Stock market bubble fueled by printed money

So the Dow Jones has hit 15,000, it was 14,000 just over two months ago, with the S & P reaching a record level, the FTSE is at its highest since 2007, and the German DAX index reaching levels not seen since before the global financial crisis.

It is like the crisis didn't happen, but oddly enough there isn't a huge amount of evidence to demonstrate that this is due to performance, rather than cheap credit.

Yes there has been a bit of a recovery, and yes some stock prices were low compared to expected revenues.

However, as Allister Heath of City AM says:

"Ultra-loose and interventionist monetary policy globally is one of the main causes of this resurgence. Pretending that it isn’t, and that economies – even those like America’s which have liquidated many past malinvestments – could immediately and easily readjust to neutral interest rates and zero intervention is a dangerous delusion.

Much of the central-bank induced madness that led to the last two bubbles is reaching ever more dangerous proportions, not least the Fed’s hubristic determination to prop up markets..."

It was the perpetual issuing of fiat money by central banks that fueled the crisis, with CPI inflation hidden by a combination of plummeting prices from Chinese imports (a scenario that has come to an end, as China no longer offers lower costs) and the inflation being largely seen in stock and property prices.

The new bubbles will be stores of future problems. 

Increases in stock prices due to good performance and optimistic earnings based on improved productivity and market growth are one thing,  increases due to banks, flooded with cheap money from central banks, seeking somewhere to put it, are another.

No one has learned anything.

Thatcher week and then some

It's been huge in the UK.  Paeans on one side, hatred on the other.  So much to read, but today's bits are

- City AM editor Alastair Heath on how the left are wrong that Thatcher's policies led to the banking crisis and as an acolyte of Hayek, she would have disapproved of the protection from moral hazard presented by the pre-crisis regulatory and monetary policy environment (and the post-crisis bailouts).

- People are organising "Thatcher death parties" which, of course, she would say is their fundamental right.  Reminding us all that to even discuss such a thing for a dead leader in the former Soviet bloc would be to risk   the secret police having one, for you, without so much laughter.  She might have wondered if they think their children and grandchildren would be proud of them, and who else they would hold such a party for, but finally that it says more of them than of her.  Highlighted is one Romany Blythe, a drama teacher who is organising a death party saying "people danced when Hitler died" and who proudly flies the red flag.

Think the Holocaust Memorial Day Trust might invite this vapid empty head to meet some people who can tell her what Hitler was like.  She's prove beyond doubt that Thatcher's biggest mistake was not to privatise education.

- The Adam Smith Institute take on current popular UK leftwing pinup Owen Jones on "something called facts", which as a child of communist parents Jones finds get in the way of a good bashing of capitalism.

Meanwhile...

Here is the intellectual depth of most of the hatred of Thatcher

Meanwhile, George Galloway, sympathiser of Saddam Hussein, supporter of "accepting" the election of Mahmoud Ahmadinejad, the man who said the Syrian people are "lucky" to have Bashar Assad as their leader (and who calls out Western intervention wherever he finds it, but is curiously silent about Russia's intervention in Syria, has done one better.

He now sympathises with North Korea with its "innocent and pristine" culture.... of locking up children as political prisoners for the sins of their family.   Of course he still trots out the North Korean line that the USA started the Korean War, a piece of propaganda disproved by the opening of the Soviet archives and even more recently by a few Chinese academic pronouncements.

- Christine Lagarde and the IMF warn against what monetary policy retard Russel Norman is proposing.  Money printing is creating a timebomb (City AM) warning it will be hard to reverse these policies when it is needed without there being a profound market reaction (i.e. bursting bubble)

Capital controls - the tool of the statist

"An economic and political disgrace" is how City AM editor, Allister Heath, describes it.

I call it theft.

Capital controls, a euphemism for banning you from taking more than a sliver of your property out of a particular country.

They are motivated by concerns over the "public good", over "the long term stability of the economy", when in fact the mere fact of introducing them speaks volumes about the latter, and is contrary to the former.

