Tuesday, July 31, 2012

Pump, pump it up Ben, Pump it up a little more


"Get your boody on the floor tonight, make my day" - Pump up the Jam

Yesterday, Asian markets as well as Singapore stock market went up with the hope that money printers-in-chiefs Ben Bernanke and Mario Draghi will step up to save the day for the corrupted, non functioning, well debted but well connected part of the world economy again. Pavlov's alpha dogs, called investors in Bloomberg, and their equally stupid trading algorithms reacted cheerfully to the stimulus "hopes". It seems like Keynesian stupidity will rule the world for a long time.

Whenever I see these investors, dancing on the floor and drunk with the printed money out of thin air, I always remember the sexy hip hop artist Ya Kid K. and her famous techno song, Pump up the jam:

"Pump it up a little more (Ben)
Get the party going on the dance floor
See 'cos that's where the party's at
And you'll find out if you're too bad"

If you know economics only as much as Paul Krugman, which pretty much means you do not know economics at all, this stimulus party may look good to you. But the only thing it stimulates is the mal investment!

The main lesson for us all: Pumping up the jam may have an ugly end.

Think about it. For the man on the street, financial institutions and banks are parasites making money from money (sometimes from clients money, frequently from tax payers money). Yes, they have became parasites thanks to stimulus packages but being a parasite is not their purpose or function. In a free market economy free from moral hazards of a money printing central bank, their purpose is to channel savings to profitable investments. But they need a mechanism to differentiate profitable investments from the unprofitable ones. And interest rate is the mechanism used to separate a profitable investment from unprofitable investment projects. If you keep it artificially near zero levels, the mechanism will stop working and savings will be channeled to first profitable and unprofitable projects and then mostly to unprofitable ones! Enter the great malinvestment period of our last few decades. By keeping the interest rates around zero, maestro (!) Greenspan caused savings to be channeled to endless stream of property projects and fuelled the great financial crisis of 2008 in USA. And to save US, Bernanke is pumping money in the world economy and creating a great bubble in the world scale.

What is at stake is more than our finances: European and American central banks are basically destroying decades of accumulated wealth, mostly created by their fathers and grandfathers, by saving the day for institutions called too big to fail (which are actually too nonfunctional to not fail). And China, who never fails to imitate West and USA, is busy with destroying 3 decades of savings by pumping them into houses which will never be occupied, trains which will never be used and bridges which will never be crossed.

So, future does not look bright. But luckily, stock markets are holding well.

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