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By Alasdair Macleod, on 16 December 11
For some time I have taken the view that rescuing eurozone governments from their financial crises was too big a job for the European Central Bank, which should stick to keeping the banking system going. The only hope was that individual governments would be forced to face up to the reality of cutting government spending hard and quickly. They have failed to even begin to address this fundamental problem. As a consequence, it is now impossible for them to roll over their maturing debt, let alone raise new money. Instead there is now a scramble into cash as banks and hedge funds prepare themselves for sovereign defaults.
Posturing over geared stability funds, financial transaction taxes, installing unelected governments, putative treaty changes and finally enhanced fiscal supervision proposals have finally convinced markets that the only outcome is widespread government defaults. There is now no alternative and the fallout will have to be managed.
The inept handling of this crisis has weakened the eurozone’s banks to the point that they are unable to subscribe for more debt. Furthermore, the ECB cannot afford to see the liquidity it provides to European banks disappear into new government bonds that will default anyway. Therefore, it is now in the ECB’s interest to see sovereign defaults occur as soon as possible, unless the International Monetary Fund can come to the rescue, which is looking less likely by the day.
There is growing evidence that there is insufficient support for an IMF bailout from its member governments. The IMF’s charter is as an intergovernmental lender of last resort, not a supporter of government profligacy. Following the failure of the G20 meeting in mid-October there has been no substantive attempt to rescue the eurozone. The telephones might be buzzing, but there is no urgent meeting, suggesting that events must take their course.
So the quicker these defaults happen, the sooner the ECB can work with the national central banks to bail out the major Eurozone commercial banks. Once we accept this line of reasoning, we must think about the likely candidates. In no particular order they are France, Italy and Greece: France and Italy because they have to roll enormous amounts of debt in the coming months and Greece for obvious reasons. Less pressing perhaps but also likely default candidates are Belgium, Spain, Portugal and Ireland: Belgium might fall with France and the others have the potential to struggle through but might chose to wipe the slate clean. And when the first goes, the rest will surely follow rapidly.
The sequence of events is now under way. This will be followed by the defaults themselves, and the likely trigger will be escalating French government bond yields.
In summary, we have reached the point where the ECB’s vested interest requires eurozone governments to default because further delay will make the rescue of the currency and banking system more difficult. Expect co-ordination between the Bank for International Settlements, The Fed, Bank of England and Bank of Japan to smooth markets through the turmoil and to back up the ECB.
This article was previously published at GoldMoney.com.
By Adrian Ash, on 15 December 11
The markets are telling us that there is a painful abscess in Europe, with the Euro at its core, writes Paul Tustain, founder and director of BullionVault.
We believe it is driving Germany and France a little mad, and that they are abusing their European partners as a result. They are about to commit an injustice which will strip away the profound goodwill which they have built up over 50 years, and they risk tearing Europe apart.
All our European friends are today irritated by Britain’s refusal to come with them. Not for the first time we are the odd man out, and being pointed at by the shallowest politicians in Europe. It’s OK. We can live with a little name-calling for the moment, and we look forward to quietly rebuilding our friendships with every one of you in the future. We hope it will be soon, although we fear it may not be.
You are right. Our British financial system contributed – in part – to the mess we are in. But you are wrong as to the reason and the solution.
What really happened is that over a period of years the political classes in New York and Europe (including the British) worked together to hold down the cost of credit. Ever since 2001 western politicians suppressed the will of the market to enter into a mild recession. What is this ‘market will’? It is the combined message from a thousand million transactions a day, expressing the free choices of 400 million people. Looming recession is the evidence that free people think it sensible to cut back a bit.
In 2001/2 that’s what western people chose to do. But the politicians wanted them to go on spending. “Put off recession to ensure re-election” said their advisors. How? By making central bank money available cheaply to the banks.
Of course we agree that bankers’ bonuses are a problem which badly needs addressing. But politicians, not bankers, created the febrile and ultimately ruinous deal-making atmosphere of 2004-2006. They skewed the economic landscape by continually releasing funny money from the central banks, and opposing the tendency to mild recession which was the judgement of the market; that means our judgement.
