A few years ago, we were chatting with our friends on the topic of personal finance and investments. Back then, it was a global financial bull market in which the savings (made compulsory by law in the form of superannuation) of millions of Australians were ploughed into ‘assets.’ Our friend’s attitude is that she will leave it all to the ‘experts’ and ‘professionals’ to invest her savings and would not want to bother herself with it. The prevailing thinking was that, as we described in The myth of financial asset ?investments? as savings (in February 2007),

… there are some who argued that if we include financial asset ?investments? such as home equity, pension and managed investment funds, stocks and so on, the savings rate is actually positive.

As we elucidated in that article, we had strong reservations on this fallacious idea. In essence, many people’s savings were (and still are) thrown into chasing prices of intangible financial assets, which hardly result in real capital formation. By chasing and bidding prices upwards, it gave rise to the illusion that ‘wealth’ had increased when in actual fact, there were no corresponding accumulation in capital goods (see The myth of financial asset ?investments? as savings to understand the meaning of capital goods). The global financial crisis (GFC) is a correction to this grand illusion.

Think about it: Why is it that after the years of ‘prosperity’ (economic boom) the state of infrastructure is so poor and neglected that governments today have to spend billions in nation building to ‘stimulate’ the economy? After all these years of boom in ‘asset’ prices, wealth and prosperity, is that what our nation (including the US, UK and Australia) has to show for?

Where had all the money gone to?

Once you understand the Austrian Business Cycle Theory (see What causes economic booms and busts?), you will be able to see that limited resources in the economy are being mal-invested into wasteful and unproductive use. So, this bust is the period when mal-investments are in the process of liquidation (e.g. deflation in asset prices). Very unfortunately, governments are hell-bent in preventing this liquidation process and at the same time, trying to redirect resources into urgently needed area via central planning.

The governments’ actions are akin to jamming on the brakes and accelerator simultaneously. No prize for guessing what will happen to the car.