Partners

Archive for September, 2012

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 EUROPEAN STABILITY MECHANISM AND THE GERMAN CONSTITUTIONAL COURT

Wednesday, September 26th, 2012

By Mark Rogers

It was widely reported two weeks ago that the German Constitutional Court had blessed Chancellor Angela Merkel’s baby, whose Herculean task is to save the euro. Germany could ratify the proposal and participate in the European Stability Mechanism.

However, this permission, if that is what really it is, was actually heavily qualified, with three points in particular standing out.

First: Any further amounts in excess of Germany’s already agreed 190 billion euros must have parliamentary approval. That is, the government cannot simply keep pumping money into the mechanism without explicit endorsement by the Bundestag, the German parliament.

Second: In order for this to be possible Germany’s (sole) representative on the ESM must report to the Bundestag – thus breaching the ESM secrecy rule for the members to meet in closed conclave. This is very neat of the judges: to expose yet again the clandestine and unaccountable methods of the EU!

Third:  Perhaps an even tastier judicial morsel: any agreement that Germany has with the ESM must not be in breach of International Law: “No permanent mechanisms may be created under international treaties which are tantamount to accepting liability for decisions by the will of other states, above all if they entail consequences which are hard to calculate.” [Emphasis added.]

Somehow one wonders why the political planners of the EU and the euro didn’t think of that for themselves.

Karin Matussek, in an article on Bloomberg, draws out the implications: “Lawmakers must not allow Germany to shoulder an amount it can’t control or that would result in it being unable to determine its political agenda, the court said.”

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

TAXING TIMES

Tuesday, September 25th, 2012

By Mark Rogers

The Times of London continues its campaigning on behalf of the taxman. I call it this because it somewhat melodramatically heads it stories on the subject of avoidance with a little logo and the heading “Secrets of the tax avoiders”.  Last week it revealed that British tax exiles in Monaco probably owe £1 billion in uncollected taxes.

On September 24 it had another go, reporting that Her Majesty’s Revenue and Customs’ “Affluence Unit” has dropped a notch in its definition of affluence: whereas before it examined the finances of those worth £2.5 million plus, it is now targeting those worth £1 million plus. In a slight departure from the usual talk of avoidance, which is legal (see previous discussion here), it has tumbled to the fact that there are owners of holiday homes abroad who rent these properties out and do not declare the income. The complexity of the rules over non-domicile earners abroad may mean that the non-declaration of these rents is because the rules were not understood, thought not to apply, or, worse, mean that these incomes are theoretically taxable twice: once in the U.K. (if the renter normally lives here) and once in the country where they exist.

In another twist of the non-domicile rules, the Chancellor Mr Osborne is also quoted as saying that he has no plans to change the status of wealthy foreigners resident in the U.K. who do not pay tax here on their global earnings because they are registered as non-domicile for the purposes of U.K. taxation. Instead they pay a levy of £50,000 after living in the U.K. for twelve years.

So fabulously wealthy Russian oligarchs, for example, pay, in terms of their incomes, practically nothing, while the locals get scoffed at for “diddling” on their taxes. Of course, these wealthy foreigners create jobs which generate taxes. But as that is true of everyone else, if the tax system is fairer and simpler, we could all make our contribution to wealth creation if we were all treated like Russian oligarchs.

Instead, the hapless Nick Clegg, Deputy Prime Minister, was reported as saying in September 24’s issue: “I will not accept a new wave of fiscal retrenchment, of belt-tightening without asking the people at the top to make an additional contribution.” How nice of him; he is going to ask. Is that what the taxman does?

And we all know what it is that they are being asked to contribute to: the state’s profligacy.

The Times has also been conducting a much more serious and wholly necessary investigation over the last few months; in the same issue just referred to it, its sole front page story concerned yet further revelations of the shocking scandal of the sex-grooming of under-age girls in the north of England – shocking not only because of the crimes perpetrated but because, as the story detailed, the nature and extent of the crimes was well known to the social services and the police, over a decade. Instead of doing anything about it, the police and the local authorities preferred to judge the under-age girls as somehow inviting their abuse. Most of the girls in question were actually in the residential care of the local authority. No-one so far as I know is calling for the relevant social workers and policemen/women to be prosecuted as accessories after (and indeed, the longer it went on, before) the fact.

In a society where the fundamental duty of the state is an accountable and transparent provision of law and order, it is shocking to hear politicians working themselves up over tax avoidance: what, after all, are we being asked to “contribute” to, when confronted with such a massive dereliction of public duty?

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 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