28 June 2010

The end of the free market…..

Today we’d like to reproduce extracts from by the excellent Tim Price-The return of real money - “The UK Debt Management Office (DMO) has been voted the most impressive sovereign funding team and DMO chief Robert Stheeman as most impressive sovereign funding official, said EuroWeek. The top award comes as the DMO sold a record £227.6 billion worth of Gilts in FY 2009/10. Hopefully, Stheeman should have better luck than the recipient of last year’s award for most impressive sovereign funding official, who was Spyros Papanicolaou, who is now the ex-chief of the Greek Public Debt Management Agency.”
 
- Hat-tip to Jonathan Escott.
 
Swiss fund manager Felix Zulauf gives a pretty extraordinary interview on King World News. Not extraordinary in the sense of wildly illogical, but extraordinary in the sense of its candour and absolutely chilling in its implications. In short, the industrialised world is drowning in debt that it ultimately cannot service. Zulauf suggests that when, not if, the next banking crisis hits, governments will be unable to step in and support them as they did in 2008, because their own finances are fatally impaired and their capacity to borrow cannot be extended indefinitely. “We have been living in a fiction for the last 20 years or so.. we thought we could borrow ourselves into sustained prosperity.” That which cannot continue forever will not. Zulauf foresees years of deflationary crisis that will culminate in the eventual replacement of the current fiat monetary system. This thesis is, of course, hugely positive for gold, the one currency that doesn’t come with counterparty or credit risk or concerns about oversupply, but hugely negative for financial assets.

Who wins the war between States and Corporations? Ian Bremmer asks the question in his new book, “The End of the Free Market”. It feels like we are in the process of finding out. Across the industrialised world, the State is in the ascendant. President Obama in a shameful attempt to curry favour with a disillusioned electorate has his press secretary pledging to keep his administration’s boot on BP’s throat; in Europe, Chancellor Merkel promises to “win the battle” on behalf of politicians with the free market as the enemy; in Australia, the government has suddenly unveiled a Resource Super Profits Tax on the mining sector which may raise $11 billion in its first two years. In the UK, the population nervously awaits an emergency budget which will shed some light on just how much private wealth the government intends to seize to try and balance its books. It is as if governments are unaware that we live in a globalised world where people can and ultimately will relocate if squeezed too hard by near-bankrupt state authorities.

The Daily Bell, like Felix Zulauf, draws attention to the deflationary decline in the US money supply:

“The real reason that banks STILL aren't lending much may also have to do with the depth and breadth of the downturn. We've written in the past this is no ordinary downturn but a fiat-money blowoff. Western paper currencies, in fact, have all failed at once, including king dollar. They have failed because incessant credit stimulation has so distorted Western economies that even after two years, these economies have not yet returned to a point where banks and other investors can tell the difference between a legitimate opportunity and one that has been kept alive by various forms of governmental chicanery. This is why "stimulus" and "bailouts" are ultimately so counter-productive. They actually retard economic recovery.

Economic ignorance also plays a part in the current crisis. After more than 100 years of concentrated power-elite propaganda, people are rightly confused about money, what it is, and how it works. In a normal-money economy (one with silver and gold) money would gain in value (deflation) gradually over time (rather than lose value to "inflation") because technology would gradually make most goods and services more efficient. During an economic downturn, money might even appreciate faster – cushioning a recession by making savings that are much more valuable.

But in a pure fiat-money environment with mercantilist central banks and their governments spewing money like the BP oil leak in the Gulf, the money economy becomes increasingly distorted along with the real one. The issuance of debt-based pure fiat currency is an invitation over the long-term to disaster. Initially, the phony dollars fool businesspeople into thinking they are richer than they are. Eventually, the economy becomes so distended and distorted that price signals break down, stock markets crash and a recession, or depression, takes hold.

“At this point, money is seen to shrink, to evaporate. Initially, money is seen to disappear because it is locked into non-performing assets that are suddenly seen as irretrievable. And then, banks (the only large entities allowed to lend in a traditional sense) won't lend because it is not possible to make a distinction between what is valuable from what is valueless.”

What is valuable at a time of such combined debt and currency crisis is what is comparatively rare, the likes of precious metals, which can be dug up out of the earth, but only with costly effort and resources. What is not valuable is the deteriorating fiat currency of increasingly discredited administrations. As political risk rises throughout the world, investors would be well served by re-examining what real money is, and just as importantly, what it is not.