A Contrarian’s Dilemma

This article from Tocqueville Asset Management is a must to read for anyone interested in the role gold plays in the investment portfolio of the public and of the Contrarian. It is simply one of the best articles written on the matter:

Is gold a “bubble” because it has now become popular or is there still worthwhile upside? As a contrarian, it is more difficult to reconcile the metal’s recent popularity with the prospect of future rewards. Is the investment consensus always wrong, or can it be right for extended periods? Does the perceived flood of new investment mean the jig is up?

The effect of four digit gold has been magical on investment psychology. Day after day, the financial media publishes glowing reports on the metal’s prospects while never failing to trash the beleaguered U.S. greenback. Hardly a day passes when I do not receive another meticulously researched, solemn tome on the merits of gold written by a market strategist or hedge fund manager. My office has stacks of them, all basically saying the same thing: paper currencies are bad so buy gold. In the parlance of the contrarian, gold is no longer a “thin file” investment idea.

Read on by downloading the article from Tocqueville.


What Happened to “Efficient Markets”?

By kind permission of The Independent Institute, we republish a talk given by Cobden Centre Advisory Board Member Professor Peter J. Boettke of George Mason University.

The financial crisis of 2008 has challenged the reputation of the free-market economy in the public imagination in a way that it has not been challenged since the Great Depression. The intellectual consensus after World War II was that markets are unstable and exploitive and thus in need of government action on a variety of fronts to counteract these undesirable characteristics. In the United States, this intellectual consensus did not result in nationalization of industry, but in detailed regulation and heavy government involvement in economic life.

The stagnation of the 1970s reversed this trend of public policy, at least in regard to the related rhetoric. A new sense of reliance on the market’s capabilities and a fear of the government’s overreaching took hold of the public imagination. By the end of the 1980s, communism’s collapse throughout eastern and central Europe and in the former Soviet Union reinforced a sense of intellectual triumph for market- oriented thinking over the demands for government regulation and control. The consensus in favor of the free-market economy proved fleeting, however, as the difficulties of transition, the plight of underdeveloped countries, and the tensions of globalization all came to represent, in the eyes of several pivotal intellectuals, the failings of the free-market system.

With the stock market losing 50 percent of its value over the past year, major banks failing, real estate values collapsing, and unemployment creeping toward dou- ble digits, claims about the superiority of the market economy over government intervention are difficult for many to view with credibility. But this situation arises from previous intellectual failings in the discourse concerning the nature of the market economy, the failings of socialism, the costs of government intervention, and the role of public policy. Simply put, we must always remember that bad economic ideas result in bad public policies, which in turn produce bad economic outcomes. The economist’s role must be to counter the first step and defeat the promulgation of bad economic ideas. Doing so is no easy task given the counterintuitive nature of economic reasoning and the role of vested interests in the development of public policy in democratic systems. But if the economist does not do the job, market corrections may be transformed into economic crises by the implementation of ill- fated government policies, and economic crisis may be transformed into political and economic catastrophe as bad ideas are joined with opportunistic politicians who, in the name of meeting the challenge of the crisis, persuade the public to trade their liberties for the promise of security.

In a time of extreme economic adjustment, it is important to remind everyone how markets in fact work. Falling asset prices, business failures, and reallocations of resources (including workers) evince efficient-market adjustments to changing cir- cumstances as much as the exploitation of profit opportunities and the exhaustion of mutual gains from exchange do. In fact, they are the flip side of one another, just as maximizing profits and minimizing costs are. The market process is a profit and loss system. Prudent economic decisions are rewarded, and imprudent decisions are penalized. The market economy in this regard is indeed a ruthless, unrelenting, and ceaseless process of economic change.

To read more, please download the paper.


Bastiat’s Iceberg: A Sean Corrigan Masterpiece for Christmas

Sean Corrigan of Diapason Commodities Management packs more sound applied economics into this report than ever: Toby Baxendale provides a commentary. This is a great Christmas read for us all: download the report here.

