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Economics
By Steven Baker MP, on 22 February 12 I was glad to see Cobden Partners’ Gordon Kerr on Bloomberg yesterday, explaining why the Greek bailout will fail:
As I wrote elsewhere, the western world may be in a second crisis of state socialism, a crisis of the welfare state. It appears that politicians’ excess spending pledges over what they could raise in taxation have been covered indirectly by chronic credit expansion since the end of Bretton Woods. As Hayek, Mises, Huerta de Soto and others have explained, that was bound to lead to a banking crisis.
If this thesis is essentially correct, it may be that Greece is simply in the vanguard of a pattern which we should expect elsewhere. That implies a need for everyone who cares about peace and prosperity to think fundamentally and without fear or favour about our plight. That’s why I am proud to be associated with both the Cobden Centre and Cobden Partners.
Economics
By Dr Frank Shostak, on 22 February 12 In his Outside the Box E-Letter February 13 2012, respected economic commentator John Mauldin presents an interview with Dr Lacy Hunt, a highly regarded US financial economist. According to Hunt the key factor behind the current World economic crisis in particular Europe’s and the US is a very high level of debt relative to gross domestic product (GDP). For instance in the US as a percentage of GDP both public and private sector debt is currently at around 400% whilst in the Euro-zone it is 450%.
This way of thinking follows the footsteps of the famous American economist Irving Fisher[1] who held that a very high level of debt relative to GDP runs the risk of setting in motion deflation and in turn a severe economic slump. According to Fisher the high level of debt sets in motion the following sequence of events that culminate in a severe economic slump.
Stage 1: the debt liquidation process is set in motion on account of some random shock. For instance a sudden large fall in the stock market. The act of debt liquidation forces individuals into distressed selling of assets.
Stage 2: as a result of the debt liquidation the money stock starts shrinking and this in turn slows down the velocity of money.
Stage 3: a fall in money leads to a decline in the price level.
Stage 4: the value of peoples assets falls whilst the value of their liabilities remains intact. This results in a fall in the net worth, which precipitates bankruptcies.
Stage 5: profits start to decline and losses emerge.
Stage 6: production, trade and employment are curtailed.
Stage7: all this leads to growing pessimism and a loss of confidence.
Stage 8: this in turn leads to the hoarding of money and a further slowing in the velocity of money.
Stage 9: nominal interest rates fall, however, but on account of a fall in prices real interest rates rise.
Note that the critical stage in this story is the stage 2 i.e. debt liquidation results in a decline in the money stock. But why should debt liquidation cause a decline in the money stock?
Take a producer of consumer goods who consumes part of his produce and saves the rest. In the market economy our producer can exchange the saved goods for money. The money that he receives can be seen as a receipt as it were for the goods he produced and saved. The money is his claim on these goods.
He can then make a decision to lend his money to another producer through the mediation of a bank. By lending his money, the original saver (i.e. lender), transfers his claims on real savings to the borrower. The borrower can now exercise the money (i.e. the claims), and secure consumer goods that will support him whilst he is engaged in the production of other goods, let us say the production of tools and machinery. Observe that once a lender lends his money he relinquishes his claims on real goods for the duration of the loan. Can the liquidation of credit, which is fully backed by savings, cause a decline in the money stock? Once the contract expires on the date of maturity the borrower returns the money to the original lender. As one can see the repayment of the debt, or debt liquidation, doesn’t have any effect on the stock of money.
Things are, however, different when a bank uses some of the deposited money and lends them out. Remember that the owner of deposited money continues to exercise demand for money – he didn’t relinquish his claims on real savings in favour of a borrower. Hence, when a bank uses some of the deposited money the bank effectively creates another claim on real savings. This claim is just empty stuff. Whilst in the case of fully backed credit the borrower, so to speak, secures goods that were produced and saved for him.
This is, however, not so with respect to unbacked credit. No goods were produced and saved here. Consequently, once the borrower exercises the unbacked claims this must be at the expense of the holders of fully backed up claims. The bank here creates money out of “thin air”. On the date of maturity of the loan once the money is repaid to the bank this type of money must disappear since it never existed as such and never had a proper owner.
Money supply and pool of funding
The point that must be emphasised here is that the fall in the money stock that precedes price deflation and an economic slump is actually triggered by the previous loose monetary policies of the central bank and not the liquidation of debt. It is loose monetary policy, which provides support for the creation of unbacked credit. (Without this support banks would have difficulties practicing fractional reserve lending). The unbacked credit in turn leads to the reshuffling of real funding from wealth generators to non-wealth generators. This in turn weakens the ability to grow the pool of real funding and in turn weakens the economic growth. Note that the heart of the economic growth is the pool of real funding, or the pool of real savings, or the ‘subsistence fund’. According to Bohm-Bawerk,
The entire wealth of the economical community serves as a subsistence fund, or advances fund, from this, society draws its subsistence during the period of production customary in the community.[2]
Similarly von Strigl wrote,
Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides labourers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. . . . The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be. It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices.[3]
On account of prolonged and aggressive loose monetary and fiscal policies a situation can emerge when the pool of real funding starts shrinking. In short, there are now more activities that consume real wealth than activities that produce real wealth. Once the pool of funding starts falling then anything can trigger the so-called economic collapse.
Obviously when things are starting to fall apart banks try to get their money back. Once banks get their money (credit that was created out of “thin air”) and don’t renew loans the stock of money must fall. Note however that the consequent price deflation and the fall in the economy is not caused by the liquidation of debt as such, nor by the fall of money but by the fall in the pool of real funding on account of previous loose monetary and fiscal policies.
The size of the debt and severity of economic slump
In his writings Fisher argued that the size of the debt determines the severity of an economic slump. He observed that the deflation following the stock market crash of October 1929 had a greater effect on real spending than the deflation of 1921 had because nominal debt was much greater in 1929.
We, however, maintain that it is not the size of the debt as such that determines the severity of a recession, but rather the state of the pool of real funding. Again, it is not the debt but loose monetary and fiscal policies that cause the misallocation of real funding. (The level of debt is just a symptom as it were – it doesn’t cause damage as such).
By putting the blame on debt as the cause of economic recessions one in fact absolves the Fed and the banking system it maintains from any responsibility in actually setting the whole thing in motion. Additionally, once it is accepted that debt can set in motion a monetary implosion and in turn an economic depression it appears to justify the idea that the Fed must step in and lift monetary pumping in order to offset the disappearing money supply.
