After a tough few years for the British High Street, with well-known shops like Barrats, Woolworths and Peacocks announcing closures all around, retail expert Mary Portas was called in by the government to write a report. An article from Retail Human Resources provides a summary of her findings.
In short, the report suggests that government needs to get involved in order to save British high streets. Can intervention be justified?
Why is the high street in crisis?
The Retail Human Resources article states that the main cause of the high street crisis is failure to compete with internet retailers and out-of-town sites. However, the report sheds no light on why the high street is struggling to respond to these competitive pressures. The fundamental problem is that people have found more efficient alternatives.
In a world where people are rapidly losing their jobs and trying to save every last penny, is it really so lamentable that we have become smarter shoppers? The simple fact is that the high street is much more expensive than the internet. Price comparison is much harder: to put it in economic jargon, the search costs associated with finding a desirable item are almost prohibitively high at a time where people have little time to spare.
Online retailing offers the benefit of at-home delivery, no queuing, email updates when a desired item appears online or at a discount and most importantly no opening and closing times. Similarly, out-of-town shopping centres have the ability to turn shopping into more of a day-long activity. So when people do actually have the time and money to dedicate to shopping, they want to make an experience out of it, and take a drive somewhere further away that offers lower prices and more convenient parking.
Shopping on the high street, by contrast, comes with the inevitable problems of transport, rigid opening and closing times, and the risk of harsh weather while shopping.
So let us ask ourselves this question again. Why is the high street in crisis? Because more efficient alternatives have been discovered. It is as simple as that.
Why does the high street matter?
According to the aforementioned article,
Ms Portas … said the high street had been “displaced” by out-of-town shopping centres, without anyone considering the impact of such a huge change.
The fact that people are not shopping on the British high street is not the end of the world. In fact, as the report highlights, people seem to have substituted shopping on the high street with online shopping and shopping in out-of-town centres.
Thus, even if we were to accept the Keynesian premise that enthusiastic consumption is essential for economic prosperity, the drop in consumption overall has not been drastic. What has changed is where people spend, and even the strictest Keynesian would say that this is economically relevant. So this ‘crisis’ is essentially the fact that people’s spending patterns have changed — something entirely natural in a dynamic economy.
From this perspective, what the report is arguing for is that the government needs to find ways to make people spend in places they have consciously chosen not to spend. People on an individual basis have chosen not to spend there. They act not act as a collective, but individually based on their own value scales.
Accordingly, it is disturbing when people bemoan the shift in preferences. It sounds like an incitement for the government to control where we spend our money, because only they are presumed to be responsible enough to evaluate “the impact of such a huge change”. Portas is essentially reprimanding the government for failing to protect the inefficient high street from its more efficient competitors.
But isn’t there more to life than efficiency? Mary Portas argued that
Community had been sacrificed for convenience, and there was now no sense of “belonging” to a local high street, which could partly explain the summer’s riots
However, whatever value the high street may have in fostering and focusing community spirit, this clearly doesn’t matter to people as much as convenience or lower prices. If it did, they would demonstrate their preferences by choosing to shop on the high street. The ‘crisis’ of the high street is a demonstration of people’s preferences, and the government should not be trying to impose what they assume are people’s preferences from above.
Why should the government be “making things happen”?
It is the job of high street retailers to find a way to overcome the difficulties they face. It is in times of crisis when entrepreneurial creativity is really put to the test, and entrepreneurs’ truly creative nature is allowed to shine. If there is a role for the high street in today’s economy, and I genuinely believe that there is, what entrepreneurs need to do is stop trying to use the government to protect themselves from ‘unjust competition’ and try and find ways to adapt to new consumer preferences. Entrepreneurship means being able to adapt to changes and taking changes in people’s behaviour as new data from which to construct a new business strategy.
It is not the government that should be making things happen. All government involvement will do is delay the inevitable demise of certain high street stores that are unwilling to adapt. What is most destructive is that this delay will come at a huge cost of a misdirection of resources and will inevitably penalise the innovativeness of entrepreneurs who have set up successful online businesses and out-of-town centres.
The best thing retailers can do, and the thing that most smart retailers will do, will be to change their strategy and opt for people who can work with this change and make the company viable under current economic conditions. Companies choosing to avoid this change will inevitably be out-competed by companies that embrace it. Retailers expecting things not to change will be acting like a woman who has lost 50 pounds and expects to fit into her old clothes. Inevitably she will have to decide to go out and buy new clothes, but until then she will look awkward and out-of-place, and waste money buying clothes in her previous size.
The bottom line
The British high street has become inefficient; its demise however is not something that should be lamented because it is giving way to better things. Any government action will simply delay the inevitable and cause a massive misallocation of resources. This is a true test of entrepreneurial creativity. All companies need to do to survive is embrace change and try and find a new innovative strategy for dealing with it.
A view from America, previously published at Forbes.com …
The world dollar standard’s death certificate arrives in the mail this week. The Bank of England — “the Old Lady of Threadneedle Street” — one of the most staid, cautious, and dignified entities in the world of monetary policy — signals that the fiduciary currency standard ushered in on August 15, 1971 is, empirically measured, far inferior to the (dilute form of the) gold standard erected at Bretton Woods. Fellow Forbes.com columnist Charles Kadlec thoroughly reprises and analyzes the facts submitted to a candid world by the Bank of England in a paper to be officially published December 20, 2011.
