China crisis

“A central power, as enlightened, as skilful as can be imagined, cannot by itself encompass all the details of the life of a great people. It cannot, because such a task exceeds human power. When, on its own, it wants to create and put into operation so many different mechanisms, it either contents itself with a very incomplete result or exhausts itself in useless efforts. China seems to me to offer the most perfect symbol of the type of social well-being that can be provided by a very centralized administration to the people who submit to it. Travellers tell us that the Chinese have tranquillity without happiness, industry without progress, stability without strength, physical order without public morality. Among them, society functions always well enough, never very well. I imagine that when China opens to Europeans, the latter will find there the most beautiful model of administrative centralization that exists in the universe.”

— Alexis de Tocqueville, ‘Democracy in America’

“It seems certain that not a little portion of the silver fell into the hands of high-ranking officials, soldiers, and important merchants, who sucked wealth from the financial system… The unprecedented riches of officials and merchants astonished the ordinary people of sixteenth century China. The cities they inhabited became islands of prosperity that stood in painful contrast to rural areas stricken by poverty. In spite of the important role of state finance in the economy as a whole…   the exploitative system of Ming finance provoked the local peoples’ antipathy against the central government. The growing scale of state finance, instead of strengthening the power of the state, provided new opportunities for officials and soldiers to accumulate private wealth and power at public expense. Some of these private powers benefited from the trade boom…  and grew into semi-independent… groups. The authority of the Ming in the world of East and Southeast Asia was lost during this turbulent age. The Ming dynasty was no longer the powerful centre of Chinese world order that it had once been.”

— Kishimoto Mio, ‘Chinese History and the Concept of Early Modernities’

If anyone should be in search of a bellwether for the degree of ‘austerity fatigue’ being suffered among European electorates, he need not look only at the travails being suffered by governments in the Netherlands, the Czech Republic or Romania, nor even Françoise Hollande’s capture of the Elysée Palace, but at the otherwise mundane local government results as they have just been returned in Britain.

For there it has transpired that, two short years after throwing the remaining scoundrels of the Blair-Brown junta out of office in recognition of the fact that its thirteen years of crony-infested misrule had gutted industry, sharpened social divisions, blown up the banks, and delivered the aspiring classes into an over-mortgaged slough of snooped-upon despond, the collective distaste for that uneasy Coalition of the Unwilling – struck up between a gerrymander-enfeebled Tory party and the perpetual bridesmaid Liberals – caused a mass electoral swing back to the real authors of much of the voters’ present misery, one sufficient to give them a clear 86-seat majority in the House were the proportion to be replicated at the next general election.

Not that this should come as too much of a shock. After all, the singular achievement of the last regime was to engineer an inordinate increase in its patronage network and hence its psephological resilience in the face of its unmitigated culpability. Given the vast rise brought about in both the numbers directly employed by the state and of those critically dependent upon its soft-budget largesse in the notionally private sector, and given, too, an endorsement of the alternative parties in 2010 so half-hearted that it left two mutually distrustful and ideologically distinct groupings trapped in a marriage of convenience as nakedly ill-founded as could be, it was only a matter of time before the ongoing grind of repairing both public and private finances which it was their unhappy lot to undertake fell victim to the force of circumstance.

Such an outcome could probably have been avoided only had one party been accorded a clear mandate and had its leaders then seized this fiat armed with a firm resolve to undergo as much of the necessary pain of redemption in as short as time as possible. This would have allowed for an earlier rebound from a much steeper initial fall and hence been conducive to a rapid rekindling of hope and renewed enterprise. Alas! The forthrightness of the forerunners of the senior partners in this misalliance, whose case partly paralleled their own, two decades previously, is not something deemed fit for modern sensibilities. The latter-day Lazarus is not to be administered strong medicine and then bade to take up his bed and walk, but is instead to be weaned off his addiction step by demoralising step, thus exhausting his trust in his physician while prolonging the weariness of his convalescence beyond all human endurance.

