Mittwoch, April 14, 2010

Markets Are There To Serve Society...

The silly season has started up in the face of an election in the UK, but in this case it's not about something silly, but rather how absurdly badly politicians understand economics.

Which is very, very bad indeed.

Take a look at this at the Financial Times.

David Cameron of the Conservative Party, in this case my choice for the UK if I were to have one, despite what I will say here, because Brown is so utterly appalling, said this:

...that markets are a means to an end, and not an end in themselves. Markets are there to serve our society, not to suck the joy out of it or trample over its values.

Whoever wrote that has a rather serious case of wishful thinking, as well as an appalling understanding of what markets really are and what they do.

What is really going on?

First, read the Insight column by Russel Napier for the full story, but it boils down to this: governments, in their fervent - and highly misplaced - belief that everything is subservient to them, is after your savings. Mr. Napier's insight is indeed correct:

The roll back of the free market has already begun, driven by the necessity to support a fragile teetering tower of public debt. Commercial banks' new capital adequacy ratios already require banks to hold higher levels of government debt. In due course a transaction tax on financial instruments, apart from government debt, will come to pass. A 'Buffet Tax' which makes short termism expensive and forces owners to engage with managers will come to see as the natural solution to produce markets which 'serve our society'.

The ultimate weapon to force private savings to fund governments will be capital controls. To support public debt to GDP levels not seen since the second world war, we are likely to a see a return of similar forms of market constraints which were necessary in that era. The 'new normal' is not sub par economic growth. The new normal is the roll back of the free markets.

To coin a phrase, yikes.

What Mr. Napier is saying - quite correctly, too, I fear - is that government debt has, effectively, broken the markets.

And he is right. There is too much debt out there for the markets, if allowed to work, to do anything but heavily discount the debt in order to sell it.

This, of course, leads to catastrophe, as the Gods of the Copybook Headings are still there, waiting for their hour of sacrifice and penance.

For politicians to believe that markets are there to serve the state, to serve "society" (whatever that may mean), is the same as saying that the politicians disdain what the markets are telling them, that they believe the markets need to stop speaking truth to power, as it were: markets always do this. Markets are dull, devastating and ruthless: markets don't care if government debt of these almost biblical proportions is going to fund a politician's mistress (or master), to pay for actual improvements to infrastructure, or whatever; all that markets care about is supply and demand.

Right now, government debt is increasingly unattractive: low interest rates, increasing likelihood of sovereign default as the less inconvenient solution to government largess (less inconvenient for the politicians, to be sure), and bond prices that remain too high for the actual return, reflecting the mistaken belief of safe haven. In order to make the sales of bonds more attractive, then, as far as the politicians are concerned, then the bloody markets will just have to knuckle down and buy our bonds, since there is, for the politicians, no alternative.

The supply of political foolishness is virtually inexhaustible. The demand is nil.

The problem?

Taking control over the markets to ensure their political subservience to the whims of their masters. The governments of this world, the ones running up massive debts for anything but the most existential reasons (debt at these levels should never be seen outside of full-blown wars), will have to take your money - my money, her money, his money, the children's college savings - in order to service the debt.

That way lies the madness that always comes before the Gods of the Copybook Headings return.

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