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By Tom Clougherty, on 21 April 10
The BBC reports that the IMF has unveiled its interim proposals on a new international tax on the financial sector, ahead of a meeting of finance ministers this weekend.
In fact, the IMF’s paper suggests two new taxes. The first, a ‘financial stability contribution’ would be levied on all financial institutions, initially at a flat rate, to help cover the ‘fiscal cost of any future government support to the sector’. The second, is a ‘financial activities tax’, which would be levied ‘on the sum of the profits and remuneration of financial institutions’.
The first point to be made is that justifying these taxes on the grounds that the proceeds will help governments deal with future crises is a straightforward con. The proceeds of the first tax could either ‘accumulate in a fund to facilitate the resolution of weak institutions or be paid into general revenue’ say the IMF, but you don’t need to be psychic to work out which of those is more likely – governments will just spend the money on current expenditure, as they always do. The second tax doesn’t even come with an either/or fig leaf – proceeds will go into general revenue, for governments to spend as they see fit.
So it is pretty clear that what we have here isn’t so much a policy to ensure financial stability, but rather to bail out profligate governments. Moreover, this could in itself worsen financial instability by making fiscal policy even more pro-cyclical (revenues would be highest during financial booms), and exacerbating boom and bust cycles.
There are other problems too. For example, the idea of compulsory ‘insurance’ against failure for banks (this is the direction the ‘financial stability contribution’ moves us in) is likely to make moral hazard – already a major issue – an even more severe problem. Even now, government guarantees to banks are largely implicit, but the IMF’s tax proposal would make them explicit. Indeed, the ‘financial stability contribution’ is not just an overt indication that irresponsible banks will be bailed out – it could easily be read as creating an obligation that they must be bailed out. And that’s hardly a way to encourage less risk-taking.
It is also problematic that these taxes will be applied to all financial institutions (including insurers, hedge funds and so on), most of which had little to do with the financial crisis. They are thus likely to damage the wider financial economy, without actually doing anything much to deal with the real offenders.
Which brings me neatly to the most depressing aspect of these proposals: the complete lack of understanding they exhibit about the actual causes of the financial crisis – loose monetary policy, ramped up by unrestrained fractional reserve banking, and amplified by fiscal incontinence. The saddest thing is that the world’s financial system desperately does need reform. Without a radically new approach to controlling the money supply and taming the credit cycle, history is doomed to repeat itself. But the IMF’s proposals do not even qualify as a step in the right direction.
By Steven Baker MP, on 30 March 10
The Belfast Telegraph reports Toby’s efforts to deliver “Big banking lessons from little Presbyterian Mutual“:
Investors at the Presbyterian Mutual Society are the only depositors in the UK likely to lose personal savings as a result of the banking crisis.
The organisation, which operated under an FSA exemption intended for credit unions in Northern Ireland, does not benefit from a Government guarantee scheme which protected savers’ money and put an end to the run on Northern Rock.
When customers attempted to withdraw £50m during the height of the banking crisis in October 2008, the PMS paid out £21m before entering administration in order to safeguard its remaining reserves, which totalled, by that stage, just £4m.
As the Northern Ireland Executive and the Government at Westminster wrangle over responsibility for the crisis, a charity and pressure group, formed to promote the principles of honest money, has formulated a plan which could refund the society’s savers, without necessitating a bailout at public expense.
The Cobden Centre, spearheaded by seafood entrepreneur Toby Baxendale, is keen to see the Bank of England issue new notes and coins to PMS investors who currently cannot access their money. Any inflationary effect would be mitigated by erasing deposits and allowing the Government to recover the society’s investments, to set against the national debt.
As the article hints, this measure is not inflationary. The inflation already happened when demand deposits were loaned. This measure is anti-deflationary. Think of it as a just and fair version of QE based on sound property rights.
Read more.
Further reading
By Steven Baker MP, on 15 February 10
 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
- Huerta de Soto, Money, Bank Credit and Economic Cycles
- Baxendale, A day of reckoning: how to end the banking crisis now
- What is wrong with banking, part 1: the legal nature of banking contracts
- Frank Whitson Fetter, Development of British Monetary Orthodoxy 1797 – 1875
- F. A. Hayek, Denationalisation of Money: The Argument Refined
- Gordon Kerr, How To Destroy the British Banking System and Bailing out the Banks – Glaring Evidence of Moral Hazard
- James Tyler, My Journey to Austrianism via the City, Money is not working and How to avoid future encounters with financial meltdown
- Irving Fisher, 100% Money, 1935
By Steven Baker MP, on 25 January 10
 Should banks be permitted to operate with a fractional reserve on demand deposits or should 100% reserves be a legal requirement? Should there be a central bank with a monopoly on note issue? What are the consequences of these choices? These were mainstream questions in the 19th century and they demand attention today. Here, following the ESCP Europe/Cobden Centre “Colloquium on Honest Money”, Steve Baker frames the debate to be had about money and banking.
