Our Daily Bread

Tue, Jan 7, 2014 - 8:57am

There can be little doubt is that Adam Smith’s chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do the least harm.

- Frederich Hayek, “Individualism and the Economic Order”, 1948 University of Chicago Press, pg 11.

As readers of this blog know, one of my strongest objections to Keynesian economics is that it facilitates, and indeed almost compels, massive malinvestment over time. Austrian economists usually explain the concept of malinvestment by noting that during times of monetary and credit expansion, the “easy money” available as part of a central bank-fueled spending binge encourages firms to make unwise investments, reduces the discipline with which they might normally allocate funds to various projects, and essentially takes a scarce resource (capital) and facilitates poor spending decisions by making it appear to be less scarce than it actually is.

As Ludwig von Mises wrote:

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. (Ludwig von Mises, Human Action: A Treatise on Economics, 1966)

In short, I tend to think of malinvestment as spending capital unwisely on the (false) assumption that capital is plentiful and easily obtained, when in reality that capital represents a finite amount of stored value that is (contrary to the market signals given by easy money) hard-earned and not easily replaced. In the private sector, we might point as an example to the imprudent buyout of a competitor at higher prices than can reasonably be recouped from the acquisition over the long term. In the public sector, virtually any government boondoggle would suffice as an example, from “community development” projects to taxpayer-funded bailouts which always seem to go over budget and yet manage to underperform prior claims of economic benefit.

OK, all of this is a bit dry and esoteric, but it is necessary background for the two points I want to make in this essay. The first point is that I don’t think people truly understand the scope of the problem that modern central banks and politicians have created for us. We are now in a cycle of malinvestment that has lasted literally for generations, and hence has created worldwide malinvestment on a scale never before seen in human history. The second point is that the depth of this malinvestment goes well beyond government spending and the odd “bridge to nowhere” or the thinly-stretched balance sheets of multinational corporations. The scope of malinvestment has profoundly shaped generations of people – human capital being the most precious capital of all – and has left enormous swaths of society ill-equipped and ill-trained to actually produce anything of value, once the easy money spigot is turned off.

The scope of malinvestment

The examples I am going to use are tailored to US readers, but I suspect that anyone living in an “advanced” western country will recognize exactly what I am talking about here. Look around at the state of the economy in your city, county, or neighborhood. Chances are that you see “For Rent” signs on many empty buildings that used to house businesses. You see EBT cards being swiped at the grocery counter, and a general economic lethargy that is impossible to deny despite the incessant attempts to convince you otherwise on the evening news. Chances are you know somebody who has lost their job, and they will be very quick to tell you that those jobs are NOT being replaced. Many of the people you meet on a daily basis are quietly working two jobs at low wages and still are barely managing to survive. In short, nobody in their right mind would confuse our current situation with healthy economic prosperity.

Now think about this: the situation you see around you is what 17 trillion in debt, borrowed from the future to “stimulate” the economy of the present, has managed to buy. Six trillion of that debt has been run-up in just the last five years. We have borrowed from futurity such an enormous amount that it will not, in all likelihood, ever be paid back. And this is what we have bought- this grueling existence with 45 million on food stamps, jobs disappearing or being replaced with temporary or part-time menial labor, this walking dead economy. These are the GOOD times, purchased by borrowing from future prosperity. Think about that long and hard, and if you ever truly wrap your mind around this it will keep you up at night.

I have never read a reasonable estimate for the scale of malinvestment we currently have, perhaps because the scope of the problem makes it all but impossible to quantify. Or perhaps it is simply that the implications of such a study would be nearly too frightening to contemplate. What I do know is that it represents an enormous opportunity cost that will not be easily recouped, and that the transition to efficient capital/resource allocation suggests a substantially lower standard of living for a very long time.

Give us this day our daily bread

One aspect of this malinvestment that often gets overlooked is the human component. As mentioned earlier, the most precious capital any society has is its human capital - the aggregate of all the education, capabilities, skills, and ability to produce- contained within the population. Just like financial capital, human capital can be misallocated as well, and I would propose that we have seen a massive malinvestment in human capital thanks to 70 years of Keynesian policies. This goes far beyond simply “We have too many people doing X job and not enough doing Y”. To a degree perhaps never before seen, tens of millions of people over multiple generations have been trained and educated to perform jobs that literally would not exist sans easy money. Many others have been insulated from the immediate repercussions of their behaviors or choices to the degree that they now possess such paltry skillsets as to be virtually unemployable. To put it bluntly, we probably have a larger proportion of our population that is unable to produce anything of value than any civilization in history. This malinvestment in the citizenry (and resultant lack of productive or profitable skills) extends from the college educated Wymyns Studies major to the high-school dropout dependent on welfare benefits whose skills may not even merit minimum wage employment . At the same time, large swaths of hard-working, well educated people may have spent their entire lives training for professions that literally would not exist outside the rarified milieu of an easy money economy.

