The Cobden Centre

The latest Material Evidence from Sean Corrigan:

The Home of the Free and the Land of the Brave? Wrong on both counts, if we listen to the testimony of no less than Bill Gross, a man who seems to think that a nation founded on commercial liberty and rugged individualism should admit the last two-and-a-half centuries have been a bit of a joke and should promptly nationalize the mortgage market. Yes, why not — and let’s clear out those reactionary Kulaks while we’re at it, shall we, Mr. G?

Material Evidence, 20 August 2010

Download the report here.

That soul which once convulsed the world will meet its end,
Not from a sword, or stones, or spears, but from an object
Which, avenging Cannae, will take reprisal for all that bloodshed –
A poisoned ring. Go on, you maniac; charge through the Alpine wastes
To entertain a class of boys and become an oration!

— Juvenal Satire X

Six years ago, on a similar occasion to this, I delivered a speech entitled ‘Hannibal ad Portas’ – ‘Hannibal at the gates’ – in which I outlined many of what I then perceived as building threats to wealth and capital preservation.

Reviewing it now, two things strike me most forcibly: firstly, that what I said was not really so profound, but merely a dogged application of common sense, leavened with the wisdom of the Austrian masters; and, next, that I obviously did a poor job of making my case since I have had to address many of the same points over and over again in the intervening years!

During that time, a good number of the risks I tried to identify have come to a baleful fruition – though I must disclaim any notion of prophethood by declaring that I could neither give any hints as to the timing of the collapse, nor single out its proximate cause, much less detail the specifics of its progress thereafter.

What I did say – and what I have scarcely ceased from repeating since – is the fact that these evils have been visited upon us due, in good part, to the wilful insistence of the court astrologers and lackey alchemists on looking at things economic in entirely the wrong manner, and in no little measure because of our own deranged faith in the conclusions they draw from their necromancy, despite an appalling record of incomprehension and outright falsehood with which we are only too familiar.

In retrospect, ‘Hannibal’ came just as the Boom which has since wrecked us was just beginning to well up toward the fantastical heights it ultimately reached, before rolling over and breaking, and scattering the hopes and dreams of many, like driftwood on a rocky shore.

Though it had its roots a further six years back, one of the salient features of this Boom was the accelerating tendency to create a majority of the new jobs called into being and to invest a dominant share of the new capital being laid down in the export industries of the East, principally – though not exclusively – in China.

But if this meant we Westerners were no longer bothering to increase our productive capacity to make things in quite the way we once did, what were we going to exchange for all the new riches of the Orient which would be pouring out of their shiny, new factories? Why, our IOUS, of course!

In the classical model of this, those IOUs would eventually be presented for redemption. The buyers would have to surrender hard value – gold or silver, typically – and with money becoming scarcer as a result, prices would fall, with the converse happening when the sellers began to spend their swelling revenues at home. This soon would choke off the attractiveness of exporting in the latter and increase the incentives to do so in the former, so restoring balance before things became too far gone and both parties got in over their heads.

Alas, since money has no tangible backing today, that part of it which is surrendered can all too easily be replaced and more excess spending be undertaken – and more debt be contracted – so turning off the regulator at source.

Compounding this mistake, the recipients chose to use this foreign money as the backing for new issues of their own domestic currency and so they absorbed very much more of it than would have been the case if it were simply being used to move container ships around the world. Thus, the ratio between our currency and theirs on the foreign exchanges did not come to reflect the markedly one-way nature of the trade being undertaken with them – theirs did not gradually strengthen, nor ours sufficiently weaken, to disincentivize slowly all but the most competitive exporters there.

Intriguingly, a similar system had been in operation once before as the West sent vast sums of American-mined silver seaward to Asia in return for their exquisite silks and calicoes, their exotic spices, and their translucent porcelains and finely-decorated ceramics.

One essential difference of course, was that the silver had to be won from the bowels of the earth and transhipped perilously across the globe: it was not simply conjured into being in the computer hard drives of some too-big-to-fail banking behemoth and so it remained both scarce and costly to produce. One essential motivation on the part of the Chinese was that the silver helped them ward off the curse of paper money whose use had plagued them ever since the 10^th century and which had bought no less than three successive dynasties to their ruin.

For more than three hundred years, this interchange worked to the benefit of both parties – right until we added tea to the list of our wants and found we liked it so much that those of us not dressing up as Indians and dumping it in the harbour could no longer pay our way without offering them something much less benign than silver in return – and so hit upon the opium which we almost literally forced into their nostrils at the point of a gun.

But, we digress.

This time around, the new possibilities which had emerged upon the fall of the old communist order in 1989 began a movement which only quickened after the Asian currency collapse of the late-1990s. This allowed us to tap a new, cheap and seemingly inexhaustible source of labour amid the rubble of left by the fallen ‘Tigers’. As the costs of many other productive inputs which were needed by these workers – such as land, financial capital, and energy – were also suppressed by a deliberate act of policy – and with a multitude of tax rebates and other incentives also tipping the scales – the prices of more and more of the goods in the shops our progressively over-spending, chronically under-investing, Occidental countries not only did not rise, they even had a tendency to decline.

Since those in charge of the money presses in each buying country only ever looked at the price of some artificial basket of those goods which were bought by end-consumers – and given that they even fretted if these were not actually increasing at some outwardly modest, but nonetheless profoundly corrosive, rate – this meant they were happy to strike more and more sparks upon the tinder, until they fanned the flames into a worldwide conflagration.

Of course, with money so easy and credit so cheap – and becoming ever cheaper and more accessible, thanks to the seductive artfulness of the banking industry – it was not long before the prices of everything not being made in China and its peers started to become more expensive instead. Houses started to appreciate and the stock market rallied: the market’s estimation of more and more risky credits improved. Classic cars, antique watches, vintage wines, diamonds, contemporary art – you name it: once people became aware that these things were going up in price faster than the interest balance on their loans, we were off to the races.

But since these were ‘assets’, not mere goods – and so were presumably priced in a fully efficient market by thoroughly rational participants – this was held to be no business of those in the central banks to interfere with. Accordingly, the monetary Hoi Phyllakes, wittingly or not, kept on adding fuel and pumping in air to a speculative inferno which was by now well and truly ablaze.

More debt meant higher prices. Higher prices meant better collateral valuations. More collateral meant more possibilities for lending and so on round again.

Now, you may have found that the whole troupe of formerly cheerleading authors of the profusion of books and newspaper articles which have been rushed out to do a little Monday morning quarterbacking on the debacle this caused are annoyingly keen to bamboozle you with all sorts of highly technical language and confusing terminology, in order that you think they are smart. PIK notes, covenant-light loans, toggles, average-rate securities, structured notes, credit default swaps, constant-proportion debt obligations, CLOs, CDOs, CDO-squareds and even cubeds – these are some of the many buzzwords bandied about by the cognoscenti .

But trying to unpick all this complexity is beside the point: the real crux was that Finance – both High and Low – was no longer allocating genuine savings to potentially useful ends, but rather conjuring up the illusion that there was a Horn of Plenty into which we could all dip – once we had paid our bankers, brokers, and fund salesmen their none-too modest fee, of course.

There was no scarcity; no waiting time was necessary; there was no need to actually produce more value in order to enjoy a better lifestyle. Just sign here, please, Dr. Faustus, and we’ll get you a higher loan-to-value, extended payment terms, and the chance to refinance when the price goes up and the rates come down, as you and I both know they will!

Certainly the specific instruments of economic torture may differ and the incantations may contain altered language, but the same twisted ingenuity of this Guild of Sorcerers’ Apprentices has, over the past 350 years, brought about the Tulipmania of the 17^th century; the South Sea and Mississippi Bubbles of the 18^th; the canal, gaslight and railway manias of the 19^th; the utility and holding company boom of the early 20^th; the Tech and Telecom madness of the turn of the 21^st, and many, many more episodes of mass insanity in between.

