It’s time to end the cruel delusion of cheap money and reckless spending

Steve Baker has written an article for today’s City A.M. calling for an end to the ‘cruel delusion of cheap money and reckless spending‘:

George Osborne will present his Autumn Statement to a country in the grip of a cruel economic delusion, perpetrated against the poor and the aspirational.

Welfare states everywhere are spending chronically beyond their means while papering over the cracks with easy money. Budget 2013 forecast spending in excess of receipts of about £9bn a month. Defence, criminal justice, local government and the Foreign Office have been squeezed. Two thirds of spending was expected on health, education and welfare, mostly pensions.

The sick and disabled, families, children and pensioners are reliant on these crucial services. With taxes already too high, government is critically funded by the bond markets. Those bond markets are in a dangerous bubble, deliberately inflated by central banks.

Keynesian economists prescribe even more stimulus to dreadfully-mistaken applause, as if it were in the general interest to expand the state yet further and borrow to do it. They should be more honest about their politics. It’s true the Budget isn’t like that of a household or business, because the government can tax, intervene and create money. That’s just the problem: state power is a great force for destruction …

Read the whole article.

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19 replies on “It’s time to end the cruel delusion of cheap money and reckless spending”
  1. says: Paul Marks

    The fiscal crises is connected to the monetary crises.

    People (such as certain individuals who work for Mr Putin on Russian Television) who pretend that one could keep the unlimited Welfare State without fiat money and the “banksters” have it backwards.

    In reality “cheap money” (low interest rates and credit bubble finance) is about propping up the Welfare States – but it will not succeed in propping them up much longer.

    As for persecuting the “banksters” – for example by fining J.P. Morgan Chase 13 billion Dollars for doing what the government TOLD THEM to do, or paying off a large part of the mortgages in Iceland by taxes on the banks and so on (i.e. disguised theft – expropriation), this will just the crash that much closer.

  2. says: joe bongiovanni

    From the article:
    “”Keynesian economists prescribe even more stimulus to dreadfully-mistaken applause, as if it were in the general interest to expand the state yet further and borrow to do it. They should be more honest about their politics. It’s true the Budget isn’t like that of a household or business, because the government can tax, intervene and create money. That’s just the problem: state power is a great force for destruction.””

    Of course the Keynesian do so….. correctly calling for state economic intervention in light of the paralysis of the broad private economy…. and especially the impotent power of the private banks in that economy to actually create the money.

    So there are two problems with the scenario laid out in the article – the first is that the government should not ‘borrow’ its deficit balances. (See Turner’s Permanent Overt Money Finance(POMF) proposals).
    And, second, NO, the government has money-creation powers only in sovereign-nation political-economic theory.
    But under our bankers-school system of money that we ALL use, ALL money is created by the private bankers(c&c,e) so, if there’s too much bank credit money – and there ain’t – then the private bankers created too much, and if there’s too little – as there is – then it’s because the private bankers CANNOT today create more money, because there is a lack of creditworthy borrowers to provide profit opportunity.

    It’s not the bankers’ fault. It is the fault of a system where the having of adequate money to achieve national economic goals is dependent upon the smooth operation of our debt-saturated capital markets.
    The problem is the debt-based system of money.

    In reality, it is the LACK of state power (over money) that is the operative great force for destruction.
    We need a new money system.

  3. says: Paul Marks

    “correctly calling for state intervention”.

    That sums Joe up and shows why he has no business here.

    Now go Joe – off to Venezuela where you belong.

    Not that your system has much more time left in Venezuela. Which will go the same way as Argentina and the other countries that follow your principles.

    As for your statements (for example that all money is presently created by private bankers – you have clearly never heard of a government mint, or the fact that most Central Banks around the world are 100% government owned) they are false.

    If there are any true statements in your comment (or in any of your comments at any time) I am not aware of them.

    1. says: joe bongiovanni

      Apologies for another lack of judgement in replying to Paul Marks’ stale diatribes, but…
      Since these intertubes are global, it’s often difficult to make any statement that fits every reader’s situation.
      Let’s clear something up.
      In all of those countries that might have public central banks, (like the UK) my statement is still valid. In all of those countries, the private banks create the debt-based money supply, (coins and currency excepted(c&c,e)), and although their are public mints and offices for engraving, it is in the ‘issuance’ of the engraved monies that seigniorage is gained. In the US, that all goes to the private banks, (c.e.).
      I erred in terminology over Lord Adair Turner’s proposal…. he calls it Overt Permanent Money Finance(OPMF), which I learned from re-listening to his INET address on Macroeconomic Policy and Economic Stability.

      1. says: joe bongiovanni

        Sorry, all.
        I did not realize that would fill up the page.
        Turner starts after the Soros intro about 9 min in.

  4. Joe is right, and Paul Marks is wrong.

    Now Paul, if you want rude rather than an attempt at an intelligent argument: off you go to Venezuela where you belong.

