Posted by: graemebird | May 30, 2008

Economics Ignorance Not Confined To Taxeating Economists.

Todays Financial Review has an article by Adrian Rollins. I don’t have a link for it so I’ll have to copy bits of it.  It begins:

“A surprise fall in business investment has raised the prospect that growth……”

Why was it a surprise? They ought to have known this immediately from the fact that the money supply peaked in December and has been falling. It wasn’t just that Adrian was surprised. It was the market and the entire economics community.

“Business Investment” means NET business investment. This is by no means some sort of primary thing. Its a highly processed figure dependent on concepts of accounting.

Loosely speaking it is somewhat akin to retained profits plus borrowings.  So we might think of it as somewhat akin to NET PROFIT… MINUS DIVIDENDS ….PLUS NET BORROWING.

The far more primary concept is PRODUCTIVE EXPENDITURE which is BUSINESS TO BUSINESS SPENDING. We might call this also GROSS INVESTMENT. So you have this huge pyramid of Gross investment with net investment just this small amount poking out at the top.

Well if a country is used to a fast rate of monetary growth and then the bank ponzi-money starts collapsing, the first thing that happens is business-to-business spending IMMEDIATELY tanks. And hence so-called business investment MUST collapse. Which is what has happened. But its taken our economists by surprise.

“However business has indicated it has ambitious investment plans, suggesting any contraction is likely to be moderate and short-lived…”

I’d give it only a small scintilla of possibility that this could happen. And that would be if our Reserve Bank has been stooging us. By running high interest rate policy but by also flooding the market with astounding amounts of cash and no-ones yet noticed.

Look at these economists RELYING ON THE BUSINESSMEN TO TELL THE ECONOMISTS WHAT IT IS THAT THE ECONOMISTS OUGHT TO BE TELLING THE BUSINESSMEN.

That is to say they are relying on surveys of business intentions to tell them what business investment will be. But if money supply contracts, then business spending will tank dramatically and therefore NET INVESTMENT will bite the dust and won’t get up off its ass for a very long time.

The article starts on page one then goes to page 14 where Adrian has a series of graphs. He has all sorts of graphs that won’t tell you much. But he has only one graph out of six that could help. He’s got graphs for the RBA target cash rate, Real retail sales, Housing approvals, Business Confidence Real Investment, and Real GDP. All but one pretty much useless information for the subject that he’s talking about.

Well what graphs does he need? He needs the real investment graph because thats the subject at hand. He needs also a graph of GDR, of Productive Expenditure, of the Money Supply (M1), And he really needs a graph of the monetary base. Since the monetary base will tell us how the banks are likely to behave in the next period.

You see we know that the banks ponzi money was collapsing. But we don’t know whether the banks are likely to resume lending flat out again. And the only chance that the banks are going to do that is if the monetary base has been growing very quickly and replacing some of the ponzi-money that has been dissapearing. If the monetary base has been growing fast enough that will give the banks a lot of confidence. But its doubtful to me that this has taken place because the Reserve bank thinks it has to fight consumer price inflation rather than stabilise business spending and monetary inflation.

“…. According to the report, businesses plan to spend almost $85 billion on new and upgraded facilities and equipment next financial year….”

This is very much Keynesian Voodoo to expect that this will go ahead.  Keynes reckons that the investors are a sort of flighty bunch. Subject to the herd instinct or as he terms it “animal spirits.” But what creates this apparent herd instinct and public mania is whatever is happening with the blowing out or collapsing of bank ponzi-money. Now that the bank ponzi-money appears to be collapsing and the Reserve Bank may not wish to deal with the situation, all these plans these businessmen thought they were going ahead with are not entirely decisive.

Businesses spend money from their revenues and their borrowings. And their revenues tank if the ponzi-money collapses. If the ponzi-money is collapsing that means the banks aren’t lending very much. Hence the business community simply CANNOT, as an aggregated group, wind up spending all this gear on net investment if the money supply continues to collapse. Their revenues will be less, and so their profits will be less or negative. At the same time the banks won’t be lending a great deal and so where on earth does the economics community imagine all this net investment is coming from?

