Register your interest



RSS

Enter your email address:

Delivered by FeedBurner
Economics

America’s $100 TRILLION problem and the death of the Provider State

By Toby Baxendale, on 24 February 10

FOX Business Network’s Brian Sullivan speaks in this interview with famed economist and fmr. Chilean Labor and Social Security Minister Jose Pinera about the Social Security problem in the United States.  See the video link at the bottom for the audio version. Thank you to Sean Corrigan for pointing this out.

This does beg the question as to what would the number for the UK be?

BRIAN SULLIVAN, FBN ANCHOR:  We are very honored to be joined by Jose Pinera.  He is the founder of the International Center for Pension Reform.  He is the former labor and social security minister of Chile and a distinguished senior fellow at the Cato Institute.  Up from Santiago into D.C., which is where we are.  Jose, it’s a pleasure.  Thank you very much.

JOSE PINERA, FOUNDER, INTERNATIONAL CENTER FOR PENSION REFORM:  Good morning.  Thank you very much, Brian.

SULLIVAN: Last week, we hit hard on the program the latest Pew Center study showing that states have about a trillion dollars gap in their — just state — pension plans.  How do we solve that?

PINERA:  Well, that is a very serious problem and I’m extremely worried about all the debt America has.

But you have a much bigger problem, Brian.  You have a 100 trillion-dollar problem.  Look, this is something published by the American government, saying that the present value of the obligations on health and Social Security amount to a 100 trillion dollars…

SULLIVAN: OK, wait a minute.  We were talking about 3-point-something trillion, 1 trillion underfunded.  You are saying we have 100 trillion dollars.  Where is that number coming from?  How do we get to 100 trillion?

PINERA:  This comes from the government.  This is not recognizing the public debate, but this is the real debt of America.  This amounts to 700 percent of GDP.  This is a gigantic liability that basically you are legislating and will be paid by your children and your grandchildren.

SULLIVAN: Let’s walk through what that is, OK?  Because these are new numbers.  These are big numbers.  These are coming from the CBO, correct?

PINERA:  These are coming from government, from the U.S. government.  These are net, liabilities of the health, Medicar,e and Social Security system.  This is the present value of what Americans will have, one way or another, to pay, unless they default on their obligation to the citizens.

And that is the future.  And I’m extremely worried because it is like you are passengers in the Titanic.  The Titanic is going towards the iceberg of aging populations.  The populations that feel entitled to all the huge benefits that the politicians have promised the people.  But they have not funded the benefits for the future.  So how are you going to pay them?  That is the big issue.  The big domestic problem facing America.

SULLIVAN: One of the big stories today is the president unveiling his own healthcare plan.  On this piece of paper, again from the CBO, $35 trillion in hospital insurance for current and future.  $34 trillion for Medicare Part B, about $18 trillion for drug benefits and Social Security.

So, actually Social Security, which we’re going to talk about later on — that is actually a big hole, but it’s smaller than health care.  How are we going to pay for this?  How does the U.S. cover a 100 trillion dollars, Jose?

PINERA: Brian, the problem is what I call the entitlement state.  The problem is that there is gigantic disconnect between what people want the government to pay them in the future, in health pensions, and what the people want to pay in tax.  And because the entitlement state is based on promises for the future, you don’t have to pay it today.

This is growing, because to win elections, politicians offer benefits to people that will be paid in the future.  So, this big hole is not only a problem in America.  It’s exactly the same problem in Greece today, in southern Europe, eventually in France, in Germany.  The West will go bankrupt until and unless you reform deeply the entitlement state.  This was created by Prince Bismarck (ph) in the 19th century.  You are all prisoners of Prince Bismarck (ph).  Prisoners of a system…

SULLIVAN: Otto von Bismarck?

PINERA:  Yes.

SULLIVAN:  Because he created…

PINERA:  He created the unfunded tax-and-expense system.  You said, he simply said if you tax workers a little, we can pay the pensions.  But then the unintended consequences has been with the aging of population and the extended life, you have been accumulating this huge liabilities that eventually be bankrupt the government.  A huge fiscal crisis is coming to the West unless you face it and confront it directly by completely changing the entitlement estate.  That’s the root of the problem.

SULLIVAN: I want to get more on Social Security in just a bit.  But for pensions — OK.  State and federal pensions.  The gap between retirement ages between private and public is growing wider.  The gap between the amount of money being given in pensions is growing wider.

How do we just solve the pension crisis on government workers, federal and state?  And is it unsustainable as it is?

