The causes of economic events, as opposed to the often more head-line grabbing symptoms, are frequently overlooked by the mainstream financial media. So while recent public opinion has seen virtually a consensus of hostility towards the symptom of financial sector malfeasance, as yet there does not seem to be a coherent understanding about the cause of the financial crisis.

1. Agcapita Update
November 2011

2. Agcapita Update
KEYNESIAN WRECKONOMICS WORLD TOUR 2011
The causes of economic events, as opposed to the often more
head-line grabbing symptoms, are frequently overlooked by the
mainstream financial media. So while recent public opinion has
seen virtually a consensus of hostility towards the symptom of
financial sector malfeasance, as yet there does not seem to be a
coherent understanding about the cause of the financial crisis. The
Occupy Wallstreet movement is an almost perfect example of this
symptom/cause confusion.
I am glad that the brazenly kleptocratic behavior of politically
favored financial institutions is receiving the criticism it deserves,
but it is important not to let the prime culprits in the ongoing
debacle slip away in the confusion.
At its core, the financial crisis results from the belief amongst the
political class and their Keynesian apologists in tenured academia
that exponential government can be supported by a linear
productive economy.
What we are currently witnessing is the inevitable collision between
the exponential government economy (debt/fiat driven) and its
proxies in the Finance, Insurance & Real Estate sectors (“FIRE”)
and the linear, underlying capital/production-based economy. In
the simplest terms the financial crisis is the direct result of:
– Capital destruction caused by growth in the size of
government;
– Risk subsidies for the FIRE sectors; and
– Artificially low/negative real interest rates that have skewed
western economies to consumption.
All this has taken place at the expense of the productive /capital
based economy in the west. Remember - you cannot print capital;
the real economy ultimately makes the rules.
The political class is all too happy to divert attention away from
its pivotal role in the financial crisis. They are now falling over
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3. Agcapita Update (continued)
themselves to co-opt the legitimate anger at what And so what of the future? Well first of all, I believe it
can only be described as the wholesale looting is wishful thinking that volatility will subside to historic
of our economies by politically protected financial norms anytime soon. Volatility will persist as it results
institutions. But we must never forget what came from the collision of two titanic and competing forces
first. It was the actions of the political class with in the global economy - the liquidation of years of low
relentlessly expansionary fiscal and monetary policy interest rate fueled mal-investments versus continuing
in the form of ultra-low interest rates that provided inflationary fiscal and monetary policy.
the risk subsidy to the financial sector activities. A
subsidy that certain participants from the financial Sadly then, the financial crisis will not end until
sector exploited with ruthless diligence. real interest rates are positive and back to historic
norms, decades of mal-investments are liquidated
But stop and honestly ask if what has transpired and governments are spending within their means.
would have taken place if the central banks had Because of this I believe the key investment drivers to
not slashed interest rates to historic lows following understand over next decade are very different from
the 2001 dot-com crash (which provided the low those that were in place in the last decade. For the
cost fuel for an explosion in the financial sector’s foreseeable future I believe we will continue to see:
speculative activities) and central governments had – Deteriorating finances of the public sector;
not created mortgage markets consisting almost – Monetary authorities willing to fill the gap by
entirely of subsidized loan financing (which in the printing money;
US in the form of Freddie and Fannie Mae provided – Low real growth rates in the west; and
the low cost fuel for an explosion in retail investors’ – High real growth rates in the emerging
speculative real estate activities). Absent these two economies.
government created drivers you would have had no
financial crisis. And so my investment beliefs remain:
Given their culpability in providing both implicit and 1) Underweight investments that rely on real growth
current explicit back-stops to this massive mal- in western markets to generate returns
investment in real estate and financial speculation,
it is unseemly in the highest degree for the same 2) Overweight investments:
politicians to be attempting to absolve themselves of – that are directly exposed to emerging economy
any responsibility and make sure that if anyone is held growth in politically stable parts of the world;
accountable it is not them. We must never forget – that eliminate or reduce counter-party risk - e.g.
that it is the state created interest rate subsidies and farmland versus wheat futures;
financial guarantees that directly or indirectly created – that hedge inflation; and
debts that do not have offsetting productive (cash – whose products have inelastic demand curves.
producing) assets to service them. Debts with no
offsetting assets is the dictionary definition of a crisis. Kind Regards
Stephen Johnston
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