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Gold Trends Analysis

Tuesday, December 24th, 2013

Gold Medium Term and Resistance Line
Long Term Trend ~ Neutral since 4/12/13 @ 1501 ~ Moving averages 1560 – 1561
Medium Term Trend ~ Bearish since 4/5/13 @ 1575 ~ Moving averages 1321 – 1370

From a medium term perspective, as long as price is below the UPPER RED LINE near and below the moving averages, the overall medium term trend is still down. We need a close above the moving averages in order to neutralize the downtrend and take it out of bearish mode. The moving averages have now come down to 1321-1370 as we enter this week.

The potential for the year end to be another low cycle has not been eliminated.   We’ve got to get above the averages and the red line in order to become more favorable towards the medium term.  Last week we lost the 1220-1222 area and came within 8 dollars of our target (1180) if broken.

If you look at the end of 2008 you see that the green channel line was broken right at the crash low.

If the lines do break the June lows on the downside the next support is the dotted line near 1100 and then the 1000-1040 area where the white line crosses.   The key for gold is for price to get back above 1370 on a weekly basis for the medium term trend to get out of this bearish mode.  Support is getting thin as we’re at the weekly trend lines.  The June lows can still be taken out if those lines give way but there is a weekly support at 1172 on a Friday close basis that would be the next point to watch for support before the line near 1000 on the chart comes into play.


Gold Trends Analysis

Gold Trends Analysis

Ext : http://www.goldtrends.net

GOLD: SAVINGS AND PENSIONS

Thursday, June 13th, 2013

By Mark Rogers

“Save for a rainy day.” The old adage, but does anyone do so nowadays?

“Saving” is much more likely to mean pensions nowadays, the likelihood of ever having one, and the certainty, if one has been saving towards one, that the recent and continuing bouts of Quantitative Easing (QE) have eroded it. “As much as £30,000 could be wiped off a £100,000 pension pot.” (This is Money, November, 2012)

But QE is only inflation speeded up; paper money is inflationary in and of itself over the long term, and with high tax regimes thrown in, no savings are safe. Those who remember the late 1970s will recall the prudent people who realised that money sitting in the bank was money evaporating, so they reasoned: why not spend it? Slap up meals, theatre tickets, luxury holidays – use it now before it is gone. During the Weimar inflation, industrial wages were eventually paid on the hour, with workers rushing out to spend them before they lost such value as they had by the second.

Converting your savings into gold sounds good, but – those ingots?? Is gold for the ordinary person?

Connect to LinGold.com (either click here, or on the box below this article) and find out. Signing up as a Member of the LinGold Savings Plan at a minimum purchase of 1gm of gold per month gives you a foot on the gold savings ladder: the cost of 1gm of gold compares favourably with the cost of, say, travel passes on London transport. Figures for 2012 on average household expenditure give the highest weekly cost as transport at £65.70, with half of that going on running a car; weekly expenditure on groceries averaged £44.20, with 80% being spent at supermarkets – doubtless because of the loyalty schemes and loss leaders that help keep prices down, as well as all the other prices wars that the supermarkets are more or less permanently engaged in.

Gold therefore, if saved for nothing other than the rainy day of retirement, compares very well with other necessary expenditures. After saving money on the weekly shop at the supermarket, it would be well to consider putting the balance into gold – and thanks to the unique LinGold.com Savings Plan, you too can do it! The democratization of gold is here to stay.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD SOVEREIGN: THE WORLD’S MOST SOUGHT AFTER GOLD COIN

Thursday, May 30th, 2013

By Mark Rogers

The Gold Sovereign is a highly collectable investment coin and the oldest coin struck by the Royal Mint. It is perhaps the World’s most famous gold coin and is the most widely traded semi–numismatic gold coin. The Sovereign is 22 Carat and is a highly collectable investment coin.

It was first minted at the order of King Henry VII in 1489; the modern version first appeared in 1817 with the now famous image of St George slaying the dragon engraved on the reverse. Today’s sovereign contains 0.235421 ounces (7.315 grams) of gold and is highly sought after throughout the world.

Henry VII

On October 28th 1489, Henry VII issued instructions to the Royal Mint to strike “a new money of gold”. Gold coins had been in circulation for the previous 150 years, this was the largest yet both in size and volume. It had yet two other intriguing features: while being large, it was also very thin, with a diameter of one and a half inches.

“The king is seated on a throne of elaborate design which fills the field of the obverse; the reverse type is the same which he adopted for the ryal, but usually the work is more crowded, a fleured tressure being added around the rose, and lions and fleurs inserted in the small intervening spaces. The coin, in spite of the somewhat restless effect produced by the massing of detailed ornamentation on the reverse, is a wonderful creation of Tudor art; the compositions of the throned figure, adapted most skillfully to the circular field, and the powerful handling of perspective to defeat the limitations of the shallow relief which was necessary in the engraving of the dies for striking so thin a flan, show a complete mastery of technique combined with the highest artistic inspiration.” (Coinage, by R.H. Dolley, Assistant Keeper of Coins and Medals, British Museum, in Lane Poole, Austin: Medieval England, Volume I, Clarendon Press, Oxford, 1958).

The coin weighed 240 grains and had a current value of twenty shillings. The king is in full coronation regalia on the obverse, and the reverse shows the royal arms against a double rose symbolizing the union under Henry VII of the Yorkists and the Lancastrians after the turmoil of the Wars of the Roses.

It was named a Sovereign and it is interesting to speculate why, the Wars of the Roses being an indication. England had been long troubled by the conflicts between the nobles and their contending champions for the crown. A weak Henry VI who could not rule France and barely controlled England was usurped by Richard III, who in turn was beaten at Bosworth Field by Henry VII, who was duly crowned king as victor in battle. However, Henry did have legitimate claim: he was Earl of Richmond in his own right, and claimed descent from the Lancastrian side, while politically he was a Yorkist. He was a powerful ruler, aided in this by his subjects who craved a quiet life and the dissipation of the nobility, many of whose lines died out on the battlefield as male heirs perished, often enough upon capture and execution.

While it is true that plots and subterfuges continued behind the scenes of Henry’s rule, the country at large was at peace and united for the first time under his reign. This imposing gold coin, emblazoned with the image of the victorious sovereign was perhaps intended as a symbol of how he had and was to continue to rule, hence the name. It set a seal on this the reign of the first Tudor, which was to be consolidated in the reign of his son, Henry VIII.

“Large and handsome, it was clearly intended to augment the dignity of the king and to propagate a political message of stability and prestige rather than to fulfill any commercial or domestic need. As such, it was struck in turn by each of the Tudor monarchs, its issue coming to an end early in the reign of James I. A Sovereign was not to appear again for 200 years.” (The Royal Mint) (Clicking on this link will not only give readers the Royal Mint’s perspective on its oldest and most famous coin, but a view of the obverse and the reverse of Henry’s Sovereign: a coin that richly merits the fulsome description given above by Assistant Keeper Dolley.)

The first modern Sovereign

Gold sovereigns were re-introduced as legal tender in 1817 as part of a major coin reform conducted by the Master of the Royal Mint, William Wellesley Pole.  A young Italian engraver, Benedetto Pistrucci, was appointed to create the reverse design of the new sovereign; he realized the beautiful image of St George slaying the dragon.  This design has been varied over the years but is essentially the same.  As a testament to its greatness, it still appears on sovereigns today.  Other designs for the reverse designs have appeared at times, during the reigns of William IV, Victoria, George IV and Elizabeth II.  A royal shield, as used on the 1489 sovereign, has often been used in various different formats.  The obverse of the sovereign followed the trend established for the original sovereigns and portrayed an image of the reigning monarch which remains the case up until today.

Gold sovereigns were withdrawn from circulation at the start of World War I in 1914, although production continued at the Royal Mint until 1917.  They continued to be struck in other mints of the British Empire but in lower quantities than before.  Sovereigns not produced at the Royal Mint in London carry a mintmark to show which mint produced them.  Production of sovereigns at other mints stopped in 1932.

