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1. Agcapita Update
September 2010

2. Agcapita Update
With hands firmly grasping the handle of the bucket…
Winston Churchill once said “that for a nation to tax itself into
prosperity is like a man standing in a bucket and trying to lift
himself up by the handle.“ It could be said with equal certainty
that printing and spending money as a path to prosperity falls
into the same category.
Unfortunately, it seems the only consistent skill governments
and central banks possess is the ability to debauch their
currencies. They have an unblemished track record in this
regard as evidenced by the uniform collapse in the purchasing
power of fiat money since modern central banking came into
widespread existence in the early part of the 20th century –
witness the greater than 95% decline in purchasing power
in both the US and Canada as an example of massive and
unrelenting central bank inflation.
Granted, pointing out the role of governments and central
banks in inflation is not a novel observation. Many have made
this connection before and much more elegantly including
Ludwig von Mises who said “Government is the only institution
that can take a valuable commodity like paper and make
it worthless by applying ink” and Voltaire, a man who lived
through a spectacular fiat money collapse, who said that
“paper money eventually returns to its intrinsic value -- zero.”
So you might reasonably ask what is the point of this note if
I’m going to state the obvious?
There is much talk about QE, stimulus, bond yields, risk
premiums, volatility, velocity of money, deflating asset prices
and so on and so on. My point today is that to focus on
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3. Agcapita Update (continued)
what is happening in the immediate term is to specifically SocGen concluded that Italy,
miss the forest for the trees. Only by taking a Germany, France, Portugal, United States,
step back is it possible to remember that the United Kingdom, Spain, Ireland and Greece
developed world is still in the midst of a truly all have large negative net worths – i.e. they
massive and unprecedented experiment in which are bankrupt. Canada wasn’t mentioned, not
the Keynesians are still in charge – printing and because the government’s finances aren’t in the
dispensing money on a vast scale. Some say same dismal condition, but because SocGen
that it will have no effect because the “velocity didn’t publish the numbers.
of money has collapsed” while others predict
It is the unfolding bankruptcy of western
hyperinflation. governments that will drive inflation as they
increasingly rely on the printing presses to
In the midst of all the seemingly contradictory fund their deficits. Jordan Roy-Byrne reminds
data and the clearly contradictory predictions I us “Hyperinflation is a fiscal not a monetary
prefer to fall back on a simple economic dictum phenomenon. The reality is that hyperinflation is
- if an item can be created for zero cost and is first and foremost set in motion and driven by a
created in increasing quantities its value will trend deteriorating fiscal situation. In fact, significant
to zero. Is money subject to different rules than economic weakness and deflation is a precursor
other economic goods? to hyperinflation. Too many analysts believe
that there has to be some economic demand
That leads directly to my next question – will or some consumption to stimulate inflation or
the governments of the west continue to print hyperinflation. Printing money to try and stimulate
money? Morgan Stanley thinks yes. In a recently your economy or excessive credit growth is what
published research piece proclaiming the US leads to inflation. Printing money because you
“broke” and that no conceivable combination of are broke and can’t service your debts is what
austerity and/or tax increases will fix the problem, leads to hyperinflation.”
Morgan predicted that some form of default via
the printing press is sure to happen. Societe To follow the logic to it’s conclusion, if the
Generale went a step further and conducted governments of the west are bankrupt isn’t a
a simple calculation of the approximate “net printing press default plausible? Time will tell,
worth” of various western governments. To but I feel certain about this – the governments of
use SocGen’s circumspect language “the the world can’t print food and can’t print energy
fiscal challenges are unprecedented”. More but they can and will continue to print money.
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4. Agcapita Update (continued)
Therefore I want to leave you with three simple
questions – in the next decade will:
– Fiat money be worth more or less
– Energy demand be higher or lower
– Food demand be higher or lower
If you believe as I do that fiat money will be
worth less while food and energy demand will
be significantly higher then perhaps you will
appreciate the logic of having long term, low
cost exposure to the things that the growing
economies of the world need (food and energy)
but located in politically stable parts of the world
like western Canada.
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5. DiSClAimer:
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contained herein are provided as of the date hereof and are subject to
change without notice. Some of the information, opinions, estimates,
projections and other materials contained herein have been obtained from
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make every effort to ensure that the contents hereof have been compiled or
derived from sources believed to be reliable and to contain information and
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reflected herein. The information, opinions, estimates, projections and other
materials contained herein are not to be construed as an offer to sell, a
solicitation for or an offer to buy, any products or services referenced herein
(including, without limitation, any commodities, securities or other financial
instruments), nor shall such information, opinions, estimates, projections and
other materials be considered as investment advice or as a recommendation
to enter into any transaction. Additional information is available by contacting
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