  5. says: chuck martel

    “In reality, it is the LACK of state power (over money) that is the operative great force for destruction.”
    Your statement implies that there are two separate forces involved, the financial industry and the state. The reality is that these two entities are siblings. The state requires the banking system, which it sanctions, to organize its plunder. The banking system relies on the state for its legitimacy and opportunity. They may have small family disagreements, generally staged for the consumption of the masses, but nonetheless they’re both on the same page.

    1. says: joe bongiovanni

      In my view, the complicity of the government is limited to its ignorance and ineptitude in allowing this private money-creation charade to continue to run its course.
      I know what the Austrians say and I do not believe it.
      The FRA says the Fed should manage monetary aggregates so as to achieve GDP-potential.
      But the Fed has no control over the M-1 and M-2 monetary aggregates. The banks control those.
      The Fed should speak for the ability to achieve its job – and support the Kucinich Bill to get the means to make it happen.

    1. says: joe bongiovanni

      This is what we should be talking about. Only Huerta de Soto has proffered a semblance of a proposal for a new money system – at least since Rothbard.
      And his is seriously lacking.
      So, we agree to take down ledger-entry money creation by the privileged few and replace fractional with full-reserve banking.
      At that juncture, we “discuss” the relative merits of stable purchasing power via public debt-free money, versus the ‘little deflation’ of falling wages and price proposal of hard money advocates.
      That’s what the debate should be about here.
      But agreeing on ending the bank-credit money charade should be an easily-achieved major step of progress among Austrians and reformers.

  6. says: George Doughty

    Come on Joe. That game is over. Are you not tired of flogging that dead horse? It’s over. Quit before the peasants with their pitch forks are hammering at your door.

    1. says: joe bongiovanni

      The real sad truth, George, is that this ‘game’ has just begun.
      I would not deign to insult Austrian economics but I’ll bet a United States Dollar that the likes of public money will be at the fore of our future discussions of ‘money’ while people try to figure out what all the great work of Austrian scholars was about.
      It’s making its proper comeback.
      Another intellectual cycle, which will become academic and then mainstream.
      Because the money system is what matters.
      Ran its course?
      How about Adair Turner’s keynote speech to the Institute for NEW Economic Thinking, where he has become Senior Research Fellow?
      So we have the former head of he UK Financial Services Auhority propounding debt-free public money – because he has figured out that this debt-based system has run its course, and that it serves no purpose for restoring prosperity to the countryside.
      I thought we were in agreement on that point.
      But Turner has figured out why public money issuance can solve the problems of the debt-based system.
      And he’s going for it.
      A much larger person than any I’ve seen hereabouts.

  7. says: Paul Marks

    Ah Ralph joins Joe – no surprise there, birds (or collectivists) of a feather flock together and, on this matter, whether they are Fascist collectivists or socialist collectivists makes little practical difference (the poet Mr Pound rushing off to sit at the feet of Mussolini, General Peron of Argentina trying to replace commercial banking with the government printing press, and on and on).

    As for money – buyers and sellers should be allowed to use whatever commodity they wish as money (gold, silver – whatever they agree upon).

    However, one thing is certain – history (experience) as well as reason (economic law) has conclusively shown that GOVERNMENT money is a bad idea.

    The consequences of government money (which dominates the modern world) have been terrible – and will get much worse.

    There is an agenda here.

    The fallacy that producing more money (from NOTHING) will enable the unlimited Welfare States to carry on.

    It will not – the present level of wild government spending can not be sustained (not be the printing press – or by anything else).

    And blaming banks (“Jamie Dimon and the banksters” – as Putin’s boy Max Keiser would put it) for the impossibility of sustaining the unlimited Welfare States is just wrong.

  8. says: Paul Marks

    Chuck – I do not think the state “requires” the banking system, there are other ways of doing things (as General Peron showed). But they are certainly useful to the state.

    As for how much influence the so called “banksters” have – one must be careful not to fall into the Jamie Dimon trap.

    Many bankers supported (financially and otherwise) Congressman Barney Frank and Senators Chris Dodd and Barney Frank (these three got more Protection Money than anyone else in Washington D.C.) – yet it was these very people who betrayed the bankers.

    First with Dodd-Frank- then with the 13 billion hit on J.P. Morgan Chase.

    First the government asked J.P. Morgan Chase to take on failing banks.

    Now it declares that these banks (which it asked J.P. Morgan Chase to take on) were engaged in bad practice – although illegality has not been proved.

    And it hits J.P. Morgan Chase with a 13 BILLION Dollar hit (on top of all there other problems).

    No one despises credit bubble banking more than I do. Including all the de facto subsidies (the “cheap money” from the Federal Reserve).

    But the relationship between the banks and the state in the United States is starting to look more like…..

    “A lady went for a ride on a tiger…….”.

    Short version.

    The world is not really as Putin’s boy Max Keiser presents it.

