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- Feb 6 2012 Briefing


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Perhaps next time the market should set interest rates

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- Feb 6 2012 Briefing

  1. 1. AgcapitaFebruary 6, 2012Briefing
  2. 2. Agcapita BriefingNEXT TIME PERHAPS WE SHOULD LET THE MARKET SETINTEREST RATESI thought perhaps I would indulge in a little gallows humor at the“sudden” discovery of the insolvency of western nations - after all it’sa theme on which my partners and I have been focused for sometime and there is only so long one can remain on high alert about thefuture without trying to have some fun at its expense.It has been quipped that history might not repeat but it certainlyrhymes. Who can read the following quote from Andrew Whiterecounting the hyperinflation of the French assignat in the eighteenthcentury and not see some striking similarity to current events?“The first result of this issue was apparently all that the mostsanguine could desire: the treasury was at once greatlyrelieved; a portion of the public debt was paid; creditors wereencouraged; credit revived; ordinary expenses were met, and,a considerable part of this paper money having thus beenpassed from the government into the hands of the people, tradeincreased and all difficulties seem to vanish. The anxieties ofNecker, the prophecies of Maury and Cazales seemed provenutterly futile. And, indeed, it is quite possible that, if the nationalauthorities had stopped with this issue, few of the financial evilswhich afterwards arose would have been severely felt; the fourhundred millions of paper money then issued would have simplydischarged the function of a similar amount of specie. But soonthere came another result: times grew less easy; by the end ofSeptember, within five months after the issue of four hundredmillions in assignats, the government had spent them and wasagain in distress. The old remedy immediately and naturallyrecurred to the minds of men. Throughout the country begana cry for another issue of paper; thoughtful men then began torecall what their fathers had told them about the seductive pathof paper-money issues in John Law’s time, and to remember theprophecies that they themselves had heard in the debate on thefirst issue of assignats less than six months before...” 1
  3. 3. Agcapita Briefing (continued)Obviously, Mr White’s quote is unlikely to be anyone’s 1921: 263 marks, December 1923: 4.2 trillionidea of humor but permit me to add the laugh track to speak. For those of you unfamiliar with theassignat or for that matter Europe’s track record with And yet they keep on trying. Full marks forfiat inflations, France and Germany alone have had 4 determination. Though given the asymmetricalnoteworthy and complete fiat currency failures (and distribution of the benefits and the costs perhapscounting?): there is something more sinister than meets the eye in their dogged Keynesian devotion to nominal1) France 1716: John Law introduced paper money GDP growth. Cui bono anyone? In any event, their to France in the form of livres. Louis XV required perseverance has finally borne fruit as European that all taxes be paid in livres. Ostensibly, the politicians can now proudly claim to have discovered currency was backed by coinage. However, the the holy grail of economics in the form of a perpetual new paper currency was rapidly inflated until motion machine whereby bankrupt nations bail nobody wished to hold worthless paper and out other bankrupt nations and so on. Why didn’t demanded the coinage. After making it illegal to someone think of this sooner? export any gold or silver, and the failed attempts by the locals to exchange their paper currency for Sadly you and I don’t live in the nominal GDP world something of actual value, the currency collapsed. inhabited by politicians, central bankers and celebrity2) France 1791: In the latter part of the 18th Keynesian economists. We live in the much more century, the French government tried fiat currency demanding real GDP world - you know the one with again - called “assignats”. By 1795, inflation of cash-flow, assets, liabilities, products, customers and assignats was running at approximately 13,000% all those other bothersome details. But you say, surely per annum. we must expand the money supply to lower interest3) France 1930s: In the 1930s, the French rates, to stimulate demand, to save the economy. government took over the Bank of France and introduced the paper “franc”. It took only 12 years Perhaps it’s a case of “financial crisis attenuation for them to inflate their currency until it lost 99% sickness” but I feel compelled to rely on the wisdom of its value. of others to make my points this week. Let’s4) Germany: Post-World War I Weimar Germany reflect on the thoughts of Jean-Baptiste Say on is one of the most well known episodes of consumption: hyperinflation in history. The Treaty of Versailles imposed heavy reparations on Germany. The “The encouragement of mere consumption is no German government took the expedient of benefit to commerce because the difficulty lies in printing the money to make the repayments. supplying the means, not in stimulating the desire Inflation was so high that it was cost effective to for consumption; and production alone furnishes burn marks to heat your home. Here is a brief those means. Thus, it is the aim of good government timeline of the Mark/U.S. dollar exchange rate at to stimulate production, of bad government to 2 year intervals: April 1919: 12 marks, November encourage consumption.” 2
  4. 4. Agcapita Briefing (continued)How comic and also convenient that the political comes down to how complex systems correct whereclass and their Keynesian court advisors have been risk and failure have been allowed to accumulateobsessed with the wrong part of the economy almost indefinitely through bail-outs? Do they gofor almost 40 years. Unlimited, deficit driven through a gradual purging of mistakes? Or do theyconsumption is only possible, granted sometimes for collapse? These are not trivial questions as they bearan intoxicatingly long period of time, via the illusion of directly on how we as investors conduct ourselveswealth created by an ever-expanding fiat currency. It over the next decade. I tend to err on the side of thedoes not, however, create long lasting prosperity as sudden discontinuous events model but we shall see.ultimately becomes apparent. In supposedly free market economies why is theJust how bad are our problems? Difficult to quantify cost of one of the most important commodities setin the limited space available here, so permit me by government agencies - the commodity beingto fall back on another quote, this time from the interest rates on money and the agencies beingvenerable Ludvig von Mises. Though 60 years old it central banks? Can that give anyone comfort givenseems almost purpose written for today. government track records in administering even simple tasks let alone controlling the yardstick by“There is no means of avoiding the final collapse which all economic activity is measured? I do notof a boom brought about by credit expansion. The mean to make an ideological observation here, just aalternative is only whether the crisis should come mathematical one. The track records of the so-calledsooner as a result of the voluntary abandonment of right and left are equally uninspiring in their respectivefurther credit expansion, or later as a final and total areas of focus.catastrophe of the currency system involved.” I digressed. Unless market forces are allowed to re-For once I hope Mises is wrong. Regardless, let’s not assert themselves in the interest rate markets, ourtell the Germans shall we, as Greece is still hoping to governments and their proxies in the banking sectorcollect a $150 billion donation or are we still calling will continue to lurch from one crisis to another, eachthem loans? progressively larger and more unexpected (at least by the Keynesian powers that be). More alarminglyAs much fun as it is to mock hapless politicians and is that the solution will continue to be massive bail-central bankers I do want to talk about something outs in the form of the purloined savings of millions ofimportant if still somewhat removed from this stage of innocent and long-suffering taxpayers. Savings thatthe financial crisis - the conclusion. More specifically the same taxpayers need desperately to fund theirwhat form the conclusion is going to take. The issue dwindling prospects of retirement. 3
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