Perhaps next time the market should set interest rates

1. Agcapita
February 6, 2012
Briefing

2. Agcapita Briefing
NEXT TIME PERHAPS WE SHOULD LET THE MARKET SET
INTEREST RATES
I thought perhaps I would indulge in a little gallows humor at the
“sudden” discovery of the insolvency of western nations - after all it’s
a theme on which my partners and I have been focused for some
time and there is only so long one can remain on high alert about the
future without trying to have some fun at its expense.
It has been quipped that history might not repeat but it certainly
rhymes. Who can read the following quote from Andrew White
recounting the hyperinflation of the French assignat in the eighteenth
century and not see some striking similarity to current events?
“The first result of this issue was apparently all that the most
sanguine could desire: the treasury was at once greatly
relieved; a portion of the public debt was paid; creditors were
encouraged; credit revived; ordinary expenses were met, and,
a considerable part of this paper money having thus been
passed from the government into the hands of the people, trade
increased and all difficulties seem to vanish. The anxieties of
Necker, the prophecies of Maury and Cazales seemed proven
utterly futile. And, indeed, it is quite possible that, if the national
authorities had stopped with this issue, few of the financial evils
which afterwards arose would have been severely felt; the four
hundred millions of paper money then issued would have simply
discharged the function of a similar amount of specie. But soon
there came another result: times grew less easy; by the end of
September, within five months after the issue of four hundred
millions in assignats, the government had spent them and was
again in distress. The old remedy immediately and naturally
recurred to the minds of men. Throughout the country began
a cry for another issue of paper; thoughtful men then began to
recall what their fathers had told them about the seductive path
of paper-money issues in John Law’s time, and to remember the
prophecies that they themselves had heard in the debate on the
first issue of assignats less than six months before...”
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3. Agcapita Briefing (continued)
Obviously, Mr White’s quote is unlikely to be anyone’s 1921: 263 marks, December 1923: 4.2 trillion
idea of humor but permit me to add the laugh track marks.
so to speak. For those of you unfamiliar with the
assignat or for that matter Europe’s track record with And yet they keep on trying. Full marks for
fiat inflations, France and Germany alone have had 4 determination. Though given the asymmetrical
noteworthy and complete fiat currency failures (and distribution of the benefits and the costs perhaps
counting?): there is something more sinister than meets the
eye in their dogged Keynesian devotion to nominal
1) 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 celebrity
2) 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 interest
3) 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’s
4) 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.”
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4. Agcapita Briefing (continued)
How comic and also convenient that the political comes down to how complex systems correct where
class and their Keynesian court advisors have been risk and failure have been allowed to accumulate
obsessed with the wrong part of the economy almost indefinitely through bail-outs? Do they go
for almost 40 years. Unlimited, deficit driven through a gradual purging of mistakes? Or do they
consumption is only possible, granted sometimes for collapse? These are not trivial questions as they bear
an intoxicatingly long period of time, via the illusion of directly on how we as investors conduct ourselves
wealth created by an ever-expanding fiat currency. It over the next decade. I tend to err on the side of the
does 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 the
Just how bad are our problems? Difficult to quantify cost of one of the most important commodities set
in the limited space available here, so permit me by government agencies - the commodity being
to fall back on another quote, this time from the interest rates on money and the agencies being
venerable Ludvig von Mises. Though 60 years old it central banks? Can that give anyone comfort given
seems 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 not
of a boom brought about by credit expansion. The mean to make an ideological observation here, just a
alternative is only whether the crisis should come mathematical one. The track records of the so-called
sooner as a result of the voluntary abandonment of right and left are equally uninspiring in their respective
further 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, our
tell the Germans shall we, as Greece is still hoping to governments and their proxies in the banking sector
collect a $150 billion donation or are we still calling will continue to lurch from one crisis to another, each
them loans? progressively larger and more unexpected (at least
by the Keynesian powers that be). More alarmingly
As 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 of
important if still somewhat removed from this stage of innocent and long-suffering taxpayers. Savings that
the financial crisis - the conclusion. More specifically the same taxpayers need desperately to fund their
what form the conclusion is going to take. The issue dwindling prospects of retirement.
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