In 1957 the Royal Mint began producing gold sovereigns once more, in part to meet world demand and  in part to prevent counterfeit production – which became rife after the Royal Mint stopped production in 1917.  They were not however reintroduced into everyday circulation.  Prior to 1979 only gold bullion coins had been issued and it was in this year that the first gold proof sovereigns were issued.  Between the years 1983 and 1999 the Royal mint ceased producing gold bullion sovereigns and only minted gold proof sovereigns.  Gold bullion sovereigns were re-introduced in 2000.

1989

To celebrate the 500th anniversary  a special 500 commemorative design was produced, showing Queen Elizabeth II seated facing on a throne. This was only issued as a proof and demand  has grown steadily over the past few years, because as a single-date type coin, it is in demand by both date collectors and type collectors.

2005 – New Modernistic design

In 2005, the Royal Mint issued another new sovereign designed by Timothy Noad a herald painter at the Royal College of Arms actually a modernistic version of Saint George slaying the dragon with the shield as a focal point. This coin was issued in both normal circulation (bullion) and proof versions for 2005 only

2007 – 2010

The Royal Mint have used re-cut dies to take the design  back almost two centuries to portray Pistrucci’s St. George and the dragon in its neo-Classical glory

Types of Sovereign

Aside from the full sovereign, the Royal Mint today produces the following sovereigns in gold proof and gold bullion versions for general sale: quintuple (£5) sovereign, double (£2) sovereign, half sovereign and for the first time ever, 2009 saw the general release of a quarter sovereign.

Sovereign designs and dates

Monarch Obverse design Reverse design Dates
George III Laureate head St George and the dragon 1817-1820
George IV Laureate head St George and the dragon 1821-1825
George IV Bare head Shield 1825-1830
William IV Bare head Shield 1831-1833, 1835-1837
Victoria Young Head Shield 1838-1839, 1841-1866, 1868-1887
Victoria Young Head St George and the dragon 1871-1887
Victoria Jubilee Head St George and the dragon 1887-1893
Victoria Old Head St George and the dragon 1893-1901
Edward VII Bare head St George and the dragon 1902-1910
George V First Type (large head) St George and the dragon 1911-1928
George V Second Type (small head) St George and the dragon 1929-1932
George VI Bare head St George and the dragon 1937 coronation proof set only
Elizabeth II First portrait St George and the dragon 1957-1959, 1962-1968
Elizabeth II Second portrait St George and the dragon 1974, 1976, 1978-1984
Elizabeth II Third portrait St George and the dragon 1985-1988, 1990-1997
Elizabeth II Sovereign portrait Shield and Tudor rose 1989
Elizabeth II Fourth portrait St George and the dragon 1998-2001, 2003, 2004, 2006-2009
Elizabeth II Fourth portrait Shield 2002 Jubilee
Elizabeth II Fourth portrait Modern St George and the dragon 2005

Technical specifications of modern sovereigns (post 1817)

  Quintuple sovereign Double sovereign Sovereign Half Sovereign Quarter sovereign
Purity 22 carat gold 22 carat gold 22 carat gold 22 carat gold 22 carat gold
Weight (grams) 39.94 15.98 7.99 3.99 1.997
Diameter (mm) 36.02 28.40 22.05 19.30 13.50
Actual gold content (troy ounces) 1.1771 0.4708 0.2354 0.1177 0.0588

Gold sovereigns: to invest or not to invest?

As one of the oldest coins in the world the British gold sovereign is highly sought after by both investors and numismatists alike.  As with all gold coins, the price of sovereigns fluctuates with the price of gold because of the gold content of the coin.  However the price of sovereigns is not entirely based on its gold content.  Gold sovereigns generally fetch a higher premium than the price of gold for the same gold content.  For example the 2009 gold proof sovereign retails at about £299 for 0.23 ounces of gold.  The current price of an ounce of gold is around £680 therefore the price for 0.235 ounces is around the £160 mark.  Therefore the 2009 sovereign is worth almost twice as much as the price of gold.

The premium of a sovereign obviously depends on its quality and whether it is easily available or not.  Some sovereigns fetch a much higher premium than others.

While there is no official grading system in existence, sovereigns are generally graded in the following manner in the UK:

FDC/proof  – perfect quality

UNC – uncirculated

EF – extra fine

VF – very fine

F – fine

(see article on quality of gold coins)

Whilst older sovereigns were produced in much larger quantities than those produced today it is much more difficult to source a good quality sovereign from these times.  Sovereigns from the reigns of George III, George IV and William IV are extremely rare in good quality.  EF quality coins can be found but are quite rare and as such would fetch a high premium.  FDC and UNC coins are extremely rare for these periods and when sold fetch very high premiums.  A George IV sovereign from 1825 made £14950 in a sale in March 2004.  Early Victorian shield sovereigns are also highly sought after and therefore an EF quality coin would fetch a high premium whilst extremely rare FDC and UNC coins would fetch incredibly high premiums.  Later Victorian sovereigns are less rare than the earlier coins in good condition, however they are again fairly rare in top condition therefore sovereigns of UNC and FDC grade would fetch a high premium.

Edward VII and George V sovereigns are also fairly easy to obtain in EF condition and were produced in very large numbers so do not fetch such a high premium.  As with later Victorian sovereigns, it is more difficult to find UNC and FDC grade coins and these would therefore fetch a higher premium.  No sovereigns were issued for Edward VIII, however a few official pattern coins were produced.  If any of these were ever to be sold they would fetch an incredibly high price due to their extreme rarity.  During the reign of George VI no sovereigns were issued apart from a very limited amount of collectors sets to commemorate his coronation.  This was a gold proof set and as such can be found today in FDC condition.  This set would today fetch around double the price of a 2009 4 piece gold proof set.  When gold sovereigns were reintroduced during the reign of Elizabeth II they were produced at much lower quantities than for other monarchs as they were no longer in everyday circulation.  However despite the fact that much fewer coins were produced they were all of FDC or UNC quality.

The majority of coins were released during Queen Elizabeth II’s reign and are not difficult to find in prime condition.  For this reason they fetch a lower premium than UNC or FDC coins from earlier periods, although they are still worth investing in as they do fetch a higher premium than the price of gold and are likely to become more sought after in the future.

Certain sovereigns are much rarer than others; some that are worth looking out for include:  1817 sovereign – the first modern sovereign and any other UNC or FDC coins from the reigns of George II, George IV and William IV (or even EF graded sovereigns from these periods), 1838 the first Queen Victoria sovereign, 1841 the rarest Queen Victoria sovereign, 1917 London minted sovereign (very few in existence as it was the year London stopped producing sovereigns) and out of Elizabeth II sovereigns the 1989 special commemorative 500th anniversary sovereign.   British sovereigns are an excellent investment choice and will continue to be so. For as long as Britain keeps its currency, it seems inevitable that the Royal Mint will continue issuing sovereigns every year for collectors, investors and enthusiasts.  However, if the UK joined the Euro would this signal the end for this iconic coin? If that were the case gold sovereigns would surely become more sought after than ever and consequently represent an even greater investment opportunity.

How to spot a fake

Many fake sovereigns have been produced over the years.  To avoid buying a fake you should always buy from a reputable source such as LinGold.com.  We have however, created a list of key things to look out for to avoid buying a sovereign forgery:

  • The feel of the coin: fakes are often very smooth or can have sharp edges
  • Be wary of coins that are too shiny with blurred details. It’s a sign that they have been cleaned and, therefore, some gold has been worn away
  • Dates: check for missing dates or check that sovereigns were actually produced in the year stated in the design shown
  • Mintmarks: if there is no mintmark check that the London mint produced sovereigns in that year, if there is a mintmark check that the mint in question produced sovereigns in that year
  • Weight, size and depth: check these correspond with official figure

GOLD STANDARDS

Wednesday, May 29th, 2013

By Mark Rogers

The proposition was examined in the last posting, Gold is Money, that gold is not a commodity or at least not in the sense that other commodities are (a distinction that will be looked at in a later posting). This proposition leads to an important observation, that gold is a unit of measurement, but an even more momentous observation arises from this: that whether there exists a gold standard of the classic kind (England from the end of the Seventeenth Century up to 1914, for the world at large 1870 to 1914) or the more controversial gold exchange standard of the interwar years, or the patched up standard of Bretton Woods, as a unit of measurement gold always provides a standard.

