ECONOMIC PERSPECTIVES 88 – OCTOBER 2020

 

More than six months have elapsed since the devastating lockdown measures were first imposed on the nation, since when we have been shrouded in a fog of confusion and ineptitude. The authorities may have been acting with the best of intentions, but the only certainty is the resulting hole in our public finances and massive damage to the economy.

Public trust is wearing thin

 

Both main political parties appear clueless on what should be done, “Conservative” and “Labour” appellations having become indistinguishable in an unprincipled spree of poorly targeted state handouts. Claims that policies are “guided by the science” are patently false – in reality they are being guided by scientists whose pronouncements are at odds with each other. Where is the scientific evidence that pubs and restaurants should shut their doors at 10 pm, or that restricting groups to no more than six people is an optimum policy? There is no consensus and a gaping vacuum lies where there should be leadership. Public trust is wearing thin.

 

The Labour party, out of power, does its best to hold the government to account. But the Tories? Where is their agenda for allowing the economy to grow? Why has no “supply-side” strategy been formulated? Desperately needed deregulation hasn’t happened and our innate entrepreneurial zest has been stifled, not unleashed.

 

The PM and his aides, by default, have fallen into the “big state” socialist trap of high taxes and too much spending, while protecting a bloated public sector that the shattered private sector can no longer pay for.

 

The tax quandary

 

The Chancellor is ferreting about, trying to work out how to raise enough tax revenue to make ends meet. The welter of imponderables has obliged him to cancel the Autumn Budget, and forced him to dream up potential new taxes while contemplating hikes in the rates of existing taxes. This dithering may be understandable – but there is never a good time to tax wealth-creation.

 furloughs and duff loans

 

Damage to the economy has already happened, and raising taxes will make it worse. A tax raid would not bring back the multitude of businesses crippled by lockdown. Furloughs and duff loans have, at great cost to the exchequer, postponed much of the pain, but an escalation in unemployment is now a certainty. It will surge to at least 4 million when a budget deficit of £300 billion compels the Chancellor to switch off the flood of free money.

 

This is not a time for retrenchment. On the contrary, we should be maximising business opportunities, allowing innovation to flourish in a low-regulation free market – which will be possible only if enterprise is rewarded, not punished. If business taxes are raised, an enterprise exodus will follow, especially now that lockdown has facilitated so much on-line business, showing that office space in UK cities is an expendable luxury.

 

Impact on prices – and the currency

 

What politicians don’t look at, they don’t see. They don’t see that (i) the welfare-entitlement culture has taken root; (ii) this year’s massive money-printing has not provided a long-term solution; and (iii) the ensuing wave of price inflation will shred the purchasing power of our money.

 

Since the level of state handouts is linked to changes in the cost of living, it is in the state’s interests to produce statistics that suppress hikes in living costs.

typical family? No such thing

 

The chief instrument for perpetrating fictional data is, of course, the official Consumer Prices Index (CPI). The contents of its underlying “basket” of goods and services, and the methodology used by the Central Statistical Office, are designed to perpetuate the myth that the UK’s annual price inflation matches the Treasury’s aspirational rate of 2 per cent.

 

But the “typical” family, whose cost of living the CPI purports to track, doesn’t exist. Consumers’ purchasing preferences are always individual expressions of human, not group, action.

 

Don’t believe a word of it!

 

Prices of many thousands of items are entered in the CPI’s basket every month, an exercise so distant from your “average” family’s weekly or monthly shopping spend that the result is guaranteed to be meaningless.

The more you look into it, the clearer it becomes that the state’s malign use of CPI statistics is designed to contrive a result that massively understates our currency’s loss of purchasing power.

 

To understand this game it is necessary to revert to the process behind price inflation. A reminder: the central bank’s money fountain must find an outlet, and its first receivers in the financial sector closest to buyers of government bonds, and their counterparties, are instinctively circumspect about the sustainability of the new money’s long-term purchasing power. Their preference is therefore to acquire something more durable.

intensifying the class war

 

Apart from real estate, quoted equities, commodities, flash cars, boats, artworks or jewellery, they will happily lash out on the tuition costs of educating their offspring and their own impossibly extravagant private healthcare. But in all cases the effect of exercising these preferences is to inflate their prices – and we know that by the time the new money trickles through the economy and filters down to the general population it will, pound-for-pound, buy fewer necessities, thus completing the transfer of wealth from the poorer to the richer segments of society, intensifying the class war. But note: this result doesn’t figure anywhere in the CPI statistics. Neat, isn’t it?

 

Retirement funds can’t keep up

 

Yet those are the very indices that are used to ensure that investments making up retirement funds are “keeping up with inflation.” The common experience of post-retirement beneficiaries is the reverse. It is hardly surprising that the use of CPI statistics to monitor the adequacy of so-called “inflation-proof” pension pots leaves them poorer in real terms every year.

 

Price levels vary from region to region and city to city, and any half-decent index must reflect this, as does the Chapwood Index. Using Chapwood, or Shadowstats, as Alasdair Macleod reminds us most weeks in his “Goldmoney Insight”, you will see that annual price inflation is running at close to 10 per cent per annum, and this has been the case for the last 10 years.

 

Gold is more reliable index

 

You could, alternatively, regard movements in the price of gold as a more reliable indicator of fiat money’s lost purchasing power than any highly suspect CPI statistics. In the year 2000 the price of gold was around $270 per ounce, Now, in 2020, you would need to pay more than $1,800 for that ounce. What does that tell you? Not that gold has somehow become more “valuable”. It’s the money that’s collapsing.

 

 

[EMILE WOOLF – ECONOMIC PERSPECTIVES 88 – OCTOBER 2020]