It is the logical end point of the moral turpitude of statists, whose fundamental belief is that private property, really, doesn't exist, but is tolerated and can be confiscated, controlled and shared as long as it fits the big picture, the grand plan.

The plans of politicians who think they know best how to run your life.

Cyprus has no future as a financial hub.  Confidence is utterly destroyed, as depositors, regardless of whether they individually will lose part of their savings as part of the bailout, will abandon its banks.

It's over.  Runs on banks happen because people panic about their property and their savings.  That money is their's, and they frequently worked hard and took time to make that money. 

They rightfully seek to protect it, withdrawing it from institutions that might take it from them, because money is an extension of the self.   It is the product of people's minds and labour, translated into a universal medium of exchange, and a means of storing that value.

Being able to take it out of a country is an extension of the right to leave, the right to take your life includes taking your possessions, includes your bank account.

Of course, banks are not foolproof.  In a free market, people rightfully take a risk in deposits with banks, particularly given virtually all banks engage in fractional reserve banking, lending much more than they take in deposits.  If a bank fails, then depositors should become unsecured creditors effectively being a segment of the new shareholders of the bank.

However, it is quite another thing for a sovereign state to do this, to restrict ALL capital flows out of a country.

You see the primary reason why a government does that is because it knows it has lost the confidence of its people, because it is about to steal from them in one way or another (in this case not through devaluation/QE of the kind propounded by Paul Krugman, Russel Norman and Robert Mugabe).  

It is a sign of failure, the tool of the statist and the act of a scoundrel.

Russel Norman says "fuck the poor" with his economic illiteracy UPDATED

It's a shame really, you can rely on Russel Norman to engage in reality evasion, but his latest attempt to introduce monetary policy into the Green Party's repertoire is laughable. 

It's a big "fuck you" to people on low to middle incomes with savings, because he wants to devalue the New Zealand dollar.  Not because there is a major flight in capital from NZ$ holdings, but because he thinks the NZ$ in overvalued.

Russel Norman knows that the money you hold should be worth less.

Not you, not the millions of people who buy and sell NZ$ and in NZ$ every day, but Russel Norman and the Green Party.

He wants the Reserve Bank to print money to devalue the dollars you have in your wallet or bank account.  

It means that the vast bulk of New Zealanders, especially those on low to middle incomes, with small savings, will have part of their own money TAKEN by stealth by the state.  

They know what it means.  It means an overseas holiday is a lot less affordable.  It means a new laptop, car, books, clothes, TV, mobile phone all become more expensive.  

It means petrol goes up, but the Greens kind of like that, as you should be driving less says transport spokesperson Julie-Anne Genter.  Of course it puts up the price of moving freight as well, and flying domestically.

However, whilst devaluation increases the price of imports, the way Russel wants to do it will increase prices across the board.

It is a recipe for more inflation.  

Yet he wants to increase the availability of credit by reducing interest rates, meaning businesses and consumers can borrow more, and so promoting more demand (after all this is what QE does) so hiking up inflation more and more.

You see, the standard response to inflation of the Reserve Bank is to increase interest rates, but Russel Norman would reduce interest rates.

He wants "new tools for managing asset bubbles", yet would be pouring petrol on property bubbles by allowing loose credit and allowing people to borrow more.

His claim is that this will help the productive sector, because exporters will suddenly get a boost because they will be able to undercut foreign competitors.  This is true, on the face of it.  Devaluations do that, but they also increase the price of inputs into production.  Fuel being the obvious one.  Tourism would become cheaper, for foreigners visiting New Zealand.  However, Air NZ wouldn't be able to take advantage of as much of that as its competitors as two of its biggest long run costs - fuel and the capital cost of aircraft, would rise.  

Yet, Norman ignores the consequences of his approach to devaluation, which would be to generate inflation.  With domestic costs soaring, exporters would find their competitiveness would be entirely wasted as they couldn't spend their renewed returns quickly enough to offset inflation, they couldn't save them (with interest rates on savings below inflation - as they are in the UK, US and Japan today) and would be less and less able to afford imports.

