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15. 02. 12. - 16:00

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15. 02. 12. - 16:00

Clem Chambers - The economic system is a plaything of politics

Greed is good, helping markets rally, credit to flow and increasing investment and employment levels argues Clem Chambers, CEO of leading stocks and shares website ADVFN.com and author of ‘101 Ways to Pick Stock Market Winners’. For free, real time stock prices visit www.advfn.com. Follow Clem on Twitter @ClemChambers

Right now, the whole economic system is a plaything of politics. The further away your investments are from the chaos of the clashing political titans, the better.

It’s said that when economics fails, it is the job of politics to step in. After five years of governments’ trying to rectify the credit crunch we are left wondering how things would have fared if no one had stepped in and all the banks of the West had been left to go to blazes with the market being allowed to pick up the pieces.

It’s tempting to think that by now the West would be back in a boom like Asia and Russia were in the 1990s.

Instead, the crisis drags on. Austria, along with eight other EU states including France, Italy the UK and Spain is on "negative credit watch" by major New York-based agency Moody’s – in threat of losing its top rating of AAA.

Austerity is, of course, meant to roll the state back to a sustainable level and perhaps it will if it is ever really applied - rather than used as a threat for public sector wage restraint.

The move against Greece underlines that in Europe this is at least desired for the margins. However, does anyone in Europe actually want a smaller public sector? The answer by and large is probably "no", but it is simply the case that it can no longer be afforded.

With the private sector workforce amounting to around 40 per cent of the population in some European countries, it is hard to let the wealth creators off the hook for the rest of the population. They are not exactly going to be incentivised as the toll on them rises yet higher.

To make things harder still, with so much GDP accounted for by low-value government spending, it is hard to cut back the state "fat" without creating poor, election-losing economic growth rates and employment figures.

It all looks horribly gloomy, but the tide may at last be turning.

The US is definitely recovering and there is another year, perhaps two, of good solid growth in the pipeline. The US still drives the world economy - a US recovery means better economic times for everyone.

The crisis that lies behind us is a result of a huge malfunction of money supply, set off by a credit freeze, in a system that had outgrown government controls and produced a private sector money supply explosion that then turned broke and into a money supply death spiral.

The central banks have got a handle on this at last and have, in effect, re-nationalised money supply from the private sector money providers - the banks.

The method to print enough money to rebuild economic momentum is understood. There are risks of inflation, but that route solves a lot of other problems like rebasing and rebalancing many economic imbalances. The alternate deflationary route would break the back of the existing systems to a level of dislocation that is difficult to imagine.

We can hope the first world is set on a path of recovery alongside the US. The leading indicator for this will be a lowering of volatility in financial markets.

As fear recedes, so greed grows.

As greed grows, appetite for risk rises and with that the attractiveness of objects rather than cash or ‘near cash’ increases. Markets rally, credit flows, investment happens, employment rises, growth occurs; greed is good, risk is great.

That’s exactly the opposite of what the politicians have been singing.

Risk must be punished, greed is bad. Greed is bad even if more than half a huge bank bonus goes straight to the poor via tax. Politicians think banks should lend more money to consumers and companies whilst magically taking less risk - this is impossible.

This is where we are left. Hoping that the "political machine" is as inept at arresting growth as it is at stopping bubbles. We are left with the hope that the politicians do not snatch defeat from the jaws of victory.

Weak Euro good, strong Euro bad.

Austrian Times

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