As long as gold remains largely in private hands and circulates, its exchange value determined by the markets, with banks holding a modicum of gold reserves, then gold will act as the benchmark against which currencies are measured, its prime function in a world of debased paper currencies to tell us what those currencies are actually worth, a bellwether that provides the information we need about how we manage our assets and how we exchange them for the safe haven.

There is another aspect of this, therefore, that throws up an interesting answer to the question that Turk and Rubino ask in their book discussed in “Gold is Money”. They point out that all paper currencies have collapsed and the reaction of governments has been, perhaps to confiscate wealth, perhaps to tighten currency controls, to generally adopt measures limiting the freedom of action of their subjects.

But this time round, it may not be governments who will take the initiative. The likelihood that the US government will confiscate gold as it did in 1933 must be set against the far less trusting, more cynical attitude of the general public towards government.

Gold has been remonetized in Utah, the Swiss People’s Party recently won the right to a referendum on the Swiss National Bank’s ability to sell off gold reserves, and the same party is arguing for a Swiss gold franc as circulating currency.

More and more people are realising how gold may be managed in such a way that investors are, in effect, re-inventing a free gold standard for the conduct of their monetary and financial affairs. Another example of a spontaneous order emerging? Let us hope so.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

The Half-Vera Valor, an accessible gold coin investment

Wednesday, May 22nd, 2013

Half-Vera Valor - Obverse

Have you heard about a Half- Sovereign? …. or a Half-Napoleon? …. maybe even a US $10 gold coin? Here we would like to present you a completely new gold product for investment.: the Half-Vera Valor. An investment quality, pure gold coin made from Clean Extraction source that is adapted to suit all budgets.

“Clean Extraction” gold

The gold used to mint the half Vera Valor conforms with the criteria of the Clean Extraction charter because it is pure gold  (999 ‰) that has been recycled from excess components of the Swiss watchmaking industry.

Unlike silver which is complicated and onerous to recycle, gold can be recycled an infinite number of times.

The recycling of the Half Vera Valor gold complies with the Clean Extraction charter in that it actively and strongly encourages the reduction of emissions that are harmful to the planet. Recycled gold helps preserve the environment because it reduces the need to rely on methods of mining and extraction that are often carried out in the most difficult conditions and give rise to toxic pollutants.

No heavy machinery or pollutants are used and there are no extraction processes required with recycled gold and any harmful products associated are strictly limited. Recycled gold has considerably less impact (if any) on the environment compared to the normal mining operations required for extraction.

Recycling of gold is like having an above ground deposit that today provides more than half of the gold required by industry in order to manufacture jewellery and investment gold products such as bars and coins.

As a reminder, in order to extract 1 ounce of pure gold from the ground normally; takes 75000 litres of water, emits 600 Kilos of CO2, 25 Kilos of Sulphur Dioxide, consumes 220 litres of fuel and produces 30 tonnes of mining waste.

Recycling gold is one way to combat the problem of ever-rarer and diminishing sources of gold. Mining production is stagnating and yet year on year demand for gold never ceases to increase.

Recycling gold is the only real solution to keeping gold prices reasonable and thus avoiding the need to use more and more invasive, difficult and destructive mining practices which would have detrimental effect on the environment.

Gold is THE clean precious metal of the future as it can be recycled at infinitum!

Quality partners and LBMA recognition

Partners chosen to participate in the conception and production of the Half Vera Valor:

Allgemeine (part of the German group Umicore), therefore the hallmark is recognised by the LBMA, they produce the “blanks” for the Half-Vera Valor (round blank discs of pure gold that are future Half Vera Valor and are ready for minting).

Huguenin is the Swiss private mint responsible for the minting of the coins.

More than just a smaller version

Careful, the Half-Vera Valor is more than just a half of a Vera Valor; it’s the “half sister” with its own unique identity. It is not merely a sub-division of the one ounce Vera Valor.

The fact that it is made from recycled gold is one point but also the method and technique of manufacture by striking only is different, even if the same DNA runs through its veins!

Still produced exclusively by AuCOFFRE.com and LinGOLD.com, the Half-Vera Valor is smaller and more intricate to mint. The complexity of its manufacture arising from its smaller size, follows in the footsteps of similar illustrious coins such as: Half Sovereign, Half Napoleon and $10 US… which all have an elevated premium compared to their larger format.

Because they are smaller and less expensive, they are in effect the type of coins that are always in demand during periods of crisis and therefore their premium can rise significantly. This makes them excellent products for investment with an incomparable leverage effect.

Taxation

Based on its characteristics and specification, the Half Vera Valor qualifies as investment quality gold which is exempt from VAT throughout the European Union.

The Half Vera Valor is considered as bullion bar-coin because it bears the required markings of a piece of Good Delivery bullion and is struck as “money”* into a coin.

The Half Vera Valor is therefore an ideal coin to save as protection against crisis, a coin that can be easily resold whenever you need, without VAT and the integrity of being an ethical gold product.

*refers to the orientation of the strike and between the faces of the coin.

Half Vera Valor - Reverse

Description

The Half Vera Valor possesses some seductive qualities and apart from being beautiful, it is a dense coin with a very pure fineness.

Weight: ½ ounce or 15.55175g

Diameter: 26mm

Thickness: 1.6mm

Fineness: 999‰ pure gold

Hallmark : Allgemeine

Striking tool orientation : 6 o’clock, struck as money

Edge: reeded

Mint quality: High proof

Taxation type: investment quality bullion, VAT exempt

Strengths

–          A beautiful product that has every chance to follow its predecessor the Vera Valor which has become the most sold 1 Oz gold coin in France since Dec 2011.

–          Unforgeable – the QR code struck into the reverse of the coin plus the laser engraved serial number on the obverse make this product  extra secure and even more attractive to investors seeking certainty of product quality.

–          An ethical gold investment that avoids any negative effects on people or environmental

–          VAT exemption is an attribute

–          A format easy to hold in the hand, a value readily accessible to all and easily imaginable in daily use day should it become necessary.

Website: VeraValor.com

THE GOLD SPOT: GOLD THE REFERENCE POINT

Tuesday, May 14th, 2013

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from CURRENCY WARS: THE MAKING OF THE NEXT GLOBAL CRISIS by James Rickards, Portfolio/Penguin, New York, 2011

The continuation of the trend toward a diminished role for the dollar in international trade and the reserve balances begs the question of what happens when the dollar is no longer dominant but is just another reserve currency among several others? What is the tipping point for the dollar? […]

Barry Eichengreen is the preeminent scholar on this topic and a leading proponent of the view that a world of multiple reserve currencies awaits […] the plausible and benign conclusion that a world of multiple reserve currencies with no single dominant currency […] this time with the dollar and the euro sharing the spotlight instead of the dollar and sterling. This view also opens the door to further changes over time, with the Chinese yuan eventually joining the dollar and the euro in a coleading role.

What is missing in Eichengreen’s optimistic interpretation is the role of a systemic anchor, such as the dollar or gold. As the dollar and sterling were trading places in the 1920s and 1930s, there was never a time when at least one was not anchored to gold. In effect, the dollar and sterling were substitutable because of their simultaneous equivalence to gold. Devaluations did occur, but after each devaluation the anchor was reset. After Bretton Woods, the anchor consisted of the dollar and gold, and since 1971 the anchor has consisted of the dollar as the leading reserve currency. Yet in the post-war world there has always been a reference point. Never before have multiple paper reserve currencies been used with no single anchor. Consequently, the world […] is a world of reserve currencies adrift. Instead of a single central bank like the Fed abusing its privileges, it will be open season with several central banks invited to do the same at once. In that scenario, there would be no safe harbour reserve currency and markets would be more volatile and unstable.

Comment: It is hard to fathom such an unrealistic expectation of lead currencies, swilling about supporting each other and every other currency, as being somehow optimistic and benign; Rickards is not saying that he thinks they would be by using these terms, he is pointing up the authors of these expectations as hailing them as benign: what could go wrong, we’re all good chaps…aren’t we?

