Now that the Euro Crisis Train is arriving back into the station after a short trip away from the front pages, there will shortly be another round of politicians and pundits calling on the likes of Greece to get out and devalue their currencies. Given these incoming siren voices, it seems time to head them off by revisiting Gordon Kerr’s article for Bloomberg, which takes a look at the supposedly seductive promise of debasing a nation’s medium of exchange to secure economic growth.
Much like Henry Hazlitt before him, Gordon takes a look at what boils down to a “deliberate policy of inflation,” not just as it affects one group but all groups in society and what happens in the long term. Governments like devaluation because it allows them to “reduce the real cost of national debts without the need to declare default or ask for a bailout.” But for savers and creditors, they find their wealth progressively destroyed and the value of their assets cut. The average citizen finds that they are now forced to pay higher prices for goods and services, particularly if they are imported, and as their wage buys less and less they can no longer plan with any certainty for their future.
In the short run, debasement gives a temporary boost to export industries, but this is counterbalanced in the longer term by rising costs for importers and consumers through potentially dramatic price inflation. The Coalition’s policy of export-led recovery via currency destruction is clearly foolish, as history shows – “No nation has achieved lasting prosperity by undermining its currency.” Again, successive policy makers seem to be forgetting Hazlitt’s ‘One Lesson’.
Unfortunately, politicians like to “promise jam and sweeties today” at the expense of a healthy economy in the future, and so refuse to level with the public about the measures necessary to return to a sound footing, instead pursuing recklessly high spending and borrowing plans in the short term, made possible by printing more and more money.
Everyone feels a bit better right now, but no problems are fixed and ultimately this currency suicide leads to economic ruin, as it has done for thousands of years and the pain of recovery will be that much greater. As Gordon sums it up, devaluation can “mask the symptoms of the crisis, but it can’t cure them. Such policies are like plastering over a structural crack in a load-bearing wall: They end in a pile of rubble.”
Now that we are being engulfed by the LIBOR scandal and find that the Bank of England was heavily involved (shock horror), perhaps it is worth revisiting one of the most important speeches given by a politician in recent memory and which couldn’t be more relevant to the latest outrage.
In June, 2010, Steve Baker MP took to his feet in the House of Commons to spell out, in plain language, why our banking system has become so corrupted and address the central economic issues that are seldom touched on in mainstream debate.
Our monetary system is characterised by private banking, with a fractional reserve controlled by a central bank, which determines monetary policy and has a monopoly on the issue of legal tender. A Monetary Policy Committee sets interest rates.
A Soviet-style committee at the centre attempts the impossible job by setting interest rates – perhaps the most important price signals in the entire economy – in the same manner that Stalin’s planners picked the price of bread, and with the same catastrophic results.
Artificially lowered interest rates increase the demand for credit, and decrease the supply of savings, but the legal privilege granted to banks means that they can meet demand by extending credit that is unbacked by real savings. There is a good argument to say that that causes the boom-and-bust cycle, the misdirection of resources in the capital structure of production, and over-consumption by consumers. That is the biggest problem that we face today.
On top of this, private banks “have the legal privilege of treating depositors’ money as their own.”
The Bank of England subsidises and supports a fractional reserve system where private banks lend out depositor’s money for a profit – money that was left with them specifically for safe-keeping. This is in breach of the depositor’s claim on that money and their fundamental right to their own property. Some might call this theft.
And that’s before we even get on to talk about the “moral hazard of having a state-backed lender of last resort and state deposit guarantees, and of the socialisation of the cost of failure”.
Price controls on interest rates, the expansion of credit unbacked by savings leading to boom and bust, the destruction of property rights through fractional reserves and more moral hazard than you can wave your increasingly worthless pound notes at. Truly a tour de force in blundering interventionism.
And yet successive policy makers still fail to connect the dots. Steve makes it easier for them:
Today, money is a product of the state. The Bank of England controls the price, quantity and quality of money. Perhaps if we were talking about any other commodity, there would be far less confusion over and questioning of the cause of the crisis. If money is a product of the state, we should ask ourselves, “Is this a good idea?”
