My Journey to Austrianism via the City

Another classic article, brought forward. This is a speech by James Tyler to the Adam Smith Institute Next Generation Group on 6 October 2009. This speech is also available on

I have spent the best part of the last two decades pitting my wits against the market. It’s an unforgiving game: I’ve seen ups and downs, and many of my rivals buried under an avalanche of hubris, passion, illogical thought and unchecked emotion.

I have witnessed the sheer folly of the ERM crisis, the Asian crisis, the failure of the Gods at Long Term Capital Management and the insanity of the tech boom.

I have enjoyed the ‘NICE’ decade (Non-Inflationary Constant Expansion), and scared myself silly during the credit crisis.

I am a trader.

I risk my own money and live or die by my decisions, and face the threat of personal bankruptcy every time I switch my screens on. I get no salary – indeed I turn up at the start of the month with a large office overhead – a ‘negative’ salary. I have no fancy company pension scheme, no lucrative monopoly or franchise.

I eat what I kill.

Mistakes cost me my livelihood, so, above all, my decisions have to be rooted in practical and logical decision making.

Some have called my kind parasitic, but I would have said that I bring order, efficiency, predictability, stability and deep liquidity to a crucial process: a process that makes the whole world keep ticking.

I make money work.

I make the market in interest rate derivatives: a market born out of the neo classical revolution in finance fostered in Chicago during the 1970s. I am a child of Friedman, Fisher Black, Myron Scholes and the modern international financial system.

My analysis was steeped in the neo-classical, efficient markets paradigm.

Friedman’s ideal was working. Enlightened central bankers guided the free market with gentle nudges and short term liquidity infusions, free floating currencies gently adjusted themselves to the constant flow of new information and efficient and rational markets took all in their stride.

Credit flowed, people got wealthier, economies developed and all was well.

And then the crisis struck.
Continue reading “My Journey to Austrianism via the City”


Money is not working.

A speech to the Policy Exchange on 31st March 2009 by Cobden Centre sponsor James Tyler. This article first appeared on but it remains as relevant today.

I want to talk about two things today;

Number 1: Free markets did NOT cause this crisis… Governments did.

Number 2: Inflation targeting has failed. Money has failed. What should we do?

Free markets did not cause this problem.

In theory, markets work by reacting to prices and direct capital towards where it will be most productively used. This is how wealth is created. Usually this works well, but markets are made up of humans, and can be fooled into overshooting by false signals.

Bubbles build up, expanding until people lose confidence. Bubbles then burst. It’s a corrective process that, relatively benignly, irons out imbalances.

The problem only comes when bubbles go on for too long, because once they get too big, the pop can be terrifying. And that’s what we’ve got now – one hell of a big bang.

False signals have caused a spectacular mal-investment in real estate and its derivatives.

But these false signals did not come from the market, but from government.

False signals.

False signals came from Greenspan’s introduction of welfare for markets. Markets were taught that no matter how much risk they took, they would always be saved. 1987, 1994, 1998, 2001. Each bust bigger than the last, and disaster was only staved off with aggressive rate cuts and increased money supply.

Clearly this was not laissez faire. Just think if events had been allowed to take their course. I bet if LTCM had gone bust then a badly burned Wall Street would have learned a lesson and Lehman’s would still be around today.

In 1999 Clinton mandated that Fannie Mae and Freddie Mac reduce lending standards. The poor were encouraged into debt. This intervention triggered a race to the bottom of lending standards as commercial banks were forced to compete against the limitless pockets of Uncle Sam.

False signals came from deposit insurance. Deposit your money in a boring mutual? Why bother when you can lend it to a lump of volcanic rock in the Atlantic at 7% and be guaranteed to get your money back.

The Basle banking accords required banks to replace rock solid reserves with maths.

Government protected and regulated ratings agencies produced negligent ratings duping pension funds, who were obligated to buy high quality paper, into buying junk cleansed by untested mathematical models.

Central banks create boom-bust.

But most damaging of all was the absurdly low interest rates set between 2001 and 2004.

The resultant glut of cheap money fueled an unsustainable boom encouraging more mortgages to be taken out, and pushing property prices ever higher.

