One of our regular Cobden Centre contributors, Gordon Kerr, is a structured finance banker who recently co-drafted a Bill put before the UK Parliament by Steve Baker MP designed to expose the extent of artificial UK bank profits claimed under mark-to-market accounting. The Bill’s second reading is scheduled for June the 10th, 2011.
Gordon is delighted to announce the formal launch of Cobden Partners. This business, a collection of people that he has met through the Cobden Centre, has been established to help small countries reform their failed banking and, in some cases, monetary systems.
Gordon is keen to hear from anyone with an interest in helping to develop this business. They can contact him via the Cobden Partnerswebsite.
He is also indebted to the Cobden Centre for permission to use the Cobden brand and hopes that one benefit to the Cobden Centre will be to promote international awareness of the important work of the Cobden Centre.
The first official press release document of Cobden Partners can be downloaded via the link below, which discusses the Financial Services (Regulation of Derivatives) Bill – published May 13th 2011:
Financial Services (Regulation of Derivatives) Bill – published May 13th 2011
A group of MPs, led by Steve Baker, seek to expose and address fundamental problems of the British banking system by presenting this Bill to Parliament. Cobden Partners is delighted to have helped by researching and producing the Bill.
Banks are producing rule compliant but false accounts which grossly inflate their reported profits and capital bases. Three specific examples:
a) Banks record unrealised gains in investments as profits, justified under mark to market and mark to model accounting rules;
b) Banks are unable to take prudent provisions for expected loan losses under the EU’s IFRS accounting standards, rules which they have chosen to adopt;
c) Banks fail to deduct from reported profits expenses such as staff compensation. This has led to Barclays being reported to accounting regulators by investors this week.
All three, and many similar accounting misrepresentations are rule compliant. Therefore the rules should be changed. The attached Bill will cure these abuses by requiring parallel accounts to be prepared under UK Companies Act law. The Bill will not breach any of our EU obligations.
Steve Baker MP says:
“I am convinced that the present institutional design of the banking system is the greatest source of injustice in society, the root cause of our boom and bust cycles, and a potent force leading to widening wealth inequality. The present banking system’s gross expansion of credit is also a key enabler of the mass wastage of natural resources.
I am convinced that this Bill will reveal the true health of our banking system, and help our Government deliver the far reaching promised banking reforms.
I am extremely grateful to Cobden Partners for their invaluable support in preparing this Bill. Without them it would not have been possible.”
Lord Flight, member of the House of Lords Select Committee on Economic Affairs says:
“I very much hope that Steve Baker’s Private Member’s Bill which has its next reading on 10th June will serve to raise the profile of the campaign and correct the serious problems which IFRS has caused. The Bill, effectively, neuters IFRS by requiring Financial Services companies to prepare parallel accounts under UK GAAP. Clause 2 of the Bill would also allow companies to switch back to UK GAAP.
It is important to note that IFRS is not an “international obligation” – at a limited company level it has been an option. France and Germany have outlawed IFRS and Italy, having required IFRS is now requiring its Ministry of Justice to vet IFRS accounting.
It is now clear that IFRS accounting was a significant contributor to the banking crisis as it positively incentivised mis-pricing risk and the omission of the cost of credit default. At its simplest bank profits were overstated in good times and losses exaggerated in bad times. IFRS 17 has also contributed to the demise of defined benefit pension schemes and the decline in pension saving by requiring pension liabilities to be discounted to present value at prevailing prime bond yields, rather than at the higher, blended, expected rate of return on investment portfolios. Also the IFRS requirement to charge the notional cost of options to the Profit & Loss account, rather than requiring a full analysis of the resulting equity dilution, serves to distort reported profit’s figures in relation to actual trading and to obscure to shareholders the real dilution cost of option issues”.
Gordon Kerr, Founder of Cobden Partners says:
“Without the exposure of the true state of banks’ accounts as set out in the Bill, taxpayers, regulators and scrutineers will remain unable to assess or properly regulate our banks.
Steve Baker is one of the most economically literate MPs that we have. His Bill should be given Government and cross party support.”
Notes to Editors:
- 5 days after the Bill’s First Reading the House of Lords’ Select Committee on Economic Affairs produced a detailed report summarising 10 months’ investigations into broadly the same concerns. This Bill should attract this Committee’s support and will address their accounting concerns.
- The Bill is unlikely to be allocated time for its second reading on June 10th without Government support. Your promotion and coverage of Steve Baker’s efforts would therefore be most welcome.
The Cobden Centre’s Jamie Whyte writes an excellent piece in this morning’s Wall Street Journal on the alleged economic merits of currency devaluation; he succinctly smashes the argument that currency devaluation is good for us. Here’s a quote:
When sterling devalues, British exporters benefit. They either receive more pounds in return for sales denominated in foreign currencies, or the foreign-currency price of their goods falls and they sell more. But this gain to those who sell to foreigners is offset by the loss to those who buy from foreigners, who must now pay higher prices. Currency devaluations effectively provide a subsidy for exporters funded by a tax on importers.
The Germans, under the Deutschmark, did not get rich by devaluing their currency, and neither did the Swiss with their Franc (in the happy days before the cantons started to let their federal government try to bounce them into the EU, by hook or by crook).
As Mr Whyte lays out, all of us working harder for no net general gain is a cost rather than a benefit. Unless of course, you happen to live on the export side of the equation, rather than the import side.
To read more, click here, which may get you one free view.
(Alas, any paywall problems require imagination or Google.)
When the bestriding Colossus of Murray N. Rothbard departed this mortal coil, he left the rest of us with the hallowed gift of his thoughts, his books, and his ideas, as well as an occasional secret desire to wear bow ties, and the happily-reverberating sound of that anarchic cackle.
However, to those few, those lucky few, who knew him dans le flesh, he also bequested various fractional stamps of his personality, in the manner of Albus Dumbledore with his fictional last will and testament, and his gifts of hidden Hallows and Horcrux detroyers to his favourites.
One Rothbard disciple must have received the Palladium Scalpel to dissect false argument; another evangelist will have picked up the Gold Baton to drive the movement forward; a third acolyte will have earned the Platinum Compass to direct the whole Misesian shooting match.
But what did Thomas E. Woods receive from this last will and testament of the Bow-Tied & Bespectacled One?
After reading Rollback, his latest best-selling book, I think it has to be the multi-faceted Silver Reluminator of anti-government invective and incisive wit, particularly as regards the unwanted rediscovery and revelation of inconvenient historical truths and hastily buried politically-embarrasing lies.
Fortunately for the rest of us, who have nothing but state-approved history books to learn from, Woods has employed this mighty guiding tool to show him where to dig in the obfuscated historical record turfed over constantly by endless shovel-ready phalanxes of court historians and other pelf-consuming tax eaters who dig in shifts for the ongoing victory of the state and their own demarcated spoil from the take.
For example, when examining the creation of the world’s welfare states, in the latter half of the book, Woods provides much raw data, and then the sensible state-ignored conclusions which arose from these detailed researches:
“He [Charles Murray, social scientist] wanted to know why it should be that ‘the number of people living in poverty stopped declining just as the public-assistance program budgets and the rate of increase in those budgets were highest’. He went on to explain why, counterintuitive as it may be, we should in fact expect this result.”
Woods follows this up, later:
“Another way to approach it is to recall that at least two-thirds of the money assigned to government welfare budgets is eaten up by bureaucracy. Taken by itself, this would mean it would take three dollars in taxes for one dollar to reach the poor. But we must add to this the well-founded estimate of James Payne that the combined public and private costs of taxation amount to 65 cents of every dollar taxed. When we include this factor, we find the cost of government delivery of one dollar to the poor to be five dollars.”
