Welfarism undermines democracy: this is one of the manifest lessons of the eurozone crisis, and is seen in many ways, the most recent being the Greek elections in the fissipiration of the political system, with the running being made by minority parties with unrealistic and self-aggrandizing agendas. Instead of there being any attempt at shrinking the state, more, and more aggressive, groupuscules want more of the same: “Syriza’s idealistic economic programme calls for providing students with free meals and doling out pensions equal to final salaries. Mr Tsipras says the state should hire 100,000 more workers to help reduce unemployment.” (The Economist, May 12th 2012). Is this “idealism” or ignorance (though the latter is, of course, the handmaid of the former)? After all one of the things that brought the Greeks to their knees was the number of people entitled to government largesse.

When the Greeks received the first bailout from the Germans, Papandreou publicly thanked the German government and people for their largesse and acknowledged that as a result the Greeks would have to do some serious cleaning up, starting with an attempt to find out how many people worked for the government. They didn’t know! This is welfarism with an insouciance.

Democracy and accountability

The idea that democracy is a device to hold government to account implies a responsible, independent citizenry and limited government. One of the things that the government is to be held accountable for is limitations on its growth. The welfare state, instead, thrives on factional interests which seek to carve out niches for themselves at the expense of others, with the state as overlord and facilitator – and therefore at the mercy of being captured by the bolder interest groups.

The Founding Fathers of the American Constitution wanted to strike the right balances between majorities and minorities, while recognizing both that majorities could become tyrannous and that minorities could descend into factionalism. The balances that the Founding Fathers sought were to prevent majorities from dealing with minorities in the old-fashioned European way – i.e. simply eliminating them, whether through exile or execution. This meant allowing minorities a functioning place within the body politic accommodating their ways where they were beneficial without creating vested interests which might put the public order at risk.

While it is self-evident that the Constitution of the U.S.A. has not prevented the growth of big government or the gradual assimilation of the American people to welfarism, it is also clear that modern government’s most serious derogation from constitutional principle is the emergence of the centralized state as a faction in itself. Large civil services become an end in themselves; the purveyors of welfare form a huge vested interest group, averse to change that may damage their own position however it may benefit the taxpayers who fund them.

While it is usual to equate freedom with democracy and welfarism with fairness, in fact there is no logical or historically necessary connection between freedom and democracy, nor is welfarism necessarily fair. In fact, the larger the state’s involvement in wealth distribution, whether it is by cash transfers, or manipulations of the educational and health systems, the more that the least admirable moral qualities are promoted in the welfare state: envy and greed.

Entitlement

The welfare state encourages the vice of entitlement, actively encouraged by the administrators of the welfare state – through education, through multiculturalism and through the benefits system. If bankers are thought to be too quick to justify their salaries, it is only done in the language of the welfare state which all are encouraged to use. (An aside on bankers: while, as has been maintained here, here and here,their remuneration is an utterly inadequate basis for the crisis, bankers at least operate in a world of more immediate accountability: recently shareholders have risen to the task of curbing pay in relation to poor performance.)

Envy in the East?

I grew up in Hong Kong (my political and economic gold standard). That there were exceptionally wealthy people was well-known, but they tended not to live celebrity lives and had risen to their riches, in many cases from extreme poverty, through hard work and good judgment. That everyone had a chance to better themselves to the extent that they were prepared to work for it because the tax system was simple and equitable, meant that envy was at a discount in Hong Kong – people tended rather to admire the rich because they were hard working and philanthropic, and because each and all had the opportunities open to them to advance to similar riches. A breeding ground for hard work, thrift and imaginative enterprise rather than envy, greed and carping.

One day.

The “sarkozy” in question? Bashing the City of London. So nothing has changed on the despising of the Anglo-Saxon economic model front, then. What else has changed as a result of the French and Greek elections?

While the Times has reported that there is a capital flight out of Greece (The Times, 8 May 2012) – which is hardly surprising – the answer to the above question is: nothing, politically.

The fireworks will be different colours after the French and Greek elections, but the unwillingness to recognise and to deal with the political death of Europe will continue: there is still no political will to recognise the failure of the euro and all the difficulties that that entails for the “union”. Not that there is much show of unity; there is little love lost on the continent for each other, but there is a determination to keep the bone of contention alive – not even the faux-radicals who have been elected to the Greek Parliament, while perfectly content to call their Northern neighbours barbarians, want to pull out of the euro! (Bloomberg here.)