Rickards’s view is of a piece with Gustav Cassel’s point (quoted in Gold on the Outbreak of the Great War), that “the responsibility for the value of the currency, in cases where the gold standard has been abandoned, must exclusively lie with those in whose hands rests this provision of the means of payment.” The point being that this is an astonishing level of trust to put into the institutions of government, not just moral trust, but a trust that the necessary calculations, observations and measurements can be made consistently and continuously to keep things afloat and stable. The euro is a very good object lesson that both these sorts of trust are misplaced, which is putting it mildly…

From an Austrian School point of view, the goodness of the humans in charge is irrelevant: it is the utterly impossible nature of the task that is the stumbling block. But it is just there, of course, that the immoral temptation to swing things to the state’s advantage comes to the fore – again as shown up by the euro.

Where there is no reference point, no anchor, no solution is feasible… which is why we keep getting  more of the failed nostrums. Which leads on to a very interesting observation: why taxes must go up in an economic world divorced from the gold standard.

Politicians are incapable of managing monetary affairs (see the article linked to below on The Mess We’re In: Why Politicians Can’t Fix Financial Crises). The gold standard prevented them by and large from acting on economic hubris. Unconstrained by gold, bewildered by their failures, corrupted by their power, they turn to the one nostrum that lies unfailingly to their hand: taxation. That is why it is found important at times of high and progressive taxation to denounce “avoiders” as selfish cheats who won’t do their bit for their fellow citizens (see my The Moral Dilemma at the Heart of Taxation). So the gold standard not only prevented printing money, it also held down taxation. Another reason to vote for gold!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

P. T. BAUER ON PEOPLE, GOVERNMENTS AND MARKETS

Thursday, January 31st, 2013

Some commonly encountered criticisms of the market system ignore the simple fact that market participants are people. Human beings and their arrangements cannot be faultless. It is therefore not surprising that objectionable phenomena are to be found in the market order, including the operation of pressure groups, the contrivance of scarcities, attempts at coercion, and well-authenticated instances of fraud. But even when they are numerous, such phenomena do not serve as a valid basis for replacing the market by a controlled economy. In recent years, detractors of the market order have made much of instances of political pressure, or of fraud by market participants. Would it make for a better society if more people with such habits were in the government sector and thus possessed the coercive power which goes with it?

From Reality and Rhetoric: Studies in the Economics of Development, Harvard University Press, Cambridge, Mass. 1984

“One of the most distinguished development economists in the world, and undoubtedly the foremost conservative one.” Prof. A. K. Sen, New York Review of Books

P. T. Bauer was ennobled as a life peer by Mrs Thatcher in 1982

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

HUMAN ACTION AND HUMAN EFFORT

Tuesday, January 22nd, 2013

By Mark Rogers

We have seen how the Deutsche Bank analysts who wrote Gold: Adjusting for Zero made a central place in their discussion for the Misean concept of human effort, and how an inflationary, fiat currency economy naturally destroys the value of effort. While at first glance it might seem odd to find such a discussion in an analysis of the feasibility of a return to the gold standard, it is precisely gold’s potential to act as a restraint on, a chastener of political ambitions, that returns the question of human effort to centre stage.

That is, of course, if you have humans in the first place who make that effort. This is so in both an absolute and a relative sense: there must be living humans capable of effort, and those living humans must want to make that effort.

In his important book America Alone, Mark Steyn analyses the western world’s contemporary woes in terms of demographics and makes the sobering observation that only America is breeding at replacement level. Elsewhere, the Spaniards are amongst the lowest in western Europe and the Russians are on an irrecoverable downward trend.

He squarely puts the blame on the welfare state, that “cosseted consumerism”, as the Deutsche Bank report puts it, that has replaced the individualism of free markets. And more to the point he makes clear what the source of this malaise is:

“Unchecked, government social programs are a security threat because they weaken the ultimate line of defence: the free-born citizen whose responsibilities are not subcontracted to the government.”

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

And for a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

STATE WORSHIP AND THE ANTI-GLOBALIZATION MOVEMENT

Friday, December 28th, 2012

By Mark Rogers

Globalization: what is it but an activity that is as old as civilization – simply a modern name for trade? Joseph Addison’s paean to its virtues stresses the civilizing effect it has, bringing together merchants from every clime and culture, who, in furthering their own mutual interests, enhance everything from landscape to palates to manners and morals.

So why is it scorned and despised by so many, especially in the rich west?

Martin Wolf in “Why Globalization Works” (first referenced here) provides a useful list summarising the attitudes of the anti-globalizers, the first three of which I will deal with in this article. His summary is an accurate one of these views, so equally accurately does he indicate their incoherence.

“The critics make the following more or less specific charges against market-driven globalization.

“It destroys the ability of states to regulate their national economies, raise taxes and spend money on public goods and social welfare.

“In the process, it undermines democracy, imposing in its place the rule of unaccountable bureaucrats, corporations and markets.

“It amounts to an abdication of power by benevolent democratic governments in favour of predatory private corporations.”

Underlying assumptions

The first thing to notice about these attitudes is the underlying assumption that the modern democratic state is benevolent and rational and that its primary function is the regulation of the economy in order to tax the productive and furnish what are laughably known as “public goods and social welfare”.

The second underlying assumption is that modern democracies are accountable, and that it is corporations and markets that somehow are not. On the contrary, the collapse of accountability is manifestly evident in the euro crisis and the concomitant collapse of the European project, yet far from behaving in a responsible, accountable manner, the politicians are desperately trying to cling onto their power and privileges.

In the U.K. we have seen how politicians brazenly justified their expenses, in the process demonstrating their ignorance of the legal system. In one of the more scandalous moments of that preposterous saga, when one of the overtly criminal M.P.s was on trial and facing the prospect of jail if convicted (which he duly was), more than one hundred M.P.s wrote the judge a letter to try and influence the outcome of that trial, pleading with the judge not to sentence him to prison. One simply does not do this to an English common law judge: he duly ignored them, but that it was possible for so large a number of M.P.s to bring themselves to behave in this way shows a sorry disregard for our constitution – but then, at least since the Second World War, that disregard has become increasingly the parliamentarians’ mode of proceeding.

Markets, on the other hand, are engines of accountability, through bankruptcies and competition. That we may not see those who run companies, and anonymity is largely how free societies function, they are nevertheless under the remorseless pressure of their customers and competitors to provide the goods and services desired.

State Worship

The most important thing about these assumptions is that they amount to an unquestioning assumption that the state is the proper director of human affairs, and that ordinary humans are not – the ordinary person is not trusted, and the greater his wealth, the less trustworthy he is deemed. This is a preposterous view, and a dangerous one. I have quoted before Paul Johnson’s dictum that the ability of the state to wreak great evil has been amply proved; whether it is capable of good is open to considerable doubt.

Take two recent stories in the press. I have dealt with the first already in several articles about tax avoidance, the latest twist to which is the transformation of a parliamentary committee, the Public Accounts Committee, which is meant to hold the government to account, the proper function of M.P.s, instead turning on taxpayers and in accusatory mode devising ways to hold the public to account. We had also earlier seen how H.M.R.C. was devising means to use schools to snoop on tax avoiders.

A yet more recent story of the government turning on the people is the revelation this week of a costly scheme to monitor every child taken to an A. & E. Department for signs that its parents are trying to hide evidence that it is being abused. The National Health Service, that is, is being turned into a Stasi-like instrument to intrude into family life. This gross violation of privacy is based on an illusion. After the prominent publicity given to the deaths of battered children such as Jasmine Beckford, Victoria Climbié and Baby P, public inquiries were held. In spite of the detailed evidence in the findings of specific neglect at best, malign acquiescence at worst, combined with ignorance and lack of care, on the part of the social workers, each inquiry came to the same conclusion: that there had not been sufficient sharing of information between the relevant branches of the state.

