
3.60
1
9
7
2
1
9
7
5
1
9
7
8
1
9
8
1
1
9
8
4
1
9
8
7
1
9
9
0
1
9
9
3
1
9
9
6
1
9
9
9
2
0
0
2
2
0
0
5
2
0
0
8
6.5
3.3
0.0
3.3
6.5
OverallRatio
d[Pvte Hrs]%,
r2=0.62

Figure3:feeltheLENGTH

Furtherunderliningthetrueeconomicimportance
ofthiswayofthinking,notethemuchcloserfit
betweenvariationsinproductiveLengthandthe
measureoftotalprivatehoursworked(r2=0.52)
thanbetweenthelatterandchangesinexhaustive
Width(r2=0.11).Note,too,thatthealterationsinthe
ratiobetweenLengthandWidthaconstruct
utterlybeyondtheconceptionoftheGDPjunkies
correlatestochangesinhoursworkedevenmore
closely,withanrsquaredof0.62.

Asweshallseelater,thebehaviourofthis
variablealsohasagreatbearinguponthequestion
ofhowchangesinthepaceofmoneycreationare
workingtoaccelerateactivityandhowrapidly
theywillaffectthedevelopmentofpricesin
general.Fornow,however,letusmerelystatethat,
totheextentwecantrackitsprogression,herewe
haveapowerfulgaugeofthehealth,orotherwise,
oftheeconomyandonewhichlargelygoes
unrecognisedelsewhere,toboot.

TheWormintheBud

ToanAustrian,noneofthisisunexpectedsincethe
schoolisfoundedupontheconceptsofcapital
structure,theentrepreneurshipwhichshapesand
directsit,thesavingofwhichitiscomposed,and
thewaythatmonetaryandfinancialdisturbances
largelycausedbythepresenceofnoisome,non
marketpollutantscandisruptthefirstanddelude
thepracticeofthesecondwhileneedlessly
squanderingthethird.

IntheclassicalexpositionofAustrianBusiness
CycleTheoryorABCTthesecularprogressionto
higherlevelsofmaterialattainmentisoneachieved
bytheentrepreneurialtransformationofvoluntary
savingsintoinvestedcapital,thusamplifyingthe
productivityoflabour,lesseningscarcityand
therebydeepeningthepoolofavailablesavings
readyforfurtherinvestment.Thisreducedurgency
forgoodstodaymakesitselffeltinanatural
loweringofinterestrates(alowerdegreeoftime
preference)andhencesignalsthepossibilityofa
furtherintensificationoftheproportionofcapitalin
themix,inavirtuouscircleofincreasinggeneral
enrichment.

Aspartofthisdynamic,evergreaterlevelsof
specializationoffunctionareinduced,introducing
morelinksintotheproductivechain(increasing
roundaboutnessintheslightlymisleadingoriginal
phraseologyofoneoftheSchoolsfoundingfigures,
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EugenvonBoehmBawerk)andincreasingthe
Lengthofthewholeinthemannerwehave
describedabove.

Farfrombeingacurse,thereisnosocalled
ParadoxofThriftwheresuchsavingisinvolved,
forasurplusofresourcesrequiredforimmediate
use(whichiswhatconstitutessavinginthefirst
place)alsoimpliestheirexistsareadilyutilizable
sourceofmenandmatrielwithwhichtoundertake
projectswhoseultimatefruitionmay(a)be
somewhatdelayed,(b)requiretheavailabilityof
otherresources,or(c)involvetheinvestmentof
capitalindifferent,complimentaryprocessata
subsequentjuncturethislatteracrucialpoint
whichisoftenoverlookedinrivalexpositionsofthe
cycle.

Figure4:DasWohltemperierteKlavier(afterGarrison)

Thus,ifmoresavingimpliesamomentarilyreduced
exhaustiveWidth,italsofacilitatesnewadditionsto
productiveLengthandhenceaidsthetransferfrom
onefocusofactivitytoanotherwithnomorethan
frictionaloutputlossesalongtheway.Theremay
besomeslackinthemarketforexistinggoodsbut,
astheirpricesfall,themarketwillsignalthatless
effortneedstobedevotedtotheircontinued
provision,whileencouraginginvestmentsaimedat
eitherreducingthecostofproducingthem(andso
restoringtherelevantprofitmargins),orinto
providingother,existinggoodswheredemandis
notsoobviouslywellsatisfied,orevenof
developinganentirelynovelrangeofwareswith
whichtotemptjadedconsumerappetitesinthe
future.

Sadly,thereisaSerpentinthisearthlyparadise,a
Deceiverwhosespeckledhideismadeupof
dollar,pound,andeurosigns,forifthereisone
thingguaranteedtothrowthisharmonious
creationofwealthintostridentdiscord,itissoft
moneyandelasticcredit.

JustpluckaquantumofunsavedcreditfromtheTree,
hehisses,andyoucanborrowwhilebarelydisturbing
theinterestrate.Betteryet,ifyouletmeofferyouoneof
mylargestandbitterestapples,wemightevenbeableto
financeyouataloweroneandnoneedtopersuade
anyonetosavewhileyoureaboutit.

Eitherway,thosesuccumbingtothetemptationwill
bedistortingthecrucialpricesignalsaboutthe
availabilityoffactorsofproductionandaboutthe
appetitefortheendconsumergoodstowhichtheir
employmentwillgiverise.Moneymarketinterest
rateswillnolongerreflecttheschedulesoftime
preferenceinthemarketforthings.Especiallyina
worldsodominatedbytheastronomically
leveragedflowswhichtakeplaceinfinancialspace
wheretheoutsideworldisoftenofnogreater
importthanisthestateofthepitch,orthecondition
oftheweather,totheplayersinasportingteam
easymoneyboostsassetprices,loweringdiscount
ratesandriskpremiawellnighregardlessofthe
truebalancebetweensaversandspenders,between
abstinenceandappetite.

Adamtheentrepreneurmaywellnowembarkupon
anambitiousschemeofexpansion,usingthisnew
purchasingpower,butinsteadofbringingabouta
willing,temporaryrelinquishmentofresourcesby
someonewhohaspreviouslyearnedaclaimtothem,
somewherealongtheline,$2willsoonbevyingfor
what$1usedtobuyandso,whereapeaceful
economiccoordinationofmeansandendsonce
ruled,thebrassytrumpetsofstrifewillsoon
resoundtoshatterEdenspeace.

Becauseofthis,manypriceswillbehigherthanthey
shouldbethoughthisdoesnotmeantheymustbe
lowerinabsolutetermssinceafortuitousincreasein
theirsupplymightcoincidewiththeappearanceof
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thisartificialnewdemand:thecriticalthingisthat
marketsignalswillneverthelessbescrambled,
entrepreneurialplansmiscast,andcapitalwoefully
misallocated.Inthesecircumstances,wherethefew,
farsightedCassandrascanonlyappealtosubtle
counterfactualstomaketheircaseforcaution,isthe
soundofmocking,diaboliclaughterparticularly
prevalent.