The Bank of England’s Financial Stability Paper No. 13, Reform of the International Monetary and Financial System, reported at Bloomberg BusinessWeek and reviewed here, is being seen by many monetary policy observers around the world as the “coroner’s report” on the death of the world dollar standard.
In the second half of 2011 monetary policy scholars, policy virtuosi, financiers and activists have issued over half a dozen books and important monographs on the very subject heralded by Forbes whose call was seconded by Heritage’s president, Dr. Ed Feulner in an influential Washington Times op-ed:
That’s why we should welcome a debate about the role of the Fed and what our monetary policy should be. But we have to ask the right questions. … Should we fix the dollar price of gold? … ‘If the defect is inflation and an unstable dollar,’ asks Lewis Lehrman of the Lehrman Institute, ‘what is the remedy?’ We can’t answer that without a robust and full discussion. Let’s hope the hard questions being asked now about the Fed touch off a much-needed debate.
This, together with ongoing efforts by The Lehrman Institute and by its strategic partner, the American Principles Project (with both of which this writer has a professional association) laid the groundwork for another critical development: putting monetary reform at the core of the agenda of the conservative movement. The largest and most influential umbrella group of conservativism is the Conservative Action Project. This convened 100 leading conservatives at a summit this month. President Reagan’s Counselor and the 75th Attorney General of the United States, Edwin Meese, III, presided and the Project issued, last week, A Conservative Consensus for 2012.
This, which fairly may be considered the consensus conservative platform, calls for Growth, Family, Strength and Accountability. The first element of the very first item on the agenda includes a call to “encourage sound monetary policy, thereby helping the economy grow and create more jobs.” Many conservatives take these words to mean going forward to gold.
But how?
Earlier this autumn, Lewis E. Lehrman published the fruit of 40 years of study and thought, study that began with his tutelage by French monetary statesman Jacques Rueff, of The True Gold Standard — A Monetary Reform Plan Without Official Reserve Currencies. It was lauded by TV journalist Lou Dobbs as “a compelling read and a compelling architecture for a way forward,” by Federalist Society co-founder and Bradley Foundation “Genius Award” winner David McIntosh as “a must read for policy makers,” by financial journalist James Grant as “The answer, brilliantly expounded….” The New York Sun’s Seth Lipsky summarized its essence:
… a transition in which, on the date that Congress authorizes the resumption of unrestricted convertibility between dollars and gold, Federal Reserve Bank notes and American dollar bank demand deposits would be ‘redeemable in gold on demand at the statutory gold parity,’ … the minting by the Treasury and authorized private mints of what Mr. Lehrman calls ‘legal tender gold coin in appropriate denominations, free of any and all taxation,’ … an international monetary conference ‘to provide for the deliberate termination of the dollar-based official reserve currency system and the consolidation and refunding of foreign official dollar reserves,’… the establishment by the conference of gold as ‘the sole means by which nations would settle residual balance of payments deficits,’ … and steps to ‘uphold stable exchange rates and free and fair trade — based on the mutual convertibility to gold of major currencies.’
Other noteworthy works on how to restore the gold standard promptly followed. These include monographs by George Mason University’s Prof. Lawrence H. White recently presented at the 29th Annual Monetary Conference of the Cato Institute, entitled Making the Transition to a New Gold Standard, and extensive and erudite testimony shortly preceding Lehrman’s book by Dr. Lawrence Parks, executive director of the Foundation for the Advancement of Monetary Education, at a September 13 hearing of Dr. Ron Paul’s subcommittee on Domestic Monetary Policy entitled “Road Map to Sound Money.”
I am an artist and serial entrepreneur, and I, like many, have been pillaged and plundered by the United States government. Heckle Sketch is my latest means of satirically venting frustration while communicating important messages about freedom and free market capitalism that are lost to the majority. The majority includes a government which was founded on such principles.
I have been involved in creating successful, innovative businesses for the past 16 years. I have lofty, but also realistic, visions for the advancement of mankind through biotechnology, space colonization, energy efficiency, etc. I have believed I can make a contribution toward these advancements through free market business creation and relevant investment. I am now realizing that I have been duped.
My latest venture, Tangerine Wellness, is a free market solution to rising health care costs, which the U.S. government cannot successfully address. The solution offers financial incentives to employees of large corporations for weight-loss and maintenance – lose weight, earn money is the motto. It is a solution that makes people healthier and has decreased healthcare costs for our clients.
Tangerine is solving the healthcare cost problem, yet we are being hindered from continuing to do so. In addition to the mountains of bureaucracy added to prospective clients’ operations because of massive healthcare reform, the changes have instilled uncertainty about their approach to employee wellness and about offering healthcare coverage at all. Prospective clients are not making market-driven decisions about the health of their employees, nor their healthcare coverage. They are basing their decisions on government coercion, which will result in continued rising healthcare costs.
When you spend over seven years putting your energy, heart and soul into a profitable endeavour that actually solves a major problem only to have the concept dismissed on government whim, you begin to question whether continuing to innovate is worth it. It is one thing to deal with natural free market forces; it is another to deal with free market forces as a secondary factor to unpredictable government intervention. Tangerine continues to be profitable and is wisely shifting toward a consumer-direct approach, but that is no cause for excitement when around the corner could be any new bulldozing regulation.