For all the fashionable Keynesian disdain for us Austrians and our insistence on facing hard facts with the least delay and absent all monetary obfuscation, here, four years into the meltdown and yet with the noisome corpse of its frustrated hopes still not decently interred, can it really be doubted that we are the advocates of an approach which is not only the most economically efficient; the least unfair (in not maintaining the TBTF destroyers of our prosperity to enjoy the undeserved emoluments of their positions, nor penalising the thrifty at the expense of the profligate, nor the worker to the benefit of the speculator); but also one which actually promises its enactors a solid chance of electoral reward for their vision?

But, of course, part of the Tory-Liberal defeat in the UK is not really a ringing endorsement of a supposedly rejuvenated Labour Party, but rather a rebuke to Tweedledum which can only be delivered in most modern polities by briefly seeming to favour Tweedledee. This sense of being trapped onboard a dreary, Janus-faced, establishment carousel was well expressed across the Channel when, in her characteristically sardonic style, Marine le Pen said she would not recommend her now disenfranchised supporters to cast their votes for either of two men only competing to see who would best do the ECB’s bidding!  Indeed, the Swiss cartoonist Stef put this even more sarcastically by envisaging Mme Le Pen being confronted by a dim-witted TV interviewer who says to her: “ We heard you advising your followers to vote ‘blank’ in the next round, but, come on, do tell us just which of the two blanks you want them to vote for”!

Such is the prevailing mental apparatus of those in power and the nomenklatura – the ‘socialists of the Chair’ – who advise them that we must look in vain for any radical thinking, for any truly invigorating ‘austerity’ where impediments to enterprise, both pecuniary and regulatory, are swept away along with the dead weight of oppressive and unaffordable bureaucracies and where budget balance is not to be sought by trimming in desultory fashion at the far-flung edges of a sprawling forest of entitlement while ladling ever more from a shrinking stock of private income in order to preserve the vast overweening bulk of the peculative, Provider State intact.

All the King’s Horse & All the King’s Men

In Europe, as readers should by now be aware, this has brought about the Continent-wide noyade of tying balance sheet-busted banks and spendthrift sovereigns together and drowning them in a lake of LTROs in order served to subvert the German – as well as the European – constitution by building up a $1 trillion shadow bail-out total on the TARGET2 non-clearing system. At one and the same time, this has reduced the proportion of unencumbered assets on bank balance sheets – and hence their private sector creditworthiness; it has perversely concentrated the Zone’s lacklustre money creation on its barely-resilient, Teutonic core at the expense of its deflation-racked periphery; and it has financed nine-figure amounts of capital flight which, in the single example of Spanish central government debt, has amounted to no less than €90 billion in the last two quarters (around a third of same-period GDP).

In America, it has allowed for a recovery which has perhaps been rendered all the more anaemic by dint of the widely acknowledged unsustainability of many of its premises. For example, many there correctly doubt the ability of the federal government to continue to run deficits well in excess of $1 trillion, year after year – doubling the debt stock since Lehman fell and growing it by $4 trillion more than can be extrapolated from its pre-crisis trend – while still expecting its obligations to pay less than the rate of expected CPI increases, as they are currently priced, for the whole of the first quarter of the century.

Many are also disquieted by the Fed’s intent to stick to its course of pumping up the money supply by 10% each and every year – as it has done since the autumn of 2008 – while suppressing nominal interest rates to as near zero as possible, as far out the curve as possible. Intuitively, they fancy this cannot be done without occasioning either or all of another horrific misallocation of capital, an accelerating rise in the cost of living, or a disruption to the entire international monetary order.

Though it is impossible to set a date by which Americans will finally stop being asked to ‘believe six impossible things before lunch’, these 300 million Red Queens, all running frantically to stand still, must intuitively be aware that the day of reckoning still lies ahead of them. Such a premonition, however dimly perceived, can not but dissuade the less feckless of them from overcommitting their scarce resources to an upswing they suspect to be so weakly founded in a genuine economic dynamic.