Politicians created a world where the only bankers who could keep their jobs were credit addicts. The villages around London are full of redundant and cautious 60 year old bankers who lost their jobs when their natural risk-aversion allowed credit-fuelled junior banks to win all the business, take them over, and clean out the old guard. Easy, state-sponsored credit found its home under the control of inexperienced and overenthusiastic bankers. They thrived only because politicians had skewed the economic landscape in their favour.
Yes, we can blame ‘the free market’ because those who acquired credit got it freely in trade with a supplier of credit. But to take this line is to wilfully misunderstand what the market is. The market is your freedom to choose. The marketplace is what you get when one billion purchasing decisions are made every day by 400 million individuals who are exercising free choice. The problems occur when people exercise those choices unwisely, which they will certainly do if they are being pushed and shoved into purchasing decisions which suit politicians seeking re-election.
Ever since 2007 the market – that is everyone who has made a choice about it – has been waking up to the deep contradictions within the Euro. Gordon Brown (let’s give him some rare credit) was one of the first. He had understood that no-one was asking the key question of how the Euro could hold together when the weaker nations were bound into union with the extra-ordinary productivity of Germany.
In Europe nothing so simple as an awkward question is allowed to get in the way of government progress. They marched forward regardless, and now the pesky market is expressing the opinion of a billion votes a day that the Euro is going to fail. Why? What went wrong?
This did. The false market in borrowed money which the politicians created back in 2002 made money accessible mostly to people who were a good risk to lenders – which means mostly older, richer people. To begin with they bought houses, which dragged the price up to impossible levels for first time buyers. The money continued to be pumped in by the central banks. Next to bubble was investment assets, and once again it suited those who were already wealthy. Poorer people got to keep their jobs, but investment assets, the bedrock of a retirement income, were becoming ever more expensive, making nice capital profits for richer people but yielding less and less in income. So it was again profiting those who already had money, and condemning hard-working people to a lifetime of slog, crowned with a tiny pension.
Yet whenever the government looked at the numbers there always seemed a risk that if they took their foot of the monetary accelerator the economy would stall; and it would have. So still the money was pumped in, and now bond yields descended to 1.5% as their values bubbled (a bubble which remains un-pricked) and hundreds of billions started accumulating at the banks.
Houses and a comfortable retirement were by now out of reach of hard-working, deserving and particularly younger people. But the enemy was not the free market, still the only practical embodiment of their freedom; the problem was the corruption of the market by monetary politics.
It was the irresponsible and self-serving policy of elected representatives – seeking re-election all over the western world – which is without any doubt the root cause of the explosion of credit which we now have to pay for. Politicians have hoodwinked you if you believe ‘the market’ or ‘the bankers’ are at fault, and you should not be taken in. The market is not a thing you can meaningfully blame. It is simply an expression of a billion private votes cast every day in what appears to both buyer and seller to be sensible and private trade, under the prevailing conditions set by the politicians. The problem was the prevailing conditions set by the politicians, not the mechanism of the market which was, as it always is, simply an expression of the judgement of free people.
But still easy money aggregates to richer people, not poorer ones, and we had ended up with an enormous pile of their savings. It had already bought houses, and investments, and still more kept on coming. Eventually vast quantities accumulated at banks, and for want of remaining opportunities it was lent to underfunded governments. As it turned out this was extremely unwise, because those governments are now threatened by default. That always looked possible, because none of them could keep up with German economic growth.
Bad lending happens from time to time. Usually it means the creditors lose their money, and gain some wisdom. Only this time some of the creditors – particularly Germany and France – don’t want to lose their money. Rather than see their banks suffer they want to force two or three generations of Greeks, Irish, Portuguese, Italians, Spanish and Belgians to pay, pay, pay. Germany and France lent stupidly to your father, yet you become the indentured slave.
That should never be how bad money-lending is resolved. The lender should take the hit when the borrower cannot repay; it helps to focus his mind before he lends. In Britain we got rid of inter-generational debt servitude 200 years ago, and it is not progress to return to it.