Today, people are well aware that we have a banking crisis, a “credit crunch“. That is, there is a problem in the financial system, a system which is centrally planned — see Economic Interventionism, Banks and the Crisis – and an approach which necessarily works badly – see Strip the Bank of England of its power. So, what are the features of the present system and what are the alternatives?
The two important features of the present, orthodox system are:
- The banks are not required to keep money in reserve to the value of demand deposits. That is, they operate with a fractional reserve. As Toby Baxendale has pointed out, today if more than one person in 34 asks their bank for their money back in notes and coins, which is a reasonable, contractually-sound request, we will have a systemic banking crisis — a run on all banks — because there is simply not as much cash as people’s bank statements say there is.
- There are, across the world, central banks in which committees of experts set “monetary policy” — see The kindness of geniuses – a rate of interest which, through various mechanisms, affects the entire economy. And the economy is, of course, what people choose to do, since the economy is nothing more or less than the cooperation of thinking, acting individuals and of corporations run by thinking, acting individuals; therefore, manipulating the interest rate necessarily distorts the actions of people and the productive structure. Central banks also act as “lenders of last resort” in the event of a run on a particular bank — which is possible because of their fractional reserve — but in the case of Northern Rock, the Bank of England did not ultimately fulfill that role.
Stepping back from today’s monetary orthodoxy — a fractional reserve and a central bank — the options are plain: we can have a 100% reserve on demand deposits, or not, and separately, we can have central banks with a monopoly on the supply of currency, or not. Hence, Jesús Huerta de Soto models (PDF) the banking debate as follows:
 The shape of the debate (click to enlarge) As Irving Fisher, one of the founders of Monetarism, pointed out in the sub-title and content of his book 100% Money, there are potential benefits to be gained from moving to another system. For example, Fisher identified the following as the headline benefits of moving to a 100% reserve requirement:
- keeping chequing banks 100% liquid so that there can be no more runs on banks,
- preventing inflation and deflation,
- largely curing or preventing depressions,
- and wiping out much of the National Debt.
Since we have had a run on a bank, since the money supply has deflated, since attempts to reflate the money supply risk price inflation and distort the economy, since the boom-bust cycle is evidently still in progress and since we are doubling our national debt, it is perhaps worth taking seriously the question of how our system of money and banking is organized.
Furthering that discussion was the purpose of the recent ESCP Europe/Cobden Centre Colloquium on Honest Money directed by Founding Fellow Dr Anthony J. Evans, Chaired by Corporate Affairs Director Steve Baker and attended by Chairman Toby Baxendale amongst 9 other academics and practitioners in the field of money and banking.
We will continue to develop and promote a range of ideas to open up and further the debate on money and banking.
Further Reading
- Baxendale, A day of reckoning: how to end the banking crisis now
- Frank Whitson Fetter, Development of British Monetary Orthodoxy 1797 – 1875
- F. A. Hayek, Denationalisation of Money: The Argument Refined
- Huerta de Soto, Money, Bank Credit and Economic Cycles
- Gordon Kerr, How To Destroy the British Banking System and Bailing out the Banks – Glaring Evidence of Moral Hazard
- James Tyler, My Journey to Austrianism via the City, Money is not working and How to avoid future encounters with financial meltdown
- Irving Fisher, 100% Money, 1935
By Gordon Kerr, on 18 January 10
The following is the text of an address by Gordon Kerr, a Cobden Centre Advisory Board Member, to the Brussels Group at the European Parliament on 13th January 2010.
By Invitation of Syed Kamall MEP, Christofer Fjellner MEP and Alexander Graf Lambsdorff MEP. Meeting chaired by Shane Frith.
Syed Kamall, Shane Frith, ladies and gentlemen, thank you for inviting me here to address you today.
1. Introduction
May I provide a few words by way of brief personal background. I have spent the bulk of my 25 year banking career as a structuring engineer.