Perhaps instead of holding an enormous and costly inquiry into the causes of the LIBOR scandal and the wider problems in the banking industry, Westminster politicians could simply swallow their pride and start listening to what Steve Baker has been saying for the last two years.
TCC Board Member, Steve Baker MP, has been on the front line this week trying to bring his sound economic judgement to bear on the latest example of crony capitalism – the scandal over Barclays’ rigging of the inter-bank interest rate. Describing the banks as having “licence not liberty,” he highlights the overall problem with the banking system, that it is “not capitalism when the tax payer has to pick up commercial risks.”
Steve calls for the adoption of his Financial Institutions (Reform) Bill, which would make bank directors and board members liable for the losses their banks incur and force them to carry the consequences of their actions.
You can listen to Steve’s interview on The World at One on iPlayer (16 minutes in), or through this MP3.
Meanwhile, writing in The Express, Stephen Pollard also highlights Steve’s radical bill as emulating the system under which NM Rothschild and JP Morgan grew their banks into financial giants while at all times acting responsibly and being conservative in their risk taking.
TCC Senior Fellow Detlev Schlichter appeared on The World at One to highlight the folly of reckless spending and ever-increasing debt that is now coming to a head in Europe. Anticipating dramatic belt-tightening and default for several European economies, Detlev warns against leaving the Euro for the purpose of debasing a new currency to fund government spending (as some mainstream economists propose), asking:
“Who wants to hold a currency that is specifically issued for the purpose of devaluation?”
You can listen to his contribution to the debate here.
In addition, TCC Board Member Steve Baker MP took to the airwaves to warn against adopting the government’s new emergency lending scheme. Steve describes the new stimulus as being potentially harmful at worst, and at best unlikely to work, given that banks are trying to reduce their balance sheets and are likely to simply sit on the cash. Highlighting the fact that the scheme originates from the same set of economists who keep failing to perceive even the general pattern of events, Steve goes on to point out the painful truth that few seem to want to face up to:
“There is no painless way out now. We have got to have a correction.”
TCC Senior Fellow, Detlev Schlichter, appeared on Russia Today with Max Keiser to talk about the coming monetary breakdown and the likely monetary repression and manipulation that governments around the world will try to put in place to avert the inevitable crisis that they created in the first place.
Summing up the present crisis:
We are in this mess because for 20-30 years whenever the economy rolled over we lowered interest rates and printed more money. The reason why banks are overstretched, why governments are highly indebted all around the world is because we always stimulate our economy by providing it with cheap money again.
On Wednesday, Radio 4 hosted a discussion about the morality of money. One of our senior fellows, Jamie Whyte (previously seen flying the flag for Austrian-style good sense in the BBC’s Keynes v Hayek debate) was on hand to lend his thoughts about moral hazard in banking. In a coup for sound reason, Simon Rose of Save our Savers and a good friend of TCC, was able to stand up for the long-suffering thrifty citizens who didn’t indulge in the profligacy of the boom and who are now being asked to bear the costs of the government-induced credit binge.
In an insightful interview, Jan goes into detail about the disastrous decision by the then Chancellor Gordon Brown to sell off half of Britain’s gold reserves (395 tonnes) between 1999 and 2002, in exchange for a trio of fiat currencies whose value has since plummeted to record lows. The gold, which was sold at the “Brown’s bottom” price of $275 an ounce – the lowest gold has been in over two decades – would now fetch over $1500 an ounce.
Trading the security and stable purchasing power of gold for dollars, euros and yen — whose supply has been constantly expanded and whose value has been consistently debased — was clearly a short-sighted and monumental blunder. As Jan points out, gold has “proven Gordon Brown wrong” and has rocketed ever since his foolish sell-off.
Gold has consistently maintained its value, whereas the pound has lost 90% of its value since 1967 – which means that three generations of savers have effectively been stolen from by monetary policy.
