The International Monetary Fund has warned that long-term fiscal reforms will be required among advanced economies as it projected the UK’s gross debt to gross domestic product would rise to 90.6pc in 2015.
According to Mark Littlewood at the IEA,
These statistics underscore the need to drastically cut government spending. Only through cutting spending and subsequently lowering the tax burden will growth be stimulated in the UK economy.
The IMF is right to point to the UK’s spending on health and pensions as areas of concern. However, when pensions liabilities are taken into account, UK national debt already stands at a staggering 333% of GDP; far worse than the 90.6% the IMF predicts for 2015. It is time for politicians to be frank and honest about our real debt levels.
The coalition government has made a start, but it must be bolder and more radical if it truly is to deal with this gargantuan task.
Regular readers will remember the Cobden Centre article by Prof. Kevin Dowd, which suggests the figure may actually be as high as 530% of GDP — “Two different methodologies by reputable researchers, both painting a very bleak picture”.
In his latest article for CentreRight, Steve Baker explains his vision of the Big Society:
The change we need is a change within. From a belief that human relationships should be based on class conflict and mutual plunder mediated by the State, to a reliance on mutual cooperation. From the view that business is somehow bad, to the realisation that all enterprise is social. From condemnation of profit, to an understanding that it is a measure of the value created for others. From fear of bearing risk, to the truth, that the search to create value for other people is the foundation of worthwhile community. From waiting for the State to decide and provide, to energetic, innovative mutual support.
In the UK there is little if any discussion on Intellectual Property Law. I think it would be correct to say that it would be considered a backwater of law for specialists and of not much relevance to the better running of society . Tucker and Kinsella, in this article, put IP law at the very heart of the advancement of a free society. Most readers of this site will know and understand that private property rights exist only when there are scarce goods, but what of goods where there is no limit to them such as an idea, or a copy of an original bit of digital data? They argue conclusively that these are truly free goods and that there is no ethical, moral or philosophical justification for the coercive restrictions on the use of these free goods. This may well be a challenging read to your commonly perceived views, but well worth a read no less.
As I reflect on this article and what this would mean to wealth creation is that if all IP laws were removed, we would unleash a tsunami of intellectual excellence that has been applied (restricted and protected thus limiting its use) in a proven fashion by entrepreneurs, in technological improvement for example, that would massively benefit more people.
I spend my time explaining to monetarists and underconsumptionist crackpots how wealth is really created:
You can only create wealth in society by entrepreneurs thinking about new ways to mix existing factors of production in better ways, by invariably investing in more intense capitalistic methods of production to produce better more plentiful and cheaper goods and services. No amount of increasing the money unit or taking from existing pools of wealth to spend via the government will create wealth; only entrepreneurs will, by going though this continuous process over time. Government should get as far away from this process as possible by not taxing corporate profits, not taxing wealth transfers from one generation to the next, not trying to “pick winners” via an Industrial Strategy, and not imposing rules and regulations over and above standard common law protections for consumers.
Now I will add “not giving monopoly privilege to creators of technology, ideas and know-how, as this prevents their widespread application; these are unlimited free goods, do not need to be economised, therefore they should not have property rights attached to them.”
Not many people are aware that on the 5th of April 1933, the US citizens were instructed to deliver up all their gold (money at the time) to the Federal Reserve and get less in purchasing power back. This confiscation of wealth would make even Emperor Nero or Henry VIII blush with its boldness.
Congressman Ron Paul has always campaigned for the Fed to open its books and have this gold counted as there are rumours that all of it is not there. An open audit would settle the matter. The Fed refuses. You can draw your own conclusions from this.
Rep. Ron Paul (R-Texas) said he plans to introduce legislation next year to force an audit of U.S. holdings of gold.
Paul, a longtime critic of the Federal Reserve and U.S. monetary policy, said he believes it’s “a possibility” that there might not actually be any gold in the vaults of Fort Knox or the New York Federal Reserve bank.
The libertarian lawmaker told Kitco News, a website tracking news about precious metals, that an audit was necessary to determine how much the U.S. maintains in gold reserves in case the government were to use gold to back the dollar.
“If there was no question about the gold being there, you think they would be anxious to prove gold is there,” he said.