My nutshell story of Tangerine cuts to the point I am trying to make while leaving out many other similar painful, government-related experiences both in this and past endeavours. Driven by a need to understand the nature of the beast that threatens my survival, I have dug deeply into the landscape of economic theories and schools of thought. I see clearly why government is harming my businesses and others, why it is the core cause of our massive economic crisis, why it is stifling innovation and the advancement of mankind, and why it is so hopeless to expect the system to repair itself.
So, what does one do when one’s dreams are shattered by government injustice and there is no hope to fix the root causes through the current system? Well, if you’re also an artist with a sense of humour, you make fun of the injustice through art while trying to make it a form of education toward a brighter future. “Ben and the Fat Cat Banksters” is my first painting to do this by humorously exposing the harm the Fed produces through fiat money printing and bailouts. Do not be fooled – so long as I can put a brush to a canvas, or commission others to do so, every perpetrator of freedom and free market capitalism that exists will be…HECKLE SKETCHED!
I recently posted an article for GoldMoney showing how US True Money Supply (TMS) appeared to be growing at a hyperbolic rate, and that gold was also on a hyperbolic course. The difference between hyperbolic and exponential is a hyperbola’s rate of growth increases with time, while exponential growth does not. Hyperbolic growth in the quantity of money ends with hyperinflation, while exponential growth can go on for ever. Both TMS and the dollar price of gold are pointing to a hyperinflationary outcome. This article explains why this might be so.
There are five apocalyptic engines pushing the growth in US money supply: they are the government’s budget deficit, its debt trap, the financial condition of the banks, the delusion of Keynesian solutions, and lastly simple compounding arithmetic.
The US government collects only 55c in taxes for every dollar spent. It is relying on economic recovery to reduce welfare payments and increase tax revenue to close the gap. This prospect is receding and establishment economists advise against cutting government spending.
The US government’s debt trap is concealed by the exceptionally low interest cost of funding. The only reason this cost is not higher is the Fed maintains a zero interest rate policy. However, as surely as night follows day, price inflation will start rising as monetary inflation feeds through, forcing the Fed to allow interest rates to rise long before any economic recovery occurs. The rise in interest costs will escalate the budget deficit, which will be financed, directly or indirectly by further monetary expansion.
The banks’ balance sheets are considerably weaker than stated, because of unrealised losses on assets, loan collateral and write-downs on their own debt. Real estate collateral write-downs alone probably exceed bank equity of $1,400bn. On an honest analysis the US commercial banks are collectively bankrupt. To simply survive the banks have no alternative other than to reduce loan exposure while requiring continuing monetary support from the Fed.
Keynesian economists, aware of the banks’ difficulties are terrified of bank credit contraction. For this reason, the macroeconomic establishment strongly promotes the expansion of narrow money to buy off a deflationary depression.
As the purchasing power of the dollar falls, the result of past monetary expansion, yet more dollars have to be issued to cover increased government costs. Past inflation becomes a compounding factor behind price rises.
Essentially, money will be printed at an accelerating rate to buy time rather than face the three realities of government default, an over-indebted private sector, and a bankrupt banking system. The Keynesians are belatedly aware of the dangers and see no alternative to printing as much money as is required to defer these problems. The monetarists in the central banks are hesitant, torn between Keynesian fears of outright deflation and worries about the rate of monetary expansion so far.
However, the history of monetary inflation confirms that once it enters a hyperbolic phase, it is almost impossible to stop. Armchair critics have derided the stupidity of central banks and economists in past hyperinflations, such as in Weimar Germany, Argentina and Zimbabwe. The truth is that when hyperinflation has become visible at the price level, it has already gone past the point of no return at the monetary level.
This article was previously published at GoldMoney.com.
In this video Philipp Bagus, Assistant professor of Economics at Madrid’s Universidad Rey Juan Carlos and author of The Tragedy of the Euro and Alasdair Macleod of the GoldMoney Foundation talk about the eurozone facing the problem that is characterised in the “tragedy of the commons” analogy. Bagus explains this phenomenon by way of an example of overfished and over-exploited oceans due to a lack of property rights on oceans. In Europe, governments run larger deficits than their “competitors” in order to externalise the costs to all users of the currency. Knowing these incentives, the Stability and Growth Pact was put in place as per the early 1990s Maastricht Treaty, capping budget deficits at 3% of GDP and the debt to GDP level at 60%. However there was no enforcement of these rules which is why there have already been more than 80 infringements to this stability pact without any repercussions.
They talk about possible solutions to the euro crisis. Bagus points out that there are basically three different ways to go about it. Firstly, governments could make drastic cuts in public spending and privatise public assets in order to balance their budgets. However, there will be – and is – strong political resistance to such proposals. Secondly, the eurozone could disintegrate, driven by a reluctance of German citizens to pay for other countries’ expenditures. And lastly, central banks and governments could decide to print their way out of the crisis, leading to high inflation.
Bagus says that as long as the incentive for running deficits exists there won’t be an increase in countries’ savings rates. Macleod points out that there is great institutional resistance to breaking up the euro. Bagus explains that the official opinion towards the euro is positive in Germany; however the sentiment on the streets looks quiet different. But as long as there is no political party devoted to this issue this mood is not likely to gain traction at least as long as inflation remains moderate.