Bastiat's Iceberg

Bastiat's Iceberg

On the Errors of GDP Accounting

  • For the USA economy, Corrigan shows the utter futility of using the conventional GDP measure. The same applies for any of the OECD countries who use the same measure.
  • Business spending in 2006 in the USA was $31 trillion vs a GDP of $13.4 trillion.
  • Businesses were spending $4.30 for every $1 spend on personal consumption.
  • Policy makers from around the world, if any of you are reading this article, please take note of the significance of this fact!
  • This focuses on something that all Austrian economists know: the desire by the mainstream economists is not to double-count. In the end, they do not count much at all!
  • As a catering fish monger myself, I buy fish off farms, boats and auctions around the world. I cut and prepare the fish and send it to my customers, the hotels and restaurants of the UK. Yet none of my spending exists in the GDP figures! My wealth and that of my suppliers does not exist as far as the authorities are concerned. I only wish that I could get the tax man to take this view like his economist colleagues in the Revenue Department!
  • I had this discussion with a member of the MPC some months ago: how if my salmon was bought at the fish farm for £1 per kg and we put a £1 mark-up on after cutting it up and the end user put a £1 mark up on, it is double counting as far as he was concerned. He reasoned that to count all of the stages of production when it only finally gets sold for £3 would be an overstatement as the price of the inputs is in the final price of £3. They miss out the significance that I and my supplier have our profit to the spend in the wider economy after we have spent our companies’ resources on continuing investment and consumption. This is all real activity! This is the danger of having statisticians running the economy.
  • All that matters, we are told, is that GDP is composed of 70% of final consumption expenditure. In reality, the final consumption element is more like a quarter of real GDP, once the production sector is included.
  • As I have always said, the health of the production sector is driven by its ability to invest in replacement capital to make more efficient production techniques, to supply more goods and services to people at better prices and with better service levels. This is the essence of entrepreneurship, the essence of wealth creation and the essence of the recovery: magic tricks perpetrated by the economic witch doctors, who wish to pursue a policy of QE or similar, will only consume capital and not replace it with some better means of production.

Continue reading “Bastiat’s Iceberg: A Sean Corrigan Masterpiece for Christmas”


The Zimbabwe Stock Market

This is a great news report from Zimbabwe via Al Jazeeera. It examines the ‘fantastic returns’ on the Zimbabwe stock exchange – and how traders are becoming ‘paper millionaires’. ‘Traders are astounded by the performance’. ‘Stock soar despite inflation’. I kid ye not.

(Hat tip to

I love – a great financial markets website – very much sympathetic to the Austrian-School world view.

To my mind, this is a great explanation of the stock market ‘rally’ of the last year.


What is a “Red” Tory?

Out of nowhere, Phillip Blond has created a think tank which has hit the headlines all over the world: ResPublica.

See here for example: The Problem With Phillip Blond: He’s Wrong About Markets.

Blond appears to be David Cameron’s poster boy, his court intellectual so we are told. Like Karl Marx before him, he has argued that the free market has led to the development of monopolies. In addition, he has attacked our successful retailers, suggesting that communities should have the power to block such giants and that they should be compelled to stock local produce.

He is devoid of any demonstrable economic knowledge so far and we hope this is not a sign of things to come. People interested how the market works may like to read Anthony Evan’s and my submission to the Competition Commission Inquiry some years back into “Tescopoly:” Are Tesco acting competitively?.


Labour’s dishonesty is leading us down the road to sovereign default – Telegraph

Via Labour’s dishonesty is leading us down the road to sovereign default, Liam Halligan launches a scathing attack on Alistair Darling, Gordon Brown and British political class:

Over the past 10 years, Labour has turned a budget surplus into a deficit equal to 13pc of GDP – the biggest in our peacetime history.

Government borrowing is at its highest since the Second World War and almost twice the previous post-war peak. And yet, and yet … when he stood up to deliver the PBR on Wednesday, the Chancellor, Alistair Darling, managed to make a ghastly situation even worse.

Read on…


EEC/CERT/CESP/Warm Front – Picking Losers…

Via EEC/CERT/CESP/Warm Front – Picking Losers…, an argument that government intervention in the energy markets is counterproductive:

These programmes¹ are examples, like the EU-ETS, where government intervention hands commercial advantage to the VILE (Vertically-Integrated Large Energy) companies, to little beneficial effect.

