Archive for the ‘money’ Category

The Western model of democratic government is broken. Successive body blows to individual liberty have left our political system with more than just a bloodied nose. Everywhere you look you see the slow creep of unchecked Executive power,  new restrictions on freedom of speech and all-powerful central planners and technocrats making decisions with absolutely no democratic mandate.

Long cherished and hard-fought for rights, such as freedom of the press are now under serious threat. Your  allegiance to a mainstream political party could exclude you from fostering a  child. The most powerful man in the world is able to send unmanned drones into another sovereign territory to perform ritual executions, without so much as  a whiff of due process. The expression of an opinion that is contrary to the mainstream groupthink will ensure you receive a swift visit from the state’s bully boys in blue. George Orwell move over. 1984? This is 2012.

The state has assumed so much power in part because it has been able to cushion people from the consequences of their own actions. Concentrated gains for some are paid for by dispersed costs for the many, thus ensuring the minimum of hissing from the goose as it is slowly plucked. Decisions are centralized and tax and regulation is harmonized. The pluralism and competition that was responsible for pre-World War II Europe’s staggering growth and innovation has now been stifled by the increasing erosion of national sovereignty by the EU. The state offers it’s citizens answers to many of life’s problems, hilariously unaware that many of these problems exist because of state intervention in the first place. Intervention upon intervention is called for to fix the side effects of previous interventions.

Cui bono? Do you ultimately believe in the maternal/paternal model of the state that runs society to the benefit of it’s incapable of children? Or do you see the modern state as the machinery of a ruling elite for extracting the maximum amount of wealth out of the productive portion of society?

Philip Bagus illustrates the true nature of the state in “The Tragedy of the Euro”  (if you have an e-reader you can download the e-book or PDF from mises.org for free!):

“The state is the monopolist of coercion and the ultimate decision maker in all conflicts in a given territory. It has the power to tax and make all manner of interventions.

The ruling class is exploitative, parasitic, unproductive, and has a strong class consciousness. It needs an ideology to justify its actions and prevent rebellion of the exploited class. The exploited class represents the majority, produces wealth, is indoctrinated into obedience to the ruling class, and has no special class consciousness”

The current ideology of the ruling class is a toxic mix of welfarism,  interventionism and mercantilism. They have cleverly narrowed the field of debate so that any opinions and ideas contrary to the service of their own vested interests are frowned upon as taboo, or even punished by imprisonment.

The elitist left display a staggering level of cognitive dissonance  when they talk about the danger of monopolistic corporations exploiting consumers whilst simultaneously providing hearty support to such paragons of consumer choice as the BBC and the NHS. The elitist right lavishly applaud the wealth generating (sic) financial industry with blind ignorance to it’s priveleged position to create money out of thin air, backstopped by the white-hot ink jets of an independent (sic!) central bank.

It’s enough to drive a man to drink… No wonder minimum alcohol pricing is on the cards.

From page 154-155, “Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System” by Kevin Dowd and Martin Hutchinson. Referring to the causes of the 2008 financial crisis:

“It is here that one can most ferociously blame Fed Chairmen Alan Greenspan and Ben Bernanke, and their decade and more of irresponsibly cheap money. By distorting price signals throughout the economy and producing burst bubble after burst bubble without any significant improvement in living standards except at the very top, they have not only gravely damaged the economy, but enabled the Left to claim that free markets “don’t work” so we must bring in government and the unfortunate taxpayer to solve our economic problems. Of course, this crisis is not a failure of free markets and not even a failure of capitalism – unless you accuse modern mangerialist crony capitalism, in which case you would be right.”

This quote jumped off the page at me. It surmises the cause the cause of the boom that lead to the bust – low interest rates and loose monetary policy (as the authors point out on page 154, from 1995 the Fed expanded the money supply 5% faster than output for 13 years). It hints at the damage this has caused to the reputation of both free markets and capitalism, even though it had very little to do with either. It also correctly acknowledges that much of the growth and rise in living standards enjoyed during the boom was illusory.

It is a fascinating world we live in. There are few people who suggest that the government should control the price of milk or manipulate the supply of shoes.  Luckily, most people recognise that government is hilariously incompetent at the functions it already performs and would resent it encroaching into areas where the free market already provides a valuable service.

Yet when it comes to money, the masses are blissfully ignorant. Money is a commodity like most other goods, albeit a special one with value added as a widely accepted medium of exchange. So why are we happy that governments (through their central banks) are allowed to manipulate the price (interest rates) of money?