Turning to the destruction of savings by the current UK government, Keiser highlights the lack of discussion by the mainstream media of gold as a savings instrument, despite it being the only such instrument “that has worked for the last 5000 years”. Meanwhile savers, clueless to the impact that rising inflation and low interest rates are having on their saved wealth, continue to hold that wealth in the national fiat currency in overleveraged and potentially insolvent banks. So much for gold being a “valueless asset” – yes, I’m looking at you Warren Buffett.
So what can the average citizen do to protect themselves? Jan suggests we buy back the gold that Gordon Brown sold off and thereby create a financial shield against the slings and arrows of outrageous fortune which are raining down upon us all. For less than £500 per UK taxpayer, we can buy back every ounce and this time it will be held by prudent citizens rather than a feckless government or central bank.
Whether you choose gold or some other means of preserving your wealth, as we lurch ever closer to monetary collapse and the bankruptcy of the public sector in the UK it’s more important than ever.
Why am I so sure of the ultimate fate of the US dollar? One simple fact: it’s just paper. Every paper currency in the history of civilisation has eventually lost its entire value.
Chilling words from two authors whose forecasts and assessments of economies the world over have been proved right time and time again. Addison Wiggin and Samantha Buker lay out in stark, and readily understandable terms the inevitable fate of the US dollar and indeed all currencies the world over.
Dispensing with the usual impenetrable language and phrases adopted by mainstream financial commentators, The Shrinking Dollar clearly explains how fiat currencies have failed throughout history, how rampant inflation is destroying the value of savings, how the US got itself into the situation where its debt and deficits are exploding, and why the dollar faces a complete collapse. Most importantly, they detail how the average citizen can take steps to protect themselves and their family from the coming financial flood.
This is required reading for politicians, central bankers and anyone who wishes to avoid the monetary breakdown we are rapidly approaching.
A new documentary has just been released about the ongoing financial crisis, and the cast list is a who’s who of Austrian economists and contrarian investors, including Peter Schiff, James Turk, and Alasdair Macleod.
Wall street is being occupied. Europe is collapsing in on itself. Around the world, people are consumed by fear and anger, and one question is on everyone’s lips: Is the financial crisis over, or are we headed towards economic disaster?
End of the Road is a 55 minute documentary film that chronicles the global financial collapse. Told in an entertaining and easy to follow style, the film tells the story of how the world came to be in such a state, from the seeds sown after WWII, to the current troubles facing us today, and to the possible future that may await us all. Some of the world’s top economic minds share the hidden tale behind the mishandling of the world’s finances, give insight into how bad policy and a flawed monetary system joined together to create a catastrophe.
End of the Road portrays eleven influential commentators within the finance and investment communities, as they share their knowledge of our current financial structure. Through each of their narratives, a story is built which chronicles the current economic dilemma and paints a picture of the world’s financial future.
James Turk interviews Doug Casey, the American-born economist, professional investor, author and advocate of the free market, in an illuminating, entertaining and yet ultimately chilling interview from November 2011.
For those of you with busy lives who don’t have the time to sit through an hour of Casey’s sage-like wisdom, this wide-ranging chat with one of the world’s foremost investors covers some key areas of vital importance to the Cobden Centre – namely the role of government and chiefly central banks in causing current and past crises.
On a side note, Casey’s clear thinking on what constitutes a strong economy is particularly timely as the Bank of England’s Governor, Sir Mervyn King, has rejected blame for the financial meltdown and instead lambasted banks that had “grown too quickly and borrowed too much”. He fails to acknowledge the role played by the Bank in creating the crisis – apparently a central interest rate never higher than 6% since 2000 despite a household savings ratio which has plummeted in the same period is nothing to be concerned about. Artificially low interest rates orchestrated by the central bank, which disregarded the level of real resources available, were one of the key ingredients in this unholy mess and the rapid and unsustainable expansion of our banking system that Sir Mervyn decries. The regulatory interventions since the crisis by the Bank and by government to “save the economy” remind me of an arsonist returning to a blaze they started while posing as a fireman.