However, rather than countering the emerging depression what monetary pumping in fact does here is to further weaken the pool of real funding and thereby deepen the economic crisis. (Note that many commentators are of the view that on account of price deflation the debt burden intensifies. Consequently, it is held that by means of monetary printing this burden can be eased thereby arresting the economic plunge. Again we suggest that pumping more money only dilutes the pool of real funding and makes things much worse). Additionally, the emergence of monetary deflation is a positive development for wealth generators since it slows down the diversion of real funding towards non-productive activities.
The fallacy of insufficient aggregate demand
Now, both Keynes and Friedman felt that The Great Depression was due to an insufficiency of aggregate demand and so the way to fix the problem is to boost the aggregate demand. For Keynes, that was by having the federal government borrow more money and spend it when the private sector wouldn’t. Friedman advocates that the Federal Reserve pumps more money to revive the demand. Fisher, whilst agreeing that the problem is with insufficient demand, held that insufficiency of aggregate demand is a symptom of excessive indebtedness. Hence what is needed to contain a major debt depression is you have to prevent it ahead of time. You have to prevent the buildup of debt.
Again we suggest that Fisher deals here with symptoms and not the true cause, which is declining pool of real funding on account of loose fiscal and monetary policies. Additionally there is never such a thing as insufficient aggregate demand as such.
We suggest that an individual’s effective demand is constrained by his ability to produce goods. Demand cannot stand by itself and be independent – it is limited by production. Hence what drives the economy is not demand as such but the production of goods and services. The more goods an individual produces the more of other goods he can secure for himself.
In short, an individual’s effective demand is constrained by his production of goods. Demand, therefore cannot stand by itself and be an independent driving force.
According to James Mill,
When goods are carried to market what is wanted is somebody to buy. But to buy, one must have the wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the annual revenue of the general mass of inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is; the more you increase the annual produce, the more by that very act you extend the national market, the power of purchasing and the actual purchases of the nation…. Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchasing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate.[4]
If a population of five individuals produces ten potatoes and five tomatoes – this is all that they can demand and consume. No government and central bank tricks can make it possible to increase effective demand. The only way to raise the ability to consume more is to raise the ability to produce more.
The dependence of demand on the production of goods cannot be removed by means of loose interest rate policy monetary pumping and government spending.
On the contrary, loose fiscal and monetary policies will only impoverish real wealth generators and weaken their ability to produce goods and services – it will weaken effective demand.
So what is then required to revive the economy is not boosting aggregate demand but sealing off all the loopholes for the creation of money out of “thin air” and curbing government spending. This will enable true wealth generators to revive the economy by allowing them to move ahead with the business of wealth generation.
Conclusions
Contrary to popular way of thinking the threat to US economy is not the high level of debt as such but loose fiscal and monetary policies that undermines the pool of real funding. Also, the fall in the money stock that precedes price deflation and an economic slump is actually triggered by the previous loose monetary and fiscal policies and not the liquidation of debt as such. Also, once the pool of funding becomes stagnant or begins to shrink, economic growth follows suit and the myth that government and central bank policies can grow the economy is shattered. According to Mises,
An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.[5]
[1] Irving Fisher, Boom and Depressions, London: George Allen, p 39.
[2] Eugen von Bohm-Bawerk, The Positive Theory of Capital, Book 6, chapter 5, Macmillan and Co,1891.
[3] Richard von Strigl, Capital & Production, Mises Institute, p 7.
[4] James Mill, “On the Overproduction and Underconsumption Fallacies”. Edited by George Reisman, a publication of the Jefferson School of philosophy, Economics and Psychology – 2000.
[5] Ludwig von Mises, Human Action on line, chapter 36 The Crisis of Interventionism.
Economics
By Ralph Benko, on 22 February 12 A view from America …
“The gold standard is a modern, digital, information-sharing, global operating standard. Moreover, it is a stable, networking, efficient, price transmission system in the form of a stable international monetary standard,” says Lewis E. Lehrman.
Big media is paying attention to proposals for a new Gold Commission. This concept first was floated by Kentucky Senator Rand Paul and reported by The Weekly Standard. A Gold Commission then was proposed by former House Speaker Newt Gingrich as part of his (winning) campaign for South Carolina. Lehrman (with whose scholarly institute this writer professionally is associated) was mentioned in both instances.
Rep. Ron Paul — now campaigning for president, in large part, on the gold standard — and Lehrman both served on the Reagan Gold Commission. The Commission met well before the good Dr. Milton Friedman distanced himself from the theory known as monetarism. Following a theory much in vogue the majority of the Commission endorsed the paper standard. Dr. Paul and Mr. Lehrman filed a minority report calling for the restoration of a stable dollar defined by law as a certain weight of gold: the gold standard. Republished, The Case for Gold remains readily available from the Mises Institute and the Cato Institute.
The gold standard is no atavism, neither clipper ship nor ox cart. Under the gold standard we will have checking accounts and credit cards and currency, not carry around purses filled with gold coins to make our daily purchases. Legal gold convertibility simply kept, and will again keep, the dollar’s value stable over time. There is as much gold per capita now as there was at the height of the classical gold standard; claims that there is “not enough gold” betray a deep ignorance of the workings of the system.
There are a lot of reasons for taking gold seriously, now. Here are three:
1. The gold standard is Constitutional money; paper is not. The Constitution contemplated money defined as precious metal. As delegate George Read observed at the Constitutional Convention, the power to issue paper money was seen “as alarming as the mark of the Beast in Revelations.”
2. The gold standard will control spending. Congress will spend every cent it can get its hands on. To constrain it we must cut off its access to money. There are only three ways in which it can get its hands on material amounts our money: taxing, borrowing and printing. We must keep up the fight on taxes and borrowing. But the most pernicious way of getting our money is by “printing” it. The gold standard locks away printing press money.
3. The gold standard creates widespread prosperity. As historian Brian Domitrovic wrote:
there is the record of 1878-82 and its own run of some 40% growth. In the four years prior, there had not been a historic collapse in economic growth that made the base year of 1878 low, as was the case in 1933. Rather, in the four years before 1878, growth had come in at 13%; in the previous ten years, growth had totaled 49%. In other words, 1878-82 was a mega-acceleration from a high base.