The VILE companies point to the fact that demand for domestic energy has fallen in the last couple of years, as evidence for their success. I have argued this was largely a response to price increases, increasing disparities between costs-of-living and disposable income, and warmer winters (until last year), and not the effect of their energy-efficiency programs. In my opinion, the timing demonstrates the point. EEC was introduced in 2002, and Warm Front in 2000, but domestic energy demand carried on rising until 2005², which coincidentally was when global wholesale gas prices spiked (consumers did not feel the full effect until Winter 06/07, but there was already concern and initial increases in 2005).


The Micropolitics of Free Market Money: a Proposal

This paper originally appeared as Economic Notes No. 39, published by the Libertarian Alliance in 1992. The Paper is available in full here.

This paper is not primarily intended as a contribution to economic theory. It is instead intended to steer the debate on free banking away from statements of loyalty to the “line”: that orthodoxy of political views which is often incoherent and always an affront to individual reason. This is accomplished by concentrating upon the process of argument.

In “A Credibility Problem” (Part I), there is a critical evaluation of the depth of understanding by free banking’s supporters of their own position, and a hard evaluation of the likely effectiveness of these arguments. Then in “How To Do It” (Part II) micropolitics are applied to the free banking issue.


To expect the introduction of legal private currency – that is to say not state owned, not state regulated, and the use of which will not result in prosecutions on the grounds of issuing counterfeit notes, fraud nor ‘economic sabotage’ – is to dream.

Most people divorce their dreams from reality. In the Conservative Party’s youth wings, home to many who “dream with their eyes open”, a majority does not as yet support the privatisation of money. Given the tendency in these sections of the Tory Party to “vote the slate” and “walk the line”, heedless of the anguished bleatings for moderation from Conservative Central Office, the fact that the “comrades” are not four-square behind the extirpation of state dirigisme is perhaps an indication of how unpractical currency liberation appears to be. Perhaps it is also a problem of definition: how many people could explain the benefits of currency demonopolisation? Of these how many would the enlightened comrade entrust with his savings? I leave the reader to make up his or her mind, but for my part I know no one personally who can simultaneously convince me of the urgent need for privatization, assure me that its introduction is remotely likely, persuade me that it won’t involve considerable disruption when introduced, and sell to me the proposition that I am better off using this currency without qualms about ‘funny money’ or ‘junk bonds’. I haven’t even begun to consider the technical operation of such a currency, which is where I consider that Hayek has left a host of questions unanswered. In short there is a credibility problem.

This is a matter that I have tested before writing this paper, by asking acquaintances of mine who are not intimately familiar with the works of people who write for the Institute of Economic Affairs, the Adam Smith Institute or the Libertarian Alliance. The test was carried out by asking the respondent what he or she thinks of the privatisation of money. The response that comes to mind most readily but is not always articulated (we do live in a civil society) is: “It’s insane!”

After a period of time devoted to demonstrating the possibility that currency denationalisation is not necessarily insane, the immediate reply is: “It couldn’t work.”

This is an understandable objection because it reflects a distinction between what Ayn Rand called “an error of knowledge” and “moral failure”. Some technical arguments exist, and I propose to evaluate some of them in the course of this paper, but it would be a gross overstatement of the public’s awareness of market economics to assume that these arguments are widely disseminated, assimilated, or even that they are conclusive. At this stage, after some explanation that the topic has been researched by Nobel prizewinners and that some historical studies have offered grounds for accepting the principle that private money could exist, in possibly atypical circumstances, the victim of my experiment may recoil at the notion of one of his or her standards for gauging reality being shattered. The response may then become: “It’s unnatural!”

By now emotional objections will have come into play; privatisation of the Bank of England is at least credible but the abolition of legal tender restrictions is – in appearance at any rate – the end of civilisation as we know it.

Having reassured the listener of the seriousness of my case and having suggested that civilisation might not end because the monarch’s head is not on every bank note the problem turns to the consequences of such radical reform: “It isn’t safe!”

This response is often considered awkward because anyone with the faintest understanding of economics, and banking especially, will feel inclined to agree …

This problem is therefore of crucial importance: are private currencies less secure than ‘junk bonds’ as well as non-inflationary? Those who answer glibly “No” to the former and “Yes” to the latter are probably not the sort of people that I will take private scrip from.

Scepticism about privatising currency is not merely understandable, in keeping with the view that the ‘masses don’t know where their true interests lie’, but is rather a healthy indication that people are wary of panaceae, immiment miracles and ‘leave it all to the market: everyone’s a winner’. Those who propounded the decimal calendar, lunar colonies before 1985 and the revival of British Lawn Tennis due imminently – since 1936 – are today on a par with those who promise the abolition of inflation and monetary stability.

