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?
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.