“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
- Ben Graham.
“What really broke Germany was the constant taking of the soft political option in respect of money..
“Money is no more than a medium of exchange. Only when it has a value acknowledged by more than one person can it be so used. The more general the acknowledgement, the more useful it is. Once no one acknowledged it, the Germans learnt, their paper money had no value or use – save for papering walls or making darts. The discovery which shattered their society was that the traditional repository of purchasing power had disappeared, and that there was no means left of measuring the worth of anything. For many, life became an obsessional search for Sachverte, things of ‘real’, constant value: Stinnes bought his factories, mines, newspapers. The meanest railway worker bought gewgaws. For most, degree of necessity became the sole criterion of value, the basis of everything from barter to behaviour. Man’s values became animal values. Contrary to any philosophical assumption, it was not a salutary experience.
“What is precious is that which sustains life. When life is secure, society acknowledges the value of luxuries, those objects, materials, services or enjoyments, civilised or merely extravagant, without which life can proceed perfectly well but which make it much pleasanter notwithstanding. When life is insecure, or conditions are harsh, values change. Without warmth, without a roof, without adequate clothes, it may be difficult to sustain life for more than a few weeks. Without food, life can be shorter still. At the top of the scale, the most valuable commodities are perhaps water and, most precious of all, air, in whose absence life will last only a matter of minutes. For the destitute in Germany and Austria whose money had no exchange value left existence came very near these metaphysical conceptions. It had been so in the war. In ‘All Quiet on the Western Front’, Müller died “and bequeathed me his boots – the same that he once inherited from Kemmerick. I wear them, for they fit me quite well. After me Tjaden will get them: I have promised them to him.”
“In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour; clothing more essential than democracy; food more needed than freedom.”
- Adam Fergusson, ‘When Money Dies: the nightmare of the Weimar hyperinflation’.
“We are currently on a journey to the outer reaches of the monetary universe,” write Ronni Stoeferle and Mark Valek in their latest, magisterial ‘In Gold we Trust’. Their outstanding work is doubly valuable because, as George Orwell once wrote,
“In a time of universal deceit, telling the truth is a revolutionary act.”
Orwellian dystopia; Alice-Through-The-Looking-Glass World; state-sanctioned inflationist (deflationist?) nightmare; choose your preferred simile for these dismal times. The reality bears restating: as the good folk of Incrementum rightly point out,
“..the monetary experiments currently underway will have numerous unintended consequences, the extent of which is difficult to gauge today. Gold, as the antagonist of unbacked paper currencies, remains an excellent hedge against rising price inflation and worst case scenarios.”
For several years we have advocated gold as a (necessarily only partial) solution to an unprecedented, global experiment with money that can only end badly for money. The problem with money is that comparatively few people understand it, including, somewhat ironically, many who work in financial services. Rather than debate the merits of gold (we think we have done these to death, and we acknowledge the patience of those clients who have stayed the course with us) we merely allude to the perennial difficulty of investing, namely the psychology of the investor. In addition to being the godfather of value investing, Ben Graham was arguably one of the first behavioural economists. He wisely suggested that investors should
“Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Graham also observed,
“In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.”
Judgment has clearly been tested for anyone who has elected to hold gold during its recent savage sell-off. The beauty of gold, much as with a classic Ben Graham value stock, is that as it gets cheaper, it gets even more attractive. This should be self-evident, in that an ounce of gold remains an ounce of gold irrespective of its price. This puts gold (and value stocks) markedly at odds with momentum investing (which currently holds sway over most markets), where once a price uptrend in a given security breaks to the downside, it’s time to head for the hills.
A few highlights from the Incrementum research:
Since 1971, when President Nixon untethered the dollar from its last moorings to gold, “total credit market debt owed” in the US has risen by 35 times. GDP has risen by just 14 times. The monetary base, on the other hand, has risen by, drum roll please.. some 54 times.
If, like Incrementum and ourselves, you view gold primarily as a monetary asset and not as an industrial commodity, it has clearly made sense to have some exposure to gold during these past four decades of monetary debauchery.
They say a picture paints a thousand words. Consider the following chart of total US credit market debt and ask yourself: is this sustainable?
(Click image to view larger version)
To repeat, there are only three ways of trying to handle a mountain of unsustainable debt. The options are:
1) Maintain economic growth at a sufficient rate to service the debt. We believe this is grossly unlikely.
2) Repudiate the debt. Since we also operate within a debt-based monetary system (in which money is lent into being by banks), default broadly equates to Armageddon.
3) Inflate the debt away.
At the risk of pointing out the obvious, which path do we consider the most likely? Which path does it suit grotesquely over-indebted governments and their client central banks to pursue?
But it does not suit central banks to be caught with their fingers in the inflationary cookie jar, so they now have to pretend that deflation is Public Enemy Number One. Well, deflation is certainly a problem if you have to service unserviceable debts. So it should come as no surprise if this predicament is ultimately resolved through an uncontrollable and perhaps inevitable inflationary or stagflationary mess.
So we have the courage of our knowledge and experience. (In fact, of other people’s experience, too. As the title of Robert Schuettinger and Eamonn Butler’s book puts it, we have ‘Forty Centuries of Wage and Price Controls’ and their inevitable failure to draw upon. We know how this game ends, we just don’t know precisely when.) We have formed a conclusion based on facts and we know our judgment is sound. For the last two years, the crowd has disagreed with us on gold. We think we are right because we think our data and reasoning are right. Not that we don’t see value in other things, too: bonds of unimpeachable quality offering a positive real return; uncorrelated assets; value and ‘deep value’ stocks. And we ask a final question: if not gold, then what? Are we deceiving ourselves – or are our central bankers in the process of deceiving everyone?