We accept that the government would do a lousy job of supplying milk but simultaneously believe that it’s all knowing bureaucrats can somehow get the supply of money just right. We would rightly shudder at the thought of the government setting the price for a pair of shoes but are perfectly happy to allow  it’s all knowing functionaries the discretion of setting interest rates.

Money is not the creation of the state. Just as the state did not invent money, nor is the state required to manage money. Money came from people, emerging through “spontaneous order”. People, interacting with each other through voluntary exchange gradually realised that certain commodities are uniquely desirable to use as money (due to properties such as divisibility and function as a store of value etc).

So what materials did individuals (free from government coercion) decide to use as their preferred money? The historical record is clear – they chose gold and they chose silver. I know of no example when people, free to choose, have settled upon paper. This is because paper money is intrinsically worthless. It can only function as money via government “fiat”, coercively imposed upon society via legal tender laws.

It shouldn’t take a great deal of imagination to understand why the state likes it this way. The printing press gives the state an unrivalled power – the ability to create money out of thin air. Except it is nothing like as harmless as that. The price is paid for by those who save, those with pensions and those on lower incomes. Inflation is a stealth tax on the poor and the thrifty, simultaneously eroding the value of saved capital and redistributing wealth from the poorest to the richest in society.

The financial sector is largely complicit in this redistribution, benefiting as the first recipients of the freshly printed money. They enjoy the benefits of the new money before inflation has eroded its purchasing power. By the time the new money reaches the poorest in society, any benefit to be derived from it has been wiped out by the increase in prices. Thus are the poor forced to pay more for everyday items and sacrifice a portion of their savings through loss in purchasing power.

Further damage is caused by the “misallocation” of capital as a result of low interest rates. In English, this means that when money is cheap people invest it in products, processes and ventures which are not sustainable. Sub-prime housing bubble anyone?

Interest rates should convey information about the time preferences of society. When people value present consumption more they will save less, driving interest rates up. When people defer consumption they save more, which drives interest rates down. However, in our current, centrally planned monetary system the interest rate is just an arbitrary number decided upon by a central bank committee (sound soviet enough for you?). The entrepreneur looking to invest capital receives a false signal – artificially low interest rates will falsely signal that society is prepared to defer consumption and has saved more capital to be in invested in longer, more marginal production processes. Except that society has done no such thing. Businesses inevitably make foolish investments and begin production of products which later turn out to be unprofitable. The end result? Boom followed by bust.

The neatest trick of all is that somehow all of this is blamed on free market capitalism. It should be clear that there is nothing free market about fiat money and centrally planned interest rates. The blame lies squarely with the state.

The debate between fiat and commodity monetary standards is slowly re-entering the mainstream. See here, here and here. To those new to the subject, this is simply a debate as to whether the money in your pocket is backed by nothing other than government mandate and coercion (fiat) or a by a physical commodity that has value beyond it’s use as money (usually gold or silver).

This is a debate which many had considered to be closed, an argument that only existed on the fringes of academia amongst eccentric free marketeers. Succesive rounds of quantitative easing, coupled with negative real interest rates have thrust this debate back into focus.

It is bizarre that it has taken so long for this issue to re-surface. The intellectual superiority enjoyed by paper money is based on a 42 year experiment that has seen the value of all paper monies race each other toward their intrinsic value – ZERO.

The alternative, a commodity standard based on gold or silver (or a combination) is viewed  by the mainstream as atavistic, “a barborous relic”. This completely overlooks the historical track record of commodity money as society’s choice of preferred choice of exchange media.

The majority of coverage will argue against the gold standard, no doubt citing the flawed gold bullion standard (1925-1931) and Bretton Woods system (1946-1971) as representative of the failings of commodity backed monies.  Neatly overlooking that both standards were not the product of the free market but centrally planned and enforced by government.

The establishment has good reason to fear the return of a TRUE gold standard via the free market, beyond the control and manipulation of government and central bank. Such a gold standard would enforce fiscal responsibility, removing the state’s ability to run up unsustainable debt backstopped by the printing press. The current monetary world order is a top down system, designed, implemented and controlled by state bureaucrats and apparatchiks for the benefit of the establishment and it’s chosen favourites. There are plenty of vested interests who are keen to see it remain that way.

I would encourage the reader to look beyond the standard criticisms. One thing is for certain – the gold standard is back on the radar. This can only be a postive thing, especially as the loose monetary policy pursued by central banks world over causes more people  to wake up to the reality of their savings  being stolen through central bank induced inflation.