Monday, December 22, 2008

Will he or won't he?

Gordon Brown must be starting to move into his depressive phase again, after a couple of manic months. At least he ought to be, with a decision required on the Jaguar bailout.

Obviously, AngloAustria's position is to let them go bust, along with everyone else queueing up in the corporate welfare lounge. Those business people who indulged in long-term investments because they were fooled by artificial interest rates, so entered structures of production much longer than the market truly required, must be cleared out from the system to allow other more competent managers to get hold of their resources. This is the only route to the solution to this crisis, along with massive government spending cuts and tax reductions.

The pain for many will be immense (and don't worry, sports fans, as a self-employed person I'm expecting to bear my share), but the pain will be over relatively soon, within one or two years. In the longer term, we also need to move to a disciplined form of money, one which we can trust, and this means a move to a 100% reserve commodity currency, probably of either silver or gold. But I'll settle for tax and spending cuts, and no bailouts, if that's all I can get.

However, looking at this 'politically', we have a very interesting situation. After years of government interventions, we have a well-connected car company with several factories in Labour marginals employing thousands of Labour Party voters. We also have a petty Stalin in charge of the government, Gordon Brown, who wishes to stay in charge of the train set for the rest of his natural life.

Brown must know that if he fails to bailout Jaguar, then Tata will let it go bankrupt, and the Brown bounce will start deflating. Expect every Labour MP in the affected areas to immediately begin sharpening their knives for his back again.

However, Brown also knows that if he bails out Jaguar, then the Brown bounce may continue for a short time, but then every other monkey in the forest will be down from the trees with their begging bowls out.

First, it will be all those who engaged in long-term roundabout production processes, so expect airlines, property developers, and other car companies to come calling. Then it will be anyone else who has enough marginal voters on their payroll to command the government's attention. (So all small and medium-sized companies who will be forced to pay for all of this largesse will be wasting their time.)

The only way to avoid upsetting all of these corporate welfare monkeys will be to pay them all off, and the only way of doing that will be to crank up the printing press and push M4 up from 16.3% to something more like 163%!

As Brown keeps buying time by printing more money, his dilemmas are going to come sooner and swifter each time, until eventually his bubble of hubris will pop. The longer he survives, the louder will be the explosion when he is finally overcome.

You never know. He might hold the line. He can 'plausibly' protect his bank bailouts by simply toeing the orthodox line of banks being too big to fail. But if he starts bailing out 'ordinary' companies, then it really is all over. Even he may be able to see this, and then when the unions are screaming for his blood, he can adopt the 'Margaret Thatcher' stance of standing up to them.

Well, he can do that if he likes. That way he'll make a bigger target for all the Midlands and Merseyside Labour MPs coming at him from behind.

We really do live in interesting times.

So what does Maturin Towers think he will do? Well, your regular correspodent merely looks at the photograph above of Gordon Brown's own 4.2 litre armoured Jaguar to work out his opinion. For once, I'll let you guess what it is.

Pip pip!!


David said...

Jack, there is more to this than you are telling.

Let these companies go bust and the already reduced market becomes sufficient to sustain those that remain and the bust companies will release labour onto the market to ultimately do better things.

If they are "saved" by the government (whether UK, USA, Canadian or whatever) they will consume resources but will not become more productive because demand for the product has declined.

So, to the extent that the government sink "rescue" funds into such companies , they will simply delay the process of the recession reversing itself.

Your two year horizon of pain would therefore seem a tad optimistic

Jack Maturin said...

I think I fully agree with you here, but I may not have explained myself properly, causing you to misread me.

I WANT the government to let these companies go bust, so that we can let the Bust do its work of cleaing out the malinvestments of the Boom. If we stop these bailouts, successful managers of other better companies will keep their profits and not have them taken away to be wasted on wretched companies like Jaguar. They will thus have more resources to produce with. The Jaguar managers will also be sacked and although there will be sunk costs lost forever in the liquidation, their remaining valuable resources, such as the relatively successful Land Rover division, will be freed up to be put to better work by these better managers.

There will be a greater pool of labour and resources, thus lowering prices, thus enabling even greater productivity gains, thus enabling even faster recovery.

Therefore the less the government does in trying to interfere with a recovering market, which needs a bust to clear up the malinvestments of the boom, induced by artificially low interest rates, the quicker and faster we will reach recovery. I think if the government does absolutely nothing, we could reach recovery within two years (though this is a horribly large bubble to pop so it could take three). If the government starts cutting spending and taxation, thus freeing up even more useful resources, we will get through this even quicker.

Alas, because of their continuous interventions, one after another, they will perhaps drag this out to five, ten or even possibly twenty years. (For those who think that's poppycock, I advise you to study the Japanese experience of the last 20 years).

We have 10 people in the gym. Five of them are healthy, and five of them are fat, because they ate too many government-subsidised chocolate bars. The gym machines power the economy. The government keeps increasing the workrate of the fit people, and transferring this energy to ease the load of the fat people. Eventually, all of the fit people collapse due to the constant increase of load, and then the fat people collapse too, though not until the last fit person has flaked out.

It would be much quicker and easier to simply chuck the fat people off the running machines, put them on diets, cut the chocolate subsidies to zero, and use the saved food to fuel those fit people in the gym who can keep the wheels of production running much faster without having to carry all of that dead weight. Yes, it's not nice for the fat people to be thrown out of the gym (i.e. allowed to go bust), but we will all be much better off if the pain is experienced of taking away the chocolate bars from the fatties and getting them back to a normal diet.

The US had many horrific crashes prior to 1929, but all of them were over with relatively quickly because the US government didn't do anything to 'lessen their pain' (mostly within 1 year, though sometimes up to 18 months).

It was only with the 'recovery plans' of Hoover, later extended by FDR, that the 1929 crash was turned into the horrible 1930s depression. Almost exactly the same thing is happening now, with the same stupid mistakes, except we are starting out from a worse position of a much reduced manufacturing base, with much less savings, plus the governments are inflating a lot more because idiots like Paul Krugman keep telling them what they want to hear.

All of this stupidity is fueled by the typical short-term horizons of government, who are incapable of seeing beyond the next election, because of the dangerous ideology of democracy being a valid replacement for logic and common sense.

This is going to be WORSE than the 1930s because we aren't just going to have a Depression. We are going to have an Inflationary Depression. No doubt politicians will try to put the blame for this on 'capitalism', and therefore try to increase the amount of socialism/fascism we have, thereby making everything even worse.

Governments can save nothing, except perhaps their own skins. And the less government we have, the better.

not an economist said...

Brown's boxed himself in to a corner with this. By decrying the Cons for being the "Do Nothing Party" he now has to do sthg in this instance for fear of being denounced a hypocrite.