Editor’s note: The Cobden Centre is happy to republish this commentary by Alasdair Macleod, the original can be found here.
At the outset I should declare an interest. In the 1980s I was a member of the UK’s Society of Technical Analysis and for a while I was the society’s examiner and lecturer on Elliott Wave Theory. My proudest moment as a technician was calling the 1987 crash the night before it happened and a new bull market two months later in early December. Before anyone assumes I have a gift for technical analysis, I hasten to add I have also made many wrong calls using it, so to be so spectacularly right on that occasion was almost certainly down to a large element of luck. I should also mention that the most successful investors I have observed over 40 years are those who recognise value and disdain charts altogether.
Technical analysts assume past prices are a valid basis for predicting what investors will pay tomorrow. The Warren Buffetts of this world act differently: they care not what others think and use their own judgement of value. This means that value investors often buy when the trend is down and sell when the trend is up, the opposite of technically-driven decisions. A bear market ends when value investors overcome the trend.
Technical analysts go with the crowd and give any trend an added spin. This explains the preoccupation with moving averages, bands, oscillators and momentum. Speculators, who used to be independent thinkers, now depend heavily on technical analysis. This is not to deny that many technicians make a reasonable living: the key is to know when the trend ends, and the difficulty in that decision perhaps explains why technical analysts are not on anyone’s rich list.
Value investors like Buffett rely on an assessment of the income that an investment can generate, and the opportunity-cost of owning it. This may explain his well-known views on gold which for all but a small coterie of central and bullion banks does not generate any income. So where does gold, a sterile asset in Buffett’s eyes stand in all this?
Value investors in gold who buy on falling prices are predominately Asian. For Asians the value in gold comes from the continual debasement of national currencies, a factor rarely considered by western investors who measure investment returns in their home currency with no allowance for changes in purchasing power.
The financial system discourages a more realistic approach, not even according physical gold an investment status. Using technical analysis with the false comfort of stop-losses leads to more profits for market-makers. Furthermore, gold’s replacement as money by unstable national currencies makes economic and investment calculation for anything other than the shortest of timescales unreliable or even impossible. But then this point goes over the heads of the trend-followers as well as the fundamental question of value.
Technical analysis is a tool for idle investors unwilling or unable to understand true value. It dominates price formation in western markets and distorts investor behaviour by exaggerating any natural bias towards trends. It is this band-wagon effect that is the root of trend-following’s success, but also its ultimate weakness. A better strategy is to make the effort to value gold properly and then act accordingly.
The Bank of England
This article originally appeared in The Telegraph on 5 March 2014. It is reproduced by permission of the author.
Five years ago today, the Bank of England cut interest rates about as low as they can go: 0.5 percent. And there they have remained.
If rates have been rock bottom for five years, our central bankers have been cutting them for even longer. You need to go back almost nine years to find a time when real interest rates last rose. Almost a million mortgage holders have never known a rate rise.
And this is all a Good Thing, according to the orthodoxy in SW1. Sure, low rates might hit savers, who don’t get such good returns, but for home owners and businesses, it’s been a blessing.
Don’t just compare the winners with the losers, say the pundits. Think of the whole economy. Rates were set at rock bottom shortly after banks started to go bust. Slashing the official cost of borrowing saved the day, they say.
I disagree. Low interest rates did not save the UK economy from the financial crisis. Low interest rates helped caused the crisis – and keeping rates low means many of the chronic imbalances remain.
To see why, cast your mind back to 1997 and Gordon Brown’s decision to allow the Bank of England to set interest rates independent of any ministerial oversight.
Why did Chancellor Brown make that move? Fear that populist politicians did not have enough discipline. Desperate to curry favour with the electorate, ministers might show themselves to be mere mortals, slashing rates as an electoral bribe.
The oppostite turned out to be the case. Since independence, those supermen at the central bank set rates far lower than any minister previously dared. And the results of leaving these decisions to supposedly benign technocrats at the central bank has been pretty disastrous.
Setting interest rates low is simply a form of price fixing. Set the price of anything – bread, coffee, rental accommodation – artificially low and first you get a glut, as whatever is available gets bought up.
Then comes the shortage. With less incentive to produce more of those things, the supply dries up. So, too, with credit.
With interest rates low, there is less incentive to save. Since one persons savings mean another’s borrowing, less saving means less real credit in the system. With no real credit, along comes the candyfloss variety, conjured up by the banks – and we know what happened next. See Northern Rock…
When politicians praise low interest rates, yet lament the lack of credit, they demonstrate an extraordinary, almost pre-modern, economic illiteracy.
Too many politicians and central bankers believe cheap credit is a cause of economic success, rather than a consequence of it. We will pay a terrible price for this conceit.
Low interest rates might stimulate the economy in the short term, but not in a way that is good for long-term growth. As I show in my paper on monetary policy, cheap credit encourages over-consumption, explaining why we remain more dependent than ever on consumer- (and credit-) induced growth.
Cheap credit cannot rebalance the economy. By encouraging over-consumption, it leads to further imbalances.
Think of too much cheap credit as cholesterol, clogging up our economic arteries, laying down layer upon layer of so-called “malinvestment”.