We have seen the same large-scale of growth in the ‘welfare industry’ in the UK, with literally millions of people earning good salaries in the provision of government welfare, with the commensurate accompanying growth of the numbers of UK citizens in poverty. And yet the broken machine continues to grow like Topsy, even in these supposed times of austerity, as rival government factions squabble over this totemic issue, like demented ferrets in a bag, all claiming to be worthier than their rivals (about driving more people into poverty at ever increased cost).
However, Woods goes beyond the usual utilitarian arguments as to why we should re-privatise welfare, after a century of escalating government failure, with higher costs and those ever-higher amounts of poverty. He examines government motivations for taking over welfare in the first place, beyond even the usual ones of providing favours for friends — with nice fat central government agency positions; providing local government clientelles with salaried sinecures; and the straightforwardly-corrupt naked buying of votes.
As in the UK, United States welfare systems are based directly upon those created by Otto von Bismarck in nineteenth century Germany. But why did this martial Prussian introduce the first pilot programmes of European state welfare? Was it because this Teutonic Iron Chancellor possessed a soft mushy heart?
Hardly, according to Woods:
“When Otto von Bismarck introduced wide-ranging social insurance in Germany in the 1870s, he did so for the express purpose of buying the people’s loyalty to his regime. An enervated, spiritless people is far less likely to rise up against parasites who live off their labor, even when that regime is exploiting and robbing them blind, if they have been conditioned to believe that they cannot live any other way.”
Rollback thus subducts the usual flim-flam of conventional state-school history books and rolls it back to reveal the core of poisonous mendacity which lies at the heart of every modern nation state, thus foiling the phalanxes of state-salaried intellectuals paid to defend it, who remain frozen in indecision as to what to do with Woods; should they castigate him, repudiate him, or freeze him out through ignorance?
Whichever way these Dementors turn, in their sneering hatred of the burning Patronus light shone upon them by Woods, he will keep up with his necessary work regardless, because that is the inescapable gift of the Silver Reluminator.
Once through the earlier restrained U.S.-centric chapters, the lessons exposed by Woods in Rollback become increasingly familiar to those of us in England and Europe, as he accelerates his text, which grows ever more pointed as the book rolls on, until by the end of the book the initial soft boxing gloves have been replaced by the kind of adamantine morning star last seen in Peter Jackson’s Return of the King, as wielded by the Witch King of Angmar on the Fields of Pelennor over the dying body of Rohan’s King Theoden.
To paraphrase the entire book, Woods attacks the following neo-socialist position, which I’m sure most of us have had to endure at the occasional dinner table or three over the past year or two: “All of the world’s problems have been caused by uncaring selfish extremists like you, and the brutal free market that you so callously defend.”
Woods retorts this mind-drained position with the following question: ‘What free market?’
In a way, Rollback is almost a sequel to his earlier polemic, Meltdown; it could even have been entitled Meltdown II by a less imaginative editor. However, only in the same fashion that you could have given Lord of the Rings a different title as well, such as The Hobbit II.
As Gandalf deals with the problem of a dragon in The Hobbit, Meltdown deals directly with the single draconian problem of state control over our lives, which is the failure of centrally-planned socialist banking, peopled by its over-manned host of bumbling bureaucratic commissars and their mistaken belief in state-loving Keynesianism.
Rollback bypasses all such outer symptoms caused by a shadowy Necromancer pulling on the more usually hidden strings of state failure — where the Bank of England is regarded as an exalted pin-sharp über-capitalist entity of omniscient accuracy as opposed to its actual nature as a state-owned socialist organ of morally haphazard ineptitude — and goes straight for the throat of the Sauronic nation state.
He charts its insatiable grasping desire to drown us all under its life-destroying socialist controls and cloak us forever in a choking ashen layer of self-aggrandising tyranny, pelf-taking, and general imbecility, as can be witnessed by any coerced foot soldier in any state army, since the dawn of time.
This book will therefore be a delight to more than the Austrian hardcore who were going to buy it anyway, but anyone else who wants an honest and straightforward answer to the following simple question: ‘What is going on and how do we fix it?’
Woods kicks off in a suitably ebullient post-existential Rothbardian mood of glee:
“A systemic crisis is poised to strike an unprepared America, as the federal government is forced to renege on its impossible promises. It will no longer be the godlike dispenser of bounties, the miracle worker that summons bread from stones.”
What I love about the passionate Woods, almost the Michael Bublé of Austrian economics, is the way you can hear his spoken voice sing through the timeless medium of ink on paper.
You can hear this controlled emotion again on the next page:
“The scale of the coming inevitable spending cuts will be unlike anything Americans have ever experienced during peacetime. Americans have never seen federal spending scaled back. Even when the newspapers speak of ‘budget cuts’, the don’t actually mean the budget will be lower than it was the previous year. They mean only that its rate of growth is falling. Government is never cut. But it will be.”
Are you listening Mister Cameron? Are you listening Monsieur Sarkozy? Are you listening Frau Merkel?
Having soaked up that unquenchable Rothbardian optimism, which came along with the Reluminator, Woods lays a contrarian message on the line:
“Federal bankruptcy, in short, may turn out to be one of the best things that ever happened in America.”
Go brother!, as we say in Henley On Thames.
When lambasting Barack Obama, in the second chapter, and the anointed one’s crass busted programme of ‘Change We Can Believe In’, initially mild-mannered words begin to reveal more of an exposed toothsome edge:
“The Obama economic program has perpetuated and intensified the problems that are sinking the U.S. economy. Those parts of it that can be legislatively reversed, like the health-care plan, ought to be promptly repealed. Those parts that cannot, like the ‘stimulus’ package, ought to be refuted and ridiculed. The nicest thing we can say about the president’s economic program is that it is only one in a long line of presidential programs that have wrecked Americans’ futures in the name of helping them.”
That Woods brands the spectacularly inept Keynesian voodoo of Obama as an ‘economic program’ is only due to his innate Catholic politeness. Later in the book, once Woods has moved through a few gears, he is much less conciliatory.
We really start chomping into the beef, in Chapter 3:
“It was not the ‘free market’ that failed us. It was a ginned-up housing market, overheated from political manipulation and artificially low interest rates courtesy of the Federal Reserve. Governments do not ‘smooth out’ or eliminate business cycles. They cause and exacerbate them. They then cite problems they themselves caused as good reasons for them to expand their authority.”
This is straight from the playbook of Von Mises himself, the Master, who always reckoned that one bad government intervention would always deserve another, until a previously free happy situation became wrapped in a red-tape thicket of monstrous stupidity and nonsense, as witnessed by the appalling mess that is the British government’s holy sacred cow of its own National Health Service.
Obviously, we can also look at our rail system, education system, legal system, or welfare system, here in England, to witness this ratcheting effect of government cost, waste, and incompetence, but at the heart of all this ongoing failure lies a government’s underpinning ability to print money out of thin air, to fund this oafishness and power-grabbing foolishness in the otherwise crushing face of economic sense.
This underlying truth is never far from the roving cross-hairs of Woods. On page 42, always a significant number, the book unmasks the creature from Jekyll Island, as the Gollum hiding in the mithril mine, with Woods plunging a glowing Numenorian dagger through the solar plexus of the U.S. central bank.
“The other culprit the establishment has tried without success to exonerate is the Federal Reserve System, the U.S. central bank that holds government-granted monopoly privileges. Had the Fed not repeatedly intervened to push interest rates down, the market would have stopped the housing bubble in its tracks. Faced with an inordinate demand for mortgage loans, banks would have found their supply of loanable funds rapidly depleted. As a result, interest rates would have shot up, and further speculation in real estate would have been arrested. These high interest rates would also have encouraged people to save, and those increased savings would have provided the genuine wherewithal for any further home lending to take place. The role of the Fed was much more significant than that of the U.S. government itself, since without the wherewithal to finance these home purchases, attempts to manipulate the housing market on the political side would have hit a natural brick wall.”
