Reality begins to dawn

Economic Perspectives 114

‘Roll the presses Rishi’
Rishi Sunak MP – hi-res” by Ministry of Housing, Communities and Local Govt is marked with CC BY-ND 2.0.

Shortly before the Chancellor’s Spring Statement, BBC2’s “Newsnight” featured Kirsty Wark interviewing two economic experts, one Conservative, one Labour. She asked each of them to describe the measures they would recommend to the Chancellor, Rishi Sunak. I found it difficult to follow their arguments because any semblance of clear thought on key policy issues such as price inflation, commodity shortages, tax increases, tax cuts, the energy crisis and government spending was lost in the blame-game of political point-scoring.

Even when the Spring Statement was delivered to the House of Commons, no consistent theme was discernible in this pot pourri of linguistic subterfuge, tax “cuts” benefiting one sector being labelled “subsidies” for another, but no mention that Britain’s tax burden is now its highest in 70 years – nor that all his supposed tax “cuts” amount to no more than one-sixth of the net tax “rises” imposed since he became Chancellor.

The public are not fools

It is not surprising that members of the public have a more reliable sense of what’s really happening, as they are directly affected. They are able to sniff out gratuitously dispensed hype when it masquerades as a rational process – especially when it rests on a premiss so patently false that it insults the public’s intelligence. Take the political convenience of blaming rocketing price inflation on Putin, or on supply-chain disruption caused by the Ukraine conflict, or on plain greed, or indeed anything – except the vast increase in the monetary base of every country with a central bank.

The USA’s Federal Reserve, from which the others take their lead, expanded its money supply from $4 trillion in January 2020 to $20 trillion in October 2021. That’s a mighty lot of dollars! Indeed, eighty per cent of all dollars now in existence were printed in the last 2 years. As Professor Pat Barron explains in his latest essay, the US monetary base has increased by a multiple of forty-six since January 1980.

Despite its periodic hints of imminent “tapering”, the Federal Reserve continues to print away at a rate of 540 million dollars per day, enacting the very definition of inflation – all pursuant to the absurd belief that creating unlimited amounts of money will “stimulate demand”, leading in turn to the miraculous growth just waiting to happen. And it’s no surprise that all this newly created money also caused a fall in interest rates and explains why returns on savings (including investment in government bonds), have become truly pitiful.

Robbing the savers

Forget ordinary citizens – they’ll have to swallow another yarn. But the ultra-low rates suit the treasury most of all: the mush they have been printing represents an addition to the national debt, and carries an interest coupon. So even a minuscule rate rise carries a massive financial penalty.

At the current level of UK government debt, a rise in interest rates of just 1 per cent would represent an annual cost to the Exchequer of more than £22 billion, which it obviously cannot pay – yet another example of behaviour that would land our ordinary citizen in the clink but, because it’s the government, the usual recourse to counterfeit enables it to print still more of it – just to pay that interest. This is verily the snake eating its own tail, and paper assets bought with the borrowed money, like all things fiat, will also crash.

To our layman it’s evident on a daily basis that as fiat money creation on this scale filters through the economy it must (must!) be reflected in higher prices; and that every such price rise is an expression of purchasing power loss. As that loss grows, the pressure for a compensatory rise in interest rates also grows.

The unaffordable cost of civil servants

A market-determined rise in interest costs hits the budgets of central and local government, against which there is no protection. Our innocent citizen knows that agencies of the state, from town councils to traffic enforcement officers; police to building inspectors; academic experts to town planners – indeed, the whole of “officialdom”: an army-sized payroll of 5.7 million people – are all remunerated out of the public purse. Commercial considerations don’t apply to their employment, but their interests are jealously guarded by powerful trade unions, even while lockdowns inflicted so much damage to the economy, and their pay-scales are protected by arcane statistical criteria rather than a competitive workplace market.