“Saved” by low rates, an estimated one in 10 British businesses is now a zombie firm, able to service its debts, but with no chance of ever being able to pay them off.
Undead, these zombie firms can sell to their existing customer base, keeping out new competition. But what they cannot do is move into new markets or restructure and reorganise. Might this help explain Britain’s relatively poor export and productivity performance?
What was supposed to be an emergency measure to get UK plc through the financial storm, has taken on an appearance of permanence. We are addicted to cheap credit. Even a modest 1 per cent rate rise would have serious consequences for many.
Sooner or later, interest rates will have to rise. The extent to which low interest rates have merely delayed the moment of reckoning, preventing us from making the necessary readjustments, will then become painfully evident.
We are going to need a different monetary policy, perhaps rather sooner than we realise.
In light of recent events, we’re bringing forward this proposal from June 2010.
There’s two ways to view the financial meltdown that occurred in 2008. The first is that it was a rare and unfortunate blip that can be remedied with calm and enlightened improvements in the regulatory framework. The second is that it exposed a serious flaw in the entire monetary system, and is likely to be repeated unless a radical transition takes place.
It’s no surprise that politicians, bankers and regulators – the architects of the banking industry – favour the first idea. This is why their response has skirted around the edges instead of dealing with the core. Even supposedly extreme measures such as nationalising banks are in fact attempts to preserve the status quo.
For those of us who favour the second idea, 2008 provided a golden opportunity to join the public debate and present a credible alternative. Perhaps we missed it. But if indeed another crisis is coming, this article attempts to outline a 14-point plan that could be implemented quickly and genuinely reform the institutions that create financial instability.
The key aspects of this proposal have been made previously, notably by economists Kevin Dowd and Richard Salsman. It could be implemented in three phases:
Over 2 days the aim is to ensure that all operating banks are solvent
- Deposit insurance is removed – banks will not be able to rely on government support to gain the public’s confidence
- The Bank of England closes its discount window
- Any company can freely enter the UK banking industry
- Banks will be able to merge and consolidate as desired
- Bankruptcy proceedings will be undertaken on all insolvent banks
- Suspend withdrawals to prevent a run
- Ensure deposits up to £50,000 are ring fenced
- Write down bank’s assets
- Perform a debt-for-equity swap on remaining deposits
- Reopen with an exemption on capital gains tax
Over 2 weeks the aim is to monitor the emergence of free banking
- Permanently freeze the current monetary base
- Allow private banks to issue their own notes (similar to commercial paper)
- Mandate that banks allow depositors to opt into 100% reserve accounts free of charge
- Mandate that banks offering fractional-reserve accounts make public key information (these include: (i) reserve rates; (ii) asset classes being used to back deposits; (iii) compensation offered in the event of a suspension of payment)
- Government sells all gold reserves and allows banks to issue notes backed by gold (or any other commodity)
- Government rescinds all taxes on the use of gold as a medium of exchange
- Repeal legal tender laws so people can choose which currencies to accept as payment
Over 2 months the aim is the end of central banking
- The Bank of England ceases its open-market operations and no longer finances government debt
- The Bank of England is privatised (it may well remain as a central clearing house)
You can download a copy of the plan in pamphlet form here.
Ambrose Evans-Pritchard recently pinned the blame for the financial crisis on “Asia’s `Savings Glut’”. This idea is not new. For readers who may have missed it the first time, we’re republishing this article from September 2009 which argues that monetary policy caused the boom, the bust and the savings glut.
Martin Wolf – Global Imbalances
Distinguished commentator and economist Martin Wolf of the FT holds that the savings glut was the source of the excess liquidity that caused the current crisis in which we all find ourselves.
Wolf’s views are expressed crisply in this PowerPoint presentation. In summary, he tells how the Mercantilist approach of the emerging nations after the Asian crisis of the 90s led to a policy of setting exchange rates to encourage exports and limit imports, supported by the stockpiling of foreign currency (a majority in USD) to fund the whole program. The imbalances can be seen as either a “savings glut” or a “money glut.”
I believe from reading Wolf’s articles in the FT that the suggestion is that the savings glut nations not only have policies of fixing exchange rates to encourage exports over imports but also that the people in those nations have a much greater propensity to save than their Western counterparts. It is argued that this demand for money, certainly in USD, causes the Federal Reserve to embark on an expansionist policy.
From page 15 of Wolf’s presentation:
- My own view is that the savings glut caused the money glut, by driving the Federal Reserve to pursue expansionary monetary policies, which then led to the reserve accumulations in the creditor countries
- But it is also possible to view the Federal Reserve as the causal agent: the money glut causes the savings glut
- Either way, the reserve accumulations and fixed exchange rates played a big role in the story
I interpret Wolf’s remarks to mean that when the massive accumulated USD reserves in the emerging nations were partially spent, a surge in liquidity arrived back at the shores of the USA, causing a housing bubble, subprime lending, less than secure CDO’s etc and the bust we now observe.
Wolf is in good company. It would seem that Federal Reserve Chairman Ben Bernanke has endorsed this view in at least the following two recent speeches.
Chairman Ben S. Bernanke, Council on Foreign Relations, Washington, D.C., March 10, 2009 :
Financial Reform to Address Systemic Risk
The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy. Its fundamental causes remain in dispute. In my view, however, it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s. In the simplest terms, these imbalances reflected a chronic lack of saving relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations. The increase in excess saving in the emerging world resulted in turn from factors such as rapid economic growth in high-saving East Asian economies accompanied, outside of China, by reduced investment rates; large buildups in foreign exchange reserves in a number of emerging markets; and substantial increases in revenues received by exporters of oil and other commodities. Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows for more than a decade, even as real long-term interest rates remained low.
