Future historians will likely conclude that the government-enforced lockdowns that beset the world starting in 2020 amounted to the biggest economic disaster in peacetime (?) in world history. But in the context of financial and economic history, even the multi-level horror show of Covid-19 will likely end up being regarded as nothing more than a giant MacGuffin. Big Government has form when it comes to turning minor crises into full-blown disasters. The institutional and bureaucratic imperative practically compels Big Government to turn everything it touches into a smouldering wreck.
Consider Bastiat’s ‘broken windows fallacy’. Our book ‘Investing through the looking glass’ picks up the story:
Perhaps the most famous fable in the history of economics – itself a compendium of increasingly tall tales – is Frederic Bastiat’s 1850 story of the broken window.
The son of a Parisian shopkeeper accidentally shatters a pane of glass. A crowd gathers at the scene. Admittedly, the shopkeeper is out of pocket by the cost of a window. But the glazier just summoned will reap the benefit. Where would poor glaziers be in a world without broken windows? Imagine all the good uses to which the glazier can put his new-found windfall from repairing the damage. Think what he could buy. All that new money circulating through the economy. Perhaps we might all be better off if more windows got broken on a regular basis?
“Stop there!” cries Bastiat, addressing the crowd directly. “Your theory is confined to that which is seen; it takes no account of that which is not seen.” Hence the title of Bastiat’s essay: ‘That Which is Seen, and That Which is Not Seen’.
The six francs paid to the glazier for effecting his repairs are what is seen. The crowd can speculate to its heart’s content to what luxurious end those francs might be expended. But what is not seen is what the shopkeeper might have done with those six francs if he had not had to pay them to the glazier in the first instance. He would, perhaps, have bought some new shoes, or a book for his library. “To break, to spoil, to waste, is not to encourage national labour; or, more briefly, destruction is not profit.”
In the modern economy, government plays a significant role. While it doesn’t create wealth – entrepreneurial activity does that – government redistributes it. That process of capital redistribution involves winners and losers. Government projects may seem to create work for some, but there is also someone who must pay for them, and that someone is normally the taxpayer. And if the capital is raised from the bond market, it doesn’t come directly from today’s taxpayer – it is extracted from tomorrow’s. Such projects may also divert spending from a more deserving group. Some government spending might even involve the outright destruction of wealth. There are, after all, only three ways in which money can be spent. You can spend your own money on yourself. You can spend your own money on other people. Or you can spend other people’s money on other people. The last is the spending prerogative of government.
As the world economy gets ever more financialised, and as ever more capital starts flowing in ways that are less than wholly transparent, Bastiat’s metaphor only becomes more powerful over time. In the words of Henry Hazlitt: “the broken window fallacy, under a hundred disguises, is the most persistent in the history of economics.”
It is not just persistent, it is widely misunderstood by the practitioners of economic ‘science’ themselves. The economist Paul Krugman, for some reason allowed a regular forum in the New York Times, wrote in the aftermath of the Japanese earthquake and tsunami of 2011, and the meltdown at the Fukushima power plant, that “the nuclear catastrophe could end up being expansionary … remember, World War II ended the Great Depression.” Krugman would also claim that the threat of an invasion by aliens could bring the US economy out of recession within 18 months. Not to be outdone, the economist Larry Summers, formerly senior economic adviser to President Obama, told CNBC that Japan’s earthquake and tsunami “may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.” As Bloomberg’s Caroline Baum somewhat tartly responded, “Too bad Japan had to wait 16 years for another opportunity.” The ghost of Bastiat would no doubt have enjoyed seeing this headline from the Daily Telegraph in March 2012: “FTSE could hit 7,000 if the Bank of England prints more money”.
Economics has coined a term for this fallacy: money illusion. Somebody who has fallen prey to this condition is unable to distinguish between real and nominal values. If quantitative easing were really a way of boosting an economy, for example, why is there no evidence anywhere of it having ever worked? Perhaps because it doesn’t. But then, at its core, not much in conventional economics really does. Economics is an overconfident discipline with delusions of scientific rigour where none really exists.
So what do we have to show for the lockdowns that emerged sporadically throughout the world since early 2020 in response to a novel coronavirus that looks increasingly like it was developed illegally using US taxpayers’ money funnelled to Wuhan by Anthony Fauci and then exploited by unaccountable shakedown criminals representing Bad Pharma ? So far, we have no discernible public health benefit whatever; a handful of hugely enriched personal and corporate interests with close ties to government; many thousands of deaths; many millions of shattered lives and livelihoods; rampant inflation; and, lastly, trillions more by way of government debt that will most assuredly never be repaid with anything except dishonest and devalued money. We were admittedly early in seeking inflation protection by way of precious metals, commodities companies and cheap but highly profitable unindebted businesses – early, but not exactly wrong. If we were wary of ‘paper’ in 2020, we are doubly or triply wary now. The allure of ‘real’ assets, on the other hand, is as effervescent as ever.
Here is another suggested definition for ‘MacGuffin’: “a gigantic nothingburger that facilitates the extraction of money and value from taxpayers and SMEs and into the purses of corrupt politicians and crony capitalists”. Example MacGuffins, in the wake of Covid: masks; footling PPE; ESG; climate change; social justice; race hustling; the war against hydrocarbons; almost everything ‘green’; the war against the nuclear family, the Church and traditional civil society, and in favour of multiple non-existent genders. Destruction is not profit.
