Earlier this week, The Taxpayers’ Alliance published a policy brief that I wrote on corporation tax. The report looks at the efficiency, fairness, simplicity, and predictability of the corporation tax system and finds it failing on all counts. The recent furore over various UK Uncut campaigns are used to argue that the corporation tax system is not understood by either the general public or journalists. Bottom line: corporations don’t pay tax, people do. And not necessarily who you think.
|
||||||
|
John Papola and Russ Roberts, of EconStories, gave themselves a difficult problem when they created their first incredible Keynes vs. Hayek video. It was like your first girlfriend being Miss World, your first rugby match being the World Cup final between England and Australia, or your first cricket match being an Ashes decider starring Freddie Flintoff. How do you top that? Well, it’s just about impossible. But you can at least attempt to match it, and in doing so, you may even surprise yourself, sneak up on the outside, and outdo the original without really meaning to. So, here’s the latest video in the sequence. While you decide if Mr Papola and Mr Roberts have matched (or even possibly bettered?) their first contest between Keynes and Hayek, look out for the Chairsatan himself, the Ben Bernank, whose dissembling conference yesterday pushed gold up to new record heights: Here’s the EconStories description of the video above:
In his various writings, the famous Austrian economist Murray Rothbard argued that in a free market economy that operates on a gold standard the creation of credit that is not fully backed up by gold (fractional reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote,
Prominent Austrian School of economics economists George Selgin and Lawrence White have contested this view. In his article in The Independent Review, Summer 2000 George Selgin argued that it is not true that fractional reserve banking must always set in motion the menace of the boom-bust cycle. According to Selgin,
However, argues Selgin, no business-cycle will emerge if the increase in the money supply is in response to a previous increase in the demand for money.
Likewise in their joint article Selgin and White wrote,
Note that Selgin and White raise several issues here. First, for them the business cycle emerges only if the increase in the supply of money exceeds the increase in the demand for money. Second, a bust is set in motion if an increase in the demand for money is not matched by a corresponding increase in the supply of money. Finally Selgin and White imply that an increase in the supply of money, which is fully backed up by gold, in excess of the demand for money, will also trigger the menace of a boom-bust cycle. Money out of “thin air” and boom-bust cycleAccording to Selgin and White, it would appear that if counterfeit money enters the economy in response to an increase in the demand for money, no harm will be done. In other words, the increase in the supply of money is neutralised, so to speak, by an increase in the demand or the willingness to hold a greater amount of money than before. As a result the counterfeiter’s newly pumped money won’t have any effect on spending and therefore no boom-bust cycle will be set in motion. But does it make sense? What do we mean by demand for money? And how does this demand differ from demand for goods and services? Now, demand for a good is not a demand for a particular good as such, but a demand for the services that the good offers. For instance, individuals’ demand for food is on account of the fact that food provides the necessary elements that sustain an individual’s life and well being. Demand here means that people want to consume the food in order to secure the necessary elements that sustain life and well being. Also, the demand for money arises on account of the services that money provides. However, instead of consuming money, people demand money in order to exchange it for goods and services. With the help of money, various goods become more marketable – people can secure more goods than in the barter economy. What enables this is the fact that money is the most marketable commodity. An increase in the general demand for money, let us say on account of a general increase in the production of goods, doesn’t imply that individuals sit on the money and do nothing with it. As we have seen, the reason an individual has a demand for money is in order to be able to exchange money for other goods and services. In the process of exercising their demand for money, some individuals lower their demand by exchanging their money for goods and services, whilst other individuals raise their demand for money by exchanging goods and services for money. Note that whilst overall demand did not change, individuals’ demand did change. We will show below that it is individuals’ demand and not the overall demand for money that matters in setting boom bust cycles. Some holders of money may lend the money to some other individuals in return for an IOU. By accepting the IOU, the lenders are relinquishing their claims on final consumer goods and services for the duration of the loan to borrowers. The borrowers can now exchange the money for goods and services they require. (Note that the existence of banks helps to match between lenders and borrowers). Now let us assume that for some reason some individual’s demand for money has risen. One way to accommodate this demand is for banks to find willing lenders of money. In short, with the help of the mediation of banks, willing lenders can transfer their gold money to borrowers. Obviously such a transaction is not harmful to any one. Another way to accommodate the demand is that instead of finding willing lenders, the bank can create fictitious money – money unbacked by gold – and lend it out. Note that the increase in the supply of newly-created money is given to certain individuals. There must always be a first recipient of the money freshly created by the banks. This money, which was created out of “thin air”, is going to be employed in an exchange for goods and services, i.e. it will facilitate an exchange of nothing for something. The exchange of nothing for something amounts to the diversion of real wealth from wealth-generating to non-wealth-generating activities, which masquerades as economic prosperity. In the process, genuine wealth generators are left with fewer resources at their disposal, which in turn weakens the wealth generators’ ability to grow the economy. Once banks curtail their supply of credit out of “thin air”, this slows down the process of an exchange of nothing for something. This in turn undermines the existence of various false activities that sprang up on the back of the previous expansion in credit out of “thin” air, and an economic bust emerges. We can thus conclude that what sets in motion the boom-bust cycle is the expansion of credit out of “thin air” regardless of the state of the general demand for money. Again, irrespective of whether the total demand for money is rising or falling, what matters is that individuals employ money in their transactions. As we have seen, once money out of ‘thin air’ is introduced into the process of exchange, this lays the foundation for the boom bust cycle. Contrary to Selgin and White, we can further infer that it is not the failure to accommodate the increase in general demand for money that causes an economic bust, but actually the accommodation by means of money out of “thin air” that does it.