Woods then eviscerates the rotten carcass of the mercantilist idea of ‘too-big-to-fail’, before examining the case of Bernie Madoff and the utter uselessness of captured regulators, especially the process of giving them more and more rope for them to hang the rest of us with, on every unearthed example of regulatory failure.
In the private entrepreneurial world, failing businesses have their resources removed until the failed entrepreneurs in charge are forced to become employees again, just like the rest of us.
Only in government is it possible to grow fatter and better resourced, the more you fail, leading to the perverse incentives that so plague all government affairs. What happens to a private school that fails, asks Woods? It goes bust. What happens to a government school that fails? It receives more tax funding.
It is this Mad Hatter economics that is sucking the life out of our western economies, and until we reverse this process, we will continue our long-term decline, to be replaced in economic ascendancy by the much more sensible people of the East.
After thus pulling back the green silk curtain in the Emerald City, and fully revealing the central planning role of the failed Federal Reserve and other satellite central banks, Woods then aims an elvish spear or two at that other arm of U.S. Imperium; its military:
“The F-22 was sold as a stealth fighter. But it keeps showing up on radar systems — and even if it didn’t, the thing is huge, … ‘The only way to make the F-22 stealthy,’ says retired Air Force Colonel Everest Riccioni, ‘is to tear the eyes out of enemy pilots’ heads.’ It wasn’t until 2010 that the program was finally scrapped. Over the life of the program, some $65.3 billion was spent, which translates into over $356 million per plane.”
And you thought Gordon Brown was a massive waster of other people’s money? No wonder the ghoulish former British prime minister spends so much of his time in North America, these days, to really experience what government waste is all about, ready for whatever tarnished pot he is eventually awarded for his wretched services to world socialism.
Woods then tackles an area close to my own heart. If you were to award me a magic wand and allow me to abolish just one government fiefdom, it would the one in which it melds the fluid minds of children to believe in the sanctity of government. Joseph Goebbels would have called my abolition target the ‘State Propaganda and Child Indoctrination Department’, though Guardian readers who make their living in it might prefer to call it the ‘State Education Department’:
“Schoolchildren are taught a version of history worth of Pravda. Governments, they are convinced, abolished child labor, gave people good wages and decent working conditions; protect them from bad food, drugs, airplanes, and consumer products; have cleaned their air and water; and have done countless other things to improve their well-being. They truly cannot imagine how anyone who isn’t a stooge for industry could think differently, or how free people acting in the absence of compulsion and threats of violence — which is what government activity amounts to — might have figured out a way to solve these problems.”
Okay, so I would like to be greedy, being so intrinsically selfish, and claim a second wish to also abolish the Bank of England and replace it with absolutely nothing at all, but what I find strange about this, is that a typical undergraduate at an English university would nod their head with you if you said, ‘it was terrible when Adolf Hitler took over private schools in Germany, to indoctrinate German children,’ but finds it inconceivable to imagine government being kicked out of the education sphere here in England. Because, as Tom Woods points out:
“Under the free market, children were condemned to live lives of hard labour. Before the rise of industrial capitalism, children spent their days picking flowers and skipping through meadows. Then capitalism appeared and whisked the children away into lives of miserable toil. Only our wise public servants could have rescued them from this cruel fate.”
Woods immediately counters this fanciful nonsense with a quote from Von Mises:
“‘It is a distortion of facts,’ he wrote, ‘to say that the factories carried off the housewives from the nurseries and the children from their play. These women had nothing to cook with and to feed their children. These children were destitute and starving. Their only refuge was the factory. It saved them, in the strict sense of the term, from death by starvation.’”
You will never see that lesson relayed in any English state school, however, or even in many of the few remaining private ones, such is the defenestrating stranglehold that Whitehall has taken over child indoctrination, via its national curricula and state-sanctioned key stage criteria, to strangle the ability of anyone to think or, God forbid, disagree with the official civilised positions on everything, including perhaps the ruthless evil capitalist exploitation of Peruvian basket weavers and the selfish societal denial of sustainable development for cardboard windmills.
Even in Harry Potter, that most quintessentially English experience, one of Voldemort’s stated aims, when he takes power, is to take Hogwarts under the direct control of government to ensure that all wizard children are ‘correctly educated’, and this is quite clearly seen by one and all as intrinsically evil, as is the earlier failed takeover of Hogwarts by Cornelius Fudge.
But in the real world, such a government takeover is seen as being ‘progressive’ and ‘necessary’. And this is what I love about Woods. He is able to articulate this Austrian incredulity in such a way, that possibly, just possibly, even a Guardian reader might be just able to spot the blindingly obvious incongruity of such a vital sensitive service as a child’s education being under the control of tax-fed bureaucrats and self-serving politicians.
Woods is also able to slay other sacred socialist magical beasts, for instance, that regular paean of Neil Kinnock, Britain’s former Labour Party leader, that we should be more like Sweden, which even the redoubtable P.J.O’Rourke once labelled as ‘Good Socialism’.
Woods differs from these mighty opinions:
“In 2008, Swedish Prime Minister Fredrik Renifeldt urged his countrymen to face facts: Swedish prosperity had been built up by the free market, and the much-vaunted Swedish welfare state merely drew parasitically upon that wealth until the country was forced to begin returning to the market economy once again. Wealth that ‘took a hundred years to build was almost dismantled in twenty-five years,’ he said.”
And there’s much more in that vein, which helps contribute a downpayment towards the entrance fee.
And so Woods continues, with the ‘Myth of Good Government’, the ‘War on Drugs’, and finally, how the state can be rolled back from its current pre-eminent position in the United States (or at least how this inevitable rollback can be accelerated and neutralised, to avoid the U.S. government retaliating upon Americans and the rest of the world, as its funding and power base shrinks).
Yes, this a very ‘American’ book. However, if like me you believe that the idea of America is still where proper liberty may once again flower in this world, in somewhere like an independent Texas, an independent Oregon, or an independent New Hampshire (or as Hoppe says, somewhere even smaller, like just one single free American city) then that flowering will partially be due to the indefatigable work of Thomas E. Woods and the books he has written, such as Rollback.
Although this common sense work may be optional for Europeans — though full of ideas which I think they will still find useful — it is absolutely essential for all Americans, and anyone else who believes in Doug Casey’s America, as opposed to Barack Obama’s United States.
If such a second American Revolution as described above should ever come to pass, involving honest money, peace, prosperity, and freedom, then Thomas Woods could even match his namesake, Thomas Paine, the rebellious Englishman from Norfolk who helped create the original successful revolt from Britain, with his similarly radical pamphlets, in 1776.
Rollback will help Woods stake that claim.
Just to nail that claim home, he even spares room, in the final paragraphs of the final chapter, for this lengthy quote from the Cobden Centre’s very own Professor Kevin Dowd, on the matter of debt repudiation, as delivered to an audience of younger people, in Paris, in 2009:
“You can play by the rules your elders would impose on you. You can expect to pay higher and higher taxes, work harder and harder to stand still, and get less and less back in return for yourselves — a life little different from slavery — and then the system will collapse anyway.
Or, alternatively, you can fight back. There is no law of nature that says you have to honor checks that other people write at your expense. You are not slaves — you are slaves only if you choose to submit to slavery. You can repudiate those checks….
Let’s be blunt about what I am suggesting. I am suggesting that if default is inevitable, and if default is more damaging the longer it is delayed, then it would be a good idea to consider embracing it. We should lance the boil, as it were, and kill off the scam — sooner rather than later.
