As recovery gets closer, governments build their power: Kohler

The S&P 500’s return to 1000 this morning caps an astonishing and historic affirmation of the role of government. The main US index has now gone from 666 to 999 – a rise of exactly 50% in five months.

The Great Reflation of the past nine months – that is the expansion of government deficits and debt and financial system liquidity by central banks – has resulted in a stockmarket and credit market rally that is now becoming self-sustaining.

Yesterday, we pointed out how governments have revived the motor industry through subsidies for trade-ins.

This morning, Barclays and HSBC highlighted the fact that the banks that survived last year’s storm now have their spinnakers flying.

Both have reported big increases in profits, in each case boosted by investment banking, thanks to the frenetic capital raising and successful proprietary trading that has been going on – all of it made possible by low interest rates and extra liquidity in the system.

Australia’s banks are flying as well, even to the point of volunteering to give up overdraft fees. Their shares prices have gone up 50% since early March, while the rest of the market is up just 30%, and they are engorged with capital.

Political oppositions are suddenly on the ropes as government leaders take credit for the recovery – none more so than Australia’s Malcolm Turnbull, who unwisely went on a non-economic excursion to try to find some traction against the rampant Rudd, and instead found Godwin Grech and a fake email.

In some ways Kevin Rudd is right: we have now come full circle from what he calls the neo-liberal ideas of the post Reagan-Thatcher era 1980s, in which the role of government was under sustained attack.

Now the ideas borne of capitalism are in retreat and regulation and bureaucratic triumphalism is on the march.

The Australian National Broadband Network, with the Government insisting on 51% ownership and the minister, Stephen Conroy, clearly running the show, is just another case in point.

This is a profound shift in thinking, and won’t be ended by “exit strategies”.

True, central banks will now start removing the stimulus of low interest rates and liquidity programmes – probably starting with the Australian Reserve Bank this afternoon – and governments around the world are in for a decade of difficult fiscal consolidation as they get budgets back into order.

The good news, by the way, is that most countries will be debauching their currencies at the same time, so they will all collapse together, which is why gold is now flirting with $US1,000 an ounce.

But business people need to understand that a permanent shift has occurred in the balance between the state and the rest of society. To the victor go the spoils.

This article first appeared on Business Spectator.