Chairman Ben S. Bernanke, The Morehouse College, Atlanta, Georgia, April 14, 2009:
Four Questions about the Financial Crisis
Importantly, in our global financial system, saving need not be generated in the country in which it is put to work but can come from foreign as well as domestic sources. In the past 10 to 15 years, the United States and some other industrial countries have been the recipients of a great deal of foreign saving. Much of this foreign saving came from fast-growing emerging market countries in Asia and other places where consumption has lagged behind rising incomes, as well as from oil-exporting nations that could not profitably invest all their revenue at home and thus looked abroad for investment opportunities. Indeed, the net inflow of foreign saving to the United States, which was about 1-1/2 percent of our national output in 1995, reached about 6 percent of national output in 2006, an amount equal to about $825 billion in today’s Dollars.
Saving inflows from abroad can be beneficial if the country that receives those inflows invests them well. Unfortunately, that was not always the case in the United States and some other countries. Financial institutions reacted to the surplus of available funds by competing aggressively for borrowers, and, in the years leading up to the crisis, credit to both households and businesses became relatively cheap and easy to obtain.
I submit that these two great economists have made a grave error. The government of the USA has legal tender laws that allow only it, ultimately, to create USD via its sanctioned agent, the US Federal Reserve. As it is in charge of the stock of Dollars and the fractional-reserve banking system, it is (counterfeiting aside) the sole source of all issuances.
As I have pointed out in other articles on this site, we use money to exchage our goods and services that we make/provide for sale for other goods and services. Money is the final good for which all other goods and services exchange. Dollars in the USA are the final good you use to exchange your goods for goods offered by other people. A price of a good exchanged for another good is the amount of money paid for that good.
If the pool of money is getting larger, there will be more Dollars to exchange for goods and services. If the quantity of goods and services offered for sale and the number of Dollars in circulation are growing at the same rate, it is possible to argue, if you are prepared to set aside the problems of relative prices, that the “general price level” will be unaffected. However, any economist would argue that if the supply of money increases faster than the supply of goods and services, prices will rise: like any other good, money is devalued by creating more of it.
Therefore, the cause of the crisis can be found only at the door of the monetary authority that created the money in the first place – i.e. the Federal Reserve and other deficit-nation central banks – and not with the saving glut nations. All they have done is seek to exchange some of their goods and services for some of the goods and services of the USA, expressing a time preference along the way. This transfer of ownership does not in itself “bid up prices” to create an “asset price boom”: it is the creation of new money which devalues it.
If new Dollars are locked away for a time and only return to their original economy in an abrupt fashion, they could well seem to be the cause of a sudden asset price bubble, but the prior cause can only be the creation and supply of the wherewithal to do this in the first place.
A Note on Mercantilism
Wolf mentions in his PowerPoint presentation quite rightly that the modern trade regime we have is “in short, a mercantilist hybrid”. Many of the Classical Economist and Political Philosophers such as Hume, Locke, Smith and in later times David Ricardo, point out in various writings that the bullion (gold and silver) that was invariably money was not wealth as such but that the goods they exchanged against were. So, create more money with no associated increase in productivity and the prices of things will rise. Consequently, the Mercantalist goal of having exports higher than imports and thus more bullion at home would just mean that prices would rise at home and cause a flow of that specie to move away from home. Therefore, if in the analogy you substitute US Dollars for bullion, our saving glut nations will get nowhere fast pursuing this policy.
Gold represented claims on already produced wealth. Thus it makes perfect sense that the more wealthy (industrially-devloped, capitalistic etc) countries had more gold historically. As we do not have a link to gold anymore, the USD acts in its capacity as the World Reserve Currency, like gold of old. Using this analogy, the gold producer / gold miner writ large is the Fed and other Central Banks. Dollars will flow away from the mine in exchange for goods and services and this causes a transfer of ownership of goods and services from people in the USA to people in the saving glut nations but can have nothing to do with asset price bubbles as the money was printed by the Fed and no one else. To argue that the savings glut itself has caused the asset price boom is seemingly to endorse the Mercantalist doctrine that was so clearly discredited many moons ago.
Some other reflections on this concept of a “Savings Glut” disturb me and lead me to question whether it is really a meaningful concept at all.
These saving glut nations still seem to have massive gluts but if spending the glut caused the bubble, you would expect the glut to have fallen as well; seemingly, it has not.
If nations save to create a glut, they must indeed refrain from consumption on domestic goods to boost the supply of export goods. This means cheap goods arrive on the shores of the deficit nations. Can this cause a boom across the economy? I think not.
The deficit nations are largely well-developed. As a 40-year-old entrepreneur with a mature business and a happy family, all well rooted in Hertforsdhire, I often say to my wife, “If I was 18 again, I would be straight out to China to exploit some of those massive developmental opportunities. The whole economy seems to be like Manchester was in the Victorian times.” So why do savings there, which should attract a greater rate of return there, not stay there?
In summary, the Fed has more than doubled its money supply since the mid 90’s as have other leading deficit nations. The savings glut and the boom and bust is only attributable to the lax money creation programs of irresponsbile central bankers around the world. They have a poor understanding of economic history and they make an intellectual mistake in misunderstanding what those Classical thinkers knew: money is not wealth.