Unsound money and unrestrained credit combines far too readily with Man’s inherent disinclination to live off the sweat of his brow to make him an easy mark for every smooth-tongued, silk-suited chancer who promises him a ticket out of the Land of Nod and, once, again, this fatal weakness has led us to a ruin which has engulfed the innocent along with the guilty.

This collapse, so our friends on the left were only too happy to declare, marked the ‘Death of Capitalism’, but it looks as though their declaration may have been just a little premature. Here we are, only two years after they jubilantly read the rites over the first corpse and the trillion dollar wake they threw may have led directly to the demise of their beloved Provider State as well.

The irony here is that while people may be blind to the notion that their own reckless borrowing and determined over-consumption was what led to disaster, they are far more likely to acknowledge that a similar act of untoward extension by the State is not to be countenanced.

As the limitations of ‘Crude Keynesianism’ became more apparent, the debate swiftly moved on from the phoney war of whether there should have been a bail out or not to a similarly heated one about whether we now need something categorised as ‘austerity’ or  a further dose of Big Government stimulus.

The truth is that even to frame the issue in this simple, sound-bite fashion is to concede half the argument.

What is ’stimulating’ about plying the drunkard with more drink or offering the glutton another helping of cake and what is ‘austere’ about the profligate being told to live once more, within his means?

The only thing austere is the message that there can be no further self-delusion; that there are no easy fixes. That there is no macro-economic diet pill, only hard work, honest endeavour, persistence and self-discipline – in other words, only the traditional route to prosperity. If we are to have a ‘policy’ to promote this, it should be a policy of lubricating, not leading; of facilitating, not force-marching.

The world has changed irrevocably with the bursting of the bubble, so what is needed now is the maximum of flexibility in adapting to such altered circumstances: what the original Austrians called, amid the traumas of the 1930s, an ‘Auflockerung’ – a ‘loosening’ of all the self-imposed rigidities which plague our economic interrelations and hamper a genuine recovery.

Perhaps THE greatest mistake in the whole, vast litany of stupidity which we daily celebrate is to imagine that there actually exists such a discipline as ‘macro-economics’.

The truth is much simpler than this sad parody of physics suggests. The world really is the sum of its parts. It is no more than a summing up of the actions we each take as individuals, a superposition which, contrary to the mainstream prejudice, never does cross some reverse quantum threshold of weirdness whereby what makes perfect sense when I strike a deal with you, you conclude a bargain with him, and he then conducts business with me, somehow produces strange and perverse effects when there are a hundred of   him, a thousand of you, and a million of me.

Once fall prey to this fallacy, however, and you will be ready to believe that to burn the house down is better than to put out the fire; that, if the whole family falls ill, the kids must run a marathon to compensate for the parents; time in the sick bed; that the retreat of an occupying army is bad news because the soldiers won’t be spending the money they first took from us on the few, threadbare goods left in our shops.

To hold this sham of a theory is to believe that capital is an undifferentiated, instantly transformable porridge, not a near infinity of tools, equipment, plant and machinery, fixed in stone, cast in steel, and intricately engineered to serve what is often a very specific purpose.

It is also to imagine that labour is a faceless, uniform, ant heap of automatons, not actual people – to smooth into dull anonymity all the bakers, barristers, scientists, and secretaries all scrambling out of bed each morning to earn a living providing what all the other bakers, barristers, scientists, and secretaries fancy they need to make their individual lives more complete.

Those who do hold this for their revealed truth – the Collectivists, the Keynesians, the Planners, and the Utopians – all have a fundamental disregard for the sanctity for the individual human soul and a profound disrespect for the potential of the individual human mind. Only they can guide us, lead us: only they can refashion our poor human clay in their own, idealized self-image.

This is a Jacobin doctrine of the kind which a religious man might categorize as Satanic in its presumption and yet those who espouse it are the Whitened Graves who routinely slander us Austrians as being dogmatic, desiccated, and discompassionate. Much better to be manifestly pro-market than a Modern Promethean, I would contend.

But, given that our rulers very much do hew to these false gods, what does their worship imply for our wealth? What does it portend for our ability to earn – and keep – an income?

The first thing to realise is that the caterer’s bill for our Banquet of Fools cannot possibly be paid, that our debts are already too high and our promises cannot be redeemed in full.

But, if not the capital R of Redemption, then what? I fear we are in for one of the other R’s; Repudiation, Rescheduling, Refinancing, Redistribution, Repression, or Redenomination.

The hidden benefit of the first, an outright Repudiation, however wrenching the experience may be, is that it might once more drive home the lesson that, no matter what the credit ratings agencies may say, the worst person to lend to is your overlord.

The second – a Rescheduling – is more insidious since it is a hidden form of the first; an outward pretence to repay, but one undertaken on a sufficiently lengthened schedule that the full value will not be rendered to the lender.

Refinancing is really no solution, but only a procrastination which will last only so long as the weaker can piggy-back on the credit of the stronger. Then, one day, all the musicians of Bremen will be found atop one another, each braying plaintively for yet another loan to stagger on awhile further, but each unable to find a further back upon which to clamber.

Redistribution entails a further harvest of the tall poppies, taking what the remnant have so far managed to salvage and adding it to the bonfire of our masters’ vanities. So great are the obligations, however, that even the most swingeing taxation, even the most relentless confiscation, will not yield enough to settle the accounts, so this, too, will prove futile in the end.

By Repression we mean that all pretence at maintaining a market will be abandoned. Increasingly Scarce resources will be allocated not according to price, but by political favour. The ration book will replace the auction house, the commissar will be always right, not the customer, and the border will become a prison wall.

Redenomination means the debt may be repaid in name, but not in substance. This is the Weimar way, the shameless resort to the wheelbarrow as a getaway car for the robbers-in-office whom we elect.

The common factor binding each of these is that they imply a future struggle over who will bear the costs and a battle to determine how long the subsidized can continue to guzzle hungrily at the table of the surcharged.

Now that the camouflage of postponement by further borrowing has been largely stripped away, this has become an urgent question – one whose resolution will affect us all most deeply.

Hence, this is a time that calls for the maximum of adaptability, as well as for a considerable display of both intellectual conviction and moral courage. If we do not have it within ourselves to do, we need to enlist the aid of men – entrepreneurial men, clear-thinking men, men of unflinching resolve – who will seek out opportunities to thrive even amid the wreck of the state and who will find safe havens for our capital regardless of the destructive death throes of Leviathan itself.

If we can persuade such men to look after our material fortunes, we can steel ourselves to face the many other challenges we will doubtless confront, secure in the knowledge that, whatever else these uncertain times may bring, we may yet be spared the worst of the coming recognition of the widespread, societal impoverishment to which the utter abnegation of classic, Manchester liberalism has reduced us.

As I mentioned at the start, the speech I gave six years ago was entitled, ‘Hannibal ad Portas’ in allusion to the admonition made by Roman matrons to their naughty children that, if they did not behave, the foreign bogeyman would take them.

But if Hannibal knocks again, perhaps we should welcome his approach, not fear it and by analogy, perhaps we, too, should embrace our own coming crisis as a rare, precious chance to make things better.

After all, the Romans were plunderers and extortioners on a truly grand scale – and, on that score, have been admired and emulated by power-worshippers and oppressors ever since. For all its specious majesty, Rome, at root, was nothing but a vast, highly-organized, Mafia state which reached its baneful zenith once it had ‘created a desert and given it the lying name of Peace’ in all the fertile lands and amongst all the sophisticated peoples within reach of its hordes of legionary killers.