Finally,thisconfusionmustleadtotrouble,since,as
themoneyfiltersthroughthehandsofthe
multifariousbuyersandsellersacrossthesystem,
theoriginalbalanceoftheirpreferencesandhence
abarleychangedinterrelationofrelativeprices
willtendtoreassertitself.Sincethecreditwhichset
allthisintrainwaspluckedfromthefatefulTree
andnotsaved,thesepreferencesdonot,by
definition,includeanyexanteaccommodationfor
resourceuseonthescalewhichAdamsplans
require.Thoughhemayinitiallyhavesucceededin
hijackingwhathewasnotreallybeingoffered,as
hispricemarginsmoveinexorablyagainsthim,
Adamwillbehorrifiedtoperceivethetrue
nakednessofhisnetincomestream,thepaucityof
whichwillrequirethefigleafofanotherhelpingof
unsavedcredittocovertheholeinhisaccounts
(assumingheisstilldeemedcreditworthyenough
tobegrantedone).

Evenifhesucceedsinsecuringone,thisonly
postponestheinevitabledaywhentheinflationary
impactofmoreandmoremoneybecomestoo
obvioustoignoreandwhenthegrowingeconomic
malaiseithascausederuptsintoafullfledged
pestilence.Facedwithanevenmorecertainruinif
theycontinueonthesamepath,finallythebanks
ortheauthoritiesnotionallycontrollingthemstart
torestrictcreditandtheinevitableBustensues.

DifferentStrokes

Atleast,thisiswhathappensifwefollowtheclassic
pathologyofthediseaseasitwasteasedoutby
Misesandhiscircleintheearlypartofthelast
century.Buttimeschangeandinstitutionsalter,
evenifhumancapricestaysconstantandeconomic
lawremainsinviolate.Breedinginadifferentmilieu
tothatofahundredyearsago,thevirushas
mutatedtoproduceasubtlydifferentsetof
afflictionsinmanyofitslatterdayhosts.

Toseewhythisis,considerthattheelaborationof
theclassicABCTtookplacewhenfiduciarymedia
i.e.,unbackedcreditwasissuedprimarilyto
producers,allowingthemtoforcesavingsupon
reluctantconsumersbybiddinggoodsawayfrom
them.Eventually,higherpricesandadversemargin
movementswhennotactivelyoffsetbyfurther
extensionsofnewcreditforcedastrugglefor
inputsanddroveupshortterminterestratesas
whatHayekcalledinvestmentthatraisesthe
demandforcapitalgaverisetothatarchetypal
harbingerofdoom,theinvertedyieldcurve.

Thissignalledthebelatedreluctanceoflendersto
putanymoredimesinthespeakeasypianolaand
wasdriveninthosedaysbyworriesabouttheir
reserveratiosaswellas,inalllikelihood,bythe
straitsimposeduponthembyanexternaldrainof
thespecieonwhichtheinvertedpyramidofmoney
ultimatelyrestedaspaymentsforburgeoning
Boomtimeimportscamegreatlytoexceedreceipts
bookedagainstthemanifestofincreasingly
uncompetitiveexportofferings.

Today,however,muchoftheborrowingisbeing
carriedoutbyandonbehalfofendconsumersto
theextentthatthenonfinancialcorporatesector,
eveninsavingspoornationsliketheUSandUK,
havebeenactingasnetlendersoffundsto
governmentsandhouseholds,atravestyofhowa
wellorderedeconomyshouldfunction.

Effectively,thisisanactoffinancingonesown
salesinordertoconjureupasimulacrumof
profitability;onewhosecontinuationrequiresboth
thatfinalpaymentiseternallydeferredandthat
onesincreasinglyindebtedcustomerscanbe
inducedintoputtingthemselvesdeeperanddeeper
inhockwitheachturnoftheproductcycle,simply
inordertomaintainsales.

Italsomeansthatmoreandmoredebtisfounded
notuponpotentiallyproductivecapitalassets,but
uponcallsofeverlongertenoruponthe
increasinglyalienatedincomestreamsofpeople
whoareoftenonepaychequeoronequarterof
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subsidingpropertypricesfromdisaster.Insuch
anenvironment,eventhatdebtwhichdoeslookas
thoughitiserectedonsolidunderpinningsmay
insteadbesecuredupontheshiftingsandsofa
businessmodelreliantonthingsneverquite
reachingthevanishingpointofvendorfinance.
Thesefirms,too,havebeenseducedintocrassly
overbuildingtheircapacitythistime,makingthe
structuretoowide,ratherthantoolongasinclassic
ABCT.Massoverconsumptionnowjoins
malinvestmentfostereddissavingjostleswith
forcedsavingasawaytodissipatewealth.

Figure5:Atunelessoldjoanna

Ironically,insuchaworld,aflatteryieldcurve
evenaninvertedoneisnolongerasurefire
indicationofstress,irrespectiveofwhateverviews
thecrowdofdullempiricistsmayassertabouttheir
blindextrapolationsfromthepast.Rather,itmay
signalthatassetmarketshavebecomesosaturated
(oftenwithfundsoriginatingfromabroad)thatthe
localofficialsettersofshorttermratesmaybe
calmlydisregardedwhileanincreasinglyreckless
searchforyieldcombinedwithanoften
unremarked,regulationdrivenquestforduration
depressesbothlongerbenchmarkbondyieldsand
theirassociatedcreditspreads.

Athirdmajordifferenceisthatrightupuntillast
autumnsfrightfulness,atleastbanksreserve
ratioswere,inmostjurisdictions,littlemorethanan
antediluvianrelic.Infact,bankingcapitalitselfis
ratheranephemeralconceptinthisdayandage
since,forinstitutionswhichhavenothingmuch
otherthandisembodiedmonetarysymbolsoneither
sideoftheirbalancesheets,newcapitalcanbe
readilycreatedexnovooftenbymeansofonebank
buyinganothersdebtandthenfundingthe
purchasewiththenewlyincreasedlineofcredit
grantedexpresslyforthepurposebythegrateful
recipientofthiscapitalinfusion.(Weshallnot
venturehereintothemurkybackstreetsof
obfuscatorysecuritization,orstrayintothe
chicaneryofbuyingofwhatpurportedtobe
insurancefromsuchserialchancersastheUS
monolinesandAIG,amisdemeanourwhichtook
placeonanunprecedentedscaleinthelate
Bacchanalia,solelyinordertodisguisetrueleverage
andsotofeigncompliancewithsomerisibly
miscastprudentialregulations).

Fourthly,whileexternaldrains(betterknownnow
ascurrencyruns)dostilloccuraswewereagain
painfullyremindedlastyearthisdoesnottendto
beanimmediatedangerforthemajordeveloped
economies,especiallysincetheintroductionofthe
eurohashelpedthemostcoquettishofperipheral
MamsellesontheperipheryoftheContinentto
shelterbehindthepetticoatsoftheirunflinchingly
prim,Teutonic,maidenauntstobefoundatitscore
(adevelopmentwhich,bygreatlyreducingthe
numberofalternatives,alsoaccordedthe
undeservingBritishpoundsomethingofa
collectorspremiumintheeyesofthemany
mercantilistcentralbankersdesperateforwhatthey
laughinglythoughtwasatouchofforeignexchange
reservediversification).