So the questions for Doug Casey are, what conditions are needed for there to be a healthy, growing economy and why is the model we have today a complete perversion of basic economics?
The way you become wealthy is by producing more than you consume, and by saving the difference… The net savings in society provide the capital to expand and develop new technologies.
Oh that simple? A growing economy based on savings and investment in productive enterprise. Unfortunately, the combination of what Jim Grant calls the “Phd standard” in monetary policy discouraging savings, an economic model which views spending cheap credit as the alpha and omega of economic growth, and successive governments taxing, borrowing and spending their way into bankruptcy is an aberration from Casey’s common sense approach. As he puts it:
The problem we have today is that there are no net savings in the Western World – it’s all debt. Trillions and trillions of dollars of debt, on most levels. And what that means is that we’ve been living out of capital accumulated by generations past, and we’re living out of projected future income.
Turning to the endless merry-go-round of boom and bust, in his view (and that of Austrian economists across the globe) business cycles are “created by the government’s debasement of the currency, which is called inflation”. The new money created to bring this about “causes people to do things that they otherwise wouldn’t.” Also, like debt, it “tends to make people think that they are richer than they are”. In this way, you can see that the present UK government’s policy of trying to reinflate the bubble caused by excessive consumer spending, a low rate of savings and an unsustainable credit boom is simply an attempt to sustain the illusion of prosperity.
Turning to the ongoing and seemingly never-ending crisis we are now experiencing, described as the “greater depression”, Casey establishes three broad definitions of a depression, the effects of which are experienced simultaneously.
The first, is a “period of time during which most people’s standard of living drops significantly”. So far, so horrible.
The second, is a period of time “when the business cycle climaxes”. Again, we’ve certainly had this part – all our chickens tried to come home to roost. Casey claims this would be entirely avoidable under a free market economic system, besides the odd fluctuation.
The third, and most important, depression is when “distortions and misallocations of capital are liquidated”, allowing the economy to recover and grow. Unfortunately, this is exactly what the various stimulus packages, bailouts, and subsidies have prevented from happening. The UK’s over-leveraged banks, overinflated asset and housing markets, a good deal of unviable businesses and a massively bloated service sector have all been allowed to shuffle on, soaking up capital that might be allocated towards more productive purposes and dragging the economy down under a mountain of debt.
In addition to this, the response to the crisis by “stupid governments all over the world, with their quantitative easing measures, are basically going to destroy their national currencies” and “destroy the savings of the middle class”, leading to a “sociological earthquake”. So the arsonist starts the blaze, returns dressed as a fireman, then begins spraying the fire with jet fuel. As it becomes a raging inferno, he tells everyone that it would have been much worse if they hadn’t acted.
If you weren’t already preparing to either kill yourself or hike off into the hills to live out a nomadic existence in the Highlands, to top it off Casey predicts more of the rioting seen in London and Vancouver in recent years as “people find that they aren’t going to be able to improve themselves” and turn violent. Just what everyone needed – a good riot and some overturned cars.
He describes the prevailing perception that government is a “magic cornucopia” that can “make everybody wealthy” or “raise everybody’s wages” as ridiculous, having nothing that it hasn’t stolen first from society as a whole. His disgust with attitudes to government and with government itself is palpable. National debts should be defaulted on for “moral reasons” and to avoid citizens being turned into “veritable serfs” to “repay a mortgage against future generations” that is completely unsustainable and in order to punish those that have financed an ever-expanding state.
Casey is particularly derisive of our dear Continent, describing Europe as “constipated, highly regulated, highly taxed”, going downhill since World War One due to the “wrong philosophical values” and shortly to become no more than a “petting zoo for the Chinese”. Unfortunately, it’s not just us as we are all in an “existential nightmare” with no way out, and the best you can do is “Hold onto your hat” as “we’re in for a wild ride”.