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SHIFTING SANDS

8 Oct 2014 11:18 AM - Article written by Robinson Sewell Partners

The role of government intervention in regulating economic activity

"The habit of ubiquitous interventionism, combining pinprick strikes by precision weapons with pious invocations of high principle, would lead us into endless difficulties. Interventions must be limited in number and overwhelming in their impact."

~ Margaret Thatcher, Statecraft: Strategies for a Changing World (2002)

Economic disasters of the past

There are times in economic history that prevailed multi-faceted transformational currents of financial activity that spurred disdain and angst amongst policy makers to apply a remedial concoction of intervention.  The 1929 Great Depression, the Dutch Tulip Bubble of 1637, hyperinflation in the Weimer Republic (Germany) in 1921 are to name a few.

Contra to intervention, the universal decree of the Invisible Hand theory by Adam Smith in the late 1700’s suggested that this natural phenomenon will guide free markets and capitalism through competition for scarce resources.  Left to its own devices, financial and economic equilibrium will establish itself into its natural order.  Albeit history has shown that sometimes left unchecked, the unforeseen consequences of this free state of affairs can also be extremely severe to the laissez-faire believers.

Government policy intervention - in our own backyard

Hence the doctrine of applying intrusive government intervening policy in order to restore financial order from fiscal chaos, regulatory morality from ethical starvation and commercial stability from undue economic collisions was formulated.  Albeit the quantum of primary and secondary impacts as a derivation of intervention is hardly predictable and always heavily debated.  Let’s fast forward to 2014…

In Australia, a post financial crisis adjustment is notable with the recent slide in prices for export commodities adversely impacting our national income.  Cross border currency wars are softening a desirable fall in the AUD.  Record low interest rates to spur economic activity are inflating asset prices, increasing risk appetite in the hunt for yield and frothing the housing market all of which will threaten downstream stability in the economy.  All the meanwhile the government is being challenged to get the budget into the black amidst these conflicting agendas and policy challenges.

Government policy intervention - what's happening around the world

Across the horizon towards the two canary’s in the global cage.  China is grappling with a slowing economy with structural reform from a construction to a consumption led economy whilst tightening restrictions on accessibility to infrastructure funding.   Developers are shifting (residential) inventory at discount making the secondary market vulnerable to correction.

In the US, an improving employment outcome and a related monetary tightening scare is pushing out credit spreads on bonds and hence placing revaluations on equities markets. 

There seem to be an extraordinary number of economic sedimentary structures that are tectonically colliding and forcing change to the application of rules directed towards domestic policy its financial engagement with the public domain.  Regulation is a reactive mechanism to shield against foreseeable financial calamities, but also distorts pricing mechanisms and can stifle investment and innovation at a time when it needs to be encouraged.  But can policy realistically repel the momentum behind a capitalist Laissez-Faire framework and protect us from financial adversity?  Or will the empowering inertia of the economic tide wash over the walls of intervention like the sand rolling over the city of Ubar?