What's going down on the street

We have been conserving paper in this publication in recent times, not necessarily part of a green agenda. But our efforts may be in vain, and that's not intended as a comment on the environmental debate, such as it is.

For over in America, they're busy chopping down trees to feed the appetite of the US Federal Reserve, bent on printing as much green paper as possible. The US dollar is responding nicely to that contribution to the supply-demand mix.

One of our contributors this time has alluded to the pretence that America wants to defend the dollar as a joke, and, as with so much else in the earnest reviews of the global financial crisis, it's certainly possible to see the funny side.

What was that quip by the workers as to the moral and economic bankruptcy of Soviet communism: we'll pretend to work, while you pretend to pay us? Well, in the administration of Western capitalism these days (a somewhat misleading notion when the size of government is considered), such has been the scale of past policy mishandling of monetary policy that the joke is on the taxpaying public.

Fiscal policy has had to become desperately loose in an attempt to offset the ultimate consequences of monetary policy having been too loose. Budget deficits are into double-digit territory. Interest rates cannot rise, because they didn't rise far enough in the past. The mess the authorities are in is akin to trying to patch up a balloon that was overinflated and has now burst. It's messy and unsatisfactory, and perhaps of dubious worth.

That should be funny, but it isn't. The resulting debts will take a decade or more to pay off. Apart from treating future taxpayers as suckers, that's also a drag on longer-term economic growth, while the only concern of the miscreant political class is the shorter-term variety that just might squeeze them through the next election.

Unfortunately, the average taxpayer doesn't really understand it, and will blame it on the banks, who certainly don't help their own image when they pay gargantuan bonuses out of gargantuan bailout support. But they're just really being as cynical as the politicians, the original sinners, who trade on the prevailing ignorance.

Unfortunately too, a certain collaboration between pragmatic economists and self-indulgent policymakers is even taking advantage of the error of their ways to insist that it is capitalism's fault, and that what is needed is an escalation of the government's role. We'll call that ironic, as I can't actually bring myself to think of that as funny.

And so back to the dollar.

The US government has taken it upon itself, through its agency the Fed, to inflict damage on its own currency to try to leverage itself out of an economic hole which features unemployment in excess now of 10 per cent.

According to theory which, without boring ourselves with the detail, became defunct in the 70s but has been resurrected to the point of prevalence now, the solution to the problem is inflation.

You got that? As well as the extra burden of taxes which will have to be imposed for years ahead to pay for the government's deficit spending, the unstated intention is also devalue your money. Whisper it, but it's actually the key method of controlling the real burden of nominal debt on the economy — print the money to pay for it, at the cost of everyone still holding cash. No wonder the savvy are into other assets; in fact, any other asset, starting with gold, and ending, who knows, with property again? Bond and equity markets have already shown distinct symptoms of reviving the bubble mentality.

Incredible, really.

From my humble perspective, they just don't get it (most of them don't want to, I would venture). Real wealth doesn't come from forever pumping demand, whether financing it from existing paper (debt) or fresh from the printing press (money).

Pot of gold

Nailing my colours to the mast, I say real wealth comes from the supply side, when the market (predominantly but not exclusively) aims to provide better goods and services in relation to a given pot of gold (now there's an asset generating excitement), even if that pot of gold itself grows through time as a result of this perpetual motion, and even if a certain of indebtedness is useful for oiling the wheels. That means debt should not be a crutch. Ultimately the effects of too much of it are debilitating. It also means resisting inflation with a vengeance.

We are told, even condescendingly, that actually deflation is the problem, asked to forget that it became a problem because of prior (mainly asset) inflation. What we are supposed to believe is that it is unacceptable, nigh on impossible, to allow demand to shift back to what can be paid for, implying that policymakers must attempt to sustain the unsustainable, because not to do so would be worse.

This month legendary investor Warren Buffett nonetheless voted for the US dollar and economy by acquiring a railroad company, an archetypal representation of American enterprise and mobility in search of business. The Reserve Bank of India, meanwhile, voted against, dumping dollars in favour of gold. The commodity markets are holding their own continuous plebiscites on whether the dollar will win or lose.

For the Gulf region, a central issue remains. Whereas Oman has disqualified itself from GCC monetary union, the UAE too, and Kuwait for some time benchmarked its currency to a basket (not only the US unit), contracting out monetary policy to the Federal Reserve does not seem entirely sensible, for reasons that are very well rehearsed. Most importantly for readers, their locally-denominated earnings look like they may be on the slide again. Their livelihoods in this region take a relative dive.

It's all a bit too heavy for my liking.

Someone once asked what an economist does. The favoured response is: economics. I discovered some time ago that degrees in the subject qualified me for this quasi-professional designation and vitally important but vaguely defined function.

But, as I once said to my Japanese boss, economics is actually an art rather than a science. And that art is convincing other people that you know what you're talking about while you keep seeking anew to advise how to run this funny old world.