Carthage, by contrast, was built largely on the gains from peaceful trade by a race – the Phoenicians – which, for a millennium or more, had been renowned for its commercial acumen and enterprising outlook, all along the Middle Sea and out into the terrifying deeps of the Ocean itself.

That reputation, that record of sustained success, strongly hints that, for all the supercilious Roman jeers about ‘Punic treachery’, the Carthaginians knew how to keep their bargains and how to give their many diverse customers mostly what they wanted at a price they were happy enough to pay

So let us not be fooled by fact that Hannibal’s name was taken in vain by the snarling creatures of a jackal-empire who enslaved a world, yet maintained they had never fought an aggressive war.

Perhaps history would have been changed very much for the better if, rather than barring the city gates in his face, the Romans had flung them wide open, and invited the head of the venerable House of Barca to step inside and give them a lesson in business management and accounting principles instead.

It should not come as a shock to readers of your author’s musings to learn that he views the mindless, repetitive, near-valueless kerfuffle which exercises the vast majority of the journeymen toilers and scribes involved in the game of prognosticating of their beloved GDP aggregates, with an amusement which is tinged with just a soupçon of contempt.

The weather was unseasonably dull, those confronted with the surveyors’ clipboards had just argued with their spouses, the price of Apple stock halted its upward surge, or the football season got off to a poor start, so ‘consumer confidence’ has drooped and, ergo, by misapplying Keynes’ trite observations on ‘animal spirits’ to spenders, rather than to the businessmen he so despised, that means retail sales will be soft. Since – in yet another tautological nonsense – ‘consumers make up two-thirds of GDP’, then the holy number itself must be headed lower.

Ye gods! Quick, before we sink into the quagmire of a ‘liquidity trap’ or the ‘multiplier’ becomes instead a divisor, the government had better spend even more – no matter how uselessly or counter-productively – to keep up ‘demand’ while the central bank, for its part, had better stand ready to induce people whose present distress is largely attributable to their past over-borrowing to contract yet further, barely-payable obligations and to fritter the proceeds away on it-matters-not-much-what as long as a cash register rings somewhere, as a result.

Let us once more enumerate the problems inherent in the fixation on GDP, since to look beyond this false god, seems to us a sine qua non of the attempt to perform any more useful an analysis.

Firstly, let us note that the measure is so far from being all-encompassing that it actually ignores roughly two-thirds of the spending which routinely takes place in an advanced economy. In essence, this means that it excludes much of the microeconomic exercise of discretion and entrepreneurial decision-making that goes on and hence is blind to matters which both assure the continuity and give rise to the main variations in the complex, delocalised, real-world economy which surrounds the blinded windows and sound-proofed walls of the statisticians’ ivory tower.

Secondly, it overlooks the fact that if the government arbitrarily orders you to wear two shirts to work in place of the usual one, or forces you to take a far more roundabout route to get there, the resulting increase in textile sales and gasoline usage will nevertheless be counted as a valued addition to output, not a petty act of tyranny.

Thirdly, it is blithely indifferent to the fact that capital is inherently heterogeneous and that labour is only partially versatile. Hence, it cares not a whit that it is all too easy to spend good money in filling the fridge with otherwise fine foodstuffs for the preparation of which we have neither the requisite skills nor the necessary kitchen utensils to hand; or which, when cooked in combination, will offend against the palate of the prospective diners.

Furthermore, it neglects to give any contemplation to the sheer inadmissibility of simply adding a side order of fries to an airbag activating device, to an anti-theft window lock, to an aircraft instrument system as a means of counting the combined material blessings of several hundred million souls – people who also each reckon their enjoyment of whatever small smattering of this mind-boggling diversity it is they partake of in a wholly idiosyncratic and non-additive manner.

But beyond even these epistemological objections, the  quaint truth is that all the blind econometrics, all the angels-on-a-pin correlation analysis, all the past-is-prologue trend extension which goes into the many attempts at predicting this swirling, statistical duck soup of a number are often no more than grand exercises in GIGO – garbage in, garbage out – since the data themselves are inherently suspect.

Take, for example, the recent revisions to the series for the years 2007 to date. It turned out that this latest, ostensibly improved guess at GDP came up a cumulative $264 billion short of the former one – a difference of around $10 billion a month. All very well, you say, since the error amounts to no more than 2% of the typical annual total, or  under a $1 per day per capita, but then reputations are routinely made and lost, fortunes wagered and won, and far-reaching political and financial policy decisions taken on far smaller margins than that.

Even more droll was the discrepancy in something that the State should surely have been aware of all along since it was (a) bailing out half the banks, brokers, and Big Businesses in the country at the time and so presumably took the pains to glance, however cursorily, at their accounts and (b) it has long insisted, in any case, that they submit reasonably representative financial information (and binding tax returns) once every quarter.

Thus, to find that, for 2007-9 combined, after-tax corporate profits turned out to be $304 billion less, the second time around the spreadsheets – a sum representing around a two-fifths of the annual average –and with a $254 billion, 190% revision in the tottering financial sector component alone – well, it does make you wonder.

Fig 1: US Corporate retained earnings

The BEA number crunchers even managed to understate non-financial corporate dividends by $243 billion – or by roughly one half – meaning that (given the accompanying profit shortfall) cumulative retained earnings were out by $295 billion – a mere 245% of their period average! To put this into context, that missing retention would have almost been enough – at the prevailing rates -to have paid the wage bill of a fifth of the entire manufacturing workforce across the nation during those three, blighted years of cutback, curtailment, and contraction.

Astrology may be no more scientifically burdened than is most modern macroeconomics, but at least the guys with the pointy hats and the Catweazle beards know exactly where and when Venus will be passing through the House of Aquarius, and will not therefore come knocking on your door two years hence to say: ‘Sorry, it must have been a speck of dirt on the telescope lens. You should have avoided tall dark strangers at all costs, not married one of them!’

Fig 2: US Private hours worked - 1997-to date

Incidentally, it will be very interesting to see just how ‘cash-rich’ corporate balance sheets turn out to be when these new estimates are incorporated into the Flow of Funds numbers in a month’s time. Certainly, this might go someway to explaining why it is that, this far into the recovery and after the application of record amounts of so-called ‘stimulus’, private hours worked are still where they were back in 1998, having recouped only around a fifth of their losses from the peak, while the headcount has made good barely one in every fourteen jobs shed in the course of the slump.

Ironically, the fact that the trade gap is once more burgeoning as exports stall and imports march on upward is seen by the Gee-whiz GDP-ites as a call for more stimulus (what else?) whereas what it really signifies is that even with so much labour and capital idled, America is living, once again, far beyond its means and hence borrowing the money to do so, wracking up record imports of – and a record imbalance in – consumer goods, as it does.

However, we should not wax too indignant at the prevailing Flat-Earthism of the economists and the investors whose views they colour, for the current growing apprehension about the strength and sustainability is exactly what we have been anticipating since the start of the year, if not before.

Our argument has been based – and broadly validated by subsequent events – on the three-pronged supposition that:-

1. the arithmetic which so flattered the yearly comparisons during the initial stages of the post LEH-AIG credit freeze (‘Snowball Earth’) would inevitably decay into a less ear-popping trajectory and so frighten the market as growth rates accordingly slowed;
2. being highly stimulus-dependent and not a subject to a natural healing process (something which the very government intrusions which the Deflationistas so avidly wish to be intensified had actually precluded), any diminution of that stimulus – such as has occurred almost everywhere we look – would see the patient’s artificial convalescence begin to falter;
3. China – whose intervention was perhaps the most gargantuan and aggressive of all – would be forced to take heed of its socially-disruptive concomitant of end-price inflation and so make sizeable reductions in the treatment’s application, to the ultimate detriment of all who piggy-back on the nation’s immense hunger for resources, components, and machinery.

