Several readers expressed surprise that last week’s essay concerned my personal NHS experiences rather than the pressing issues of the day. In such a rapidly changing economic picture no commentary can ever be bang-up-to-date, while more enduring truths are easily overlooked. In this essay I shall attempt to relate the present crisis to its origins in the last one, and to highlight the shallow and mechanical thinking that is now sowing the seeds of the next one. Crises may have a variety of triggers, but they also have much in common. Some fundamental truths are not given the prominence they warrant.
The last financial crisis of 2008/2012 was handled in a way that guaranteed a repeat performance 10 years later. It was triggered by the issue of mortgages on low-grade housing to impecunious borrowers, parcelled into marketable tranches of collateralised debt obligations (CDOs), rated as AAA or AA-grade securities by conflicted rating agencies and then sold on to other institutions. In reality, most of these instruments were worthless IOUs signed by desperate and gullible borrowers.
A gigantic Ponzi fraud
The gathering storm reached its apogee in the USA, whose Treasury, Federal Reserve and the SEC must have seen that a gigantic Ponzi fraud was being enacted by banks under their noses. Yet there were no interventions and no prosecutions.
When, inevitably, Bear Stearns and AIG went bust they were bailed out by the Fed – but Lehman Brothers proved to be “too big to save”. The lending portfolios of all three institutions were stuffed with toxic mortgage-backed securities, and their demise stands as testimony to the greatest act of criminal negligence in US financial history. In this indictment I include the useless institutions of state as much as the wide-boys who ran their banks into the ground. Had a few of those avaricious lenders been consigned to a decent spell in an institution of correction, some sorely needed lessons might have been learnt.
And I mean corrective lessons, not lessons on how to do it all over again – which is exactly what the Fed and other central banks around the world have been practising. It’s called Quantitative Easing (QE). These banks have learnt that debt-creation and money-creation are two aspects of the same phenomenon – and they have been exploiting it.
Ever since the Fed printed its way through the financial crisis, the usual assortment of neo-Keynesian freeloaders, the New York Times and proponents of “modern monetary theory” (MMT) have been preaching that it doesn’t really matter how much fiat is conjured up because, after all, all new debt created by the state is owed to the state – an eminently self-cancelling condition.
The real lesson
Counterfeiting by central banks (for that is what they have been doing) always carries terrible consequences:
(i) when markets are awash with trillions of made-to-order “counter-fiat”, conjured out of thin air and totally unbacked by anything real, money is abundant and interest rates fall;
(ii) since those unbacked trillions represent government debt, suppressing rates becomes government policy;
(iii) as this travesty becomes ubiquitous, rates go lower and lower – in Japan, the EU and other countries, into negative territory, and people must pay a bank to accept their deposits;
(iv) this insanity reverses timeless economic relationships, and represents a massive transfer of wealth from savers to borrowers, leaving pensioners and others dependent on returns from their life savings stranded without income – a situation that even the most obtuse observer can recognise as perverse;
(v) recipients of thousands of pounds of “stimulus” cheques in the post, or directly into their bank accounts, blithely accept it but never consider its effect on the economy. They simply swallow the bilge espoused by monetary economists that passes for grown-up thinking;
(vi) the malinvestment and distortion engendered by limitless unbacked money-printing and suppression of interest rates cannot continue indefinitely, much to the chagrin of central bankers forced to recognise that the natural determinant of interest rates is, and always will be, time preferences – abandoned in 1997 when Gordon Brown handed the rate-setting prerogative to the Bank of England;
(vii) the natural consequence of ceaseless money-printing (the very definition of “inflation”) is the cost-of-living crisis we now face, and government addresses this by raising interest rates after suppressing them for the past 12 years;
(ix) the broadcast media are fond of making comparisons with the economic situation in the 1970s, 80s and 90s, when interest rates hovered between 10 per cent and 20 per cent – against which our current 2.25 per cent is a storm in a teacup; and
(x) natural law dictates that whatever is unnaturally suppressed must eventually bounce back, and that’s what’s happening with unwelcome repercussions as workers across a range of industries are on strike, seeking unaffordable pay rises to catch up with inflation – just as occurred in the 1920s when Weimar Germany experienced an out-of-control spiral of more money and higher prices.
