COMMODITIES INVESTING
men find themselves embroiled in a orders fail to be renewed or start being cancelled.
bidding war for the factors they so In this way, the investment boom will crack, typically taking the
urgently need to complete the transfor- form of a cascade of failure and retrenchment spreading downwards
mation of their wares to saleable final from the capital goods manufacturers to the High Street. Far from
goods. We can grasp the urgent need consumer behaviour being a leading sign of distress, it is only now,
for funds by imagining they are needed when rising unemployment makes itself felt that boom-swollen
to unblock the stream of products now incomes shrink and the tinkle of cash registers begins to fade.
languishing, uncompleted, on an idled The recession has now truly arrived, though not, you will note,
assembly line whose workers have all from any lack of ‘effective demand’, but rather due to a surfeit of
been tempted away to better-paid defective – that is, mutually incompatible – demand.
work serving beers in the bar across the
road from the factory. Sifting Through the Rubble
Moreover, some of those caught out by How long the downturn will last is very hard to say, but it must be
this uncoiling of the inflationary tangle noted that our modern interventionist state and floating currency
may have to finance a store of unsold regime may help ‘smooth’ (in truth disguise) the amplitude of the
inventory – unwilling, just yet, to admit cycle, but only at the expense of magnifying its wavelength.
defeat and to clear it out at whatever As this boom teeters on the abyss of readjustment, attempts will
disappointingly lowly price the market doubtless be made to foster mindless spending somewhere around
will currently bear. Effectively they have the globe, whether by pouring concrete at government bequest
become leveraged speculators on a (maybe we could hold the Olympics and the World Cup on an annu-
resumed rise in that inventory’s price. al basis in future), by issuing all Chinese citizens with four credit
Anxious to salvage anything they can cards (à la Korea in 2000), or by cutting rates to the bone across
from the wreckage of their plans, the Asia and exhorting everyone to buy a house (as in Greenspan’s
swelling ranks of struggling producers post-Tech America).
will be willing to pay interest not merely It might even appear to work, though contrary to received wisdom
up to the level of their expected profit what we really need is less exhaustive consumption, not more, if the
(as before) but even up to the full extent system is to heal itself. Even if consumption-biased GDP aggregates
of their (soon to be foregone) deprecia- start to look better, remember that the cycle manifested itself in
tion allowances as well. This is a phe- what we called a ‘lengthening’ of the productive structure, in under-
nomenon Hayek termed; “investment taking investments increasingly removed from the immediate provi-
that raises the demand for capital.” sion of consumer goods, and especially of consumer-staples.
Inevitably, then, the fatal divide
between entrained investment and the
... our modern interventionist state and floating
ex ante desire to save will all come to
currency regime may help ‘smooth’ (in truth
reveal the false premises on which the
disguise) the amplitude of the cycle
boom was launched.
With costs rising and selling prices As a result, a crushing asymmetry came to bear here, which lies in
falling for all those firms suffering the the fact that it is far easier to achieve such a lengthening – to use
effects of this excruciating dislocation, easy money and expensive shares to build plant, lay pipelines, and fill
they will begin by freezing all discre- the factory with banks of gleaming, new, highly-specialised machin-
tionary spending – especially that ear- ery – than it ever is to shorten it again – to retool the assembly line
marked for new capital outlays – then for a different use, to bring a different ore out of the same mineshaft,
‘non-essential’ outside business servic- to break the equipment profitably up for scrap – when the premise on
es will be curtailed and, finally, redun- which these bold steps were taken proves to be a mere falsehood
dancy notices issued to the workforce. spun amid the intoxicating mood of financial incontinence.
The first of these countermeasures will Since the quantity of stranded capital will be both so large and so
tend to focus much of the pain up into immobile there will subsequently be little, if any, enthusiasm for an
the higher-goods sectors. Here, rev- outright dismantling of that capacity; especially where an expedient
enues derive much more from expendi- bankruptcy filing can both lift the burden of heavy dividend and inter-
tures made by their fellow businessmen est payments and break labour covenants. As a consequence, there
below the line rather than above it, and will probably ensue a long period of sub-marginal economic returns in
the former are decidedly much more any such business as capital slowly dissolves amid a corrosion of high-
deferrable. Moreover, those bearing the grading, under-maintenance, and neglected depreciation.
brunt typically turn out the most nar- Doubtless too, some Keynesians will pipe up that it has all been
rowly specific range of products, them- worth it – that we wouldn’t have all these factories, all this fibre-
selves often requiring the most spe- optic cable, all these international trading hubs, and technology
cialised equipment to make. These are, parks if it weren’t for the bubble. That is a little like trying to comfort
therefore, the types of companies least yourself by saying you wouldn’t have all those near-pristine Italian
likely to find any alternate outlet once suits hanging in the wardrobe if you’d known you were going to put
38 SEPTEMBER 2007 COMMODITIES NOW
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