With forcible, ‘unorthodox’ QE having largely peaked (pro tem) and with the more traditional fiscal-deficit monetization process of re-inflation having also reached its upper bound (at least until resort is once more made to the credit–jacking of the remaining, higher-level sovereigns and supras in support of their weaker peers and sub-divisions), real monetary growth has been everywhere decelerating since the turn of the year.

Lo and behold! With the usual lag of two-three quarters, the all-important growth in business revenues (and, hence, in business spending) has responded and has been reflected in those key sentiment indicators – such as the NAPM and IfO surveys – which these largely determine.

Given their significance, we make no apology for trotting out the relevant charts once more, by way of substantiating this claim.

Fig 3: Japanese rM1 v Small biz profits & sales – 1980-td

Fig 4: US rAMS v NAPM – 1960-to date

Most importantly, the slowdown in real money creation in China has been dramatic: dropping by a   third from 34% yoy to 23% in just six months – a shift which is, moreover, probably understated given the unrepresentative nature of a Chinese CPI construct which is not only sullied by the inclusion of many administered (i.e., artificially fixed) prices, but which excludes many important private expenditures. The impact of this monetary slackening on such real-side quantities as industrial production could not be more clear.

Fig 5: EZONE rM1 v Ifo/INSEE – 1992-to date

Fig 6: d2(China rM1) v d2(Industrial Production YOY) – 1997-to date

Is this the dreaded “double-dip”? Not necessarily of itself, but the emerging retardation – even if this would not otherwise become a retrograde motion – may nonetheless give financial markets a fright sufficient for them to undermine a fragile real economy which remains largely uncleansed of the toxic waste of the Boom and whose functioning is still impaired by the many inappropriate constellations of capital and labour held over therefrom, largely at the behest of the State.

In such a condition – and absent sufficient incentive or means for corrective entrepreneurial action to effect a curative re-ordering – this unsteady structure is likely to sway and shudder once more. As it does, it will appear to the many 1937-paranoids in authority (who are sadly unwilling to allow it to be partially dismantled and properly re-assembled) to stand instead in need of further, ad hoc buttressing.

The next downswing – should it become aggravated by a new wave of violent deleveraging – will thus contain the seeds of the next monetary intervention and thence the next ersatz rebound, all of which cosmetic surgery is likely to postpone, not promote, a genuine recovery for far longer than is in any way necessary.

“[Government] is apprehended, not as a committee of citizens chosen to carry on the communal business of the whole population, but as a separate and autonomous corporation, mainly devoted to exploiting the population of the benefit of its own members… The intelligent man, when he pays taxes, certainly does not feel he is making a prudent investment of his money; on the contrary, he feels he is being mulcted in an excessive amount for services that, in the main, are useless to him, and that, in substantial part, are downright inimical to him”

— H.L. Mencken, ‘More of the Same’, American Mercury 1925

Imagine a country unfortunate enough to have succumbed in conflict to a foreign enemy and now subject to a thorough-going military occupation by the forces of their victorious foes.

Young men, who have been conscripted in a vast profusion, are marched in to pacify the vanquished nation’s populace, to patrol its streets, watch over its borders and constantly to patrol its coastlines – though, in truth, much of their activity soon palls into a dull routine, being merely work for work’s sake, meant to deny the devil too many idle hands for mischief, rather than because the doing of it fulfils any useful purpose of itself.

Some of these warders of the conquered realm are barracked in camps where their basic material needs are catered to in large, centralized facilities specially built for the purpose, while others are billeted on civilian householders in their homes – whether or not these latter show any willingness to have their property used, their provisions divided, and their privacy violated in this way.

Aside from the fighting force itself, there is an even larger host of administrators, technicians, and other support staff abroad in the land, many of its members busy overseeing the activities of the conquered – issuing requisitions to the factory owners; commandeering resources; ordering farmers what to grow and where; and generally re-organizing a significant part of the people’s economic lives in order to serve the needs of their new masters in place of those of their own.

War, after all, had best be made to pay for war and all those martial souls need to be fed, shod, clad, sheltered, and even re-armed if they are to maintain their military effectiveness.

Finally, however, the glad day dawns when the war is ended and blessed peace takes its place. Bested on some far distant battlefield, the invader negotiates a peace, its armies meekly surrender their arms and the erstwhile Hectors and Horatios shuffle apprehensively off to wire-strung detention centres, there to await their fate. Meanwhile, the bells ring out in carillons of joy and young and old alike take to dancing in the streets in a great celebration of regained liberty.

As it soon transpires, large numbers of the former garrison have no wish to return to a homeland many can scarcely still remember. Besides, they have grown to love their new surroundings and many of them have found wives and sweethearts there, to boot. They plead to be allowed to stay and – at first with reluctance, but gradually with a laudable hope for reconciliation (for this occupation, while not without its share of accompanying evils, was not marked by wholesale rapine or blemished with overmuch outright atrocity) – the authorities accede to more and more of these very human requests.

Even amid the rejoicing, however, there are one or two grumblings to be heard. Will all these former soldiers not still be have to fed and clothed at our expense, some ask or – worse to some – finding productive work at last, will they not represent a drug on the market for labour, depressing the wages of us, the long-suffering natives?

Not so, reply the wiser heads. For we should see them not as a surplus, but rather as a vital human resource and each, eager to earn his keep and ply again a peaceful trade, will have to give as much value as he gets, in future, if he is to earn the goods he formerly took simply by merit of his uniform. This can only be to the benefit of all.

But, there are others, too, whose feelings of relief are decidedly mixed – the sutlers and the swordsmiths, the bar-keepers and the bawds, the munitions-makers and the mule-breeders – for all those who supplied the enemy have lost the greater part of their custom, even though their conscience must have told them that their living was being made at the final expense of those unconsenting fellow citizens whose wealth and income were being tapped to make up the soldiers’ pay and quartermasters’ drafts.

At length, they, too, still their complaints and resign themselves to seeking out another kind of clientele; to producing ploughshares not poniards or pikestaffs, all the while consoling themselves that, now the exactions of war have been stopped, the majority will have more money in their pockets and that, in the general hunger for the things long denied them during the grim, grey years of subjection, trade and industry will soon be booming once more and commerce will again flourish.

Some good while may pass before they see it this way, but certainly, no-one among even those who flourished most – or languished least – will so rue his temporary loss of business that he will advocate striking up a quarrel with some other likely nation, in order to capitulate as abjectly as possible and so refill the deserted camps and cantonments with another batch of loose-pursed intruders!

So far, the verdict here seems indisputable. The end of the occupation – though occasioning a measurable difficulty for the few, as well as a by no means trivial challenge of readjustment for the many – will overwhelmingly redound to the common weal: a truth which will be instinctively recognized in an intuition of good to come which almost everyone will later find to have been a correct one.

A Continuation of Policy by Other Means

If all the foregoing seems unobjectionable – and we fully trust that it will – then consider how little the argument changes if there is no foreign occupation, but instead the imposition of martial law by those in power domestically.

We still have the same diminution of the private sphere; still the same tyranny over people’s lives, however softly velveted is the mailed fist which holds the nation down. We still have the same forcible redirection of employment and still the same sequestration of income and arbitrary denial of property as we did when the perpetrators spoke a foreign tongue – and, on that account, we will be just as glad to be rid of all their impositions when the laws are at length repealed or the regime is toppled in the dust of despots past.

Finally, even where the intent is in no way overtly malign – where the nation has been put on a purely defensive war-footing in order to deter the aggression of a hostile neighbour – the very same conditions will apply and the very same relief will be felt when the Dogs of War are finally put back on their slips and ‘Havoc!’ no longer cried.

