Dear MoneyWeek Online reader,

Phony choices from a bogus profession

We got a look at how the world really works last week. Bloomberg ratted out Sophia Constantinidou. The 52-yearold gets e400 ($496) a month from the Greek Government, part of her late mother’s state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn’t tie the knot. 

Ms Constantinidou is on ‘lifestyle support’, thanks to the generosity of the Greek government, which is on lifestyle support itself, thanks to the generosity of the European government, which is only able to pay its own bills thanks to creditors who may or may not know what they are doing. The big debate among economists is when to pull the plug. ‘Austerity!’ insist the Germans and Canadians. ‘Growth!’ promise the Americans.

Several things have become obvious: firstly, a ‘recovery’ is not going to happen; second, after 60 years of credit expansion the world has entered a long period of financial adjustment and debt destruction; third, most economists should be put to work picking up trash along federal highways. Not that they would do a very good job of it, but at least they would be kept out of mischief. 

Imagine the poor pharaoh...seven lean years and only the advice of a slave to help him through. And think of how the Dark Ages might have been brightened up if Charlemagne had had Keynes at his right arm. But now we have thousands of economists. And they offer us a choice: austerity or growth? 

The gist of the ‘Austerians’ argument is that while cutting government spending is generally undesirable, now it is necessary. Besides, it will lower interest rates, and increase privatesector activity.   

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On the other side, the voices are even more delusional. Here we find the familiar neo-Keynesians, Martin Wolf howling at the FT and Paul Krugman mugging at the New York Times: “What we are seeing is an epidemic of private-sector frugality,” cries Wolf, warning that “cutting public spending will not automatically raise private spending.” For his part, Krugman has turned sarcastic: “If you’re looking for somebody who aims at an inflation rate of 0% while unemployment rises to 13%, then [austerity backer, Axel] Weber is certainly the right man.” 

Relieving Ms Constantinidou of her monthly stipend would be an ‘austerity’ measure, say the Austerians. Letting her keep it would promote ‘growth’, say the Keynesians. Both positions are claptrap. 

Through absolutely no fault of her own, Ms Constantinidou has become a leech. Resources are being diverted from savers, investors, and householders so that she can get something for nothing. Economists on the one side pretend that giving her the money increases ‘demand’ and helps the economy grow. On the other, they pretend that taking away her unearned income would impose a hardship on the whole economy. 

As to the first proposition, if you could really make people better off by robbing Peter to pay Paul, Peter would already be penniless. There is no shortage of people willing to take away his money. As to the second, too bad for the leech. Paul will have to give up something he had no right to in the first place. But where is the austerity? Resources don’t disappear. Ms Constantinidou may have to say goodbye to her unearned transfer payments. Someone else will say ‘welcome home’ to their long-lost money. 

But in Wednesday’s Financial Times, Mr Wolf, slipped another ace up his sleeve. Instead of larceny or usury, he suggests trickery: why rob Peter or borrow from him, in other words, when you can scam him with phoney money? “Why it is right for central banks to keep printing,” is his headline. 

Cut off from reality by their own conceits and fantasies, economists see the economy as nothing more than a sophisticated machine. It’s all just a matter of pulling that lever there or pushing this button here. Do the right things at the right time, and the machine will give you any response you want. Raise government spending enough and you might be able to get the machine to tell you that GDP growth is positive. Pay enough people to do enough ‘make-work’ jobs and it will tell you that the employment rate has gone up. 

But an economy is made up of real people. And real people have their own ideas. Sometimes they are lighthearted and spendthrift. Other times they are worried – such as when they see too much debt or too much money-printing. 

That’s when they ignore the advice and the assurances of both the austerians and the neo-Keynesians. They sell bonds and buy gold. 

To read Bill’s thoughts, sign up to Money Morning’s free email at www. moneymorning.co.za.

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Market update

Click here for the latest stock market news and charts.

The JSE all share index advanced 0.12% yesterday. The gold mining index gained 0.56%. Resources added 0.69%. Banks and financials weakened 0.11% and 0.03% respectively. Industrials pulled back 0.38% and the platinum mining index jumped 0.6%.

London's FTSE100 climbed 0.5%. The Dow Jones traded flat, down  0.05% and the Nasdaq fell 0.13%.

Tokyo's Nikkei closed down 1.38%. Hong Kong's Hang Seng lost 1.07%.

Brent crude is currently trading at $77.02 per barrel.

Spot gold's trading at $1240.07 up 0.27% and platinum was last quoted at $1568.00.

And here's how the rand is performing against the major currencies:
R/$ 7.59
R/₤ 11.47
R/€ 9.32

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