The market responded by pushing scarce economic capital towards highly speculative property development.

As prices rose people remortgaged, and borrowed to consume more. This unchecked process tended to be destructive, as scarce economic capital flowed out of our economy and headed to those economies efficiently producing consumer goods, such as China. Rampant asset inflation clouded our ability to see this depletion process in action.

Everyone had a great time whilst the party lasted, not least Governments who were incentivised to let it run, blinded by ever larger tax revenues.

But all parties come to an end, and central banks had to prick the bubble eventually. Interest rates went too high, and sub prime collapsed, and then all property prices plummeted. Trillions of dollars were ripped out of the financial system, and the credit crunch began.

It’s happened before.

But, despite its complexity, there was nothing new or unpredictable about this process. All the great busts of the 20th century were preceded by a Government sanctioned fiat currency booms.

In the 1920’s, the Fed pursued a ‘constant dollar’ policy. This was the era of the innovation, Model T Fords, radios and rapid technological advancement.

Things should have got cheaper for millions of people, but money supply was boosted to try and keep prices constant. All that extra money flowed into the stock market, pushing prices to crazy levels, and we all know how that ended.

In the modern day, targeting price changes has been an utter disaster for us too.

It let the Bank of England pretend they were doing their job, when money supply was growing at a double digit rate. It let the authorities relax whilst an economy threatening credit bubble was building up.

And it gave Gordon Brown the leeway to convince people that boom and bust was over.

Things should have got cheaper.

Inflation targeting made no allowance for globalisation, the rise of India and China, and the benign falls in general prices that should have been triggered. Think about it; if all those cheap goods were to become available, consumer prices should fall. We would have had greater purchasing power, and become wealthier for it.

But, the Bank of England was aiming at a symmetrical plus 2% target. Falling prices in some goods necessitated stimulating rises in others. They unleashed an avalanche of under priced debt and we had our own crazy asset boom.

Inflation targeting was a myopic policy.

Governments make terrible farmers.

When a central bank sets interest rates, they set the price of credit. Inevitably they create distortions.

Consider this; Governments cannot set food prices without causing a glut -or- painful shortages. Now, food is a pretty simple commodity, yet we all understand that central planners simply cannot gather enough information to set the price accurately.

It has to be left to the spontaneous interaction of thousands of buyers and sellers to set the price.

So, why do we think that enlightened bureaucrats can put an exact price on something as vital, yet complicated, as credit?

In a nutshell, if I can’t tell how much my wife will spend on Bond Street this weekend, how can they?

Let’s wake up from this fantasy.

There is a better way.

What’s the cure? Let the invisible hand to do its time honoured job. Leave interest rates to be set by the millions of suppliers and users of capital.

Get the central planners out of the way.

It’s the way it used to happen. The period of fastest economic growth the world has seen was America between the civil war and the end of the 19th century. Money was free and private and the Fed did not exist.

So, how do we get back to freedom in money? Fredrich Hayek – the great Austrian economist – did the best thinking on this. What he proposed was that private firms should be allowed to produce their own currencies, which would then be free to compete against each other. People would only hold currency that maintained its value, firms that over-issued would go bust Producers of ‘sound’ money would prosper.

History gives us plenty of successful examples of private money working well, 18th Century Scotland had competing banks, all with their own bank notes. People weren’t confused. It worked. There are many other examples.

In the modern age, technology makes the prospect of monetary competition even more tantalising. Mobile phones, oyster cards, smart tags, embedded chips, wireless networks. The internet. Prices could flash up in the shopper’s preferred currency.

A proposal.

Here’s an idea of how to kick the process off;

Tesco’s want to get into banking. Why not currencies as well? Tesco would print one million pieces of paper. Let’s call them Tesco pounds. It would be redeemable at any time for £10 or $15. They would then be auctioned, and the price of a Tesco set.

Anyone who owns a Tesco has a hedge against either the £ OR $ devaluing therefore the Tesco has an additional intrinsic value. Maybe they’ll auction at £12.