“Our Federal Reserve admits to nothing, and they should prove all the gold is there. There is a reason to be suspicious and even if you are not suspicious why wouldn’t you have an audit?
“I think it is a possibility,” Paul said when asked if there was truth to rumors that there was actually no gold at Ft. Knox or the New York Fed.
Paul had been one of the Republicans to spearhead a broader audit of the Fed as part of the Wall Street reform bill passed through Congress this year. The provision, which was weakened somewhat in the final version, found Paul joining with a number of Democrats to require the Fed to open its books and outline its assets and liabilities.
The gold reserves, which Paul’s new bill would audit, are generally seen as a guarantee on a nation’s currency, but the U.S. moved the dollar away from being tied to the price of gold in 1972.
Paul stopped short of calling for the reinstitution of the gold standard and instead called for the government to allow the use of hard currency — gold and silver tender — alongside the use of the dollar.
“If people get tired of using the paper standard they can deal in gold or silver,” he said.
Desperate times lead to desperate measures and on a side note, I wonder what is being planned now. I remember being told at the start of my business career by a wise old multi millionaire, “remember, when the banks or the government need money, they can only come after you if you have money,” i.e. they can’t confiscate what you do not have.
In his usual delicate and roundabout way, in the first of two new videos, Peter Schiff criticises several recent media articles about how a new recessionary dip is impossible, due to the nature of the current upwardly sloping bond market yield curve.
[As Gary North explains, most ordinary US recessions are presaged by a downwardly sloping yield curve, where long-term interest rate yields are lower than short-term ones.]
With short-term interest rates at zero, Schiff argues it is impossible for the bond market yield curve to play any meaningful role in such forecasting, because no part of it can go lower than zero.
[You cannot push a man back any further when he is already hard pressed up against a wall; physicists call this a boundary value problem. In the past, the inverted yield curve signal did play a useful part in predicting recessions, because investors knew the Federal Reserve would engage in a standard cycle of first cutting interest rates to please incumbent US presidents, to 'stimulate' the US economy at crucial political times. Later, the Fed would then increase interest rates, in timetable fashion, to cut off the ensuing rise in price inflation.]
“The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting.”
Things have changed, says Schiff. The Fed has now boxed itself in, because it has reached an end game in maintaining this cyclical ‘heating’ and ‘cooling’ cycle. He explains why the Fed will now keep interest rates at zero for as long as it can, rather than raising them in the old fashion, thus invalidating the chartists’ yield-curve-must-invert prediction tool, based upon the Fed reflexively raising rates in ‘ordinary’ situations.
Schiff then argues why the bond yield curve shape actually indicates price inflation ahead, rather than the impossibility of a further ‘double-dip’ recession.
To continue his debt analysis, Schiff then comments upon the various US bond mutual funds being flooded with the savings of American investors, who are betting on US government bonds rather than stocks. Schiff thinks these bets are misplaced, because those savings are being wasted on useless government spending rather than useful productive investment in industry.
The government will not pay the last bond holder back in real purchasing power, says Schiff, but will pay back these bonds in newly printed Federal Reserve currency, when they face the position of being unable to roll US government debt over any more and the Fed steps in with its printing presses to save their day.
“The Fed chairman must do as the President wants or the Fed would lose its independence.”
Moving on from bonds, Schiff extends his earlier ideas on unemployment benefits and defends his core position on why he thinks the Dollar is going to ultimately collapse:
In his second video, Schiff comments upon the recent news of what the mainstream media thought was an unexpected 27% drop in US housing sales.
‘Why are they surprised?’ asks Schiff. The housing bubble has burst and cannot be reflated. If the government keeps trying to reflate this bubble, they will keep wasting all of the resources employed and it still won’t work.
The video goes on to discuss the continuing plunge of the Dollar against the Yen and also ends with a defence of Schiff’s own predictive record in the face of a hostile US media, all of whom only wish to hear that the Emperor is wearing a full set of rich embroidered clothing tailored from the finest silks and cottons:
Below is also the latest economic commentary article by Peter Schiff, published by Euro Pacific Capital, expanding on several of the issues discussed above. Look out particularly for the single line quote which precisely summarises, in a piquant nutshell, the main reasons behind the multi-decade war-torn hazardous strife of most of the African continent:
In a CNBC debate last week, former Labor Secretary Robert Reich presented a set of contradictory beliefs that unfortunately reflect the conventional wisdom of modern economists. In a discussion with Wall Street Journal columnist Stephen Moore, Reich correctly and comprehensively listed the reasons why American consumers could spend so lavishly before the crash of 2008 and why they can no longer keep up the pace. But instead of making the logical conclusion that former levels of spending were unsustainable and that spending should now reflect current conditions, he advocated that government take on additional debt so that tapped out consumers can spend like they used to.