So, if you are with me this far, tell me why it is any different when the Home Army carries few actual arms and when most of those who fill its ranks wear no obvious uniform, or bear no fluttering pennons, but whose stormtroopers and Sonderkommandos nonetheless boss us and direct us; telling us what we can and cannot do; relieving us of a good portion of our income to pay their keep and to enact their schemes of domination; and hemming in our natural rights to property with rules and regulations which we ourselves pay for them to conjure up and to impose upon us?

What if this occupying army is in service to – nay, if it actually constitutes – the government itself?

What if comprises a host grown fat and bloated and officious as it siphons off the best milk from our herds and swipes the choicest fruit from our orchards in order to satiate its vast, pestilential, multi-million array – its troops of tax-gatherers and health-and-safety tinpots; its platoons of permit peddlers and planning panjandrums; its ranks of red-tapers, rubber-stampers, and rubbish recycling-bin riflers; its columns of closed-circuit televoyeurs and carbon credit cozeners; its divisions of dole deceivers and disability dissemblers; its junta of jobsworths, Jacks-in-Office, and gender outreach counsellors; its cohorts of Cultural Marxist commissars, and clipboard commandants; its echelons of egalitarian engineers, its squadrons of subsidy-suckers – and all the other plunderers who make up this Legion of the Damnable?

A Set of Lies Agreed Upon

Why, then, should we listen to the hand-wringing of the punditocracy when they tell us that to disband even the most ineffective and ill-disciplined section of this rapacious army of permanent occupation is somehow to condemn ourselves to ruin?

Why should we heed the brow-beating of the leader writers when they insist that to reduce even some of the country’s unsustainable deficit – not even, you will note, to try to eradicate the whole of the annual shortfall, much less to address the noxious legacy of debt accumulated over long years of easy profligacy – is for the Emperor to condemn all of us to his former nakedness if foregoes his customary non-attire (one cut by his charlatan couturiers from the virtual cloth of spending what he routinely does not earn) and dons, in its place, a debilitating hair shirt of ‘austerity’ ?

No! Better that we stop our ears to the insidious wheedlings of all the Philosopher Kings – the Stiglitzes and Soroses, the Krugmans and Kaletskys and all the other intellectual Vichy who would perpetuate our subjugation – and press on with the attempt to demobilize as many of these battalions of bad husbandry as possible.

Nor should we be persuaded that, without the reckless dollops of Other People’s Money which the vote-buying minions of the State dish out in all their counter-productive billions, the real economy will crumble and blow away in the wind: that shops will empty and factories shutter; that the lights of enterprise will dim, and flicker, and fade – any more than they would if a foreign conqueror were to relinquish his pitiless hold upon those who own them and allow them to take charge, once more, of their own destinies.

Rather, we should steel ourselves for the challenge ahead in a frame of resolute self-reliance and, to show our true intent, we should first make plain our utter rejection of the doom-mongers’ vision of a people grown too servile and enervated under the heels of the horde which strangles their growth and saps their strength that they dare not greet their own liberation with the utmost, unqualified, clarion jubilation.

Otherwise, this will be a long, protracted war, and, as Sun Tzu himself noted all those centuries ago, no country has ever benefited from such a calamity – to which aphorism, we might add, all too few have emerged with even their money, much less their wealth, intact, either. It may also be true that ‘there’s a great deal of ruin in a nation,’ but keep in mind that when Adam Smith penned those words, at a bleak moment in British history, he was making an observation, not a policy recommendation.

The Saving Grace

In a recent editorial, Martin Wolf of the Financial Times – and one of the Tories’ newly appointed Wise Men on banking reform – has been fretting about what he calls ‘financial repression’ – an unpleasant experience we are all apparently about to undergo as insolvent governments take ever more draconian measures in the vain attempt to forestall the inexorable workings of economic law.

It strikes us as funny how the possibility of suffering this sort of violation of our shrinking personal freedoms never seems to have occurred to Mr. Wolf and his fellow nomenklatura when they were all deriding us Austrians in 2007/8 for arguing that the best means of resolving the banking crisis was simply to adhere to a strict policy minimalism which would offer only the most unavoidably last-ditch safeguards to the innocent bystanders, whilst otherwise insisting on the rigorous and universal application of basic accounting standards to all with pretensions to public incorporation.

Then, we said, we should insist upon an unflinching economic triage, pursued through the bankruptcy courts, for all those who succumbed to the normal rigours of inspection. For our temerity, Mr. Wolf and his ilk flung the tired old ad hominem of ‘Liquidationists’ at us, while trotting out the Golden Calf of Keynes and invoking all the other Philosopher King rhetoric about how the beneficent state could effect a rescue from the ‘market’ failure (actually, an oft-repeated implosion of unbridled financial corporatism) which would otherwise engulf us all.

But, pass on a few years and, now that the respectable establishment pairing of Reinhart and Rogoff have published a quasi-empirical compendium of the many historical precursors of today’s crisis – a record accorded an undue profundity simply because most modern, pseudo-scientist, New Keynesian, DSGE modellers are so lamentably ignorant of anything which happened before they started playing with differential calculus at college – we find that Mr. Wolf is beginning to despair of Leviathan’s ability to compensate for the widespread malfeasance in which it was itself necessarily complicit all along.

Initially, we tried to keep the balls in the air by throwing only a rather notional dollop of ‘taxpayers’ money’ at the banks – originally only ‘theirs’ (or, more strictly, at their expense) to the extent that the copious central bank creation of that money as the core of the crisis response might potentially diminished the worth of the stock of it already in said taxpayers’ possession. But, alas, we must now lift the wherewithal directly from their pockets, whether by taxing them more heavily or by denying them their accustomed easy access to an over lavish public trough.

In the meanwhile, however, the problems have only grown larger, the debt mountains higher, the political entanglements more Gordian, the perverse incentives more corrosive, than they were back when Lehman was thrown to the wolves by way of a misdirection from the conjurer’s trick of using AIG as a conduit to make most of Dick Fuld’s more politically-adept, billionaire-buccaneer competitors whole again from the public purse.

So now, with typical Collectivist inconsistency, Mr. Wolf’s fear seems to be that the banks will have the constituents of their balance sheets dictated to them; that pension funds will be made first to serve the state, and only afterwards their subscribers; that ‘interest rate ceilings will be imposed’; and that the free movement of capital will be hemmed about with arbitrary restrictions.

Forgive the cynicism, but isn’t this shopping list exactly what, not too long ago, the interventionist pundits and ‘Kathedersozialisten’ – Mises’ socialist professoriate – were, to a man, proffering as the solution to, not the source of, all our woes?

Thus the decline of the market order (in truth, a process which occurs when those quintessentially non-market giants – the state-cosseted, fractional reserve banks – are increasing their unbacked, forced-currency lending, not when they are restricting it ) has led, with a grim inevitability, to the defeat of the Versorgungstaat  – the Provider State – which had presumed to supplant it.

Nothing daunted, the governing elite predictably refuses either to learn from this reversal or to rein in its rapacious political ambitions, but crosses more fully over from the illusory compromise of the ‘Third Way’ into ever more totalitarian behaviour. Though the transition to the Zwangswirtschaft – or Command Economy – may initially take the form of relatively trivial irritants such as banning ‘naked’ short-selling, it is soon being reinforced with more sinister, Big Brother measures such as imposing restrictions on the amount of the state’s own legal tender deemed acceptable in ostensibly private transactions. From thence it is but a small step to imposing foreign exchange restrictions and capital exit levies, and enacting all manner of other revocations of basic human freedoms, as Roepke long ago made plain.