It may be paved with good intentions, but the road to hell remains the road to hell. And it was Big Government that commissioned it.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you, too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Get your Free
financial review
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
Future historians will likely conclude that the government-enforced lockdowns that beset the world starting in 2020 amounted to the biggest economic disaster in peacetime (?) in world history. But in the context of financial and economic history, even the multi-level horror show of Covid-19 will likely end up being regarded as nothing more than a giant MacGuffin. Big Government has form when it comes to turning minor crises into full-blown disasters. The institutional and bureaucratic imperative practically compels Big Government to turn everything it touches into a smouldering wreck.
Consider Bastiat’s ‘broken windows fallacy’. Our book ‘Investing through the looking glass’ picks up the story:
Perhaps the most famous fable in the history of economics – itself a compendium of increasingly tall tales – is Frederic Bastiat’s 1850 story of the broken window.
The son of a Parisian shopkeeper accidentally shatters a pane of glass. A crowd gathers at the scene. Admittedly, the shopkeeper is out of pocket by the cost of a window. But the glazier just summoned will reap the benefit. Where would poor glaziers be in a world without broken windows? Imagine all the good uses to which the glazier can put his new-found windfall from repairing the damage. Think what he could buy. All that new money circulating through the economy. Perhaps we might all be better off if more windows got broken on a regular basis?
“Stop there!” cries Bastiat, addressing the crowd directly. “Your theory is confined to that which is seen; it takes no account of that which is not seen.” Hence the title of Bastiat’s essay: ‘That Which is Seen, and That Which is Not Seen’.
The six francs paid to the glazier for effecting his repairs are what is seen. The crowd can speculate to its heart’s content to what luxurious end those francs might be expended. But what is not seen is what the shopkeeper might have done with those six francs if he had not had to pay them to the glazier in the first instance. He would, perhaps, have bought some new shoes, or a book for his library. “To break, to spoil, to waste, is not to encourage national labour; or, more briefly, destruction is not profit.”
In the modern economy, government plays a significant role. While it doesn’t create wealth – entrepreneurial activity does that – government redistributes it. That process of capital redistribution involves winners and losers. Government projects may seem to create work for some, but there is also someone who must pay for them, and that someone is normally the taxpayer. And if the capital is raised from the bond market, it doesn’t come directly from today’s taxpayer – it is extracted from tomorrow’s. Such projects may also divert spending from a more deserving group. Some government spending might even involve the outright destruction of wealth. There are, after all, only three ways in which money can be spent. You can spend your own money on yourself. You can spend your own money on other people. Or you can spend other people’s money on other people. The last is the spending prerogative of government.
As the world economy gets ever more financialised, and as ever more capital starts flowing in ways that are less than wholly transparent, Bastiat’s metaphor only becomes more powerful over time. In the words of Henry Hazlitt: “the broken window fallacy, under a hundred disguises, is the most persistent in the history of economics.”
It is not just persistent, it is widely misunderstood by the practitioners of economic ‘science’ themselves. The economist Paul Krugman, for some reason allowed a regular forum in the New York Times, wrote in the aftermath of the Japanese earthquake and tsunami of 2011, and the meltdown at the Fukushima power plant, that “the nuclear catastrophe could end up being expansionary … remember, World War II ended the Great Depression.” Krugman would also claim that the threat of an invasion by aliens could bring the US economy out of recession within 18 months. Not to be outdone, the economist Larry Summers, formerly senior economic adviser to President Obama, told CNBC that Japan’s earthquake and tsunami “may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.” As Bloomberg’s Caroline Baum somewhat tartly responded, “Too bad Japan had to wait 16 years for another opportunity.” The ghost of Bastiat would no doubt have enjoyed seeing this headline from the Daily Telegraph in March 2012: “FTSE could hit 7,000 if the Bank of England prints more money”.
Economics has coined a term for this fallacy: money illusion. Somebody who has fallen prey to this condition is unable to distinguish between real and nominal values. If quantitative easing were really a way of boosting an economy, for example, why is there no evidence anywhere of it having ever worked? Perhaps because it doesn’t. But then, at its core, not much in conventional economics really does. Economics is an overconfident discipline with delusions of scientific rigour where none really exists.
So what do we have to show for the lockdowns that emerged sporadically throughout the world since early 2020 in response to a novel coronavirus that looks increasingly like it was developed illegally using US taxpayers’ money funnelled to Wuhan by Anthony Fauci and then exploited by unaccountable shakedown criminals representing Bad Pharma ? So far, we have no discernible public health benefit whatever; a handful of hugely enriched personal and corporate interests with close ties to government; many thousands of deaths; many millions of shattered lives and livelihoods; rampant inflation; and, lastly, trillions more by way of government debt that will most assuredly never be repaid with anything except dishonest and devalued money. We were admittedly early in seeking inflation protection by way of precious metals, commodities companies and cheap but highly profitable unindebted businesses – early, but not exactly wrong. If we were wary of ‘paper’ in 2020, we are doubly or triply wary now. The allure of ‘real’ assets, on the other hand, is as effervescent as ever.
Here is another suggested definition for ‘MacGuffin’: “a gigantic nothingburger that facilitates the extraction of money and value from taxpayers and SMEs and into the purses of corrupt politicians and crony capitalists”. Example MacGuffins, in the wake of Covid: masks; footling PPE; ESG; climate change; social justice; race hustling; the war against hydrocarbons; almost everything ‘green’; the war against the nuclear family, the Church and traditional civil society, and in favour of multiple non-existent genders. Destruction is not profit.
It may be paved with good intentions, but the road to hell remains the road to hell. And it was Big Government that commissioned it.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you, too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Get your Free
financial review
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
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