“Voters shy from hard choices.” Thus Lexington in the Economist, April 28th 2012, page 42. “…voters everywhere … want many impossible things before breakfast, including low taxes and all the things that high taxes pay for.” He is, after a fashion, taking issue with Grover Norquist of Americans for Tax Reform, who concedes that the argument for small state-low tax politics is yet to be won: “Too many voters continue to like some of the things their taxes buy, such as entitlements and government jobs. If those things can be shrunk, [Mr Norquist] believes, so can their fondness for the state. Good luck with that, Mr Norquist.”

Well, Mr Norquist is perfectly entitled to point to Europe, where fondness for the state was invented and has become inbred, and in particular to Greece.

Greek voters wanted low taxes, so they simply didn’t bother to pay their taxes at all – and the tax collectors went on strike in sympathy – and they still wanted the things that high taxes pay for. A price system this is not.

The idea, fantastic as it seems, that tax collectors would go on strike against changes to their salaries would beggar belief were it not yet another strong reminder that those who advocate that the state simply pays it way out of trouble (which is what got us into the trouble in the first place) forget that the state has no money.

Even the editor of the Economist has advocated that the state in the UK should build more infrastructure (which, he says, “incidentally” provides more jobs) as a way of spending its way to recovery. This is the same Economist which considered the Socialist candidate, now victor, in the French presidential elections, M. Hollande, “rather dangerous” (April 28th) – even though he promises just such spending…

The tax collectors of Greece went on strike because they do not want their salaries cut, but in striking, i.e. refusing to do their job which is to collect the taxes out of which their salaries are paid, they are in effect cutting their incomes to zero.

The state has no money of its own: all that it spends is ultimately derived from the taxpayer: either directly, or by borrowing, which is then paid back by further despoliations of the taxpayer.

Ah! but what about Quantitative Easing? Apart from sounding like what Gargantua did after arriving in Paris, it has pretty much the same effect on the average saver: deluging the economy with printed money simply attacks the taxpayer from another angle – those who have saved see their savings and pensions eroded. Without savings, where is investment, and therefore growth, to come from?

Too much liquidity, and fake at that: QE seems to me to be essentially the government forging its own currency…

While there is much speculation that there are moves afoot in some countries to rein in the private ownership of gold (see here and here), it is encouraging to read the following story (originally posted at L’Or et L’Argent) about how Singapore is opening up its markets to gold. This is yet another move in the free Asian economies to strengthen their positions, a welcome strength in view of the economic turmoil in the developed world and in China, whose economic future seems very uncertain.

Given that the following article points out the strong position of gold in Hong Kong, readers might like to read this fascinating account of gold dealing there; amongst other interesting points is the note that the Chinese Gold and Silver Exchange Society is the world’s oldest gold dealing exchange. Gold and stability could have no sounder exemplification than the growth of Hong Kong as one of the world’s strongest economies throughout the twentieth century and still leading the way in the new millennium!

Singapore’s move comes in tandem with growing speculation amongst gold observers that there is a slow but sure momentum building up to a return to the gold standard. The financial turmoil in Europe and the erosion of the US economy is fundamentally a crisis of paper money and cannot continue without a major shift towards the kind of stability that a properly backed currency provides. This shift will come either when the relevant governments realise that such a resolution of their problems needs to be carefully managed – or it will be forced upon them if they continue to do nothing other than roll the printing presses, which will in the end precipitate a catastrophe of an order such that even they will not be able to deny the obvious.

I shall in the very near future be posting reviews of Detlev Schlichter’s Paper Money Collapse and James Rickards’s Currency Wars, which contain detailed analyses of how our present woes are the inevitable result of fiat money, and, in Rickards’s book, an outline of how a return to the gold standard should be managed.

Meanwhile:

Singapore bows before Gold

The world’s fourth largest financial centre is seeking to open itself to the gold market. Thus, it has decided that tax cuts will apply to precious metals including gold.

The Finance Minister Tharman Shanmugaratnam confirmed a month ago that an exemption would be made to the 7% tax rate, hitherto applied to gold and all other precious metals, in order to encourage growth in trade negotiations and in particular as an incentive for producers to participate in the market.