To achieve this, Reich called for lowering taxes on working Americans and raising taxes on the rich. He argued that middle-income Americans are more likely to spend additional dollars while the rich are more likely to save and invest. As a “demand-side” economist, Reich made clear that spending is superior to savings and investing as a catalyst for growth.
To put it simply: Reich believes that the cart pushes the horse. In his worldview, businesses produce goods and services simply because consumers spend. Therefore, anything that increases spending fuels growth. Unfortunately, he fails to see what should be strikingly obvious: capital formation must precede production, which then allows for consumption.
In a complex society like ours, those relationships are hard to see. However, if we break it down to a simpler level, it becomes more obvious (as I try to accomplish in my new book: How an Economy Grows and Why it Crashes). For example, let’s take a look at a simple barter-based economy consisting of only three people: a butcher, a baker, and a candlestick maker.
If the candlestick maker wants cake, he can’t simply demand that the baker hand it over. The cake needs to be produced, and the baker has to expend labor and material to produce it. Unless the candlestick maker offers the baker something of value in exchange, the cakes won’t get baked. The ability of the candlestick maker to demand cake from the baker is a function of his ability to supply candles to trade. Without production, consumption can’t occur.
What if the candlestick maker gets sick and produces no candles? As the baker would be unwilling to give his cakes away, he would likely stop baking cakes for the candlestick maker. Economic activity would naturally contract until the candlestick maker recovers.
But according to Reich, if the candlestick maker doesn’t have anything to trade, the government should step in and give him candles. But where will the government get them? It could take them from the candlestick maker; but if he is not making candles, how will he pay the tax? Even if there were a few candles left to tax, any that the government took would simply transfer demand from the candlestick maker to the government. No new demand is created.
Alternatively,if the butcher is still healthy, the government could tax him, and give his steaks to the candlestick maker to buy cakes. However, this doesn’t create new demand either. It simply transfers demand from the butcher to the candlestick maker.
Some may feel that a barter-based metaphor doesn’t hold water because the ability to expand the money supply and create credit gives an economy far more flexibility. This is a deceptive argument. Although money is more efficient than barter, it doesn’t change the dynamic between production and consumption.
But Reich suggests that printed money can stimulate demand just as effectively as real candlesticks. But what good will the paper offer the baker if there are no candlesticks to buy? All the baker can do is bid up the prices of those goods, like steaks, that continue to be produced. Similarly, if the government simply prints money and gives it to people to spend, no new production occurs. Prices merely rise to reflect the increase in the supply of money relative to the supply of consumer goods.
In a more complex economy, the relationship between production (supply) and spending (demand) still holds. Every consumer either lives off his own productivity or the productivity of someone else. When individuals work, the wages earned result from the productivity of labor. The ability to consume is directly related to the production of goods or services that result from one’s efforts. However, if people waste their labor in unproductive jobs, little real demand is created.
In the Soviet Union, everyone had a job, yet workers had to stand in line for hours for basic necessities. Although everyone worked (for the government), production was too low. This lack of production meant wages delivered relativity little in the way of purchasing power.
Since production cannot be created by government stimulus, neither can demand. To the extent that there are savings, demand can be brought forward by stimulus – but only at the cost of future demand, plus interest. If stimulus could produce demand, then no nation would be poor. Taken to its logical end, Reich’s argument suggests that African poverty would be wiped out if African governments simply printed money more freely. In reality, Africans are not poor because they lack currency to spend; they are poor because their corrupt and inept governments inhibit production by soliciting bribes, denying property rights, abrogating contracts, preventing the accumulation of capital, and nationalizing profits.