Does an increase in commodity money in relation to demand cause boom-bust cycles? The introduction of money made it possible for individuals to specialise and engage in trade on a much wider scale than the barter economy would have permitted. In the early stages of the emergence of money it was an ordinary commodity that people demanded because it contributed some tangible benefits to their life and well being. In other words, people already attached some importance to this commodity. In addition to offering benefits pertinent to this commodity, people also discovered that this commodity, let us call it X, had some other features that made it more marketable than other commodities. For instance, commodity X is durable and it is also portable. The various producers of perishable goods found that it was to their benefit to exchange their produce for commodity X and then use commodity X in exchange for other goods. Would an increase in the supply of X, in response to an increase in the demand for X, undermine the process of real wealth formation? The answer is no. Since X is a commodity it implies that individuals attach importance to it on account of the benefits it offers. So the fact that producers of this commodity derive a much greater benefit than otherwise on account of the fact that X is also demanded as a medium of exchange is no different from any other commodity which for some reason suddenly experiences much stronger demand than before. Now, if all of a sudden the supply of X were to increase sharply in excess of demand, people would find that its purchasing power would fall and this in turn would diminish its marketability. Should this persist, the demand for X as a medium of exchange would decline and people would seek the services of another commodity as a medium of exchange. Once a commodity loses its appeal as the medium of the exchange, it remains in demand for its other attributes. However, all this is not going to set the boom-bust menace in motion. Now, the introduction of paper money, which is fully redeemable into commodity X, doesn’t alter anything we have said so far. Paper money should be seen as a receipt or a claim on the commodity X. So whenever this certificate is exchanged for goods and services the seller of these goods acquires a claim on X, while the seller of the claim acquires goods and services. Note that in the process of the exchange useful goods have been traded. This is, however, not so when a bank prints a certificate which is unbacked by X. The bank then lends this unbacked certificate to some individual. What we have here is a claim on money that was created out of “thin air”. Note that in the case of a fully backed certificate an exchange of useful goods takes place, i.e. something useful is exchanged in return for something useful. In the case of unbacked certificate, we have a situation that once this certificate is employed in an exchange it leads to an exchange of nothing for something useful. We have shown above that the exchange of nothing for something is what sets in motion the menace of the boom-bust cycle. We can therefore conclude that in contrast to money out of “thin air”, a market chosen money can never be harmful to individuals well being – it cannot set in motion the menace of boom bust cycle. An increase in the supply of fully backed money in relation to demand will only lead to a fall in the purchasing power of money. This, however, will not give rise to a misallocation of resources and to the boom-bust cycle. Again, an increase in the excess supply of proper money doesn’t set in motion an exchange of nothing for something. (We still retain here the act of an exchange of some useful goods for some other useful goods). Contrary to Selgin and White, then, as far as the business cycle is concerned of course it matters whether the new money is or is not fully backed up by gold. Selgin also maintains that fractional reserve banking (the creation of money out of “thin air”) was responsible for the industrialization of developed countries.