Amid the ongoing expansion of the money supply and persistent deficits, Bagus can’t see the dollar gaining in value over the medium to long term. He also says that ECB policies are a lot more pragmatic than the ones undertaken by the US Federal Reserve. Talking about sound money, Bagus explains different ways to go about its introduction. One way would be to back all the money in existence by gold, adjusting the price of gold accordingly. Another would be to take away legal tender laws and have competing currencies. However this would require the governments to impose dramatic reforms, which is partly why they will oppose such measures.
This interview was recorded on November 15 2011 in Madrid.
The pathetic state of the global financial system was again on display this week. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously?
On Tuesday, the prospect of another gigantic cash infusion from the ECB’s printing press into Europe’s banking sector, which is in large part terminally ill but institutionally protected from dying, was enough to trigger the established Pavlovian reflexes among portfolio managers and traders.
None of this has anything to do with capitalism properly understood. None of this has anything to do with efficient capital allocation, with channelling savings into productive capital, or with evaluating entrepreneurship and rewarding innovation. This is the make-believe, get-rich-quick (or, increasingly, pretend-you-are-still-rich) world of state-managed fiat-money-socialism. The free market is dead. We just pretend it is still alive.
There are, of course those who are still under the illusion that this can go on forever. Or even that what we need is some shock-and-awe Über-money injection that will finally put an end to all that unhelpful worrying about excessive debt levels and overstretched balance sheets. Let’s print ourselves a merry little recovery.
How did Mr. Bernanke, the United States’ money-printer-in-chief put it in 2002? “Under a paper-money system, a determined government can always generate higher spending…” (Italics mine.)
Well, I think governments and central banks will get even more determined in 2012. And it is going to end in a proper disaster.
Lender of all resorts
Last week in one of their articles on the euro-mess, the Wall Street Journal Europe repeated a widely shared myth about the ECB: “With Germany’s backing, the ECB has so far refused to become a lender of last resort, …” This is, of course, nonsense. Even the laziest of 2011 year-end reviews will show that the ECB is precisely that: A committed funder of states and banks. Like all other central banks, the ECB has one overriding objective: to create a constant flow of new fiat money and thus cheap credit to an overstretched banking sector and an out-of-control welfare state that can no longer be funded by the private sector. That is what the ECB’s role is. The ECB is lender of last resort, first resort, and soon every resort.
Let’s look at the facts. The ECB started 2011 with record low policy rates. In the spring it thought it appropriate to consider an exit strategy. The ECB conducted a number of moderate rate hikes that have by now all been reversed. By the beginning of 2012 the ECB’s policy rates are again where they were at the beginning of 2011, at record low levels.
So why was the springtime attempt at “rate normalization” aborted? Because of deflationary risks? Hardly. Inflation is at 3 percent and thus not only higher than at the start of the year but also above the ECB’s official target.
The reason was simply this: states and banks needed a lender of last resort. The private market had lost confidence in the ability (willingness?) of certain euro-zone governments to ever repay their massive and constantly growing debt load. Certain states were thus cut off from cheap funding. The resulting re-pricing of sovereign bonds hit the banks and made it more challenging for them to finance their excessive balance sheets with money from their usual sources, not least U.S. money market funds.
So, in true lender-of-last resort fashion, the ECB had to conduct a U-turn and put those printing presses into high gear to fund states and banks at more convenient rates. While in a free market, lending rates are the result of the bargaining between lenders and borrowers, in the state-managed fiat money system, politicians and bureaucrats define what constitutes “sustainable” and “appropriate” interest rates for states and banks. The central bank has to deliver.
The ECB has not only helped with lower rates. Its balance sheet has expanded over the year by at least €490 billion, and is thus 24% larger than at the start of the year. This does not even include this week’s cash binge. The ECB is funding ever more European banks and is accepting weaker collateral against its loans. Many of these banks would be bust by now were it not for the constant subsidy of cheap and unlimited ECB credit. If that does not define a lender of last resort, what does?
And as I pointed out recently, the ECB’s self-imposed limit of €20 billion in weekly government bond purchases (an exercise in market manipulation and subsidization of spendthrift governments but shamelessly masked as an operation to allow for smooth transmission of monetary policy) is hardly a severe restriction. It would allow the ECB to expand its balance sheet by another €1 trillion a year. (The ECB is presently keeping its bond purchases well below €20 billion per week.)
Deflation? What deflation?
It is noteworthy that there still seems to be a widespread belief that all this money-printing will not lead to higher inflation because of the offsetting deflationary forces emanating from private bank deleveraging and fiscal austerity.
This is an argument I came across a lot when I had the chance in recent weeks to present the ideas behind my book to investors and hedge fund managers in London, Edinburgh and Milan. Indeed, even some of the people who share my outlook about the endgame of the fiat money system do believe that we could go through a period of falling prices first, at least for certain financial assets and real estate, before central bankers open the flood-gates completely and implement the type of no holds barred policy I mentioned above. Then, and only then will we see a dramatic rise in inflation expectations, a rise in money velocity and a sharp rise in official inflation readings.
Maybe. But I don’t think so. I consider it more likely that we go straight to higher inflation.
The deleveraging in the banking sector is the equivalent of austerity in the public sector: it is an idea. A promise. The reflationary policy of the central bank is a fact. And that policy actively works against private bank deleveraging and public sector debt reduction.