So now in the fullness of time, some bright spark in the government has seen how the NHS can be turned into an information gathering and disbursing scheme – entirely neglecting two essential facts: the male abusers of infants are not the children’s natural fathers (mothers may hide the evidence of abuse, but this is because they are either mentally deficient, as Baby P’s showed every sign of being, or simply scared) – this is common knowledge, but is routinely overlooked. The second is that a highly abused child is more likely to be imprisoned at home than be taken to hospital. When a social worker did manage to get Jasmine Beckford and her sister into hospital, the police were adamant that they should not be returned. The social worker over-ruled them, and the police acquiesced (why they didn’t take advantage of that hospitalization to arrest the step-father I have never understood).

There is ample evidence that when the state reaches a certain size, and has acquired powers of intrusion into daily life by nationalizing health and education, its functionaries become a coterie, acting in their own interests at the expense literal and figurative of the general public. That the state in this form should be trusted with our welfare is belied by history, the same history that shows the most dangerous religion ever invented is the cult of the state.

Re-inventing the wheel

The present writer indeed agrees with those who object that globalization “destroys the ability of states to regulate their national economies, raise taxes and spend money on public goods and social welfare” and hopes that destruction proceeds apace. To quote the American commentator Michael Ledeen: “Faster please!”

Joseph Addison was right to see in the mercantile classes of his day the great benefactors of mankind: we in our day have seen the “benevolence” of the state in action, not least in those developing countries the anti-globalizers weep for where state aid has created destitution, and where restoring trade and expanding markets have repaired the ravages of that aid.

Not for the first time in the late twentieth and early twenty first centuries have we been required to re-invent the wheel – under the baleful glare of those who think it shouldn’t have been invented in the first place.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

And for a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GLOBALIZATION: A VIEW FROM THE EIGHTEENTH CENTURY

Wednesday, December 26th, 2012

THE ROYAL EXCHANGE by Joseph Addison (1672-1719)

There is no place in the town which I so much love to frequent as the Royal Exchange. It gives me a secret satisfaction, and, in some measure, gratifies my vanity, as I am an Englishman, to see so rich an assembly of countrymen and foreigners consulting together upon the private business of mankind, and making this metropolis a kind of emporium for the whole earth.

I must confess I look upon high-change to be a great council, in which all considerable nations have their representatives. Factors in the trading world are what ambassadors are in the politic world; they negotiate affairs, conclude treaties, and maintain a good correspondence between those wealthy societies of men that are divided from one another by seas and oceans, or live on the different extremities of a continent.

I have often been pleased to hear disputes adjusted between an inhabitant of Japan and an alderman of London, or to see a subject of the Great Mogul entering into a league with one of the Czar of Muscovy. I am infinitely delighted in mixing with these several ministers of commerce, as they are distinguished by their different walks and different languages: sometimes I am jostled among a body of Armenians, sometimes I am lost in a crowd of Jews, and sometimes make one in a group of Dutchmen. I am a Dane, Swede, or Frenchman at different times, or rather fancy myself like the old philosopher, who upon being asked what countryman he was, replied that he was a citizen of the world.

Though I very frequently visit this busy multitude of people, I am known to nobody there but my friend Sir Andrew, who often smiles upon me as he sees me bustling in the crowd, but at the same time connives at my presence without taking any further notice of me. There is indeed a merchant of Egypt who just knows me by sight, having formerly remitted me some money to Grand Cairo; but as I am not versed in the modern Coptic, our conferences go no further than a bow and a grimace.

This grand scene of business gives me an infinite variety of solid and substantial entertainment. As I am a great lover of mankind, my heart naturally overflows at the sight of a prosperous and happy multitude, insomuch that at many public solemnities I cannot forbear expressing my joy with tears that have stolen down my cheeks. For this reason I am wonderfully delighted to see such a body of men thriving in their own private fortunes, and at the same time promoting the public stock; or, in other words, raising estates for their own families, by bringing into their country whatever is wanting, and carrying out of it whatever is superfluous.

Nature seems to have taken a peculiar care to disseminate the blessings among the different regions of the world, with an eye to this mutual intercourse and traffic among mankind, that the natives of the several parts of the globe might have a kind of dependence upon one another, and be united together by this common interest.

Almost every degree produces something peculiar to it. The food often grows in one country, and the sauce in another. The fruits of Portugal are corrected by the products of Barbados; the infusion of a China plant sweetened with the pith of an Indian cane. The Philippine Islands give a flavour to our European bowls. The single dress of a woman of quality is often the product of a hundred climates. The muff and the fan come together from the different ends of the earth. The scarf is sent from the torrid zone, and the tippet from beneath the Pole. The brocade skirt rises out of the mines of Peru, and the diamond necklace out of the bowels of Hindostan.

If we consider our own country in its natural prospect, without any of the benefits and advantages of commerce, what a barren, uncomfortable spot of earth falls to our share!

Natural historians tell us that no fruit grows originally among us besides hips and haws, acorns and pig-nuts, with other delicacies of the like nature; that our climate of itself, and without the assistance of art, can make no further advances towards a plum than to a sloe, and carries an apple to no greater perfection than a crab; that our melons, our peaches, our figs, our apricots and cherries, are strangers among us, imported in different ages, and naturalized in our English gardens; and that they would all degenerate and fall away into the trash of our own country if they were wholly neglected by the planter, and left to the mercy of our sun and soil.

Nor has traffic more enriched our vegetable world than it has improved the whole face of nature among us. Our ships are laden with the harvest of every climate: our tables are stored with spices and oils and wines; our rooms are filled with pyramids of China, and adorned with the workmanship of Japan; our morning’s draught comes to us from the remotest corners of the earth; we repair our bodies by the drugs of America, and repose ourselves under Indian canopies.

My friend Sir Andrew calls the vineyards of France our gardens, the spice-islands our hot-beds, the Persians our silk weavers, and the Chinese our potters. Nature indeed furnishes us with the bare necessaries of life, but traffic gives us a great variety of what is useful, and at the same time supplies us with everything that is convenient and ornamental. Nor is it the least part of this our happiness that while we enjoy the remotest products of the north and south, we are free from those extremities of weather which gave them birth; that our eyes are refreshed with the green fields of Britain at the same time that our palates are feasted with the fruits that rise between the tropics.

For these reasons there are not more useful members in a commonwealth than merchants. They knit mankind together in a mutual intercourse of good offices, distribute the gifts of Nature, find work for the poor, and bring wealth to the rich and magnificence to the great. Our English merchant converts the tin of his own country into gold, and exchanges his wool for rubies. The Mohammedans are clothed in our British manufacture, and the inhabitants of the frozen zone warmed with the fleeces of our sheep.

When I have been upon the change, I have often fancied one of our old kings standing in person, where he is represented in effigy, and looking down upon the wealthy concourse of people with which that place is every day filled. In this case, how would he be surprised to hear all the languages of Europe spoken in this little spot of his former dominions, and to see so many private men, who in his time would have been the vassals of some powerful baron, negotiating like princes for greater sums of money than were formerly to be met with in the royal treasury!

Trade, without enlarging the British territories, has given us a kind of additional empire: it has multiplied the number of the rich, made our landed estates infinitely more valuable than they were formerly, and added to them an accession of other estates as valuable as the lands themselves.

AN OBITUARY FOR THE LEFT

Wednesday, December 19th, 2012

By Mark Rogers

Perry Anderson, editor of The New Left Review, wrote an editorial for the January-February 2000 issue, in which he looked at all that had happened over the previous twenty years, and what it meant for the Left: the collapse of the Soviet Union, the resurgence and resilience of capitalist market economies and the emergence of “New” Labour. The piece contains a remarkable acknowledgement of two of the strengths of the market idea as they had emerged in that time:

“The only starting-point for a realistic Left today is a lucid registration of historical defeat. Capital has comprehensively beaten back all threats to its rule, the bases of whose power – above all, the pressures of competition – were persistently under-estimated by the socialist movement. The doctrines of the Right that have theorized capitalism as a systemic order retain their tough-minded strength; current attempts by a self-styled radical Centre to dress up its realities are by comparison little more than weak public relations. Those who always believed in the over-riding value of free markets and private ownership of the means of production include many figures of intellectual substance. The recent crop of bowdlerizers and beauticians, who only yesterday deplored the ugliness of the system they primp today, do not.”

