The Risk Factor: Time for an Honest Assessment


Emile Woolf, Going Postal
Piles of new Notgeld banknotes awaiting distribution at the Reichsbank, during the hyperinflation
Bundesarchiv, Bild 183-R1215-506 / CC-BY-SA 3.0 / CC BY-SA 3.0 DE

As the spread of Covid begins to wane we should consider afresh whether, for example, a shopkeeper who travels to work to open his business is in fact acting irresponsibly. This comes, as ever, down to the question of risk. Since some people are more risk averse than others, is it right that everyone is forced to self-isolate until the most risk-averse citizen is no longer fearful of his fellow humans? Clearly he has the right to isolate himself, but not the right to dictate that everyone else should do likewise.

Such fundamental issues affecting civil liberties do not go away just because the virus appears to be under control. Be assured – it will be back, and our timorous representatives and trade unions will advocate yet another lockdown.

Allocating scarce resources

The allocation of scarce resources – economics, in a word – is closely bound up with risk, in this instance the risk of squandering resources – but when it comes to addressing options for dealing with Covid-19, any exercise in economic cost-benefit analysis is dismissed as a heartless distraction from the overarching imperative of “saving lives”.

Yet allocating scarce resources is exactly what ministers are appointed to do, and collective hysteria over the virus should not be allowed to get in their way. Even the National Institute for Clinical Excellence (NICE) has been putting a price on citizens’ lives for years: there is a threshold limit of £30,000 of additional spending by the NHS for extending a patient’s life by one year. If this applies to treatments for heart disease and cancer, why not Covid-19? Such assessments are essentially economic rather than clinical.

Take distancing. Nothing has been quite so destructive to economic functioning as the two-metre rule, with or without a mask. Yet there was never a shred of scientific evidence to support this particular distance – the government certainly wasn’t following any science. Nor is there any evidence that two metres is wrong. As I pointed out in my last essay, you can’t “prove” a negative.

By the same token, no one can prove that one metre is better than two because the whole notion of distancing is arbitrary anyway. Instead of leading, our leaders have been blindly following the precautionary principle”: better to be safe than sorry.

Mismanagement rampant

But why do so many unsupported notions persist as we approach our fourth month in lockdown? Sadly, it’s part of a consistent pattern of ineptitude. Where, for example, lies the sense in imposing a two-week quarantine on UK nationals arriving back home, even when they are returning from countries with a far lower Covid incidence than Britain?

Regrettably, this top-down vacuity has ruled us from the start. Three months ago feverish panic buying caused your local supermarket to run out of toilet rolls – remember? Now the same shop is advertising double packs of toilet rolls “reduced to clear”.

Mismanagement obviously played a part in the protective equipment fiasco too. Mountains of stuff had become unusable after being allowed to deteriorate in defective storage centres. Thus none of the recognised public health suppliers proved capable of meeting the demand for ventilators, respirators, gowns and liquid-resistant fabric. At the same time, procurement procedures were mired in profiteering scandals involving unscrupulous suppliers. It is no surprise that the outcome was a spike in care-home fatalities.

Surely one of the most obscene miscalculations was the construction of 17 field hospitals in Wales to help ease demand on the NHS during the pandemic, at a cost of £166 million. Only one of these hospitals has treated any patients at all! The Welsh health minister now says, presumably with a straight face, that with hindsight he should have done it differently!

But don’t be too hard on him. No one in authority appears to have had the remotest clue what they were doing either!

Disastrous monetary strategies

Current miscalculation is not limited to coronavirus guidance, but extends to the wider economy. Be warned: don’t be taken in by the booming equity market, nor by statistics on GDP growth. Any positive message appearing to emerge from these stories is delusional.

The Federal Reserve (US central bank) has led the way for central banks everywhere by issuing the greatest flood of new money ever printed, and at this month’s meeting agreed to keep this up by buying US Treasuries and other financial assets for an indefinite future period at the rate of $120 billion per month. What many don’t realise is that the latest buying spree includes assets issued by private sector institutions that are obviously prone to higher default risk.

In whichever country QE is practised the local treasury’s banking cronies will be the first with snouts in the trough. The pattern is always the same: their frenetic purchases push up prices of financial assets, including equities and unsecured corporate bonds. The 2010 frenzy, when parcels of mortgage-backed “collateralised debt obligations” (CDOs) were shunted back and forth between brokers and investment bankers, was child’s play compared with the current scale of speculation and malinvestment.

How about “quantitative tightening”?

The Bank of England and the European Central Bank are in the same class when it comes to conjuring tricks. It’s amazing what can be done with a computer mouse! You will now be seeing reports that central banks practising the dark art of quantitative easing can just as readily put the process into reverse with a policy of quantitative “tightening”(QT) should they believe that their government masters have lost control of their runaway welfare programmes.

Forget it! No matter what the problem, the only remedies known to central banks always lead to still more credit creation. Even back in 2013 when the Fed merely signalled that it might ease up on QE, the markets threw a “taper tantrum”. Then, in 2017 when she was chair of the Fed, Janet Yellen tried to engineer some QT. But her attempts to unwind outstanding bonds on the Fed’s balance sheet led to so much tumult in the markets that the idea was dropped and a hushed rethink ensued.

Clearly, the Fed’s macroeconomists had not come across Barron’s axiom: anyone who CAN print money WILL print money – the truth of which is shown, in every fiat money regime, to be incontrovertible.

Interest rates – free market or central bank control?

Inevitably the QE drug habit highlights the impotence of central banks wishing to “control” interest rates. The law of demand and supply dictates that the effect of flooding the market with unlimited quantities of new money is to suppress interest rates, thereby distorting and obscuring their true function – to measure the differential time preferences of parties to a transaction.

Spendthrift governments are beneficiaries of this malpractice. The cost of servicing a massive deficit would be totally unaffordable at state level when the interest rate rises; but right now long-term rates provide no incentive for saving or investment – a situation that is incompatible with the operation of a market economy. This is now the global situation, and it’s serious.

Hearing from some who have learnt

This week, ex-BoE Governor Mervyn King spoke out: “I think the economics profession has engendered a terrible mistake, believing it doesn’t really matter why the economy is growing too slowly – you just need to lower interest rates and print more money!”

His former deputy governor, Sir Paul Tucker, sounded a further chilling warning that the central bank’s latest practice of funding state spending directly, risks transforming it into the government’s own private bank – the very policy pursued in Weimar and Zimbabwe, incidentally signalling an end to central bank independence.

Ask yourselves: which political factions would welcome that? Now?

Referring to the bloated equity valuations and the burgeoning bond market bubble, Lord King said: “another economic and financial crisis would be devastating to the legitimacy of a democratic market system.”

When a central banker and his deputy let fly at every core Keynesian precept, sounding far more like Austrian economists, something is in the air!

© Emile Woolf June 2020 (website)

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