PINERA:  It is totally unsustainable.  You either will have to raise taxes big-time in America, or you will have to cut benefits.  But it’s extremely difficult to do that in a system in which you have people entitled to all these things.

That’s why what we did in Chile was to completely change the logic.  In Chile, you save for old age.  In Chile, we have sort of a Benjamin Franklin system, you see.  You remember Benjamin Franklin, the thirteen virtues?  You should save for the future, you should be self-reliant.  We have instilled a culture of personal responsibility and saving.

Of course, we also have a safety net for the very poor.  But 80, 85 percent of the population will finance their old age, health and pension with their own personal savings.

SULLIVAN: We are going to take a quick break, Jose.  We will come back and talk about what you did in Chile, and what we might have to do here.  Look at some of the pretty scary numbers around Social Security.  And also what we can do about it.

Will the Chilean plan work here?  How does it work?  We are going to learn as we continue part two of our exclusive interview with Jose Pinera, right after this.

(COMMERCIAL BREAK)

SULLIVAN: Welcome back.   I’m Brian Sullivan in Washington, D.C. today, and I am here because we are being very privileged to speak to Jose Pinera.  He’s the architect of Chile’s Social Security reform.  He’s the former labor and Social Security minister and the founder of the International Center for Pension Reform.  It is an exclusive interview.

Jose, we’re very happy to have you.  Listen, although some of the numbers you are throwing around are pretty frightening, there have been — there’s a lot of debate in this country about whether or not our Social Security plan, our system is going to be there for people that are if their 20s and 30s.  There’s a big debate about whether or not we will be solvent by 2040.  Do you believe that the U.S. system as it is now can be solvent decades from now?

PINERA:  Clearly not.

SULLIVAN: Clearly not.

PINERA:  Clearly not.  In only seven years, the Social Security system will begin to have a deficit.  That is more money will have to be spent than money coming in.

And then you will face the very hard choices.  You will probably have to increase the retirement age.  You will probably have to increase payroll tax.  You may have to cut benefits, unless you change the paradigm and you go to a system of personal accounts.

Personal accounts is very simple.  You save for old age.  And that saving gets accumulated rate of return, so you benefit from that extraordinary force of compound interest.  When you reach 65, you are going to look whether the government is deficit or in surplus, you look at the balance of your account, and with that, you buy annuity for your life.

It is a system we had all over the world before Otto von Bismarck, a Prussian chancellor created this monster of the unfunded welfare estate that is bankrupting Europe and eventually the U.S.

SULLIVAN: That’s the problem with Social Security, right?  Is that we are using money now.  Instead of me saving for myself, the money that is taken out of my paycheck, out of everybody in this room’s paycheck, is being paid to current beneficiaries.  You have described that as a Ponzi scheme.

PINERA:  That is a Ponzi scheme.  You could even call it a Madoff scheme.

SULLIVAN: Hopefully, the money is real somewhere.

PINERA:  No, there is no money being saved for the future.  There is no funding.  There’s no trust fund.  You are paying the money immediately to the retirees, and the problem is that with Baby Boom generation retiring, with the expectancy of life increasing every single year because of your great doctors and researchers, you will not be able to pay the promises.

So, the system will eventually default.  Technically default in the sense that you will have to break the promises to the people, and that may create a lot of pain and a lot of anguish.  That’s why you have to look into the future, do the responsible thing and begin moving towards a system of personal accounts.  It’s the only long-term solution.

SULLIVAN: Seventy-one million people will be 65 in this country by 2030.  330 people turn 60 years old every hour right now.  But they are expecting benefits.  How would we implement a system like yours with everybody already expecting the current system to be there for them?

PINERA:  The first decision that I took as secretary of labor and Social Security of Chile was to guarantee the benefits of the elderly.  I call it we are not going to take your grandmother check away.  We will find a way to protect the elderly.

So, the system has to be changed for the young people, for the future that are coming into the labor force or are already in the first years of the labor force.  And the moment you change the dynamic and people begin to know that if they save more, they work more, they will get a better pension out of their own saving, then the whole system begins to…

SULLIVAN: Here’s the criticism will be that we are at 11-year flat line for the stock market.  That if you have your money in the stock market for 11 years, you are basically flat.  That’s what people will say.  That the stock market has proven that it is not a wealth creator.  At least in the short-term.

PINERA:  The stock market is today the Dow Jones is around 10,000.

SULLIVAN: 10,300.

PINERA:  Do you know how much it was when we began our system in Chile 30 years ago?