Across the wide, blue Pacific, the news of late has been equally discouraging. Trade numbers have been notably weak in Korea, Taiwan, Thailand, the Philippines, New Zealand, and Indonesia (as well as in that other poster child of the Asian-led resource boom, Brazil), while recent production data also look sickly in both Korea and Australia.

The importance of this is that the last economic cycle has, as we continually point out, been characterised by the extraordinary growth of world trade – up in volume terms by 75% compared to a GDP increase of less than 50%, and in dollar terms almost tripling versus a GDP doubling, in the last decade – with much of that trade being dominated by what has been afoot in the Asia-Pacific region, in general, and in China, in particular. Where trade has led, productive capacity and output has followed, needless to say.

Thus, a slackening of the pace of imports and exports across this region is a warning that not only are our Occidental woes sapping Oriental energies, but that their own, internal drivetrain is in need of a serious overhaul.

Partly, of course, this is a result of China’s own violent monetary switchback which saw the yearly gain in M1 accelerate more than 30 percentage points in the year after the Crash to reach a near-incredible 39% in early 2010, before this renminbi equivalent of the Yellow River in full spate suffered so harsh a drought that January just gone saw it trickling onward by a paltry 3% – at least a two-decade low. Debate still rages over just how much damage this has wrought, though the agonised tone of the political debate should perhaps caution us against being tempted to put too much faith in the anodyne official aggregates, even if some refuse to trust either the anecdotal evidence of much more severe commercial distress or accept our own, basic economic understanding of how such things usually pan out.

Leaving such polemics aside, on a more fundamental level, we seem to be confronted with a choice between three main courses for China to follow in the foreseeable future.

The first is the one on which much of the market is still pinning its hopes, viz. that there will soon be a further episode of purposive re-inflation of both asset and commodity prices. In essence, the Pollyannas hope that the Beijing authorities will continue to behave like true disciples of the barbarous cargo cult of Western central banking and will press hard on the gas pedal any day now, in order to trigger the air-bag of a tertiary bubble and so cushion the impact of the collapse of the secondary one blown in real estate two years ago, an enormity which, the reader will recall, was itself subject to an enthusiastic policy of encouragement in order to replace the imploded export boom of two years previously again.

Even though this assumption goes against the grain of everything emanating from the official mouthpieces of the regime, in truth, we cannot unequivocally rule this out. If the harshness of the so-called ‘landing’ is deemed to entail a greater threat to the Party’s overriding mission of self-preservation than any of its likely side-effects then the calculus will no doubt change. Perhaps the main thing militating against a repeat of this destructive stop-go, however, is the undeniable association in the popular mind of such exercises in the mass provision of credit with corruption, influence peddling, and an aggravation of the unequal distribution of spoils which is endemic in any inflation, much less when this takes place in a society where the lack of a free market means that far too many resources are still being allocated by the arbitrary factors of party standing and patronage.

If the Bernanke Fed can excite a unanimity of derision from such otherwise incompatible groupings as the small-town focused, small-c conservative Tea Party and the right-on, urban, radical unwashed of the ‘Occupy’ movement by being seen arbitrarily to shower its largesse on the bloated plutocrats of Wall St, how much more irate will the average Chinese become when the rising cost of his daily noodles and the increased hopelessness of his struggle to offer his would-be bride a marital home stands in opposition to the swagger with which the Calvin Klein cadres and Moschino Maoists disport their ill-gotten gains in the boardrooms of the price-hiking SOEs and the congress halls of the party apparatchiks?

That the regime is aware of this can be seen in the weekend editorials in the People’s Daily which set the blame for much of the current malaise firmly at the doors of an over-expansive central bank and warned of the imminent danger of stagflation if monetary policy were again to be unleashed in the attempt to counter the current slowdown. Not much room for equivocation, there, one might think, meaning that there will be no major reversal, but rather a drip feed of expedients aimed at mitigating the worst of the slowdown for each sector and each region in turns, mainly through reforms of the institutional or regulatory framework and through tax changes, rather than liquidity injections of the scale of 2009.