Asaresult,eventrulyabyssaltradedeficitsoffer
fewconstraintsasaRueffianchildishgameof
marblesinsteadassuresapainlessreplenishmentof
theborrowerscoffersyetanothercasewherethe
incorporealmemoryofsomethingwhichhas
alreadybeenexhaustivelyconsumedis
miraculouslytransubstantiatedintoanassetand
soconfusedwithwealth.Thoughoneofthemain
argumentsinfavouroffloatingexchangerateswas
thattheywerethoughttointroducethefirebreaks
withwhichtoimpedethespreadofacrisisfrom
onecountrytoanotherafailingitwasfeltwas
inherentinasystemoffixedparitiesandfree
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capitalmovementsthishasinnowaydiscouraged
theperilofwholesalecrossborderborrowingbeing
conductedinthecurrencyofwhichevercountryhas
thelowestinterestratesapplicable:astratagem
whichinvariablyincreasestheinfectiousnessofthe
Bust,butalsojustasimportantlyhelpsheighten
thefeverintheBoomwhichprecedesit.

Sinoflation:Cheapmoney=cheapgoods

Asidefromthesemoregeneralconsiderations,in
thespecificrecentexperience,therehasbeen
anotherelementinthemix.Thisisthat,asthe
sleepingdragonofChinahasawokentoroar
unrestrainedlyfromitsfactoryfurnaceofathroat,it
hasgreatlyskewedthebalancebetweenthe
internationallytradedpricesofmanufacturedgoods
andthoseofthecommoditieswhichgointotheir
creation.

ForallthegenuineprogressmadeinChinathispast
decade,itisalsoundeniablethatthesignaleffectof
copiousamountsofcheapindustrialcredit;an
arguablyundervaluedexchangerate;preferential
accesstolandoneasyterms;domestically
subsidisedenergy;statefundedinfrastructure;an
absenceofonerousenvironmentalregulations,and
favourabletaxandtariffsettingsaddedtoalabour
forcewhoseemploymentisnotoverburdenedwith
ancillarysocialcostshasbeentofosterboth
exportorientedindustries,perse,andafetishfor
physicaloutputingeneralwhichonesuspectshas
alltoooftentranscendedtheboundsofeconomic
rationality.

RelativePricesofTradedManufacturesvIMFCommoditiesagainstChinesetradeflows
30.0
55.0
80.0
105.0
130.0
J
a
n

9
1
J
a
n

9
3
J
a
n

9
5
J
a
n

9
7
J
a
n

9
9
J
a
n

0
1
J
a
n

0
3
J
a
n

0
5
J
a
n

0
7
J
a
n

0
9
20.0
220.0
420.0
620.0
820.0
Relative Prices(lhs)
Chinese TRD(rhs)

Figure6:Novisibleinflation=GreatModeration

TheupshotofallthatisthatChinahasbeenatonce
avoraciousandnonetoodiscerningconsumerof
commodityinputsandanovereagerdisposerofthe
resultingmanufacturedandsemimanufactured
outputsoftenfindingitselfapricetakeronboth
sidesofthetrade,asaconsequence.

ThishascontributedgreatlytothatsameSatanic
mirthtowhichwereferredtoabove,for,iftheeffect
ofrisingcommoditypriceshasbornelittleweightin
thecounselsoftheWisesincetheywereoften
expungedaltogetherfromthepolicymakers
favouredcoreCPImeasurestheresulting
suppressionoffinishedgoodspricesloomed
decidedlylargeinassuringourelectmonetary
GuardiansthattheCheshireCatversionof
inflationwhichtheyexclusivelymonitorwasstill
grinningbenignlyuponthemevenasthemadness
intensifiedallaboutthem.

OneconsequenceofChinasdeificationofGDP
talliedgrowthwasthatthegratefulcommodity
exporters,sufferingacompleteembarassderichesse
afteryearsofrelativepenury,atoncesetabout
launchingtheirownorgyofoverbuilding,
overconsumption,andoverlendingonemadeall
themoreurgentbytheirrefusaltolettheir
currenciesappreciateasthetermsoftradeshiftedin
theirfavour.Onceagain,whatshouldhavebeena
signalofscarcityandactedasadampenercame,for
alongtime,toactasafurtherstimulant,quickening
analreadyoverrapidglobaleconomictempo.

Here,itisworthpausingtomaketheobservation
that,toacertainextent,therehasbeenasharp
geographicaldividebetweenplaceswherethemore
classicalAustrianbusinesscyclehasbeenin
evidenceandregimeswhereourmodified,modern
versionhasbeenmoredominant.

Itmaybethatthisimpliesthatoursistooparochial
aviewandthatwecouldbetterpictureourstylised
assemblylineasgirdlingtheentireglobe,notjust
spanningitsindividualpoliticalsubdivisions.This
way,wecouldsimplysay,thatjustasdosome
companies,somenationstendedtospecializein
higherordermalinvestment,othersinlowend
overconsumption.Eitherway,eachwasintimately
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tiedtothefateoftheotheranddecoupling,go
hang!

Forexample,inthelikesofChinabutalso,toa
degree,intheotherexportpowerhousessuchas
Japan,Germany,andSwitzerlandeasycreditwas
predominantlyresponsibleforpromotingtoomany
additionstotheLengthofthecapitalstructureand
wasfarlesssuccessfulinstimulatingexhaustive,
endconsumption;bycontrastitunleashedaHigh
StreetandhousingfrenzyofexcessiveWidthinthe
likesoftheUK,Spain,andtheUS.WhenLehmans
fallandAIGsperilbrieflysnappedthenexusof
vendorfinancewhichhadlinkingthetwo,the
resultswerecatastrophicadisasterwhose
aftermathwillbewithusforalongtimetocome,
despitetheconcertedeffortsofmanytoreforgethe
chainsspanningthegreatdividebetweenMakers
andTakersofgoods.

Asadirectresultofthisdivergence,the
consequencesofthebusthavealsobeenmarkedly
differentinthetwocasesrealestatebustsand
muchmoreseverefallsinautosalesinNewABCT
territoriesversusshockingplungesincapitalgoods
ordersandindustrialoutputintheClassicABCT
ones.Sadly,bothhavesincefoundoutthatthey
havedestroyedtrillionsofdollarsofwealthand
wastedbillionsofmanhoursofeffort.Thefirstwere
merrilyconsumingtheircapitalfromthestartina
RakesProgressofcreditenabledoverindulgence,
yetthelatter,thoughcommendablefortheirhard
workanddiligenceinstrivingmanfullytoguide
theirfullyburthenedargosiesuponthetide,
succeedednonethelessonlyinhavingthem
smashedintomatchwoodwhentheyfellvictimto
thesamebewitchingmelody,beingtrilledfromher
fatefulrockbytheLoreleiofLooseMoney,that
beguiledtheirmostprodigalcustomerstoawatery
graveoftheirown.