Singapore will thus be able to compete on an equal footing with other neighbouring markets open to the gold trade, the most important being Hong Kong where producers prefer to sell their bullion – free of tax. It is evident that having to pay a 7% tax in Singapore discourages investors. This measure is completely logical and fair since no kind of taxes should be applied to a safe haven investment – the latter being basically currency.

This reduction will be initiated as of next October – which prompted certain declarations to be made at the time this measure was made public, for example, `that an important producer has expressed a particular interest in opening a factory in Singapore in the light of the announced tax change’ and furthermore that there will be more gold trading companies present in the country.

Gold has risen sharply and this is why there is so much competition between countries which are putting in place strategies to meet current requirements. If Singapore wishes to compete with its Asian neighbours who have a significant advantage, it will be extremely advantageous for it to adopt this fully justified initiative which will enable the gold market to benefit from a fall in tax or an exemption. By maintaining high taxes, Singapore has risked putting off all potential investors – the latter being welcomed with open-arms in Hong Kong and Japan.

The Fourth Summit of the BRIC nations, a major political event.

This is a huge story and yet has gone largely unreported by the major western media. On the 29th of March in New Delhi, the Fourth Summit of the BRIC nations took place (Brazil, Russia, India, China).

“The BRIC nations (Brazil, Russia, India, China and South Africa) should no longer use the US Dollar in their bilateral exchanges. That is what was decided on Thursday the 29th March, 2012, during the Fourth Summit of leaders of these five nations in the Indian capital”.

Source: algeriedz.info and rian.ru

The following was decided during this meeting: an essential step was taken towards a “multipolar” global monetary system. March 29th 2012 will undoubtedly not be the date remembered in history as marking the end of the era of the Dollar. Nonetheless, the change is major.

Towards an overhaul of the IMS

We are entering a phase of disintegration of the International Monetary System as we know it. Our monetary system dates back to the Bretton Woods agreement of 1944 which was brought to an end by the Jamaican agreement of 1976 (this ended the gold standard).

So what will happen now? Stock markets are starting to fall because the issuing of European bond funds is doing badly or is disappointing (depending on your degree of optimism about the outcome of this policy), which is the case for Spain and now Italy.

What one must understand is that according to the current economic system it is the surpluses of some which finance the deficits of others, thus creating a balance. In other words, western countries are in a chronic deficit which has been, and I stress has been, financed by the major Asian exporting nations on the one hand (China and India) and the oil-producing nations on the other.

For the last few years, nobody was lending to western states (by this we mean the US and Europe) which now find themselves in an irreversibly compromised situation.

It is this lack of external funds which is pushing the central banks, the FED and the ECB to massively intervene in the markets. The only option that remains for us is indeed the use of the printing press and the creation of money with all the negative consequences that follow.

Though this Fourth Summit of the BRIC nations is a founding step towards the overhaul of the IMS this is certainly not the ultimate goal.

Ground-breaking events in international relations

Discussing the topic of the monetary system without mentioning the political dimensions would be a mistake. The future International Monetary System will be shaped by the international balance of power and alliances between the major players in the context of the fight for access to energy and agricultural resources and in the broader sense to raw materials. A strong axis is taking shape amongst the BRIC countries, and Iranian diplomacy is also far from insignificant.

The trans-Atlantic relationship remains strong despite the strains and divergences. Lastly, one should not imagine that the United States of America will let their status as world leaders slip away without a colossal “fight”. American policy has always been based on a simple concept: “America First”.

We are thus entering a new phase in the current crisis:

In 2007, the subprime crisis led to a financial and stock market crisis.

The financial crisis led to an economic recession.

The economic recession lead to massive state intervention in the form of stimulus packages which resulted in massive debts for these states.

The debt crisis can only lead to a major monetary crisis.

The monetary crisis (which is on its way) will lead to the restructuring of the International Monetary System.

And… the manoeuvres have already begun. The global repercussions will be deeply felt, as the International Monetary System is to the global economy what tectonic plates are to geology. We are touching upon the essential part. The tremors will truly be felt.

Will you be ready?