In the same artilcle JPMorgan economist Helen Kevans says “In the second quarter there will be a rebound in investment and probably consumption will be much stronger after being hit by two interest rate rises in the first quarter…”

Well is this just Adrian and Helen talking?   No we have another economist here. David Colosimo of Goldman Sachs says:

 “but a quick recovery in spending by firms would mean the household sector would have to carry much of the burden for the substantial slowdown the Reserve Bank thinks is necessary to bring inflation down…”

My God Man? Business spending will die in the arse if M1 doesn’t recover. And this lack of business spending will be beginning to turn the screw on the consumer sector by then.    I’m not saying consumer spending will have tanked by then.    Because its a downturn in BUSINESS SPENDING that leads to a recession and consumer spending is almost irrelevant. Is there any enlightened view in this survey of economic opinion?   

Citigroup economist Paul Brennan reckons things will pick up in the coming months. He too thinks January February and March is just some strange anomaly.

Well how about Lehman Brothers?     Stephen Roberts warns that the economy might lose a bit of steam in the fourth quarter (October, November, December) BUT NOT ENOUGH TO JUSTIFY AN INTEREST CUT BEFORE MID-2009.

  The Reserve Bank is getting all the wrong advice by people who  have little idea of the situation. The Reserve Bank had to flush the place with cash once the money supply started collapsing. It had to BOUNCE AND FLATTEN. And here one fellow reckons the Reserve Bank ought to instead screw us right into the ground right up until mid-2009.

Well then is this just some sort of perversion of the leftist Fairfax papers? No indeed. Go to the Fridays Australian and you will find an article talking about an UNEXPECTED drop in business investment.  An UNEXPECTED drop.

Right. I just managed to find some data from the Reserve Bank. There is a rather relieving increase in monetary base from 47 to 49 between February and March. But its only just enough to replace the ponzi-money still being lost at that stage. Perhaps the Reserve Bank is on the job after all but merely being a slow and tepid about it.  A reflection of the fact that they don’t have a clue what they are doing. What looks rather good is that at least M1 hasn’t deteriorated between February and March. But note that M1 is smaller than it was last June.

                                         

        Date      Currency Deposits   M1       Broad   Base

Jun-2007 37.9 188.1 226.0 962.5 43.7
Jul-2007 37.7 181.4 219.1 971.6 44.1
Aug-2007 38.6 181.8 220.3 996.8 46.3
Sep-2007 38.9 185.5 224.5 999.6 47.6
Oct-2007 38.7 182.7 221.4 1028.3 45.7
Nov-2007 39.2 187.1 226.4 1048.2 47.9
Dec-2007 40.0 191.3 231.3 1066.4 51.8
Jan-2008 39.4 186.7 226.1 1074.9 48.4
Feb-2008 39.4 181.0 220.4 1074.5 47.0
Mar-2008 39.3 181.4 220.7 1080.8 49.0

Now that we have the figures here this gives me the opportunity to review the BOUNCE AND FLATTEN strategy that would allow us to get out of this damaging situation, but in the context of getting to where we can have the cost of living falling all the time. Bringing inflation under control is not about eyeballing consumer price rises. Its about choosing the right metric and flattening its growth.

We want to bounce back as quickly as possible to the former maximum of M1 in the first instance. So pretending that we are starting from March 08 we see that M1 falls short of the peak by 11 billion dollars. We don’t want to wait around to bridge that gap. So the best way to deal with the situation is to flush 11 billion of new cash into the situation.

In March the total of currency in the hands of the public and the monetary base was 39.3 + 49 billion equals 88.3 billion. So we want to add 11 billion to that right away bringing the total up to 99 billion.

If we left it at that the banks would pyramid ponzi-money on top of that and we’d have bubbles if not hyper-inflation. So that 11 billion boost to M1 has to be accompanied by putting on a reserve asset ratio high enough to keep the banks from expanding the money supply above its prior maximum total of $231 billion.

Thats stage one of what we’d need to stop this recession coming on. Stage II would be then going through a similiar process with Gross Domestic Revenue and Productive Expenditure. Flatten them out as well. All the time we want to be increasing the cash and monetary base component of M1 at the expense of the Ponzi-Money component. So that the  Reserve Bank can then hit what it aims at when it comes to targeting Gross Domestic Revenue and Productive Expenditure.

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Responses

  1. […] an article by Adrian Rollins. I don??t have a link for it so I??ll have to copy bits of it.? It begihttps://graemebird.wordpress.com/2008/05/30/economics-ignorance-not-confined-to-taxeating-economists/AFX UK Focus 2008-05-28 20:58 US Treasury’s Paulson to tell Saudi Arabia high oil prices are burden […]


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