Who made this very sound statement two years ago in relation to QE I?
The last resort of desperate governments when all other policies have failed
Answer: George Osborne, our Chancellor.
Sometime soon it will have to stop because in the end printing money leads to inflation.
Answer: our Prime Minister.
Both of these statements were made in 2009 when the first round of QE unfolded.
If people are spending less, it follows that the money unit is being used less. Indeed corporate balance sheets are paying down debt and chalking up healthy cash balances. Coupled with this, in a fractional reserve system, when money gets repaid and not relent, as we know, it came from nothing, and it goes back to nothing.
Personal savings are at their highest for many years as households do the same, pay off debt and replenish cash balances.
Bank reserves are the highest they have been for a long time in relation to overall bank balance sheet size.
God help us if people do start to spend again in the fashion of old as there will be the mother of all inflations.
By the way, many empirical studies, most notably by Friedman, show us that the demand for money is very stable.
As we have discussed here before, regime policy uncertainty will cause people to hold precautionary balances, but only for a short period of time.
With the first round of QE of £200bn and now the second of £75bn we have nearly added 15% to the money supply.
They way out for the Bank of England is to massively raise interest rates as part of a very tight money policy. Either way, this is bad news for us.
Hoping a mild inflation will reduce our real debts over time is a very dangerous game. As soon as the inflation genie is out of the bottle, and we all realise that our money is depreciating, we will spend it, retailers will reprice to take into account the new demand, and prices will soar.
They are hoping not only for a mild inflation, but also for those in receipt of the new money, the people who have had their gilts bought with the new money, to then go and spend it and get those “animal spirits” working again.
So the bankers once again win. More expensive houses, more fast cars and boats, with their bonuses for organizing the buying of the gilts.
The banks get the new money deposited with them and can then shore up their balance sheets even further, as I suspect they are still concerned about all the wonky property loans and dodgy sovereign debt they need to wipe off their books. Thus, giving effectively £75bn of money out of the ether to the banks will not have the desired effect of increasing lending or spending (besides the bankers’ toys already mentioned). We all just have our purchasing power diminished while that of the banking system is raised. They get the new wealth effect, not you!
As most of these institutions are replete with failed corporate executives, still in the same jobs, who will more than likely repeat the same mistakes, who are regulated by the same people in differently named organizations, we have once more a recipe for disaster.
As we always say on this site, the creditors get fleeced . A pensioner buying an annuity today with a £300k pension would have got £22,500 pa and now will get £18,500, should the yields go down to where they want it. The ongoing war on the poor is relentless. Pensioners just have to swallow a 30% pay cut. Forget looters in Tottenham, we will have geriatrics in the streets of green and leafy middle class suburbia smashing the place up if they are not careful. They will suffer for the mistakes of past governments who in partnership with the banks created the mother of all credit booms, which has led to the largest misallocation of resources since the 30s.
As blame for the artificial boom does not lie with the Conservative Party, but with the Blair and Brown money regimes, I can’t fathom why the current government keeps trying to repeat the policy mistakes of the previous one, especially when they condemned this approach to money policy back in 2009.
One further thing, if they do pull yields down on gilts, this may well make borrowing costs marginally cheaper, but lets face it: if 50 basis points means you live or die in business, you are kidding yourself that you have a viable business anyway.
Likewise, if you are a home owner who is so close to the wire that a fraction of a interest rate move wipes you out, then you are a renter of a home, not an owner. The quicker you default, then better for you and your family. Release your burden, rent, and feed your family. No one will be saying at your funeral “he was a great man, he honoured his mortgage. Even though he never should have taken it out because he could not afford it, he was advised by the bank to do so. What’s more, they were so kind that they gave him a mortgage worth more than the house, so he could buy his furniture. Failing to feed his kids and getting divorced did not trouble this honorable man; for the rest of his life he toiled for the bank.”
Embrace default and let’s get this correction over and done with, so we can carry on and rebuild our lives in peace.
A Modest Craft – Sept 12, 2001
It is at times like these that we in the financial sector are humbled in the presumption of our own importance and of the meaning of our works. Daily, we chase the ebb and flow of symbols and numbers across the screens and ticker tapes of the world, seeking to distill from them a fleeting pattern, or to recognize within them some more enduring form.
Rarely, if ever, amid the hubbub of the trading room or the raw intensity of the Pit, do we reflect on the power of such symbols. We crane for each flickering change in a terse alphanumeric—USZ1, DELL, CPI +0.2%, DAX +150—each of us striving uselessly, but compulsively, to see it before our peers do, or, with a little more purpose, to interpret it more quickly than they.
These electronic lights represent a stock, a bond, a currency; of that much we remain aware. But the stocks or bonds themselves are but symbols: a claim to the ownership of a minuscule fraction of some sprawling enterprise, or a right to receive payment from it in days to come.
Again, that payment—in dollars, or euros, or yen—is another symbol: a sign that men have “laboured the earth,” in Jefferson’s trenchant phrase, and that they seek to exchange the fruits of those labours for our own.
This is where the chain of ciphers and sigils leads us at last, then—to the efforts of ordinary men and women going about their daily lives, working at one thing, the thing at which they are most competent, in order to swap their efforts for other things, for a whole diversity of things, made, in turn, by countless, faceless others doing what they are good at, too.