Neverwasteagoodcrisis

Lastly,tocompleteourlistofchanged
circumstances,wemusttakenotethat,comparedto
theArcadiaoflaissezfairewhichobtainedwhenthe
firstAustriansweredevelopingtheirtheory,the
spaceinwhichprivatebusinesscanoperatehas
becomemuchshrunkeninthemodernpopulist,
ProviderState,aplacewheredeTocquevilles
epitaphfortheRepublicthatitwillendureuntil
thepoliticiansdiscovertheycanbribethepublic
withitsownmoneyshouldbechiselledintoevery
pavingslabandstampedoneachmetallicscrapof
itschronicallydepreciatingcoinage.

DuringwhattheRooseveltcultlikestoregardasthe
gloriousapotheosisofthepeacetimecommand
economyinthe1930s,thegovernmentcomponent
ofGDPasapercentageoftheprivatesectorresidual
ranupfromalowly,preCrash10%toapeakof
19.1%,duringwhichmetastasisthelargestannual
deficitincurredwasoneof~11%ofprivateproduct,
attainedin1934.ThiscombinationtookFederaldebt
outstandingupbyaround30%insixyearstoa
highwatermarkof47%ofpGDPin1935.

Itisthereforesomewhatchasteningtorealisethatin
onlythreeyearssinceWWII(1947,1948and1950)
hasthegovernmentshareeveragainbeenlower
than21%twopercentagepointsabovethefraction
reachedattheclimaxoftheearlieremergency.Such
isthesalutarylessonofthedifficultyinvolvedin
confiningtheevilsofgovernment,onceloosed,back
withinPandorasbox:ahardshipweshallallyet
havetoface.
USGovtDebtThenandNowas%ofPrivateGDP
0.0
50.0
100.0
150.0
200.0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
5.0
55.0
105.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
State&Local
Federal
1930s
2000s
(95.0)
(45.0)

Figure7:NewDeal?BigDeal!

Moreover,thedeficitthisyearwillclearlyexceed
12%ofpGDP(again,abovetheGreatDepression
maximumandgreaterstillifweaddinaheftystate
andlocalgovernmentshortfall,orifweconsiderthe
growthofthevariousotherliabilitiesduethe
authorities).Indeed,theaverageforthepasttwo
yearsshouldcomeinat11.7%whereitwilleasily
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surpassthemaximum8.8%recordedforthatdire
bienniumof1933/4.Asaresult,Federalmarketable
debtoutstandinghasrisen24%pointsrelativeto
pGDPinsixquartersandhasclearlynotfinishedits
ascentbyalongchalk,eventhoughitisalready
higherthanatanytimeinthemodernera,excepting
onlytheyearssurroundingWWIIandtheKorean
carryoverfromthatconflict.

Itisasorryattestationtothespiritofthetimesthat
thislongpersistenceofwhatwereinitiallyseenas
emergencypolicysettingsisnowregardedasbeing
athoroughlyroutineminimum.Whetherthetalkis
ofKeynesianstabilizersor,moreworryingly,ofso
calledstatecapitalism(read:softfascism),itisnow
takenforgrantedthatevenmoregovernmental
interferenceisadesideratuminthestruggletomake
upforthefailuresofthatmisshapenchimeraof
public:privatemiscegenationwhichthemainstream
insistsonconfusingwithcapitalismproper.

Thatthepublicauthoritiesmighttakesomelimited
stepstoremedythemostgrievousofthemistakesto
whichtheirownactionshavegreatlycontributed
maybesomethingwhichformsthebasisofa
reasoneddebate,butseriouslytosuggestthatthe
currentcollapseoftheperverseincentivesinherent
inwhatwemighteuphemisticallyterminflationary
corporatismsomehowgivesgroundsforafurther
damagingpoliticizationofsocietyismerelytopile
erroruponerror.

Tosumup,thoughweneedtobecognisantofits
differenceswhentryingtoanalysetheinvestment
backdrop,thisnewgenusofABCTstillsprings
fromthesamefamilyasitsclassicantecedentin
thatitisatheorywhichdealswiththedreadful
resultsemanatingfromawidespreadfalsification
ofthecrucialsignalssentbyprices,bothbetween
goodsandacrosstime.Itcannot,however,betoo
stronglyemphasisedthattogarblethesesignals
onanationwide,ifnotapanglobal,scaleandso
tomisleadsomanywellintentionedindividuals
intocontributingunwittinglytotheirownruin
canonlybedonewithinaframeworkwhichhas
nothingatalltodowiththefreemarketand
everythingtodowithstateinterventionism.

Theprimary,mutuallyreinforcingevilstowhich
thelatterhasgivenrisearecentralbanksupported,
fractionalreserve,fiatmoneybankingandthe
perniciousrotofwhatJanosKornai(frombitter,
personalexperience)hasmemorablytermedthe
phenomenonofsoftbudgets.Bythislatterwe
meanthecapacityoflossmaking,statesponsored
(orstatesheltered)entitiestoignoreaccounting
realitiesforaslongasthewealthofotherscanbe
transferredintothem,whetherbluntlythrough
taxation,licensing,andacompulsiontousetheir
services;moresubtlyviasubsidiesandpreferential
treatment;orinsidiouslyviainflation.

Thelatter,ofcourse,isthedefaultsetting,forsoft
budgetsandsoftmoneyareofteninextricably
linkedinthedestructionofapeoplescapital.

Reallocatelabour,reallocatestocks,
reallocaterealestate

Evenamongthescantremnantwhoarewillingto
grantthattheAustrianshavesomethingusefulto
sayabouteconomics,therearethosewho
reflexivelychargethatwhatMises,etal,have
elucidatedisnonethelessapartialtheoryinthatit
dealswellenoughwiththeBoomandtheBust,but
thenhaspreciouslittletosayabouttheprocessof
recovery.Itsmanyinfluentialenemiesamongthe
variouscabalsofPlannerstakethisvilification
muchfurther,spittingvenomouslythatitsdevotees
arenaughtbutspitefulLiquidationists.

Likeallgoodjibesthishasjustakerneloftruth,but,
likeallgrosscalumnies,italsoarchlyleavesout
morethanitsays.ToanAustrian,theBoomand
Bustisataleoftheultimatecollapseofasustained,
governmentsanctioned,thoroughlyCanutian
attemptatviolatingthelawsofeconomics.Justas
anavoidanceofsuchattemptswouldunderthis
constructionprecludetheinceptionofthecycle
itself,so,too,doesrecoverycallforaprocessof
holistic,entrepreneurialrecuperationnotmore
Politburotinkering.

AsevenSchumpeter(onlyanAustrianbybirth,
notbyintellectualpedigree)rightlypointedout:
mostofwhatwouldbeeffectiveinremedyinga
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depressionwouldbeequallyeffectiveinpreventingthis
adjustment[tochange].Hewentontoadd:thisis
especiallytrueofinflationwhichwouldundoubtedly
turndepressionintotheshamprosperitysofamiliarfrom
Europeanpostwarexperience,butwhichledtoa
collapseworsethantheoneitwascalledintoremedy.