Is there a necessary connection between gold coins and politics? The short answer is: yes. Undoubtedly over the course of the last century, and beginning fairly early on, gold became, and still remains, a highly controversial political subject. The most influential economist of the century, John Maynard Keynes disparaged not just the gold standard but the metal itself: he thought wealth creation a sort of secular sin, and considered those who saved to be selfish. In 1933, President Roosevelt banned the private ownership of gold, and passed measures to confiscate privately held gold – something that may be about to occur in places as widely diverse as the European Union, Turkey and Vietnam, with a suspicion that the same is afoot in China.

Not surprisingly, these animosities towards gold have gone in tandem with the creation and expansion of the Welfare State, the political entity that is utterly bankrupt and is the prime cause of the financial crisis.

So, yes indeed gold, whether in the form of collectable coins or other types of investment, is very political indeed, but not just because it is seen as a store of selfish wealth, or, as its enemies derisorily call it, “hoarding”.

Ray Vicker in The Realms of Gold (published by Robert Hale, London, 1975) makes this very important point:

“The deeper one gets into monetary matters, the more one realizes that the whole argument about gold’s monetary role, or its inability to perform it, involves fundamental emotional attitudes toward man and his environment.

“Not only technical monetary systems are at odds when the chrysophilites and the chrysophobes argue money. This is cash versus credit. Sound versus easy money. A balanced federal budget versus deficit spending. Rugged free enterprise versus government economic management. A black-and-gray world versus utopia. The belief in sinful man meeting the conviction that man is essentially good. The idea that progress only comes through individual gain clashing with the contention that communal efforts spell forward movement.”

Gold, therefore, is not only a measure of prudence, it is also the summation of the political arguments of the last century – and even a repository of some of the profoundest truths of human existence.

Those who invest in gold are, in the long run, realists, as the following account by Vicker of what happened in the 1960s and 70s makes clear:

“When sense and nonsense are being evaluated the chrysophobes must explain how come they erred so much in the 1960s when they were denigrating gold and claiming that it was on the way out. It was in the 1960s and early 1970s that the great monetary battles involving gold were fought, with few people in the United States realizing what was happening even after the dollar experienced two devaluations. Briefly, the dollar, which had been ‘as good as gold’ for so long, no longer was as good as a thirty-fifth of an ounce of gold. And many people were discovering this fact.

“These people were termed ‘speculators’ through the monetary cyclones which erupted. Actually, they were ordinary businessmen, bankers and others who had sense enough to protect their assets. In politics, whenever anyone disrupts a pet project of the party in power, it is customary to tack some derogatory term onto the disrupters. The word ‘speculator’ has enough of an unsavoury connotation that it appealed to those in government who saw themselves as ‘defenders of the dollar’, though they couldn’t see the easiest method of preserving the whole system – a doubling of the monetary price of gold.”

Therefore, however unlikely it may seem on the surface that a numismatic website should feature regular political commentary, the central role that gold plays in human affairs means that its political and economic aspects need constant analysis.

Taxation in the modern state is an attack on wealth and its creation.

Which is illogical, because without wealth creation there can be no tax base.

The Welfare State was founded, and is foundering, on conundrums such as these. So perhaps it is not surprising to see a Tory Chancellor of the Exchequer engaging in what amounts to left-wing style class warfare.

George Osborne has just announced that he is “going after the wealthy tax dodgers”. As reported in The Daily Telegraph, Tuesday 10th April, he has been examining “anonymised” tax returns furnished by HM Revenue and Customs which show the completely legal measures that some very rich people have been using to reduce their tax bills, through what the Chancellor and the Revenue are pleased to call “loopholes”.

If the measures are legal, how can those who use them be called “dodgers”? (And see here for another example of the Revenue being rude.)

Osborne has cleverly turned the issue into a moral one and in doing so has introduced a novel legal concept on the hoof. These schemes of tax avoidance have been dubbed “aggressive” avoidance, as if by hurling an adjective about what is legal is suddenly rendered “un”-legal.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

And it is to be observed that such charities find more efficient and targeted ways of spending the money they receive through such donations. Can the government be expected, can the government even promise, to spend the money that it thus intends to steal as efficiently? Of course not.

One obvious practical problem that also looms is that many of these allegedly “aggressive avoiders” are foreigners, who settled here because of the way the tax rules had already been drawn up: they run businesses, they spend – in other words, they are already “contributors” in various ways to the economic life of the country. If the rules that encouraged them to settle here are changed, then they will simply leave, or if they stay, the taxes imposed on them will dry up certain expenditures, which will amount to much the same as if they had departed.

