The Hunt for Scarce Resources

Oh thank goodness for political stability now that Indecision 2010 has been resolved:

“Swan firm on mining tax… Independents, Greens want change” – Australian Financial Review

“The first cracks have appeared in the Gillard government’s alliance with the crossbench MP’s, with the Greens signalling they may side with the Coalition on some issues…” - The Age

So yet again your editor finds himself agreeing with former Labor Party leader Mark Latham. Excerpts from Latham’s column in today’s Australian Financial Review include:

“[E]lection results in Australia are determined by voters who are blasé about politics: those who visit a polling booth only because of the coercion of the state, the threat of fines and court action under Australia’s compulsory voting laws…

“Up to half the bureaucracies, rules and regulations of the state could be abolished without any noticeable impact on the life of the nation.”

Blimey! That’s almost something we could vote for. Although we think Latham is being a bit too kind on the Canberra bureaucrats, “Up to half”, we’d argue you could get rid of 99% of them and it wouldn’t have any negative impact on the life of the nation.

However, as for democracy, we tend to agree with Doug Casey’s view:

“Democracy is no solution – it’s just 51% bossing the other 49% around. For God’s sake, Hitler was democratically elected. Democracy is just mob rule dressed up in a coat and tie.”

Maybe Mark Latham is becoming more libertarian as the years pass? Although we’re sure he’s still lugging around plenty of socialist baggage, so we won’t big him up too much.

But enough of that, more of this…

Several Money Morning readers have pulled us up on our views about the Christchurch earthquake. Their argument has been that the earthquake actually will be positive for the New Zealand economy. How?

Because most of the cost of funding the rebuilding will come from insurance claims.

Therefore there won’t be any drain of funds from the private sector. The household that had $10,000 in the bank account will still have $10,000 in the bank account because all they need to do is file an insurance claim and the insurer will pay for the rebuilding or repairs to the home.

So, because of that the householder will be able to spend or save their money as they wish.

The other argument goes that it will also be positive for the economy because it will draw additional labour into the Christchurch area, most probably from overseas due to a skills shortage in New Zealand and that this will lead to more spending and more job creation.

All of which will be good for the New Zealand economy.

Apologies for bringing up this subject again, but we do like to tie-up loose ends where we can. So, are the insurance and job creation arguments reasonable?

In short, no. Let me explain…

First off, as usual, those that use the insurance argument only address half the story. Insurance is, well insurance. It’s there to insure against the worst. Insurance isn’t supposed to be profitable.

As soon as you consider the profitability of something then it becomes an investment, not insurance.

For instance, your editor generally views gold as being an insurance policy against the worst. We hold gold – and silver – on the off chance that inflation will go haywire, or political instability cause social breakdown then gold is a good insurance policy as it would surely become a valuable method of indirect exchange.

However, we don’t actually want that to happen. We don’t actually want there to be hyperinflation, because if that did occur it’s most likely to result in a lowering of our quality of life.

Abolition of coercive governments and bureaucracies is a different thing. That would be a positive.

But even the most bearish of bears is unlikely to wish for hyperinflation or social breakdown, unless of course they have bought gold as an investment rather than as insurance.

Then they should see their investments rise in value. But if there wasn’t hyperinflation or social unrest then their investments may not perform as well as if they’d invested in shares or bonds or property.

For most people, including those that hold gold, they are most likely to be better off without hyperinflation or social unrest. The gold holdings serve as an insurance policy should the worst happen.

It’s the same with insurance policies and earthquakes. Very few people in Christchurch right this minute, or even in the medium term will be thanking their lucky stars that an earthquake flattened the city.

Even with insurance, it’s likely that most people will be worse off now than they were three weeks ago. While they may be able to claim insurance for rebuilding or repairing their house or business, it doesn’t avoid the fact that they house or business has been destroyed.

It doesn’t avoid the fact that they’ll have to live in temporary accommodation for several months. Accommodation that will most likely be of a lower standard than their home before it was damaged.

Aside from that, how will the businesses generate revenue if they have no shop or factory to operate from?

How will individuals generate income if their employer doesn’t have a shop or factory to employ them in?

Again, maybe they have insurance policies to cover for this, but it’s unlikely to provide them with the same level of income as they’d get from their fully operating business or job.

As we recall, personal income protection only covers a maximum of 75% of your salary anyway.

And are the people who worked in the shops or factories skilled enough to get a job as a builder, carpenter or glazier so that they can “benefit” from the supposed economic boom from the earthquake?

Or, just as builders, carpenters or glaziers may descend on Christchurch in their droves looking to profit from disaster, is it not equally likely that shop workers or factory workers, dentists and hairdressers may leave Christchurch in order to get work they are qualified for elsewhere?

Not to mention the fact that insurance companies aren’t charitable organisations. Sure they may be able to pay claims from reserves, but odds are they will want to rebuild the reserves. And that means potentially increasing future premiums for those that have claimed, and perhaps those that haven’t claimed.

And finally there’s the issue of the demand for scarce resources. With hundreds or thousands of buildings to be repaired or rebuilt this will naturally cause the price of building materials to rise.

Because earthquakes happen so suddenly there obviously isn’t the time for building merchants or timber yards to prepare in advance for the increased demand. Therefore prices for timber and bricks and bathrooms and kitchen units will be higher than they otherwise would have been without the earthquake.

That means households in other New Zealand cities will also have to pay higher prices as the demand increases and as businesses realise they are able to increase prices to meet the demand.

Naturally, higher prices for these goods means less money is available to be spent or saved elsewhere in the economy – remember even those not covered by insurance will now have to pay the higher prices too.

And due to the higher demand and higher prices it may be that to rebuild the same house would actually cost more than the amount it was insured for. So you may be in the position of having to rebuild a smaller house as a consequence of the increase in building costs.

Remember, building insurance is based on an insured amount, not whatever the cost is to replace it with an identical building.

Look, the fact is, despite the claims made by the economic ignoramuses in the mainstream, a disaster is called a disaster because it is, well, a disaster.

The idea that a disaster provides an economic benefit appears to be some sort of perverse Keynesian inspired invention to support the equally fallacious claims about make-work projects.

You know the ones, paying one group of people to dig a hole and then another bunch to fill the hole back in again. Because on the surface it appears to create jobs it’s deemed as a positive to the economy.

It’s no different with natural disasters.

Would anyone seriously have argued two weeks ago that it would be good for the New Zealand economy if they blew up Christchurch and then built everything from scratch? We wouldn’t have thought so. But if it is such a good idea why didn’t anyone suggest it?

They didn’t suggest it because they know that it would be madness.

Whether cities have been destroyed by natural disaster or by man makes no difference. Destroying something for the sake if it doesn’t result in a positive outcome for the economy.

The reality is it’s a drain on the economy as resources have to be diverted from elsewhere.

We’re not making complicated arguments here. All that’s required is to think about the associated consequences of particular events, not just the immediate effects.

It’s something that unfortunately most of our chums in the mainstream press are completely incapable of doing.

Cheers.
Kris Sayce
For Money Morning Australia