Time to give up the fiat pancakes

Today is Pancake Day and whilst many, including The Real Asset Co research desk, will be enjoying it, there is still an ongoing economic crisis in the foreground. Maybe its time to give up something other than chocolate or smoking. Maybe its time to give up on reckless spending and fiat money.

Shrove Tuesday, or Pancake Day, is celebrated the day before Ash Wednesday and is typically the day that signals the beginning of a period of abstinence and self-control.

Times have rapidly moved on since the death of Christ and very few of us take Shrove Tuesday as seriously as we once would have. Now we tend to give up vices rather than ‘nice’ things. Many give up alcohol or smoking, some give up swearing, others give up chocolate.

But times are changing once again, and many of us are already getting used to giving up such things due to tightening our belts.

May we make a suggestion of a new type of Lent, to suit modern times? A global, economic lent.

This year the financial crisis is 5 years old. The entire global event has been spawned from greed and wanting more and more tempting food from the larder of the credit creation machine.  Central Banks, governments and the financial markets have all gorged themselves on junk economic policies, junk money, and of course junk-bonds.

But have we not, as individuals, over consumed credit cards, low interest rates and cheap mortgages?

In the United Kingdom, public and private sector debt has now reached more that 507% of GDP. Japan is just ahead of us with 512%. This figure is made up of four main components: government, financial corporations, non-financial corporations and household debt.

Our household debt, as a percentage of GDP, is 81%, which is above average when ranked in the ten most mature countries. It is estimated that it will take more than a decade for private debt levels to reduce down to those seen before the millennium.

Whilst household debt does account for a large amount of our debt, it is the financial services sector that is responsible for nearly half, sitting at 219% of GDP.

Those of us with household debt shouldn’t feel too smug. Of the top ten mature countries globally, we still have debt which represents an above average amount of GDP. Whilst the MPC and the Federal Reserve, have each indicated they will not be raising interest rates for some time, this will be mathematically impossible to justify when inflation starts climbing. Over two-thirds of UK mortgages have floating interest rates; something that could cause a pinch, or worse foreclosure, when inflation begins to rise.

It took us just a few years to get our country’s debt to this level, but it took Japan twenty. Perhaps it’s time we stopped clearing out the easy money larder and took a period of abstinence and self-control.

Banks have to do global economic lent they’ve eaten too many fiat pancakes already… and so have we.


We don’t need no regulation

Taking the title from a recent Guardian article, Jan Skoyles looks at the arguments made by Thomas Frank, in his new book ‘Pity the Billionaire’ , against the Republican  nominees’ demands for less regulation. Mr Frank believes that the on-going financial crisis demonstrated the need for more regulation. She looks at the reasons against government regulation and argues that it should be down to the markets.

The Republican candidates’ views on the economy, Wall St and regulation are hot topics, understandably so given the current financial climate.

This is something which Thomas Frank, in his new book, ‘Pity the Billionaire’, is particularly vocal on. In his book, he states that ‘[Republican nominees’] ideas, if implemented, would crash the economy, wreck the regulatory state, [and] exacerbate the already outrageous gap between the rich and everybody else.’

Sounds extreme. But it also sounds just like the America we already have.

The biggest issue Mr Frank takes against the party’s candidates is that the most promising nominees have ‘sworn to liberate banks and financial institutions from government supervision.’

Mr Frank believes the financial crisis happened as a result of failed regulation by government. He is incredulous that a real-life presidential candidate, in the midst of a crisis, could advocate a market free of regulation.

He criticises those who fight for true capitalism, free-markets and minimal government involvement for presenting their ideas in an ‘economy in ruins thanks to complex, unregulated financial derivatives. Monopolies and oligopolies were everywhere. Hourly wages had been falling for decades.’

The state is involved in the economy already…but that’s because it has to be. A completely free market would be a disaster, something not even the business community itself wants to try.

Yes, the financial system did collapse due to complex, badly managed financial markets and yes, big companies do get bigger, and we definitely agree that hourly wages have been falling for a long time. But we do not agree that the Republicans are wrong to fight for less government intervention and financial regulation.

To argue against government regulation does not mean one is arguing against standards. It also does not mean that you are against regulation per se, just government-led regulation.

Mr Frank asks us to look at the backdrop in which the Republicans state their cause. We ask him to look at backdrop of this financial crisis – decades of government regulation and intervention.

The current financial crisis snowballed out of an already highly regulated environment. Whilst some of us see this as proof that heavy regulation is the wrong path, Keynesians believe it is proof that the regulators are either inefficient or do not have enough powers.

Why is that individuals such as Mr Frank and Paul Krugman believe that the best way to deal with a costly situation, such as a country’s debt or banking system, is to spend government resources on it? Why do they never consider that the answer may be to spend less money on it and step back from the scene of the crime, rather than contaminate it further?

Standards do matter and regulation, in some cases and to some extent, is important. However, it has consistently been shown (and what better example than the current crisis) that government regulation is inefficient and leads to poor standards.

Has government regulation improved standards?