Consider this: The present credit crisis started in 2007. Yet, none of the major economies registered deflation. All are experiencing inflation, often above target levels and often rising. In the euro-area, over the past twelve months, the official inflation rate increased from 2 percent to 3 percent.
From the start of 2011 to the beginning of this month, the U.S. Federal Reserve boosted the monetary base by USD 560 billion, or 27 percent. So far this year, M1 increased by 17.5 percent and M2 by 9.5 percent.
Below is the so-called “true money supply” for the U.S. calculated by the Mises Institute.
As the Mises-Institute’s Doug French pointed out, total assets held by the six biggest banks in the U.S. increased by 39% over the past 5 years. Maybe this is not surprising given that in our brave new world of limitless fiat money, credit contraction is strictly verboten.
In the UK the official inflation reading is at around 5 percent, but nevertheless in October the Bank of England embarked on another round of “quantitative easing”. It has so far expanded its balance sheet by another £50 billion in not even three months, which constitutes balance sheet growth of about 20 percent.
What we have experienced in the UK in 2011 provides a good forecast in my view for the entire Western world for 2012: rising unemployment, weak or no growth, failure of the government to rein in spending, growing public debt, further expansion of the central bank’s balance sheet, rising inflation.
Death of a safe haven
And what about Switzerland? Here the central bank expanded its balance sheet by 40 percent over just the first three quarters of the year, and almost tripled the monetary base over the same period of time. Most of this even occurred before the 6th of September, the day on which Mr. Hildebrand, the President of the Swiss National Bank, told the world and his fellow Swiss countrymen and women that the whole safe-haven idea was rubbish and that Switzerland was now joining the global fiat money race to the bottom.
Deflation has become the bogeyman of the policy establishment. It must be avoided at all cost! Of course for most of us regular folks deflation would simply mean a tendency toward lower prices. It would mean that the capacity of the capitalist economy to increase the productivity of labour through the accumulation of capital and to thus make things more affordable over time (a true measure of rising general wealth) would accurately be reflected in falling nominal prices. The purchasing power of money would increase over time. This, however, would require a form of hard and apolitical money. Instead we are constantly told that our economy needs never-ending monetary debasement in order to function properly. We are constantly told to fear nothing more than deflation, which can only be averted by a determined government and a determined central bank. And the never-ending supply of new fiat money.
Appropriately, there is no talk of exit strategies any longer.
Given the size of the already accumulated imbalances I think a stop to this madness of fiat money creation would be painful at first but hugely beneficial in the long run. I am the last to say that no risk of a very painful deflationary correction exists. But a correction is now unavoidable in any case, and every other policy option will make the endgame only worse. Even if I am wrong on the near-term outlook on inflation and even if all this money-printing does not lead to higher inflation readings imminently, it will still be a hugely disruptive policy. Money injections obstruct the dissolution of imbalances and invariably add new imbalances to the economy, including new debt and capital misallocations, that will make even more aggressive money printing necessary in the future.
The nationalization of money and credit
Herein lies a fundamental contradiction in our present system: The desire for constant inflation and constant credit expansion requires that the banks be shielded from the effects of their own business errors. Allowing capitalism’s most efficient regulators, profit and loss, to do the regulating, would mean that banks could face the risk of bankruptcy – this is, of course, the ultimate disciplinary force in capitalism. This could then lead to balance sheet correction and thus periods of deflation. Ergo, banks cannot be capitalist enterprises at full risk of bankruptcy as long as constant credit growth and inflation are the overriding policy goals. The constant growth of the banking sector must be guaranteed by the state through the unlimited provision of bank reserves from a lender-of-last resort central bank.
That banks get ever bigger, that they routinely hand out multi-million dollar bonuses, and that they frequently get bailed out, is not a result of the greed of the bankers – a stupid explanation anyway, only satisfactory to the intellectually challenged and perennially envious – but is integral to the fiat money system.
Banking under state protection ultimately means banking under state control. In the end it means state banking. And this is where we are going.
Last week the Federal Reserve and the Bank of England announced plans to tighten the control over the balance sheet management and the risk-taking of private banks. This is just the beginning, believe me. The nationalization of money and credit will intensify in 2012 and beyond. More regulation, more restriction, more control. Not only in defence of the bankrupt banks but also the bankrupt state. We will see curbs on trading, short-selling restrictions and various forms of capital controls.
A system of state fiat money is incompatible with capitalism. As the end of the present fiat money system is fast approaching the political class and the policy bureaucracy will try and defend it with everything at their disposal. For the foreseeable future, capitalism will, sadly, be the loser.
The conclusion from everything we have seen in 2011 is unquestionably that the global monetary system is on thin ice. Whether the house of cards will come tumbling down in 2012 nobody can say. When concerns about the fundability of the state and the soundness of fiat money, fully justified albeit still strangely subdued, finally lead to demands for higher risk premiums, upward pressure on interest rates will build. This will threaten the overextended credit edifice and will probably be countered with more aggressive central bank intervention. That is when it will get really interesting.
We live in dangerous times. Stay safe and enjoy the holidays.
In the meantime, the debasement of paper money continues.
