More Stimulus!? Please!

December 3, 2014

The falling oil price is good for the budget in Japan. It’s also positive for consumer spending, so perhaps we could see some light at the end of the tunnel as a result... But of course, it could put the inflation targets of the BOJ under pressure. You’re looking at potentially more stimulus next year. That is what some analysts are talking about...”

— Squawk Box Europe

That just happened to be on in the background a few days ago, causing me to stop what I was doing and hit rewind on the PVR just to write it down for you.

After all, how much more stimulus can even the most resilient economy endure?

You’d think there has been enough of it already, with the US central bank finishing year six of “ZIRP”, following in the footsteps of the Bank of Japan, which has pursued that policy for decades.

If you’re stimulating and within a short time of stopping realize that you need more stimulating there's got to be something wrong with the whole idea.

In truth, policymakers are killing jobs every day they stimulate – proving only that they have no idea where jobs come from.

The word “stimulus” is a euphemism for a wasteful redistribution through fiscal policy (government borrows and spends) and/or monetary policy (government counterfeits the currency and suppresses interest rates), usually both. It is the product of the general idea of interventionism brought to you by your progressive neighbour, the dogmatic superstition that government can and should fix anything.

The Keynesians and neoclassical establishmentarians categorize it as a “stabilization policy”, as Wikipedia describes it, implying that it does something more than simply reshuffle the deck chairs, as though it catalyzed growth, or softened a bust. Any empirical study of market history can disprove that latter claim in particular. The problem with most (Fed paid) economists is that they stubbornly hold to the myth that the free market system is inherently unstable and government is the key to patching it up.

If it weren’t for Roosevelt, they say, the banking system would have gone to hell and free market capitalism with it in 1933! That’s your standard history. As if, without the government’s oversight and stabilization policies, the capitalist system would be prone to recurrent business depressions like then!

Imagine that. A world with recurrent business depressions! Good thing we don’t have free market capitalism running rampant or else we’d have a lot of depressions. Or as Keynes put it in his how-to guide for central planning in a totalitarian society, the unhampered capitalist economy would get stuck in a liquidity trap, with prices falling, interest rates at zero, plus or minus, and growth stagnant.

Unfortunately for the progressive historian, that’s a moot point now!

We do not have a purely free market economy and arguably never really had. But, surely the government has been regulating, hampering, and increasingly subsidizing the capitalist system since at least 1913. That’s when it created the Fed, the income tax act, and adopted other progressive measures, thereby turning the constitution of limited government into unlimited government.

[If you don’t believe that these things ultimately led to the great depression, then at least since the Roosevelt era! Right!?]

How well have their stabilization policies worked? How much time, how much computing power, do bureau-rats, with all their supposed sophistication about society, need to stabilize inherently unstable capitalism? Their intellectual supporters continue to blame the free market system when things go wrong, which is is easy to do if you stop the analysis before getting to the ultimate cause of the evil.

Most people, moreover, don’t like to think beyond the next sentence coming out of their mouths.

But what if it’s the other way around. What if the progressives have it wrong? Heck, what if Marx was wrong after all dammit and the free market system is not actually unstable, and the true cause of financial crises and business depressions all along was the state-sponsored interventionism?

What if everything really did happen for a reason, a real one, not a metaphysical Geist.

Indeed, how much intervention does it take to get the sheeoples to see it is intervention that is to blame, not the market mechanism? None of this is really original. Nor is it an idea that has been refuted.

It is just ignored, systematically and preferentially. In his outstanding treatise, planned chaos, in which Ludwig von Mises argued how interventionism and socialism can only lead to chaos, he wrote how:

Anti-capitalistic policies sabotage the operation of the capitalist system of the market economy...All those evils which the self-styled "progressives" interpret as evidence of the failure of capitalism are the outcome of their allegedly beneficial interference with the market. Only the ignorant, wrongly identifying interventionism and capitalism, believe that the remedy for these evils is socialism.” (i.e.: or more interventionism.)

What a remarkably novel concept: government produces chaos, not free markets?? If only people knew!

Like any intervention, stimulus undermines and misallocates capital (and labor) - by directing it to unsustainable and unproductive activities. If it is supporting an uncompetitive enterprise it is doing so at the expense of a more productive one. When the intervention means suppressing interest rates below their natural level (thereby ignoring their free market function), it overrides free market incentives for saving and investment, supplanting savings with pure money creation instead, and then directing that.

By discouraging private saving they are effectively taking over the investment function -its direction!

Now how can that go wrong?? Hint: shortfall of saving trips up investment at some point.