But default now would be particularly bad for German and French banks, so our European friends are deluding themselves that what is at fault here is ‘the market’, which is why they are trying to devise ways to tame it. What they want to do is to stop it from making its judgement against the Euro, so that they can follow on with their agenda, controlling first one market, then the other, and always with the officers of Brussels making the decisions which are ordinarily made by people exercising their free market choices. The current European plan is to disenfranchise your judgement upon them by making the financial marketplace somewhere which is too expensive for you to cast a vote, because it will be taxed by them.
Right now they have the financial services market in their sights. If – they reason – they can stop those votes being cast in the marketplace then they can carry on doing what they do (which obviously must be right) and no-one and nothing will hold them to account.
To be fair that is not their conscious intention. They are simply trying to repair a difficult situation of massive debt. But they are failing to make the intellectual connection between free choice and markets. That is a common weakness in governments, and this is what caused David Cameron to be hauled before his Franco-German counterparts and be instructed to accept a tax on financial services.
As it happens in Britain we made the same policy errors as Europe, we created the same mountain of money, we have a similarly bust government, and so we have in one country a microcosm of the entire European mess. But we are going to resolve it in a very different way. We are not going to turn into slaves the subordinates and the children of people who borrowed our money. Nor are we going to take the money explicitly from those who lent it (though perhaps we should). That won’t happen because that would mean our government would go into default, which it will not do while it controls the issue of money. So, instead, we will use a third way.
Our government is going to live with a profound devaluation of Sterling, which will eliminate the government’s own debt without explicit default. In this way it will share the pain of default across all creditors. All savers – even those whose debtors are perfectly solvent – are going to share in setting this thing back on a sustainable course.
At different stages through this process of adjustment we will experience interest rate hikes, currency crises, and sharp inflation, which will continue until twenty five years of savings, and twenty five years of a credit-fuelled house price bubble, have been removed from the system by devaluation. By the time it ends the creditors – taken collectively – will have paid. By then houses will be again affordable by anyone with a half decent job, the bond market bubble will have burst, long standing pension savings will be near worthless, equities will again yield sensible dividends, student loans will have inflated to irrelevance, our freedom to choose our private actions in our marketplace will have been preserved, and Britain will again be a great deal fairer than it currently is. It’s going to be a very unpleasant journey and it looks like we are making it alone.
In Europe many will doubtless laugh quietly as all this happens to us. But they will have no reason to hate us for our problems, which will be wholly independent of theirs. Besides, they will probably be too busy hating each other. The creation of the Euro has caused 1,000 years of carefully constructed and often hard fought mutual independence to be sacrificed on the altar of monetary union. We think that Europe’s political class is making a monumental error in holding on to it because it carries all their political credibility. Their resulting policy is to enslave half of Europe, and to kill the messenger – the financial market. This happens to be the section of the European economy which we in the UK have specialised in, while we have been buying German cars, and French aeroplanes. So let’s be clear, David Cameron did not have much of a choice.
In summary then, the proposed Franco-German policy is built on the lie that it is the market which is the cause of the problem. We think their policy is dangerously brutal to European debtors, that it is unfair to Britain, and that it transgresses the existing treaties whose laws were designed to stop governments doing exactly what the leaders of France and Germany now want – which is to suppress the rest of Europe into servitude. We think it will end in deep loathing of Franco-German power, and destroy the one part of Europe which we wanted to join, and which can be saved if we stick to the existing treaties. That is the single market. To us it is a single market of free choices which guarantees the freedom and the prosperity of our continent, yet that is what is being destroyed in an effort to cling on to the Euro.
Contrary to popular belief most of the British love Europe and the Europeans. But we also love our free market and the way it exposes the vanities of overreaching politicians. Last week Germany and France forced David Cameron to choose between the two, and he chose well.
Paul Tustain is the editor of www.Galmarley.com and director of BullionVault. This article was previously published at BullionVault.com.
By Alasdair Macleod, on 14 December 11
Last Friday, David Cameron came back from Brussels having rejected proposals to draft a new European Union treaty, having failed to get promises of adequate safeguards to protect Britain’s financial sector. But given that the UK has no veto over Brussels’ power to regulate anyway, the prima facie reasons presented to Parliament were therefore not crystal clear. However, Cameron must have been aware that ratifying a new treaty without safeguards was a non-starter, and the fact that the dominant mainland powers were not even prepared to consider them is a reflection of their lack of rational thinking rather than his. After all, they should have been briefed that any treaty changes now require a referendum under UK law, and given the EU’s self-aggrandising tendencies, any treaty changes would be a tough sell to Parliament – let alone the electorate.