I played a minor role in wrecking the British banking system by designing and implementing synthetic capital structures – these are mechanisms for banks to produce, as if by magic, additional capital in their accounts which does not in reality exist.
This artificial capital was and remains a product of inconsistent regulatory capital rules that applied to different categories of banking activities.
By way of example: multi billion portfolios of insured loans were flipped from the funded regulatory regime (8% capital ratio) to the derivatives regime (1/16th of this – 0.5%) merely by wrapping them up in credit default swaps.
I will seek to persuade you today of my view that there exists a simple and perhaps Europe-wide cure to the banking crisis. Make a simple legal change.
Simply stipulate that funds deposited under demand deposit contracts with banks belong to the depositor and must be backed by cash or a near cash asset (such as Government bonds).
This proposal would not freeze the banking system. On the contrary, it would revitalise it by ensuring that there could never in future be a run on banks. This proposal would enable free markets to flourish, and would remove the banks from taxpayer dependency.
The European Parliament has this power. Let me invite you to consider using it.
2. Why is this step necessary?
Let me frame the regulatory options very clearly. The number of truly different ways of regulating the banking industry is two. The only alternative to the 100% collateralised demand deposit regulatory structure is the Fractional Reserve system. This is the present system.
Under fractional reserve regulation banks are required to maintain a minimum say 8% “fraction” of their exposures as capital.
Since the bulk of European banks are shareholder owned rather than mutuals or government owned, market forces virtually compel them to push Fractional Reserve regulation to the limit.
No bank CEO could keep his job if he was not fully leveraged in supposedly stable market conditions.
Furthermore, capital is expensive to raise. Under the present system market forces result in the emergence of methods of inflating what I would regard as a fair measure of bank capital such that it appears greater than it actually is.
If the proposal now made is ignored then I fear we will have failed to learn anything from the 2008 collapse.
The alternative is simply to patch the banks back together under a supposedly strengthened Fractional Reserving set of regulations. However, FR in any form is almost certain to lead to another boom bust cycle.
In the initial phase banks will generate large profits as they again inflate the money supply, driving asset prices up which in circular fashion will boost lending once again as the collateral values of the assets justify greater and greater loans. This will give the appearance of economic growth but, like the boom that preceded the present bust, it will merely be storing up more problems for present and future taxpayers.
Contrast the sincere and genuine concern shown here in this Parliament for the interests of future generations in the context of our climate change concerns with the scant regard for their financial interests demonstrated by our continued tolerance of ineffective banking regulation.
3. A few words on the critical importance of demand deposit contracts.
Why has the UK Government, and others, bailed out banks? Of all the stakeholders in banks, which category of stakeholder was deemed so important that such previously unimagined sums needed to be spent to protect its interests?
Borrowers’ interests did not justify the bailout; their loans would be treated as an asset in liquidation and sold to the highest bidder;
Shareholders – surely this is the class of stakeholder least deserving of any taxpayer rescue funds.
Lenders – mainly other banks and institutions. This class does not merit state protection, they knew the risks and took them. Likewise derivative counterparties; this class is in exactly the same category as lenders, the only difference being the technical point that most derivative exposures are unfunded as opposed to funded. The widely quoted credit default swap market illustrates the maturity and professionalism with which both these categories of stakeholder assume credit exposure to banks.
The key stakeholder whose interests could not be sacrificed must be DEPOSITORS. Why are depositors’ interests considered so important and deserving? I think the answer to this question must be that depositors mistakenly believed back in October 2008, and even since then, that funds they deposit in a bank belong to them. That is a serious mistake. In case any of you are in any doubt there is no legal difference in any European jurisdiction of which I am aware between a deposit contract and a loan contract. Both are loans to the bank and a deposit contract is a loan that can be called back by the lender supposedly on demand.
But few UK citizens are aware of this point. A recent UK survey found that 70% of the sample surveyed believe that depositors own the money they put in a bank, just as the client of a law firm owns the funds he leaves in a solicitor’s Client account in the UK. How would you feel if you went to collect your funds from your solicitor and were told “ I’m sorry, I’ve just lost all your money by speculating it without your permission in an attempt to boost my profits? ” Yet this is how we approve of banks treating our demand deposits under fractional-reserve banking rules.
The proposal now submitted would prevent future crashes and would recognize the critical importance of demand depositors by stipulating that ownership of demand deposit funds remained with the depositors, not the banks.
Market forces would ensure that banks worthy of surviving the present crisis would clean up their business models and render their balance sheets transparent. They would seek to grow and profit by persuading depositors to convert some deposits to loans.