So the plans to deal with people who have done nothing illegal will have the opposite effect: less wealth creation, less voluntary “distribution” through getting and spending of that created wealth through the rest of the economy and more government waste – of human resources as well as cash…

Once upon a time, these things were done so differently: here is the opening paragraph of A. J. P. Taylor’s volume in the Oxford History of England, “English History 1914-1915”:

Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman. He could live where he liked and as he liked. He had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without any restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home. For that matter, a foreigner could spend his life in this country without permit and without informing the police. Unlike the countries of the European continent, the state did not require its citizens to perform military service. An Englishman could enlist, if he chose, in the regular army, the navy, or the territorials. He could also ignore, if he chose, the demands of national defence. Substantial householders were occasionally called on for jury service. Otherwise, only those helped the state who wished to do so. The Englishman paid taxes on a modest scale: nearly £200 million in 1913-1914, or rather less than 8 per cent. of national income.

Translated from an original article by Charles Sannat, Director of Economic Studies, AuCOFFRE.com, Paris

With regard to the economy, we have just gone through a “settlement” period with the Greek crisis. But in reality nothing has been settled. As far as Greece is concerned, we have gained a few months’ respite in so far as that country remains indebted to the tune of more than 120% of its GDP and nothing indicates that a recovery in the public finances can succeed. Having said that, we shall see within 12 to 24 months.

More worrying of course is the economic situation of Spain and Portugal, with here too monumental social damage in progress and popular demonstrations which are starting to become extremely significant in the fight against austerity plans. Beware. Spain is not Greece. Spain is a great country, with a great history and Franco’s nationalism only dates back to 1975, i.e. yesterday. As any expert on Spain will tell you, that country will never accept a Greek-style humiliation. The Prime Minister has in fact called a stop to certain reforms. And he is right-wing. Spain will not be able to find a way out of the economic, financial and property crisis with a strong euro which does not correspond to the intrinsic characteristics of its economy. The same applies to Portugal.

We should not forget our own country, France. If we recall, in 2010, there were 1.42 working people for every retired person. Retirements will end up by no longer being paid for because there is quite simply no more money. The problem is not in 20 years’ time. It is now.

France is also in bankruptcy. The Court of Auditors in France, chaired by the Socialist Migot, has stated that it is necessary to dispense with indexing pensions to inflation. With real inflation of 5% per annum, in 10 years’ time a pensioner will lose the equivalent of 60% of his purchasing power. That is the reality.

Lastly, let us remember the end is nigh atmosphere at the end of 2011 (that was three months ago). One really wondered whether the euro would have survived by Christmas. What has changed since then?  One simple but basic fact. Over-indebted countries (France and Germany) became even more indebted, to temporarily save a country like Greece from immediate bankruptcy. But it is the entirety of our economic system which is in an irremediably compromised position. Nobody is able to say so. Even less the “people” behind the system. That is self-evident.

The only truth is the following: infinite growth related to mass consumption thanks to abundant and cheap energy in a finite world is a system likely to fail.

• A gold purchaser does not buy gold to speculate.
• A gold purchaser does not buy gold to get rich.
• A gold purchaser does not have a view on the financial results of the next quarter.
• A gold purchaser buys gold because he or she has a fundamental analysis of the current dead end in which the global economy finds itself.
• He or she buys gold because each serious crisis ends up by finding a “monetary” resolution that is usually painful.
• He or she buys gold because gold has been the Vera Valor (true value) for more than 6,000 years whilst the euro barely celebrates its 10th anniversary.
• He or she buys gold because before 1914 the currency was gold; because in the inter-war years those who had given up gold got to know a period of hyperinflation which led to Nazism coming to power with the disastrous consequences that we all know.
• He or she buys gold because in 1971, the dollar was no longer convertible and only the banknote plate continued to function unsupervised.
• Above all, he or she buys gold because he or she knows, and it is a historical certainty, that nothing is immaterial. During the last century we saw five different international currency systems or one every 20 years on average.
• He or she buys gold because the current system will change. Regardless whether it is in six months or six years.
• Gold buyers buy gold because they know that whatever the outcome of change, they will have simply kept the value of their assets. And it is that which will make all the difference.