The credibility problem is compounded by the additional correlation of forces supporting or opposing change. The basic list of opponents to change is more powerful than for any privatisation to date. The list of supporters of currency privatisation is the flimsiest for any privatisation to date.The opponents come in four categories: interest groups in favour of less choice in currency exchanges than exists at present (i.e. Socialists, certain sections of bureaucracy); interest groups in favour of the status quo (i.e. the Bank of England, H.M. Treasury); some financial institutions that would benefit in a marketplace, issuing currency, but with more to lose (in terms of market share to new operators and in faster clearing of credit) than seems prudent to stake on change (i.e. some banks and building societies, particularly the larger ones); those potential users of private currencies who would prefer to keep ‘safe’ state currency because it’s the known quantity and because it is ‘guaranteed’ (i.e. the entire population of the United Kingdom).


Those whose interests lie with greater state control are of little concern to this study: its purpose is not to convert Socialists, nor bureaucrats. This study is more interested in the reasons why money privatisation is not in prospect in the UK, what the weaknesses are in the argument for free currencies, and whether or how the enterprise might succeed.

To read on: download the paper.


Can Government Create Wealth?

In this article, I argued that a useful measure of GDP needs to extract the government sector, as all it represents is a movement of wealth from the productive private sector to the productive and not so productive government sector. The private sector is the well spring of wealth creation and the government sector can in itself create no wealth, it can only redistribute it to achieve outcomes that it determines to be more desirable.

One of our regular readers commented as follows:

I have trouble with the suggestion that government spending cannot — at least in theory — result in wealth creation.

The commentator goes on to give an example of taxes creating a useful service, that of a national railyway that creates wealth and an example of printing money that, given to the right projects, will create wealth. They are as follows;

Suppose FooCorp sends their packages by carrier pigeon. This is slow and expensive (pigeons need to be trained and fed, and packages go missing when they fly past hunting grounds). FooCorp realises that they can increase efficiency by investing in a private rail network. The cost savings delivered by the network are greater than the cost of the investment, and FooCorp reaps the rewards. This, presumably, is wealth creation. If so, why is wealth not created if a taxpayer-funded rail network benefits the taxpayers more than it costs them?


Suppose that rather than confiscating our wealth directly through taxes, the government confiscates it indirectly by printing money. The government spends its new money not on bank bailouts or welfare programs, but instead on the fusion researchers, who eventually deliver cheap power for all UK citizens. Again, it would seem that though the original funds were ill-gotten, the result has been genuine wealth creation.

I do not deny the possibility that in these specific individual, stylised examples a government can create wealth. However, in the round, they can never create more wealth than a freely functioning economy.

Economic Calculation in the Socialist Commonwealth

This is the title of a very famous essay – for the full downloadable PDF, see here.

Ludwig von Mises masterfully shows us how rational economic calculation in a socialist system is impossible. Only a half-baked system of production is possible under socialism. Empirically, we saw this in Eastern Europe and the Soviet system. The message is very simple;

  • In the free market, people transact for goods and services via voluntary exchange, facilitated by the use of money.
  • Money is the price you pay for the goods.
  • The price mechanism tells us all sorts of information as to the scarcity of those goods and services (higher prices) or their abundance (lower prices). They also indicate the need or wants of consumers as they will pay more for more wanted goods and services and less for less wanted goods and services.
  • Entrepreneurs look out for these price signals so they can direct the factors of production in better ways and combinations to satisfy those most urgent needs of the consumer.
  • If government owns the means of production, there is no price for capital goods.
  • The central planner has to make up a price to get a capital input.
  • How is this done?
  • It can only be done at best by educated guesswork.

The Pretence of Knowledge

This is the tile of a very famous speech by Hayek: see here

Also see Hayek FA 1937 Economics and Knowledge, Economica V4 N13 33-54 and 1945 The Use of Knowledge in Society, The American Economic Review .