And after? Over the next decade, another historic expansion of 49%. 49% on top of 40% on top of 49%, 1868 to 1892. That’s registering “the strongest output growth…in US history outside of wartime.”
Regarding policy, there was one major shift that occurred in these heroic years in the latter 19th century. In 1879, the U.S. went back on the gold standard.
“A modern, digital, information-sharing, global operating standard,” says Lehrman. Let’s boot up that commission and take a really close look as to how gold might be the “golden bullet” to get an American economic miracle roaring.
Economics
By Jan Skoyles, on 21 February 12 Today is Pancake Day and whilst many, including The Real Asset Co research desk, will be enjoying it, there is still an ongoing economic crisis in the foreground. Maybe its time to give up something other than chocolate or smoking. Maybe its time to give up on reckless spending and fiat money.
Shrove Tuesday, or Pancake Day, is celebrated the day before Ash Wednesday and is typically the day that signals the beginning of a period of abstinence and self-control.
Times have rapidly moved on since the death of Christ and very few of us take Shrove Tuesday as seriously as we once would have. Now we tend to give up vices rather than ‘nice’ things. Many give up alcohol or smoking, some give up swearing, others give up chocolate.
But times are changing once again, and many of us are already getting used to giving up such things due to tightening our belts.
May we make a suggestion of a new type of Lent, to suit modern times? A global, economic lent.
This year the financial crisis is 5 years old. The entire global event has been spawned from greed and wanting more and more tempting food from the larder of the credit creation machine. Central Banks, governments and the financial markets have all gorged themselves on junk economic policies, junk money, and of course junk-bonds.
But have we not, as individuals, over consumed credit cards, low interest rates and cheap mortgages?
In the United Kingdom, public and private sector debt has now reached more that 507% of GDP. Japan is just ahead of us with 512%. This figure is made up of four main components: government, financial corporations, non-financial corporations and household debt.
Our household debt, as a percentage of GDP, is 81%, which is above average when ranked in the ten most mature countries. It is estimated that it will take more than a decade for private debt levels to reduce down to those seen before the millennium.
Whilst household debt does account for a large amount of our debt, it is the financial services sector that is responsible for nearly half, sitting at 219% of GDP.
Those of us with household debt shouldn’t feel too smug. Of the top ten mature countries globally, we still have debt which represents an above average amount of GDP. Whilst the MPC and the Federal Reserve, have each indicated they will not be raising interest rates for some time, this will be mathematically impossible to justify when inflation starts climbing. Over two-thirds of UK mortgages have floating interest rates; something that could cause a pinch, or worse foreclosure, when inflation begins to rise.
It took us just a few years to get our country’s debt to this level, but it took Japan twenty. Perhaps it’s time we stopped clearing out the easy money larder and took a period of abstinence and self-control.
Banks have to do global economic lent they’ve eaten too many fiat pancakes already… and so have we.
Economics
By Alasdair Macleod, on 21 February 12 In the past, insurance companies and pension funds have been keen to advertise the benefit of compounding arithmetic for savings. Over the last 30 or 40 years the rate has been lifted by inflation, but to understand the cost inflation brings you have to consider the whole savings cycle: not just the accumulation stage, but also annuity values in retirement. Furthermore, the historical experience of a typical working life should be compared with a theoretical sound-money alternative.
Let us assume a man works for 40 years, during which time he invests a fixed amount annually. This is invested mostly in bonds for a return that gives him a lump sum on retirement. The marketing folk stop at that point, but we shall go on. This lump sum is applied to an annuity to give a fixed income for the retiree’s life expectancy. Let us also assume that $1,000 is invested annually, and we shall use the average return on the 10-year US Treasury bond as our yardstick. The result is shown in the table below under the heading of Paper Money.
|
Paper Money |
Sound Money |
| Annual payment at start of period $ |
1,000 |
1,000 |
| Bond yield |
7.18% |
2.50% |
| Inflation |
4.44% |
-1% |
| Nominal value at end of Year 40 $ |
224,150 |
69,088 |
| Inflation adjusted value $ |
74,056 |
87,510 |
| Pension based on inflation-adjusted value $ |
6,458 |
4,750 |
| Inflation-adjusted value of last payment $ |
2,075 |
6,091 |
The nominal value of our pension-pot on retirement is an attractive $224,150, but during its accumulation price inflation has averaged 4.44%, so its inflation-adjusted value is only $74,056, implying that the difference ($150,094) is a hidden inflation tax, leaving our saver with only one-third of his savings in real terms.
Assuming the lump sum is then turned into an annuity at a continuing bond yield of 7.18% for a retirement of 25 years, this inflation-adjusted figure gives an annual income of $6,458, and if inflation continues to average the historic rate, the final payment will only be worth $2,075 in inflation-adjusted terms. Note how the purchasing power of the annuity falls over time while our retiree’s health and care expenses can be expected to increase when he can least afford them.
The reason for taking inflation out of the equation is so we can compare the inflationary past with a sound-money alternative. This calculation is dramatically different under the reasonable assumptions in the table’s last column: an average bond yield of 2.5% and price deflation of 1% annually. The deflation-adjusted outcome is significantly better than the paper-money example. Furthermore, the purchasing power of the annuity increases, in tune with the health and care needs of an aging retiree.
Our example is simplistic: bond yields have varied hugely since 1971, and we have ignored management fees and taxes. We have not considered bond yields that are exceptionally low today, so annuities taken out now will yield considerably less than our example shows.
The bottom line is the saver is impoverished by inflation to a greater extent than generally realised. The state has benefited from the transfer of wealth from its citizens’ savings, the result of monetary inflation, but at considerable future cost. The state is left with the welfare, health and care costs for an aging population unable to support itself and with an increasing life expectancy.
The cost of looking after growing numbers of impoverished retirees will become apparent in coming years, increasing government deficits more rapidly than expected. What we don’t know is when the markets will reflect the enormity of these future obligations.
This article was previously published at GoldMoney.com.
Economics
By Toby Baxendale, on 20 February 12 My Foreword to Prices & Production and Other Works, published by the Ludwig von Mises Institute in 2008.
 It is with great pleasure that I fully support the reproduction of these works. I congratulate Lew Rockwell and his team for having the foresight to do this in honor of Hayek, one of the most important economists of the last century.