What was proposed in Brussels was a typically dirigiste response to unwelcome economic reality. Perhaps the script intended was as follows: we go through the motions of imposing fiscal controls and responsibility, and that should be enough to get the European Central Bank – working with the International Monetary Fund if necessary – to release the money to continue to finance our political ambitions. This is not the direction of travel for the UK.
In political terms we are probably witnessing the end of an empire, and when such an event occurs it can be swift. Forward-thinkers need to look beyond the EU as an institution, and in this respect an alternative and as yet unrecognised future for Germany is evolving. She faces stagnant markets in Europe, declining markets in the US, but booming markets for her products in China, South East Asia and other emerging economies. Even if the eurozone does not break up, her economic motivations will lie increasingly elsewhere and the weaker EU members will remain an unwelcome burden.
Her biggest problem is France, a point not yet recognised by commentators and as yet untested in the markets. In the short-term, Sarkozy faces an election next May, which explains why he must stick like glue to Angela Merkel rather than cut government spending. But France also has to refinance the same amount of debt as the Italians before May: about €180bn, and half in the next two months. This is an impossible task without external help, because the major French banks which have always been coerced into buying French government bonds in the past are themselves in a critical condition. A short-term fix is urgently needed of which there is no sign as yet.
We have to trust that there will be a solution, but talk of treaty-change does not represent urgent action. Anyway, the French socialists, who look like winning May’s election, have said they will not ratify any new treaty – creating more doubt and uncertainty for markets. It does not take much imagination to see French bond yields rising to over 7%.
This is the mess that Cameron has disassociated himself from. It will not be long before this becomes more widely appreciated.
This article was previously published at GoldMoney.com.
By Sam Bowman, on 4 November 11
This article was co-authored with Adam Baldwin and previously published at adamsmith.org.
Our new report, released today, assesses the impact of a Financial Transaction Tax (aka Robin Hood Tax) on Britain’s economy. The results are eye-watering – it would destroy the City’s derivatives trading sector, hit Britain’s growth and ramp up market volatility. The executive summary is below:
1) The European Commission has proposed a Financial Transaction Tax (FTT) on all securities traded with at least one party within the European Union. A tax of 0.1% would be applied to shares and bonds trades and 0.01% to derivatives trades, including over-the-counter derivatives, of which London is a world centre.
2) The EC’s impact assessment projects a 1.76% hit to long-term (20-year) growth across the EU. This would amount to a £25.58 billion cost to the UK economy over this period, and a £185 billion cost to the total European Union economy (2010 prices). This is based on a direct application of the cost to Britain’s economy. The true figure is likely to be far greater, because of Britain’s disproportionately large financial sector (and especially its derivatives trading sector).
3) The EC impact assessment also projects up to a 90% decline in derivatives trading if its proposed Financial Transaction Tax is implemented. The City of London is the centre of global over-the-counter derivatives trading, accounting for nearly half (45.8%) of all global interest rates derivatives turnover. This would adversely and disproportionately hurt the London economy, and would destroy a socially-valuable financial activity that is integral to the modern British economy.
4) Contrary to some supporters of the FTT, the tax would increase market volatility. There is no empirical support for the idea that the FTT would reduce volatility. Indeed, by making transactions more costly, the tax would make markets less responsive to new information and more prone to violent lurches up and down. Academic models of the tax have been inconclusive at best.
5) The FTT would reduce market liquidity in all securities markets. 40% of the London Stock Exchange’s volume is based on high-volume, low-margin transactions, which would be wiped out by the FTT, making markets far more illiquid. Markets’ ability to incorporate new information into asset prices would be undermined.
6) Unemployment would rise if an FTT was introduced. At the margin, the FTT would mean less investment and less output. The tax, if implemented in 2014 as proposed by the EC, would slow down an economic recovery and reduce capital investment. The EC’s long-run projection for this is a 4.5% reduction in investment.