Everyone else is half-witted, rendered moronic through TV and lobotomized by the eternal Welfare State. They will suffer. But this last sentence should of course not be quoted. It is OFF the record as they say. And I will not even give a small coin (out of gold) to a tramp when he goes around begging with his small sign: “May I call upon your kindness, Ladies and Gentlemen, in helping a former paper salesman by giving a bit of change to eat and help me to remain clean.” These people are ruining French people, just as with the Russian loans, or the assignats, and with each devaluation… In short it is necessary to know history and fully understand that they do not support us. The people act as compensation for the rich (banks and the system).

That’s why gold is bought.

Gold is rising I am happy. Gold is falling I am equally happy because I can buy more.
A gold buyer is always happy:-)

It is a universal truth that revolutions devour their children: this is ruefully acknowledged in the cases of the French and Bolshevik revolutions – considered “good” revolutions, as if Robespierre or Lenin were somehow accidents.

The revolution that is now unwinding with a vengeance is the Welfare State. It may seem overdoing it to call the Welfare State a revolution, but consider: it is normal to discuss the Welfare State in terms of safety nets, short-term solutions to modest problems like seasonal unemployment and housing for the poorest, or, in a more wide-ranging version of the arguments for it, as a necessary bulwark against economic catastrophes such as the Great Depression.

Yet the Welfare State itself devours so many resources and applies them without the constraints of market discipline, with the accompanying bloating of the civil service to administer it, that this in itself constitutes a revolution in economic and political habits. Add to this that as a result huge numbers of people have come to perceive government as a necessary arbiter of the way they live and the provider of their needs: this is an even bigger revolution.

For example, many people live in council flats and houses and survive on benefits including housing benefit. What the benefits system effectually does, in consequence, is to deprive people of any assets whatsoever, including themselves. That is, those who live entirely at the provision of the state do not exercise the assets they possess in hands and brains to carve out a living for themselves – it is not worthwhile to do so, as they are better off on benefits than working. This is a major reversal of those virtues that Keynes reviled (as we have noted here): industry, thrift, independence, a proper self-respect.

What this means is that the Welfare State is the chief driver of what we may call “de-development” in the western democracies. This takes two forms: the destruction of economic facts (see the discussion here) and the culture of dependence on government. Both have their origins in the misplaced desire to assist the poorest in society. The subprime crisis, for example, has its origins in FDR’s “New Deal” and the creation of the government-backed savings and loans “banks”. The massive growth of these institutions in itself became a problem, compounded by the Clinton administration’s drive to force lenders to lend to the poorest African Americans, under penalty of being convicted and fined for “racism” if they did not do so – ignoring the economic reality that no-one’s interests were served by deliberately creating debt in households that manifestly could not afford to repay it.

The bundling of “toxic debts” into securities that could then be traded was the banks’ and the markets’ ingenious but short-sighted nostrum to deal with one consequence of government intervention that had gone badly wrong. It may have kept western economies afloat a few years longer, this juggling act by the banks – but the policy behind it seems to have been somewhat Micawberish, waiting for something else to turn up…

And what has turned up is the massive bankruptcy of the Welfare State, nowhere more obviously epitomised than in the eurozone. Entirely driven by the manifest fact that the Welfare State is unaffordable, as is bluntly stated by those who know this – those who don’t, harp on about services being “underfunded”, as if unsustainable taxation only needed to become even more unsustainable and the problem would be solved!

As James Bartholomew points out in his crucial book “The Welfare State We’re In” it is only in the Welfare State that the poor are taxed – in ultra-capitalist Hong Kong the poor pay no taxes because the threshold on earnings before taxation kicks in is high, meaning that everyone has a chance to better themselves.

It should be more widely understood that bankruptcies are a sign of a healthy economy – stripping out ill-conceived or unworkable economic projects. This is the core of the eurozone crisis: what are we being told doesn’t work?

When Debt’s Called Credit (1), (2) and (3) looked at the follies of the modern mortgage. In the following piece, Howard R. Gray, Chartered Surveyor and Barrister at Law of Lincoln’s Inn and the Middle Temple, discusses the alternatives to foreclosure.

Why should mortgages be hostages to fortune?