Do you want a life of toil and slavery, followed by ultimate destitution, or do you want to stand up for yourself and fight for the chance of a decent life? It’s your choice.”
Woods concludes:
“It is the choice facing America.”
I would contend, that it is the choice facing everyone in the West.
In a fascinating interview — which I for one would have loved to see go on for at least an entire afternoon — Jeff Tucker spoke last week to Cobden Centre author, Professor Gerard Casey, who is Associate Professor of Philosophy at University College Dublin, Ireland.
They discuss Murray Rothbard’s philosophical contribution to modern Austrianism, and especially the Rothbardian view of the modern State:
[The book mentioned at the start of the interview can be found here, though those with light wallets may wish to avoid clicking through that link.]
Professor Philipp Bagus, who has recently joined our Cobden Centre Advisory Board, spoke last week to Jeffrey Tucker of the Ludwig von Mises Institute, about his early academic life in Germany, and his two recent books: Deep Freeze: Iceland’s Economic Collapse (co-authored with David Howden) and The Tragedy of the Euro; Jeff Tucker includes a brief mention of the Cobden Centre:
I’ve just discovered a recent interview with Professor Huerta de Soto, released on April the 15th, this year. Okay, so this is hardly ‘hot off the press’, but I’m very much a believer in the school of better late than never, and the universal truths of human nature and human action never dim just because of a few measly days.
Here’s the interview:
Here’s the full description:
An exclusive interview with professor Huerta de Soto
In this interview, Jesús Huerta de Soto, Professor of Political Economy at Rey Juan Carlos University, Madrid, outlines how central banks caused the financial crisis. He explains why fractional reserve banking causes economic problems, and why artificially-low interest rates are a bad idea. Fractional reserve banking creates “too big to fail” banks. An 100 per cent reserve system would give smaller banks a chance to compete.
Huerta de Soto also discusses the paradox of blaming the free market for the financial crisis, how the monetary system has been nationalised, and how central banking amounts to “pure socialism”. De Soto argues that efforts by central banks to maintain an “optimum” money supply and fix interest rates at the “correct” level are doomed to failure.
Furthermore, he explains the three measures he would take to fix the financial system. These are 100 per cent bank reserve requirements, the abolition of central banks and the implementation of a pure gold standard. He outlines why under a free banking system, fractional reserve banking would die out.
Although gold would likely play a role in a free-market monetary system, the professor states that a gold standard system can only work in an 100 per cent bank reserve system. Huerta De Soto argues that the popularity of banking theories is irrelevant in assessing their validity.
At the end, he discusses how his book, Money, Bank Credit and Economic Cycles, has been favourably received and translated into many languages, and how it can help central bankers anticipate economic cycles. He also shares how encouraging it is that students around the world are becoming critics of fractional reserve banking and supporters of sound money.
You can read a full transcript of this video here.
Although we must bear in mind that one of these gentlemen works for a fund which holds a billion dollars worth of private gold and silver, and the other gentleman runs a business which makes its living from holding enormous amounts of private gold and silver, there is much that is interesting in this very recent (11th of May) half-hour discussion between John Embry, of Sprott Asset Management, and James Turk, of GoldMoney. They discuss gold, silver, the markets, fiat currency, the banking system, and what will follow when the current world fiat currency system eventually collapses:
Here’s the accompanying description:
John Embry discusses gold and silver with James Turk
In this video, John Embry – Chief Investment Strategist at the Canadian firm Sprott Asset Management – discusses the recent correction in the silver price with James Turk, Director of the GoldMoney Foundation. John argues that long-term savers and investors in precious metals should not panic in the face of such corrections, and also discusses the growing divergence between the paper and the physical silver market, and how we are in the early stages of a big rise in precious metals prices. Watch the full 30-minute interview at www.goldmoney.com/john-embry-interview.
Amongst other subjects, we fly south from Iceland down to Ireland, then compare how these two North Atlantic islands are coping with their respective economic crises, before Howden considers Portugal, Greece, and Spain, and how the fate of these nations may be tied to the immediate fate of the Euro, by weighing up the latest evidence from an Austrian perspective:
The remarkable thing about being an aspiring Rothbardian, is that no matter how much Rothbard you read, the next virgin Rothbard book up on your reading list is always a superb surprise.
The twists and the turns on the route are remarkable; though they are almost always consistently within the same Rothbardian memory palace and universe of thought.
As a searcher for truth in a world of lying politicians, bureaucrats, and technocrats, many of us at first pursue an initial tentative pathway through the Dead Marshes of state propaganda, state education, and other self-justifying political lies, via the guiding ministrations of Hazlitt, Rand, Heinlein, Hayek, and Mises. Eventually, however, the inevitable high pass of Rothbard is reached; it can no longer be put off, or deviated from, despite what the Cato Institute says. But what to read first when faced by that mountainous bibliography? The Bow-Tied and Bespectacled One looks down upon you from heaven and sniggers. ‘Be my guest,’ he says. ‘Pick one, while I eat a ham sandwich with Michaelangelo.’
Obviously, if you’ve read Human Action, you have to go to its ‘sequel’, Man, Economy, and State. Though that seems a dauntingly mighty effort, particularly when the book arrives on the delivery truck, usually man-handled to your door by at least two burly delivery van drivers, who puff and pant their way up your drive, with their insignia cards being sucked into the gravitational mass of this immense Magnum Opus.
At this point the aspiring Austrian may be temporarily satiated, and thus turn elsewhere for a little variety. Hoppe springs to mind, of course, and then Mises is revisited, particularly Socialism, Liberalism, Bureaucracy, Omnipotent Government, and The Anti-Capitalistic Mentality, this final one being a delightfully light snapshot of our modern socialistic world, in which music industry stars can go on MTV and speak such inane unchallenged drivel as, ‘I hate capitalism, but I love spending money.’
Despite the remarkable freshness of Mises, you soon hunger for more of the Master’s Apprentice, Rothbard.
So, now it’s the magnificent and monumental Conceived in Liberty, where you have to unlearn and revise much that you had formerly taken for granted in British and American history, seen through the hugely-detailed chromatic prism of individual motivation and perseverance in the face of enormous historical odds, which after 4,000 years finally created a society which threw off the Old Order of pharaohs, kings, warriors, and priests, much to the benefit of Europe, which had to adapt quickly to avoid losing all of its tax-paying population to the wonderful liberty of the New World.
(Oh what a shame it has proved that the Jeffersonian dream of America has become the Hamiltonian nightmare of the United States. For more on that, you need DiLorenzo and Woods, but I digress.)
Many who have followed this familiar literary trail from the elegant Manhattan apartment of Mises down to the more urbane Amsterdam Avenue home of Rothbard, past all the gilded creatures of that locale, will know that the next port of call has to be the most distilled Rothbard book of all.
This is the simply incredible Austrian Perspective on the History of Economic Thought, in which much becomes clear that was once hidden, buried, written out of thought, or gleefully atomised in the memory hole by ruling bandit gangs writ large and their priestly hordes of intellectual bodyguards who support these bandits and their parasitic Old Order predations upon the rest of us, in return for a dishonourable pew at the trough.
Perhaps after this colourful detour we’re ready for some more Rothbard? But where to go next? You may think you’re hardcore by now, but you’ve only scratched the first outer layer of that vast tottering pyramid of Rothbardian books, articles, videos, and speeches, which astonishingly sprang from the resolute and presumably much-battered typewriter of just one single man.
Mises.org spoil us for choice, of course, with their innumerable windows through to the soul and collected wisdom of Rothbard, with most of his books freely available to download, and every audio tape and video tape that can be harvested from a chaotic world up there on YouTube and discussed in depth at Mises University.