‘Muddle through’ would be the watchword here and a dispiriting prospect it would be to China Bulls and China Bears alike.

Hanxi Socialism

The second possible pathway for China is that, constrained by considerations such as these, the gathering storm brewed from the turbulent confluence of rising wages (many of them mandated from on high), sluggish sales, scarce (and arbitrarily distributed) credit, and over-burdened balance sheets is either deliberately allowed to blow itself out or else it proves too violent a blast to by withstood by the shelter promised by the exercise of fiscal ‘fine tuning’ and piecemeal monetary relaxation. Austrian malinvestment busts are usually well up on the Saffir-Simpson scale of destruction and are equally typically well shielded from the mainstream macromancers’ radar networks, so this eventuality – the so-called ‘hard landing’ scenario – while inherently unpredictable, is not to be ruled out, by any means.

We must here be in no doubt that even if the Chinese leadership does enjoy a certain leeway, denied the authorities elsewhere, in disguising losses, supporting state zombies, and commissioning innumerable, offsetting, Keynesian ‘masses for the dead’. It may thus be that it has the capacity to postpone a final accounting for another goodly slice of the investable medium-term to come. This is especially the case while the lack of ready capital convertibility comprises a system of levees within the confines of which the state can slosh entries from one set of books to another. No matter how much flexibility this imbues in the regime’s planning, it cannot, however, suspend the laws of economics, or even exceed the fictional extremes of accounting, indefinitely. One day, Ozymandias’ ‘colossal wreck’ will again lie toppled amid the ‘lone and level sands’.

When trying to gauge how shattering will be his fall, we can do no worse than to consider the sheer scale of the misdirection of capital which has taken place in the country. For example, note that, in the past three years alone, China has increased the length of its expressways by a massive 40%, taking their span to a 15,000 mile total which is now beyond those of both the much richer European Union and the comparably geographically extensive USA. It is said to have more high-speed rail track – some 6,000 miles – laid than has the rest of the world combined. Work was halted on projects which would have seen this doubling again, last autumn,  in the wake of the Wenzhou train-wreck, a tragedy which served to call into question the parlous state of the Railway Ministry’s finances (it lost another Y7 billion in QI), as well as that of its operational competence.

Car sales have already been so ‘brought forward’ by the Middle Kingdom’s version of the cash-for-clunkers stopgap that they have all but halted this winter, as have white goods sales – which were similarly advantaged post-2008. At 60+ GW, China accounts for a quarter of the world’s installed wind power capacity: a shame then that profits for its 100-odd domestic operators are becoming more and more elusive, with anything up to half the turbines lying inactive at any one time.

Not that the lesson has been entirely taken to heart for, as the squeeze on residential construction continues, talk is now of frustrated real estate moguls embarking upon another profligate wave of commercial construction – taking the form of so-called HOSPA’s, or integrated complexes of hospitals, offices, schools, parking, and accommodation. As usual, the suspicion is that, in this Bizzarro, ,‘Field of Nightmares’ world of investment for its own sake, they may well build it, but, by the same token, no-one may ever come.

Notoriously, the country is reputed to be possessed of some 64 million vacant apartments – a plethora equivalent to more than the past three years’ growth in an urban population which has already reached a plurality and which is, in any case, set to see its increase slow dramatically in coming years. At least that is what is implied by a 2010 census which reported a slump in the total fertility rate from the already sub-replacement figure of 1.85  recorded in the 2000 edition to an alarmingly low 1.4. This puts the country below even Russia, on a par with Europe’s greying polities and barely ahead of the self-extinguishing Japanese.