Tesco would specify a shopping basket of goods that cost £60. It would promise that 5 Tesco Pounds would always buy that weekly shop. The firm would use its assets to adjust the supply of Tesco Pounds so that they kept this stable value.

They would need to otherwise their shelves would be cleaned out!

As central banks inflated the £ and $ away over time, the convertibility into these currencies would matter less. We would be left with a hard currency that meant something.

There would be other competitors and a real choice about which money to hold your wealth in.

McDonalds has a better credit rating than Her Majesties Government, so maybe people would be happy to hold Big Mac tokens? I don’t know – it will be a free choice.

Currencies would sink or swim depending on how well they performed. What’s more, firms issuing the currencies would come up with different ways of maintaining their value. Some would offer Gold. Manufacturers may use notes backed up by steel, copper and oil.

Let’s see what a free market chooses. Somebody might have a brainwave and come up with an idea that nobody has thought of.

That is what free markets are best at.

I can guess the reactions that my proposal might inspire in some. How would the man on the street cope? Well, nobody would outlaw the Government’s money, and people could carry on as before. Through the operation of the market, we would find out what worked best . Step-by step, the economy would be transformed and standards driven up.

In economics, spontaneous orders are always so much more rational and stable than planned ones. Always.


This is not a crisis caused by free markets. A free and unregulated market in money has not existed for over a century.

This is a Government crisis. A crisis over the monopoly of money.

Inflation targeting seemed so persuasive…. but it was a false God, and we deserve better. Stability and sound money can only come if we put the money supply back where it belongs…

Under the control of the free market.


Large changes in fiscal policy: taxes versus spending

This paper by Alberto Alesina and Silvia Ardagna provides very good empirical research to confirm that what we expect a priori: that deficit cutting sets up a strong recovery, while deficit spending funded by tax increases does not. The abstract nicely summarises other aspects of the paper, and it is worthwhile for anyone to read who is involved or interested in public policy.

We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.

H/T to Sean Corrigan.


Arden Partners – Equities to Win

We are indebted to Ewen Stewart of Arden Partners for permission to publish his report: A Game of Two Halves – Equities to Win. Please see that report for full detail.


2009 was a remarkable year for the global economy and a remarkable year for equities. In this note we try to explain why 2009 turned out as it did and examine the prospects for 2010 and beyond.

We have called this note ‘A Game of Two Halves – Equities to Win’ because we believe that although the short-term trends for the UK economy are improving the longer-term forecast looks troubled indeed. Despite this, we believe the outlook for UK equities remains positive.

The first few months of 2010 may well surprise on the upside in terms of employment, house prices, consumer-spend and even, ultimately, GDP. But this is no ‘V’ shaped recovery.

We argue that trend growth, longer term, is likely to significantly disappoint. We argue that the UK’s superior growth, relative to many other developed nations, in the noughties was largely an illusion and we struggle to find the dynamo for growth over the next few years. We believe that the unwinding of the extraordinary fiscal and monetary stimulus, is a necessity, but will also be very difficult to achieve painlessly.

We believe the markets are still underestimating the structural problems with the public sector deficit and that politicians of all colours will be forced to deal with it. The consequences of not doing so would result in rising interest rates and a collapse in international confidence. The deficit remains the key issue for the UK and it may well bring substantial political challenges in itself. Indeed perhaps we should not have called this ‘A Game of Two Halves’ but a ‘Back to the Future – Welcome Mr Heath and the 1970s’?

Despite this, we are not bears of equities. It is true that current valuations are not particularly cheap by historic standards but the UK stock market is fairly defensive and internationally diverse. We believe equities look attractive against cash, bonds and, ultimately, real estate. We are concerned about a potential rise in inflation and again equities are a good hedge.

We have set a year end target of 5750 for the FTSE 100. Sector valuations do not follow a clear pattern and we believe this offers a number of anomalies. We have outlined our suggested sector weights below. As a generalisation, we seek overseas earnings – especially the US$, moderate leverage and strong cash flow as the place to be in 2010 with a return to M&A being more pronounced than perhaps expected.

Policy reaction

The extreme cannot become the norm?