One feels like Neo in that final lamentable Matrix movie, where our martial arts hero is faced with a billion Agent Smiths; which one do you attack first?
Fortunately, to shorten your quest, I now know the next one you should read; Egalitarianism As a Revolt Against Nature. It was a long time in the finding, but I finally got there.
Where to begin? As Man, Economy, and State is to Human Action, so you might say that Egalitarianism As a Revolt Against Nature is to The Anti-Capitalistic Mentality, though much expanded when compared in size to that tiny work of Mises, with perhaps a little soupçon of Hayek’s Fatal Conceit thrown in for taste.
Although the History of Economic Thought is still hard to beat, and perhaps remains the pinnacle of Rothbard at his finest, I think Egalitarianism has to be right up there challenging for that coveted top spot.
This collection of essays opens in predictable enough fashion:
“For well over a century, the Left has generally been conceded to have morality, justice, and ‘idealism’ on its side; the Conservative opposition to the Left has largely been confined to the ‘impracticality’ of its ideals. A common view, for example, is that socialism is splendid ‘in theory,’ but that it cannot ‘work’ in practical life.”
Pure music to your eyes, of course, as an aspiring Rothbardian. But later in the next chapter, after the usual glorious bubbling stream of sparkling Rothbard, there’s this:
“Or rather, to be more precise, there were from the beginning two different strands within socialism: one was the right-wing, authoritarian strand, from Saint-Simon down, which glorified statism, hierarchy, and collectivism and which was thus a projection of conservatism trying to accept and dominate the new industrial civilization. The other was the left-wing, relatively libertarian strand, exemplified in their different ways by Marx and Bakunin, revolutionary and far more interested in achieving the libertarian goals of liberalism and socialism; but especially the smashing of the state apparatus to achieve the ‘withering away of the State’ and the ‘end of the exploitation of man by man.’”
The relatively libertarian strand? Of Karl Marx?!?
Crazy.
Well, that’s what the Cato Institute would say too, perhaps, but if you persevere it works. It fits. Like a pearly piece of grit in an oyster shell.
And these pearls just keep being strewn throughout the book, explaining how socialism was the wrong answer to the right question of challenging the Old Order, and how this wrong answer has metastasised into the horrific creatures of IMF austerity and world global government that we see gathering around us today, as vampire squid elites keep foisting their socialist paper fiat nonsense upon us, to try to drag us back a few thousand years to some kind of horrific murderous New World Order (read, Old Order) and a borderless global Romanesque Empire.
Soon we will all realise that one of the important sub-definitions of money, perhaps the most important one of all, is that money should be a store of value, and that therefore printed-from-the-Brow-of-Zeus socialised ‘currencies’ are simply not money, but are more akin to Soviet ration tickets. When that shoe eventually drops, the Old Order may try one last throw of the dice with their IMF SDR gambit or their usual joker card, a global world war.
However, these efforts will also fail, claims Rothbard.
The revolutions of the last few hundred years, particularly the Industrial Revolution, have made the world too complex for the Old Order to rule over in the manner to which it aspires. Yes, it can rule agrarian non-industrialised societies, as it did with the Inca Empire, the Roman Empire, and the Athenian-dominated Delian League — though you’ll notice that none of these once-mighty edifices lasted — however the world’s population will no longer stand for such serfdom and penury, even if it currently tolerates a pelf-extraction rate of forty or fifty percent. The ratchet of liberty has clicked, and there’s no turning back the mass-industrial technological clock, says Rothbard.
Even if we claim to be socialists, and allow the state to continually extract a pelf ‘protection’ tax rate from us of forty percent, or more, we will only tolerate a society in which we can have our iPhones, iPads, and MacBooks, along with foreign travel, exotic food, windsurfing opportunities, the potential of an exciting career, and most of all some fun in our lives, rather than the endless unendurable austerity, tedium, and deference, of terminal servitude to a ruling criminal oligopoly and its supportive caste of privileged bureaucratic and priestly technocratic tax eaters.
All of what we want as modern people can only be delivered via complex industrial society, tied together with trillions of streams of disparate information held within the minds of billions of individuals. Complex industrial society, and these myriad communication pathways, can only be achieved through freedom and the final elimination of the Old Order, a fate which Rothbard brands as inevitable, in a seemingly deliberate and playful historicist swipe at Marx, the libertarian.
Witness the Soviet Union. The socialists made the terrible still-unacknowledged mistake of using Old Order methods to generate paradoxical freedom from the despised Old Order societal structure; for instance, by replacing the hated Okhrana secret police of the Tsar with the hated NKVD secret police of Stalin.
The world’s socialists were still shocked, nevertheless, when the Berlin Wall came down, despite their ideological brethren having inflicted this mass-murdering criminal regime upon the people of Russia and other countries, with one Soviet agent, Vasili Blokhin, being personally responsible, one bullet at a time, for the murder of of 7,000 Poles in one protracted session, and perhaps tens of thousands of other innocent victims over his career, all of them shot by Blokhin in the back of the neck, for which Stalin awarded this Soviet hero both the Order of the Badge of Honor and the Order of the Red Banner.
At last, despite a cover-up which had lasted many decades, aided and abetted by western governments, the socialist system was eventually seen by one and all to have failed, thus forcing many western socialists into the green socialist movement to escape from having to defend the busted flush of the laughable economic merits of red socialism, which found it impossible to even marry a right shoe together with a left shoe, without first threatening to kill someone.
And let’s not mention the laces. Those were last seen on a train to Murmansk, along with all of those one-ton nails and giant cubes of window glass.
What was best, however, was that this monstrous grey socialist dead-hand construct had been overthrown by ordinary people, as Rothbard had predicted it would be, in a relatively bloodless collapse.
This hated political construct had previously sent tens of millions of these ordinary people to die in its mindless socialist Gulag, a number far outweighing the murderous national socialist, Adolf Hitler. And yet still we see inane music industry stars wearing T-shirts branded with scarlet hammers, stars, and sickles.
The only thing the Soviet Union was perhaps good at was killing ordinary people, exporting Kalashnikovs, and producing vodka; such glory for socialism and the socialists.
However, look at Russia now, even under the former KGB general, Putin? Look what a little freedom did. For example, who would have believed 40 years ago that Max Keiser would now be broadcasting hard money truths from Moscow, while the Chairman of the Federal Reserve would be broadcasting soft money lies from Washington? Or that Russia may itself be contemplating a hard gold rouble, of which we hear constant unsubstantiated whispers, while the west descends into a sea of political paper currency?
Perhaps if Daniel Craig remakes Goldfinger as James Bond, the pivotal scene with Oddjob will be set in the Russian State Depository for Precious Metals and Gems rather than Fort Knox, to complete the monetary inversion, with perhaps a return for Xenia Onatopp instead of Pussy Galore?
And look what a little freedom did for China, which may itself be contemplating a gold or silver yuan, almost in a pastiche of Henry Hazlitt’s novel, Time Will Run Back, a book almost quite literally ahead of its time.
This unwinding of socialism will continue, says Rothbard, until it truly does wither away, to fulfil the misguided dream of Bakunin and Marx.
Naturally enough, Rothbard predicted communism’s fall, in 1974, in the pages of his startling collection of energetic essays, barely contained within Egalitarianism:
“For only liberty, only a free market, can organize and maintain an industrial system, and the more that population expands and explodes, the more necessary is the unfettered working of such an industrial economy. Laissez-faire and the free market become more and more evidently necessary as an industrial system develops; radical deviations cause breakdowns and economic crises. This crisis of statism becomes particularly dramatic and acute in a fully socialist society; and hence the inevitable breakdown of statism has first become strikingly apparent in the countries of the socialist (that is, communist) camp. For socialism confronts its inner contradiction most starkly. Desperately, it tries to fulfill its proclaimed goals of industrial growth, higher standards of living for the masses, and eventual withering away of the State and is increasingly unable to do so with its collectivist means. Hence the inevitable breakdown of socialism.”