    If you doubt that…..

    Find out who actually created the Bitcoin scheme – which Max promotes on his show (as if were an objective observer).

  9. says: Paul Marks

    By the way Joe – I never asked you to “reply to my stale diatribes” I pointed out that you are not a free market person and, therefore, you have no business here. And I asked you to go – as I have in the past. I no longer ask with great politeness as you do not seem to be able to take a hint – you seem to be the sort of person who only leaves if a boot is placed up their backside.

    I do not go to collectivist sites – so please have the basic common decency to return the favour and stay away from here.

    Stick to you own kind. Stop Trolling here.

  10. says: chuck martel

    It’s kind of confusing. The Fed is purchasing $85 billion in assets a month, some of it from JP Morgan, and then agrees to a contribution from the firm of $13 billion. It’s not like the old days, however, when these banks were private companies. Now they’re publicly traded and it’s the shareholders whose pockets are being picked. Management won’t miss any meals. If anything, the deal made between the justice department is an attempt to balance the books of a group of failed government agencies.

  11. says: Paul Marks

    Chuck – good point about lack of shareholder (i.e. OWNER) control. Now that even Germany has Capital Gains Tax (since 2009) one can expect to see a decline of individual share owners even there.

    When I was born most shares in the United Kingdom were owned by individuals – then came Capital Gains Tax (1965) and the rise of the system by which some hired managers (for example those in banks) were responsible to other hired managers (in pension funds and so on) with individual owners largely pushed out to the picture. The new system is not a good one.

    As for the financial services industry – the so called “Deregulation” of 1986 in Britain (“Big Bang”) was actually a GOVERNMENT TAKEOVER – with the rules of private companies and associations overturned and replaced by (eventually) thousands of pages of detailed government regulations – some “de” regulation.

    The old private companies and associations were not monopolies – for example there were other stock exchanges (such the Liverpool Stock Exchange – independent up to 1986) and trading “off exchange” was also legal.

    And, yes, one thing that a lot of people noticed after 1986 was the owners of the Merchant Banks (the trading banks) started to sell up.

    Everything was supposed to be wonderful in the new (government dominated) system – yet the partners (the owners) of the merchant banks (over the years) sold up and walked away.

    “I smell it in the air, I taste it in the waters, I feel it in the earth” – something has changed, something is wrong.

    As for the American situation.

    If Jamie Dimon (of J.P. Morgan Chase) really thought he could control Barack Obama in 2008 he (Mr Dimon) was a fool.

    I am reminded of L. Baggins (of the Sackville Baggins branch of the family) at the end of the Lord of the Rings.

    “He has been a wicked fool, but he is caught now – we should try and rescue him”.

    However, the hobbits did not have much sympathy for the fallen “Chief” even after they found out he had had his throat cut by one of his “guests”

    One can not really enjoy one’s meal with a cut throat.

  12. says: Allan Matthews

    I always thought that state creation of money and private bank creation of money were the same thing but minus the debt and interest?

  13. says: Paul Marks

    There is a basic difference Mr Matthews.

    Banks expand CREDIT when their lending is not based on REAL savings.

    Eventually this credit bubble collapses – the “boom”, turns to “bust”.

    There are two great alternative views as to what to do when “boom” (the credit bubble) turns to “bust”.

    Either the government (or Central Bank) should create money (currency) to try and maintain the credit bubble (in technical language “increase the monetary base” in order to maintain the “broad money” supply) or it should not.

    It is wrong to say that only Keynesians are in favour of bail-out-ism (increasing the monetary base to maintain the banker credit bubble) Chicago School (at least after Milton Friedman arrived) people are also in favour of it.

    For example, Milton Friedman did not believe that Benjamin Strong (of the New York Federal Reserve) did a bad thing when he encouraged the credit money supply expansion of the late 1920s – after all Irving Fisher pointed out that the “price level” was stable, so (according to the doctrines of Fisher and Friedman) no harm was done by the expansion of the broad money supply (the expansion of the credit bubble) of the late 1920s.

    Frank Fetter (on the other hand) argued that Irving Fisher’s “price level” index missed the point that an expansion of the credit bubble (“broad money”) is harmful whether or not prices in the shops go up.

    Frank Fetter (famous for his refutation of Henry George on land – but sadly not famous for his refutation of Irving Fisher) was arguing from what would now be called an “Austrian” perspective.

    Still what-should-be-done when the credit bubble collapses?

    Milton Friedman argued that this “collapse of the money supply” should not be allowed to take place – that the government (or Central Bank) should do anything needed to prevent it.

    That is the policy that the Federal Reserve (and the Bank of England, and the European Union Central Bank and the Bank of Japan and ….) are following.

    They have vastly increased the monetary base (“narrow money”) in order to maintain the credit bubble (“broad money”).

    Let us see how that works out.

    I am astonished that the farce has lasted as long as it has.

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