An old Polish soldier who had settled in London after World War II exposed me to the teachings of Hayek when I was sixteen years old. He had fought the Nazi machine as a member of the Royal Air Force. An equally nasty totalitarian force subsequently occupied his country: the Stalinist Communists. After the war, he settled in my neighborhood, and I got talking to him. He was adamant that I read Hayek as Hayek could show me all that was wrong with totalitarianism. The book offered was The Road to Serfdom. I did. I dedicate this reproduction to all those people who have suffered untold hardship under various totalitarian regimes.
Setting my sights on the London School of Economics, where Hayek had taught for twenty-plus years in the 1930s through the 1950s, as a place to study, to my great pleasure, we could study, as part of our political theory course, The Constitution of Liberty. Although Hayek had taught at the LSE in the economics department, none of his economic works were taught. Indeed, I was totally ignorant, up until my mid-twenties (i.e., post-university) of his economic works, which needless to say were the works cited in the awarding of his Nobel Prize. Further, it was Hayek who led me to the works of Ludwig von Mises, about whom I am certain that I would have otherwise known nothing.
Just as my Polish friend sparked my social and political interest in Hayek, I hope this volume can do the same for others concerning his economic work. This volume intends to revitalize Hayek’s contribution to the study of economic fluctuations (more commonly now called business cycles) and monetary theory. Hayek demonstrated an entrepreneurial and empirical attitude toward his work. Just as his social, political, and legal work is rich with warning about too much well-meaning government interference, so too are his neglected economic works.
After his time at the Institute for Business Cycle Research in Vienna, he funded his own trip to the United States to interview economists and develop his work. Hayek understood the importance of statistical verification but was also committed to getting the theory right rather than counting on empirics to generate their whole result. His legacy should be to complement theoretical quibbles with hard facts, and these essays contain rich avenues to pursue.
One particular area I would like to draw the reader to is his works contained here on the business cycle, which was the work that grew from Mises’s initial work on the matter in 1912, which has become known as the Austrian theory of the business cycle. Most contemporary economists have dismissed this work as not being in accordance with the observable facts and thus not worthy of being taught; hence, perhaps why I never saw sight nor sound of his teachings as an undergraduate.
In brief Hayek contends that an artificial manipulation by government of the interest rate creates a subsidy of credit that causes entrepreneurs to bring forth projects that were hitherto marginal. In reality, the consumers do not want the goods of these projects, so there is a misallocation (malinvestment) of resources. A careful reading of these early Hayek essays preempts the modern debate over rational expectations and shows that the cluster of errors can be avoided by his steadfast commitment to methodological individualism. Entrepreneurs are neither lemmings nor computers because they are heterogeneous.
If we extend the assumption of heterogeneity from capital to entrepreneurs, the question is, which type of entrepreneur is creating the cyclical activity of interest? Standard economic theory suggests that it is the marginal entrepreneur who moves the market, and Hayek points us in a direction that very few scholars have acted upon. I would find great value in subjecting this point to empirical evidence, to see who these marginal entrepreneurs are (the ones who are exposed when their credit subsidy is removed in a monetary contraction), and the conditions of their entry and exit. Perhaps moral hazard is not the greatest problem created by subsidized credit, and the effects of adverse selection create even larger inefficiencies.
Hayek stressed the role of relative price movements and focused attention on the interest rate. But he also provided a rich and accomplished critique of the use of abstract, aggregate variables. This presents a temptation for theorists to overemphasize interest rate changes, despite the fact that they only affect the risk of highly leveraged firms. In many cases the volume of credit, raw money creation by the Central Bank, seems a more realistic variable than the rate of interest.
Hayek’s faculty position at the LSE (1931–1950) not only raised the profile of the Austrian School, but also elevated capital theory to one of the key economic issues, by highlighting (and translating) the key Swedish and Austrian insights for the English-speaking orthodoxy. During this period the LSE was the frontier of the continental tradition, and Hayek, Keynes, Robinson, Sraffa, Shackle, Robbins, et al. were at the peak of their discipline. This volume reminds us of a time when Austrian theory sat at the top of the table of debate, and offers us the way to return there.
Hayek was writing in a tradition where economists were conscious of the practical relevance of their work. To be sure, Hayek utilized grand thought experiments and abstraction, but his theoretical work always sought to understand the real world. Since then a divergence has occurred between self-referential academics and a generation of business consultants who lack the rigor of price theory. I am sure that a reassessment of the likes of Hayek is of fundamental importance to any young economist seeking to bridge these two spheres and return to a science of commerce.
In fact, the critical problem of how individuals coordinate is the thread that runs throughout Hayek’s work, and the monetary aspect returns with his late attention to the nationalization of money. In these works we see Hayek as a price theorist, and as a facilitator of economic inquiry. As an entrepreneur I recognize deep insights throughout Hayek’s work, but also several points that have to be expanded and verified. This volume should not be seen as an example of preservation, but an engine of discovery.
Economics
By Detlev Schlichter, on 18 February 12
Economics
By Tim Price, on 17 February 12 “Playing with expectations works temporarily. The risk-on trade is in a mini bubble, as today’s buyers want to be ahead of the slower ones. The buying trend is sustainable only if the global economy strengthens, which is unlikely. The stocks aren’t cheap. Desirable consumer stocks are selling for 20 times earnings. Banks are cheap for a reason. Internet stocks suggest another bubble in the making. The Fed is trying to inflate an expensive asset. The rally, hence, is quite fragile. As soon as a shock like Greece defaulting or bad economic news unfolds, the market will quickly head south.”
- Andy Xie, ‘A world flying blind‘.
For value investors of a certain age (e.g. mine), discovering that Warren Buffett has feet of clay is like suddenly not believing in Father Christmas. This twinkly-eyed, raspy-voiced, avuncular old gentleman almost embodies Clint Eastwood crossed with a Care Bear. And nobody can hold a candle to his long-term investment record. And yet.. The rot set in (at least as far as this writer is concerned) when Buffett went from investing in private non-financial businesses to siding with the establishment, using his institutional heft to win sweetheart deals in dubious banking institutions way beyond the reach of regular Joes. In other words, somewhere along the line he went from representing the 99% to representing the 1%. And at the first sign of trouble, he simply wraps himself up in the American flag.