Yes,weareliquidationistsinthesensethatwe
believethataswiftandrigorousprocessof
bankruptcywouldmostreadilyclearthedecksof
thedebilitatingclutterofirrecoverablesunkcosts
andthusallowforeitheraresumptionofuse,ora
reallocationoftheremainingphysicalcapitalstock
inwayssuitabletothegreatlychangedeconomic
matrixofthepostCrashworldandthereforeat
pricesnewlyremunerativewithinit.Thisisnotto
saythatweareardentDeflationists,muchless
moralSamsonswhowantthetemplepulleddown
aroundussothatsinnerseverywherecanreceive
theirjustdesserts.

Miseshimselfwasatpainstocontrastthedesirable
actofabstainingfromfurtherinflationhowever
painfulthewithdrawalsymptomsinherentinsuch
anabnegationwiththeinadvisabilityofa
deliberatepolicyofdeflation,cautioningagainstthe
latterinnouncertaintermsandexcoriatingthe
Britishforattemptingitin1925byclassifyingitasa
displayofinexcusableignoranceofeconomicsaswellas
ofmonetaryhistory.Theidea,thenasnow,istolet
pricesadjustasrapidlyaspossibletoastable
supplyofmoney,regardlessofhowlargethathas
becomeintheboom.Thatway,weletchangesin
therealvalueofthemoneystocktaketheplaceof
forcedalterations(ineitherdirection)ofitsnotional
one.

Bycontrast,Hayekparticularlyinhislateryears
wasfoolhardyenoughtogofurther,suggestingthat
itwasthemoneyflowwhichshouldbestabilized,
thoughatleasthewasstillconsistentenoughto
confessthattoeffectthisinpracticenotonly
contravenedmuchofhisownphilosophisingabout
thelimitsofknowledgebutalsoriskedintroducing
moreoftheverydistortionshewassoanxiousto
avoid.Alas,thisisnotahumilitysharedbytodays
centralbankchiefswhowilltryanydegreeof
pecuniaryCPRinordertogetLazarustopickuphis
bedandwalk.
Certainly,comparedtothesoftbudget
pharmacopoeiasoftheStiglitzesandtheKameis,
theAustrianmedicalbagmustseemdispiritingly
emptyofpatentcures,itsprescriptionsboiling
downtothebareHippocraticinjunction,Dono
harm,whilerecommendingthatanythingwhich
addstotheemployerscostsorreduceshis
flexibility(folliesespeciallyprevalentwithrespect
tonominalwagetaboos)shouldbeeschewedtothe
utmostdegree.

Nonetheless,thereisagreat,overlookedmeritin
suchstudiedminimalismnotleasttheavoidance
ofunintendedconsequencesofadeeplynegative
kindandthechanceitofferstodeescalatean
alreadyheightenedsenseofuneaseamongpeople
tryingtocometotermswithaharsh,butyetnot
totallyhopelessnewreality.Dothevociferous
proponentsofoverwhelmingforceindealingwith
thecrisisnotseeitsisludicroustoexpectthe
wouldbearchitectsofabrighterTomorrowtostart
buildinguponsuchviolentlyshiftingsandsastheir
policieswouldperpetuate?

Itisclearthatoneofthemainaggravatingfactorsin
theGreatDepressionwasexactlythatwhilenew
moneycouldreadilybecreatedespeciallywhen
theinconstantdisciplineofthebantlinggold
exchangestandardwasabandonedandcurrencies
werefreelyfloated(i.e.,scuttledwithallhands)
theforedoomedbattletorestorethestatusquoante
meantthatdoorstoentrepreneurialendeavourkept
onslammingshutinsteadofbeingprised
determinedlyopenandsothenewlymintedmoney
wasnotaspowerfulastimulantasitmighthave
been.Itwasnotjustthetariffbarriers,butthe
cartelisationoftheNRA(seethethoughtsofLee
OhanianatUCLAifyouwillnottakeanAustrians
wordforthis);themandatory,scorchedearthfollies
oftheAAA;theabdicationtotheextortionismof
organizedlabourinethWagnerAct;the
monopolisationofmarketsbythelikesoftheTVA;
thequixoticchangesinthevalueofthedollar;and
theattackonprofitsthatsoutterlystultifiedprivate
business.

Worsethananyoftheseimpedimentstakensingly
substantialasmanyofthemwereitwasthesheer
inconsistencyoftheirannouncement,application,
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and(often)theirarbitraryabandonmentaspolitical
cronyismandelectoralopportunismtooktheplace
ofgenuineconsumerpreferenceandcommercial
acumenindecidingwhatgotdoneandwhogot
paid.Onetellingsignoftheparalysisthisinflicted
upondecisionmakersoutsidetheprecinctsofthe
capaciousStateorphanagewasthatthecurrentcost
averageageofprivateequipmentrosesharplyfrom
7.2yearsin1925toa74yearsamplehighof10.1in
1935.

Currentcostaveragedageofprivateequipment&softwareinyears
6.0
7.0
8.0
9.0
10.0
1
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Figure8:Amountainoferrors

Ofcourse,todayspolicymakerswillnotdinefrom
exactlythesamemenuofstupiditiesasdidtheir
reveredpredecessorsinoffice,but,evenifwetend
todownplaythechancesofsufferingsuchself
inflictedwoundsasareversiontonaked
protectionism,westillfacetheprospectofthemany
zombiefirmswhichhavearisensuckingupvital
oxygenwhilebeingusedbothassocialpropsand
nakedvotegenerators(GM,forexample);oflabour
costsbeingartificiallyboostedbysuchmeasuresas
Obamasilltimeduniversalhealthcareprogramme;
andofthehockeystickbrandishingGreen
CommissarsofHolyMotherGaiaburstingforth
fromthatneopaganCouncilofTrenttakingplacein
Copenhagen,allzealoustoaddgreatlytothecost
baseofstrugglingcompanieseverywhere.

ToanAustrian,itisonlythroughan
encouragementofanactive,diversified,adaptable
entrepreneurialismthatthepresentwoescanbe
overcomeandfreshopportunitiesexploitedamid
theOzymandianruinofyesterdaysdreams.The
Austrianalsoinsiststhatthiscanonlytakeplace
byusingthoseresourcesrecentlyfreedupeither
byfailureorfatigueinwaysnarrowlyfocusedon
makingprofitsandsoreplenishingabadly
depletedpoolofcapital.Thisispreciselythe
reasonwhythevampiricpresenceofsomanyof
theCorporateUndeadisdecidedlydetrimentalto
theprospectsofachievingalastingrecovery.

Noneofthisistodenytheimpactofmonetary
policy,butonlytocautionthatitseffectsmaybe
ratherdifferentfromthosetheinflationistshad
hopedfor.

EscapeVelocity

Wewrotealongpieceearlierthisyear(Septembers
ResourceRuminations:ShowmetheMoney)inwhich
wetriedtomakecleartheseparatequalitiesof
moneyandcredit,thoughmanywouldargue,
alongwithHayekhimself,thatthedemarcationline
isnotonlyablurredone,butthatshiftsinwhereit
fallsareoneofthecharacteristicsoftheBoomBust
cycle.Indeed,hislatestagemusingsthat
interventionshouldbetargetedatoffsettingthe
evaporatingmoneynessofmanycredit
instrumentswhichtakesplaceduringtheCrash
couldevenbetakentojustifytheextraordinary
QuantitativeandQualitativeEasingprogrammesof
todayscentralbanks.Here,wewouldstrongly
demur.