Reich is correct about one thing: Americans are indeed broke. But rather than encouraging the country to spend itself deeper into debt, he should call for greater savings so that we have the means to invest in new businesses and new industries. That is the true road back to solvency, but it will only work if we have less government spending, fewer regulations, lower taxes (particularly on those with the highest propensity to save and invest), and higher interest rates.
Unfortunately, Reich and his allies are calling the shots in Washington. The country cannot recover until the only thing politicians stimulate is demand for new economic leadership.
In news which will please the Mogambo Guru, in a recent King World radio interview Ben Davies, of Hinde Capital here in England, predicted that silver is about to go through a price revolution. You can read Hinde Capital’s own report about that, here:
Mr Davies actually dared to employ the word ‘Austrian’ in his situational explanation, thus demonstrating high intelligence, discernment, and refinement. This deep level of insight was further displayed by his disentanglement of the complex picture underlying the extraordinarily complicated silver markets. Here is a very brief synopsis of his fascinating exposition:
Since Mao’s edict banning the personal holding of gold and silver ended in 2003, China has been a major player in both the growth of demand for gold and silver — Davies believes that China may even move into a much greater usage of silver coinage, basing this move upon the ‘Silver Panda’ coin
[The word 'Yuan', one of several names for Chinese currency, itself derives from the Mandarin word for 'Round', which symbolises the ancient Chinese reliance upon round silver coins — the Japanese word 'Yen' also probably derives from 'Yuan', indicating a close historical connection to commodity money in the Eastern cultural mindset, which augurs well for the eventual re-adoption of commodity money in the moribund West, when we see how well the East does with it]
Silver has been held down like a cork underwater, particularly because of its use in complex short future and option derivatives positions, but this cork may be about to be let go as these derivatives markets are cleared up
[The historical ratio between gold and silver was generally around the 15:1 mark, which could indicate a forthcoming Great Leap Forward in the price of silver, especially if the Chinese move steadily towards a standardised silver coinage and abandon paper completely, with the ratio currently at approximately 65:1]
Davies also believes there isn’t enough silver to go around because of industrial demand, with big moves up in the silver price from September onwards
A reader has sent in his thoughts about the recent proposals to reform the regulatory apparatus of the UK banking system:
Last Friday I had a quick view at the report by HM Treasure on a proposal to reshuffle the institutional setting for financial system regulation and oversight in the UK. The introduction (4 pages) is interesting but sometimes depressing. It openly recognised that UK authorities (Bank of England and FSA) failed to see the problems coming and to react adequately. Good. However, the solution it proposes is not to improve the understanding of the building up of bubbles and imbalances, or to reinvigorate the political will so it can make decisions even if those affect the banking status, or to stop trying to achieve the unachievable (a big apparatus able to foresee everything in the system as a whole), but… just rearranging chairs… (every one else in the world, G20, ECB, FED, is rearranging chairs too, so this reshuffling is quite mainstream). However, maybe in the case of the UK there is a possibility to introduce sound thinking in this new Bank of England-based structure (and stop the endogamic kind of thinking within current monetary authorities), through the external members of the newly created “Financial Policy Committee”. The report says (p. 17) among other things:
2.43 It will be important to ensure that the external members of the FPC are able to provide sufficient levels of expertise and challenge to the Committee’s deliberations – this will not only include experience of banking, but also other financial sectors such as insurance and investment banking and, of course, macroeconomic expertise.
2.44 In addition to the chief executive of the CPMA, the Chancellor will appoint four external members of the FPC using a similar recruitment process to that used for the MPC. The Government will look carefully at the best way to ensure that external members demonstrate ample relevant knowledge and experience and the ability to work constructively in a committee environment, without conflicts of interest that would prevent them participating fully in the work of the Committee.”
My take on this is that the external members of the FPC have to be radically different in make up than the internal members of the current MPC i.e. usually a academic, or some who has come from that background. Entrepreneurs, great business leaders and representatives from the SME sector , all who operate at the coal face would have more of an idea about what is and is not actually going on in the economy, better still, why not think about reforming the whole system anyway so we do not rely of 20 or so central planners to determine the value of our very currency, arguably with language, the foundation of civil , peaceful society.
Above all, if we are only tinkering and not radically reforming, he concluded “please appoint those WHO DID SEE it coming and who have a sound theoretical framework behind it (and kick out those who were clueless…)”
Bravo to that, we can name a number of Austrian School economists and Austrian influenced fund managers and entrepreneurs who could do this job.