His ignorance is breathtaking.  He says that printing money so that the government can engage in..

"Buying Christchurch earthquake recovery bonds will reduce the need for the Government to borrow offshore. Currently, about 60 percent of all Government borrowing is from offshore.

"Buying overseas assets to restore the EQC's Natural Disaster Fund will prepare us better for any future natural disasters."

So he will print money, for the government to borrow from the Reserve Bank, creating inflation, saving the government from borrowing from those with actual money, by debasing the savings of NZers.  Then, having devalued the NZ$ he proposes using it to buy assets from overseas which will suddenly cost more.

He claims that the UK, US, Japan and the European Union (presumably he means the European Central Bank, as there are 11 currencies in the European Union) engaged in quantitative easing (money printing) to boost their export sectors, which is utter nonsense.  It has been an exercise in trying to stimulate demand in stagnant economies.  After 15 years, Japan remains stagnant, whereas the US has small hiccups of demand that quickly subside.  However, in all these cases the effect has not been to substantially devalue currencies relative to major trading partners (nor was it designed to).

He thinks that the NZ$ has a high value because of speculators, yet he himself wants to speculate with the money held by every New Zealander, by debasing it.

The average New Zealander isn't as ignorant as Russel, because they know that when the NZ$ drops, they lose, unless they have earnings in foreign currencies (which few do).

So the losers are the poor and middle income New Zealanders.  They can't readily open foreign currency bank accounts, buy foreign shares or equities and rescue their savings from the thieving politicians and central bankers out to take it from them.

The rich will bail out of Russel Norman's vision for the NZ$.  They can afford to. 

The poor would have to swallow it.   Give up on the overseas trip.  Give up on buying a laptop or a kindle.  Watch while their savings earn nothing in the bank, and lose value in real terms - just like they did when Post Office accounts offered 2% when inflation was 12% under Rob Muldoon.   

Of course foreigners buying New Zealand made goods and services would do well, because the products would be cheaper.  In fact, a holiday to New Zealand would be so much cheaper.   However, they aren't exactly poor now are they?

The Green vision for monetary policy is simple:

- Take money from NZers' savings through devaluation (who pay more for imports from everywhere) - transfer it to foreigners buying NZ goods and services (who pay less for imports from NZ) and NZers who make money from foreigners buying NZ goods and services using foreign currencies.

- Take money from NZers who are savers and transfer to those who are borrowers (through low interest rates).

- Fuel a new property bubble as NZers use cheap credit to enter the property market as a hedge against inflation, and fuel a new sharemarket bubble as the same happens (fleeing savings accounts as a hedge against inflation, and foreigners buy NZ shares because they are cheap).

- Fuel hyperinflation, as the debased currency puts up import prices and the flood of cheap credit overheats demand.

The people who are hurt the most from devaluation and inflation are the poor.  More money printing will make it worse.   This inflationary spiral can only end by:

- Hiking interest rates as happened in the late 1980s, effectively reversing the "gains" for exporters and businesses by pushing their borrowing costs through the roof, sending thousands bankrupt and bursting the property bubble;

- Banning inflation, Muldoon style, creating shortages - (former) east Germany style

- Abandoning the NZ$.

In all of those scenarios, the people who lose the most are those who are least able to leave the country or shift their savings elsewhere.

Hyperinflation, debasement of savings, makes the Green Party's claim to give a damn about poverty almost laughable.

UPDATED:  Of course The Standard embraces it, tribal like, because they see money printing as some sort of anti "neo-liberalism" project.  (yes, anyone opposing the left just want to eat the poor).  The intellectualism in this post is astonishing "I look forward to John Key, when he gets back from fellating Mickey Mouse" showing how asinine the debate is.