Certainly,itistruethatcreditcanseemtoactlike
moneythatitcanstretchormultiplyitsefficacy
andnevermoresothanintheBoom.Buttheplain
factisthatcreditisanagreementtodeferfinal
settlementanactforwhichaculminatingtransfer
ofmoneyisasinequanon.Conversely,thosetrading
inandoutoftheBoomare,inthemainpart,
swappingoneformofdeferralforanother:moneyis
thelastthingwithwhichtheywishtobesaddled!

Thisshouldbeparticularlyevidentifweconsider
thatonlyatriflingminorityofthetradesconducted
acrossthemajorstockandfuturesexchangesdonot
endupbeingnettedoutbetweencounterparties.
OTCderivatives,too,areoftennovatedorcleared
viaaprimebrokerwhomayautomaticallyfundhis
clientforthebalancedue;whileasellerofasecurity
mayofteninvestthefundsduetohiminarepo
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whicheffectivelypaysforthesale.Noneofthis
involvesmuchinthewayofmoney.

However,whatisalltoooftenoverlooked,isthatit
isthestockofmoneyproper(orgnesiomoney,as
weshallrefertoithereafter)whichdetermineshow
muchofanetwithdrawalhowlargeafinal
settlementcanbeachievedatanyonetime.What
themarketlooselycallsliquidity;i.e.,theease
withwhichpositionscanbeswappedinsidethe
circleofplayersisnottobeconfusedwiththe
amountthatcanbesimultaneouslyliquidated.
Naturally,duringtheupswing,fewdowishtocash
out,orliquidate,sotheinvertedpyramidofcredit
canbecomeevermoretopheavyifyouwill,a
Ponzischemecanpredominatewhereincredit
increasinglypaysforcredit(aconceptwhichtheoft
quotedMinskymayhavepopularised,butwhichhe
hardlyoriginated).Thisthenwhirlsonandon,with
inflatedpricesboostingcollateralisationandso
cultivatingmoreinflation,untilthemarketfinally
breaks,thesauvequipeutbeginsandbemused
tradersrediscover,totheircost,Cantillonssobering
dictumthatsilver[gnesiomoney]isthesinewsof
circulation.

ItisnotentirelycleartothisAustrianthatthereisa
casetobemadeforfacilitatingthetransmutationof
thispyramidofmisplacedhopeintohardmoney
upondemand,onlyfortryingtoensurethat,ina
worldwheremuchofthatmoneyisprincipallyboth
calledintoexistenceandextinguishedbychangesin
thevolumeofcredit,thatitsstockisheldreasonably
steadysothatthestabilizingfeedbackofitsreal
worthincreasingaspricesfalldoesnotbecometoo
viciouslyshortcircuited.

Withthatunderstood,wecanalsolookanewatthe
interlinkagesbetweendevelopmentsinthesupply
ofmoneyandchangesinthebusinessrevenues
whichmarkitscirculation.Giventhecardinal
importanceofthelatterwhichwehavehopefully
demonstratedabove,itishere,ifanywhere,thatwe
findthepivotaldegreetowhicheconomicdecision
makerschoosetospendthemoneywhichcomesinto
theirhandsorholditforitsownsakeastheultimate
inriskinsurance;asakindofeconomicoption
straddlewhosepremiumistheopportunitycostof
notholdinganearningassetinstead.
Wecanthinkofthisasshowingupinthebehaviour
ofmoneyvelocityandconsiderwhatimpactsit
mightbehavingonthewidereconomy.

Todigressforamoment,theveryideaofvelocity
isactuallyatouchproblematicaltoanAustrian
sinceitisthequotientofonewronglyapplied,
aggregativeentity(nominalGDP,notoverallsales)
dividedbyanother,thewronglyemployedM2or
M3(whicharelargelycredit,notmoneymeasures)
inthetautologicalequationofexchange.Even
beyondthis,weAustrianshaveanepistemological
issue,since,tous,macroaggregatesarenomore
thanexercisesinaconvenient,confirmatory,
statisticalshorthandwhichgiveafeelforthesum
totalofcountlessmillionsofmicroeconomic
decisionsbeingtakenbyindividualsaccordingto
theiruniquesubjectivepreferences.Theythus
provideasnapshotofresults,notcauses,nowhere
moresothanintheusetowhichmoneyisbeingput
atanygivenmoment.

Thefirsthintthatattitudeshavechangedinthe
recessionisthatUSnonfinancialcompanies
themselvesnowholdmorequasimoney(thereal
thingplusforeigndeposits,time&savingdeposits,
andmoneymarketfundshares),bothindollar
termsandasapercentageofnetworth,thanever
before,havingseenthefirstincreaseby25%since
2006to$2.3trillionandthelatterrisefromthecycle
lowpointof8.5%to12.8%atthelatestcount.

QuasimoneyonUSNonfinancialbusinessbalancesheets
$0
$1,000
$2,000
$3,000
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0
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0.0
6.5
13.0
Level,blns(lhs)
%ofNetWorth (rhs)
6.5

Figure9:Buyingthemselvesanoption

Next,althoughitisclearthattherateofincreaseof
realmoneyinthevarioussystemsprovidesagood
leadingindicatorforthelikesoftheISMPurchasing
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managersreport,theGermanIfOindex,Japanese
smallbusinesssurveycashflows,theTankan,the
ShanghaiComposite,Chineseindustrialproduction
andelectricityuse,itisalsoevidentthat,inthis
particularcrisis,actualbusinessturnoverhasbeen
verysluggishtorespondtothevastinfusionsof
gnesiomoneywhichhavetakenplacevelocity(if
youinsist)hasfallensharply.

FRB,ECB&BOEExcessreservebalances(blns)
$0
$350
$700
$1,050
$1,400
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FRB ECB BOE

Figure10:Bah,Humbug!

Incidentally,thisshouldhavebeenratherdifficultto
bringaboutinasystemwheretheamountofmoney
heldinphysicalbanknotesisarelativelyminor
fractionoftheoverallmoneysupply,for,oncethe
restisplacedinabankasademanddeposit,the
banksshouldhavelittlealternativebuttolenditor
spenditandsobeginanewtheclassic,fractional
spiralofmoneybegettingmoney.

Thegreatironyis,then,thatbyencouragingthe
bankstoparkvastexcessesofreservesontheir
balancesheetsandsoallowingmoneytoleakout
ofactivecirculationthecentralbanksmaywell
havehelpedwindowdresscommercialbank
balancesheetsandboostsecuritiesprices,butthey
havealsopartlyneutralisedtheirownfranticefforts
tokickstartthesystem.Itmaybe,ofcourse,that
theywerewiseenoughtorealisethiswouldbethe
caseexante,calculatingthatitenabledthemtomeet
theincreaseddemandformoneyoccasionedbythe
crisiswithoutriskinganimmediateinflationary
overshoot,but,giventheiravowedreadinesstotake
thewildestofmeasuresimaginableinorderto
stimulatetheswiftestgrowthofcreditaggregates
withtheleastpossibledelay,onecannotbutsuspect
thatitmayalsohavebeenasomewhatcomical(if
fortuitous)misstep.