As if the “working from home” euphemism isn’t enough, the unions are now pushing for civil servants to be allowed to tailor their work around domestic circumstances such as the “school-run”. While unions wish to preserve the benefits (to their members) of flexible working, to put the work-life balance ahead of productivity at this precarious moment beggars belief and reveals the depth of our malaise.

The process that led to it is brilliantly spelled out in Godfrey Bloom’s latest book “The Magic of Banking: the Coming Collapse” – which I recommend to anyone seeking an explanation.

People cossetted by a protective framework view the world through that prism, nurturing the belief that the state can guarantee them cradle-to-grave support. But devising a tax system to pay for this is the ultimate challenge. Mr Sunak loves to tell the electors that his plan is to cut taxes on “working families”, whatever that may mean. Yet he is so bamboozled by the complexity of his own changes that he has inadvertently created a “poverty trap” in which the lowest paid find themselves better off not working!

The teaching of Lord Keynes that started it all

John Maynard Keynes taught that a high-spending, state-managed economy will deliver optimum outcomes, compared with an economy in which free markets reign.

The natural by-product of this opinion, which powers every state-run dictatorship, is Keynes’ most famous dictum. It appears in his major work “General Theory of Employment, Interest and Money” and reads as follows:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

Well, are you convinced? Before you follow the academic herd and become a committed Keynesian, please read the above paragraph again, more closely, noting these observations:

1 – We are not told where those banknotes came from. Presumably they were printed by the central bank, in which case Keynes foreshadowed QE by about 80 years, and we are again experiencing, big-time, where this hare-brained notion leads. But that’s exactly what he intended!

2 – He proposes that the state should pay people to undertake demeaning and utterly useless activities that avoid the risk of unemployment. He doesn’t tell us what these people will eat or who will provide it.

3 – Note the words “…with the help of the repercussions…”. And this purports to be a serious contribution to economic theory?

4 – Note the words “would probably become a good deal greater than it actually is”. But how great this “good deal greater” might be is not explained, nor is the mechanism that might “probably” achieve it. The only thing missing is Tommy Cooper’s “jus’ like that!” Yet Keynes is referring here to the community’s “real income” and “capital wealth” – no less!

5 – He concludes by effectively telling us that if, for any reason, it’s proving difficult to do anything useful or productive, following his advice “would be better than nothing”.

This bilge has been a major focus of economic study and has been the underlying rationale of economic policy ever since Keynes wrote it, demonstrating that palpable madness is no barrier to implementation – especially when government is clutching at straws, desperate for a theme to win votes, especially one that prioritises spending. Giving voters an endless supply of bread and circuses wins elections!

Inescapable consequences of following the wrong path

But there are consequences, mainly the unintended variety. Once the state is given access to a Keynesian money-printer, a culture of welfarism follows, as night follows day. A commitment to provide healthcare, education, pensions, social security, free transport and the like, to the growing ranks of “needy”, plus all the other “free” handouts, severs the link in the public mind between state-provision and its true cost.

The idea of “free” money is facilitated by the absence of any independent backing for it. President Nixon severed the link between credit creation and a nominal veneer of gold-backing in 1971, since when the dollar has lost 98 per cent of its purchasing power through inflation. (Nixon feared, needlessly, for the adequacy of America’s gold reserves when foreign holders were redeeming their dollars for gold.)

Historically the collapse and disappearance of a currency, irremediably corrupted by the state’s policy of deliberate debasement, has always been followed by an alternative embraced as acceptable in the public mind. Ask yourselves: why is every central bank in the world building up its gold and silver reserves as never before? In anticipation that the fiat version of money collapses under the weight of its own zeroes?  In anticipation of a “crack-up boom” when the public has finally abandoned all faith in the bank’s fiat currency and can’t get rid of it fast enough – in exchange for anything tangible, whether needed or not?

What can save the day?

Whatever takes the place of fiat money, its success will depend on (i) recognizing the role of savings as the community’s capital base; and (ii) the fact that production and consumption are linked by work.

© Emile Woolf April 2022 (website)