It may be a blessing that Ben Bernanke made the study of the 1930s great depression his speciality. We say may because, while the unprecedented global response undoubtedly has alleviated economic implosion, it does remain to be seen if the ‘nationalisation’ of deficits, the eclipse of moral hazard and the unique policy of both near-zero global interest rates and, in many parts of the globe, with quantitative easing (QE), has succeeded in sending growth back on an inflation-free growth projectory or whether the underlying malaise has been merely kicked into the medium grass. These issues are global, with substantial government deficits, trade and growth imbalances impacting upon different regions.

Source: Bank of England Stability Report, December 2009.

The economic policy reaction in the UK has been greater and more prolonged than any G20 nation, which is partially demonstrated by the chart above. The Bank of England cut interest rates to 0.5% (the lowest since the foundation of the Bank in 1694); 2009 saw a programme of QE to the tune of £200bn (equivalent to 25% of all outstanding gilt stock) and government spending was accelerated, despite plummeting tax receipts. The fiscal deficit is forecast by the Treasury to peak at 12.6% of GDP – a figure roughly twice as large as the UK’s 1975-1977 IMF crisis, and on a par with Greece.

Read on: A Game of Two Halves – Equities to Win


More evidence of the incompetence of state accountants re derivatives

Via The Telegraph:

Meanwhile Angela Merkel, the German Chancellor, criticised investment banks for the role they may have played in helping Greece to mask its fiscal problems: “It would be a disgrace if it turned out to be true that banks that already pushed us to the edge of the abyss were also party to falsifying Greek statistics.” Her comments were in reference to a derivatives deal arranged by Goldman Sachs in 2001 which allowed the Greek government to mask its budget deficit by deferring interest payments.

If questioned on the witness stand, wired to a polygraph, with the death penalty looming for any dishonest response most public officials who had employed “exotic” derivatives structures would admit that the main purpose of the transaction has been to deceive stakeholders in public entities.  It is possible that some decision makers were merely genuinely incompetent, but that is hardly reassuring to taxpayers.  It is worth noting that in every case we discuss on this site the accounting profession provides no defence barrier affording any protection for the taxpayer.  I doubt whether accountants understand derivatives.

When the second phase of this crisis unfolds derivatives will be seen to have been employed for nefarious purposes on a grand and widespread scale.

In the UK I expect the quasi state housing association movement to experience problems when the huge volume of poorly understood debt instruments called “LOBOs” come up for refixing.  The acronym stands for “Lender’s option, Borrrower’s option”.  It is a 20 year loan instrument with early termination options, enabling the bank to play games with the yield curve.  More detail later.

Needless to say any financial product with embedded derivatives purchased by the quasi public sector tends to lead to problems at some stage for the public sector.  If LOBOs were such a good idea why don’t the private sector buy them?


Alchemists of Loss, Prof. Kevin Dowd

Dowd, Alchemists of Loss

We are delighted to announce a forthcoming book by Cobden Centre Senior Fellow Professor Kevin Dowd and US-based journalist and former investment banker Martin Hutchinson: The Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System. The book contains some delightfully simple insights into a complex subject. For example:

The credit default swap sneaked up on everybody, becoming a $62 trillion market, without anyone outside the business knowing much about it. As the Bear Stearns, Lehman and AIG debacles revealed, these instruments also involved highly non-transparent credit risks of their own. As a holder of a CDS you don’t know whether your counterparty has issued only a few of your CDS, in which case you’ll probably get paid in a bankruptcy, or whether he has issued fifty times the outstanding debt you’re trying to hedge, in which case you’re unlikely to get paid.

And moreover:

Financial engineering’s benefit to the global economy is highly questionable and the proliferation of financially-engineered products of recent years has brought few benefits and led to huge losses for society at large. As we have seen, one quarter’s bad losses in late 2008 wiped out all the accumulated financial engineering profits of the last quarter century and saddled taxpayers with a bill for hundreds of billions, if not more.