This does not make much sense once it is realized that fractional reserve banking (the creation of money out of “thin air”) is actually instrumental in creating the dilution of real wealth formation and boom-bust cycles. After all, if fractional reserve banking is an important source of wealth formation, surely world poverty should have been eliminated a long time ago. It seems that Selgin is confusing funding with money. What gives rise to the expansion of real wealth is the expansion in the pool of real savings. It is real savings that funds the production of various capital goods, i.e. tools and machinery. In short, it is real savings that sustain various individuals that are engaged in various stages of production. All that money does in all of this is to provide the facility of the medium of the exchange. It makes it possible for individuals to exchange goods and services. The services of money are not enhanced on account of its greater supply. If anything, the increase in the supply undermines the services of money. After all when people’s demand for money rises they don’t want more money as such, but rather more purchasing power – it is the increase in the purchasing power of money that makes goods and services more marketable. The increase in the supply of money only prevents an increase in the purchasing power of money from taking place. According to Mises,
ConclusionAlso, on a gold standard – contrary to Selgin and White – fractional reserve banking will always set the platform for boom-bust cycles. The main problem in Selgin and White’s analysis is that they look at the demand for money from a macro perspective rather than from the perspective of the individual. In short, Selgin and White’s macro-analysis forces them to ignore the misallocation of resources that unbacked credit expansion produces. This article was previously published on 19 March 2007 by BrookesNews.com. [1] Murray N. Rothbard – The Case For A 100 Percent Gold Dollar, Cobden Press 1984. [2] George Selgin – Should We Let Banks Create Money?, The Independent Review, Summer 2000 p 93-100. [3] Ibid. [4] George Selgin and Lawrence White. In Defense of Fiduciary Media; or, We Are Not Devolutionists, We Are Misesians! Review of Austrian Economics 1996, 9:83-107. [5] George Selgin – Should We Let Banks Create Money?, The Independent Review, Summer 2000 p 93-100. [6] Ludwig von Mises, Human Action, 3rd rev.ed. (Chicago: Contemporary Books, 1966) p 421. Gold reaches £913 per ounceIf political leaders and central bankers think that they can curb the currency debasing effect of QE merely by turning off the tap, they are mistaken. Markets reflect not just today’s monetary policies but also rational players’ expectations as to future activity. At a lunch recently with Ewen Stewart, the parallels between the UK’s QE and the Weimar Republic’s printing of paper Reichsmarks became starkly apparent. Since QE began, Ewen explained, 69% of all gilt issuance has been bought by the Bank of England. This makes sense when one digests the transactions entered into by the Government to create money and then issue gilts. Consider the following transactional steps:
What are the commercial drivers of these four steps? Why would the DMO issue at Step 4 given that it has purchased at Step 1? The only conclusion is the creation of money, which necessarily entails the debasement of the currency. Would the DMO agree with this summary? Perhaps not. It explains the QE operation in different language. According to its pamphlet “Quantitative Easing Explained”, the exercise stimulates the wider economy by ‘injecting’ money.
But this denial that banknotes are being printed is mere spin. The term ‘injection’ is misleading – it implies that the substance being injected is already in existence. This is not the case with QE. A pamphlet purporting to explain QE should clearly state that the money is “created” before being injected. It is true that banknotes are not actually physically printed as they were in Germany in the 1920s. But that is because today, unlike in the 1920s, bank accounts are represented by computer entries. Therefore it follows that the creation QE and the transfer of QE proceeds to a bank by increasing the bank’s account balance with the Bank of England is, in plain English, printing money. It is an exact modern equivalent of rolling the printing presses and sending a pile of banknotes round to the physical headquarters of RBS or Barclays under the watchful eye of a bevy of burly bank stewards. Indeed, the sophistry of the DMO’s denial that QE is money printing, based on the technical point that physical ink and pieces of paper are not required at the point of QE money creation, is exposed by the diagram summarising the above quoted paragraph from page 8 of the pamphlet:
Upon recently re-reading Adam Fergusson’s detailed daily chronicle of the collapse of the German fiat currency in 1923, I was struck by what economists call the J-curve effect. It was a matter of years, not weeks, before the full and dire consequences of the policy of printing money became apparent. All of the characters whose lives Fergusson recounts, with the exception of the politicians, could foresee the dreadful consequences of money printing. But the crisis evolved in phases. As it started to bite, clever Germans worked out that debt would be inflated away and that hard assets would quickly rise in value. At page 109 we learn how in 1922 the clever Hans-Georg von der Osten, borrowed in February to buy a substantial estate, then paid off the entire loan in the autumn with a modest crop grown that year on the land. During that summer he also bought 100 tons of maize from a dealer for 8 million marks, only to sell the same crop back to the dealer a week later for twice the price. With the profits “I furnished the mansion house of my new estate with antique furniture, bought three guns, six suits and three of the most expensive pairs of shoes in Berlin, then spent eight days there on the town”, he boasted. There are of course many differences between the UK’s economic circumstances now, and those of Germany in the early 1920s. But there are also many parallels. One significant parallel is that Germany’s rulers knew that the country was unable to pay its war debts, and possibly embarked on their programme of currency debasement, to the ire of the Reparations Commission and creditor nations, as a deliberate policy to inflate the problem away. So in March 2009, in order to address the banking crisis, the UK believed that a £200 bn programme of quantitative easing was an essential monetary policy tool to stimulate the economy and “control inflation”:
I can only assume that the German government believed that, when the nirvana of modest national debt had been reached, they could end the debasement and somehow revive the economy. However, by 1924 many Germans could not afford food because confidence in the currency was so low that nobody wanted marks. Fiat currencies depend entirely on confidence, and when the confidence bubble is punctured, no matter how slowly the air escapes, it proves exceptionally difficult to repair. Both the US and the UK are now experiencing this. When the UK launched QE in March 2009, gold stood at about £600 per ounce, today the same ounce costs over £900. I would be grateful for any Bank of England officials to enlighten me as to where my above squaring of QE with Weimar money printing may be mistaken. If our central bankers are unable, perhaps they would be so kind as to acknowledge that their website quotation above is grievously mistaken. QE, far from being a technique of inflation control, represents the introduction of the germ of hyperinflation which, unless stopped or preferably reversed very soon, will continue to grow like a virus within our economy and in turn may wreck our society. At what level of the pound to gold would the BoE start to lose confidence in the merits of QE? Or is the price of gold in pounds irrelevant? Was Isaac Newton therefore confused in his insistence on a clear relationship between the pound sterling and a specified weight of gold? If that is their view, perhaps the BoE ought to take that famous bar of gold out of their own museum. That would be more consistent with the BoE’s apparent present beliefs: we should forget that the pound was once a hard asset backed by gold, and learn to appreciate that the paper pound exists as a pure confidence asset. Fergusson’s final paragraph should appear next to those absurd sentences on the Bank of England’s website.
Thanks to Ewen Stewart and Andy Duncan who have contributed to this piece. In 2008 Eurostat reported that Ireland was the second richest country in the EU. Less than three years later, Max Keiser presents us with a very different picture, of an Ireland few could have imagined. There is blame aplenty and no shortage of wonderful writers in this country to expound their various theses on who or what was to blame, but not many focus on the central bank and its money. When savings collapse and the total debt per taxpayer climbs to nearly 500,000 euros, one doesn’t need to wade through 900-odd pages of Ludwig von Mises’ Human Action to suspect interest rates might have been to blame. Higher interest rates would have discouraged this level of borrowing, and increased savings — real savings. One also realises that an average wage of around 35,000 euros (and falling) will never repay a total debt (still climbing) of 500,000 euros per taxpayer. Everyone knows this, but to face it would require the politicians to make themselves most unpopular in Brussels, and prompt some very uncomfortable conversations with bankers and property developers, with whom they had a very cosy relationship. Much easier to shift the obligation to service the debt onto the taxpayer and even raid his pension. It seems childish to break it down to this level but the creditor’s relationship was to the bank or property developer. At what point did the contract stipulate that in the event the creditor could not be paid, the taxpayer would step in and shoulder the burden? As a foreigner in Ireland, I have been moved by the stoicism of the people, but the degree to which it is being called upon is unjust. The shifting of debt obligations onto the taxpayer is simply not acceptable and one wonders how long it will be before the people decide to follow the more boisterous attitude of other small nations who are starting to make a stand (Finland, Iceland and Norway). Let us hope it will be peaceful.
