Lessons Forgotten So Soon :: by Wilfred Hahn

Four years ago, stock markets in the major developed markets hit their final lows, many having fallen 50% to 70% from their prior highs. Since that point all the policymakers in the world have been huffing and puffing, trying to put things back together again. To date their efforts have not met with sustainable success. If anything, they have been digging themselves into even deeper holes while at the same time dangerously inflating financial assets.

Our perspective has always been that the great spectacular financial crashes at that time were signposts marking the end of an era. The post-WWII period came to its Keynesian endpoint (to use a technical term). That’s the point at which the weight of debt finally broke the aging camel’s back. Factors such as changing beliefs about families, deepening idolatries, deteriorating morals, heightening corruption, and an extreme stratification of wealth were not supportive of continuing prosperity or a continuation into even greater indebtedness. This remains the case.

Yet, macro-economists and policymakers continue to think that they can solve these problems and moral issues by manipulating interest rates and printing money. It seems laughable were they not so serious. Such measures do not deal with the underlying causes or even the symptoms. The post-modern world indeed has its shamans. In recent years, the most popular have been the central bankers. A clear indication of this is the Bank of England’s (BoE) recent recruitment of the Governor of the Bank of Canada (Mark Carney). He is expected to work magic for the British economy. Just why would they pick him to be the first foreign head of the BoE since its inception over 400 years ago? If anything, confidence games such as these indicate the desperation of our times.

Were any lessons learned over the past five years (since the Global Financial Crisis shook the foundations of the world financial markets and economies)? Economists and scholars have now had plenty of time to glean important lessons that would protect against repeated errors in the future.

Rather not, it seems. The financial sector is back to its old tricks, again parasitically sucking profits out of the real economies. As a renowned professor (Dr. John Kay) recently documented, most financial markets have served no important function other than to reward financial industries themselves. Basing his study on Britain’s stock market over the past 20 years, he discovered that it was more a tool for people to cash out than to raise capital for industry. The same conclusions would apply to America according to Dr. Kay.

As the graph on the front cover shows, in the case of the U.S. financial sector, despite the supposedly cataclysmic collapse and following reprimands urging reform over the past half-decade (also necessitating many government bail-outs and mergers), the great leeching by this sector continues worse than ever before. Not only are profits (as a percentage of national income) now bigger than before, these financial institutions are also even bigger and more concentrated than before! The brazenous of this industry is astounding. (We quote 2 Peter 2:22 referencing swine and dogs on the front page in this connection). Perhaps this must be expected during these times, as it thrives on the utility and metaphysical properties of money, the idolatry of which (love) is said to be the “root of all evil.”

While the big worry was that these major financial institutions were “too big to fail” (TBF) they have since also become “too big to rescue.” Lately, they have now literally become “too big to govern.” How so? Read this recent statement made by Eric Holder, the Attorney General of the United States: “I am concerned that the size of these [financial] institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

What he basically said was that the government dare not prosecute any of the banks or other financial players for fear that rocking the boat in this way may risk bringing down the entire economy. That’s the state of affairs that we have today. The corruption and crime is so big and deep that to uproot these tares would risk jeopardizing the entire field. This admission of the real state of affairs in America (and other countries), along with the new unorthodox inventiveness of the world’s central banks, serves as a signpost of the times and forewarns of a grim future. In the meantime, stock markets have been giving no indication of concern, hitting new all-time highs in the U.S.

Have there been any efforts to restore fairness and integrity to the financial and monetary sectors? No, though there have been lone voices advising otherwise. As document in other recent articles (see the most recent issue of Eternal Value Review) ever greater lawlessness and immoral principles are being endorsed by policymakers. We anticipate that in the years ahead, we will witness even greater confiscations and transfers of hard-earned wealth.

The problems have global dimensions. Consider the Eurozone. Is Europe on the mend? Is it overcoming its imbalances and corroding banking sector? The prevailing view is “Yes” because a measure of confidence (induced by the words of Mario Draghi, head of the European Central Bank, last year) has driven down interest rates in the problem euro countries. Yet, in recent times we have seen again how even a small Eurozone member such as Greece (and yet even smaller, such as Cypress), can threaten to bring down the entire European banking system.

Speaking of which, the most recent bail-out of the Cyprian banking system set new precedents, clearly illustrating that no one’s deposits and assets (deservedly or not) are beyond the grasp of the state. People forget that it is political economics (there being no such thing as economics without a political framework) that is at work. When it is deemed to be necessary and for the “greater good,” assets can be so easily confiscated by fiat (even though much if not all is of fiat value to start with.)

Are any countries on a steadier course? Not really. While it took many decades for the Advanced Nations (these being the most wealthy nations) to fall into their current unstable condition, it is remarkable how quickly new entrants to the world of “free-market” economics caught up. We are not referring here to comparative standards of living, but rather financial conditions. Even communist countries such as China wasted no time assuming the bad financial habits of the Western nations. In fact, China boosted its national debt by an equivalent of 40% of GDP in one year (2009) alone, in the belief that this would help generate a rapid economic recovery. It certainly served to provide a short-term boost. But now, it is again falling into a malaise, this time with a much bloated financial system.

Most incredible recently is the growing belief of many prominent economists that the U.S. and global economies are now improving and on the road back to recovery. This outlook is not certain at all…in fact, unlikely. Only in the financial world is the expression of confidence itself taken as a sign of improvement. It is all a process of the blind leading the blind.

There are many glaring facts that do not fit the picture of ruddy confidence. These are conveniently ignored. Why? Because to do otherwise would undermine precious “confidence.” (We show some of these inconvenient facts in chart form on page 3 of the April 2013 Eternal Value Review.) To name a few: the use of food stamps keeps rising in America; unemployment continues to surge upward around the world; the gold price indeed continues to rise in terms of weakening currencies (i.e. the Japanese yen); and people’s retirement assets have not risen in 15 years.

There is a large array of structural problems around the globe. We cannot mention them all. In the case of Europe we will state that much greater challenges lay ahead. A big clash between Germany and France is almost certain as the latter country (a key heavyweight of the Eurozone) is also rapidly headed to a debt trap.