Buffett’s latest advertorial (for himself and for Wall Street), ‘Why stocks beat gold and bonds’, adapted from an upcoming version of one of his legendary shareholder letters and published in Fortune, may be the most irritating thing he’s ever written (or had written for him). As an investor he rightly draws attention to the critical requirement to maintain one’s purchasing power in the face of rampant state inflationism. He accurately highlights the staggering reduction of real value in the US dollar since 1965 (some 86%) as a result of overmuch dependency on the printing press. He fairly declares a dislike for currency-based investments in a world of rapidly inflating, unbacked fiat money. And he then goes on to rubbish gold, of all things, using the tired and specious argument that purchasers are simply displaying ‘greater fool’ theory, eagerly awaiting new rises in price that will suck in new purchasers ad infinitum.
It looks suspiciously and ironically as if Warren Buffett, for all his undoubted investment success, has never actually studied any monetary history. We know that he has speculated in silver in the past, and that the experiment did not end fantastically well. He concedes that gold has industrial and decorative utility, but also states that “if you own one ounce of gold for an eternity, you will still own one ounce at its end.” Erm, that’s kind of the point.
A straw man argument gets wheeled out that a pile of inert gold cannot hope to compete in terms of productive utility with a pile of farmland and Exxon Mobil stock of the same nominal value. To which one is surely entitled to respond, WTF ? It would be surprising and not a little alarming if anybody who has ever purchased gold did so with the expectation of eating it, or using it as fuel. Buffett would be on stabler ground if he made an intellectually valid comparison between gold as a store of value and, say, a big pile of T-Bills of the same nominal value – or of the same US dollars he has already identified as a more or less guaranteed loser over anything other than the very, very short term. But this is an exercise in sleight-of-hand, of conflating utterly disparate assets with wildly different underlying investor objectives, only to pluck a sheaf of blue chip American stocks with a flourish out of the hat, and to noisily declaim against anyone with the temerity to even dream of going short America or its mighty stock market.
If gold is a bubble, it’s difficult to know how to describe something like US Treasury bonds. “Crap” would be a start, though. The credit specialists at Stratton Street point out that the amount of marketable Treasury securities outstanding last month topped the $10 trillion mark. But even as their supply was dislodging roof tiles, their average yield – across all maturities – fell to just 0.9%. US consumer price inflation, which we will take at face value rather than presume is grotesquely manipulated, stands at 3% year-on-year. Do “investors” in US Treasuries – including Warren Buffett – have any idea what they are doing ? To his credit, he acknowledges that “bonds should come with a warning label,” but in displaying such commitment to T-Bills in the Berkshire portfolio he does appear to be fetishizing liquidity over, say, any hope of a meaningful return.
The reason why Buffett’s views of gold should be ignored can be seen in the following charts, all courtesy of James Bianco at Bianco Research. The first shows the extent to which the central banks of China, the ECB, the US and Japan have allowed their balance sheets to explode, in a desperate attempt to compensate for banking and private sector deleveraging since the debt crisis began:
As Bianco points out,
If the basic definition of quantitative easing (QE) is a significant increase in a central bank’s balance sheet via increasing banking reserves, then all eight of these central banks [the others include the Bank of England, the Swiss National Bank, the Banque de France and Germany's Bundesbank] are engaged in QE.
What’s particularly shocking about the data is that while every major central bank is busily printing money like it’s going out of fashion – which it is – one of the biggest culprits is the one most widely associated with sound monetary policy, namely the Bundesbank, which has been one of the biggest inflationists of all:
The full piece, together with charts that show desperate inflationism for the central bank of your choice, can be found here. The combined size of the Big 8 central banks’ balance sheets has almost tripled over the last six years, from $5.4 trillion to more than $15 trillion and still rising. That $15 trillion compares with the capitalisation of world stock markets which stands at $48 trillion. The Big 8 central banks now account for the equivalent of one third of world stock market capitalisation. Investors buying stocks now may well be doing so because they anticipate more QE – which they are more or less certain to get, given that most of the West is turning into Japan. But their preference for equity investment may have nothing to do with expectations regarding things like economic growth or revenues or profits, just money printing. That may not be ‘greater fool’ thinking, but it is not founded on sound economic reasoning, rather simply shifting capital into an ever-rising pool (albeit of continually depreciating money). Since governments and their central banks maintain a monopoly for the creation of the money we use, devaluing it as aggressively as they now are is like forcing investors into a blind alley and then setting fire to the alley. Perhaps we should be thinking outside of the current monetary box, as we do seem to be caught in a new and disturbing paradigm.
Warren Buffett is not the only institutional investor to be offering unsolicited investment advice. Blackrock chairman and CEO Larry Fink, recently interviewed on Bloomberg television, gave a guarded opinion on asset allocation:
Be 100% in equities.
Interesting. I wonder if Blackrock, as a $3.5 trillion asset manager, has anything we could buy?
This debate is in danger of getting overly simplistic and just a little polarised. Just because US Treasury bonds (and UK Gilts, and German bunds) no longer represent anything approximating to real value does not automatically validate equity as the 100% alternative. Buying into a rising market is fine, but what happens when central banks stop filling the bath or, worse still, take the plug out or, worse yet, find that they are no longer in control of the water ? We take a more nuanced perspective, and in addition to holding high quality non-Anglo Saxon sovereign and investment grade debt (yielding more than 6% to boot), we hold selective high quality equity investments, but also completely uncorrelated trading vehicles, and precious metals. The investment world does not come down to an all-or-nothing decision between debt (mostly rubbish, now, admittedly) and equity. While the bigger picture is fraught with monetary mismanagement in response to a grave crisis, there are plenty of other investment choices out there, and a growing fundamental argument underpinning the ownership of real assets. Perhaps we are naive in expecting some of the world’s largest (traditional) asset managers to acknowledge the truth. The investment world is not limited to a binary choice between (expensive, risky) debt and (in many cases expensive, and just as risky) stocks.
This article was previously published at The price of everything.
Economics
By Toby Baxendale, on 16 February 12 Today, as the last article in this series, we present the words of Say himself, taken from his masterpiece A Treatise on Political Economy.
Does the first paragraph not sadly resonate today?
 BOOK I, CHAPTER XV
OF THE DEMAND OR MARKET FOR PRODUCTS.
It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices. But ask them what peculiar causes and circumstances facilitate the demand for their products, and you will soon perceive that most of them have extremely vague notions of these matters; that their observation of facts is imperfect, and their explanation still more so; that they treat doubtful points as matter of certainty, often pray for what is directly opposite to their interests, and importunately solicit from authority a protection of the most mischievous tendency.