SULLIVAN: Thirty years ago.  1980 — 2 grand.  Dow 2000.

PINERA:  900.  The Dow Jones was 900.  So — if you had began your system at the same moment that Chile began, you would have benefited enormously from the stock market.

SULLIVAN: Tenfold gain.

PINERA:  OK. And you don’t have to put all the money in the stock market at all.  We don’t put it all.  You can have a very diversified portfolio of corporate bonds, of mortgages, of government bills (ph), of stocks international — you have to be very prudent with long-term management.  That’s how we have been in Chile, and that’s why we have been able to give workers a rate of return of 9 percent above inflation for 30 years compounded.

So, the system works because in the long run, you see your economy is so strong.  I do believe in America.  And you must believe that workers by saving for old age would be much better than the government promise.

SULLIVAN: Instead of the 12.4 percent tax that we pay, like in Chile, they take 10 percent out, automatically put that into a private account that’s not for use for current beneficiaries it is our money; correct?

PINERA:  Yes, correct.  Your money is protected constitutionally.  That money grows in your account exponentially compounded 45 years, so forget the…

SULLIVAN: Can the government tap into it?

PINERA:  No, no…

SULLIVAN:  If Chile if the government gets into — in Chile if the government gets into financial difficulty, can they go raid that money?

PINERA:  No way.  It is protected by property rights.  This is your money, we have accumulated already seventy percent of GDP in that money.  The capital markets in Chile have boomed, have increased.  We are financing the new infrastructure, the new growth of the industrial, the forest, with this money.

Instead of Chile having a huge trillion-dollars debt, as you have, we have a huge funded system of retirement.

SULLIVAN: Jose Pinera, we are going to leave that here.  But I know later on we will be speaking about European problems.  Thank you very much for joining us, at least in this hour.  And we’re going to see you more in a couple of hours.  Jose Pinera of Chile.  Thank you, Jose

PINERA:  Thank you very much, Brian.

http://wallstreetpit.com/17422-jose-pinera-social-security-in-the-u-s-to-face-deficit-in-7-years

Toby Baxendale is an entrepreneur who owns, amongst other things, the UK's largest fresh fish supplier to the Food Service sector, see www.directseafoods.co.uk. Toby is dedicated to furthering the teaching of the Austrian school of economics. He established and funded the 1st Distinguished Hayek Visiting Teaching Fellowship Program at the LSE in Honour of the Nobel Laureate F A Hayek. Toby is Chairman of The Cobden Centre. Richard Cobden's timeless principles of the abolition of legal privilege of the few at the expense of the many - the Corn Laws, unilateral free trade, sound honest money and international peace - are worthy in this day and age to promote. | Contact us
24 February 10 | Tags: , , , , | Category: Economics | Comments are closed
Economics

A day of reckoning: how to end the banking crisis now

By Toby Baxendale, on 4 February 10

Drawing on the work of Nobel Laureates in economics from three traditions, plus numerous other distinguished scholars, Cobden Centre Chairman, economist and successful entrepreneur Toby Baxendale presents an informal introduction to our proposal for honest money and the benefits consequent on the reform. See also our precis of Irving Fisher’s 100% Money.

Fact

  • The average overhang of credit to money of all banks in the United Kingdom is 34 x to its reserves i.e. its actual money base1.
  • If more than one person in 34 walks into all banks simultaneously to withdraw their deposits, there will be a system wide bank run and a mass liquidity event with systematic default and insolvency.
  • We saw the start of this with Northern Rock in the summer of 2007.
  • We attempt to paper over the cracks and restore confidence in the banking system still today – with little success2.
Sterling Liquid Assets (BoE FSR, Jun 2009)

Sterling Liquid Assets (BoE FSR, Jun 2009)

A practical, politically-acceptable proposal

Our proposal is, as Irving Fisher wrote, “The opposite of radical”:

  • Require 100% cash reserves to be held against all demand deposits; there can never be a crisis if a bank always holds 100% cash against all its demand deposits.
  • Parliament can do this with one Act.

A similar Act took place in 1844. The Bank Charter Act or “Peel’s Act” established a 100% reserve requirement for bank notes that were issued claiming to be redeemable in gold. The reality was that there were 23 notes in issue for every one unit of gold at the time, creating instability, “panic” and general economic chaos. Not a too dissimilar situation from today where we have 34 claims on money to one unit of money. Politicians in the 19th century did not see the creation of unbacked credit through accounting entries as a problem, since it was only done on a very small scale. The problem then was rampant note issue (claims to real money) well over and above the monetary base, as this was the preferred method the bankers used at the time.