By such free and open exchange, best conducted using fair and honest chains of symbols so that no man is unwittingly deluded or knowingly defrauded in the act, we each seek to serve our enlightened self-interest and satisfy both basic needs and wider aspirations. We find the opportunity where we are most rewarded, and we send out our labours into the vast, teeming, immaterial, immanent Market that is our world.
And—O Mirabile—what things come back, in what profusion, pouring in from all corners of the globe, from people we have never seen, whom we will never see, and who equally are oblivious to our very existence also.
This is the majesty of the free market, of capitalism, this self-organizing scheme that most fully utilizes our jewelled planet’s greatest resource—humanity itself—so that the masses of today live better than all the fearsome khans and haughty emperors of old.
But on Tuesday, out of a clear autumnal sky, all this was put at deadly hazard by earnest men, albeit men whose earnestness had been twisted into suicidal hatred by the potent brew of fanaticism and despair. By their intricate assault on the good people of the U.S., these men showed that they were versed in the power of symbols all too well.
To attack the Pentagon—a cabbalistic form, if ever there was one—was shocking enough, displaying what guerrilla fighters have shown from time immemorial: that all of Caesar’s legions cannot guard against the man who fears nothing but to fail, and who holds his life most gloriously spent in depriving his enemies of theirs.
But far more shocking yet was the strike deep into the very heart of trade, of commerce, and of finance that those few crammed canyons of soaring steel and glittering glass at the tip of Manhattan represented, not just to America, but to the entire world. This was not just an abomination: in many ways, it was a deliberate act of sacrilege.
In tens of minutes, before unbelieving eyes staring from the streets below or gazing in horrid fascination at TV screens across the globe, fireball billowed into smoke and then collapse: crushing, utter, complete and roaring collapse.
As though struck from where they stretched unto the very portals of some jealous god to choking dust and stumbling rubble, they fell in ruinous descent, and Hope itself seemed perished.
The Twin Towers, standing symbolically over Wall Street, were a 1,300-foot rendition of those two, short verticals that transform a mere “S” into a dollar, transmuting it to a symbol for work and wealth and well-being across the Earth.
The enormity of the towers’ swift destruction has been such as to suspend analysis. We have yet to truly register what has been done, how many lives have been lost in screaming (if mercifully brief) terror, how many countless other lives will bear the mark of what was wrought, shivering in the cold snatch of fear each time they see the suddenly naked skyline of New York.
It would be heartening to think that sober wisdom will now occasion restraint in the councils of the powerful, that the understandable desire for retribution, for lex talionis, to be invoked neither will lead to rash and unjust acts that only serve to excite more hatred, nor open up the way for the ever-eager State to intrude more insidiously in people’s lives at home, while snarling ever more belligerently at foes—real or imagined—abroad.
It would be heartening to believe that in America of all nations, the brash, young, self-confidence of its people will swiftly reassert itself, that temperance will season justice, and that this brief, vicarious brush with mortality will give rise to a more measured outlook on life.
It would be heartening to think that, having been shocked by just how fragile is the framework on which we build our dreams, we will become less prone to forcing them upon others. Our fear must be that, in a world already made fractious and divided by the inexorable, UN-inspired, left-liberal-sanctioned politicizing of race and creed and gender, a world made insecure by the erosion of freedom and the imposition of alien values by the Guardians of our global Platonic republic, yet more discord is sown.
We must also fear that, in a world made resentful by seeing the fruits of its labours channelled to vainglorious corporate demi-gods who strut the stage like Achilles simply because a hyperactive credit system has grossly inflated their stock price, Capitalism is made to take the blame.
Capitalism is about the better production of wealth and its distribution through unrestricted exchange. It is about the multiplication of output that comes about by the division of labour. It is about the preservation of capital—those mental and physical tools that build each successive flight on our long stairway out of penury and deprivation—and it achieves that preservation only by the common virtue of thrift and the duty of stewardship on one hand, and by the banishment of envy and the sanctity of property upon the other.
Capitalism is about “labouring the earth” more fruitfully so that fewer men go needy, so that the next fanatic finds less willing recruits, so that amid bustling commercial intercourse, barriers of class and race and ignorance are dissolved into mutual respect and benefit.
Capitalism is nothing to do with the agents of the Crown who sail alongside the honest argosies of trade. Capitalism is nothing to do, either, with the forced acceptance of any creed or code of law, save that of the honest self-interest by which both buyer and seller achieve an increment of value in their exchange.
For we must realize that Capitalism, this most certain route to prosperity devised by man, is also the victim of the exactions of the State and the depredations of the credit system. Why else, even before yesterday’s barbaric deeds, were we increasingly in peril of our livelihoods, our investments, and our savings?
Sadly, that is a verity too rarely glimpsed when the battle ensigns of the fleet and the Jolly Rogers of the corsairs are concealed amid the merry, ingenuous bunting of the mass of ordinary merchantmen seeking innocently to ply their trade.
From this passing meditation on these matters, which this week’s dark happenings have prompted, we shall soon return to the business of chasing symbols and trying to make sense of them. That is, after all, our modest craft in the rich whirl of the market.
For today, we pray for the maimed and the bereaved. We are anxious for the path of the economy and our immediate prosperity. We fret that liberty will once again be the most enduring loser.
Chief Investment Strategist
Diapason Commodities Management S.A.
FT – Bullion bulls talk of $5000 gold
Historically, gold and silver were the money of choice, freely chosen by the people as the most marketable commodities. The value of your labour was measured in these precious metals.