Such a ‘Vampire Economy’ – regardless of the false distinction of whether the overseers consider themselves as belonging to the Right or the Left – always has for its motto: Gemeinnutz geht vor Eigennutz – ‘the Needs of the Collective before the Needs of the Individual’. By comparison, a liberal dose of ‘liquidationism’ might seem a relatively mild restorative, eh, Mr Wolf?

Augustine’s Prayer

Well perhaps not, for only a week or two after the publication of this exercise in self-contradiction, Mr. Wolf provided us with another classic tergiversation in a missive which – echoing a growing groundswell of collectivist anguish – carried the direst of admonitions that to introduce ‘fiscal austerity’ (i.e., sound finance) now would be to bear the world back to the dreaded event horizon of ‘debt deflation’ and that, therefore, this was a step to be postponed, sine die.

Once again, we must point out that this sort of chronic theoretical inconsistency – when wedded to the inexorable institutional implacability of the behemoth state in its quest to gobble up ever more of the private sphere – is among the core reasons why we Austrians can sometimes seem as if all we counsel is despair when we vehemently oppose that ever-changing succession of quick fixes and quack remedies which masquerades among the mainstream as ‘counter-cyclical policy’.

Starting from the fantasy of the Tooth Fairy economics which lies at the heart of Keynes’ ‘bread from stone’, underconsumptionist delusions, our opponents always urgently advocate that somebody, somewhere, must start living beyond their means in order to compensate for those poor, put-upon prodigals who have s-o-o unfairly been forced to resume living within theirs after years of eating their own seedcorn, a feast they gorged upon while simultaneously tearing holes in the roof which sheltered the reserves of their more prudent neighbours.

When this, in turn, degenerates into a budgetary disaster for those who heeded the call to alms (sic), and in the absence of anyone else to inveigle into self-ruination, they instead echo the hypocritical prayer of Augustine of Hippo, ‘Lord, make me chaste – but not yet!’ Meanwhile, their friends in government will have vastly expanded their destructive meddling in affairs which should be none of their concern in line with that dreadful, progressively tyrannising asymmetry whereby they always increase their incursions with alacrity, but only withdraw again with the utmost reluctance, snarling and growling and rabid to devour any untapped sources of wealth they can sink their fangs into in the attempt to limit the scale and duration of their own retreat – and wider consequences be damned!

As a result of all this serial befuddlement, we have now reached as stage where the banks are excoriated on the one hand for causing the bust (true, but who were their most insistent accomplices?); are faced with having to meet tougher capital measures (only a partial solution while fiat and fractions abound); are threatened with a transaction levy, or a profits surtax (making the required capital raising more dubious and more fraught with costs likely to be passed straight on to their customers) and yet are vigorously condemned for ‘holding back recovery’ by not repeating the insanities of the boom years and forcing unaffordable credit down the throats of those still misguided enough to employ the  proceeds in unremunerative consumption.

Moreover, this crass, have-it-both-ways populism is one which takes place even though said banks – as the back-door to the monetization of that same orogenesis of government debt to which their own (and their biggest customers’) rescue partly gave rise – are entangled in a vast scheme of legalized fraud,  a veritable  Ponzi-within-a Ponzi.

As components of this whirligig, banks receive support from the state and then buy the same sovereign debt by means of which they themselves are being buttressed. Then, however, the state overextends itself and likewise needs a ‘rescue’ and so increases its call on its banks.

Long unable to attract sufficient savings to fund their loans, the banks are again soon struggling even to borrow from their fellow banks – since each is fully cognisant of the horrors on his own balance sheet and so is justifiably fearful of what lurks on those of his counterparties. So, to break the logjam, not only does the central bank step in to buy government debt directly – albeit with a specious promise to ‘sterilize’ this one, narrow class of transaction – but it ups its provision of repurchase finance (lending ostensibly short-term, but perpetually rolled, money against the collateral of those same, increasingly unsaleable bonds), as well as its buying of the commercial banks’ own, unloved security issues. Ludicrously, while trying to restore function to the by-now moribund money market, the CB then short-circuits the flow by allowing the banks to place untold billions of the resulting balances back on deposit with it, greatly lowering the incentives for them to overcome their mutual mistrust, as it does.

Of course, this cannot but increase the risks carried on the central bank’s own balance sheet and soon there arises a threat to its thin sliver of (a rather virtual sort of) capital which, in extremis, it implicitly relies upon being replaced by …   well, by the near-bankrupt government it is funding in the first place and which will borrowing the necessary money from the banks it and the central bank are manfully propping up!

Who says it is impossible to pull oneself up by the bootstraps in a world of fiat money, fractional reserves, and fictional accounting?

Maginot Line Mentality

But even this was not enough for our sage, for the next sally into the debate over whether we should retrench or not took the form of an endorsement of those who employ the standard, approach to budgetary arithmetic; a crew of inveterate aggregationists who imagine the world is composed of three armies of faceless automata labelled the ‘Private Sector’ (split into the two divisions of ‘Households’ and ‘Businesses’), the ‘Public Sector’, and ‘Foreigners. These peddlers of half-truth are once again out in force, warning against any premature ‘belt-tightening’ on the part of the Provider State.

According to this overly simplistic view, if someone is reducing his indebtedness, someone else must be inveigled into raising his and hence, if the domestic private sector in Country A still wants to live within its means when its overlords are also showing some thoroughly unaccustomed restraint, then either the government or populace of Country B must live outside of theirs (i.e, they must run a current account deficit) in order to make this possible. Since, the macromancers say, not EVERYONE can run a trade surplus at once, this is a strategy doomed to failure and, ergo, no-one at all should take the initiative now to put their own house in order, lest they disarrange that belonging to somebody else.

Truly, it is remarkable how otherwise intelligent men can tie themselves up in such phantom paradoxes, all built on logical houses of sand, whenever they turn to pontificating on matters economic. And to think it was Keynes who had the gall to accuse Hayek of following an initial mistake with ‘remorseless’ logic to end up in Bedlam!

At its root, the alleged problem of ‘saving’ is often viewed with the same fearful mindset which informs all enemies of progress, sanctifying a status quo ante which may in fact be very less than ideal and applying the same paralysing pseudo-rationale of the ‘precautionary principle’ as do the worst Green Salemites.

The mental model is that if B usually buys $100 of merchandise from A, giving him the money to spend on C’s wares and, in turn, furnishing C with the wherewithal to buy B’s goods, this closes a neat little circuit which must henceforth be preserved intact and unaltered, at all costs. But, let A hold on to his money instead and now, it is said, both B and C will lose custom (assuming they have no direct need for each other’s goods). ‘Saving’ therefore leads to a collapse of trade and a general impoverishment.

Well, yes – unless either B or C persuades A to hold an asset in lieu of the cash they need to circulate the fruits of their labour: i.e., unless they transfer the right to some of their property to A in order to satisfy his desire to hold a reserve of wealth in place of enjoying the satisfaction of more goods.

Here, the problem is that the doom-mongers have failed to distinguish between a stock and a flow – between issuing new debt and selling existing claims at, presumably, a better price now that demand for them has risen, thanks to A’s thrift.

For example, the global stock of international debt securities tends to increase by around 10% – and that of domestic debt securities by some 5% – per annum, so ‘saving’ can imply buying out of the much larger granary of old, ‘secondary’ paper, as well as taking up the lesser harvest of new, ‘primary’ issuance. For the seller, this only represents a portfolio shift (from bonds, etc., to cash), but the buyer’s actions will also tend to raise the price  – and hence lower the yield – on bonds at first, but by extension on capital means in general, and so will surely provoke a response from someone (let’s call him D) with an investible idea whose estimated return might finally exceed a hurdle-rate which has just been lowered by dint of A’s purchase (anyone who denies the efficacy of this mechanism thereby removes the rationale for the very kind of central bank intervention for which anti-savers like Mr. Wolf are incessantly bleating).