The status quo in the Western world, including all US Administrations since Reagan and UK since Thatcher, has been Milton Friedman's monetarism.  That is to progressively increase the money supply regulated by interest rates set by a state central bank to manage inflation.

Hayek opposed this, Rand opposed this, Murray Rothbard opposed this. Alan Greenspan once did, and then embraced Friedman's view. Detlev Schlichter opposes it now.

A fundamental cause of the global financial crisis is the continual state issuing of new credit and new money, so that it isn't savings being reinvested, but money created from..... nothing.

Monetarism, as it is called, attempts to manage the inevitable inflation arising from this (lowering the value of the medium of exchange by producing more of it inevitably means prices rise), but ignores asset price inflation.  The property and sharemarket bubbles caused by malinvestment are ignored.

It has failed.

QE has been the Keynesian response in Japan, the US, the UK and the Eurozone.  The mass destruction of value due to these bubbles popping has been filled by massive money printing, yet it has not resulted in a sustained kickstart to demand for simple reasons.  One is that the banks, which were the conduit of the cheap credit, have been told to increase reserves, so are filling up their reserves with freshly created cash and banks have also tightened up credit enormously, because they were told to not undertake anymore bad lending.  The other is that there is a lack of confidence in the economic fundamentals.   It is why gold prices have soared, as a safe haven.

It wasn't undertaken to improve export competitiveness.  It has demonstrably failed to boost Japan's economy.  It has created minor blips in the US economy, and nothing more.

For the Standard to say that having a consistently high dollar is about speculators making money from New Zealand is demonstrable ignorance.  To think that, say cutting the value of the NZ$ by 25%, is good for the working poor (when it will raise prices of petrol, electrical goods, overseas holidays and any imported books, clothes), is bizarre.

However, socialists have long thought thieving from the mass of the population through debasing the currency was an easy path to spending more money on what they think is good for them.  Easier to implement than a straight out tax, and easier for all of the elite to evade, by shifting their own savings away from the debased currency, leaving the average people robbed.

Taking from the poor to give to the rich

Yes that's what Labour's David Cunliffe and the Green Party's resident vulgarian, Russel Norman are advocating.

Peter Cresswell gave some clear reasons why it is delusional as economic policy, I'd like to make it a lot simpler.

Devaluing the New Zealand dollar would be the government stealing from the poor to give to the rich.

How?  Because those who win are exporters and those who lose are people who save cash in the bank.

Those with modest savings, without stocks or shares, without the means or wherewithal to shift their money into foreign currencies, equities, gold or property, are the losers in any devaluation.

It debases the cash they hold, whether it be in banknotes or bank accounts.  It takes away from their ability to consume, to buy what they want if it comes from overseas or is dependent on imports as a major factor of production.

It means the poor will less be able to afford an overseas holiday.

It means the poor will less be able to buy a laptop or a games console or a new TV, or books that aren't printed in NZ.

It means the poor will have to drive less (not that the Greens give a damn about that)

The winners are farmers, vintners, hoteliers and moteliers, in essence those who own export oriented businesses (or in the tourism sector) who suddenly find they can undercut competitors in other countries (or in the case of tourism attract visitors).

That of course makes for another group of winners.  Foreign consumers of NZ goods and services.

Devaluation discounts the prices they pay, which of course is the opposite of what happens to the goods and services NZers buy from them.

So there you have it.  The Labour and Green Parties want to reward those who sell goods and services overseas and their foreign customers, by taking wealth directly from New Zealanders who import goods and services from overseas, and who undertake foreign travel.

If you have enough money, you can open foreign currency accounts, you can shift your depreciating NZ dollar into other assets or commodities, and protect yourself from this government endorsed theft by stealth.

However, if you're relatively poor, with savings largely sitting in a bank, you've had it.

That's from the parties who, like attention seeking poseurs, are pretending to live like poor people to highlight how tough poverty is. 

They want to take from the poor to give to the relatively well off. Why?  