4. Replies to Possible Objections
Various objections have been set out:
- Banks would fail to be able to provide loans. Response: Bank lending would only be curtailed to the extent that they could not provide loans not backed by savings willingly lent to banks. Some of the projects presently being financed would not succeed in obtaining credit in such an environment. This is surely no bad thing since it is precisely these marginally viable transactions that form the tipping point of each successive banking crisis. Only 3% of the UK Bank’s liabilities are demand deposits.
- Interest rates would rise and economic development be held back. Response: The absence of bank crises would eliminate the massive squandering of capital goods which accompanies severe recessions, and there is no reason to suppose that the interest rate would be any higher in such a system than the market rate implied in today’s environment. Again, the matching up of saved funds with loaned funds should prevent the inception of non- viable projects saving the system from the crashes which always lead to a freezing up of bank lending.
- A 100% reserve requirement would inhibit the contractual freedom of the parties. Response: On the contrary, the proposal represents the natural application of traditional property law principles to a monetary deposit contract.
- Economic growth is not possible without a certain amount of credit expansion and inflation. Response: May I quote De Soto “ The slight, gradual and continuous deflation (in the sense of a rise in the purchasing power of the monetary unit) would actively foster sustained, harmonious economic development”.
5. Conclusion
At the point of collapse the Royal Bank of Scotland had leveraged itself so severely that it had lent out each pound sterling sitting in so called demand deposit accounts 66 times.
Even the most prominent defenders of fractional-reserve banking recognize that the establishment of a 100% reserve requirement would put an end to banking crises.
Simon Johnson, former Chief Economist of the IMF said in May 09 “The Finance industry has effectively captured our Government…recovery will fail unless we break this financial oligarchy”
You have the power to prevent any recurrence of these banking crises and to free governments and taxpayers from the finance industry. I urge you to use it, change the legal status of demand deposit contracts as proposed – provide that such funds remain 100% cash backed and remain the property of depositors.
Ladies and Gentlemen, thank you.
Gordon Kerr
January 13th 2010
Further reading
By Steven Baker MP, on 29 December 09
 Razeen Sally’s Trade Policy, New Century (PDF) succeeds magnificently in explaining the 21st-century case for free trade and, specifically, unilateral trade liberalisation to the interested, non-specialist reader.
From the IEA home page of the book:
The World Trade Organization (WTO) is failing to deliver the trade liberalisation desperately needed to bring prosperity to developing countries, according to a new study released today by the Institute of Economic Affairs. The WTO is hamstrung by a cumbersome negotiating model and the influence of vocal protectionist lobbies who oppose free markets. At the same time, increasingly popular regional ‘free-trade agreements’ often create as many barriers as they remove by erecting new obstacles to trade with countries outside the blocs concerned.
In the context of policy paralysis at the WTO, the author, LSE trade expert Dr Razeen Sally, argues that governments must take back the initiative from supranational institutions. The priority must be unilateral liberalisation – removing trade barriers to benefit domestic consumers rather than waiting for tortuous international negotiations to be resolved. Governments can also help maximise the benefits of free trade by liberalising their economies and strengthening key institutions.
But what is the imperative for the UK? Surely, European Union citizens enjoy free trade?
The EU is a customs union: we trade ostensibly freely within it, but, as can be seen from the EU’s TARIC database, we find ourselves behind a complex system of tariffs on, for example, wheat, notwithstanding the battle long since won by our inspiration, Richard Cobden, to repeal England’s Corn Laws in the general interest.
And this is the key point: free trade is in the general interest. We may make the political and economic arguments in detail, but the public good is our ultimate aim, and not just at home. Razeen Sally explains (pp179-180, emphasis mine):
Adam Smith fortified his presumption in favour of free trade with an explicit political argument. Protectionism is driven by ‘the clamorous importunity of partial interests’ who capture government and prevent it from having ‘an extensive view of the general good’. Free trade, in contrast, tilts the balance away from rent-seeking producer interests and towards the mass of consumers. It is part of a wider constitutional package to keep government limited, transparent and clean, enabling it to concentrate better on the public good.
As important to Smith and Hume was the moral case for free trade, centred on individual freedom. Individual choice is the engine of free trade, and of progressive commercial society more generally. It sparks what Hume called a ‘spirit of industry’; it results in much better life-chances, not just for the select few but for individuals in the broad mass of society who are able to lead more varied and interesting lives.