7) If the FTT was only introduced in the EU or G20, many traders currently operating in the UK would relocate to places like Hong Kong, Singapore or Zurich. There is little scope for a worldwide FTT – even types of trades that are affected in a minor way by the FTT would likely move en masse to other jurisdictions that would flourish as FTT-free zones.
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By Steven Baker MP, on 27 November 10
 Via Note from Her Majesty’s Treasury on EMU (Novembre 1989):
The European Council agreed at its meeting in Madrid in June to launch the first Stage of economic and monetary union (EMU) on 1 July 1990. The Council also confirmed the objective of the progressive realisation of EMU but did not specify how that objective was to be realised. By common consent the next steps in economic and monetary integration of the twelve Member States will be crucial to the future economic development of the European Community. That development must be based on firm and durable foundations which reflect both the diversity and the unity of the economic and monetary situation in the Community. This paper suggests how such sound foundations should be laid in a way which avoids the pitfalls of other approaches now under consideration.
Follow the link above for details of how Britain thought competing European currencies would have been a better alternative to Delors’ Euro: competition would have made money honest.
It’s a fascinating read which lays aside the notion that competing currencies are far beyond the mainstream. What a pity this plan wasn’t enacted.
And a grateful hat-tip to Michael Fallon MP, who brought the existence of this paper to my attention.
See also Denationalisation of Money: The Argument Refined.
By Robert Thorpe, on 24 November 10
As the bailout of Ireland begins in earnest, many in the media are asking “What went wrong?”, and coming to some dubious answers. The circumstances are well known. Ireland saw a long boom before the financial crisis. That boom was accompanied by a large rise in house prices and a boom in building construction. After the financial crisis and ensuing world-wide recession, many Irish banks were bailed out by the government or nationalised. The Irish government practised austerity policies, increasing taxes and reducing expenditure. But, as the cost of the bailouts increased, so did the budget deficit.
Many commentators are now claiming that Ireland’s membership of the Euro was the underlying problem (for example, Peter Oborne. In this argument many sound economic ideas have been mixed with careless ones.
One argument is that if Ireland had not been part of the Eurozone it would have been able to devalue it’s currency. It’s true, that if Ireland still had the Punt then this would be possible but not as significant as many people believe. In today’s world with floating fiat currencies controlled by central banks there is no clear concept of “devaluation” any more. The economic prospects of the region encompassed by each currency and the policies of the central banks are taken into account by the exchange rate market, and the exchange rate fluctuates minute by minute. This means there are two different arguments. The first, which focuses on the private sector, is that when a country enters recession the value of it’s currency falls allowing a growth in exports. This is a dubious argument, but whatever its merits it could not have seriously improved the financial situation of the Irish banks or the Irish government. The second argument is that in a crisis the state’s central bank may create money and use it to pay debts and finance bailouts.
A modern state can easily create new money without having additional assets. If Ireland had kept the Punt, it’s own fiat currency, then the government could have bailed out the banks using newly created money. But, that would simply be a hidden tax. Inflation would ensue then holders of money and money-substitutes would see the real value of those assets fall. Holders of assets denominated in money such as loans and bonds would see those fall in value in real terms too. The tax would be paid by the people through this loss of purchasing power. Any permanent increase in the stock of money must lead to inflation, though there may be a time lag until it becomes noticeable. A temporary increase could only be achieved by withdrawing money from circulation afterwards, and that could only be done with taxation. That governments can create money to get themselves out of sticky situations is beneficial to governments, but not to the people they’re supposed to serve.
Critics of the Euro also claim that the Eurozone currency area could not have worked. According to this view the ECB must run monetary policy to suit the core Eurozone countries. But interest rates that are a good fit for Germany and France will cause problems in other Eurozone countries. There is some truth in this. In the years before the crisis, the ECB ran low interest rates to stimulate the northern European economies, particularly Germany and France which were struggling with rigid labour markets. A side-effect of that policy was the building booms in Southern Europe and Ireland which weren’t sustainable. Though there is some truth in this view, it’s still confused. The idea that labour market problems can be successfully compensated for by reducing interest rates is from Keynesian economics. The idea that central banks reducing interest rates to excessively low levels causes unsustainable booms is from Austrian economics. These views can’t be mixed because they come from conflicting theoretical starting points. It isn’t possible that Keynesian economists are right in France and Germany but Austrian economists are right in Ireland and Portugal. In my view the ECB’s low interest rates may have been an attempt to stimulate the Northern European economies, but that policy wouldn’t have worked under any circumstances. The ECB’s policy came at a cost to Ireland and the Southern European countries when the property bubbles burst, but that cost doesn’t reflect any benefit to the Northern European countries.