So, here we are, drawing to the close of another year and still we struggle with the legacy of the last Boom, still we search around for macro economic Tooth-Fairy, ‘liquidity’ solutions to the problems caused by our earlier misallocations of capital instead of facing the fact that insolvent entities need to be liquidated and their assets put to work by people who’ve shown they can run their businesses successfully without a government crutch!
Thus, having started the year with gains of almost 10%, nominal total returns for MSCI World equities are off 7%, with the US flat and the Eurozone down by nearly 20% – as are the Emerging Markets in which it seems every portfolio manager (as well as a great number of real business leaders) is putting so much faith. Junk returns have been their lowest in more than eight years, barring period of the Crash itself. In commodities, Base Metals are off by a quarter; Ags by a fifth; and Energy is flat – largely thanks to the little local difficulty experienced by the dear, departed Colonel!
Only the Precious Metals show anything substantially in the plus column, being up 7%, and even that gain is due to gold alone and nothing else. So, with those flight-to-quality stalwarts, Bunds, up 17% and UST’s up 28% – their best showing in 13 and 26 years, respectively – it’s been another bust for the ‘Risk On’ front-runners of global recovery ever since the Fed let its distortive, but otherwise largely ineffective QE-II programme expire in the summer.
Are things going to get any better in the near future? In answering this, we should never underestimate the efforts of all those at work in the market economy whose only honest route to material self-satisfaction is to provide a service which their fellows will value, in their turn. Diligence and determination, leavened with a soupçon of entrepreneurial insight and fuelled by the dedication of earned surpluses to capital re-accumulation is ultimately the only remedy for the ills which afflict us and it would be foolish indeed to say that this process is not ongoing, however much it is being hampered by the stupidity of the Philosopher Kings.
That said, our blind persistence with the worst kind of Rooseveltian ‘experimentation’ and our obsession with monetary necromancy constitute nothing less than a major inhibition of this immunological response of self-healing through thrift and innovation.
Indeed, one has to fear that the faulty signals given off by all the measures so far taken – many of them beyond even the conception of all but the most wild-eyed monetary cranks before we started down into this particular Vale of Tears – have already caused some of those same healing mechanisms to turn cancerous. Who can say how much well-intentioned effort over the past three years – however fruitful it has appeared to have been in the interim – has been misled into taking for permanent and self-sustaining what is only a short-lived artefact of a massive monetary and fiscal intervention which cannot continue indefinitely without bringing about the complete destruction of the market order – and, probably, the liberal society which it fosters?
Beside the peril this engenders for even the most perspicacious entrepreneur (a man who, no matter how well-endowed with exceptional Kirznerian vision, can never, to quote Hayek, really know his place on the complex, topological manifold which is the modern productive structure), the difficulties it throws up for us players in the sigils and ciphers of capital may seem trivial enough. Yet, it cannot be healthy for any of us when, with so much of the basic pricing mechanism in the market not functioning – whether because of accounting suspensions, bail-outs and support schemes, currency interventions, the imposition of zero interest rates, collateral squeezes, the disease of HFT – we all have been reduced to trying to work out what constellation of data, or what political mood will next allow Bernanke or his peers to launch their helicopters, financing both public wastefulness and private denialism, and so give us all a few months’ trading rally.
So perverse has this become that the market can sometimes persuade itself that, in this Bizarro-world which we inhabit, weak data is to be construed a positive since it increases the likelihood of another burst of official inanity, despite the fact that such actions as will then be taken will not only fail to address the underlying problems, but will surely add new woes to the list, every time they are undertaken.
So, for example, much has been made of the fact that, next year, the usual rotation of bottoms on seats means will we not only get an even more Dovish mix on the FOMC (sic!), but that 2012 is an election year, meaning that the Administration will be expecting the usual helpful policy settings pretty early in the spring, with the aim of producing an artificial slew of good news, right about the time people go to vote in the Fall.
What this really implies is that we have actually become conditioned to welcome the periodic alternation of the authorities’ heavy-footed recourse to the accelerator and the brake, in total disregard of the damaging consequences such a hysteresis inevitably entrains.
Are we doomed to stage a re-run of QEI, QEII and the rest, only to see the cost of living go up for ordinary folks by more than their incomes; only for the whole economy to roll over again when the groundswell of complaints leads to the stimulus being temporarily withdrawn again? If so, we will inculcate two, decidedly unhelpful lessons in the public mind: one, that prices – while not immune from cyclical swings – will ratchet higher and higher at each pass; and, two, that while cost control can be relaxed if those rising prices offer some undue security of return to the producer, it is nonetheless not wise to over-commit one’s resources during the initial sugar-rush for fear of being over-extended when it is next suspended.
The term for what may then result is ‘stagflation’.
In Europe – where the most acute dangers seem to lie at present – this may seem some way from being the case. Monetary growth has, after all, slowed to such a point that – ceteris paribus – we should expect price rises to show clear signs of slackening in the coming months unless the users and holders of the euro lose a sufficient degree of faith in their money that they strive more anxiously to get rid of it, regardless of its objectively less ample supply. Signals will naturally be hard to unscramble here, but among the symptoms would almost certainly be a weakening of the currency’s value on the foreign exchanges. The fact that this has begun to occur is by no means conclusive to the case but should nevertheless alert us to be on the look-out for other such behaviours for confirmation that this inflationary erosion of trust may be under way.