This is not just a temporary case of “monetary solutions failing to solve structural problems” as many Austrian economists would assert. Such a formulation downplays the true generational nature of the structural problems- decades of malinvestment has left us with a large numbers of people either unable or untrained to produce much of anything of genuine value. Not to put too fine a point on it, but what exactly are these folks going to do to earn their daily bread? To say that we may have a difficult transition to a different monetary regime if/when the current Keynsian debt-based system runs its course, is in my opinion a gross understatement. Such a financial transition may well suggest a lost generation, or even generations, in terms of human capital. It may suggest social or political implications that are rather bracing to contemplate.

. . .

The phrase “The End Of The Great Keynesian Experiment” implies a great deal more than just a financial reset. Bad decisions have consequences, and 70 years of bad decisions have compounded into a rather monstrous situation. How this situation will ultimately be resolved is anyone’s guess, but I suspect that the actual costs – including the human costs - of Keynesian economics will be something that we will be paying for, for a very long time. Prepare accordingly.

About the Author


Jan 7, 2014 - 9:14am

This guy is talented - choose

This guy is talented - choose your favourite


Jan 7, 2014 - 9:17am

Yamada see's $1,000 Au in 2014

Hedge Funds Raise Gold Wagers as Yamada Sees $1,000: Commodities By Elizabeth Campbell and Debarati Roy
January 07, 2014 7:25 AM EST

Hedge funds raised their bullish gold bets to a six-week high, splitting with analysts at Technical Research Advisors LLC and Goldman Sachs Group Inc. who are predicting more declines after last year’s rout.

The net-long position in gold jumped 19 percent to 34,104 futures and options in the week ended Dec. 31, U.S. Commodity Futures Trading Commission data show. Short holdings slid 4.6 percent to 72,571, the lowest since Nov. 19. Net-bullish holdings across 18 U.S.-traded commodities fell for the first time in six weeks as investors became the most bearish on sugar since September.

Gold tumbled 28 percent in 2013, the first decline in 13 years and the biggest since 1981, after some investors lost faith in the metal as a store of value. The Federal Reserve on Dec. 18 cut the pace of its monthly bond purchases. Bullion is poised to fall another 19 percent in the coming months to $1,000 an ounce, said Technical Research’s Louise Yamada, who’s the former head of technical research at Citigroup Inc.

“With gold, in the short-term, we’re being pulled in multiple directions,” said Michael Cuggino, who manages about $10 billion of assets at Permanent Portfolio Family of Funds Inc. in San Francisco. “There were sellers trying to get out in front of the tapering. Physical demand is OK, but not strong. You also have increasing economic activity, which could begin to accelerate inflation.” ('Haze: questionable demand statement by this guy imho)

Price Slump

Futures in New York climbed to $1,247.70 yesterday, the highest since Dec. 16, as last year’s rout made the metal attractive to buyers of coins, bars and jewelry. Prices slumped 25 percent in the past 12 months, as the Standard & Poor’s GSCI Spot Index of 24 raw materials slid 5 percent, while the MSCI All-Country World index of equities advanced 16 percent. The Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 3.5 percent. The Bloomberg Treasury Bond Index fell 2.5 percent.

Bullion fell to $1,181.40 on Dec. 31, within $2 of the 2013 low reached in June. Prices rebounded partly as some investors closed out bearish wagers, Cuggino said. Fifteen analysts surveyed by Bloomberg News expect gold to rise this week, two are bearish and four neutral, the highest proportion of bulls since December 2012.

While short-term rallies may occur, a head & shoulder pattern signals that gold will extend its declines, Yamada of Technical Research said. A drop to $1,000 would mark the lowest intraday price since October 2009.

‘Very Weak’

“The market still looks very weak,” Yamada said in a telephone interview from New York. “There is potential for further declines, and it’s too early to say if the market has a double bottom in place.”

Prices are “likely to grind lower” through 2014, Jeffrey Currie, the head of commodities research at Goldman Sachs in New York, said in a telephone interview Dec. 19. The metal will reach $1,050 by the end of 2014, the bank said in a Nov. 20 report.

Gold surged more than 500 percent in the 12 straight years of gains through 2012 as the dollar weakened. The rally accelerated from December 2008 to June 2011 as the Fed expanded its balance sheet through debt purchases and held borrowing costs at a record low in a bid to revive growth amid a U.S. recession. Bullion reached a record $1,923.70 in September 2011.

Fed Taper

Fed officials said Dec. 18 they would trim monthly purchases of bonds to $75 billion from $85 billion starting this month. The central bank will probably reduce its quantitative easing in $10 billion increments over the next seven meetings, before ending the program in December, according to the median estimate of economists surveyed by Bloomberg on Dec. 19.

“Gold is at a bit of a crossroads here,” ......(cont.)