Compound this bald average with the one child-driven gender gap of 117 males for every 100 females under the age of 15, and of 106:100 for the 15-64 age group, and it is apparent that the overall headcount is about to undergo a steep decline, with the dependency ratio rising commensurately. Not exactly what either a bullish real estate developer or a hopeful condo-flipper wants to read, particularly when, as the relevant Vice Minster, Hu Cunzhi, has pointed out that  urbanization of land has increased 1.85 times faster than the urban headcount in the last decade.

Even if all these contradictions, all this sub-marginal, top-heavy investment and egregiously indebted local authority spending, do not come toppling to the ground in a heaven-obscuring cloud of dust, the third way ahead might still usher in changes which are no less profound, if nowhere near as dramatic.

Here we speak of the fabled ‘rebalancing’: of the abandonment of growth for its own sake and  a disavowal of capacity extension for kudos and career enhancement rather than capital return. The achievement of this shift is, remember, the publicly sworn intention of a central government accorded a near divine status in the estimation of both credulous Western stock promoters and envious dirigistes. Therefore, they and we – for all we may doubt either the CCP possesses either the intent or the instruments to bring this about – must at least consider what the landscape of a future China would look like were it to succeed even partially in effecting this transformation.

As we consider this, it is important to begin with the recognition that a good part of the current set-up is dependent upon the channelling of cheap credit as well as savings (whether ex ante-voluntary, or post hoc-‘forced’) towards the erection of plant, the digging of mines, and laying out of infrastructure with little thought as to their prospects of providing a realistic return on investment. The case of the steel industry (in some cases currently said to be turning to pig farming as a sideline, in the desperate attempt to make ends meet!) is a classic example. Having grown headlong from 15% of total world output to 45% inside the last ten years, we now find the People’s Republic endowed proudly with a vast industrial segment which only declared a gain of 3-4% on equity last year – below even the somewhat suspect official rate of inflation – and, even if these profits were genuinely come by, testament to a negative real return on capital employed, given that the sector is said to carry debts of around $400 billion, to boot.

With land often afforded to such businesses on easy terms from growth-hungry, soft budgeted local governments all too happy to clear away those unfortunate existing occupiers who are typically bereft of the protection of well-defined property rights; with labour costs lowered by exploitation of the houkou system which discriminates against rural ‘immigrants’ by denying them access to basic benefits in their own land; with subsidised energy inputs on tap and with precious little consideration attached to safe or sanitary waste disposal at the end of the production line, rigorous cost accounting has perhaps not been deemed a sine qua nonthus far.

With few dividends to pay or bank loans ever to redeem (and hence a decided lack of capital discipline to endure) and with either the sweetener of an export tax rebate for those facing outwards, or a quasi-monopoly cost-plus framework for many of the large SOEs which dominate the internal market to enjoy, the old game of expansion for its own sake cannot fail to have induced its players to be wasteful of resources, largely indifferent to the cost of such inputs, and, hence, insidious destroyers of wealth.

However it actually does go with this putative reform programme, one cannot deny the fact that, should the focus switch away from protecting producer interests (as is prevalent in all primitive-mercantilist or socialistically-retrograde societies) towards promoting consumer ones, much of this monstrous profligacy will have to be curbed.

Taming the Dragon

Implied in such a shift is the process of making profits by serving one’s customers’ needs better and cheaper than one’s competitors can do, and not just running the assembly line and firing up the furnaces in order to fulfil the latest, top-down physical output quota. Instead of generating ‘profits’ by shifting large amounts of under-remunerative expenditure below the line, and hence not fully costing it (perhaps using financing granted by such goods’ own vendors out of the proceeds of the virtual sales they thereby make), or through employing the company’s working capital and credit lines in ‘curb’ lending (or even outright loan-sharking) and capital account-dodging, commodity-collateralised, currency speculation, sales will henceforth have to achieve a genuine premium over properly registered costs or else failure will rightly beckon.