Prof. Dowd has kindly agreed to pre-release two chapters through The Cobden Centre:

From Chapter 16:

Alert readers will have already picked up some of the advice we would give investors and clients of financial institutions:

  • take a longer-term perspective and return to investment rather than speculation;
  • do not seek to ‘enhance’ yields, because this always exposes investors to hidden costs and risks, whilst firms seeking finance should resist cutting corners on their financing costs, for the same reason; thus, both parties should be realistic in their expectations;
  • avoid frequent trading, focus on static over dynamic strategies, buy and hold over activist portfolio management;
  • pay more attention to costs and hidden charges, and work on the assumption that higher charges are usually a good signal of a bad deal;
  • distrust commission-based salespeople;
  • if you use derivatives, be clear why and use them only for risk management and not speculation;
  • avoid complicated opaque products; and
  • do not take liquidity for granted and ensure that your liquidity is protected in a crisis.

Besides this motherhood and apple pie stuff, investors should also be careful of correlation-based investment and risk management strategies, which work well when not needed but are apt to break down when they are. This is not to suggest that they should give up on diversification. People understood diversification long before Modern Portfolio Theory, but they tended to practice it differently and more wisely. Diversification was assessed by committees of experienced practitioners, who took a long-term view and relied on their judgment rather than unreliable correlation estimates – a far cry from modern practices of modern fund management, with its obsession with short-term performance assessment

Investors should demand transparency. Perhaps the most sobering lesson we have learned since the subprime crisis broke is the benefit of transparency in business dealings. Time after time, when a fiasco has occurred, a key contributing factors has lack of transparency. Subprime mortgages, CDOs and credit default swaps were all financial innovations that relied crucially on nobody asking too many questions. So too with the vast Madoff Ponzi scheme, involving some of the most sophisticated investors in the world,  which rested on the same fatal human omission.

Download Chapter 16 to read on.

From Chapter 17:

The restoration of a rational and stable financial system inevitably requires major reform on a number of fronts. History gives much guidance here and also a role model: the period we should seek to emulate is the nineteenth century. Then money was sound, the dominant currency of the time, the pound, was literally as good as gold, while financial institutions were conservative and generally stable, and an altogether healthier financial ethos reigned.

It is very common these days to sneer at the gold standard: after all, it was Keynes who once dismissed it as “a relic from a barbarous age”. We would suggest, on the contrary, that a gold standard or some suitably 21st Century commodity equivalent would be highly desirable, and put an end to the disastrous century-long experiment with fiat money and its attendant miseries of inflation and monetary instability. The fact that Keynes opposed the gold standard is a further reason to support it.

The nineteenth century model would also entail major reforms to financial institutions and the regulatory system: greater liability and greater responsibility, the repeal of deposit insurance and investor protection legislation and the abolition of the big financial regulatory bodies such as the SEC and FSA. And by nineteenth century standards, we really mean early nineteenth century standards, those that pertained to the period before the Bank Charter Act of 1844 and the Companies Act of 1862, when liability was very real.

As for the banking system, we would suggest that the role model is Scotland pre-1845, when the Scottish banking system was virtually free of state control, unhindered by a central bank, and equally admired and envied across the world – and copied by countries such as Canada and Australia. In all three countries, free banking systems operated highly successful for very long periods of time. Indeed, the Canadian system was widely admired in the United States – and many US reformers in the late nineteenth century saw it as their ideal. The Canadian system was highly stable – apart from the failures of two small Alberta banks in 1985, its last notable bank failure was that of the Home Bank of Canada back in 1923. There were no Canadian bank failures in the 1930s and, even after the establishment of the Bank of Canada in 1934, many still regard the Canadian banking system as the best in the world.

Our first choice environment would be one with a commodity standard, free banking (no central bank) and financial laissez-faire, restrictions on the use of the “limited liability” corporate form and the most limited government. Even if we don’t return all the way to these early nineteenth century standards (and we can imagine the opposition!), we should still move as much as possible in that direction, though we would not advocate the reintroduction of the notorious debtors’ prisons immortalized in the fiction of Charles Dickens! However, our proposed reforms herein are adapted to the “second best world” (if it’s actually that; it may be about thousandth best of all the ‘parallel universe’ possibilities) in which we live, with relatively large government, a fiat currency and a central bank.