Since our saver has foregone a call upon a batch of actual goods (or readily available services), this transfer of purchasing power from A to the new market entrant D also comes complete with a corresponding physical reality of economically employable means (in stark contrast to the destabilising struggle to ‘force’ saving which is routinely unleashed during unbacked credit creation). This is nothing less than capital formation at its most basic and much more of it – rightly directed by uninhibited, delocalised market price signals – is what we want if we are to lead all the army of un- and under-employed back into gainful work.

Even if there is no D to join in the interaction – if we assume that there was ‘full employment’ and few identifiably underutilised productive means – B and C do still have their unsold output at their disposal. Their challenge, therefore, is not to implore the state to frustrate A’s freely-expressed change in preferences to their personal benefit (which is what ‘stimulus’ and inflation do), but to find another way to put it to use; to alter it or to recombine it (perhaps in co-operation with one another) so as better to fit their productive abilities to the newly-altered configuration of demand being given vent upon the market.

This imperative is a matter of horror for the sort of interventionist who wants to fossilize the economy and lock everyone into the same static patterns of exchange which were briefly achieved at the top of the Boom, condemning everyone to life in a kind of industrial theme park or commercial conservation zone.  In so doing, the Nobelist meddlers never seem to acknowledge that the very fact of the Bust having taken place implies that the prevailing pattern of activity is unsustainable and self-aggravating, riven with conflicting goals and abuzz with scrambled signals.

Few complain when we over-expand and misapply our efforts in the Boom as we do when we are led astray by a flood of unbacked credit creation, but, somehow, like a beleaguered Wehrmacht commander on the Russian Front, ‘Das ist Verboten’ to retreat the merest inch in order to retrieve our gross strategic errors. The intoxication of the former false prosperity may have led us into a blind alley of our own construction, but we must never attempt to retrace our steps, much less demolish its walls and use the bricks to build something more rewarding.

But, to the contrary – and for all that it undoubtedly involves at least a temporary hardship for the individuals caught up as these shifts take place – such a withdrawal is, nonetheless, an unavoidable requirement of our return to a full participation in an evolving, dynamic economy and, accordingly, we can even construe the turmoil as a salutary experience – at least, to the extent that it provokes a genuine entrepreneurial response to a rapidly changing environment.

Three Billion for Sparta

Returning to our schematics from above, yet another possibility is that while our original three – A, B, and C – are going about their business carousel as normal, there is a temporarily impecunious D who accepts a service from a fifth player, E, in return for a promise to pay at some future date.

Here we cannot resist a diversion to ask, only partly with tongue in cheek, did E here extend credit or did he save – i.e., sell more in this period than he bought, acquiring a financial claim as a mark of his forbearance? The reason for the question is that this business of ‘vendor finance’ is usually lauded by underconsumptionists everywhere as a boon to society whereas, in fact, its indiscriminate practice – made all the more prevalent in an easy-money environment of low interest rates, stretched payment terms, vanishing down payments, and lucrative securitisation – is nowadays one of the main contributors to the Rake’s Progress which always precedes the traumas of the Bust.

But, back to our former fivesome. Suppose next that D persuades C to hire him, works his contracted stint, and receives a cash payment which (i) D uses to redeem his IOU from E; and which (ii) is therefore now denied to C’s former supplier B, thus breaking the ABC circle just as surely as before. Disaster surely beckons again, this time thanks to D’s egotistical and anti-social act of working where once he was idle and saving where once he blithely overspent, the miserly, self-supporting swine!

But, not so fast: in place of a rather illiquid and possibly non-negotiable IOU, E now has good, hard cash burning a hole in his pocket and so may choose to spend it on the goods for which B is desperately seeking a market. Shelves empty and pockets full, B can then buy his usual consignment from A and A from C, leaving C able to renew his employment of D who can henceforth enjoy a steady stream of E’s services, this time paying cash on the nail.

So, rather than spelling doom to all concerned, D’s renewed adherence to a balanced budget has actually widened the commercial network, increased the division of labour, and potentially enriched all thereby. Yes, there has been a potential for disruption, but its flipside was an opportunity for change which was susceptible of the exercise of entrepreneurial flexibility and vision, an act that not only diminished the negatives, but profitably exploited them.

Yes, E was induced to dissave as the counterpart to D’s saving – but how do we know he was not itching to do this all along and had only grudgingly accepted the latter’s custom, on what he may have seen as highly disadvantageous terms, for want of a better alternative? Mr. Wolf (again) apparently presumes to know that the contrary was the case!

It might be useful here to recap on what we might mean when we use the term, ‘saving’. Do we mean refraining from using one’s income to buy, not a consumable, but a longer-lasting, good – hopefully one which may throw off its own income stream (i.e., do we mean acquiring capital)?

Do we mean making good the legacy of past dissaving by delivering surplus goods and services now to make recompense for the excess of which we availed ourselves earlier?

Or do we merely mean restoring a match between income and outgo, neither paying down our existing obligations nor contracting any new ones?

Even FT opinion writers can surely not condemn the first of these acts – it is, after all, the very cause of our rise from the Hobbesian immiseration which so plagued our ancestors. As for the second, surely the idea of making good on one’s contracts – which is all this fundamentally entails – is also one of the bedrocks of our material well-being: just visit one of the many benighted countries where this is not to be expected, if you doubt this.

Finally, the last case implies that, henceforth, we will endeavour to give as much as we receive; that we will no longer live as a cuckoo in the nest at someone else’s expense – hardly a reprehensible change of behaviour, one might think, were it not for that reverse quantum-weirdness threshold of modern macro-economics whereby all that makes implicit sense on our everyday scale gives rise to an incomprehensible (but exquisitely mathematically-tractable),  Red Queen Wonderland of ‘believing six impossible things before breakfast’ as we cross to a different one (here, to a larger, rather than a smaller scale, as in real science).

Above all, this angst about the supposedly dire consequences of reducing the toll taken of our labour and of our wealth by that most wasteful and capricious of actors – the State – shows a dreadful paucity of imagination. It also displays the usual stultifying effect of thinking of six billion-odd aspiring individuals as merely the mindless constituents in some homogenous, macro-economic slime mould.

Before he pontificates next time, perhaps Mr. Wolf should ask himself: is there no-one in the world who wishes to borrow or to raise equity? Is the whole teeming horde of humanity so well-endowed with capital means  – and so poorly supplied with the entrepreneurial ideas with which to usefully employ them  – that no-one can be found to take goods in exchange for a simple IOU or business participation?

It cannot be emphasised enough that there is no microeconomics and macroeconomics, but only economics, rightly defined, and an overly erudite Shamanism masquerading as such. Ultimately, we are dealing here with a problem which seems to show the superiority of the latter over the former but which has been carefully posed in a deliberately misleading way by those who now mock the sensible, but silent, majority as ‘Austerians’ in order to produce their usual required answer – the desirability of ever more government intrusion in our lives.

The Road less Travelled

So, yes, it may be true that we can’t all run an austerity programme if we assume that each of the named three broad groupings are completely monolithic in their behaviour. Nor dare we do so if we further insist that some arbitrary – but largely fictive and decidedly sub-optimal level of ‘demand’ – or, worse, of ‘growth’ in that demand – MUST be maintained without interruption, no matter what the cost, even when this is akin to telling a man suffering from exhaustion that if he does not get up from his hospital bed and back on the treadmill forthwith – and although his doctors continually have to pump him full of harmful pharmaceuticals just to keep him clinging there – he has no hope of a cure.