To enable us to form clear and correct practical notions in regard to markets for the products of industry, we must carefully analyse the best established and most certain facts, and apply to them the inferences we have already deduced from a similar way of proceeding; and thus perhaps we may arrive at new and important truths, that may serve to enlighten the views of the agents of industry, and to give confidence to the measures of governments anxious to afford them encouragement.
A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can not expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it. Now, of what do these means consist? Of other values of other products, likewise the fruits of industry, capital, and land. Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.
Should a tradesman say, “I do not want other products for my woollens, I want money,” there could be little difficulty in convincing him that his customers could not pay him in money, without having first procured it by the sale of some other commodities of their own. “Yonder farmer,” he may be told, “will buy your woollens, if his crops be good, and will buy more or less according to their abundance or scantiness; he can buy none at all, if his crops fail altogether. Neither can you buy his wool nor his corn yourself, unless you contrive to get woollens or some other article to buy withal. You say, you only want money; I say, you want other commodities, and not money. For what, in point of fact, do you want the money? Is it not for the purchase of raw materials or stock for your trade, or victuals for your support? [1] Wherefore, it is products that you want, and not money. The silver coin you will have received on the sale of your own products, and given in the purchase of those of other people, will the next moment execute the same office between other contracting parties, and so from one to another to infinity; just as a public vehicle successively transports objects one after another. If you can not find a ready sale for your commodity, will you say, it is merely for want of a vehicle to transport it? For, after all, money is but the agent of the transfer of values. Its whole utility has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others. So that you will have bought, and every body must buy, the objects of want or desire, each with the value of his respective products transformed into money for the moment only. Otherwise, how could it be possible that there should now be bought and sold in France five or six times as many commodities, as in the miserable reign of Charles VI.? Is it not obvious, that five or six times as many commodities must have been produced, and that they must have served to purchase one or the other?”
Thus, to say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause; an error that proceeds from the circumstance, that almost all produce is in the first instance exchanged for money, before it is ultimately converted into other produce: and the commodity, which recurs so repeatedly in use, appears to vulgar apprehensions the most important of commodities, and the end and object of all transactions, whereas it is only the medium. Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist. Should the increase of traffic require more money to facilitate it, the want is easily supplied, and is a strong indication of prosperity—a proof that a great abundance of values has been created, which it is wished to exchange for other values. In such cases, merchants know well enough how to find substitutes for the product serving as the medium of exchange or money [2]: and money itself soon pours in, for this reason, that all produce naturally gravitates to that place where it is most in demand. It is a good sign when the business is too great for the money; just in the same way as it is a good sign when the goods are too plentiful for the warehouses.
When a superabundant article can find no vent, the scarcity of money has so little to do with the obstruction of its sale, that the sellers would gladly receive its value in goods for their own consumption at the current price of the day: they would not ask for money, or have any occasion for that product, since the only use they could make of it would be to convert it forthwith into articles of their own consumption. [3]
This observation is applicable to all cases, where there is a supply of commodities or of services in the market. They will universally find the most extensive demand in those places, where the most of values are produced; because in no other places are the sole means of purchase created, that is, values. Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another.
It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.
For this reason, a good harvest is favourable, not only to the agriculturist, but likewise to the dealers in all commodities generally. The greater the crop, the larger are the purchases of the growers. A bad harvest, on the contrary, hurts the sale of commodities at large. And so it is also with the products of manufacture and commerce. The success of one branch of commerce supplies more ample means of purchase, and consequently opens a market for the products of all the other branches; on the other hand, the stagnation of one channel of manufacture, or of commerce, is felt in all the rest.
But it may be asked, if this be so, how does it happen, that there is at times so great a glut of commodities in the market, and so much difficulty in finding a vent for them? Why cannot one of these superabundant commodities be exchanged for another? I answer that the glut of a particular commodity arises from its having outrun the total demand for it in one or two ways; either because it has been produced in excessive abundance, or because the production of other commodities has fallen short.
It is because the production of some commodities has declined, that other commodities are superabundant. To use a more hackneyed phrase, people have bought less, because they have made less profit [4]; and they have made less profit for one or two causes; either they have found difficulties in the employment of their productive means, or these means have themselves been deficient.
It is observable, moreover, that precisely at the same time that one commodity makes a loss, another commodity is making excessive profit [5]. And, since such profits must operate as a powerful stimulus to the cultivation of that particular kind of products, there must needs be some violent means, or some extraordinary cause, a political or natural convulsion, or the avarice or ignorance of authority, to perpetuate this scarcity on the one hand, and consequent glut on the other. No sooner is the cause of this political disease removed, than the means of production feel a natural impulse towards the vacant channels, the replenishment of which restores activity to all the others. One kind of production would seldom outstrip every other, and its products be disproportionately cheapened, were production left entirely free [6].
Should a producer imagine, that many other classes, yielding no material products, are his customers and consumers equally with the classes that raise themselves a product of their own; as, for example, public functionaries, physicians, lawyers, churchmen, &c., and thence infer, that there is a class of demand other than that of the actual producers, he would but expose the shallowness and superficiality of his ideas. A priest goes to a shop to buy a gown or a surplice; he takes the value, that is to make the purchase, in the form of money. Whence had he that money? From some tax-gatherer who has taken it from a tax-payer. But whence did this latter derive it? From the value he has himself produced. This value, first produced by the tax-payer, and afterwards turned into money, and given to the priest for his salary, has enabled him to make the purchase. The priest stands in the place of the producer, who might himself have laid the value of his product on his own account, in the purchase, perhaps, not of a gown or surplice, but of some other more serviceable product. The consumption of the particular product, the gown or surplice, has but supplanted that of some other product. It is quite impossible that the purchase of one product can be affected, otherwise than by the value of another [7].
From this important truth may be deduced the following important conclusions:—
1. That, in every community the more numerous are the producers, and the more various their productions, the more prompt, numerous, and extensive are the markets for those productions; and, by a natural consequence, the more profitable are they to the producers; for price rises with the demand. But this advantage is to be derived from real production alone, and not from a forced circulation of products; for a value once created is not augmented in its passage from one hand to another, nor by being seized and expended by the government, instead of by an individual. The man, that lives upon the productions of other people, originates no demand for those productions; he merely puts himself in the place of the producer, to the great injury of production, as we shall presently see.