Hayek built on the work of his teacher Mises by adding the following;

  • Planning the production process in the free market economy is done by billions of people exchanging goods and services, facilitated by the medium of money.
  • Prices to entrepreneurs are indispensible communication points in their planning process, showing the entrepreneur what factors of production and being demanded to produce what goods and services.
  • This knowledge is dispersed and comes from a multiplicity of sources.
  • Central planners cannot possible have brains big enough to take over the role and plans of all the entrepreneurs in society and all the spending individuals, thus they have a “knowledge problem.”

Although this was all debated well before the advent of super calculating computers, no program can ever take into account the changing needs and preferences of individuals. Also getting into the computer all of the combined information all the time in all circumstances for all times and places to replicate the market place cannot as of yet be done and I suspect never will be done.


So in answer to our commentator, I would advise a quick reading of the above mentioned classics as I think they are unbeatable in their logic. A government may get lucky with a plan and subsequent taxation of wealth to spend on that plan but, overwhelmingly more so than not, they will fail for the given reasons.

In the mixed economy we exist in today, Lord Andrew Adonis, the current Secretary of State for Transport, is doing just as our commentator suggests and is planning to build a high speed rail network that will undoubtedly bring benefits by moving the great cities of our nations closer together. More trade will take place than before, that is for sure. This I hope will be one of those lucky central planning projects.

The reported £34 billion is a lot of money to spend. Would the private sector have undertaken this? We do not know the answer to the latter for sure, but I would note the following pre big government;

  • All the great roads until the 40’s, but now only toll roads as the road system has been nationalised, were built by the private sector;
  • This is the same for all the railways, the canals and other infrastructure systems;
  • And all the bridges;
  • All the health care provision;
  • All the education provision;
  • Power supply;
  • The tunnels;
  • And the sewers.

I could go on and on…

If we consider food retail, we find Tesco created with £34 billion of private money invested in its capital. Do we really think that the government could provide for this in a better way?

When governments issue debt, it crowds out private sector bond issuance and fewer big capital projects are provided for by the market system.  To create a better functioning market place, governments should be forbidden from raising bonds, then the needs of the market could be met as people will still want to save and they would look more favourably on corporate issuance.

Indeed, we should look once again at how bonds could be the basis of all welfare provision, as I discussedhere, from “How do we fund a Deficit” onwards.

Our commentator gives the second example of using QE or creating money out of nothing to give to some scientists who develop a superior technology that drives masses of benefit. Again, I would say this is possible and more down to luck than having the many millions, if not billions, of economic actors, working through the price mechanism solving problems and allocating resources in the most efficient way, as only entrepreneurs can.

I would back the market, comprising all of us cooperating, over any central planning agent any day of the week!

Government can create the climate for lasting wealth generation by:

  • Upholding the rule of law;
  • Upholding the sanctity of contract;
  • Avoiding war unless attacked;
  • Removing legislation that obstructs the market.

There is much more but these are some key areas. I would like to refocus our commentator on thinking of ways the government can create the climate of wealth creation, rather than attempting to be the wealth creator itself.

Further reading


Protectionism, Regulations and Globalization — ECIPE

Via Protectionism, Regulations and Globalization — ECIPE:

Economic history tells us many lessons. One particular lesson of contemporary relevance is that the internationalization of economies should not be taken for granted. It should not be viewed as a perpetuum mobile; a force that is impossible stop. The current crisis – and the responses to it – has triggered fears of a replay of the 1930s when tit-for-tat protectionism and economic nationalism followed hard on the heels of a financial crash. The world economy then experienced a giant process of deglobalisation that took almost 40 years to unwind.

The current crisis has been far from as severe as the crisis in the 1930s. Nor have crisis measures been ostensibly protectionist. Many protectionist measures have been introduced (still counting), but they have been far from as drastic as the spiraling tariffs of the 1930s. This is comforting knowledge, and it testifies to the disciplining effects on protectionist sentiments offered by WTO agreements. However, it might be less comforting than we are led to believe by most modern accounts of the crisis and globalization. To understand what is currently happening in the global economy we might have to release ourselves from traditional concepts of the integration of markets. In the past centuries, markets have been integrated through trade and cross-border movement of production factors. For most of the time, it has been a process of internationalization: one country after another have linked up with the global economy as it has become a destination for production and the origin of inputs and products for final consumption at home. In such an internationalized economy, trade barriers have damaged flows across borders and imposed costs on producers and consumers.

Read more: Protectionism, Regulations and Globalization — ECIPE