[A-List] New Economy Bull

[Annewilliamson]

Espousal of the Fattest
 
The Daily Reckoning 

London, England 

Wednesday, 11 December 2002 

                --------------------

The Daily Reckoning PRESENTS: Austrian school crusader, 
Sean Corrigan, on why rate cuts won't salvage the post-bust 
economy...on either side of the Atlantic.


ESPOUSAL OF THE FATTEST
by Sean Corrigan

As the matronly European Central Bank hoists up her skirts 
to join in the mad whirligig being danced by the Fed and 
the Bank of England, I'd like to try to show you how 
today's easy money - with interest rates at 40 year lows - 
might actually be causing the current problems afflicting 
British and American business, not curing them.

To begin with, let me state an assumption: no business - 
unless protected by a government-imposed monopoly - has the 
power to set its own realized selling price. Instead, the 
firm's customers express their own individual sets of 
preferences by interacting on the free market. It is the 
customers who establish what they are willing to pay for 
what the company offers for sale. 

In a free market, the most rarefied form of democracy 
exists: we all get precisely one vote for each and every 
dollar we have at our disposal. If one group of people has 
access to more dollars than you, those people will be 
outvoting you. They will be outbidding you and possibly 
pricing resources out of your grasp - whether these be 
directly or indirectly employed labor, raw materials, 
unfinished goods, plant and equipment, office or factory 
space.

If the extra dollars were earned fairly and squarely on the 
market, that's not only your tough luck, it's absolutely 
intrinsic to the way the free market functions to improve 
everyone's lot in life. It's how successful businesses 
accrue the advantages which tend to reinforce their 
success; a success which can only be gained in the first 
place by satisfying their customers better than all their 
competitors could.

But if the extra dollars are derived from sources outside 
the market, it's not only unfair, but it risks short-
circuiting the whole positive feedback loop and stultifying 
growth in the economy. The negative effect is instantly 
recognizable if we are talking about theft, fraud, 
protective tariffs, or government subsidies. But what 
people don't recognize is it also applies to people who 
borrow newly printed money, too. Effectively 'free' money 
turns our commercial Survival of the Fittest into a venal 
Espousal of the Fattest.

During the bubble years, the people with the extra dollars 
were the Tech and Telecom companies, the pass-the-parcel, 
Dot.com, Pie-in-the-Sky POs and the bankers and lawyers who 
were at the front of the queue when the money spigot was 
opened wide. People in genuine, productive businesses were 
losing out, except where they could redirect some of their 
own output to serve these misjudged, misreported, or plain 
misdealing, enterprises in their heyday.

That's how we ended up with 500 million miles of fiber 
optic cable laid, but we were short of many drugs and other 
forms of medical provision; why we spent billions on unused 
3G phone licenses, but ran short of refinery capacity; and 
why new power stations proliferated to the point where 
there is now perhaps a 30% oversupply, yet basic transport 
is as problematic as ever.

When the Bubble finally collapsed under the weight of its 
own contradictions, the overcapacity in select industries 
was revealed and is now widely understood. But what far too 
few people have yet worked out is that bubble era companies 
got to 'vote' all those unearned dollars purely because of 
a credit boom; a boom that was at best tolerated, and at 
worst enthusiastically endorsed, by central banks with 
their twisted view of the world. (Thank you, Chairman 
Greenspan!)

What, in turn, have the central banks attempted to use as a 
remedy for the credit boom in the months since...and why 
hasn't it seemed to work?

Well, We, the People, though it has cost us dear, have 
taken away the right of the fantasists and fraudsters to 
vote with unearned dollars. The structure of the economy, 
at least, is no longer so heavily overweight in these 
capital intensive, technologically saturated companies. But 
what has replaced them? A different batch of people voting 
with unearned dollars: the almighty consumers! 

Despite record levels of personal debt, the economy now 
rests on the hope that consumer spending will be an 
effective replacement for the lost bubble dollars...and 
that businesses left gasping on life-support can collect 
just enough of these extra dollars in their cash registers 
to avoid embarrassing their anxious creditors any further 
than they must. 

Since everyone of us is a consumer - whereas very few of us 
worked for, or profited from WorldCom, Enron or Boo! - this 
doesn't seem like grand larceny so much as a little 
innocuous fiddling with our expenses. Very few consumers, 
however, have been taught to worry about the perils of 
over-consumption, so the expense fiddling goes unnoticed 
and unconsidered...but over-consumption is still 
responsible for giving rise to damaging imbalances.

For proof of misplaced investment during the boom, you only 
have to look at the gleaming corporate headquarters of 
hubris - what a friend of ours calls the 'Edifice 
Complex'...or Marconi's share price...or central London 
property vacancy rates. 

Today, consumers voting with unearned dollars is just as 
surely rigging the auction: distorting price-cost 
relationships everywhere; driving a wedge between 
consumption and production; swamping the honest demand 
which can only arise from our taking part in valuable 
production; and throwing demand in general so out of kilter 
with supply that it sets the economy at war with itself.

Worse, while there remains hope that bubble companies may 
accidentally end up justifying their existence, bubble 
consumers are like spoilt five-year-olds whose doting 
parents keep giving them treats today in return for dubious 
promises of better behavior tomorrow. The Tech and Telecom 
bubble may have burst, but we consumers are just as surely 
putting resources out of the reach of many businesses by 
bidding them up beyond the point where they can reasonably 
expect to make a profit.

No expectation of profit means no investment and no 
expansion into the gaps left by the failed bubble companies 
- despite the flood of easy money. That means less income 
for workers, suppliers and shareholders. That means we all 
become ever more reliant on accessing credit - this time to 
maintain the pretence that our material standard of living 
hasn't been jeopardized by the boom years.

The demand for credit becomes more and more insistent even 
as our creditworthiness spirals lower and lower. And the 
hullabaloo we raise about our discomfort? It induces the 
central bank to seek novel ways of adding ever more 
unearned dollars to the system - even though they were the 
root of all the problems.

That's why Easy Money equates to Hard Times...and why we 
shouldn't keep mindlessly bleating for the Fed, the Bank of 
England or the European Central Bank to continue reducing 
rates to ever more artificially depressed levels. 


Regards,

Sean Corrigan,
for The Daily Reckoning

P.S. That crafty old pirate William Paterson, inspiration 
behind the founding of the Bank of England, came to 
understand only too well that being 'the man' who 
controlled the creation of the unearned dollars meant he 
could reap more benefits for himself than he ever could in 
the days when the Jolly Roger flew from his flagstaff. But, 
even canny old Cap'n Paterson might not have fully 
appreciated that the creation of easy money also does just 
as much to disrupt the patterns of honest trade and that 
such disturbances leave everybody poorer as a result.

Editor's note: Sean Corrigan is the founder of Capital 
Insight, a London-based consultancy firm which provides key 
technical analysis of stock, bond and commodities markets 
to major US, UK and European banks. Corrigan is a graduate 
of Cambridge University and a veteran bond and derivatives 
trader from the City. Corrigan serves with distinction as 
The Daily Reckoning's 'man-on-the-scene' in London's 
financial district.