The first of those strengths he identifies percipiently as the pressure of competition, that creative pressure that stimulates prosperity by weeding out bad, corrupt, or ineffectual ideas and practices. His recognition that the machine-like description of capitalism that pervades socialist writings from Marx onwards was an inadequate base from which to understand just what drives markets is a welcome change from denunciations of markets in terms of conspiracy theories, which is often the revolutionist’s bolt-hole when confronted with matters he cannot comprehend or which have actually defeated him. Anderson’s realism is based on an actual understanding of what had been happening.

This is reinforced by the second strength that he describes, that “tough-minded strength” of those “doctrines of the Right that have theorized capitalism as a systemic order”. This is the source of capitalism’s resilience, and his phrasing suggests that it is, amongst others, Hayek that he must have in mind, which in turn underpins his acknowledgement that those “who always believed in the over-riding value of free markets and private ownership of the means of production include many figures of intellectual substance.”

Anderson had looked defeat in the face and realized that it came about in part through treating arguments for the market as being merely those of vested interests, and in doing so failed to acknowledge the real strengths of what socialists thought they were opposing. While his pessimism is to be understood, his clarity in perceiving that there is integrity amongst his opponents and any future discussion is going to have start from there is a real measure of how comprehensive the Left’s defeat on these questions has been.

An adequate gloss on those pressures of competition and what they mean in practice, both politically as well as economically, is found in Martin Wolf’s Why Globalization Works (Yale Nota Bene, Yale University Press, New Haven and London, 2005).

In stating that a market economy is a necessary condition for a stable democracy, he goes on: “The market may not be a sufficient condition for such a democracy. But it was a necessary one, because the concentration of power inherent in a planned economy was incompatible with effective pressures from below.”

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

Gold Banking: news item

Wednesday, November 28th, 2012

In recent posts we have looked at the Utah Sound Money Scheme and the Utah Gold and Silver Depository, where a local return to precious metal backed currency is successfully under way. Other States of the Union are watching.

The story which this article links to shows that the legendary investor Eric Sprott has made a drive for the same kind of banking in Canada, expected to start operations next year. We shall watch this space.

Go to this link for more.

ADAM SMITH’S ERROR (Part One)

Friday, November 23rd, 2012

By Mark Rogers

In my review of The Mess We’re In, amongst the many admirable qualities of the book I drew attention to is the way in which the author traces the evolution of the idea and meaning of value from Adam Smith to the Austrian School (see section headed “Value”). Rather than finding fault with Smith’s original conception, the author rightly contended that an idea of such complexity would go through several major evolutions before all the streams of thought that went into it would produce a meaningful and useful concept . Indeed, here I point out that there is growing realisation amongst some economic thinkers that we are only just beginning to come to an understanding of what money itself is.

In this spirit I offer some very interesting observations by Jane Jacobs in her book The Economy of Cities (I have already cited the work of Jane Jacobs here and here).

The Division of Labour

“Adam Smith, who identified the principle of the division of labour and explained its advantages, seems not to have recognized that new work arises upon older divisions of labour.” She analyses Smith’s famous description of the divided labour in a pin factory, and goes on to comment that Smith, having described the processes visible in the contemporary factory, drew a fundamentally inaccurate conclusion: he “assumes that this same principle also accounts for the existence of pin making itself. He called pin making simply a larger division of labour.”

However, the type of pins that Smith was observing had originally been manufactured as part of the task of making carding combs. The wire bristles for these combs were occasionally made in the same manufacturies as the frames, but often they were made in independent shops which sold them to the cardmakers. “Bristle makers, engaged in making a tool for the textile industry, were almost making pins. But when some of them actually did so, they were not further dividing the labour of making carding combs. Nor were they further dividing the labour of making bristles. They were not dividing at all. They were adding a new complexity, pin making, to an older simplicity, bristle making. From this addition came the rest of the divisions of labour in pin making” that Smith then went on to describe.

Smith’s Mistake

This unwarranted inference from observation she calls a mistake that was “subtle and casual”: “Smith gave to division of labour unwarranted credit for advances in economic life.”

Note that the mistake takes the form, not of misdescribing what he saw, nor of being inaccurate about what it could achieve, but rather of giving it an exaggerated influence in the rest of economic life. Yet, “[d]ivision of labour is a device for achieving operating efficiency, nothing more. Of itself, it has no power to promote further economic development.” She goes on to point out that this being so, it is even limited in its scope to improve this operating efficiency because further developments in efficiency, after extant work has been suitably divided into separate functions, “depend upon the addition of new activities”.

Another interesting observation is that division of labour is by no means a hallmark, as so many thinkers have assumed, notably Karl Marx, of an advanced economy. A moment’s reflection will show this to be true. But here one must defend Smith because it must be remembered that Smith was describing a developing economy in The Wealth of Nations, something new in economic life in the wake of the industrial revolution, which may explain why he made the incorrect inference: so much was new and unexpected as those in the extra-legal economies of the time were forcing the old medieval guilds onto the back foot.

How Jane Jacobs arrived at her conclusions in the light of her study of cities will be examined in Part Two. Suffice to say here that this work of hers is able to throw considerable light on the problem of the division of labour, and if in this instance we can say that Smith was mistaken, rather than simply incomplete, in the hands of Jane Jacobs the mistake turns out to be a fruitful one. It is also important to note that the complexity involved in the idea of value is of a different order from a mistaken assumption about how economic activity comes about: the latter is amenable to empirical observation, while value, though having intrinsic empirical implications, is also a complex philosophical issue.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

THE GOLD STANDARD: FURTHER ENCOURAGEMENT FROM WISE EMINENCES

Sunday, September 30th, 2012

By Mark Rogers

September has been an important month for the Gold Standard. In The Times of London, on Friday 28 September, Lord Rees-Mogg wrote a further analysis of the hazards of paper money. He concluded:

“In any reform of the global system, some measure will have to be used to replan the stabilisation that was provided by the Gold Standard.

“I do not expect governments or central bankers to abandon the ability to issue their own currency. But what governments will not do, private individuals can. If individuals want to protect the purchasing power of their savings, gold can do it; paper will not.”

There are, however, two banks that are taking the ideas of the problems of fiat money and of a return to gold very seriously indeed. Can it be a coincidence that they are both German Banks?

We saw that on the 12th September, the German Constitutional Court gave guarded assent to Germany’s participation in the European Stability Mechanism. This cautious response must be seen in the context of the devastating consequences of fiat money systems.

Six days later, 18th September, the London head office of Deutsche Bank published a Global Markets Research paper by Daniel Brebner and Xiao Fu called Gold: Adjusting For Zero, which makes the case for a return to the gold standard and argues for how it may be done. (I shall be writing about this later.)

On that very same day, Dr Jens Weidmann, President of the Deutsche Bundesbank and Member of the Governing Council of the ECB, made the opening speech at the 18th colloquium of the Institute for Bank-Historical Research (IBF) in Frankfurt. His address is entitled: Money creation and responsibility. It is a short and compelling speech, in which he too analyses the hazards of fiat currencies and does so by recalling the money creation scene in Goethe’s Faust. It is a speech so full of good things that commentary is otiose. I urge readers to click here and read the full text.

THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

Sunday, September 9th, 2012

The Mess We’re In by Guy Fraser-Sampson, published by Elliott & Thompson, London 2012

Reviewed by Mark Rogers

Guy Fraser-Sampson has written a sustained account of our present woes through examining their roots in the past – and not merely the recent past. The financial crisis is not actually a single problem but a series of problems. Unless analysis takes account of this, then no attempt to explain the mess we’re in will produce any valuable insights let alone fixes.