The most important institutional policy that must be solved is that of an excessively expansionary monetary policy. Simply making the monetary authority “independent” does not achieve this if the monetary authority retains its interactions with politicians and the financial community, both of which want loose money. The ideal to aim at is a hard money Fed, a Paul Volcker Fed.

Download Chapter 17 to read on.

You can also pre-order Alchemists of Loss at Amazon.

Further Reading


Economists: UK economy cries out for credible rescue plan

Via an open letter in The Times:

IT IS now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.

In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.

In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.

It is good to see that some of our Chairman’s and our CEO’s old University distinguished teachers are advocating a credible plan for deficit reduction and an end to the ruinous tax and spend of the Labour Government . There is hope yet that the mainstream have not all succumbed to the snakeskin oil smooth and seductive Keynesian economics which we thought the second but last Labour Prime Minister, James Callaghan, had buried when he said:

We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

— Labour Party Annual Conference Report 1976, page 188.


Remove the systemic risk, don’t levy against it

Via The Guardian, City minister campaigns to protect taxpayer from bank failures:

City minister Lord Myners today stepped up the government’s campaign to ensure taxpayers will never again need to bail out banks by urging delegates to a Downing Street seminar to hammer out ways to transfer the risk of bank failures away from the public sector.

At the start of the meeting with academics, country officials from the G7, international and UK policymakers, Myners said: “There is clearly a strong rationale to charge for the externality caused by the financial sector and financial institutions should shoulder the responsibilities for losses they may face”.

“Numerous innovative ideas including contingent capital and systemic risk levies have recently emerged to increase the resilience of the financial system globally and to ensure that the costs of any future failures primarily fall to banks and bank investors rather than taxpayers,” Myners said.

Well, yes indeed: businesses should certainly shoulder their own risks.

However, rather than raising a levy on the systemic risk, the law should remove it: bank deposits should be subject to sound property rights and contract law.

Further reading


How To Destroy the British Banking System –- Regulatory Arbitrage via ‘Pig on Pork’ Derivatives.

Financial engineer Gordon Kerr explains how to destroy the British banking system through the use of derivatives which take advantage of the regulatory system, then sets out four measures to solve the problem.

Nine years ago I worked as a structuring engineer in a three-man team within the investment banking unit of a major British bank. One of us was very bright. He stunned me one day with an idea as to how we could:

  1. Produce immediate (but illusory) substantial profits for our bank, thus ensuring that we would enjoy generous personal remuneration;
  2. Generate ‘virtual’ share capital to boost our bank’s capital reserves;
  3. Leave the actual investment risk exposure and profit expectation of our bank almost exactly the same after the transaction as before it.

Was this idea the kind of rocket science derivative engineering that justifies master of the universe labels for the three of us who designed and implemented it? No: it was extremely simple. Here’s how it worked. We transmuted some loan assets into a derivative transaction for regulatory purposes, whilst leaving the actual loan arrangements unaltered.

Continue reading “How To Destroy the British Banking System –- Regulatory Arbitrage via ‘Pig on Pork’ Derivatives.”


Imagine that the Crisis was a Shortage of Bread

One day in October 2008, the UK’s banks all collapsed.

Perhaps it would be more accurate to date stamp the collapse one year earlier when Northern Rock failed and was rescued.  UK Banking, in a commercial sense, ended on that date.  We now have a state sponsored banking system.  Some would disagree because banks such as Barclays have not actually grabbed the lifeboat, but I beg to differ.  If the Government removed support from the banks it has underwritten then Barclays too would fail, so the entire UK system is effectively nationalised.

Most politicians and media commentators appear to have accepted the state bailout as a reasonable response to the banking collapse.  We are asked to believe that the lifeblood of the economy, bank lending, is flowing again.  However, data supporting this contention is hard to find.  That which does exist is artificially enhanced by the Government’s injection of artificial, printed money.

The media soothe us with frequent assertions that the bailout and its sister policy, QE,  are working, but they are clutching at straws.  The banking bailout combined with the printing of money taken together is the single worst economic decision ever made by any UK Government.  Let me prove this  by way of simple analogy.

