The Four of Horsemen of the Apocalypse

The Cobden Centre has highlighted an article by Frank Field entitled "The Four of Horsemen of the Apocalypse".

The government has busily been printing money and practically the whole of this funny money has been used to buy government debt.

So those economists employed directly by banks, or those dependent on bank contracts, again mislead when they prattle on about long-term interest rates being held. We simply do not know to what level long-term interest rates will go once the game of printing money stops.
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It simply isn't possible to increase the money supply by 300% and for there not to be a megadose of hyperinflation built into the system. Inflation is the cruellest of redistributors taking away from those who have saved and penalising most those on low earnings who have limited or non-existent collective bargaining powers.

Inflation's Moral Hazard

An excellent article by Theodore Dalrymple:

But asset inflation — ultimately, the debasement of the currency — as the principal source of wealth corrodes the character of people. It not only undermines the traditional bourgeois virtues but makes them ridiculous and even reverses them. Prudence becomes imprudence, thrift becomes improvidence, sobriety becomes mean-spiritedness, modesty becomes lack of ambition, self-control becomes betrayal of the inner self, patience becomes lack of foresight, steadiness becomes inflexibility: all that was wisdom becomes foolishness. And circumstances force almost everyone to join in the dance.

Except in one circumstance, that is: the possession of a salary and a pension that the government promises, implicitly or explicitly, to index against inflation. This is the situation of public-sector workers and is a pyramid scheme, too, perhaps the biggest of the lot, since events may require the government to renege on its obligations. But meantime, such employment will seem a safe haven, and the temptation will be for government to expand it, with the happy consequence—for itself—of increasing dependence. And dependence, too, undermines character.

Read more

Reflections on the Role of Gold in Investment Practice

In a speech to to the 1st Gold Conference in Zurich, Tony Deden explains his use of gold for capital preservation:

In capital preservation, the problem we face is that we own a fixed amount of money capital – while the central bank produces, at virtually no cost, increasing amounts of the same thing, and in so doing, it reduces the value of what we have saved. On a compounded basis, after only a short period of time, we become impoverished.
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Over the ensuing years, in the aftermath of the great Greenspan liquidity of the Y2K scam and the momentous money creation that followed 9/11, it became clear that

• (a) the dollar, as a reserve currency would eventually have to be re-examined,
• (b) the financial situation in the US would deteriorate rapidly,
• (c) the gap between mine supply and traditional demand was growing and
• (d) central banks had become large speculators in the gold markets via the leasing mechanism.

It was only appropriate to re-consider my ownership in gold, not merely as an investment, but also as an insurance policy against a monetary collapse, a crisis in the payment system or a geopolitical conflict. I saw gold ownership increasingly as insurance rather than as an investment.
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I now view gold not merely as insurance, but indeed as cash substitute. More than 45% of our net assets are in precious metals. Holding paper cash subjects me to credit risk, counterparty risk, foreign exchange risk, political and inflation risk. I can avoid most, if not all these, by substituting with gold. It simply means that I trust nominal money less and less.
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Frankly, we now have two generations of economic agents who are entirely ignorant about the nature of money. We welcome rising prices and see them as wealth even as they are merely the result of inflation. We demand more cash to save the system, instead of allowing those who fail to go bankrupt, so that more efficient competitors can emerge. We have tolerated the Swiss National Bank sale of our gold reserves in exchange for American paper money and promises.

We demand cheaper currency to stay competitive because we do not know the true nature of competitiveness. If cheaper currency is the source of wealth, where has Bangladesh gone wrong? If cheaper money means economic prosperity, why not just print as much as we can and give it out to everyone? We have become fools. The customers know nothing and the advisers know even less. And then we have the idiot economists—the neo-classical, Keynesian variety with solutions to problems they did not even anticipate; solutions that have, in fact, long been discredited. And so we lurch from crisis to crisis—eating our meager capital in the hopes of becoming rich in money. It’s a pity.

Read the full speech.

The changing face of Britain

Oxford, November 2009:

Tyranny of the subservient

20% of people employed in the UK today are employed by the state. Some of these people are honest, competent, and hard working. A subset of them actually succeed in making a net contribution to our society. Unfortunately, we are also saddled with billions of pounds worth of bureaucrats who are at best useless, and more often actively destructive. They not only squander our money, but frustrate both the productive private sector and the good elements of the public sector.

It is impossible in practice to separate the wheat from the chaff, for we would need to rely on the chaff to identify the wheat. The only hope seems to be a large-scale cull, which would send the incompetent to the dole, and the competent into more productive private-sector employment.

Unfortunately, public sector workers and others who benefit from a bloated government would turn out in force to oppose any party that made specific commitments for large-scale cuts. Each additional public sector worker adds a negligible amount to our tax bill, but for the worker the job is vitally important. The lion runs for its dinner, but the elephant is running for its life.

So we find that mainstream politicians seek to appease the private sector with tough talk about fighting bureaucracy, but they are never specific, and the rhetoric is quietly betrayed. The state gets larger and larger.