Though the scale of the novelty might be shocking to some, credit will then have to be provided at a proper market price – i.e., on a risk-adjusted basis – and not simply granted at an unvarying, homogeneous interest rate to meet a state-owned bank’s loan expansion target, or to reflect the central government’s shifting menu of industrial preferences. That same bank will have to compete for deposits in the open market, which will tend to involve paying a positive real rate of return once in a while, as well as seeing to the implementation of proper credit controls and the observance of strict repayment schedules.

Instead of relying on a pliant workforce to subsidise its own jobs by passively funnelling hard-scraped savings back to the megaliths of the industrial complex at repressed rates of return, companies will have to compete for financial capital, perhaps by paying dividends to a new middle-class of privatisation-empowered shareholders. We can but dream, but they might also have to contend on a far more equal footing with a host of small businesses and start-ups, staffed by many of its erstwhile wage-slaves, for the custom of those who today make up its disgruntled captive client base by default.

Such developments could hardly fail to temper the urge to crash industrialisation or to the me-too parochialism of the lower echelons of government, who may no longer feel they must each keep up with the Comrade Wu’s in the neighbouring division by building their own shopping mall, their own airport, their own 5-star hotel, smelting plant, and factory complex in the sort of debt-laden, vanity project mentality which, it is gradually beginning to emerge, may have characterised the disgraced Bo Xilai’s shop-window ‘state capitalism’ in Chongqing.

If all this could be achieved – and begging the question of whether it even could be achieved under the aegis of the present authoritarian political structure – we would argue that the ordinary Chinese citizen would ultimately enjoy a higher standard of living than he does today and that he would probably feel less put-upon, into the bargain. As his and his peers’ affluence grew, this would undoubtedly increase their call upon certain commodities, but it would also restore those incentives – so woefully absent at present – to innovate, to economise, and to act entrepreneurially so as both to minimise their use and to maximise either their supply or that of their existing and yet-to-be discovered substitutes.

However far short we might, in practice, fall of such a Utopia of Manchester liberalism in the coming years, what we would not see would be a prolongation of the sort of resource gluttony we have experienced throughout the past cycle when the country’s voraciousness has been truly beyond the Pale.

China, which represents perhaps a tenth of global trade and global GDP and a fifth of global population has manoeuvred itself into a position where it routinely constitutes more than two fifths of a the global consumption of a whole range of key minerals. Worse still, as work we have done reveals, it has lately found itself responsible for what in some cases is considerably more than 100% of the incremental demand for such materials (growing its take while the rest of the world has shrunk its portion), despite contributing under a tenth of the simultaneous increase in world population, a sixth of overall trade, and at best a third of the entire incremental output which has resulted from the use of these resources (that last maximum largely an artefact of the lag between the peak and trough of our own post–Tech, credit supercycle and its ill-judged 2009 attempt to compensate for its shattering disappearance over its own event horizon).

Nor should we fool ourselves that this naked greed for the bounties of the earth can or must rise henceforth quite as inexorably as the 12-inch ruler extrapolations made by the unholy alliance of environmental exhaustion alarmists and mining chief executives would have you believe. Barclays has recently released research propounding the view that, with regard to the outlook for agricultural commodities, per capita calorie, fat, and protein uptake in China already exceed that which obtains among some of its better-off Asian neighbours; a finding which implies that, unless its citizens immediately surrender their iron rice bowls and mutate into supersize, McDonald’s-munching Americans, the steepest gradients may be behind us.

Our own findings, suggesting that a far worse disproportion applies for a host of harder commodities, are broadly supported by a paper recently published Down Under by Professor Ross Garnaut of the University of Melbourne. In this, he concludes that it is patently unreasonable to expect that all 1.3 billion Chinese could somehow acquire the same average industrial profile as the mere 70 million special cases extant in South Korea and Taiwan (the latter’s population not much more than that of Shanghai alone).