Just for one moment let us imagine that October 2007 did not portend the banking crisis that would shortly unfold, but a different and even worse catastrophe.  Let us pretend that we woke up that autumnal morning to discover that there would be no more food.

We all listened in silence as our tearful Prime Minister announced that Al Qaeda had won.  All of the world’s soil had just been contaminated with a terrible and genocidal bug.  There was no antidote to, nor means of arresting the spread of, this terrible bug.  There was no hope of killing it.

We could no longer eat anything grown in the ground. Nor could we ever consume farm animals, because they of course graze on land.  An emergency measure dictated that we put our pets to death to conserve precious food supplies.  We could eat them now, but this would only delay the inevitable starvation for a few days.

We were all certain to die if we ate any food harvested from October 2007.  All our international trading partners had been similarly infected.  No other country would send us any food, they all had the same problem.  A raft of worldwide emergency measures would ensure that no food would be imported to the UK.

Happily there was one exception, one strain of produce that was immune to the bug –  wheat.  There was one food we could still eat, bread.

Ironically the bread baking industry was going through its own mini crisis as this news broke.  The bakers were all on the verge of bankruptcy because, a month earlier, the UK’s dominant retailing business, Tescopoly, had decided to sell bread at 1p per loaf in order to rid the nation’s high streets of the few remaining shops that were preventing its continued expansion.

The Government had not worried about the strangulation of the high street baker when Tescopoly had launched that attack, but the new food crisis brought an immediate change of policy.   Every baker in the UK was to be bailed out by the taxpayer.  The practical measures were in three parts.  The Government would immediately and indefinitely:

  1. Service the rents and business debts of every bakery in the UK;
  2. Pay senior bakery staff their base salaries plus substantial bonuses in return merely for agreeing to keep their bakeries open and turning up for work;
  3. Fix the price of all bread to be produced.  Prior to the Tescopoly assault bakers were selling standard loaves at an average price of £2.  Even at that price they only made a 10% profit, or 20p per loaf.  The deadly bug was hardly likely to lower the costs of wheat, and yet the Government decided to fix the price of a standard loaf at 40p, a reduction of 80%.  [Sharp readers will note that by October 2008 UK interest rates had been fixed at 1%, an 80% reduction from the pre-crash level of 5%].

The Government anticipated difficulties in selling this policy to the public.  It easily persuaded the bakers (in return for the free money they would enjoy) to issue statements to the effect that they would make “every effort” to bake as much bread and feed the starving population.  However these palliative words were accompanied by the stark warning that, of course, the Government could not actually run the bakeries nor guarantee levels of bread production.

How much bread do you think the bakers produced after this bailout?

As soon as the disappointing news about continued bread shortages broke, the Government announced that it was surprised that the rate of increase of bread production was disappointing.  Swathes of the population were starving to death.  The Government spin machine turned on the bakers who were castigated as socially irresponsible.  The press reported a new era of zombie bakers, and the nation’s patience was further tested when it was reported that many bakers were stockpiling wheat, not even turning their ovens on in the mornings, yet ordering lots of new Ferraris.

Desperate to defend itself the Government dreamed up another wheeze designed to confuse the public and mask the problem: falsifying the wheat accounts.  Because the original emergency measures had provided that the Government was now the sole auditor of the wheat supply, the Chancellor of the Wheat Exchequer decided simply to pretend that we had twice as much of it.

Eminent economists and nutritional experts were wheeled out to explain that “cooking the books” made sense.  The public were brazenly told that the exercise was simple false accounting, but they did not object, so desperate were they for any hope of increased bread production.

To maintain the pretence, the virtual wheat was treated as if it were real.  It was manufactured on a computer overnight by the Chancellor and was kept in a virtual cold store.  The policy was given a fancy name – “Quantitative Freezing”.

Incredibly this policy boosted morale for a year or so and was presented as working.  The Government basked in the glory of saving the nation from starvation.  However the burial grounds were filling rapidly and the emperor’s true nakedness was exposed when the crematoria sought permission from the Department for Climate Change to burn bodies 24/7.