Prior to regulatory bodies, the rule of law kept businesses in line – as it does today in many private industries. Arguments for regulation were based on the belief that there was no law which would cover one industry. The first regulatory board in the US was set up in 1887 to regulate railroads. They set rates and fares amongst other things. It led to a cartel-based service, driving many competing firms out of business. Since 1887 several regulatory bodies have followed, including food agencies, pharmaceutical agencies and, of course, financial bodies.

Has ever-increasing government intervention improved matters? Not according to Bill Bonner:

We’ve already seen how in the US, the health care, education and defense industries have been thoroughly zombified. Huge amounts of money have been “invested” in these industries over the last four decades. Despite all the money, people are statistically no healthier…and no better educated.

If it’s so useless why do we have it?

William L. Anderson relates regulation nicely to inflation:

Regulation is like inflation; both are portrayed as bad things, both are products of the state, yet they persist. And they persist because at least some influential individuals are benefiting from them. Thus, those who gain are going to make sure that these issues are portrayed in the most favorable light.

As is noted in the several models below, as produced by Mr Devlin Cooper, governments and businesses can, and do, benefit from regulation. They demonstrate the regulatory capture which occurs in government regulation.

(1) The Public Interest Theory—Government regulation is required to resolve market failures (including asymmetric information, externalities, market power, natural monopolies).

(2) The Capture Theory—Producers have a demand for regulation in order to try to capture greater market shares themselves.

(3) The Stigler Model—The government has the power to coerce, and interest groups want to convince the government to exercise their coercive power in order to benefit the interest groups.

(4) The Pelzman Extension of the Stigler Model—Pelzman mainly extended Stigler’s theory by noting that legislators want to stay in office, and they are willing to offer favorable legislation to interest groups in return for political support.

(5) The Becker Model—You might see greater regulation in areas where there are market failures because in instances of severe market failures, there may be more to gain by regulation.

Market failure is, of course, whatever the government wants it to be. A voluntary transaction between parties can usually be labelled a ‘market failure’ if it does not serve the interests of some particular group.

If it is damaging to an individual or group then this should be managed by civil law.

It is interesting to note that, according to William L. Anderson, in the century following the founding of the United States there was virtually no regulation in comparison to today. That was the system which provided the foundation for the world’s (once) most powerful country. Regulation came about in the late 19th Century around the same time the American Constitution was turned on its head as governments and central banks became more entwined and interventionist.


Government regulation, wrongly, makes us think competition is a bad thing. But competition is a good thing for an economy. A business which has competition knows it must work to attract and retain customers. It will not set unfair prices or charges as it knows that the customer will vote with his feet and go to the competition.

Of course banks, and other businesses, will seek to maximise profits (it is part of the human mindset) but customers, in return, will always seek value. These interests interact in a free, unregulated market as Anthony W.Hager explains:

These interests combine in a free market, making astute businesses profitable while rewarding prudent customers with quality services, all at an agreeable price. Government interference upsets that balance, imposing undesirable results on everyone

The existence of regulatory bodies campaigned for and organised by governments, but supported by business, means markets are now victims to a comprehensive program of government intervention. Business is no longer democratic. Governments are now able to ‘buy’ businesses’ votes and businesses are able to organise regulation to suit them. Understandably, big businesses embrace regulation because it reduces the competitive threat.

Common sense

Ron Paul, a Republican nominee and campaigner to ‘End the Fed’, states that he ‘shudders’ every time he hears someone call for more government regulation as a result of the crisis. For Dr Paul, it is this regulation which drives businesses to behave recklessly. He argues:

  • Regulatory agents are not omniscient, they cannot watch and predict everything.
  • Heavy regulation favours big business; they can afford to hire lawyers to identify loopholes.
  • Regulation is a moral hazard. Knowing an industry is regulated, we place all of our trust in it. We question very little. Hence why we stopped asking where our money was going. We trusted the regulators.
  • “Nothing should take the place of common sense”

Ignoring the fundamentals

Of course it is only fair to posit that financial regulation has only come into being due to the fiat monetary system. As noted above, regulation has grown and compounded over the last one-hundred years. This is the same period in which our money has been distanced further and further from a sound monetary system. This perceived need for regulation stems from the issue of fiat money which has no intrinsic value and can be created at will by both governments and banks.

Governments respond to calls to fix our banking system by increasing the control over the system. But they already have control over our monetary system, the system which led us to this mess. They, or Mr Frank, do not stop to look at the fundamentals which have led people to demand yet more regulation.

It would be strange to not wish for high standards in areas such as health, banking and education. But it is not strange to want to remove the state’s role in establishing and enforcing these standards.

When governments become involved in the setting of rules in the market, they are imposed uniformly. This creates uniform errors, or even crises (as we have seen), when something goes wrong.

Libertarians believe that good regulation must be born of the market, ‘…a bottom up approach,’ as described by Dr Tim Evans. This method would not create these uniform rules which we see today, but would allow a ‘polycentric’ approach to the setting of standards.  This would be led by consumers.

Consumers seek value, not votes. These complex systems of banking and health should not be under the control of a group who have an ulterior motive in the market place. Dr Tim Evans explains, ‘The more complex and dangerous something is, the more it has to be born of real people in real and open markets.’

Government regulation, like fiat money, represents government interference in the market. Both have had disastrous consequences.