Tuesday, May 25, 2010

Some facts: Markets like predictability, Politicians like chaos

Interesting and useful article, on world investment climate.

Two truths:

1. Markets like predictability. What tax system is best? Whatever one we have, if we keep it and are sure it won't change. What exchange rate is best? The current one, whatever it is. And so on.

2. Politicians crave chaos. What tax system is best? The one I am "reforming" to achieve. What exchange rate is best? I can't tell you, because central bank data are secret, but you'll see. What new policies will help the economy, save the poor, and improve health care? Just TRY to guess what I'm thinking now! Uncertainty is the preferred habitat of politicians and speculators. The politicians are the predators, and the speculators are carrion birds and hyenas that follow the predators around. Amazingly, after investment is destroyed, the politicians actually have the eggs to blame the speculators. Impressive, that the lion would blame the hyena, just because the hyena happens to be seen chewing on the deer the lion killed.

In a stable system, politicians are almost irrelevant. No one is afraid, things are getting better, and there is lots of investment. In an unstable system, we all hang on every word from our "leaders."

The Great Depression was caused by bad monetary policy, and an over activist response by Hoover. (Yep, I said Hoover. Look it up. He pressured the Fed to cut money supply, and worked behind the scenes to raise prices and force financial enterprises to "capitalize" losses. The "do nothing" description is a myth.)

Then Roosevelt, a political genius, realized that the chaos Hoover had created could be used to the advantage of the Democrats and their crony capitalist allies. So Roosevelt consciously choose taxes, pricing regulations, and make-work projects that would create a continuing crisis. (Read Amity Shlaes' fantastic book, THE FORGOTTEN MAN, for a detailed historical account).

The only reason we got out of the Great Depression was that anticipation of WWII made Roosevelt realize that chaos was bad for production and investment. And in a war, everybody listens to politicians anyway, so he was able to end the artificial domestic crisis in favor of a real international crisis. Roosevelt clearly called off the dogs in 1939 and 1940, as you can see from memos telling investors and manufacturers in plain language that they were now free to invest and make things without fear of government attacks.

Like Roosevelt, President Obama is a man of excellent political instincts and zero understanding of markets and the causes of prosperity. We are entering another stage of artificial continuing crisis, and it could last for years. Higher business taxes, a transactions tax, new regulations of finance, new federal ownership of manufacturing in automobiles, steel, and other industries. Anything to make investment returns less predictable, and preserve the power of the government.

7 comments:

David said...

So is buying and holding still the right approach to investing? Should people start looking to more bomb-proof assets instead of stocks? It seems like you, Cowen, and Kling all seem to be signaling that you think there's a growing, but still small, chance of something really bad happening.

Also, what are your thoughts on the Rand Paul thing? As at least a mild tea-party supporter and Libertarian candidate, I think the people would like to know your position. But maybe the politician in you doesn't want to wander into the same tar pit as Rand...

Anonymous said...

So Roosevelt consciously choose taxes, pricing regulations, and make-work projects that would create a continuing crisis.

It is your assertion that the New Deal was FDR's grand plan to consciously create economic problems? You're really going to assert that he did these things on purpose in order to screw with things and prolong suffering (while at the same time neglecting any possibly positive impact those programs might have had)?

The only reason we got out of the Great Depression was that anticipation of WWII made Roosevelt realize that chaos was bad for production and investment.

Well that, and there was the biggest spike in government spending ever, a Keynesian wet dream. All those bombs and bullets and tanks and Private Snafu cartoons didn't just fall out of the sky.

Corporate tax rates were raised only slightly during most of the Great depression. Then there was an upshot in 38-40, followed by large increases in 40, 41, 42 which stayed in place till the end of the war and were increased even further.

Income tax rates also were increased throughout the war years.

And since when does having the biggest war in the history of human existence lead to less chaos?

Mungowitz said...

Anon: That's a fair comment, toward the end. Yes, George W Bush certainly used the same tactics, and he used the war approach that served Roosevelt so well.

Let's review:

1. I claim Obama is doing a bad job.
2. You claim Bush was worse.

Well, yes. But that's a pretty weak defense, sweetie. We have often said on this blog that GWB was the single worse Prez in US history.

eightnine2718281828mu5 said...

---
memos telling investors and manufacturers in plain language that they were now free to invest and make things without fear of government attacks.
---

Of course! And the fact that we paid manufacturers to produce 2.5 million trucks, 300,000 aircraft, 3 million machine guns, 1 million artillery pieces, 22 aircraft carriers, 350 destroyers, 200 submarines, and equipment for over 10 million soldiers was of no consequence.

Anonymous said...

@ Mungo

Um... not sure where I mentioned George W Bush at all in my comment? Not sure where I mentioned Obama either. The entirety of my comment was restricted to a historical period before either man was born.

Shawn said...

i think there might be an anon that's so anon he doesn't even show up, or decided to buhlete his comment.

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