It’s true that a Central Bank faces greater problems if the currency area that it regulates spans many countries with different conditions. But, as we have seen, Central Banks can’t avoid recessions and crises even if they only regulate the currency of a single sovereign nation.
Many countries have found themselves facing the consequences of the bad decisions made by Central Banks. Ireland isn’t unique in that respect. What makes Ireland unique is the extraordinary lengths that the government have taken to support banks and property developers. In September of 2008 the Irish government guaranteed for two years all bank accounts with Irish banks and almost all loans to those banks. This September, when that guarantee was due to expire, it was extended for another three months. The government decided that rather than risk paying out on that guarantee they would bail out banks as and when they needed it. They nationalised the worst-affected bank – Anglo Irish Bank in 2008. So far, through several bailouts Anglo-Irish Bank has cost the Irish government €22.9 and the other banks have cost ~€10.1, though the extent of losses hasn’t been fully recognized and will probably be much greater. It is these debts that have caused Ireland’s budget deficit to rise much more than those of other countries.
There have been many rumours about corruption in the Fianna Fail and in Anglo-Irish bank. The actions of the former board of Anglo-Irish bank are under investigation by financial regulators and the police, the former CEO has been declared bankrupt. There are close links between the ruling Fianna Fail party and many property developers, that was the subject of jokes long before the crisis. The previous Taoiseach Bertie Ahern was investigated for receiving bribes from property developers. I think there’s probably some truth in these allegations of corruption. But the politicians that form the government had many ways they could abuse their power for personal gain. A politician has many ways he can make a little on the side without bankrupting his country.
It’s ideas rather than corruption that have created such a great crisis for Ireland. The government thought that the resources the state could lay claim to were inexhaustible. They believed that if the state guaranteed bank accounts that this guarantee alone would satisfy the markets. The Finance Minister Brian Lenihan once called the guarantee the “cheapest bailout in the world so far”. The government forgot that the power of the state isn’t magical. A government can transfer the liabilities of banks onto the taxpayers, but they can’t abolish them. Back in 2008, the government were worried that the failure of a bank would harm Ireland’s reputation, but in the long run their cure was worse than the illness.
As Phillip Booth wrote, the first step the Irish government, the IMF and the EU should take is to end the guarantees.
By Philip Booth, on 23 November 10
Europe is trapped in a cycle where debt is being passed round and round in circles – the banks are bust so the Irish government bails them out; the Irish government’s debt is owned by other banks and if the government defaults, they go bust; the EU as a whole then tries to rescue both in opaque arrangements which are only sustainable because Ireland is so small; now Britain is getting involved.
Responding to debt crises in this way is entirely unsustainable, we potentially have crises in Italy and Spain around the corner and nobody can shoulder their indebtedness.
The EU has been sitting around doing very little for the last two years (except for dreaming up new regulations for the banks, hedge funds and private equity). What it and the nation states involved should have been doing is ensuring that banks can be wound up in an orderly fashion so that all providers of capital and credit potentially lose money except for depositors who were insured at the beginning of the crisis. The EU governments are simply underwriting mistakes made by private businesses and then blaming it all on “casino capitalists”.
The Irish government’s debt position would not, in fact, be that bad if it were not for the bank guarantees. Ireland is not another Greece (or Italy) – its underlying position is sound. The key issue has not changed since the beginning of the crisis – it is the need to recognise failed financial institutions for what they are and not load the cost of their bad loans onto taxpayers in general. At the beginning of the crisis, the bail-outs were understandable; we have now had two years to sort out proper legal mechanisms for winding up banks.
By Toby Baxendale, on 7 October 10
I gave the following presentation at a fringe event during the Conservative conference in Birmingham.