Europe’s travails are being all the more drawn out because of the incomplete realisation that the scale of the vulnerabilities built up during the last 10 years’, risk-dulled Rake’s Progress is unlikely to respond to piecemeal solutions – certainly not to a belated reimposition of the original Stability Pact, however laudable such a Gladstonian form of finance might be. Nor is it politically reasonable to expect the populace to endure quarter after quarter of grinding ‘austerity’ in order to keep their debtors happy, with no prospect of any early relief from their torment.
There may, truly, be little chance that such an approach will lead to growth, as the Keynesian defenders of Big Government and unsound finance never cease to assert, but this is because theirs is a very extravagant version of ‘austerity’, indeed. Under this, their beloved Leviathan – even if pared of some of its ability to use debt to corrupt the elections and pervert representational accountability – must otherwise be restricted in its diet as little as possible.
Thus, it continues to commandeer scarce resources, pushing up their prices beyond the level at which some enterprising fellow could use them to expand his own business. Thus, too, the state still imposes its grossly-expanded menu of priorities on individuals thereby denied a due measure of choice in their own affairs. Worse, yet, by persuading such persons that public services (and disservices) are ‘free’, the state precludes a proper ordering of them in people’s subjective rankings while instilling the message that they are somehow a ‘right’. They are typically abused as a result, while the ‘broken window’ effect prevents some hidden other from taking their place and thereby increasing general satisfaction.
Given this dreadful predilection to keep the state as swollen as possible, the Keynesian parody of ‘austerity’ can only mean a greater proportionate diversion of a lesser stream of income to its belly. The hard-pressed citizenry not only sees its gross wage packet shrink (something which, alas, may be necessary to price them back into jobs) but the tax-take soar on its members, their prospective employers, and their would-be capital-provisioners, too.
Nor, given the implicit threat that, the minute the storm has passed, the state will go back to living out its Neo-Jacobin fantasies on credit, will the crushing burden of past debts be lifted, for any such full or partial repudiation will be deemed greatly to impair its future ability to borrow. Thus, the gluttonous jacks-in-office casually increase their call upon the living standards of today’s subjects in order to preserve their future potential to alienate that of their children, once more.
No-one, of course wants to do the sensible thing: to allow for meaningful debt write-offs against the promise of budgets which are balanced by cutting expenditures to the bare, safety-net bone and only by raising taxes as a very last resort – and then on consumption, not on capital, for preference. Combine this with a broad programme of liberalisation and a decimation of the ranks of bureaucratic Nannies who so stifle self-reliance and individual endeavour and we might just encourage that so-far elusive replacement of profligate public by profitable private sector activity. Whisper it, but growth might then begin flourish among the Ozymandian ruins of the Warfare-Welfare state.
Oh, and if any of this puts banks in jeopardy, let them fail where they must and encourage the swift application of transparent judicial action to re-distribute both the deposit base and the loan book (suitably marked-down and written off necessary) among the hands of the well-capitalised and the still-solvent.
Instead of this, the establishment is shielding the banks from the consequences of their own folly, even as it is dragging them down in a drowning man’s clutch by linking them ever more tightly to the fortunes of the governments whom they have already treated in far too lax a fashion. Beside this, the mooted ‘fiscal union’ is short-hand for more ‘German Reparations’ – this time, for winning the peace, not losing the war – while unrestrained ECB bond-buying is clearly a road to ruin, even if it is disguised by laundering it through the IMF, or offering ‘unlimited’ term funds to bond-buying banks, or setting up its own SIV in the form of a leveraged, bank-licensed ESM.
We Anglos tend chronically to underestimate the determination of the Euro nomenklatura to hold their grand project together and therefore do not always appreciate the degree of pain they are willing to endure to that end, but – really – is there any chance they will see this through without radically revising their approach? If not, ought we not to try to imagine what will give way first? The 27 as a unitary body? Frau Merkel’s insistence on fiscal self-reliance? Or the ECB’s self-image as a grander Bundesbank? The ramifications of each are as different as they are profound.
Finally, we come to our favourite bone of contention – China!
Money supply there is growing at the slowest pace in at least fifteen years; funds seem to be leaking back out of the country as confidence in yuan appreciation wanes; property sales – on which so much finance (and, one suspects, so many ‘profits’) depend – have all but evaporated; SMEs are bleeding badly, squeezed between higher costs, tighter credit, and sagging external markets. Is there still room for doubt that the end of the last three years’ orgy of credit expansion – that 20% a year, 40% of GDP bloating of bank assets – has brought about the inevitable ‘hard landing’?
Again, the stock promoters in the West want to reassure us (a) that China’s all-knowing bosses can ‘fine-tune’ this – to put that horribly overworked phrase to use – and that – YAWN! – weakness now means much more stimulus next quarter, so this is only a blip – a ‘buying opportunity.’
Forgive the cynicism, but your author seems to remember that Ben Bernanke thought he could ‘fine tune’ things back in 2007/08 about the same time that Mervyn King and his team were confident of achieving the mythical ‘soft landing’ in Britain. On top of that, we have the signal success of all our efforts at re-inflating a collapsing property bubble to reinforce our confidence in Beijing’s abilities to do likewise.