The new Chancellor has suffered a rebuff delivered by the timorous ranks of his ostensible supporters, who have demanded a climb-down because he and his boss focused on tax cuts as a key policy initiative. These myopic naysayers, braying about the unfairness of cutting the top rate of 45 to 40per cent, have overlooked the facts that:
(i) the top rate for many is actually 60 per cent when you include National Insurance charges, resulting in one of the highest top rates in the developed world;
(ii) the confiscation of more than than half of incremental earnings is a massive disincentive for ambitious workers to work hard;
(iii) as for the taint of unfairness, any beneficiary of a tax cut must, by definition, be a taxpayer in the first place, a status that warrants no apology; and
(iv) the top rate didn’t raise much money anyway – it was always about punishing the “rich” rather than raising money to pay for public services.
“Unfunded” is a linguistic device
As expected, all the opposing cohorts – notably the Mark Carneys, Gordon Browns, Financial Times, Economist, IMF, myriad remnants of the Remainer faith, expert BBC commentators and, predictably, the venerable Gove – uniformly leapt to the ramparts to condemn the Truss/Kwarteng tax-cutting initiatives as irresponsibly “unfunded”.
I ask you, dear readers, to pause and think that one through. A tax cut simply means leaving more money in the hands of its earners. Maybe those are the “wrong” earners because they are already well-off, while others might be more deserving of relief, but that’s a different question entirely.
Complaining that a tax cut is “unfunded” can only be interpreted as committing the sin of relieving some taxpayers of a financial burden, while not following it by burdening others. But tax-cutting does not, and can never, represent spending and only spending can be “funded” or “unfunded”.
Cutting government spending – the main question
Which brings us to the crucial question for Truss and Kwarteng of cutting government spending. Although they have not had a chance to elaborate, what’s not in doubt is the massive scope that exists for reducing the size of our bloated state. Here are just few possibilities:
If the Chancellor were, for example, to take an axe to the quango sub-state we now inhabit, would we really miss it?
Quango is the acronym for “Quasi-Autonomous Non-Governmental Organisation”, and according to the Taxpayers’ Alliance, there are over 800 of them, employing over 300,000 people at an annual cost to taxpayers of more than £260 billion.
Why, as a tiny example, does government need to pay £24 million a year to the British Film Institute (BFI) “to support film production and audience development” when we already have a plethora of privately funded films to watch?
The Department of Health oversees 19 quangos of which NHS England is the largest, with £100 billion of funding per annum. TPA research shows that rationalising health quangos would reduce their number from 19 to 7, with a major cost reduction.
(ii) Culling failed projects :
As for the abomination known as HS2, its Phase 1 carries a budgeted cost exceeding £40 billion of which £16 billion has already been spent. The latest estimate for completing the project is over £100 billion. The Public Accounts Committee damned HS2, saying “they have been blindsided by contact with reality”. We know that the project should have been scrapped years ago, but the government is persevering – a clear instance of carrying on with a madcap project for no better reason than that, having acquired its own faux momentum, it would be embarrassing to cancel it now. It clearly fails my own ultimate test: Would I have supported this project if it was my money?
(ii)Culling public sector pensions: Applying correctly adjusted discount rates the cost of gold-plated public sector pensions exceed the contributions of scheme members by some £57 billion per annum, borne of course by UK taxpayers, many of whose own pensions are paltry by comparison. There’s scope for a rational cull.
(iii) Overseas development aid: The government website on overseas aid is a tour de force of linguistic chicanery. Over the 5 years to 2026 the UK will spend £11.6 billion on a host of aspirational objectives that have questionable relevance to the scale of values of aid recipients, such as Yemen, Afghanistan, Syria and Ukraine. Provided we safeguard against handing money to corrupt leaders, our aid budget should be used to provide infrastructure to irrigate land rendered arid by drought, or to buy medical equipment. But social and religious practices of recipient countries are none of our business and we must not attempt to impose Western values under the foreign aid pretext.
“Bottom-up-thinking” would transform public spending
It’s clear, in the light of all this, that what’s needed is a government capable of posing the difficult questions before spending decisions are made – questions like what terrible things will befall our citizens if we DON”T spend their money on this?
As UK citizens face a potentially gruelling period it is essential that our resources are not squandered. When considering the philosophy of government spending afresh, its existing patterns must be jettisoned.
© Emile Woolf October 2022 (website)