Human Co-operation and the Universal Division of Labour
Adam Smith showed us, and it is not disputed internally within the nation, that specialisation in tasks has led to the explosion of the population and material prosperity. One person the farmer, one the hunter, one the gatherer, one the home maker, etc., with the specialisation always geared to who is best at doing the task.
This is accepted by all rational people.
Ricardo showed us that what applies to the individuals in the nation should also apply to the free trade between the nations of the world. It is always advantageous for each nation to concentrate all its efforts to produce things it is best at, even if it could produce some other lesser goods better than the next best producer.
So why does this idea meet such resistance? Why do we allow crony capitalists and other vested interests to get a privileged, protected position — such as the European Union farmers when they argue for the Common Agriculture Policy (CAP) — that allows them to push up the prices of their goods and services at the expense of you and me, the consumer?
The Irrefutable Case for Free Trade
David Beckham is a super star football player, who also learned the skills of his father the gas fitter.
His father, Beckham senior is a gas fitter who wanted to be a superstar football player
Let’s say that David can hire a gas fitter for £20 per hour. With a little practice, he could be twice as efficient as his father. We will imagine that he could market his own gas fitting services for £40 per hour.
By playing football, we will suppose that Beckham can earn £10,000 per hour. Meanwhile, his father the gas fitter couldn’t make more than £1 an hour playing football.
Beckham Jnr has a 2-to-1 advantage as a gas fitter, but a 10,000-to-1 advantage football star.
If he divides his time equally between gas fitting his own house and playing football, his total output for the week can be valued at:
10 hours gas fitting x £40 per hour = £400
10 hours football x £10,000 per hour = £100,000
Total output: £100,400
If David’s father divides his time the same way we could value his production as follows:
10 hours gas fitting x £20 per hour = £200
10 hours football x £1 per hour = £10
Total output: £210
Between them, David and father have produced £100,610 worth of output.
The Law of Association (Mises) or the Law of Comparative Advantage (Ricardo)
Now let’s examine the situation if, as we expect, David hires his father. David’s production can now be valued at:
20 hours football x £10,000 per hour = £200,000
Total output: £200,000
And his father’s at:
20 hours gas fitting x £20 per hour = £400
Total output: £400
Their total output has risen to £200,400.
The Greatest Protectionist Block in European History: The European Union
With this case proven, our politicians should use the irrefutable law of association to call for the dismantling of fortress Europe as it price gouges its hapless taxpayers.
The Taxpayers Alliance report “Food for Thought” by Dr Lee Rotherham shows us that the EU protectionist food policies costs the UK £10.3 bn per year or £400 of net disposable income per household.
CAP is one aspect of the protectionism sponsored by the EU depriving us of a higher living standard; the real cost of all their interventions is many thousands of pounds per year for the EU taxpayer.
Cobden and Peel
For those interested in free trade, one of Cobden’s finest orations was delivered in the House of Commons on March 13, 1845, and described by John Morley as “probably the most powerful speech he ever made:
Men on the Tory benches whispered to one another, “Peel must answer this.” But Peel crushed in his hand the notes he had made and remarked, “Those may answer him who can.”
The Corn Laws were abolished by persuasive, clear, rational and logical argument. I hope some of the politicians here today will be able to do the same with the protectionist EU, and have that abolished.
By Sean Corrigan, on 28 September 10
By Steven Baker MP, on 8 September 10
This post originally appeared on stevebaker.info.
Dan Hannan and Ruth Lea have launched the EU Referendum Campaign:
The EURC is an organisation that is determined that every adult in Britain should have the right to choose whether our country should be a politically independent self-governing country or a member of the European Union.
With the EU now making the vast majority of laws we must obey and with new plans to take control over the tax and spend policies of its member countries, the British people must be given the right to decide where ultimate political power lies: In Brussels or with our elected parliament.
Unless we win the right to vote on Britain’s membership of the EU within the near future, our democracy is in danger of falling under the total control of the Brussels elite and disappearing for all time.
For the Telegraph, Dan writes:
The question, these days, is not whether referendums are compatible with representative democracy, but what the next one will be about. If we are allowed a vote on how to elect our MPs, why not a vote on whether those MPs run the country? If we can have a referendum on whether to have a mayor in Hartlepool, what about one on whether the majority of our laws should be handed down from Brussels?
Read more here.
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