Wicked Kings through the ages debased the people’s money for their own profit. The last English king to do this was Henry VIII. Our money was free from debasement for many years thereafter; the value of our work undebauched.
Today, governments around the world assume the powers of kings of old as they embark on the “monetisation” of their debt, minting new money from nowhere. They call it QE.
Since 1971, when Nixon severed the last link to gold (struggling to pay for the latest war), paper currencies have been the most extreme derivatives, resting on a mere memory of underlying value. CDO squared has nothing on paper fiat.
So the people are voting with their feet, and returning to ancient currency — to gold and silver.
How much does an ounce of gold buy you today? $1800 worth of goods and services. And a year ago? $1200 worth of goods and services. How much purchasing power been taken away from you?
How long will governments around the world, with no political will to tackle their dangerous debts and zombie banks, be able to maintain confidence in their paper systems? I do not know, but I feel that we’re fast approaching a day when the whole western monetary system will fundamentally change.
I hope the new paper will be redeemable in gold or silver. Governments can’t mint this stuff up like magic. They will be forced to raise money through taxation alone, according to what the public will bear. No longer will they be able to kick the can down the road, while stealthily confiscating the fruits of our labour.
I am delighted that even the FT, that stalwart of conventional economics, is now asking ‘how high could gold go?‘. Let us hope they consider the fundamentals, and recall our long, sorry history of debasement.
It is with no feelings of joy that we republish this article, first posted on 8 February 2010
Guest contributor Anita Acavalos, daughter of Advisory Board member Andreas Acavalos, explains the political and economic predicament in Greece.
In recent years, Greece has found itself at the centre of international news and public debate, albeit for reasons that are hardly worth bragging about. Soaring budget deficits coupled with the unreliable statistics provided by the government mean there is no financial newspaper out there without at least one piece on Greece’s fiscal profligacy.
Although at first glance the situation Greece faces may seem as simply the result of gross incompetence on behalf of the government, a closer assessment of the country’s social structure and people’s deep-rooted political beliefs will show that this outcome could not have been avoided even if more skill was involved in the country’s economic and financial management.
The population has a deep-rooted suspicion of and disrespect for business and private initiative and there is a widespread belief that “big money” is earned by exploitation of the poor or underhand dealings and reflects no display of virtue or merit. Thus people feel that they are entitled to manipulate the system in a way that enables them to use the wealth of others as it is a widely held belief that there is nothing immoral about milking the rich. In fact, the money the rich seem to have access to is the cause of much discontent among people of all social backgrounds, from farmers to students. The reason for this is that the government for decades has run continuous campaigns promising people that it has not only the will but also the ABILITY to solve their problems and has established a system of patronages and hand-outs to this end.
Anything can be done in Greece provided someone has political connections, from securing a job to navigating the complexities of the Greek bureaucracy. The government routinely promises handouts to farmers after harsh winters and free education to all; every time there is a display of discontent they rush to appease the people by offering them more “solutions.” What they neglect to say is that these solutions cost money. Now that the money has run out, nobody can reason with an angry mob.
A closer examination of Greek universities can be used as a good illustration of why and HOW the government has driven itself to a crossroad where running the country into even deeper debt is the only politically feasible path to follow. University education is free. However, classroom attendance is appalling and there are students in their late twenties that still have not passed classes they attended in their first year. Moreover, these universities are almost entirely run by party-political youth groups which, like the country’s politicians, claim to have solutions to all problems affecting students. To make matters worse, these groups often include a minority of opportunists who are not interested in academia at all but are simply there to use universities as political platforms, usually ones promoting views against the wealthy and the capitalist system as a whole even though they have no intellectual background or understanding of the capitalist structure.
This problem is exacerbated by the fact that there is no genuine free market opposition. In Greece, right wing political parties also favour statist solutions but theirs are criticised as favouring big business. The mere idea that the government should be reduced in size and not try to have its hand in everything is completely inconceivable for Greek politicians of all parties. The government promises their people a better life in exchange for votes so when it fails to deliver, the people naturally think they have the right or even the obligation to start riots to ‘punish’ them for failing to do what they have promised.
Moreover, looking at election results it is not hard to observe that certain regions are “green” supporting PASOK and others “blue” supporting Nea Dimokratia. Those regions consistently support certain political parties in every election due to the widespread system of patronages that has been created. By supporting PASOK in years where Nea Dimokratia wins you can collect on your support when inevitably after a few election periods PASOK will be elected and vice versa. Not only are there widely established regional patronage networks but there are strong political families that use their clout to promise support and benefits to friends in exchange for their support in election years.
Moreover, in line with conventional political theory on patronage networks, in regions that are liable to sway either way politicians have a built in incentive to promise the constituents more than everyone else. The result is almost like a race for the person able to promise more, and thus the system seems by its very nature to weed out politicians that tell people the honest and unpalatable truth or disapprove of handouts. This has led people to think that if they are in a miserable situation it is because the government is not trying hard enough to satisfy their needs or is favouring someone else instead of them. When the farmers protest it is not just because they want more money, it is because they are convinced (sometimes even rightly so) that the reason why they are being denied handouts is that they have been given to someone else instead. It is the combination, therefore, of endless government pandering and patronages that has led to the population’s irresponsible attitude towards money and public finance. They believe that the government having the power to legislate need not be prudent, and when the government says it needs to cut back, they point to the rich and expect the government to tax them more heavily or blame the capitalist system for their woes.