There is a strain of Keynesian perversity which maintains that the great blessing which was the Second World War was what finally ‘ended the Great Depression,’ if only by wasting an inconceivable amount of wealth, by killing and maiming millions, and by forcibly conscripting – enslaving – millions more in the armed forces. In this present attempt to decry good housekeeping, we see the same aberration at work – infused, as ever, with the Planners’ inherent contempt for ordinary human initiative and self-reliance.

How else can we categorise a policy which assumes that to commandeer resources willy-nilly and to consume them in pursuit of even the most frivolous – or nakedly partisan – of ends is somehow to confer a benefit on a society composed of foolish little people who have independently decided they should commit the cardinal error of consuming a little less, all by themselves and in despite of the contrary wisdom of their betters?

But, just stop for a moment to ask yourself: if the government were to cease the pretence of educating your children tomorrow, would you just give up on their instruction entirely? If not, if the cuts now deny you a ‘service’ which you do not sufficiently value to replace with one to which you must voluntarily subscribe, it was clearly so far down your list of subjective preferences that the whole effort to provide it was a misguided one in the first place. In essence, if you will not spend your own money on what the state offers, why should you either expect to spend someone else’s, or else welcome having the thing imposed upon you by force?

Moreover, just how do we suppose all this government spending is determined and what do we imagine are its effects? Even in some Utopia where it was carried out in a totally disinterested fashion and with a complete disregard for its base, political returns, those disbursing the funds from this fantasy Whitehall can have no real idea of whether they are using them to their best purpose, as Mises and Hayek long ago made plain.

Worse, by spending on things which are either under-productive (in particular, the surplus goods churned out by zombie companies and obsolescent industries), unproductive (make-work programmes and Olympic stadia), or even utterly counter-productive (e.g., the Health & Safety Stasi and all the bloody panoply of foreign adventurism), they are exercising a demand where none freely exists, further distorting the crucial relative price signals which best ensure the harmonious working of the economy. A reduction in the number and magnitude of such impediments to material well-being is hardly a loss, therefore, should the state desist from its urge to launch yet another tired, old, New Deal.

To return to the case of schooling which we adduced above, the chances are, of course, that you would take over direct responsibility for the task, perhaps by clubbing together with your neighbours to hire a tutor or tutors to work for you and by using the larger after-tax (or after-inflation) income the shrunken state has now left in your pocket to engage one or more recently-released teachers at what will probably turn out to be a lower overall cost – and for a greater overall return – than before.

After all, you will no longer have to support him – under threat of imprisonment if you demur – when he tries to fill your children’s heads with crude propaganda or wastes their time on fatuous, centrally-mandated exercises in Cultural Marxism. Nor will you have to pay for all the intervening layers of bureaucrats who not only steal your money and transfer it to some government-appointed pedagogue – regardless of this latter’s personal merit and absent any control over what he purports to teach your offspring – but who also each take a sizeable cut for both their current upkeep and their own, feather-bedded, early retirements at every one of the many intervening acts of paper-shuffling along the way.

More directly, do you suppose it too far-fetched to imagine that the similarly disburdened businessman might be tempted to take advantage of the abundance of cheap resources, both human and material – suddenly liberated by this dreadful act of ‘austerity’ from the state’s vast and profligate commissariat – and so give a gainful, market-directed, mutually-enriching, carefully-husbanded, private employment to them in place of the gross misuse to which they were previously subjected by an intemperate and illiberal Leviathan?

Finally, given that, this way, we will each end up doing more for ourselves, with greater efficiency, and with far more personal sway over our choices than otherwise would have been the case, might we not only have more to spend on other things, once the necessities of life have been seen to, but be a good deal happier about the whole arrangement, to boot?

In sum, if ‘austerity’ now means a short, recuperative spell in purgatory, the quicker to attain the Promised Land beyond, we cannot quit the present Road to Serfdom quickly enough, no matter what blandishments Mr. Wolf and his intellectual kith promise will be offered to the unheeding traveller if he will only continue to trudge upon its wearisome paving – an ill-fitting stonework uniquely comprised of Good Intentions.

So, in a recent editorial, the FT’s Great Thinker, Martin Wolf, has been fretting that we are about to undergo a period of what he calls ‘financial repression’ as insolvent governments take ever more draconian measures in the vain attempt to forestall the inexorable workings of economic law.

Funny how this never seems to have occurred to him and his fellow nomenklatura when they were all deriding us Austrians in 2007/8 for arguing that the best means of resolving the banking crisis was simply to adhere to an austere policy minimalism which would offer only the most unavoidably last-ditch safeguards to the innocent bystanders, while otherwise insisting on the rigorous and universal application of accounting standards. Then, we said, we should insist upon an unflinching economic triage, pursued through the bankruptcy courts, for all those who could not pass the inspection. For our temerity, Mr. Wolf and his ilk flung the tired old ad hominem of ‘Liquidationists’ at us, while trotting out the Golden Calf of Keynes and invoking all the other Philosopher King rhetoric about how the beneficent state could effect a rescue from the ‘market’ failure (actually, an oft-repeated implosion of unbridled financial corporatism) which would otherwise engulf us all.

But, pass on a few years and now that the respectable establishment pairing of Reinhart and Rogoff have published a quasi-empirical compendium of the many historical precursors of which most modern, pseudo-scientist, New Keynesian, DSGE modellers are so lamentably ignorant, we find that Mr. Wolf is beginning to despair of Leviathan’s ability to compensate for the widespread malfeasance in which it was itself necessarily complicit all along.

So it is that we have passed from throwing  a rather notional dollop of ‘taxpayers’ money’ at the banks – originally only theirs to the extent that the copious central bank creation of that money as the core of the crisis response was potentially diminishing the worth of the stock of it already in said taxpayers’ possession – to lifting money directly from their pockets, whether by taxing them more heavily or denying them their accustomed easy access to an over lavish public trough. In the meanwhile, however, the problems have only grown larger – the debt mountains higher, the political entanglements more Gordian, the perverse incentives more corrosive – than they were back when Lehman was thrown to the wolves by way of misdirection from the conjurer’s trick of using AIG as a conduit to make most of Dick Fuld’s more politically adept competitors whole again.

So now, with typical Collectivist inconsistency, the fear seems to be that the banks will have the constituents of their balance sheets dictated; that pension funds will be made first to serve the state, and only afterwards their subscribers; that ‘interest rate ceilings will be imposed’; and that the free movement of capital will be hemmed about.

Forgive the cynicism, but isn’t this shopping list exactly what, not too long ago, the interventionist pundits and ‘Kathedersozialisten’ were, to a man, proffering as the solution to, not the source of, all our woes?

Thus the decline of the market order (in truth a process which occurs when those quintessentially non-market giants, the state-cosseted, fractional reserve banks, are increasing their unbacked, forced-currency lending, not when they are restricting it) leads, with a grim inevitability, to the defeat of the Versorgungstaat which had presumed to supplant it. Nothing daunted, the governing elite predictably refuses to learn from this reversal or rein in its rapacious political ambitions, but crosses more fully over from the illusory compromise of the ‘Third Way’ into ever more totalitarian behaviour. Though the transition to the Zwangswirtschaft may initially take the form of relatively trivial irritants such as banning ‘naked’ short-selling, it is soon being reinforced with more sinister, Big Brother measures such as imposing restrictions on the amount of the state’s own legal tender deemed acceptable in ostensibly private transactions. From thence it is but a small step to imposing foreign exchange restrictions, capital exit levies, and enacting all manner of other revocations of basic human freedoms as Roepke long ago made plain.

Such a ‘Vampire Economy’ – regardless of the false distinction of whether the overseers consider themselves as belonging to the Right or the Left – always has for its motto: Gemeinnutz geht vor Eigennutz. By comparison, a liberal dose of ‘liquidationism’ might seem a relatively mild restorative, eh, Mr Wolf?