It is often forgotten but when you place £1m in a savings account (in cash) in say the Royal Bank of Scotland, which has no legal reserve requirement, they then lend £970k (in credit) , keeping on average 3% of cash back in reserves, to an entrepreneur in say HSBC, who then deposits that money in HSBC. We now have one claim to the original £1m and one claim to the £970k. The money supply has moved from £1m to £1.97m – just like magic! This is credit expansion.

The reality is that across all the banks in the United Kingdom licensed by the Bank of England, we have for every £1 of money (in cash), £34 in claims to money (credit)!

Peel’s problem was the over issue of notes to gold: our problem is the over issue of credit to money.

Continue reading “A day of reckoning: how to end the banking crisis now”

  1. See the Bank of England’s Financial Stability Report. Oral evidence from Sir Fred Goodwin (RBS) and Mr Andy Hornby (HBOS) to the Treasury Select Committee was at variance with our calculations:
    Q1864 Mr Love: Sir Fred, can I ask you, following on from those questions, how leveraged was RBS at the time of the Lehman’s dissolution?
    Sir Fred Goodwin: I think there would have been a variety of different ways of looking at the leverage ratio.

    Q1865 Mr Love: I am just looking for a rough idea, order of magnitude.
    Mr Fred Goodwin: Towards the higher end but there would be others higher than us. We would have loans to deposit.

    Q1866 Mr Love: What was the ratio?
    Sir Fred Goodwin: 110% but there would be others similar to that, there would be some higher and some lower. We were to the right of the middle, we were at the higher end of the middle.

    Q1867 Mr Love: Mr Hornby, can you tell us what it was for HBOS?
    Mr Hornby: Yes, our loans and advances were around £450 million, our customer deposits were about £250 million, therefore the percentage of one to the other was around 57%.

    See http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/144/144i.pdf – Page EV246, Q1864 [↩]

  2. See for example, Caithness, ”My Lords, the Banking Bill which we are currently discussing in the House is very complex and detailed, but it does nothing to resolve the current banking crisis, which lies at the heart of our economic problems. The noble Lord, Lord Peston, has just said that it is the fault of the bankers. I agree with him up to a point, but would go further and say that the fault that really needs correcting is our whole banking system.” [↩]
Toby Baxendale is an entrepreneur who owns, amongst other things, the UK's largest fresh fish supplier to the Food Service sector, see www.directseafoods.co.uk. Toby is dedicated to furthering the teaching of the Austrian school of economics. He established and funded the 1st Distinguished Hayek Visiting Teaching Fellowship Program at the LSE in Honour of the Nobel Laureate F A Hayek. Toby is Chairman of The Cobden Centre. Richard Cobden's timeless principles of the abolition of legal privilege of the few at the expense of the many - the Corn Laws, unilateral free trade, sound honest money and international peace - are worthy in this day and age to promote. | Contact us
4 February 10 | Tags: , , , , , , , , , , , , , , , , , , , | Category: Economics, Law, Society | One comment
Economics

There’s only one escape from our debt trap – Telegraph

By Steven Baker, on 18 December 09

Via Edmund Conway at The Telegraph we learn that the debt today cannot be inflated away:

In fact, around four fifths of the state’s debt bill is inflation-proof. The only way ministers and mandarins could inflate their way out of the crisis would be to rip up all the contracts that tie these debts to inflation: possible in the case of the state pension (which is one reason why Gordon Brown’s pledge to link it to earnings is probably doomed), difficult for all the rest.

Thankfully, James Tyler has explained How to deal with the Banksters, a proposal in the tradition of Fisher, de Soto and others which just happens to deal with the debt too.

Steve Baker is a professional engineer with a background in the Royal Air Force and entrepreneurial software businesses. Among other things, he has worked with major banks and regulators internationally. His personal and political website is at stevebaker.info. | Contact us
18 December 09 | Tags: , , , , , , , | Category: Economics | Comments are closed
Economics

The Exodus of the Business Community

By Toby Baxendale, on 15 December 09

Here’s a sobering thought. If you are due to pay 50% income-tax in the new tax year, do not be fooled: it will come closer to 80% when you add on a few mandatory extras such as the full 17.5% VAT on most of your spending coupled with the 12.8% National Insurance paid by your employer on your behalf. (I have ignored a few allowances – but also the ’stealth taxes’ pulling back on the other side such as Stamp Duty, Airport Tax, Car Tax, Tax on fuel … it just goes on and on.)