2. That each individual is interested in the general prosperity of all, and that the success of one branch of industry promotes that of all the others. In fact, whatever profession or line of business a man may devote himself to, he is the better paid and the more readily finds employment, in proportion as he sees others thriving equally around him. A man of talent, that scarcely vegetates in a retrograde state of society, would find a thousand ways of turning his faculties to account in a thriving community that could afford to employ and reward his ability. A merchant established in a rich and populous town, sells to a much larger amount than one who sets up in a poor district, with a population sunk in indolence and apathy. What could an active manufacturer, or an intelligent merchant, do in a small deserted and semi-barbarous town in a remote corner of Poland or Westphalia? Though in no fear of a competitor, he could sell but little, because little was produced; whilst at Paris, Amsterdam, or London, in spite of the competition of a hundred dealers in his own line, he might do business on the largest scale. The reason is obvious: he is surrounded with people who produce largely in an infinity of ways, and who make purchases, each with his respective products, that is to say, with the money arising from the sale of what he may have produced.
This is the true source of the gains made by the towns’ people out of the country people, and again by the latter out of the former; both of them have wherewith to buy more largely, the more amply they themselves produce. A city, standing in the centre of a rich surrounding country, feels no want of rich and numerous customers; and, on the other hand, the vicinity of an opulent city gives additional value to the produce of the country. The division of nations into agricultural, manufacturing, and commercial, is idle enough. For the success of a people in agriculture is a stimulus to its manufacturing and commercial prosperity; and the flourishing condition of its manufacture and commerce reflects a benefit upon its agriculture also [8].
The position of a nation, in respect of its neighbours, is analogous to the relation of one of its provinces to the others, or of the country to the town; it has an interest in their prosperity, being sure to profit by their opulence. The government of the United States, therefore, acted most wisely, in their attempt, about the year 1802, to civilize their savage neighbours, the Creek Indians. The design was to introduce habits of industry amongst them, and make them producers capable of carrying on a barter trade with the States of the Union; for there is nothing to be got by dealing with a people that have nothing to pay. It is useful and honourable to mankind, that one nation among so many should conduct itself uniformly upon liberal principles. The brilliant results of this enlightened policy will demonstrate, that the systems and theories really destructive and fallacious, are the exclusive and jealous maxims acted upon by the old European governments, and by them most impudently styled practical truths, for no other reason, as it would seem, than because they have the misfortune to put them in practice. The United States will have the honour of proving experimentally, that true policy goes hand-in-hand with moderation and humanity [9].
3. From this fruitful principle, we may draw this further conclusion, that it is no injury to the internal or national industry and production to buy and import commodities from abroad; for nothing can be bought from strangers, except with native products, which find a vent in this external traffic. Should it be objected; that this foreign produce may have been bought with specie, I answer, specie is not always a native product, but must have been bought itself with the products of native industry; so that, whether the foreign articles be paid for in specie or in home products, the vent for national industry is the same in both cases [10].
4. The same principle leads to the conclusion, that the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.
For the same reason that the creation of a new product is the opening of a new market for other products, the consumption or destruction of a product is the stoppage of a vent for them. This is no evil where the end of the product has been answered by its destruction, which end is the satisfying of some human want, or the creation of some new product designed for such a satisfaction. Indeed, if the nation be in a thriving condition, the gross national re-production exceeds the gross consumption. The consumed products have fulfilled their office, as it is natural and fitting they should; the consumption, however, has opened no new market, but just the reverse [11].
Having once arrived at the clear conviction, that the general demand for products is brisk in proportion to the activity of production, we need not trouble ourselves much to inquire towards what channel of industry production may be most advantageously directed. The products created give rise to various degrees of demand, according to the wants, the manners, the comparative capital, industry, and natural resources of each country; the article most in request, owing to the competition of buyers, yields the best interest of money to the capitalist, the largest profits to the adventurer, and the best wages to the labourer; and the agency of their respective services is naturally attracted by these advantages towards those particular channels.
In a community, city, province, or nation, that produces abundantly, and adds every moment to the sum of its products, almost all the branches of commerce, manufacture, and generally of industry, yield handsome profits, because the demand is great, and because there is always a large quantity of products in the market, ready to bid for new productive services. And, vice versâ, wherever, by reason of the blunders of the nation or its government, production is stationary, or does not keep pace with consumption, the demand gradually declines, the value of the product is less than the charges of its production; no productive exertion is properly rewarded; profits and wages decrease; the employment of capital becomes less advantageous and more hazardous; it is consumed piecemeal, not through extravagance, but through necessity, and because the sources of profit are dried up [12]. The labouring classes experience a want of work; families before in tolerable circumstances, are more cramped and confined; and those before in difficulties are left altogether destitute. Depopulation, misery, and returning barbarism, occupy the place of abundance and happiness.
Such are the concomitants of declining production, which are only to be remedied by frugality, intelligence, activity, and freedom.
Notes for this chapter
1. Even when money is obtained with a view to hoard or bury it, the ultimate object is always to employ it in a purchase of some kind. The heir of the lucky finder uses it in that way, if the miser do not; for money, as money, has no other use than to buy with.
2. By bills at sight, or after date, bank-notes, running-credits, write-offs, &c. as at London and Amsterdam.
3. I speak here of their aggregate consumption, whether unproductive and designed to satisfy the personal wants of themselves and their families, or expended in the sustenance of reproductive industry. The woollen or cotton manufacturer operates a two-fold consumption of wool and cotton: 1. For his personal wear. 2. For the supply of his manufacture; but, be the purpose of his consumption what it may, whether personal gratification or reproduction, he must needs buy what he consumes with what he produces.
4. Individual profits must, in every description of production, from the general merchant to the common artisan, be derived from the participation in the values produced. The ratio of that participation will form the subject of Book II., infrà.
5. The reader may easily apply these maxims to any time or country he is acquainted with. We have had a striking instance in France during the years 1811, 1812, and 1813; when the high prices of colonial produce of wheat, and other articles, went hand-in-hand with the low price of many others that could find no advantageous market.
6. These considerations have hitherto been almost wholly overlooked, though forming the basis of correct conclusions in matters of commerce, and of its regulation by the national authority. The right course where it has, by good luck been pursued, appears to have been selected by accident, or, at most, by a confused idea of its propriety, without either self-conviction, or the ability to convince other people.