At the beginning of his book Mr Fraser-Sampson lists five problems that have intertwined to produce the mess. These are: the aftermath of the banking crisis of 2007-08, which appears to require governments to find a method of managing the banking sector in order to forestall the need to rescue banks in the future (something which later in the book he demonstrates will be impossible to do anyway, as the debt liabilities incurred through the bail-outs are so enormous that the money simply will not be there in the future). Second, the perpetual running of budget deficits producing ever higher levels of national debt – a problem that exists almost universally. Third, the threat of recession; fourth, (an immediate problem for the U.K.) pensions and the fact that most funds are in deficit, emphatically including civil service ones. And lastly, the functioning of the political system, particularly with regard to how economic decisions are made within it. This last will, he states, come as a surprise since it is not usually admitted as a problem in an economic context.

And that is where the whole interest of this book lies: for by insisting that ready-made assumptions and quick answers are neither helpful nor available, Mr Fraser-Sampson probes beyond the usual confines of the discussion, debunks conventional wisdom, and in doing so produces a thoroughly sobering analysis.

Politicians: Cause or Cure?

The theme which runs through the book is that a dispassionate look at the economic history of the twentieth century, and in particular at its most celebrated and influential economist Keynes, cannot avoid the conclusion that politicians are not in a position to fix the problems.

The idea that they are has come about because it is assumed that politicians have an inevitable, unavoidable, necessary function in economic planning and control, so that when problems arise their roots must, ipso facto, lie elsewhere; but whoever suggested this fulcrum of expedience and necessity? Why, the politicians themselves, egged on by those economists who advocated such a role for politicians (and for themselves as the necessary advisors).

However, says Mr Fraser-Sampson, this is not the case: politicians are the cause of financial crises. This accounts for his interest in the last of the five problems adumbrated above.

What led him to this insight? He says: “I had long been aware that post-war economics had featured two rival schools of economic thought: that of socialism, inspired initially by Karl Marx, and that of Keynesianism … I was also aware that British economic policy had featured an uncomfortable mix of these.” So far, so good; this points to an important feature of the problem especially in its public policy aspect. But then what happened? He goes on:

“What I had not previously known was that there was in fact an additional school of thought, to which we might refer loosely as the Austrian School, which was viewed as so deeply subversive that many economic textbooks entirely failed to mention it, preferring to pretend that it had never existed. … Going back to reread history from the perspective of the Austrian School was a revelation. Suddenly the real causes of our current difficulties, the fundamental causes with their roots deep in the past and their consequences glaringly obvious in the present, became clear.”

The author’s thesis is that “whatever approach has been taken in the past has failed.” He advocates first that a completely new approach is called for and second that politicians cannot be entrusted to implement it. His “central argument will be that it is politicians themselves who have caused our current problems, and that the time has come for them to be called to account.”

What needs to be said immediately, to avoid any confusion, is that this book is not in any way an introduction to the Austrian School. It does not claim to be. It was his going to school with the Austrians that enabled this approach.

Looking beyond the interventionist and Keynesian muddles and platitudes and their concomitant inability to properly define the problems and their inability to offer anything other than more of the same, a counsel of despair if ever there was one, the Austrian insights into money, prices, value, business cycles, and the interdependence of law and economics proved the key to the mess, and provided the author with the means to come up with proposals of real value, one of which, concerning the banking system – which I will deal with in due course – is far-reaching in its potential efficacy, especially in the light of the place-seekers’ and gubernatorial fawners’ mantra of “too big to fail”, a decidedly un-Austrian idea.

Crises and Confusions

After introducing the reader to his theme, the author proceeds to untangle the knot of the five problems which he has outlined in his brief introduction. He takes the opportunity to lay down a very trenchant marker of the viability and honesty of politicians as managers of financial affairs. In discussing the aftermath of the bank failures of 2007-2008, he notes that “many of the bank mergers that were pushed through almost overnight would have been outlawed by the competition authorities had they been attempted by the banks themselves.” He further points out that the bans introduced by France and Germany on short selling were not only illegal under EU regulations, but that “it is strongly arguable that such a ban must create a false market, something that if done by an individual would constitute a serious criminal offence.”

So, early on we are already alerted to the sheer untrustworthiness of politicians and this is reinforced by drawing attention to the fact that, in a free society, the ability of elected politicians to act beyond the law is deeply disturbing. And all in the name of the public good, as defined, of course, by the politicians themselves.

How has this come about? In short, modern politicians in creating welfarist economies have acquired too much power. It is not surprising therefore that in giving the people what they “want” or are supposed to want, politicians create large self-interest groups which the politicians then ingratiate themselves with by bribing them with their own and other people’s money.

A singular example of this he addresses in a later chapter where he describes how the Atlee government built the welfare state by purloining the Marshall Aid funds allocated to Britain for infrastructure renewal after the Second World War (readers familiar with the work of Corelli Barnett will recognise the debt which Mr Fraser-Sampson acknowledges): not only had Britain exhausted its finances to fight the war, but instead of gratefully using the American’s money to rebuild infrastructure and the industrial base (as was done in Germany and France), Atlee’s socialists used it to create two unwieldy and unnecessary structures in nationalising health and education, in the name of building a “home fit for heroes” – and what a squalid place that rapidly turned out to be.

Having untangled the five strands of the financial crisis, the author then fills in some background in looking at “Money and Inflation” and “Markets and Crashes”. In the first of these chapters, he looks predominantly at Keynes’s influential writings on the Versailles Treaty, and the reactions to the Wall Street Crash and the Great Depression. These reflections lead on to looking at markets and crashes mainly in the light of the theories of Adam Smith, where he makes the important qualification that “markets today are almost certainly more complex than the ones Smith had available for study” and notes that Smith did not envisage “a market that was no longer free as a result of government action”.

This does not of course mean that Smith’s insights are no longer valid – a point to which I shall return.

After this however, the author does something unexpected, in the light of the intellectual feast he had promised us at the beginning of the book, namely to look at the history of modern financial crises through the eyes of the Austrian School.

He devotes his next two chapters to Keynes. After an initial confusion, the reader suddenly realises the author’s intention: Keynes has to be dealt with at some length not only because he was the most influential economist of the twentieth century, but also because his faults and the financial and economic turmoil they created were the focus of the Austrian School’s unravelling of political economic management. Hayek in particular, though the two men remained on more or less friendly terms personally, was Keynes’s fiercest critic, and one of the most detailed.

The way in which the author lays the Keynesian trail in order to start back-pedalling over it with the Austrians as guides is particularly well-done: the reader is not put off guard for too long before realising what is being done.

This is a book rich in insights and discussion of all aspects of financial crises, and as the book now progresses it is replete with the lessons learned from the Austrians, in particular Menger, Wieser, Mises and Hayek. I will cease trying to give an overall account of the book, although I hope what I have said above gives a proper idea of its scope, and concentrate on a few very valuable insights that help fill out the far-too-much neglected contribution of the Austrians and the growing realisation of the inadequacy, not to say fatal wrong-headedness of Keynes.

Value

It is well known that Keynes despised and debunked the virtues of the Classical Economists, starting with Adam Smith. It is therefore highly instructive to turn to the manner in which the Austrians viewed the classical school.

 A very succinct but suggestive account is given of the way in which Smith’s conception of value was used as the foundation stone of a theory of value that ultimately became quite complex but at the same time illuminating and useful.

Smith “believed that you could value something by adding up the cost of everything that had gone into producing it, including of course the cost of labour.” This basic insight – not of course wrong, so much as incomplete – was developed by William Stanley Jevons, who established the theory of marginal utility. This was still not the end though; the Austrian Carl Menger in developing it, revealed another two aspects:  first, the idea that “no two individuals would value the utility of a product in the same way”, and second, that “the utility of each successive item decreases”.

It was Ludwig von Mises and Friedrich von Wieser who rounded off the task. Mises established that money is only valid “in terms of the utility of the goods it can buy”; while Wieser discovered the principle of the “opportunity cost” – that what happens when a value is put on utility (which perhaps should be viewed as a value external to the actual good itself, rather than the “intrinsic” value Smith sought to recover in his definition), is that a decision is being made on what not to spend on other goods.

A fruitful train of ideas, expanding and growing, each adding something to the previous assumptions. Perhaps Adam Smith’s ideas should rather be viewed as acorns, that were ultimately most fruitfully watered by the Austrians.