Think about this number for a moment. It means that for 80% of the year you will be working hard for the state and 20% for you and your family plus any philanthropic causes you contribute to. This means you will be working from the 1st of January to the end of September for the State. It won’t be until towards the end of September in to October, November and December that you will truly be working for yourself in any sense.

This is a subtle and pernicious form of modern day slavery, for sure.

Alistair Darling, our hapless Chancellor, tells us that those with the biggest and broadest shoulders should share the largest burden of funding the deficit that his Government – and only his Government – have created over the last ten years.

I am reminded of Ayn Rand’s great novel published in ……. Atlas Shrugged, Part 3, Chapter 7. Here is John Galt speaking:

If you saw Atlas, the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength, and the greater his effort the heavier the world bore down on his shoulders — what would you tell him to do? To Shrug.

Ayn Rand’s prophetic warning – that it is the businessmen of the world who create the wealth in the first place, which allows what a ’statist’ like Darling wishes to do to advance his Party’s vision of social progress – will, one day, if pushed far enough, cause this country’s wealth creators to just shrug their shoulders and move on and away. At worst, what will be left is a society bereft of those who actually make money – or such a diminishing pool that the state will implode, consuming itself to death with no new wealth to replenish it.

In Capitalism: The Unknown Ideal, Rand reminds us:

Businessmen are the one group that distinguishes capitalism and the American way of life from the totalitarian statism that is swallowing the rest of the world. All the other social groups – workers, farmers, professional men, scientists, soldiers – exist under dictatorships, even though they exist in chains, in terror, in misery, and in progressive self-destruction. But there is no such group as businessmen under a dictatorship. Their place is taken by armed thugs: by bureaucrats and commissars. Businessmen are the symbol of a free society – the symbol of America.

Well, the UK State has run out of money. It will borrow £200 billion next year to pay its ever-ballooning payroll. Meanwhile we, here in the UK, are relying on the good will of our lenders to bankroll our state workers on a week-by-week basis. Yes, the UK is existing on a hand to mouth basis only. This is what it means to have a £200 billion deficit to fund. The government takes £4 in tax and spend £5 on its programs. It does not have the political courage to take immediate efforts to make this £4 in and £4 out, as any prudent family must budget.

When human beings began to peacefully exchange goods and services, civilised society was created. Money is the medium that facilitates this exchange to our satisfaction. Society, and its closely associated derivative, money, which facilitates peaceful exchange, is arguably the greatest invention of mankind. All other things flow from the basic functions of exchange being enabled to be fulfilled: it is, quite simply, this that has lifted us up from primitive existence. We should be glorifying those, like Ayn Rand’s fictional John Galt, who – far from being labelled fat cats – are a shining beacon of hope in desperate times. Rand goes further:

“So you think that money is the root of all evil?” [leaving it aside that this is a common misquote: St Paul suggests that the love of money is the root of evil, a distinction lost to those who damn the rich out of hand.] “Have you ever asked what is the root of money?” continues Rand. “Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?

“Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to become the means by which men deal with one another, then men become the tools of other men. Blood, whips and guns–or dollars. Take your choice–there is no other.”

A modern day John Galt is none other than Michael Spencer, who I have the good fortune of knowing. He is the billionaire founder of ICAP, the largest inter deal broker on the planet. He employs 4,500 people, transacts £1.4 trillion of trades per day, has 50 offices world wide. His charity day at the office raises half of he total amount that the whole BBC Children in Need raises. Glory to the forces of free market capitalism, that most potent wealth creating force known to mankind.

Michael Spencer was interviewed by the Daily Telegraph on the 5th of December and said: “If the Conservatives are not elected and if Labour continue to increase taxes as they probably will then, regrettably, we would presumably have to reconsider moving domicile.”

The prospect of working 80% of the year for the State, like the Titan Atlas holding up the world is becoming too much for the likes of Spencer. We are approaching the tipping point. We need our Spencers and the whole army of entrepreneurs more so now then ever to create the wealth to get us out of the Labour Party induced mess we are in today.