After a meeting in Brussels, current Prime Minister George Papandreou said:
Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state.
It is not out of the kindness of his heart that he initially did not want to impose a pay freeze. It was because doing so would mean that the country may never escape the ensuing state of chaos and anarchy that would inevitably occur. Eventually he did come to the realisation that in the absence of pay freezes he would have to plunge the country into even further debt and increase taxes and had to impose it anyway causing much discontent. Does it not seem silly that he is still trying to persuade the people that they will not pay for this situation when the enormous debts that will inevitably ensue will mean that taxes will have to increase in perpetuity until even our children’s children will be paying for this? This minor glitch does not matter, though, because nobody can reason with a mob that is fighting for handouts they believe are rightfully theirs.
Greece is the perfect example of a country where the government attempted to create a utopia in which it serves as the all-providing overlord offering people amazing job prospects, free health care and education, personal security and public order, and has failed miserably to provide on any of these. In the place of this promised utopian mansion lies a small shack built at an exorbitant cost to the taxpayer, leaking from every nook and cranny due to insufficient funds, which demands ever higher maintenance costs just to keep it from collapsing altogether. The architects of this shack, in a desperate attempt to repair what is left are borrowing all the money they can from their neighbours, even at exorbitant costs promising that this time they will be prudent. All that is left for the people living inside this leaking shack is to protest for all the promises that the government failed to fulfil; but, sadly for the government, promises will neither pay its debts nor appease the angry mob any longer. Greece has lost any credibility it had within the EU as it has achieved notoriety for the way government accountants seem to be cooking up numbers they present to EU officials.
Dismal as the situation may appear, there still is hope. The Greeks many times have shown that it is in the face of dire need that they tend to bond together as a society and rise to the occasion. Family ties and social cohesion are still strong and have cushioned people from the problems caused by government profligacy. For years, the appalling situation in schools has led families to make huge sacrifices in order to raise money for their children’s private tuition or send them to universities abroad whenever possible. This is why foreign universities, especially in the UK, are full of very prominent and hard working Greek students. Moreover, private (as opposed to public) levels of indebtedness, although on the rise, are still lower than many other European countries.
However, although societal bonding and private prudence will help people deal with the consequences of the current crisis, its resolution will only come about if Greek people learn to listen to the ugly truths that sometimes have to be said. They need to be able to listen to statesmen that are being honest with them instead of politicians trying to appease them in a desperate plea to get votes. The time for radical, painful, wrenching reform is NOW.
There are no magic wands, no bail-outs, no quick and easy fixes. The choice is between doing what it takes to put our house in order ourselves, or watching it collapse around us. This can only come about if Prime Minister George Papandreou uses the guts he has displayed in the past when his political stature and authority had been challenged and channels them towards making the changes the country so desperately needs. Only if he emerges as a truly inspired statesman who will choose the difficult as opposed to the populist solution will Greece be up again and on a path towards prosperity. He needs to display a willingness to clean up the mess made after years of bad government and get society to a point where they are willing to accept hard economic truths. One can only hope…
From Deception of Government Intervention (1964) – an essay in Mises’ anthology Economic Freedom and Interventionism – we learn how governments adopted “the third way”:
Faced with the tremendous challenge of totalitarianism, the ruling parties of the West do not venture to preserve the system of free enterprise that gave to their nations the highest standard of living ever attained in history. They ignore the fact that conditions for all citizens of the United States and those other countries which have not put too many obstacles in the way of free enterprise are much more favorable than conditions for the inhabitants of the totalitarian countries. They think that it is necessary to abandon the market economy and to adopt a middle-of-the-road policy that is supposed to avoid the alleged deficiencies of the capitalistic economy. They aim at a system which, as they see it, is as far from socialism as it is from capitalism and which is better than either of those two. By direct intervention of the government, they want to remove what they consider unsatisfactory in the market economy.
Such a policy of government interference with the market phenomena was already recommended by Marx and Engels in the Communist Manifesto. But the authors of the Communist Manifesto considered the ten groups of interventionist measures they suggested as measures to bring about step-by-step full socialism. However, in our time the government spokesmen and the politicians of the left recommend the same measures as a method, even as the only method, to salvage capitalism.
In the aftermath of the financial crisis, we are now going down a road towards ‘judgement-based’ regulation of financial firms in an attempt to salvage capitalism.
It is proposed that firms will be supervised by what amount to shadow management teams of disinterested, public-spirited individuals more able to reach sound views than firms’ own management teams: they shall possess “the optimal experience and technical ability”.
Quite where these mythical philosopher kings are to be found, I do not know. Presumably, financial firms and regulators already hire the best people available. And the notion that the best people will work for the regulator despite inevitably higher rewards in the firms themselves is silly.
Financial firms will find their business subject to the day-to-day judgement of government officials. To think that those officials will be more capable than the institutions’ traders and managers is a fantasy. The outcome will be, as it has been, a surprise financial catastrophe as regulators fail to foresee the future and, since they are bound to converge on “best practice”, fail as one.
A free society is not one based on constant official interference with business. It is one based on cooperation, choice, competition, profit & loss, predictable rules fixed well in advance and exit from the market: that is, property, contract and the classical rule of law.
Rather than resort to fantastic ideas about the effectiveness of government interference with market phenomena, we would do better to reapply the principles of a free society. Financial institutions should be no exception, for government intervention caused the crisis [1,2].
Postscript: Marx and Engels’ ten measures are available here.