Agora Financial’s Rude Awakening

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Taipei, Taiwan

• The growing risk in Treasurys and four ways to bet against them,
• The trouble with separating man from the economy he builds,
• It’s only the end of the world, why waste time worrying? And more…

Joel Bowman, reporting from Taipei, Taiwan…

Super typhoons, an earthquake and a tsunami; to put it mildly it has been a devastating week for the Asia Pacific region. Now another typhoon, Parma, is closing in on our doorstep. We await quietly its wrath. In the Philippines, the Catholics pray for deliverance. Here in Taiwan, the Buddhists batten down their hatches…

…and yet, from the shiny towers of modern economic theory, there pours forth a deluge of pure idiocy that threatens to drown us all.

In the aftermath of last week’s natural disasters, a few misguided economists have rushed forward to assure a battle-weary public that there will be “minimal economic impact” on the effected nations. Some, evidently suffering from a most unfortunate case of myopia, even suggest that the region will be “better off” for having suffered so at the hands of Mother Nature.

“Rebuilding has an accelerating effect on GDP,” Wai Ho Leong, Barclays Capital’s senior regional economist in Singapore, remarked in an interview with Bloomberg. “Typically, it more than makes up for such shocks. The overall impact on the economy might even be positive, if we factor in rebuilding programs.”

Such abuse of logic leads the unthinking person to assume that all our economies would be far better off, if only we were fortunate enough to be visited on by regular and extreme natural disasters.

One might have thought that such specious reasoning would have gone the way of the dodo after Frederic Bastiat elucidated for us its inherent flaw in his 1850 essay, “That Which is Seen, and That Which is Not Seen.”

In his famous example, “The Broken Window,” Bastiat examines opportunity cost, the cost of that which is “unseen.”

Suppose, Bastiat’s example goes, that a careless son breaks a windowpane in his father’s store. Witness that the bystanders will placate the shopkeeper with such statements as, “what would become of the glaziers if panes of glass were never broken?”

The idea here is that the “seen” effect of the broken window is a net positive, i.e., a glazier will be paid 6 francs (the figure in the example) to fix the window. What is left unseen, however, is not only that the shopkeeper must furnish 6 francs for a new window, but that he now has 6 francs less to spend on those things he might have purchased had his careless son not damaged his property in the first instance. (In Bastiat’s second supposition, where the window is not broken, the shopkeeper spends his 6 francs on shoes and enjoys, in addition to his new kicks, an unbroken window in his store.)

As Bastiat correctly concludes, “Society loses the value of things which are uselessly destroyed.”

The message is simple enough that one might think even a mainstream economist would be able to grasp it. Alas…

The misguided Leong continues: “We have seen the experience of Sichuan and more recently in Taiwan. Over an extended time period, there was no discernible impact on gross domestic product on a net basis.”

[It is true here that Mr. Leong has enslaved his reasoning capacity to the dubious metric we know as gross domestic product. And it is true that this measurement tends to paralyze the inquiring mind, often beyond resuscitation. But that debate is for another day...]

More than 3 trillion yuan ($440 billion) was committed to rebuild houses, highways and railways leveled by the earthquake that struck Sichuan back in May, according to Vice Provincial Governor Wei Hong. We can easily understand, therefore, that this money will not now be used by either individuals – to purchase new machinery for their farms, for example – or by the local government – to cover other expenses.

That 3 trillion yuan is an “unseen” cost, but a cost nonetheless…and quite a discernible one at that.

Even of we forgive Mr. Leong this error, we might have expected him to count the cost of the 87,000 people who perished in the disaster. Even if he wishes to separate these individuals from the economy, he must admit that such a tragedy represents a massive loss of productivity. You know…for the “economy.”

Such egregious remarks might be considered comedic fodder if the (lack of) thinking behind them was not so pervasive in modern economics, where spending – any kind of spending – is seen as an absolute and unchallengeable positive for all and sundry.

In the same article, Song Seng-Wun, an economist at CIMB-GK Securities Pte, assured us that, “For now, this is a human rather than economic story. In fact, there could be a mild boost from reconstruction works.”

Here we can see the pernicious misconception in higher resolution; that is, the assumption that economy and man are isolated entities. Of course, there is no “economy” without humans and any attempt to separate the two is, at best, a grossly sophistical error. From fascism to communism, all tyrannical and oppressive regimes have this mendacious claim at their heart.

Whether in response to natural or manmade disaster, beware the message, “good for the economy,” if it deviates in any way from what is good for the individuals who build it.

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And the Rest of Your Rude Reading…

The Last Bear
By Bill Bonner

Personal conversions sometimes mark dramatic turns in history. Saul of Taursus saw a vision so bright it left him blind. The next thing you know, he had changed his name and was pushing Christianity all over the world. According to Gibbon, the Roman Empire fell as a consequence. Then, on the advice of his mistress, Gabrielle, Henry IV became a Catholic, leading to the Edict of Nantes and its subsequent revocation.

How to Relax and Enjoy the End of the World
By Bill Bonner and Addison Wiggin

The world as we have known it is coming to an end. But what do we care? We smile and vow to enjoy it. It took the Roman Empire hundreds of years to fall. During that time, most people did not even know their world was coming to an end.

Kinder, Gentler…and Perverse
By Eric J. Fry

The kindlier, gentler version of American capitalism that has come into fashion since last year’s credit crisis is neither kind nor gentle… at least not to capitalists. The “new capitalism” visits the sins of an imprudent minority on the backs of a prudent majority.

The Sun Sets on the West
By Chris Mayer

What will the global economy look like in 2050?…and should we care about that now, forty years before the fact? Dr. Marc Faber, the 63-year-old Swiss editor of the well-regarded Gloom Boom & Doom Report, recently addressed both questions.

Risk-Free is Not Without Risk
By Eric J. Fry

“All things must pass,” George Harrison mournfully crooned on his 1971 album of the same name. “All things must pass away…Sunrise doesn’t last all morning. A cloudburst doesn’t last all day”…and neither does a superpower’s global economic hegemony.

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[Rude Endnote: Your editor is off to Seoul, South Korea, this week to catch a glimpse at the world’s second most populous metropolitan area. If you’re in the city and want to grab coffee, drop us a line below.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com