Sismondi, who seems not to have very well understood the principles laid down in this and the three first chapters of Book II. of this work, instances the immense quantity of manufactured products with which England has of late inundated the markets of other nations, as a proof, that it is impossible for industry to be too productive. (Nouv. Prin. liv. iv. c. 4.) But the glut thus occasioned proves nothing more than the feebleness of production in those countries that have been thus glutted with English manufactures. Did Brazil produce wherewithal to purchase the English goods exported thither, those goods would not glut her market. Were England to admit the import of the products of the United States, she would find a better market for her own in those States. The English government, by the exorbitance of its taxation upon import and consumption, virtually interdicts to its subjects many kinds of importation, thus obliging the merchant to offer to foreign countries a higher price for those articles, whose import is practicable, as sugar, coffee, gold, silver, &c. for the price of the precious metals to them is enhanced by the low price of their commodities, which accounts for the ruinous returns of their commerce.
I would not be understood to maintain in this chapter, that one product can not be raised in too great abundance, in relation to all others; but merely that nothing is more favourable to the demand of one product, than the supply of another; that the import of English manufactures into Brazil would cease to be excessive and be rapidly absorbed, did Brazil produce on her side returns sufficiently ample; to which end it would be necessary that the legislative bodies of either country should consent, the one to free production, the other to free importation. In Brazil every thing is grasped by monopoly, and property is not exempt from the invasion of the government. In England, the heavy duties are a serious obstruction to the foreign commerce of the nation, inasmuch as they circumscribe the choice of returns. I happen myself to know of a most valuable and scientific collection of natural history, which could not be imported from Brazil into England by reason of the exorbitant duties.*
- * The views of Sismondi, in this particular, have been since adopted by our own Malthus, and those of our author by Ricardo. This difference of opinion has given rise to an interesting discussion between our author and Malthus, to whom he has recently addressed a correspondence on this and other parts of the science. Were any thing wanting to confirm the arguments of this chapter, it would be supplied by a reference to his Lettre 1, à M. Malthus. Sismondi has vainly attempted to answer Ricardo, but has made no mention of his original antagonist. Vide Annales de Legislation, No. 1. art. 3. Geneve, 1820. Translator.
7. The capitalist, in spending the interest of his capital, spends his portion of the products raised by the employment of that capital. The general rules that regulate the ratio he receives will be investigated in Book II., infrà. Should he ever spend the principal, still he consumes products only; for capital consists of products, devoted indeed to reproductive, but susceptible of unproductive consumption; to which it is in fact consigned whenever it is wasted or dilapidated.
8. A productive establishment on a large scale is sure to animate the industry of the whole neighbourhood. “In Mexico,” says Humboldt, “the best cultivated tract, and that which brings to the recollection of the traveller the most beautiful part of French scenery, is the level country extending from Salamanca as far as Silao, Guanaxuato, and Villa de Leon, and encircling the richest mines of the known world. Wherever the veins of precious metal have been discovered and worked, even in the most desert part of the Cordilleras, and in the most barren and insulated spots, the working of the mines, instead of interrupting the business of superficial cultivation, has given it more than usual activity. The opening of a considerable vein is sure to be followed by the immediate erection of a town; farming concerns are established in the vicinity; and the spot so lately insulated in the midst of wild and desert mountains, is soon brought into contact with the tracts before in tillage.” Essai pol. sur. la Nouv. Espagne.
9. It is only by the recent advances of political economy, that these most important truths have been made manifest, not to vulgar apprehension alone, but even to the most distinguished and enlightened observers. We read in Voltaire that “such is the lot of humanity, that the patriotic desire for one’s country’s grandeur, is but a wish for the humiliation of one’s neighbours;—that it is clearly impossible for one country to gain, except by the loss of another.” (Dist. Phil. Art. Patrie.) By a continuation of the same false reasoning, he goes on to declare, that a thorough citizen of the world cannot wish his country to be greater or less, richer or poorer. It is true, that he would not desire her to extend the limits of her dominion, because, in so doing, she might endanger her own well-being; but he will desire her to progress in wealth, for her progressive prosperity promotes that of all other nations.
10. This effect has been sensibly experienced in Brazil of late years. The large imports of European commodities, which the freedom of navigation directed to the markets of Brazil, has been so favourable to its native productions and commerce, that Brazilian products never found so good a sale. So there is an instance of a national benefit arising from importation. By the way, it might have perhaps been better for Brazil if the prices of her products and the profits of her producers had risen more slowly and gradually; for exorbitant prices never lead to the establishment of a permanent commercial intercourse; it is better to gain by the multiplication of one’s own products than by their increased price.
11. If the barren consumption of a product be of itself adverse to re-production, and a diminution pro tanto of the existing demand or vent for produce, how shall we designate that degree of insanity, which would induce a government deliberately to burn and destroy the imports of foreign products, and thus to annihilate the sole advantage accruing from unproductive consumption, that is to say the gratification of the wants of the consumer?
12. Consumption of this kind gives no encouragement to future production, but devours products already in existence. No additional demand can be created until there be new products raised; there is only an exchange of one product for another. Neither can one branch of industry suffer without affecting the rest.
Economics
By Douglas Carswell, on 16 February 12 More unemployment. More recession. More massive public debt. More print-more-money-and-pray quantitative easing.
More Mervyn King bleating on about the stalled economy – but failing to explain why he has missed his inflation target for years.
What passes for economic “debate” in Britain today is between those who still believe monetary stimulus is the way to engineer growth versus those who say we need fiscal stimulus.
Each time more monetary stimulus fails to produce prosperity, the fans of fiscal stimulus say we need to spend more. Each time public debt gets a little bit less manageable, those who favour monetary stimulus claim it is they who are right.
But what if they are both wrong?
If central bankers knew how to make us wealthy, the West would be booming. Instead, having handed them the macroeconomic controls, we find ourselves trapped in a decades long spiral of debt and stagnation.
It was attempts by central bankers like Mr King to engineer growth through monetary manipulation that landed us in this mess to start with. Further monetary stimulus today can no more restore us to prosperity than fiscal stimulus was able to in the 1970s. Debauched monetarism is no more the answer than debauched Keynesianism.
If you cannot engineer growth from on high, who in Whitehall is working on plans to set the economy free to grow from below?
What “winter of discontent”-style event might it take to prove that we need something altogether bolder and more radical than the current bankrupt orthodoxy.
This article was previously published at TalkCarswell.com
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