The concept of a loan secured upon real estate has been a standard feature of our society: Common law systems have used real estate as a fundamental element of wealth. The engine of society must be production, distribution and sale of goods and services, and these need to be financed. Loans come in two main varieties, secured and unsecured; as would reasonably be expected, security is preferred and thus the mortgage provided the very best security for commercial transactions.

So what exactly is the mortgage? The dead pledge is that the real estate is held in a shell form by the home purchaser until the loan is paid, while ownership in real estate terms is recognized to be in the hands of the owner of the property. However, the truth is the mortgagee has the power in theory to reclaim his money should the mortgage payments fail to arrive on time. We’re used to the situation, though there have been very serious problems with the way mortgagees choose to bundle mortgages, treating them as negotiable securities. This has become such a problem in the U.S. that situations have arisen where mortgages are so muddled administratively that it is frequently impossible to know who has title to the income stream as mortgagee.

Foreclosure and Perpetual Institutions

Let me tell you what happened during one of my property cases many years ago. My client owned two properties in London, one in Camden Town and one further north towards Alexandra Palace. He was behind in his payments on the Camden property and found himself in court in foreclosure proceedings:  the usual method was to repossess the property, sell it cheap and recoup the difference, if possible, from the mortgagor.

I thought this innately unfair and frankly inequitable. I therefore broached the perpetual nature of banks: the mortgagee (a recently converted building society) took great umbrage at this idea. The question was simply: if a bank is a perpetual institution why is it selling property on the cheap when it could quite as easily hold onto it until the market turned as it always does, recoup the loan plus any ancillary expenses and, of course, hand back the difference to the mortgagor. Does this not appear to be a thoroughly equitable solution to a very unpleasant financial situation? The response was most alarming: defending counsel was spat upon by the solicitor for the bank!

Moral of the story

Banks generally are perpetual so long as they are properly managed. The truth is that banks being in the real estate business should be better equipped to be in that market during a recession or depression. Writing off loans, attacking mortgagors’ equities, often negative or thoroughly underwater during a recession, results in spectacular losses. Most mortgagees (the banks) ignore the benighted borrowers unless so large they threaten the bank’s viability: so why not immunize against such threats?

If Freddie Mac and Fannie Mae had been disenfranchised from foreclosure in the first instance and had been made to stand back and look into the future and consider the possibility of managing underwater real estate, loans would have been factored to take that possibility into account. Given that recessions come and go and that banks are perpetual entities, by smoothing out repossessions over time very large elements of risk in real estate finance would disappear.

Since banks in any event hold onto properties in excess of 20 to 30 years why should they be shy of holding onto a property for three or four years to await a return to normality during a recession? While it is true that such a procedure might tie up funds, nevertheless a smoothing process which prevents a precipitous collapse in value through inimical short-term behaviour can only improve investment strategies for lender and borrower let alone the nation.

It would behoove the banking system to come up with this sort of arrangement rather than ask the government to do it for them. Now that gold and silver are becoming increasingly valuable it is high time to back up this process by ensuring some more rational security is built into the real estate market. By way of example, multigenerational mortgages exist in France, meaning that longer time horizons do not have to be a problem even for the shorter terms we are used to: this suggests that there are means of ensuring that foreclosure procedures could be smoothed out, as well as ensuring that the market waves are taken into account ab initio when the mortgage is granted.  

Money out of nothing – or gold?

Governments which overspend do not have a clue how to operate other than by creating money out of nothing or raising taxes. By having a mortgage market that can ride out economic waves there would be potential for underwriting the real economy as opposed to the fantasy economy of economically predatory governments. It won’t prevent government from fiscal irresponsibility but it might slow down the crash a while.

Introducing some form of gold valuation as an ancillary method of making real estate credible and tradable, should the currency collapse completely, ought to be carefully considered: this is a question of innovative contract design. Revaluing English real estate in the rental sector with regular rent reviews has, for example, been largely successful in dealing with inflation. If value is going to diminish significantly over time because of recession, why not make allowances for it and use some form of valuation based upon gold, coupled with foreclosure extension. This could be a short term method for the duration of a currency collapse.

Linking the value of real estate to gold through an underwriting formula is not an unreasonable proposition. Whatever the dollar or pound price of a good such as a Saville Row suit, pricing it in gold does not change much in the simple weight of gold. Real estate would work in the same manner: while for the most part the price of the real estate may go up or down, nevertheless, there would remain a component of the price that wouldn’t change much in real value over time, although it may change by significant amounts when measured in fiat currency terms.