Jan 7, 2014 - 9:21am

The end will come when enough

The end will come when enough people lose confidence. If they are too busy scrabbling for a living will they even have time to think it all through and then act on it?

Mr. Fix
Jan 7, 2014 - 9:39am

These are not just bad decisions,

What we are going through has been carefully planned and is being orchestrated by psychopathic madmen with the sole intent of theft and depopulation.

They will need to be defeated, or any new system to arise out of the ashes will simply be a new scam to rape and pillage the populace.

Nice job Pining.

Jan 7, 2014 - 9:42am



(Reuters) - Turkish Prime Minister Tayyip Erdogan on Tuesday blamed Ankara's widening current-account deficit on large gas and oil imports and said the gap would not pose a threat to the country "for the next four or five years".

"We have natural gas and oil, which is imported," Erdogan said in a speech during a trip toJapan.

The gas imports are "causing this current-account deficit," he said through an interpreter. "It's not because of what the government has done."

The deficit in Turkey's current account - the broadest measure of trade in goods and services - widened to $51.9 billion in the first 10 months of 2013 from $39.6 billion a year earlier.

TRANSLATION: F... You Western Bankers we are going to continue gold buying in defiance of the coup You instigated.

Which means escalation. Turkey->Iran->China->Pakistan.... then Saudi-> India (so far complying with Western demands, but lets see what happens after elections) ... new alliances of gold holders are forming. Debt limit ceiling increase in this spring becomes even less likely.

Jan 7, 2014 - 9:44am

jobs unavailable without easy money

So the neighbor girl who has a Masters in Library Science and being paid 70k a year and insane benefits really couldn't earn a living if we weren't in an easy money environment? Real work for real food I say as well. Good article. I am helping butcher four steers and cut them up and wrap the cuts. In exchange for two days of meat cutter skills I am awarded a quarter of fine midwest beef. There will be no USDA inspectors there either by the way. Barter, the wave of the future. Barter will be coming soon to a city, county near you.

sierra skier
Jan 7, 2014 - 9:46am

Good Morning all.

Now to read.

Excellent points Pining.

We have far too many folks who are employed in non productive parasitic industries such as finance and many of the useless service industries. These folks have little value in the production of the real items the population needs to live. When difficult times come their skills will be the first to become unmarketable and unless they have alternative skills and knowledge their value to society will be of little or no use.

Jan 7, 2014 - 9:56am

Word to the bird

Look at all these mathematicians going into high finance and quant jobs, just to be able to build a quicker mouse trap that robs from ordinary investors.

These are some of the brightest young minds that we have, and they are squandering their talent. They could be solving real world changing problems, but no they are enticed by the easy money coming from the whores on Wall Street.

The money would only be alluring to a society that has lost its moral compass, and that goes hand in hand with FIAT money in general.

Jan 7, 2014 - 10:08am

Pining Malinvestment is the understatement of 2014

On a shortlist:

-A trillion dollar/year military that can destroy the earth many times over, it is so huge, it needs to fabricate enemies to have someone to kill.

- An ethanol program to "reduce our dependence on foreign oil" resulting in the requirement of more than a gallon of oil to produce a gallon of ethanol

- The destruction of our food supply with exotic chemicals and GMO monster food while we fuck up health insurance and distribute toxic pills to people poisoned by the toxic food

- Billion Dollar Campaigns

- taxing the middle class to subsidize poverty

- An unbelievably comprehensive spy network while our bridges, roads, crumble

- Billions in foreign aid while our own cities turn into wastelands

And in the end, whomever can actually earn their daily bread, ends up trading the fruits of the labor for bread made with genetically modified wheat that will kill him anyway.

Debt is the money of slaves.

Jan 7, 2014 - 10:12am

The end will come when enough @ HappyNow

lose confidence in the unseen electronic digital cards, credits and quatloos, that just keeps on giving. So simple to figure out, it would be child's play to pull it all together. Hey how about that, the children are in charge. They only needed to have the cooperation from a hungry pack of elected and unelected stooges who owe favors for their good fortune, a supercomputer matrix and the heavy weighted power and control of gooberment to pull it all together. The age of electronic distribution of unlimited financial and economic repression meds for all in the underclass and for all the newbies of this class getting so much free electronic meds, the lame feel no pain. Its a tall order to shake confidence out of those stacks of shear confidence, no jobs, no future, no soup lines, no gruel, no pain, just key in a password and your feeling good Louie. When dose it end?, end? oh my God I hope not.

Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

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Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
9/24 10:00 ET Consumer Confidence
9/26 8:30 ET Q2 GDP third guess
9/27 8:30 ET Durable Goods
9/27 8:30 ET Pers Inc and Cons Spend
9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
9/5 10:00 ET Factory Orders
9/6 8:30 ET BLSBS

Key Economic Events Week of 8/26

8/26 8:30 ET Durable Goods
8/27 9:00 ET Case-Shiller Home Price Idx
8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

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