Capital Misallocation: The Important Lesson I Learned From My Thai Taxi Driver by Simon Black, Sovereign Man

Capital Misallocation: The Important Lesson I Learned From My Thai Taxi Driver

Santiago, Chile

If you’ve ever been to Bangkok, you’ll know that this place has some of the most notoriously horrendous traffic on the face of the earth.

It makes the worst LA gridlock look like Plano, Texas.

Any seasoned traveler to Thailand has to plan around it. You never leave the airport and head into town at 5pm.

Doing so, you’re just asking for trouble.

Sure enough, I was asking for trouble the last time I flew into Bangkok two weeks ago. It was the only flight available, so I came in at a rather inopportune moment.

My driver, to his credit, was trying to do everything he could to circumvent the traffic. Either he just couldn’t sit still or he was trying to prove to me that he was working hard on my behalf.

So at every chance he could, he would turn down a little narrow alley somewhere trying to get around the jam. But every time we would just hit more traffic or find ourselves stuck at a dead end.

Undeterred, he kept this up, over and over and over again, as he tried to find a clean path to the hotel.

Each time we took a turn for a shortcut it raised my hopes up a little bit, thinking that somehow we’d take the right turn and it’d be smooth sailing from there.

But it never worked. Every time we simply ended up in the same place as we were before. Gridlock.

After about an hour and twenty minutes of frustration, I’d had it, and I told the guy, “Look, let’s just stay here. Let’s just wait. Because anywhere we go, it’s just going to be the same thing.”

Because sometimes in life, there are no shortcuts. We just have to sit there and take the pain.

Sitting there in traffic, I had an opportunity to meditate and reflect on life. And I realized that the situation I was in was a great analogy for what’s happening with the world economy.

For the last couple of decades those in charge have been building up huge bubbles, one after another, by merely kicking the can down the road.

They went from the Asian financial crisis, to the Long-Term Capital Management bailout, to the NASDAQ bubble, to the real estate bubble, to the banking bubble, to the sovereign debt bubble, and now to this central banking bubble where balance sheets of major central banks have just exploded in recent years…

Every time there’s a little problem, a recession or some banking failure, they try to take shortcuts. Doing anything they can to avoid taking the pain and to look like they’re proactively doing something about the problem.

They slash interest rates to zero, they conjure an extraordinary amount of money, and pave the way for trillions of dollars, euros, and yen to be misallocated in the system.

And when it all starts to collapse, they try to take yet another shortcut.

But all it does is lead to another crisis. To exactly the same place where they were before—total gridlock.

Today, the vast majority of banks in the West are highly illiquid and thinly capitalized. Even central banks themselves are borderline insolvent.

The US Federal Reserve, which is absurdly viewed as the backstop to all the world’s financial problems, has been talking all this tough language about tapering and raising rates, and yet ironically the Fed’s balance sheet is about as high as it’s ever been.

In fact, certain Fed liabilities are at record levels. They never took the pain.

The best thing they could’ve done was to just let it happen. To let things fail.

When governments and businesses severely misallocate capital, the market has a neat little way of clearing out the bad decisions.

Unnecessary or poorly run businesses are shut down, making room for people with new ideas and better management. Prices are bid down so low that those who were prudent and have built up savings are able to jump in and buy assets on the cheap.

Yes, the transition may be painful, but overall the economy and society is better off.

Sometimes the best action is—inaction.