The late Milton Friedman must be turning in his grave as he watches Governments around the world wantonly pumping money into their respective economies and, in some cases, rewarding poor management.
The US Federal Reserve has ceased counting M3 (the total money supply in the economy), the Australian Government has thrown an inflationary $10 billion into the economy, while all banks in Australia are now effectively rated AAA.
Friedman was a great economist, a shining light at a time when the world seemed to be churning out great economic thinkers like cheeseburgers, and not lightweight bank economists but original thinkers like J M Keynes and J.K. Gailbraith.
For those of you who have never heard of him, Friedman, who took out the 1976 Nobel prize for Economics, was born to Jewish Hungarian immigrants in Brooklyn, New York – a suburb more famous for mobsters than economists – and spent much of his early career working on Franklin D. Roosevelts’ new policies that were designed as a means for the Government to try and spend its way out of the 1930’s depression.
You will remember that the depression was caused by twin evils – the economy went into recession and the Government tightened its spending, rather than increased its spending releasing liquidity into the economy (Governments are now pumping money in but with limited control).
So Friedman knew a thing or too about how to get an economy out of the darkness – because he’d seen it and knew how to fix it.
His central ideas were – in no particular order:
1. Inflation is the real killer of economies – whatever you do – don’t let inflation get away from you (curious then that at this moment that we as a nation are “not worried about inflation..”
2. The best way to control inflation is to control the supply of money, that is done by managing (not let run rampant) the supply of cheap money into an economy – we could be left facing stagflation if this is left unchecked and growth bottoms out while inflation takes off.
3. When you are trying to spend your way out of a downturn whatever you do – don’t give people a lump sum. It doesn’t work – give them a higher income or a chance at a higher income.
It’s the third point we want to dwell on for a second here, the current Australian Government, under Labor’s Kevin Rudd (The Dentist), has decided to take half of his inherited surplus and inject it directly into the economy as a one of payment to approximately 30% of the population with lower incomes.
Mr Friedman, if he had the luxury of being alive to see this, would be turning purple with rage.
He would also be pointing to the chapter of his Phd thesis, titled the Permanent Income Hypothesis, which argues that consumer behaviour tends to change not when people get a one-off benefit, but when they can reasonably expect to earn more money in the future.
In addition he would be encouraging all those people excluded from receiving a payment to buy shares in Coca-Cola Amatil and Woolworths – because by and large that’s where the $10 billion hand out just before Christmas is headed, on feasts and presents for the grandkids.
He would also be turning purple at the idea that the Government has underwritten all the deposits of Australian banks – essentially everyone is now rated AAA – courtesy of Mr Swan.
That’s an interesting notion when you think about as all the banks now have the same risk profile – Bendigo Bank is as risky as CBA, while Adelaide Bank is safe as NAB.
To be blunt it’s just not true – all banks are not as safe as each other and the hard work of people at CBA, for example, in building up their business has been punished, while the banks which have run profligate risk books have been rewarded.
According to the Government it is now ok to leverage your business to the US dollar debt markets and lend more than you’ve got – because they will just bail you out.
The socialists have a word for this it’s called the nationalisation of an industry and by and large it’s an interesting strategy if everyone is AAA rated – then of course no one is AAA rated, it becomes a meaningless measure and likewise all reward for good management becomes irrelevant.