Toby Baxendale is an entrepreneur who owns, amongst other things, the UK's largest fresh fish supplier to the Food Service sector, see www.directseafoods.co.uk. Toby is dedicated to furthering the teaching of the Austrian school of economics. He established and funded the 1st Distinguished Hayek Visiting Teaching Fellowship Program at the LSE in Honour of the Nobel Laureate F A Hayek. Toby is Chairman of The Cobden Centre. Richard Cobden's timeless principles of the abolition of legal privilege of the few at the expense of the many - the Corn Laws, unilateral free trade, sound honest money and international peace - are worthy in this day and age to promote. | Contact us
15 December 09 | Tags: , , , , , , , | Category: Economics, Society | Comments are closed
Economics

Cllr Ian Parsley’s humorous take on the Pre Budget that never was

By Toby Baxendale, on 11 December 09

See http://ianjamesparsley.wordpress.com/2009/12/10/lies-damned-lies-and-spending-plans/

Toby Baxendale is an entrepreneur who owns, amongst other things, the UK's largest fresh fish supplier to the Food Service sector, see www.directseafoods.co.uk. Toby is dedicated to furthering the teaching of the Austrian school of economics. He established and funded the 1st Distinguished Hayek Visiting Teaching Fellowship Program at the LSE in Honour of the Nobel Laureate F A Hayek. Toby is Chairman of The Cobden Centre. Richard Cobden's timeless principles of the abolition of legal privilege of the few at the expense of the many - the Corn Laws, unilateral free trade, sound honest money and international peace - are worthy in this day and age to promote. | Contact us
11 December 09 | Tags: , , , , , , | Category: Economics | Comments are closed
Economics

How long will it take to pay off the £1 trillion of National Debt?

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

Toby Baxendale is an entrepreneur who owns, amongst other things, the UK's largest fresh fish supplier to the Food Service sector, see www.directseafoods.co.uk. Toby is dedicated to furthering the teaching of the Austrian school of economics. He established and funded the 1st Distinguished Hayek Visiting Teaching Fellowship Program at the LSE in Honour of the Nobel Laureate F A Hayek. Toby is Chairman of The Cobden Centre. Richard Cobden's timeless principles of the abolition of legal privilege of the few at the expense of the many - the Corn Laws, unilateral free trade, sound honest money and international peace - are worthy in this day and age to promote. | Contact us
11 December 09 | Tags: , , , , , , , , , | Category: Economics | 2 comments
Economics

The Four of Horsemen of the Apocalypse – Frank Field MP

By Steven Baker, on 30 November 09

Via The Four of Horsemen of the Apocalypse – Frank Field MP:

For some time now it has been possible to see the four horsemen of the apocalypse on the horizon. Most economic commentators ignore their existence and the potential damage that could be inflicted on our economy if they all swept through at once.

Horse one symbolises the ruinous state of public accounts. [...]

Horse two is the harbinger of inflation. [...]

Horse three warns of a rapidly collapsing tax base. [...]

Horse four sounds a jobless recovery. [...]

The economic and political outcome is too grim to describe if all four horses of the apocalypse swoop down at once.

[...]

Recommended reading.

Steve Baker is a professional engineer with a background in the Royal Air Force and entrepreneurial software businesses. Among other things, he has worked with major banks and regulators internationally. His personal and political website is at stevebaker.info. | Contact us
30 November 09 | Tags: , , , , , , , , , | Category: Economics, Society | Comments are closed
Economics

Happy days are here again? Another view from the City

By Ewen Stewart, on 16 October 09
UK Household Savings Ratio (click to enlarge)

UK Household Savings Ratio (click to enlarge)

Equity Strategist Ewen Stewart makes the case that the national debt will within 5 years be over £150,000 per family of 4 with debt repayments of twice the present defence budget, up from £31 billion in 2008/9 to £70 billion in 2013/14. He explains the root causes of our difficulties and indicates a route to recovery.

It’s all over. What a fuss about nothing. The economy will soon be growing again and, look, the FTSE100 is up almost 50% since the March low. Even house prices, according to the Halifax, have risen 6 months in a row. The doom mongers were wrong. Central Banks and Keynesian public spending programmes, together with QE, have worked. Brown indeed has saved the world!

Well that would be one interpretation and a very short sighted one too, for this recovery shows all the hallmarks of a drug addict who claims to be going straight injecting a further mighty dose of the substance that has caused such decay in the first place to prolong the party.

The problem is that the underlying fault lines in the UK economy remain and, thanks to the Government’s response, are even more pronounced.

The underlying problem is, in my view, an addiction to debt, a banking system which is over-leveraged, and now government finances that are out of control. This country that has been living considerably beyond its means for a very long time. Artificial efforts to prop this up, through printing money or inappropriately low interest rates, at best are a short term delaying tactic and at worst risk stoking a loss of confidence and ultimately inflation.