If not, far more reasonable comparisons would then have to be made to the developmental trajectories of the much more populous nations of Japan, America, and Europe. These suggest that China is already well ahead of where such more relevant historical precedents suggest it should be for its level of advancement. That this is already beginning to be recognised more widely in the case of steel – which, curiously enough, is not among the most important commodities to those in finance, even if it cedes first place only to oil as a traded commodity in the real world – shows that the argument may have some merit. It may also explain why BHP Billiton felt it had to reinsure investors last week that it would not henceforth be spending willy-nilly in order to help repave Xanadu, nor that it was unable to rein in its outlays in fairly short order should the metals-clad pavilions of fabled Cathay ever begin to totter.

If I Had A Hammer

In summary, we know that commodity pricing has been unusually strong during this stripling century partly because of the rise of the new Asian productive networks, centred in China; partly because the West enjoyed an easy-money boom made all the more palatable to policy setters by dint of that same Asia’s proficiency in churning out cheap manufactured goods at the expense of a climb in resource prices which was systematically ignored by Occidental central bankers in their obsession with the statistical fiction of ‘core’ CPI .

It cannot be denied that the best returns of the past decade have accrued to those shrewd investors who did not try to navigate the shark-infested Chinese waters whose attempted passage has humbled even such luminaries as Anthony Bolton, but who were early in adopting the strategy of selling ‘shovels in the Klondike’ – i.e, those who did not buying direct stakes in the gold rush itself, but rather who committed funds to those well-governed, entrepreneurial companies and previously underinvested resources which they estimated would see the most demand from thence.

Here, what we have tried to raise is the question of whether those halcyon days are now behind us, rather than simply being in intermission. Personally, the author finds it hard to avoid the inference that, barring a monstrous policy mistake emanating from Beijing, absent an unlikely early renaissance in Europe, and lacking a full-throated return to the Go-go years in the United States, this might, indeed, be the case and, if so, a great deal of market positioning – as well as corporate planning – is predicated upon what is fast becoming an outdated reading of the dominant trends.

Conversely, we also know that the only attempt which our masters can conceive of making to address the disastrous legacy which a too easy, too fiscalized, and too readily internationalized monetary policy has bequeathed to us is that of printing ever more of the blessed stuff. Soon enough, those at the helm of the tutelary Provider State who are either too fearful or too obstinate to compel their restive electorates to accept that they have been promised far more costly entitlements than can ever be honestly fulfilled may also give up the unequal struggle to make their voters face a painful reality.

When they do so, they will again be tempted to re-open the Keynesian spigots, issuing yet more billions of their doubtful pledges with the implicit backing of their pliant central banks, so as to take advantage of interest rates which have suppressed to perilously low levels and which will continue to be capped for as long as is humanly possible. That this is no fanciful prognosis can be seen in the fact that, even within the very throne-room of the kingdom of the blind, the partially sighted Richard Fisher at the Dallas Fed has forthrightly accused his own institution of seeing ‘every problem as a nail: its only tool a hammer’.

If this is continued beyond the point where the current, highly unusual willingness to hold on to a large fraction of the superabundance of newly-created money – and thus dampen its worst disruptions – begins to evaporate, what we have called the Spectre of 1937 – that fear of tightening too early which will almost guarantee the tightening comes too late – could well turn this into a ‘Flucht in die Sachwerte’ – a flight to real values – as Mises was wont put it. Commodities, whatever their travails in the interim are of necessity to be included in the real objects of such a sauve qui peut and should therefore appreciate greatly in terms of paper currencies, should such a panic ever break out.

Each successive resort to the printing press may well bring less and less material relief to a world still trying to maintain the pretence that the pre-Crash reckoning of prosperity was a sound one and still striving therefore to return valuations to those that prevailed in that particular vision of El Dorado, but the repeated recourse to inflationism will teach people that they should seek out ways of protecting themselves from its malign effects.

As they do so, they will eventually act upon their new-found understanding and then, instead of assuagingthe fever as they are today by holding money, they will begin to aggravate it by accelerating their purchases and building up their precautionary stocks of goods. And that will be an evil day, indeed.