Overall, it is Rothbard’s unquenchable optimism which marks him out. Although as pessimistic as the best of us, in the short-run, when discussing Boobus Americanus or Boobus Anglicus, he is absolutely certain of the long-run outcome of our global societal fate, and that is a future of honest money, peace, freedom, prosperity, and the death of the Old Order, much though the tax-eating beneficiaries of that Old Order will kick and scream at the rest of us, on their way down and out, before we make them earn a living rather than continuously feasting upon the rest of us.
In the end, the productive will slough off the unproductive, and the Old Order will die, says Rothbard.
And so it goes on, with essay after glorious essay exploring all forms of egalitarianism and smashing them all with typical twinkling Rothbardian glee.
It is a rip-roaring masterpiece of a book, and one I’m sure Mises himself would have loved.
For all aspiring Rothbardians, it is also an essential weapon in your intellectual armoury and it will be a boost to your morale if you’re struggling to maintain a grip on your sanity in this currently insane world of hilarious Keynesian nincompoops.
If you believe in a Creator, then you must acknowledge that He (or She) possesses an incredible sense of humour. Without this, how do you explain Iceland?
God must have smashed innumerable comets into the Earth to provide it with billions of tons of cool blue water to wrap trillions of tons of hot red metal, to form an unstable rice-pudding skin between them, which did its best to hold these competitive elements apart in a thin bubbling veil of steaming blackness.
Married together by massive gravity, and whirled apart by centripetal momentum, gigantic physical vectors of radioactivity, weight, and pressure encouraged these antagonistic liquid magmas and waters to form a volcanic border of fractured tectonic plates, which generated enormous scarred crack zones and eruptive hot apocalypse spots around the globe, as God’s good Earth spun in its frozen solar-heated void, in a nondescript arm of the Milky Way galaxy, in a bygone corner of a far-flung Universe.
To amuse Himself, perhaps one dull Sunday teatime, God must have toyed with the Earth further, to possibly put off the enormous tedium of Monday; He squeezed the Earth between His omnipotent fingers, while watching Master & Commander on Blu-ray, for the nth time, to create the most virulent global explosive crack He could imagine.
(Which to me definitively proves that God must be male; a female deity would have kept things much tidier, even if working as a U.S. air force general.)
On top of this pulsating orange broken scar, ripped into the deep Atlantic floor, through which boiling seas poured to fight hissing plumes of upwelling magma, God placed the rocky raft of a new country.
To provide a decorative punchline, He named this new raft Iceland, rather than the much more appropriate Fireland.
Hardy Vikings then appeared, one stormy sea-washed morning, to face up to God’s challenge of life on this barely-cooled basaltic rock; could they live in this harsh place and survive?
Much to His grudging respect, they could. Indeed, they made a great fist of it, and created a society of liberty and community, which grew so strong that it could throw off the challenge of an admittedly enfeebled Empire, when the doughty Icelandic people disrespected Her Britannic Majesty’s Royal Navy in the 1970s, by winning the Cod Wars against the descendants of Patrick O’Brian’s Jack Aubrey and Stephen Maturin.
But God must have grown bored again, following these spats over state-sanctioned fishing rights, because He decided to inflict His remarkable island with a second volcanic storm, this time via a maelstrom which consisted of burning paper, rather than a flurry of splattered magma, and government stupidity, rather than the voluntary human action of individual responsibility.
God had failed to beat back the Icelanders with a hostile physical environment. Could He defeat them instead, and test their fierce Norse mettle to destruction, with a hostile financial environment?
Fortunately for the rest of us, and particularly perhaps for the Irish, the Greeks, and the Portuguese, this second deific challenge is detailed gloriously in the new book, Deep Freeze: Iceland’s Economic Collapse, written by Professor Philipp Bagus and Professor David Howden, which is freely downloadable for your Kindle or iBook pleasure via the messianic Ludwig von Mises Institute.
In much the same way that East Germany and West Germany formed the perfect means of comparing complete socialism and partial socialism, the isolated case of Iceland formed an almost perfect storm of a standalone test-tube to examine the money-crank experiment of fiat paper currency, a diabolical pathway to fiscal hell followed by all of the world’s short-sighted and feeble-minded governments since 1971 — and all of the personally selfish corrupt individuals within them — when Richard Nixon took the Bretton-Woods U.S. dollar off the final tattered shred of a voluntarily-accepted commodity money standard. This thereby allowed an almost infinite abuse of power amongst government officials around the entire world, based upon the oil-based momentum and former pre-eminence of the dollar, as the pyramidal fulcrum of the exploded Bretton-Woods global currency system.
With the final link to gold cut and the pyramid finally floating free — untethered from reality and held in check solely by the intelligence, self-restraint, and common decency of a transitory officer corps of elected Beeblebroxian politicians and a much larger army of permanent Vogonic bureaucrats — it was merely a question of how long it would take for reality to catch up with the almost infinite paper currency bubble that the world’s central planners were about to blow up, to test these new unknown limits of financial paper gravity.
Historically, hard money limits were first established in England by the various pre-millennial Anglo-Saxon tribes, with 240 silver pennies, known as sterlings, making up a Troy pound of silver. After centuries of royal debasement by the invasive British Crown established by Norman bandit marauders, particularly by that Mafiosi war-mongering rogue Henry the VIIIth, a new governmental hard money standard was re-established by Sir Isaac Newton in 1717, when he used his imperial office as Master of the Royal Mint to impose a bimetallic standard to force the creation of a gold standard:
“I humbly represent, that a pound weight Troy of Gold eleven ounces fine and one ounce allay is cut into 441⁄2 Guineas, and a pound weight of Silver eleven ounces two penny weight fine & eighteen penny weight allay is cut into 62 Shillings. And according to this rate, a pound weight of fine gold is worth Fifteen pounds weight six ounces seventeen penny weight & five grains of fine silver, recconing a Guinea at 1l.1s.6d. in Silver money.”
Thus was born the British state’s gold sovereign, the famous cavalryman of St. George, with four and a quarter sovereigns being approximately one fine ounce of gold, which is ironic, seeing that it was the sovereigns of old Great Britain who had destroyed the old silver pound with their perpetually rampant gluttony and greed.
And so, here we were again with our more modern caretaker-kings, ripping off the world’s common people to fund their extravagant lifestyles and their never-ending grabs for personal power and avarice — just think of Tony Blair or Gordon Brown if you’re struggling with that one — with concentrated doses of corrupted power and Keynesian ideological madness viewable under the Deep Freeze microscope of the special Icelandic situation.
As with all my favourite books, Bagus and Howden come at the problem from an unorthodox angle. To be cunning, however, they begin straightforwardly enough for an Austrian-based book:
“The real reasons for Iceland’s collapse lie in state institutions by the state into the workings of the economy, coupled with the interventionist institutions of the national and international monetary systems.”
So far, so predictable. But then, immediately following this bland opening, there’s this:
“Iceland’s crisis is the result of two banking practices that, in combination, proved to be explosive: excessive maturity mismatching and currency mismatching.”
Say what? I awoke at once from my cortical slumber.
Now, here I must declare an interest. Although I wish I were an independently-wealthy dilettante and a full-time member of the England cricket team’s Barmy Army, perhaps spending a few months in each rainy season stuffing envelopes for Lew Rockwell fund raisers — to do something vaguely half-useful with my life — I am alas in the dreadful position of needing to earn a meagre crust to get by each year, via the teaching of people in private circles about derivatives, structured financial products, and fundamental financial analysis. (Rates available on application, with availability considered for Bar Mitzvahs and weddings.)