Because their entire philosophy is to intervene, to do something, because they know better than the millions of people making individual decisions about what to buy and sell and at what prices, because they are uniquely blessed with greater knowledge, so they can debase the wealth of some to better others, so they look like they've done something good.

They're not.  They are ready to steal by stealth.  Don't let them.

Quantitative easing should upset the left - it's highly regressive

Anthony Randazzo of the Reason Foundation explains why money printing quantitative easing ought to get the socialist Occupy movement out in the streets. 

Which of course wont happen, since their pinup economist - Paul Krugman - is a fond believer in printing more money and spending more money the state doesn't have, to boost the economy.

No doubt some Democrats will think this is a cunning move to give the US economy a boost before the election, as some Republicans think this also, and are criticising it on that cynical basis.  That isn't a reason to criticise it, because it is unlikely to make enough difference to enough people to have an electoral impact.

So why is it bad?

You see you have to ask the question as to who benefits from the creation of new money and who loses.  Bearing in mind Bernanke has said he will create US$40 billion out thin air, every month, until the economy recovers, this matters.  It's also why the price of gold took a big hike overnight.

The beneficiaries are those whose securities the Federal Reserve is now going to buy with its new money.  Those will include the securities holding debt to the Federal Government or mortgages.  So the immediate winners are investors in those securities who now have a willing buyer.  With such purchases, the recipients are the financial institutions who now have money to reinvest.  So it is the shareholders of those institutions who immediately gain from money printing.  The next beneficiaries are those owners of securities, stocks and bonds that gain such investments, as they suddenly find there is more money available to invest.  Prices for stocks and bonds will rise, so existing holders of them benefit.

Those who own such stocks and bonds are going to be primarily other institutions or wealthy individuals. People who are also aware of the counter-risk of money printing - inflation - and so are able to take steps to protect themselves from what inevitably becomes a new round of malinvestment.  Why malinvestment?  Because the flow of "free money" will see choices made that are dependent on what securities the Federal Reserve buys.  The Federal Reserve will want to sweep up government debt and mortgage securities because they are seen as low value investments, so that there is a preference for stocks and shares.  However, with investors having low confidence in the economy, many also sweep into commodities, because they see any scope for rising demand being seen in rising prices for commodities.

So a speculative bubble emerges, with those who joined at the start - those who gained from state purchases of their securities, gaining the most.  Whether it be energy, food or minerals, another round of malinvestment will create a bubble.

That's where we find the losers.  For the consumers of such commodities, be it in purchasing food, heating their homes or even building materials to fix or extend their homes, they face inflation, and as that grows it means their purchasing power declines.

With virtually zero interest rates, it means savers lose out as with growing inflation, they find they are fighting a losing battle.  They can choose to hop onto various speculative bandwagons, but know it is high risk.  So they mix between commodities, stocks and shares, property and various other equities.  Those who already had property theoretically benefit, but few are likely to realise this gain unless they sell at the right time and convert their depreciating currency into another investment.   Of course for those who largely live on receiving an income, they face inflationary pressure with little hope of relief unless their field of employment can afford to raise their wages.   Those who are saving to buy property or indeed anything, are on a losing streak.

In short, what is called quantitative easing, which is a euphemism for printing money, benefits those who the Federal Reserve buys securities from the most, and actively harms those who are poor, who don't own property or whose savings are primarily in bank deposits.  

Will it work?  Well Randazzo believes that private debt levels remain so high that most people are simply concentrating on reducing their levels of debt, rather than seeking to invest.  So whatever trickles down is likely to be used on that.  

Keynesians steal from the aspiring middle classes

You might have noticed the price of gold skyrocketing in the past year or so.  You might wonder if this is a bubble that is going to pop, spectacularly.  Well, it might, but there is a reason why gold (and to a lesser extent silver and platinum) are becoming preferred investments, it is because of fears about the alternatives.  Those fears are because of the abject failure of the Keynesians to deal with a financial crisis that started with a fiat money fueled credit bubble, exacerbated by perpetual government deficits and "saved" by printing money.