Sustaining value

The simple conclusion is that banks are perpetual entities: they will be around after all the mortgagors have passed out of this world. It is not unreasonable to suggest that foreclosure should not entail the complete destruction of a loan contract. Given that recessions, depressions and booms are the norm in real estate as they are in the rest of the economy, nor should it be unreasonable to take account of this nature of the market by using a smoothing process to deal with a failure of the mortgagor to make his payments in full and on time. Since so many mortgagors have considerable equity in buildings this situation should have some form of protection in the loan recovery process. The market will develop ways to handle a creative process to allow a mortgagor to at least recover his investment just by allowing the market to turn back to an upward move in value.

By sustaining the value of buildings and preventing mortgagors from defaulting while awaiting a market turn coupled with creative processes to handle this there will be far fewer buildings coming onto the market in a distressed condition thus destroying overall building values during the pit of a depression.

At the end of the post on the U.S. Federal Reserve’s non-existent gold I quoted C.H.V. Sutherland on paper money, which he points out  ”is not money at all, in any true sense, but an extension of credit”, hence “credit currency”. The latter term now of course encompasses electronic money, the device which makes quantitative easing so much easier.

The idea that paper or electronic money is really nothing more than an extenstion of credit, a promise to pay, raises an interesting point: to borrow money is in effect to take out a mortgage on the paper credit you hold and earn, that is, to extend credit on the basis of credit currency earnings is to extend credit on credit.

This raises the issue of trust that lies behind such a system to the level of the most important practical as well as moral feature of that system, and potentially compromises any sense of value that the monetary system embodies.

This post is by way of reflecting on some basic ideas about value and how it arises and what systems best embody it and allow it to function. These are introductory ideas merely, and the examination of this problem will continue in later posts, embracing history and anthropology as well as economics.

Hernando de Soto (whose work has already been referred to here and here) makes the interesting claim that we are only beginning to understand the nature of money, what brings it into existence and what supports it. His work in the extra-legal economies of the developing world has thrown up this question in sharp relief. His discovery that the poor, some 87% of whom live and work outside any formal legal structure, are camping on assets worth trillions (the value of which cannot be realised because of the absence of workable legal systems that realise title to those assets), raised the question of how assets are dissociated from their potential value.

There would appear to be a formula that runs from assets to value to capital to money, and that the jump from the first to the second of these, which in turn gives rise to the latter two, is a jump over a very large gap. That jump is taken very much for granted in the developed world because we do it all the time without necessarily realising it, so secure are our legal arrangements; but the gap effectively immobilises the poor in developing economies. They have assets in the form of unrealisable savings, which renders them, therefore, essentially worthless.

There is an interesting anthropological speculation arising from the idea that without property there can be no money system: that is if the formula suggested above turns out to be a true and fruitful one, then the common understanding that things such as cowrie shells and cattle were a form of pre-currency is a misunderstanding of the functions of money. That is, they may have been no more than a more highly stylised form of bartering and possibly, again against previous understandings, a less efficient one, not a rationalisation that led in time to formal money currencies.

If money only arises against a property system, and that in turn is the result of the development of formal legal systems, there can be very little connection between any system of bartering and formal money. The idea that money is a realisation of value inherent in property means currency is the result of a property holding system which, to be realisable, must have clear title. Then, on the basis of that title, the value of the asset can be ascertained and then realised as capital which then has a representational form as currency. That is, money as a representation of value, as a means of realising that value and being a store of that value is the result of a legal system that can render property fungible – that is, that the asset can be more than one thing.

This, of course, means that property is a form of savings, and that savings are therefore at the root of money. As we have seen in earlier posts, savings have been under attack throughout the twentieth century, with Keynes as a cheerleader of that attack, an attack which has been redoubled recently with quantitative easing and with measures against the purchase of gold being enacted in Europe. Even George Bernard Shaw saw through the paper money promise and recommended the purchase of gold! 

The failure to realise the necessity of savings and their wider functions in a workable economy is at the root of the financial crisis.

Those wise Cantonese grandmothers in Hong Kong understood the vital nature of savings – and, moreover, the best way to store them as gold.