Mortgage lending would be “capped” to stop borrowers taking out risky loans under radical Bank of England plans to prevent a repeat of the credit crisis, a senior official has disclosed.
But why did borrowers wish to borrow so much, so riskily? And why did lenders wish to lend so much, at such risk?
In the first place, credit has been too cheap for too long. Low interest rates are bound to encourage people to borrow more and save less. Therefore, people saved less and borrowed more. This was the result of the Bank of England’s decisions.
House prices kept rising because people kept borrowing and pumping money into housing. Housing was excluded from the Bank’s measure of inflation, so rates stayed low.
The appearance of inevitable and uninterrupted house price rises gave the impression that we were in a new era within which the old rules did not apply: borrowing caps could be raised to excessively risky levels and borrowers could rely on price increases to deal with the capital.
Lenders used models which fundamentally understated risk. For example, markets do not behave within the Gaussian or “normal” distribution: extreme events happen more often than a normal distribution predicts. Furthermore, the risk of mortgage default correlates across similar mortgages when the economic environment changes. Still, the models said risks were lower than they were, so more credit could be extended.
Since the lenders were neither, on the whole, mutuals or partnerships with open-ended liabilities and since the employees making the decisions shared only in the upside, there was insufficient motivation to manage to the true level of risk.
Moreover, securitisation of mortgage pools and so forth palmed off the risk onto hapless investors who probably trusted the risk models and the market environment created by excessively cheap credit. And, “Hey, look at the returns!” The personal touch was missing from the relationships between borrowers, ultimate lenders and intermediaries, further corrupting the system.
Of course when the pantomime ended, the taxpayer was forced to pick up the bill. And still bonuses were paid in bailed-out banks!
Now, having created the boom with cheap credit and moral hazard, the Bank plans, not to fix the root problems, but to pile intervention upon intervention…
There is much else to be said, for which I recommend The Alchemists of Loss and Money, Bank Credit, and Economic Cycles. However, on the face of it, the Bank’s present proposals merely extend the infantilisation of the financial services sector.
Later this week, I will indicate ten serious plans for financial reform.
The Mises Institute is doing some great work in building up a comprehensive online university curriculum covering every aspect of Austrian economics. In this sample introductory lecture from the Mises Academy’s inaugural online course, “Understanding the Business Cycle,” Dr Robert P. Murphy attempts to answer the question, “What is Austrian Economics?”.
The subjects covered in this introductory lecture, after a brief introduction, include:
Methodological Individualism (starts at 1:45 minutes) — The basis of all economics should be based upon the individual person making discrete choices
Methodological Subjectivism (10:00 minutes) — The preferences behind those choices and how they determine the processes behind price formation
Market Process vs. Equilibrium Determination (17:00 minutes) — The Austrian need for entrepreneurial interaction in the market process and why other schools of economics entered the rival blind alley of mathematical determinism
Time Structure of Production (26:15 minutes) — The vital and almost unique inclusion of the passage of time in how Austrians view capital formation and structures of production, and how this builds towards the human act of final consumption
A Priori Deductive Laws (31:30 minutes) — The Misesian and subsequent Rothbardian tradition of building up economics from basic axioms, the primary one of which is that humans act
Why Austrian Economics Matters (39:15 minutes) — A brief exposition on why the Austrian school is seen by outsiders as being merely ideological, but why it really matters despite this criticism
Overview of the Mises-Hayek Trade Cycle Theory (44:00) — The view from 30,000 feet of the Austrian Business Cycle Theory (ABCT) and how this theory lies behind the booms and busts of the modern financial world
Materials recommended for further reading alongside the lecture series include the following two books, both of which are available online in their entirety:
Right at the end of his lecture, Dr Murphy also points towards the famous Hayek-Keynes rap video, which explains the entire dichotomy between Keynesianism and Austrianism in a mere seven minutes and thirty-three seconds. Fortunately, Dr Murphy’s reference in his lecture provides me with the great excuse to link to this video here:
For those with a few hours to spare, rather than seven minutes and thirty-three seconds, my own favourite and fuller introduction to the Austrian school is the six lecture series provided by Murray Rothbard on The History of Economic Thought:
