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CURRENCY CURRENTS

Wednesday 31 October 2012

A free global-macro & market newsletter

Quotable But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Frederic Bastiat, The Law Commentary & Analysis Wishing there were another economically devastating hurricane to follow Sandy ... Sandy, youre a fine girl What an economic boon you would be If my life, my love, and savings werent at the bottom of the sea Dooda-dit-dooda, Dit-dooda-dit-dooda-dit We at BLACKSWAN have decided to hose down the fine art and walls of our office and throw our computers through our windows. Sound stupid? Nope, its genius ... if you think about the money well be pumping into the local economy to have our office gutted and rebuilt and our durable goods replaced. And that is why, during this uncertain economic recovery in the US, we should be thanking God for Sandy. You know Sandy, the storm that is expected to cost East coast businesses $20 billion in damages and about the same amount in lost business activity. Sounds rough. But dont forget the multiplier effect, boys and girls! Frank Holmes, the fearless leader of US Global Investors, uses the multiplier effect to estimate the economic boost from the storm to be about $100 billion worth of new spending and activity. If youre wondering who the heck Frank Holmes is, you probably have plenty of company. But consider that PIMCOs well-known Mohamed El-Erian agrees with Holmes in that the costs of short-term destruction will be more than off-set over time. This begs the question: really? Our system of gauging growth in this country (and the rest of the world) is severely flawed. I have to believe the only way to accept the above analysis is because the growth-at-allcosts mentality has become so perverted. We have come to value spending and

consumption as the virtue of an economy at the expense of savings, production AND wealth creation. I mean, lets pretend Frederic Bastiat and the broken window fallacy never existed, right? Bastiat put forth the idea that money spent on fixing a broken window could now not be spent by that same person elsewhere. Additionally, Bastiat emphasized the unintended consequences of such a destructive event, namely the assumption that the worker who is hired to fix the window actually benefits. And even if he does benefit, does society benefit to an extent at least equal to the value of the broken window? In other words, destruction for the sake of generating activity does not balance. If it did, why not hire men to destroy our roads so we can hire crews to repair them? At some point, it begins to amount to stealing value for the sake of generating spending and labor. Im not sure about you, but I think thats one of several appropriate descriptions of a central government. A big feature of Bastiats analysis is the concept of finite resources. Critics of Bastiat point to times when there is a slack in resources to justify employing destructive practices in order to generate activity. Lets call it forcing a good investment. In fact, there is slack in a key resource money. With that in mind, this Sandy may just be what the Feds ordered. The expectations of the multiplier advocates are that this need to rebuild will beget and increase in the velocity of money. After all, a key feature of the on-again off-again economic recovery since the financial crisis has been a plunge in the velocity of money. (Perhaps thats good, since its kept some of the broken-window inflation plot under wraps!)

Black Swan Capitals Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swans full disclaimer, which is available at http://www.blackswantrading.com/disclaimer

But all the extra money sitting idle is not in the bank accounts of small businesses and especially not in the bank accounts of consumers whove spent much of the last four years deleveraging. I propose we let the banks fund the rebuilding effort. After all, thats where all the Fed-generated money has gone. Unfortunately, thatll never happen. What is hoped for is that consumers and businesses will help policymakers carry on their preferred model whereby everyone borrows from banks backstopped by an endless money supply (i.e. taxpayers and central bank money printing.) In other words, policymakers want to see the demand for credit increase; they want to force good investments because they neglect the subjective theory of value. I guess it makes sense since nothing holds value anymore when the money spigots are permanently open and savings dont matter. If this perverted debt-based economic system can return to speed, then what harm will it be to destroy a little financial and moral wealth here and there? Lets just say, the real costs go unseen ... for a while. All I can say is thank goodness Sandy spared the BLACKSWAN headquarters down here in South Florida.

Black Swan Capitals Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swans full disclaimer, which is available at http://www.blackswantrading.com/disclaimer

JR Crooks BLACKSWAN www.blackswantrading.com

Black Swan Capitals Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swans full disclaimer, which is available at http://www.blackswantrading.com/disclaimer