To sum up: an investment boom driven by “stimulus” is the antithesis of the concept of economic growth, which can only be sustained by real savings-backed investment.

There is no shortcut. You can’t turn stone into bread.

Only the real abstention from consumption (saving) can sustain sound investment, and deliver economic growth. The forced saving through money creation (government controlled monetary policy) that results in subsidized investment booms only stretches the available resources of the economy, eventually undermining capital, which in the final analysis supports jobs, consumption and growth.

The artificial boom comes at the expense of saving and is thus a tax on capital. It is a burden on progress and growth. The only reason it seems like prosperity is because the stimulating policy encourages people to consume their wealth rather than create it -in the expectation that consuming drives growth. It goes without saying, of course, if you decrease saving rates and believe that will make you wealthier, it’s just a delusion. But more consumption can feel like prosperity because that’s where growth eventually leads.

The Fed tries to replace those savings it compels you to squander with money creation, thereby producing the boom-bust cycle, effectively fueling the delusion. Now that may all be abstract to you but the inevitable economic downturns destroy countless lives, as well as many potential jobs and wealth.

What a surreal world it is, to watch pompous pundits puzzle over various social or economic problems, always to ask the same bloody question: What should the government do about it? Whether it is poverty, inequality, unfairness, price-gouging, climate change, war - name your injustice - the solution to every problem always and inevitably requires some act of coercion by the state apparatus to right a wrong.

In spite of the multitude of solutions employed by them in their everyday lives without having to resort to the use of force or coercion, people are simply conditioned in this narrow minded response. So be it.

If people want stimulus, as Mencken might say if he lived today, they deserve to get it good and hard.

Gold Trade Continues Under Pressure

The oil price collapse and a no vote for sounder money in Switzerland weighed heavily on gold.

The gold price is off $50 in two days, back to $1150.

After a retracement bounce in gold prices back up to resistance levels last week, a plunge in oil and copper prices - mostly on supply side dynamics in my opinion - unnerved precious metals’ bulls again, resulting in another sell off in the metals as well as the equities of the producers who extract them.

Weak commodity prices have been a drag on the gold trade since summer, after a promising first half rally failed. But now the CRB is making new 4-5 year lows while the USD is making new 4-5 year highs.

In addition, the collapse in oil and gasoline prices is likely to give financial markets a boost because of the usual expected effect of those declines on consumer spending and manufacturing profits (mining is also sensitive to energy costs btw), as well as inflation expectations, in turn continuing to cap bond yields while simultaneously stoking concerns of a coming deflation shock – a double negative for gold.

Nothing is easy is it?

You’d think that a situation where people are begging for more stimulus when we have already had a record amount of intervention in money and interest rates, and an unbearable amount of public debt, would have given gold more support. But the absence of inflationary fallout while stock prices keep roaring higher has destroyed confidence in the precious metals. The fundamentals are as strong as ever, even stronger than ever, but none of it matters if the narrative isn’t producing inflation and instability.

In this narrative, the fall in oil is just another reason to sell gold – especially combined with the no vote in the Swiss referendum this weekend – in a psychologically weak market. But it is a net positive if it is stoking the progressive impulse to inflate, and lulling policymakers into a further false sense of security.

The Bust Hypothesis

While the oil price decline might buy the bulls a bit more time, recall that we have been arguing recently how the declining trend in money growth in the leading economic hubs may be about to undermine the boom. What if the oil price decline is somewhat of a canary-in-the-coal mine omen that Wall Street bulls ignore in their exuberance about the latest data from auto sales and consumer spending over Christmas?

In other words, what if the oil price is falling because of the slower rate of growth in money in the US, EU, Japan, and China?? There may be some fundamental supply side factors contributing to oil’s decline but to the extent that it is part of a broader decline in commodity prices, the culprit responsible is most likely monetary. In other words, maybe the declining oil price is confirming our bust thesis: that we are heading towards a bust -with stock and bond (financial) markets way too far ahead of an expected QE in Europe and Japan, and far too overvalued and reliant on Fed support in the US and Canada. However, given the way attitudes are today, the risk is we get a premature over reaction from monetary policy.  It is very unlikely we will see a deflationary policy, not until people understand the benefits of sound money -which not even the Swiss want.

******** 

Subscribe to the premium letter to access my recommendations in this sector.

(Source:  Ed Burgos:  www.dollarvigilante.com)

Ed Bugos is a mining analyst, investment banking professional, and senior analyst at The Dollar Vigilante (an online guide to surviving the dollar crash), with more than 20 years experience in the investment business advising clients on portfolio and trading strategies.

14 karat gold is 58.5% pure gold