Bethatasitmay,theinferenceisthatifthebiggest
ofallspendersbusinesses,notexhaustive
consumersarenoteagerlyplayingpasstheparcel
soastoparlaycashintogoodsasrapidlyaspossible,
thenthosepricesstillmostlysetintherealworld
(andnotacrossthegamingtablesofthereenthused
capitalmarkets)shouldnotbesubjecttomuchin
thewayofupwardpressure.Empirically,wecan
demonstratethisbyplottingbusinesssalesover
gnesiomoneyagainstchangesintheCPIindex.The
fit,asyoucansee,isagoodone.

GermanBusinessRevenueVelocityvCPI
32.5
22.5
12.5
2.5
0.5
7.5
M
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9
1
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3
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M
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0.5
1.5
2.5
3.5
dVELO(lhs)
CPI(rhs)

SweepAdjustedUSAMSVelocityvCPIYOY%(6mma)
30.0
20.0
10.0
1.5
0.0
10.0
M
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3
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0
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0.5
2.5
4.5
6.5
YOY (lhs)
CPIYOY (rhs)

Figure11:DieSchildkrteandtheTortoise

Misesalreadyknewthisyearsago,ofcourse,
thoughwedoubttheGedankenmastereverdrewa
graphinthewholeofhislongandfruitfulcareer.
Onlywhentherecoverybeginstotakeshapedoesthe
changeinthemoneyrelation,aseffectedbytheincrease
inthequantityoffiduciarymedia,begintomanifestitself
inthestructureofprices,ishowhephrasedit.
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Translated,thismeansthatonceentrepreneurial
activitypassesthethresholdwherethosefirms
newlyexpandingoutweighthosecontracting,allthe
extramoneywhichhasbeencreatedwillbeginvery
muchtomatter.Giventhatwhatwehavebeen
experiencingthispastyearorsoiswhatMises
calledasimpleinflationi.e.,onewherecentral
banksandgovernmentsspendmoneystraightinto
existenceratherthanaproductivestructure
alteringcreditexpansion,thisislikelytofeedall
themorerapidlythroughintodisconcertinglyrapid
pricerisesforallkindsofgoodsandservices.

Shouldthathappen,centralbankpolicymakerswill
besetsomethingofachallengeandnowhereisthis
morelikelytohappeninfairlyshortorderthanina
Chinawherebanksmaybedysfunctionalintheir
ownway,butwheretheyhavenotyetbecomeas
functionallyimpairedashavethoseintheWest.
NorareChinesebusinessmennotablyshyabout
drinkingtheirfillatthegovernmentfaucet,evenif
theirOccidentalcounterpartsremainalittlemore
circumspectthanistheirwont.

Thus,whilethefocusofmosthasbeenontheloose
relationshipbetweencreditexpansionandoutput
growth,whathasbeenoverlookedistherather
tighteronewhichobtainsbetweenmoneygrowth
andheadlineCPI.Thislatterstronglysuggeststhat
wemightbeinforarathernastysurprisebytheend
ofthefirsthalfof2010.

ChineseCPI(t+9)vRealM1YOY
10.0
5.0
0.0
5.0
10.0
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9
3.0
10.5
18.0
25.5
33.0
CPIt+9(lhs)
d2CPIt+6(lhs)
RM1 (rhs)

Figure12:THEsinglebiggestriskfor2010

QEorQED?

Aswehavenoted,however,quantitativeeasing
hasasplannedactedtoboostsecurityprices.It
hasdonethisnotonlybyrelievingthemarketof
someofitsexistingholdingsofpaperandby
absorbingsomeofthetorrentofgovernmentpaper
floodingintothemarketnowtheshadeofKeynes
hasbeensummonedupfromtheEighthCircleof
theInferno,butalsobyplacingmoregnesiomoney
inthehandsofnonbankfinancialinstitutionssuch
asinsurersandpensionfunds.Thishassparkedits
ownkindoffractionalreservewhirligigaseachhas
triedtodisencumberhimselfofthismostclosely
dentallyinspectedofgifthorses.

Thishasbeeneffectiveevenuntothesecondpower
sincetheabhorrenceofhavinganythingbutthe
mostexiguoussmatteringofliquidassetsinthe
portfoliohasgrowninlockstepwiththeriseinthe
priceofstocksandbonds.Thesocalledsmart
moneymayhavegoneovertheAngelFallsfully
investedlastyear,butHeavenforbidthattheynow
havethewitorthemoralcouragetotellthoseto
whomtheyhaveafiduciarydutythattheyhave
learnedalittleprudencefromtheordealnotwhen
theyhaveabenchmarktochaseandfeestoearn.

Thus,forexample,thepercentageofsuchassets
heldbyUSstockmutualfundshavingrisenby
onlyafewpercentagepointsduringtherout(partly,
onesuspects,asthepriceofeverythingelse
tumbled)arealreadybacktowithinawhiskerof
theirlowesteverlevels.
ICIUSStockmutualfundliquidassetratio%
3.5
4.5
5.5
6.5
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Figure13:MutualfundsGoingallin

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Diapason Commodities Management
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Itshouldalsobenotedthat,forallthemuchbruited
endeavoursofindividualsandnonfinancial
businessestoweanthemselvesoffdebt(whetherby
redemptionorrepudiation!),thecountervailing
thrustoftheSoftBudgetsectorsgovernmental
aggrandizersandstatesponsoredbanking
speculatorshasbeenenoughtonegatemuchin
thewayofanoverallreductionofleverage.

TheevilBanksterswontlendtous,crythesmall
businessmenwithwhosesalvationtheyare
supposedlyentrusted.Tooright!Whygotothe
effortandexpenseofperformingthediligenceon
andlatermonitoringofwhatamountstoamere
microcredittooneofthesurvivingBehemothswhen
thereareahostofsour,oldpositionstobenursed,a
plethoraoflucrative,newmarketgamblestobe
taken,andatorrentofsteepyieldcurve,zerorisk
weightedsovereignpapertoabsorb,eachatalmost
nochargeandatwhatseemslikeverylittlerisk?

ThatpithyseeroftheUnseen,FrdricBastiat,must
bespinningfuriouslyinhisgrave!

BISBankAssets(exSecurities)plusOutstandingDebtSecurities($blns)
$35,000
$55,000
$75,000
$95,000
$115,000
D
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USDTotal
USDTWIadjusted
WhatGlobaldeleveraging?

Figure14:GlobalCreditRelax,Irving!

Here,therefore,wefindamajorfailingofthecentral
policyofreinflation:namelythatithasinstigated
another,potentiallydisastrous,tsunamiof
speculationinassets,increasinglydivorcingtheir
pricesfromtheharshrealityoftheearningpotential
ofthefirmsandindividualsunderlyingthem.This
hascomeaboutbecause,farfrombeingsupported
bymeasurestosmooththetransitionofcapital
awayfromaproductivearraylockedinto
assumptionsaboutascaleandcompositionof
demandwhichnolongerholdgood,ithashelped
financeallmannerofexpensivepoliticalexpedients
designedtopinitfirmlyinplace.