Therefore, you might imagine that I would have few problems with excessive maturity mismatching and currency mismatching.
However, despite knowing my durations from my convexities, at this point in the book, which was only page five, I was scared.
What on Earth were Bagus and Howden talking about?
Would they be gentle with me? Would they explain the Icelandic situation in ways a man could understand even when he was drinking a beer and stoking up a barbecue, even when he had …temporarily, you understand… forgotten everything he is supposed to know professionally during a working week, while he wears a suit?
Luckily for me, they could.
“Iceland has something in common with other developed economies that the recent economic crisis has affected: its banking system was heavily engaged in maturity mismatching. In other words, Icelandic banks issued short-term liabilities in order to invest in long-term assets.”
Thank the Lord.
And so the book continues, as it delves into areas of fiscally-obscured complexity, to explain this convoluted Icelandic smörgåsbord of financial impropriety. They render its hidden colours into daylight in much the same way that Sun Tzu explained the Art of War; comprehensible chunks of knowledge are levered out from spirals of incomprehensible chaos, chapter after chapter, to enable even a simple barbecuing man such as myself to understand the whole thing.
But they go even further than that; they also enable our steak-eating tong-wielding hero to understand how such a situation can be fixed and how it can be prevented from happening again.
After revealing how the Icelandic banking system rode its dangerous roller coaster of short-term loans being used to finance long-term investments, they deconstruct how it then met a grey brick wall of crunching credit restriction (which I’ll let them explain much better than I possibly could).
To satisfy Rothbardian respectability along their route, the authors also mark their book with the usual de rigueur badges of Austrian authenticity; e.g. quotes from the Master himself, Ludwig von Mises, including one of my favourites from A Theory of Money and Credit:
“For the activity of the banks as negotiators of credit the golden rule holds, that an organic connection must be created between the credit transactions and debit transactions. The credit that the bank grants must correspond quantitatively and qualitatively to the credit that it takes up. More exactly expressed, ‘The date on which the bank’s obligations fall due must not precede the date on which its corresponding claims can be realized.’ Only thus can the danger of insolvency be avoided.”
Iceland thus broke the golden rule of Von Mises, first expressed almost a century ago. It therefore paid the predictable consequence, just as the rest of the government-loving world will pay the predictable price when it finally faces up to the similar silvered rule of Max Keiser, that all paper currencies invariably shrivel away to nothing.
(Mervyn King, of our own Bank of England, always appears to be such a reasonably intelligent cove, that you wonder if he realises this too, or whether he does the visual equivalent of sticking his fingers in his ears and singing a loud song, every time he thinks about the upcoming collapse of his own paper pound. Perhaps he hopes he will be retired before this happens, so the blame can then be attached to his successor? Sorry to disappoint you there Mervyn; that may fool those who believe in the sanctified bureaucratic wisdom of central government planners. However, the rest of us will know better, and so will the history books, especially the one to be entitled ‘What Were They Thinking?’, which will rightly deride the delusional money-crank stupidity of those who will continue to admit that they once believed in paper money. If I live long enough, Mervyn, I even think I know who the author of that future masterpiece will be, if Bill Bonner turns down first option rights on the title.)
In Chapter 3, The IMF, Moral Hazard, and the Temptation of Foreign Funds, Bagus and Howden really begin to expand their tag-team onslaught against the common enemy of our current Keynesian paper money Emerald City godlings, and other lesser wizards, as they drill further into the deeper core of an underlying problem:
“In some ways, Iceland’s financial crisis could be recorded in the history books as much like the crises in Mexico, Russia, Brazil, Argentina, or any number of Asian nations. However, it differs in two major ways. First, the extent of its boom and subsequent collapse are much greater than anything experienced in the aforementioned developing countries. More important, and more puzzling, is the fact that Iceland is the first developed country to suffer a financial calamity of this scope since the Great Depression.”
Using the idea of Iceland as their perfect fairy cake experiment, Bagus and Howden tease out every centrally-planned machination designed to manipulate and cajole the world’s productive populations into unknowing governmental fiscal servitude.
As Richard Cantillon noted in his Essay on Economic Theory, enslaved humans usually produce for their masters about half the amount of finished goods that freed slaves produce for themselves. The great trick of the world’s elite may therefore have been to yoke the rest of us into debt slavery, without us realising it, to feed their insatiable greed for power over the rest of us and to extract wealth from the rest of us, thereby avoiding Cantillon’s half-production trap, and thereby avoiding the need for they themselves to be in any way useful to anyone else.
Thus, taxpayers may grumble at the trillions of paper money tickets used to bail out the failed financial entities owned by the elites, but they’ll grudgingly go along with it, so long as they feel that they in some way they control the public ‘servants’ that rule over them, who are of course beholden to these elites via the instruments of public debt employed by our rulers to keep buying power-enhancing votes from the ruled.
As an aside, if we examine the current Irish situation in which each Irish taxpayer has been saddled with a debt of €500,000 euros — and rising — as against an average salary of €35,000 euros — and falling — then we can see just how far down the green baize casino table the debt slavery dice have been rolled by these elites; I wonder if they continue to believe that nobody in Ireland will ever read Murray Rothbard’s article, Repudiating the National Debt, as summarised in this quote?
“In order to go this route, however, we first have to rid ourselves of the fallacious mindset that conflates public and private, and that treats government debt as if it were a productive contract between two legitimate property owners.”
This heads-we-win, tails-we-win situation is, of course, in direct contravention of the iron rules of proper Schumpeterian capitalism, in which creative successes succeed and destructive failures fail, to the huge benefit of society, particularly productive talented people, and to the short-term harm of unproductive untalented wastrels. These losers thereby have entrepreneurial resources withdrawn from their grasping unlucky fingers and must rejoin the rest of us proles in the ranks of the employed, while those few who have proven themselves good at directing capital to fulfil the needs of the many, are allowed to get on with this vital job, with resources liberated from the bankrupt losers, plus profits from their own earned successes. Real laissez-faire free-market capitalism is thus almost magical in its self-balancing efficiency.
Perhaps one fine spring morning, after coming really close in the 19th century, we might even try it.
Our current elite experiment in insidious debt slavery has therefore lasted just over forty years. However, as this latest slavery construct collapses and the world reawakens to the 4,000 year-old benefits of honest money, Bagus and Howden explain the how? and why? of these obfuscated debt slavery mechanisms, via the litmus paper of Iceland and its own horrific acidic experience, in a transparent way which clears the misty opaqueness of how these elites have managed to keep this self-serving shell game going this long.
And nobody is more within the beating heartstrings of this supposedly untouchable club of elites than the International Monetary Fund, which in my own view should rename itself the Soviet Unification Corporate Kleptocracy (or SUCK) to telegraph to the rest of us what it is really all about; that they even considered Gordon Brown as their next grossly-overpaid puppet figurehead, perhaps tells you everything you need to know about this malignant self-serving organ.
The authors begin their examination by highlighting the explicit public purposes of the IMF:
“The Fund originally had four goals: 1) promotion of exchange rate stability, 2) cooperation of monetary policy, 3) expansion of international trade, and 4) to function as a lender of last resort.”
To cut a long story, the IMF lost the last three of these purposes in 1971.
Post-Bretton-Woods, central banks — especially those outside the satellite control of the Federal Reserve — started to argue with each other over monetary policies (vis-à-vis China and the U.S.); international trade agreements (for all their faults) have sidelined the IMF’s purpose on trade; and floating exchange rates have meant that the IMF stopped being necessary as a lender of last resort, as in 1972 the Greek central bank could print as many drachmas as it needed to fund the fiscal deficits of the Greek government. Obviously, we have seen a slight resurgence of this former IMF role, when emasculated governments such as the ones in Ireland, Portugal, and Greece, have had to beg for ECB euro support, but that is an entire story in itself, as previously covered by Bagus in The Tragedy of the Euro.