In a speech on 12 January 1995, Gordon Brown said

The biggest question ... is why our constitution is over-centralised, over-secretive and over-bureaucratic and why there is not more openness and accountability ... The real alternative is a bonfire of the quangos and greater democracy

The bonfire never came. Instead, New Labour has presided over a staggering expansion of government spending. Even before the bailout of the banks, David Craig estimates that government spending increased by 55% — a total outlay of £1 trillion more than if spending had been kept at 1997 levels. This money has not bought a commensurate improvement in public services, but it has accustomed an ever larger portion of the population to state dependence.

According to the Office for National Statistics

Public sector employment fell every year between 1991 and 1998, reducing by 816,000 in total. Between June 1998 and June 2005 public sector employment rose by 680,000 to stand at 5,846,000,13.2 per cent higher than in June 1998 [1]

If the trend continues, we will find ourselves beyond a point of no return. It is not inconceivable that a majority of the population could depend for their livelihood on the state. The revenue-generating minority would then be powerless to stop their continued exploitation.

Of course, our first-past-the-post electoral system means that those dependent on the state need not even form a majority. After all, the past three Labour governments have led us ever more quickly down the road to ruin with the consent of less than half of the population (43.2% in 1997; 40.7% in 2001; 35.3% in 2005).

It would seem that our only hope lies in the dishonesty of our politicians: that one day a leader will come along who cuts the size and cost of government much more radically than the electorate were led to suspect.

[1] Trends in public sector employment. Labour Market Trends, vol 113, no 12, pp 477-488.ISSN: 1361-4819.
The document notes that June 2005 levels were "still below the levels seen in 1991". I haven't been able to find data for before 1991, but it would be interesting to see. Improvements in information technology should mean that ever fewer administrators are required to manage public services. It is truly worrying that we seem to be heading in the other direction.

Lisbon Treaty ratified: what happens now?

The best thing the Conservatives could do, after coming to power, would be to unilaterally withdraw Britain from the EU, refusing any claims for financial compensation. The EU we now find ourselves in is not the EU that we joined, and at no stage along the way has the public been given a choice about the freedom we have surrendered. Successive governments have quietly but steadily devolved power to Brussels, reneging on their promises, and neglecting their duty to protect British interests.

Only outside the EU does Britain stand a chance of reversing the tide of bureaucracy and quangocracy, giving power back to the people. Once out of the EU, we would have a clean slate to decide what sort of relationship this country wants with Europe. The most we ever signed up for was free trade.

Withdrawal would not go unpunished — the EU would make an example of Britain, and impose harsh duties on British products — but we would survive, and a truly free Britain would easily out-compete a continent burdened by bureaucracy and regulation. We should not forget that even in our current over-managed state, Britain, unlike Ireland, has long made a net contribution to EU coffers.

Unfortunately, it is vanishingly unlikely that our next government will withdraw from the EU. The Conservatives won't do it, and the parties that would do it are unelectable. In the worst-case scenario, UKIP and the BNP will succeed in sapping enough votes away from the Conservatives that Labour stays in power.

The best we can hope for is what James Bartholomew has proposed:

Now that the Lisbon Treaty has been ratified, the referendum that should be offered would ask three questions:

1. Do you wish the British government to withdraw from the European Union?

2. If Britain remains in the European Union, do you wish there to be a referendum on any future European Union treaty?

3. If Britain remains in the European Union, do you wish the British government to negotiate a reduction in the control of the European Union over British government?

Economic stimulus across the pond

The US government has applied the same Keynesian stimulus principles as the UK, but on a larger scale. "Cash for clunkers" is the American version of our car scrappage scheme. The New York Times asked four economists Did the Stimulus Work?

Jeffrey Miron was sceptical:

Much discussion of the recession presumes it will end only because government comes to the rescue.

In fact, the U.S. economy recovered from significant recessions before 1914, when monetary and fiscal policy had not even been invented. Economies can and do recover on their own, and intervention might make things worse by generating uncertainty and distorting the economy’s allocation of resources.

A further caveat is that two elements of the fiscal stimulus — cash-for-clunkers and the $8,000 tax credit for first-time home buyers — probably shifted significant activity from the fourth quarter and beyond to the third quarter because consumers knew these provisions would expire soon. Thus the stimulus plausibly shifted the timing of economic activity without necessarily improving the long-term path.

Russell Roberts expressed similar concerns:

Everyone seems sure that at least the “cash for clunkers” program was a good thing. A Reuters article, for example, said: “The program, which ended in August, contributed to a jump in consumer spending in the third quarter and helped to pull the economy out of its worst recession since the 1930s.”

But there is no way of knowing whether this is correct. Yes, it was good for consumer spending. On cars. But part of its impact was to encourage consumers to buy cars instead of other things, and to buy cars today rather than cars tomorrow. Its impact on employment was probably minimal.

I think the Keynesian narrative is right about one thing — consumers lack confidence. The crucial question is whether a large increase in government spending financed with borrowed money that swells the deficit to $1.4 trillion is good for confidence or bad for it. No one knows the answer

Miron concluded:

The case for additional stimulus is weak. If further stimulus occurs, it should focus on changes in policy that make sense independent of the recession. This means reductions in tax rates rather than increases in expenditure. Repeal of the corporate income tax would be ideal.