Examplesofthesearealmosttoonumeroustolist,
butamongthemaretheringingEuropean
declarationofeconomicinsanitythatALLofthe
Euroraumsbanksarestrategicandhencecannotbe
allowedtofail;thenudgenudge,winkwinkof
regulators,happytocolludeingrossviolationsof
accountingprinciples;theschemestobringforward
purchasesofhousesanddurablegoods(mainly
cars);theprogrammeswhichkeepsadlyredundant
labourturningupformakeworkattheirnow
flounderingemployers;theunimaginativetwo
massesforthedeadnonsenseofinfrastructure
spendingconductedforitsownsake,andperhaps
mostspectacularlyofallChinasworldwide
welfareinitiativeforthesupportofcommodity
producerseverywhereviaitspurchasesbothdirect
andbyproxyofstockpilesof,e.g.,aluminium,
copper,steel,andironoreaswellasofthecars
andotherwaresintowhichtheyarewrought.

DCIpriceindexvCRUSteel&SandyBargeCoaldivergence(100xSigmas)
(200.0)
(100.0)
0.0
100.0
200.0
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DCI/Steel
DCI/Coal

Figure15:ValuevPriceGuesswhichtradesmost

AstheheadofChaseNational,WinthropAldrich,
toldaWiseMonkeymeetingoftheSenate(ina
testimonynodoubtghostedbyhisestimablechief
economist,BenjaminAnderson)aspartofahearing
intothecausesandremediesofthenascentGreat
Depressionin1933:

Theneteffectofthese[valorisation]effortstomaintain
thepriceofwheatwasmerelytodeferthefacingoffacts.
Productionheldupmorethanitwouldotherwisehave
heldup...surpluswasaccumulated...

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Plusachange,youmightthink.

But,believeitornot,youcannotfoolallofthe
entrepreneurs,allofthetime,andsotheurgetocut
costsandtobuttressthebalancesheetasameansto
adapttowhatmightbealonglastingloweringof
revenuesisnottobedeniedbyanastutebreedof
menandwomenwhoaresubjecttojustifiable,if
oftenunarticulated,fearsabouttheunwelcome
sideeffectsofstateintervention,Someoftheseare
centredontheamountoffavouritismlikelytobe
showntotheotherwiseuncompetitivezombiesto
whomLeviathanmustcontinuetofunnelboth
resourcesandordersfortheresultingoutput:some
relatetotheuncertaintyaboutwhichparticular
stimulusprogrammewillendwhenandso
collapsethevariouspocketsofartificiallyelevated
demand.Perhapsmostworryingofall,theyare
profoundlyconcernedaboutthesizeofthefuture
taxbillandabouttheviciousnessoftheassaulton
capitalwhichmustresultwhentheShepherd
eventuallydecidesthatallthisexpensivehusbandry
mustbepaidfor,bothinfleecesand,inextremis,in
lambcutlets,too.

Allthisremainsinfluxatthemomentandits
determinationisthereforetheobjectofanavid
enquiryacrossthewholespectrumofpoliticaland
economicopinion.Aswehaveargued,however,
fartoomanyoftheseekersaftertrutharepeering
intothewrongendofthetelescopelookingonly
forsignsthatendconsumershavebeenmagically
touchedoncemorewiththeKeynesianfairydust
ofconfidence.Wehopetohavepersuadedyou
here,DearReader,tostopyourearstotheir
incantationsand,puttingthehorsefirmlybackin
theshaftsaheadofthecart,tofocusonwhat
businessesaredoinginstead.

Pickacardanycard

Inthatsameaddresstowhichwealludedabove,
oneironicallydeliveredbythesonoftheoneofthe
meninstrumentalinsettinguptheFederalReserve
duringthedisquietingpauseofferedbefore
Rooseveltsfreneticallyharmfulexpansionof
executivepowerbyhisselfishlyaloofinterregnum,
Aldrichcontinuedthus:
Thevolumeofbankcreditdoesnotdependaloneon
thevolumeofbankreserves[but]onthetemperofthe
businesscommunity,andonthemovementofgoodsand
onthepricesatwhichthegoodsmove.Giventhe
restorationoftheexporttradeandrevivalofraw
materialprices,creditwillexpandrapidly.Thereisno
usetryingfurthertoforceitfromtheotherendbyan
artificialincreaseinbankreserves

Everythingwehavesetoutinthepagesabovetends
totheexactsameconclusion:letushopethatthe
ignoratioelenchitowhichthisincontrovertible
reasoningisnonethelessalmostuniversallysubject
doesnotleadtothesamesorryoutcomeasitdidin
Aldrichsday.

Inthemeanwhile,acertainamountofcautionis
warrantedthankstothefactthattheprovisionof
whathasturnedouttobeanotiosesuperabundance
ofmoneyhasledustoinveigleourselvesintoa
situationwherethemarketispricinginapaceanda
magnitudeofrecoverywhichmaynever,infact,
materialise.Accordingly,thebreak,ifitcomes,will
beallthemoreviolentandtheresulting
disappointmentrisksbeinghorriblyself
aggravating,notonlythroughtheshocktoafragile
confidenceitwouldimpose,butbecauseitcould
shatterwhateversimplefaithpeoplemayhavein
thecapabilitiesofthePlanners.Afterall,the
conjurorcanonlyproduceapennyfrombehind
yourearjustsomanytimesbeforeyouwearyofthe
illusionandbegintoentertaindoubtsaboutbothhis
repertoireandhiscompetence.

Itmaybethat,inthecomingyear,theaudience
quitsthetheatre,itsmembershappyfortheirhour
ofdiversionandeagernowtobeabouttheirown
affairsoncemore.Iftheydo,thatparticularexample
ofanexitneedstoberigorouslyfollowedupbythe
kindsoliberallypromisedbyourlegionofpump
primers,orvelocitywillriseastransactionspick
upandexcessmoneywillfeedstraightbackinto
disruptivelyhigherprices.

Conversely,however,ifthethoughtofthegalestill
howlingoutsidekeepsmostofthehousesittingin
theirseatsforanencore,theymayrapidlyturn
restiveatseeingthesame,tired,oldtricksbeing
performed,eveniftheaccompanyingdrumrolls
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Diapason Commodities Management
Lausanne & London
20
Tangible Ideas Dec 2009
andcymbalcrashesswelltoadesperatecrescendo
inanhystericalbidtoretaintheirinterest.

Eitherway,asthecurtainfallson2009,hemaybe
revellingintheapplause,but2010mightjustbethe
yearwhentheGreatMarvofindshimselfbooed
roundlyoffthestage,nothubristicallyfeaturedon
thecoverofTimeMagazine.

SeanCorrigan,
ChiefInvestmentStrategist,
sean.corrigan@diapasoncm.com

AppendixI

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Diapason Commodities Management
Lausanne & London
21
Tangible Ideas Dec 2009

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Diapason Commodities Management
Lausanne & London
22
Specialist Capital Goods
suppliers can be thought
of as outside yet attached
to the chain
Resource Ruminations Oct 2007


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Diapason Commodities Management
Lausanne & London