The Blitz was terrible, but it was far from the worst that could have happened. While the constant fear of bombing, mandatory curfews and destroyed cities rendered a great tragedy on Britain, the steady supply of Nazi bombs saved her from another fate. While German bombers were busy emptying their destructive cargo onto Britain, they were unable to drop a different type of cargo that would have meant not just sudden impairment of the livelihoods of the British (as did the bombs) but their future prosperity as well. Operation Bernhard was hatched in 1942 by SS Major Bernhard Krüger (whose claim to fame now rests on naming what would become one of the War’s most devious plots after himself). The plan involved flooding the British economy with £5, £10, £20, and £50 notes. In what was the largest counterfeiting operation in history, a team of 142 “counterfeiters” (i.e., inmates) at the Sachsenhausen concentration camp toiled for three years to amass a sizeable British fortune: 8,965,080 Bank of England notes were produced with a total value of £134,610,810. The initial plan called for bombing runs to drop the currency from the sky. Britons know a good deal when they see one – pounds sent from heaven would be a ray of sunshine in an otherwise dreary wartime economy. As the counterfeit pounds were spent, inflation would be triggered. The once proud British economy would be brought to its knees as skyrocketing prices would foil entrepreneurs’ plans, destroy savings, and otherwise wreak havoc on the economy. Luckily, the tenacity of the British paid off. The Luftwaffe, increasingly hindered as the war wore on, lacked the bombers to drop the counterfeit notes over the British countryside. Disaster was averted. And yet today we have a similar plan in action. Mervyn King, governor of the Bank of England, has undertaken his own little “Operation Bernhard.” The base money supply of the United Kingdom – the notes and coins in circulation – has increased by over 75 percent over the last decade. That supply of dingy notes and tarnished coins that weigh down Britons’ pockets has grown by leaps and bounds that Major Krüger could only dream of. While the Nazi’s could only produce £134,610,810 over the course of the war, this is about 7 percent of what the Bank of England was able to produce in 2010 alone! Even at the height of the operation it is claimed that about 1 million counterfeit notes were produced per month. Even if we concede that all of these notes were of the largest denomination printed (£50), this would still only amount to £600 million a year. Even this massive figure pales in comparison to the approximately 1.9 billion extra pounds of currency that the Bank of England put into circulation last year. To put it in other words: In the last year the Bank of England pursued an operation that was over twice as effective as the Nazi’s could only dream of during the height of the war. Mervyn King and his colleagues have pursued an inflationary policy the likes of which Britain’s largest enemies could only wish for during the war. I know that you are supposed to have love for thine enemies, but this all begs the question: Mr King, whose side are you on anyway?
Here is an excerpt from Liam Halligan’s splendid piece in today’s Telegraph:
Read more at the Telegraph.
A fascinating BBC Radio 4 documentary was broadcast today, detailing the story of the Irish government’s recent bailout by the ECB. It is available for 7 days on the BBC’s iPlayer web site: Here’s the BBC’s blurb:
One is beginning to wonder if we have an über-radical Cobden Centre mole within the organs of the BBC. Here are two related Irish newspaper stories:
As Star Trek’s Mr Spock would say: “Fascinating”. In frivolous mood a couple of weeks ago, I wrote the following within a Cobden Centre article:
I was therefore shocked, shocked to witness the following major report on last night’s Newsnight programme:
Click through the link above (for as long as it works, which should be until approximately the 28th of April, 2011, and possibly only in the UK), and be as amazed as I was. It’s the first piece up, after the programme intro, but if you lack the will to last that long, spin through to 1:18 on the clock). Obviously, the content is hilarious and heavily skewed towards Gosplan central planning and global monetary socialism, with three Gosplan technocrats dancing on the head of a pin, but my jaw literally dropped when I saw the piece come up and I even managed to refrain from shouting at the television every time David Blanchflower opened his mouth, which probably tells you how stunned I was by the broadcast topic of this piece. However, what really made it for me was when Diana Furchtgott-Roth — a former chief economist at the U.S. Labor Department and therefore one of the Anglo-American Gosplan technocrats who got us into this mess, along with Blanchflower — came on to give us her two copper-plated zinc cents’ worth. I’ll let you listen to her words yourself, but what I really loved was the thick golden necklace that she wore — nay, Sutton Hoo golden burial torque!
Oh, the irony. One only hopes that it was a deliberate dress choice on her part, and formed some kind of intended subliminal message for the watching audience. Speaking of James Turk, via his GoldMoney Foundation he sponsors various educational initiatives in the splendid and necessary cause of sound money. A recent lecture in this programme, is below. This presentation was delivered on the 1st of March, 2011, in Kasterlee, Belgium, with this video being released for general viewing on the 15th of April: |
 |
|||||
|
Copyright © 2012 The Cobden Centre - All Rights Reserved. Registered Charity Number: 291371 |
||||||