It is my central conjecture that much of the economic growth over the last decade was less the result of genuine private wealth creation but more the result of a number of unique factors which were both unsustainable in their nature and damaging to long term growth. If this view is correct the scale of the over-leverage and the action required to alleviate the problem become even more pronounced.

Continue reading “Happy days are here again? Another view from the City”

Ewen Stewart is an Equity Strategist with a major UK bank. | Contact us
16 October 09 | Tags: , , , , , , , , , , , , , , , , , , , | Category: Economics | 2 comments
Economics

Material Evidence – bonds and new money

By Sean Corrigan, on 5 October 09

Sean Corrigan’s Material Evidence: bond yields, new money, state borrowing and the difficulty of making sound business decisions in the present environment.

Material Evidence 2009-09-23

Material Evidence 2009-09-23

Read the report here.

Sean Corrigan is an economist of the Austrian School Liberal Tradition. Corrigan is Chief Investment Strategist at Diapason Commodities Management. | Contact us
5 October 09 | Tags: , , , , , , , , | Category: Economics | Comments are closed
Economics

Why Budget Deficits are Bad for the Economy and Why Sir Samuel Brittan is Wrong

By Toby Baxendale, on 4 October 09

Toby Baxendale exposes flaws in the economic thinking of the left, indicates the dangers of deficit spending and points to a better way to fund welfare while stimulating genuine commercial investment.

Published in the FT on Friday the 2nd of October under the title “A cool look at the current deficit hysteria”, we find an article by a respected economist saying that there is nothing to worry about running a deficit at the present and predicted size. Our predicted budget deficit of 12.4% of GDP in the current financial year, gradually declining to 5.5% in 2013-14 is no big deal. Coupled with the public sector debt itself, we see it leveling out at 76% of GDP. Sir Samuel says “Debt ratios of this size are historically far from unprecedented. In the Victorian period the ratio was nearly 200% and almost reached that level again in the early 1920s. In 1956 it was just under 150 per cent.” He goes on to add, “the debt was gradually reduced from the peaks mentioned above without any heroic gestures.” In a classic Keynesian tone, he concludes “The big error of the current discussion is to confuse the budget balance of individuals and companies with the government budget balance, which needs to be in deficit so long as attempted savings exceed perceived investment opportunities. Gordon Brown more or less understands this, and I wish he would use his talents to explain such fundamentals instead of stirring up an outdated class war.”

For our international readers, Gordon Brown’s speech to the Labour Conference 2009 was a class war-laced speech worthy of some of the most envy driven and hating sections of the Left. The full text is available here, if you want to take yourself back to the start of the last century. I presume this is what Brittan refers to in the last quote.

Also deficit spending — living beyond our means — in the language of the left is “investment.” There are 5 references to this type of activity in this speech. I recall a timely quote to remember from Ludwig Von Mises in Human Action (Scholar’s Edition), Page P.737:

At the bottom of the interventionist argument there is always the idea that the government or the state is an entity outside and above the social process of production, that it owns something which is not derived from taxing its subjects, and that it can spend this mythical something for definite purposes. This is the Santa Claus fable raised by Lord Keynes to the dignity of an economic doctrine and enthusiastically endorsed by all those who expect personal advantage from government spending. As against these popular fallacies there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of its quantity.

How is Wealth Created?

As I have said on this web site before, wealth is created on the factory floors, in the boardrooms and in the offices of people making their factors of production — land, labour and capital — work better for them in satisfying the needs and requirements of their consumers. Invariably, this means those factors need to be brought together in better combinations or made more productive. The latter is the most common way and this almost always needs savings — i.e. forgone consumption — to invest in the newer, more productive processes.

Governments do not create wealth, they can only take it from A and give to B.

What does an Interest Rate do?

As I have said before on this web site:

Simply put, you value more highly present goods of the same quality and quantity than you do future goods. Furthermore, the value of future goods diminishes as the length of time necessary for their completion increases. This sets up a price differential between goods now or goods later. This price differential is called an interest rate.

In reality it is also the rate of profit in the economy, as it is these saved resources that are the only source of future funding for investment and the associated return on that investment. So it is arguable to say that this is the most important metric in the economy.

To underscore this, it is the saved resources of all the economic agents in society that produces the goods and the profits of the future. The return (interest) on the savings can only be the additional component that allows the additional investment in making the production structure — all those activities mentioned above going on in factories and offices — that will produce the new goods and services. The rate of return on these savings must in-fact be the rate of profit of that which is lent to enterprises.