In the circumstances, there is no danger of our being overly sanguine about the depth and seriousness of the underlying problems in China: even the key, annual central economic work conference in Beijing summed up the world situation as ‘extremely grim and complex’. Remarkably, however, that same meeting declared that ‘prudent’ monetary and ‘flexible’ fiscal policy (no indiscriminate easing, but lots of tinkering with tax and subsidy) would serve to deliver a stability defined as a ‘means to maintain basically steady macro-economic policy, relatively fast economic growth, stable consumer prices and social stability’.
Good luck with that, chaps!
Both arising out of and then compounding all this economic disquiet we have an ongoing crisis of legitimacy in politics.
We have the Tea Party and Occupy Wall Street active on the opposite ends of the US political spectrum. We have the rise of splinter groups like the ‘Real Finns’ in their homeland or the ‘Pirate Party’ in Germany. We have worries about what reaction there will be when the tyranny of ‘technocratic’ government by Goldman Sachs alumni really bites home. We have the Arab Spring. We have street protests in Moscow and persistent rumblings about civil unrest in China.
Not helping matters, the US and its allies are sabre-rattling in the Gulf and stirring up trouble in the South China Seas, while even comic opera Argentina seems to be sorely tempted by the chance to make another grab for ‘Las Malvinas’ now that the interloping Brits seem to be on their uppers.
On the one hand, a shake up of the cosy orthodoxy which led us into the dire straits in which we find ourselves is no bad thing – assuming this all stops short of bloodshed, of course – but, on the other, the pervading sense of impermanence can only add to the uncertainties faced by economic decision makers everywhere, whether entrepreneurs, managers, investors, or ordinary householders.
As we have often argued, this is only likely to dampen further the chances of generating a self-sustaining recovery – so much so, in fact, that it would almost be better for policy-making to be suspended, here, far short of any ideal formulation, so that at least everyone knows the obstacles they will have to surmount and the nature of the challenges they will face and so can set about planning to overcome them.
But to expect career bureaucrats and lifelong, professional politicians to simply cease and desist in their collectivist conceit that they and only they can fix what they simultaneously deny they first broke is, well, to expect those seasonally-fattened gallinaceous bipeds to welcome the onset of Yule!
A Merry Christmas and a Prosperous New Year to one and all!
Those of you based in London hopefully know that I have a regular column in City AM each Tuesday. Last week I discussed government vs. private investment:
When private sector investment declines, then the reasons need to be identified and a solution found. The key policy question needs to be “why aren’t businesses investing?” Attempting to offset it with government spending is just an accounting deception. And too much government intervention can be the underlying cause, not the cure – through high tax rates, burdensome regulations and policy uncertainty.
The print edition contained a chart in which I used the Gross Fixed Capital Formation data to compile and contrast government and private investment. That data has now been published by Kaleidic Economics: here is the announcement, and you can view the data here.
Gordon dealt with the flaws in IFRS, the reasons for the debt crisis, the case for hardening money, the need for international money in support of trade and more.
Later in the day, I said in the Commons that the Government’s response to the ICB report seemed to take accounting for granted, asking the Chancellor to consider the issue seriously in the forthcoming white paper.
For some time I have taken the view that rescuing eurozone governments from their financial crises was too big a job for the European Central Bank, which should stick to keeping the banking system going. The only hope was that individual governments would be forced to face up to the reality of cutting government spending hard and quickly. They have failed to even begin to address this fundamental problem. As a consequence, it is now impossible for them to roll over their maturing debt, let alone raise new money. Instead there is now a scramble into cash as banks and hedge funds prepare themselves for sovereign defaults.
Posturing over geared stability funds, financial transaction taxes, installing unelected governments, putative treaty changes and finally enhanced fiscal supervision proposals have finally convinced markets that the only outcome is widespread government defaults. There is now no alternative and the fallout will have to be managed.
The inept handling of this crisis has weakened the eurozone’s banks to the point that they are unable to subscribe for more debt. Furthermore, the ECB cannot afford to see the liquidity it provides to European banks disappear into new government bonds that will default anyway. Therefore, it is now in the ECB’s interest to see sovereign defaults occur as soon as possible, unless the International Monetary Fund can come to the rescue, which is looking less likely by the day.
There is growing evidence that there is insufficient support for an IMF bailout from its member governments. The IMF’s charter is as an intergovernmental lender of last resort, not a supporter of government profligacy. Following the failure of the G20 meeting in mid-October there has been no substantive attempt to rescue the eurozone. The telephones might be buzzing, but there is no urgent meeting, suggesting that events must take their course.
So the quicker these defaults happen, the sooner the ECB can work with the national central banks to bail out the major Eurozone commercial banks. Once we accept this line of reasoning, we must think about the likely candidates. In no particular order they are France, Italy and Greece: France and Italy because they have to roll enormous amounts of debt in the coming months and Greece for obvious reasons. Less pressing perhaps but also likely default candidates are Belgium, Spain, Portugal and Ireland: Belgium might fall with France and the others have the potential to struggle through but might chose to wipe the slate clean. And when the first goes, the rest will surely follow rapidly.
The sequence of events is now under way. This will be followed by the defaults themselves, and the likely trigger will be escalating French government bond yields.
In summary, we have reached the point where the ECB’s vested interest requires eurozone governments to default because further delay will make the rescue of the currency and banking system more difficult. Expect co-ordination between the Bank for International Settlements, The Fed, Bank of England and Bank of Japan to smooth markets through the turmoil and to back up the ECB.
This article was previously published at GoldMoney.com.