To sum up: free trade is of course associated with standard economic efficiency arguments. But the classical-liberal case for free trade is more rounded, taking in the moral imperative of individual freedom and linking it to prosperity. Finally, free trade contributes to, though it does not guarantee, peaceful international relations. Freedom, prosperity, security: this trinity lies at the heart of the case for free trade.
In a short article, I can scarcely do justice to this monograph’s insight in relation to the case for classic liberalism nor to its observations on emerging geopolitics: I heartily recommend the book.
Further reading
By Toby Baxendale, on 21 December 09
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 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”
By Steven Baker MP, on 18 December 09
Via Don’t Blame the Federal Reserve – Stephen Mauzy – Mises Institute:
Banks operate under a fractional-reserve system that allows them to create liabilities and money virtually at will. This system expands money beyond what it would otherwise be and guarantees inflation by pushing the broad money supply far beyond the base money. Money, in essence, is debt, with supply dictated by loan demand.
A full-reserve scheme would prevent banks from lending phantom money. Banks’ primary functions would be bifurcated into money warehousing and deposit lending. As warehouses, banks would collect fees for storing deposits, with the deposited funds always available to the depositor. As deposit lenders, banks would accept time deposits to lend. The depositor would earn interest for the use of his money, while the bank would earn the spread between the rate it paid to depositors and the rate it charged its borrowers.
Insufficient credit is the first and most voluble objection to a full-reserve banking system. This shortage may or may not occur. If it did, no problem — private finance companies would arise to fill the credit void. They wouldn’t accept deposits, instead they would raise funds by issuing equity and debt. These companies would be free to specialize and lend to what their charters dictate.
By Toby Baxendale, on 11 December 09
Scanning the papers yesterday, yes there is focus on the Deficit and plans by both parties to reduce it. Skepticism that the Labour Party will reduce and more confidence that the Conservative Party will.
There is little mention that the National Debt will actually rise to £1 trillion next year.
In terms of getting this simple message across, I put it to you readers….
Labour’s misspending will cause the National Debt to rise to £1trillion pounds next year. To put it in perspective, if you spent £1 million a day for 1 million days or 2,740 YEARS, you would spend a £1 trillion.
Or…..
Gordon Brown’s mishandling of the economy will cause the National Debt to rise to £1 trillion pounds next year. To put it in perspective, if you spent £20 billion a year for 50 YEARS, you would spend a £1 trillion.
Is this a bad dream? How are we going to get out of this mess?
A radical solution promoted by some of us at the Cobden Centre, written about by 5 Nobel Prize Winners in Economics and countless other distinguished economists, should be aired among the powers that be. Just to recap….
The money supply is made up of notes and coins — approx £50 billion — plus £1.5 trillion of demand deposits.
We must remember that when we deposit money with a bank we become a creditor to the bank (the money ceases to be yours) and a demand deposit is a claim against that financial institution that can be used for the purchase of goods and services: this becomes yours.
For a bank, the demand deposit is an IOU to you the deposit maker. This means that your bank statement is in effect an IOU from the bank to you.
Make the whole money supply notes and coins and delete all demand deposits.
This is not inflationary: as you create the cash and put it into the corresponding individuals’ bank accounts, you delete the corresponding demand deposit.
The banks then have no creditors, only assets.
You, as a depositor, are no longer a creditor but a customer who deposits his money for safe keeping.
If the banks now only have assets and their share capital, their balance sheets become positive to the exact amount of demand deposits you have replaced with cash i.e. a staggering £1.5 trillion.
As a one-off act, we can then take this £1.5 trillion away from the banks and return them to their pre-reform net worth.
With those assets, we can pay off the National Debt in an extremely short space of time.
I have pondered this at length now. Not many people are capable of understanding this very simple idea as they do not know how to distinguish between what is cash, notes and coins and what is a demand deposit i.e. a bank IOU. If you can understand this, you can solve the UK’s Debt Crisis.
Further Reading
By Steven Baker MP, on 9 December 09
Via FT.com / UK / Politics & policy – Do-it-yourself warning as state cuts back, further evidence of the need for genuine social progress through mutual cooperation:
The relationship between the individual and the state will need to be radically redefined as the next government cuts billions of pounds from local authority spending, council finance chiefs and chief executives are warning.
Some individual council services could face cuts of 30 per cent or more over three years after 2011, a joint study by Solace, the Society of Local Authority Chief Executives, and Cipfa, the Chartered Institute for Public Finance and Accounting, has concluded.
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