How do we Fund a Deficit?

The Government Bond

If the government has taken less in tax receipts than it gives out in transfer payments i.e. it has deficit, then it will raise the difference on the whole through the selling of government bonds or “Gilts”. These are promises that the UK taxpayer will pay back the bond holder at a date in the future.

It is important to note here that the savings and investment process that ensures that saved resources are put to their most urgent investment needs, as described above, immediately becomes distorted when a government bond soaks up resources to go into the government coffers for spending and not into productive industry. In short, at the very time today when we need our best wealth creators, the owners of all the businesses in this country, to be firing on all cylinders, looking at making themselves more productive and selling goods and services more in tune with the new demands today, in this post-boom world, we have a policy of running a deficit which will starve these wealth creators of the wherewithal to start lifting us out of this mess.

Contrast this with the Corporate Bond

A wealth creator may sell a corporate bond to fund his investment activities.  Thus we must also observe that when you work producing wealth, you create a surplus.

You had capital of £X and, by the end of the year, you have capital of £X + £Y. You can give a return — coupon or interest rate — back to your investor. The merry-go-round can start all over again with a greater level of wealth accruing in society.

With the government bond, capital is taken away form the citizen and the interest is extracted via the taxation system to pay the bond holder. There is no wealth created, only at best transferred to another person and at worst totally destroyed.

When the proceeds of the government bond are issued to people on the dole (2.6m) and people on incapacity benefit (2.7m), capital is completely destroyed and the tax payer then pays interest on nothing!

A Note on Welfare Spending and the Future Funding of Welfare Provision

We currently rob Pater to pay Paul: that is, we fund a good portion of our welfare budget via the on-going issuance of public debt, the need for which has arisen as we are not prepared to live within our means as a nation i.e. less tax is taken than is spent by HMG.

The Rt Hon Ian Duncan Smith MP has produced a report here called “Dynamic Benefits: Towards Welfare That Works” that starts the process of simplifying the system for the claimant and the administrator. This is very welcome and long overdue. It also starts the reversal of the process whereby, over the last 12 years of Labour Government, benefits have become so rewarding — in the sense that if you are on welfare and you take employment, your net pay decreases — there is a great incentive never to get off them. All of this is welcome.

However, what you need to do, in the smallest local regions possible, is create an insurance scheme in a mutual or let the old Friendly Societies — see here for a brief account of their great history — take subscriptions from the people in the area to provide welfare to the people who need it when they fall on hard times. This has the effect of forcing the Society to invest in productive business activities to get a return on their investment to pay any welfare claims.

Contrast a bond paying interest on nothing (no capital) like a government bond with a corporate bond generating wealth (paying interest on capital) which the old Friendly Societies used: the latter is beneficial to the economy because investment takes place. Government spending can only ever be a redistribution.

Summary:

As Ludwig Von Mises says in the Scholar’s Edition of Human Action p770/1:

If government spending is financed by taxing the citizens or borrowing from them, the citizens’ power to spend and invest is curtailed to the same extent as that of the public treasury expands. No additional jobs are created.

So the message I am hopefully giving here, with the best clarity that I can, is that deficit spending totally undermines the wealth creation process.

If the government is urged to step in and spend where the private sector sees no opportunity, as Sir Samuel says, this will only lead to more general impoverishment. Does it need saying that only wealth creators create wealth and not wealth re-distributors, that is, the government?

This gives rise to the notion that a public debt is no burden because we owe it to ourselves. Now in fairness to Brittan, he is not saying this, he is just saying that in the absence of enough opportunities for savings to be fully utilized, then the government should spend instead. I hope in the above I have demonstrated that if funded by bonds (the majority way), then this is in fact a set-back to recovery.

Toby Baxendale is an entrepreneur who owns, amongst other things, the UK's largest fresh fish supplier to the Food Service sector, see www.directseafoods.co.uk. Toby is dedicated to furthering the teaching of the Austrian school of economics. He established and funded the 1st Distinguished Hayek Visiting Teaching Fellowship Program at the LSE in Honour of the Nobel Laureate F A Hayek. Toby is Chairman of The Cobden Centre. Richard Cobden's timeless principles of the abolition of legal privilege of the few at the expense of the many - the Corn Laws, unilateral free trade, sound honest money and international peace - are worthy in this day and age to promote. | Contact us
4 October 09 | Tags: , , , , , , , , , , , | Category: Economics, Society | 3 comments
 
  Older Entries »