The author draws attention to Keynes’s sneer at Say’s Law, but if that Law were to be treated in the same way as the Austrians treated Smith, it too could grow and expand – something, perhaps, which the supply side theorists have attempted.

Thatcher and Monetarism

When Mr Fraser-Sampson comes to view the record of Mrs Thatcher, the only politician in the post-war period whom he thinks made a decent attempt to restrain political interference in finance and the economy, he is again illuminating, particularly in relation to monetarism (and the Falklands War).

In examining what options there were to deal with the chaos left behind by the Labour Government in 1979, one instrument on the table was monetarism. The most famous advocate of monetarism, Milton Friedman, was a thinker to be reckoned with: he was one of the early opponents of Keynes, in particular of his theory of full employment. Friedman proposed that, despite Keynes and the obvious attraction of the idea for politicians, full employment was a mirage: there is always a natural rate of unemployment (think: students; think: people leaving one job without having found another; just two possibilities with which to fill out this idea).

In spite of misgivings, Thatcher herself being more inclined to follow Hayek, it was decided to see what would happen with a monetarist policy – and what happened was one of two things, which to their credit the monetarists were to explicitly recognise (no indulging in that old utopian refrain: “it hasn’t been tried properly”).

What happened was that monetarism appeared not to work. Appeared not to, because the results of the Thatcher government’s implementation of it demonstrated one of two things: either monetarist policies would only work over a very much longer timeframe than its intellectual begetters had thought feasible, or the definitions of money on which the theory was based were wrong. A healthy dose of empiricism is always a virtue in a theorist and Friedman himself acknowledged the difficulties. In the circumstances of the eighties, there was not time to wait while the thinkers went back to their scribbling pads: monetarist controls were abandoned, to give way, it was hoped, to a more Austrian approach.

Central to this approach as it affects the possibility of political policy is the principle that economic information is simply too diverse and too diffuse to be amenable to centralised control. Taking Mises’s analysis of and strictures on socialist planning, Hayek developed a hugely important theory of markets as information networks, with prices being the chief vehicle of the information that they disperse. What is important in the context of this book, is that it follows from Hayek’s elaboration of his information theory that too little overall is capable of being known about this information – there are too many links in the chains of information for them all to be ravelled together in central planning bureaus, and even if the collection exercise were at all possible, the ability to process and analyse the information in the real-time that market transactions, even of the humblest kind, require would take too long and invariably spawn too many anomalies. Which is why basic food stuffs, for example, were permanently running out in the Soviet Union.

Hayek developed these insights into his theory of spontaneous orders, one of his most fruitful economic and anthropological ideas (his investigations into how this idea illuminates legal and constitutional history are a highly fertile branch of his thought).

This idea is also a moral one, and for reasons that go to the heart of Mr Fraser-Sampson’s concerns. For involved in the idea of markets as complex information systems, spontaneously evolved from the considered actions of many, many people, is that politicised economic systems and social fabrics cannot be built on them: it is simply impossible for politicians and civil servants to attain the omniscience required, and any attempt to try produces economic chaos and mismanagement (to put it mildly). Hence we see that in financial crises politicians wildly clutch at straws, some of them, as we have already noted, criminal.

And what has the Falkland’s War got to do with monetarism and spontaneous orders? Not only that monetarism lost, while in the Falklands the Argentineans did, but the victory over them ensured that Mrs Thatcher stayed in power. By the end of 1981, Thatcher was deeply unpopular; her policies were deemed not to be working, and at the next election it was widely assumed that the Labour Party would win. Victory in the Falklands produced a huge wave of patriotism that focused on the lady who was not for turning, and she was re-elected. Mr Fraser-Sampson points to this as being a remarkable lease of life to continue with the attempt to depoliticise the British economy.

Too Big To Fail?

It is in dealing with the banks that Mr Fraser-Sampson comes to the heart of his theme: that politicians with all their inevitable short-termism are the worst people to have in charge, micromanaging the financial detail while the walls come tumbling down around them.

He establishes this by his account of how banking regulation is at the heart of the crisis – and that we have a very long way to go before we are out of it. His essential point here is that we have run out of money, and that the more is borrowed/quantitatively eased, the bigger the bill for our great-grandchildren.

To put it bluntly, the regulation of the banking system, with all its bureaucratic exfoliation and micromanaging complexity, had one aim in view: to prevent banks collapsing. A reasonable goal, if perhaps unreasonably pursued, would be most people’s assumption confronted with such an argument. But it is precisely here that Mr Fraser-Sampson demonstrates lies the biggest danger of letting politicians have this kind of control: and he does so in a startlingly simple way.

We already have practitioners with knowledge accumulated and abilities honed over the centuries by their forebears; we already have laws, mainly established through precedence (case law) and capable judges to cope with banking failure – though banks, through specialist banking regulations and regulatory bodies, have been excluded from their scope.

What is being said here? To backtrack slightly, Mr Fraser-Sampson points out two fundamentally necessary reforms of the banking system. First, the payments system, which should be removed from within the banks: “it was the potential collapse of the payment system that seemed to frighten politicians most back in 2008. All sorts of arguments could be advanced about how it is illogical to treat the bond-holders and shareholders of banks differently from those of other commercial enterprises, but the thought of voters not being able to take cash out of ATMs swept all logic aside.” He goes on to point out that the two main forms of customer-to-customer bank transfers, BACS and CHAPS, are outside the banking system; they are operated by non-profit subsidiaries of the Bank of England – so a vehicle exists into which the rest of the payment systems could be removed.

He goes on to say that, once this is done, it will facilitate the other essential reform: the Bank could set up “another non-profit subsidiary that could act as a virtual shadow bank, with every commercial bank being obliged to back up their records to the shadow bank every evening. In the event of a bank failing, this would enable the Bank of England subsidiary, with both the payment systems and the current customer records under its control, to continue to operate customer accounts while making arrangements … to transfer the accounts of all affected customers to new banks.”

And the beauty – and simplicity, compared to what goes on now – of this is that: banks would then be allowed to fail safely.

Customers would have to pay for all this of course, but the really important consequence of these arrangements is that “there would be no need for any bank regulations at all [my emphasis].”

“If banks can fail safely, and in future will be allowed to do so, then both separation and capital adequacy become irrelevant. Banks can function just like any other commercial firm, with the directors being allowed to choose how much risk and reward they wish to target.”

And when anything serious goes wrong, those practitioners and laws I mentioned above would come into play, just as they do in the ordinary commercial world: administrators and liquidation would ensure that banks and their assets and their customers would go through the same insolvency procedures as all other businesses that go bust.

Without the possibility of bankruptcy hanging over their heads, bankers will continue to take unacceptable risks – unconstrained by their shareholders and sanctioned by the promise of bail-outs by politicians.

So in order to curry short-term favour, keep those ATMs whirring, and win the next election, the politicians created an unwieldy and ultimately unmanageable banking regulatory system that in the end caused the banks to crash. No wonder that bankers fancied they could do as they wished, operating as they were, by legislation and regulation, outside the law – an ironic state of affairs.

So Where Does This Leave Keynes?

While Mr Fraser-Sampson starts his investigations with a certain amount of respect for Keynes, by the time he has finished Keynes is ruefully relegated to the second rank of economists. Mr Fraser-Sampson draws attention to the fact that by now even the famous Multiplier Effect is seriously being called into question.

Mr Fraser-Sampson does his best to rescue something of Keynes, particularly in regard to his theories of deficit spending – that it is something that should only be done when there is a surplus to draw on and if it is truly necessary – and suggests that its fault lies not so much in the theory itself, but in politicians who, once given the “permission” to deficit-spend, found it too useful a habit of which to cure themselves.

Yet indeed even this limited rescue of Keynes doesn’t really work, because Keynes, unlike the Austrians, saw a very big role for politicians in transforming the world according to the Classical Economists, into one more to his liking; once having given the politicians their heads there was no drawing them back.

As this book so ably and comprehensively demonstrates, this is the long drawn out source of our present ills.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS 

And for background on the reviewer: CONFESSIONS OF A LAW AND ORDER ANARCHIST