However, do government bureaucracies, such as the IMF, wither away and die when the mandate for their original creation withers away? Hardly. Grasping hold of that first straw, and its Keynesian-mandated role to ‘manage’ exchange rate stabilities, the IMF has evolved from a reactive backstairs 1950s organisation, into a pro-active 21st century regime, popping up all over the world to enhance ‘stability’. With self-aggrandising policies trying to turn the SDR (Special Drawing Rights) currency into a new global Soviet currency, the IMF has carved out an even larger niche than the one it previously occupied in its former Bretton-Woods existence, and thus forms the first layer in our cake of Icelandic fiscal destruction.
Having plotted out this layer, Bagus and Howden locate a central tendril in our search for understanding:
“In normal markets, lenders make loans to borrowers, and borrowers may enter bankruptcy. The debts are settled via a bankruptcy procedure in the court system; ‘this is how market economies are supposed to work.’ Risky countries, and, more importantly, their creditors, view the guarantee of bailouts as an insurance policy. Investors are less cautious about investing in developing economies as the IMF has implicitly guaranteed to cover their losses in the event of a financial calamity.”
This led directly to the following:
“This underpricing of risk led Icelandic banks to take on liabilities denominated in foreign currency. It also caused an increase in international speculation in Iceland as foreigners were lulled into thinking the króna was less risky than its fundamentals would have suggested.”
One of the cats is thus out of the bag.
Bagus and Howden then move onto currency mismatching, which once again bears the usual imprimatur of government interference in the natural working of free markets, thus wrecking them:
“As Icelandic interest rates were relatively high, investors indebted themselves in dollars, euros and yen at low interest rates and invested the proceeds in Icelandic assets. Like maturity mismatching, this is risky. When the currency that has been invested depreciates relative to the currency that is loaned, there may be considerable losses, resulting in the insolvency of the investors exploiting the carry trade.”
“As with maturity mismatching, the question that comes to mind about currency mismatching is why did Icelandic banks engage so heavily in this risky practice? And for that matter, why does anyone? The answer relates to implicit government guarantees. Because of implicit government guarantees, especially the possibility of obtaining IMF assistance in dire circumstances, people start to believe that exchange rate risk is reduced.”
Indeed, the authors even quote the former CEO of Kaupthing, Armann Thorvaldsson:
“I always believed that if Iceland ran into trouble it would be easy to get assistance from friendly nations. This was based not least on the fact that, despite the relative size of the banking system in Iceland, the absolute size was of course very small. For friendly nations to lend a helping hand would not be difficult.”
Ho, ho, Mr Thorvaldsson.
But how many of us think similarly? How many of us think that if we blow our private pension on a mid-life crisis, then ‘our government’ will come along and sort it all out for us? Well, perhaps we Austrians may be in a small minority of people who try to stand on their own two feet. However, Mr Thorvaldsson would perhaps have been right in his assumption, on an Icelandic collapse, if the rest of the world had failed to apply for the same credit crunch begging bowl at exactly the same time that he and his friends did.
This kind of welfare-mentality and moral hazard thinking was exacerbated in Mervyn King’s ‘Nice’ decade, when the British, European, U.S., and Japanese governments exported their monetary inflation to the conveniently remote sink hole of Iceland:
“Via currency mismatching, the main economies exported their credit expansion to Iceland. Thus, artificially low interest rates in Europe, the U.S., and Japan deceived entrepreneurs about the availability of real savings not only in their own currency areas but also in Iceland.”
In Chapter 5, The Consequences of the Boom: Malinvestments, Bagus and Howden further analyse the consequences of even more government interventions, both explicit and implicit, to explain how the financial services industry in Iceland grew so large, to the detriment of more traditional industries, where fishermen’s sons wanted to become derivatives traders and apply the Black Scholes Merton equation to contango aluminium option futures.
With the Central Bank of Iceland (CBI) backing all risky bank investments in 2001, as a ‘lender of last resort’, the Icelandic government expanded mortgages and long-term house building via their own Freddie Mac organisation, the Housing Finance Fund (HFF). They also encouraged other long-term capital-intensive investments, such as aluminium smelting.
Iceland thus became a bullet train heading at a hundred miles an hour into a future upheld via a paper Valhalla rainbow of massive fiat money infusions, which could fall away at any time.
And the problem for Iceland was this. You could take out a large mortgage in euro or yen, but if push came to shove, the Central Bank of Iceland could only print króna.
But who cares if the sun is shining? In eight years, between 2000 and 2008, house prices in Iceland increased 300%. And as we all know, house prices can only go up, even in a small country like Iceland which relies upon fishing, high-tech goods, and geo-thermal energy to make ends meet.
The train wreck scenario was thus pumped and primed, as the Keynesians like to say:
“In 2007, after ten years of growth, the big three Icelandic banks, Kaupthing, Glitnir, and Landsbanki, owned assets in excess of 1100 percent of Iceland’s GDP, comprising nearly eighty percent of the island’s total banking assets. An oversized and unviable banking model had developed. The pretense under which this system developed — that a central bank stood ready and able to bail it out if it came under pressure — would be called into question as the crisis progressed.”
Oh dear.
I will let Bagus and Howden explain what happened next. Suffice it to say, it lacked prettiness.
After working through the timeline, in concise detail, they then explain the three main props of the necessary restructuring process, which I’ll summarise below:
“Malinvestments — those misdirected resources and entrepreneurial errors — need to be liquidated. Prolonging their existence prevents the economy from moving production and consumption patterns to those that are conducive to long-term growth.”
“An oversized financial sector is not necessary for the country, nor is it healthy. It has removed resources from those areas where Iceland has a real competitive advantage. The financial sector needs to be allowed to shrink down to the size required by Iceland’s economy.”
“Lastly, the consumption-led boom bred a new type of Icelander. The inflationary economy of the boom years increased the time preference of the nation. Icelanders need to regain their traditional prudence about credit and spending.”
To conclude, Bagus and Howden defend the free-market system beloved of Austrians, and explain how the Icelandic economy was no such thing. This is in the finest tradition of Misesians everywhere. We should never give in to Keynesian evil and try to placate it with weasel words. We should always proceed boldly against it and smash it into the rancid dustbin of history where it belongs.
I can therefore heartily recommend this book to anyone who wants to understand how governments have got us into our current mess, and how they are currently using their own weasel words to try to push the blame for this onto those of us who believe in freedom and liberty, and the costs for wasteful government spending onto hapless taxpayers. They would like us to forget, of course, that they were ‘in charge’ the whole time, and were happy to receive enormous personal payments and pension rights while they were all chancellors, prime ministers, presidents, foreign secretaries, and central bank governors, pontificating to the rest of us on how they had abolished the processes of boom and bust in their nice decades of bubble expansion and gold sales.
Somehow, however, none of the subsequent bubble collapse was anything to do with them.
Well then, tax eaters. If that is true, then please hand us back your salaries so I can pay for my Barmy Army lifestyle, and stop taxing me, so I can become the dilettante I dream of.
In the meantime, the rest of us should read Deep Freeze, particularly anyone in Ireland, Greece, Portugal, Spain, Belgium, or France, or anyone else who is going to be forced to shoulder the risks of private banks to enable their governments to keep borrowing and spending in their name, and dragging them into the abyss of old age poverty and along the road of tax debt serfdom, while Iceland itself recovers, having refused to toe the line on IMF austerity.
