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 - 10:21am


In my view, the be all, end all, ultimate "malinvestment" is living on Pennsylvania, Avenue, after being reelected for a second term by slack-jawed American voters with a sub 75 IQ.

As always, Pining, another great article.

Jan 7, 2014 - 10:32am

What would GDP

be otherwise? What if we had not morphed into this economy, based on money which otherwise would not exist? How much of a hit would that have on the economy? 20%? 30? 50? If we go to barter things would grind to a ridiculously low level. Barter, though the absolutely most fair and honest, is inefficient and impractical (you may not have anything of value to barter for a transaction you need, hence no transaction - I think in a madmax economy PM banks would pop up everywhere facilitating credit for barter).

I have thought about this a great deal as it is a very big part of this PM trade. What I do know is that we have stolen GDP growth from the future. If a reset happened, that "increase" would vaporize and then some. We used to rationalize our "future stealing" by saying "if you can borrow at 5% and increase productivity 6%, then you should borrow more." You don't hear that anymore -even at rates near 0.

What would the US economy's GDP be if we wiped out all debts, reset the currency, and moved forward with an Austrian economic framework?

Whatever that drop is, is what the future of the stock market is. Thoughts?

Jan 7, 2014 - 10:37am

Bloomberg Blues

- anyone sure Bloomberg really "know" what the truth is, or that their anchors are not all cia/nsa whatever spin doctors?

Jan 7, 2014 - 10:46am

Utah Fusion Center

which is used to house all the US citizen spying data is an insane malinvestment. I only hope that when this episode ends that the populous has the wisdom to convert it to the largest digital library, free to all, allowing free education to anyone with the time and inclination, and willingness to pay the marginal fee for high speed data.

Think about it. Education is nothing more than transferring data/info from one being into another's head. Technology advances, driven largely by the wildwest-free-market semiconductor and hard-drive industry (no bailouts there folks-ever) has been driven down nearly to zero. Yet the cost charged for transferring this data and recognizing it through govt regulated institutions has increased through the roof. Universities are worse price gougers than DeBeers and diamonds....or plywood hucksters in a hurricane...

"Fusion University"



Jan 7, 2014 - 11:02am

Gold Repricing of 1933 Was Just A Debt Default

About a week ago, we wrote about two new IMF papers who discuss a savings tax. The topic and the idea is gaining traction after the IMF described the effect of a one-time 10% tax on all savings recently.

In one of the latest two papers, Bron Suchecki brought up another interesting point from the paper. On his personal blog, he extracted a quote from the paper which proves that the repricing of gold in 1933 was nothing more than a debt default. An interesting view which has been underexposed.

“… the United States had already defaulted on its sovereign debt in April 1933 to domestic and external creditors alike. The abrogation of the gold clause in conjunction with a subsequent 40 percent reduction in the gold content of the U.S. dollar (January 1934) also amounted to a debt haircut amounting to about 16 percent of GDP.” Bron Suchecki writes:
Nice to see mainstream economists calling a spade a spade and a handy link to use next time someone says the US never defaulted on its debt. The rest of the paper is a depressing read, with Reinhart and Rogoff concluding that a “mix of austerity, forbearance and growth” will not get advanced economies out of their debt overhangs and that they will have to “resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression.” While this is all stuff gold followers are aware of, it is the continued appearance of this financial repression narrative and related bail in and other talk in mainstream circles that I think is more important. As it becomes accepted wisdom that this the path we are on, then we will see money move into gold. However, while the mainstream continue to believe that we don’t have a big debt overhang and with a bit of taper here and there it will all end up peachy pie, we are going to see gold languish.

This forced repricing has been discussed extensively by Jim Rickards in the last few years. He expects the government to be forced to return to a form of gold standard and, by doing so, reprice gold. His latest expectations, as described in his newest book to be published soon, are gold going to $9,000 in that proces


NW VIEWrealitybiter
Jan 7, 2014 - 11:06am

@ realitybiter

Thoughts? >>> Wiped out debts, reset currency, & Austrian economic framework?

We are all on a bus being driven through time and the driver is only concerned with his interests. Nothing will change the speed and direction until external events transpire which flatten the tires and the roadways collapse. We are stuck on this bus with madmen as drivers.

Freedom from this journey is usually just another detour and merges onto the old dusty roadway , just down the yonder bend. Times and future events will crush the existing framework as mankind will have to face his folly. jmo

Jan 7, 2014 - 11:11am

Too many healthy people on disability

Thanks for your post, Pining. A funny thing happened over Christmas. I was with some family who happen to be very liberal. Very well-meaning, but in denial about the reality of our fiscal situation. I had mentioned something about how disability actually hurts the people who are on it by keeping them stuck. My stepmom looked at me and said something like "You're not going to be one of those people who is going to blame people on welfare, are you?!"

I told her that while I was living in Los Angeles, I had friends my age, at the time, late 30s, who were perfectly healthy but taking advantage of government programs. One friend I had was on "disability" supposedly for Bell's Palsy, which she showed no symptoms of whatsoever the brief time (about 6 months) I was her friend, and she most certainly could have worked with it regardless. She didn't want to work, that's all.

I had another friend who actually did have a good reason for being on disability (to a point) - she was a pilot and started suffering from migraines, which makes you unable to fly an airplane. However, disability destroyed her. She was depressed, feeding a food addiction and becoming quite obese, and spending copious amounts of time in her apartment with her shutters closed during the day. Oh, she had taken yoga teacher training and was trying to teach some yoga in the park once in a while but otherwise was not working.

Being on disability for her only enabled and encouraged her addiction and depression. It would be better for her mental health to be forced to work to make her own way in life.

Well, my stepmom was really skeptical, but ironically enough, a few days later, we ran into a neighbor who was my age, in her early 40s, totally spry and healthy on the surface, smoking cigarettes like crazy, and she mentioned to us offhand - with no shame - she was on "permanent disability."

Really? By your mid-40s?

Before you think I am unsympathetic to people with hidden ailments, I have had chronic fatigue syndrome since age 17 and was on disability briefly at 23. But I hated being on it and I got off it before I probably should have. I *wanted* to work. I *wanted* to contribute.

And I'm sorry, but unless you are totally sick or a quadriplegic, you can do something. Heck, even quadriplegics can contribute - look at Stephen Hawking!

A good number of Americans on disability now are just taking advantage and they don't give a damn if they take the country down with them while they do it. Their karma may be very harsh if we go into total collapse mode.

Jan 7, 2014 - 11:13am

@ sierra skier

Not to forget, the world's largest "parasitic industry" is the US government.

As for "non productive", the United States Congress, hands down.

Jan 7, 2014 - 11:14am

@tyberious re: 1933 debt default through gold revaluation . . .

The same sort of thing is coming again. We've called it the "reset."

Similar to 1933, paper gold will need to be killed off. Those who held notes redeemable in gold were out of luck. Nobody owning paper gold will get the benefit of the reset.

Only those who ignored the law and kept physical gold remained whole after the government devalued the dollar (defaulted) against gold.

So long as COMEX (paper) PM trading and SLV/GLD exist, the reset is not yet upon us.

imfdStephanie C
Jan 7, 2014 - 11:21am

Disability doubt

It is my belief that people are allowed to go on disability for minor or non existent conditions as it gets them off the unemployment numbers, you could claim not having any work is a disability.

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