You see the real bubble which is being manufacted is inflation.  Central bankers and governments invented the euphemism "quantitative easing" to hide what they are really doing - because most kids at school learnt in economics why printing money doesn't make any sense.  However, quantitative easing is printing money.  It is the easy solution of dictators who don't know how to pay their soldiers, civil servants and the like.  Now it is the easy solution of elected governments who are afraid to let prices collapse in those parts of their economies subject to the credit bubbles, and who are afraid of being forced with the full reality that they have been engaging in fiscal child abuse for decades.   The French government for example, started running deficits in the mid 1970s, so it was borrowing off of people who are now in their 30s and facing either higher taxes or less "benefits", so that their parents and grandparents could have an easier life.

Investors are moving into gold because inflation mean that a whole host of typically "safe" investments no longer are.  Conventional bank deposits (even ignoring the risk of some banks that face sovereign debt risks)

will now not pay enough to cover inflation.  Furthermore, government bonds are now seen as significantly riskier than they once were because of the default of Greece and the near defaults of many others.  Those without such risks are paying such low rates of interest (for demand is so high), they are insufficient to compensate for inflation, so investors diversify their "safe" investments.

Of course what this means is that the vast bulk of the population, who put their savings in "the bank" in some form or another, are losing their money.   In effect, their government is stealing from them by printing money in order to avoid the consequences of others facing devaluations in their businesses, property or other assets.

To put it simply, the Keynesians, who can be seen in both government and opposition in most major governments, are stealing from the vast bulk of the population, by stealth, in order to avoid the fallout of letting some selected businesses and assets from collapsing in value to correct the years of the credit bubbles.   Who does that hurt?  It hurts the young and those on relatively lower incomes who do not have property or do not have any other savings mechanisms.   Don't expect the politicians on the centre-right to have an answer, because they'd rather stay in power, like those on the centre-left.  Those on the far-left want to put their heads in the sand completely, and pretend inflation isn't an issue.

It is - the evidence is seen in gold.

One alternative to gold are to buy shares, which of course many have been doing, although the sheer volatility and complexity of it means that it works well for larger investors and institutional investors who have the in-house expertise to spread risk and seek opportunities for bargains, particularly looking at more robust foreign shareholdings.  The other is property, which of course has been the source of part of the problem in the first place.

The property conundrum is that there have clearly been significant property bubbles in many countries facing the crisis, such as Ireland, Spain, the US and the UK.  Australia has a bubble, but that is commensurate to its own commodity led economic buoyancy.  New Zealand's one is more volatile.   However, we may yet see the spectre of property prices easing up as investors see less risk of losing value in property than in inflation.

Now Central Bank governors and governments may claim that if inflation takes off (we are talking around 5% now, so it's hardly dead) then interest rates will be increased, and the usual monetarist solution to inflation will be applied.  Except, of course, what happens with stagflation?  Will the Keynesians insist that when economic growth is nascent that there should be more and more money printed, and forget inflation?  In which case, batten down the hatches for that battle wont be won.  Or will the monetarists tighten the screws on credit and interest rates, and strangle what little growth there is to kill off the bubble of inflation created by the Keynesians?

For Barack Obama, David Cameron or indeed John Key, the hope is that this doesn't come to pass.   None would swallow what they would have to do to ride things out, which is to give up on printing money, let a significant correction in asset prices occur (including a major slump in property prices and share prices), stop deficit spending and begin the long slow road towards economic recovery based on setting businesses free.

Instead for all of their weasel words, they will continue to steal from the vast bulk of the public by creating inflation, devaluing their own public debt, and creating cheap credit to save themselves from facing voters with the reality of many years of boom and bust economics based on fiat money.

Keynesianism failed before, and it is failing now.  It is about time that both it, and monetarism were consigned to history and a serious investigation begin as to how to reform monetary policy with free banking.   If you think that sounds absurd or frightening, then reflect on the past three years and give a better solution.