The Soviet experiment showed beyond reasonable doubt that, even with no restriction on authority and compulsion, one could not successfully control an economy. Today, the Soviets are mocked. How could anyone think that you could control an entire economy?

Today people expect the Fed, with limited authority over the monetary base, bank regulations and interest rates, to succeed where Gosplan failed. And they see no contradiction in doing so. Amazing. What is especially amazing is that even Mr Bernanke, who is an economic historian, appears to believe that he can steer the economy. Yet the evidence is clear that government attempts at economic management always increase entropy.

There’s nothing like a good bearish article to warm the cockles of a bear’s heart. So sit down and enjoy this one (PDF), the glow will last all weekend, at least until the market opens. Thanks to “Investment Postcards from Cape Town” for the reprint.

It is frequently pointed out that bonds are not a good investment, because the yield on quality bonds, i.e. Treasuries, is insufficient to compensate for inflation.

The problem is, there are no good investments available. Where investment is defined as an income-producing asset with low risk of principal loss. Essentially all asset classes are overpriced. Equities have been overvalued continuously since 1991. Real estate, well don’t go there. Commodities and currencies aren’t investments, they don’t produce income.

So one does what everyone else is doing, one becomes a speculator, betting on future prices. Yuck. I hate it, but there is no alternative. This has meant, and continues to mean, markets where there is no tie to investment value, price action is the only thing. Manipulation is prevalent. But in the long run, I believe that value will govern. I’ve been in the speculation mode since 1997. I want to go back to being an investor. The overvaluation is driven by an excess of cheap credit. People borrow because they can, drive up the price of assets with the borrowed funds, and come to believe that they are investment geniuses. The great deleveraging, which will remove the supply of cheap credit, has started. The banking system is a collection of zombies, dead companies still trading, their capital an accounting fiction. I am just stunned that seemingly intelligent people think that the economy can resume growth with securitization of credit essentially shut down, and a banking system that is desperately short of capital already, and facing more losses in the future.

There is nothing that the Fed can do without a well-capitalized banking system, it is not a lender to end users of credit (except the brokers, I guess). It needs to look at the Japanese example and learn, not to wait as long as the BoJ did to restructure a broken system. It will not, and cannot, heal itself. Of course, the systemic failure is largely due to the actions of the Fed itself and recognizing this will be difficult. It is perhaps not something Mr Bernanke is capable of doing, given that he is so imbued with the nonsense of modern monetary “economics.” It is not what we don’t know that hurts us, it is what we know that isn’t so.

Oscar Wilde once said “A cynic is a man who knows the price of everything and the value of nothing.” Perhaps he might better have aimed the barb at economists, who tend to look at the economy solely in terms of money. Sometimes it is worth stripping away the money aspect, because it is at best a rubbery yardstick and at worst a conjurer’s wand, providing the illusion of wealth and success where neither exists. The Fed has used monetary policy to accelerate consumption. Easy credit and low interest rates encourage present consumption and discourage deferred gratification. The justification is that the demand for goods and services stimulated by credit results in more investment, thence more production, thence more goods and services to distribute around the population, thence a higher standard of living for everyone.

Unfortunately, this hasn’t worked out. More goods and services have been produced, but they have been distributed mostly to the self-appointed elites of government, finance, law, medicine and the boardroom. Most people are no better off, and in many cases worse off in real terms, than they were twenty years ago. Worse than that, people who thought they were amongst the better off are seeing their houses, cars and assets seized when they cannot pay their debts. Communities are left with streets of overgrown lawns and vandalized houses. Unemployment is rising. The industrial base has been eroded and moved offshore, where the citizenry has been more willing to defer consumption and invest in the education and training, the plant and equipment to produce the goods and services that Americans want. The country’s infrastructure is falling apart from lack of maintenance, let alone replacement or improvement. The education system is producing five times as many lawyers as engineers - because engineering is too hard. While the elites worship celebrity chefs, the use of food stamps is at record levels.

And yet the government has the nerve to claim that the economy is growing. No. America is consuming itself.

It is rare when I read something with which I agree 100%. Here is such a case, this succint interview with Jeremy Grantham (in the Globe & Mail).

You draw comparisons between what’s happening today and the start of the Great Depression.

We’re in that 1929-30 window, where we’ve had a shock to the system. But the secondary effects - less consumption, lower profit margins, lower GDP, lower employment, lower global trade - are beginning to work through the system. They’re steadfastly ignored because they’re still quite slight. It takes a year, 18 months [or] even longer for some of these effects to show up.

As the article notes, Jeremy, like me, got out of the NASDAQ bubble way too early. However, it is encouraging to note that his analysis and mine come up with the same answers.