ECONOMIC PERSPECTIVES 91 – 14 NOVEMBER 2020
Economically speaking, we are in a pickle. The blame-game is in full flow in its search for scapegoats. The most obvious culprit is, of course, the Covid virus, but it would be a huge mistake to blame that. The government’s inconstant and wavering response to Coronavirus has undoubtedly exacerbated our economic woes, but please don’t, for a moment, blame the virus – it did not cause the crisis. It accelerated its arrival and brought it forward. But it was going to happen anyway. Of that, based on sober analysis of all pre-existing economic symptoms, you can be certain.
Since long before the appearance of the virus, the UK and the USA, like most countries in the Western world, were deeply committed to an economic approach that, in any of its forms, has never succeeded in bringing stability, let alone growth. The chief feature of this approach is its adoption of the “culture of dependency”.
Dependency on the State
The “welfare ethic” had already taken hold of hearts and minds everywhere. Implicit in its adoption, of course, is the unquestioned conviction that “the state” is ultimately responsible for creating jobs, keeping us in work, guaranteeing a respectable standard of living and looking after us in old age and sickness.
This boundless expectation is all very well – but it rests on pervasive and deep-seated ignorance: it fails to address the most fundamental question of all: how is all this state-sponsored largesse to be paid for? Or, even worse: given that the state is ultimately responsible for everything, the question of “paying for it” shouldn’t even arise. (“Modern Monetary Theory” posits that since we, effectively, owe all this money to ourselves, it all cancels out and therefore doesn’t matter anyway!)
credit expansion and welfare provision
We know that for most of the past hundred years governments have engaged a variety credit expansion methods to meet the vote-winning demands of welfare provision – always with disastrous consequences for the purchasing power of their currencies. That is logical and beyond rational argument, no matter what “Modern Monetary Theorists” would have you believe. Members of the public, unconcerned with the workings of high-finance, can be relied on to regard any money-printing wheeze as normal practice.
Explaining the subterfuge
Note that the first step in this version of money-creation is taken by an arm of government known as the Treasury, which issues government ‘debt’ (“long-maturity bonds”) to financial institutions and banks in its coterie of complicit colleagues. Most of these bonds are then purchased by none other than the venerable Old Lady of Threadneedle Street, the Bank of England itself.
But here’s a revelation: the central Bank pays for those bonds with pure, freshly minted counterfeit – otherwise labelled “fiat money”.
[“Fiat” is a Latin word – it is the 3rd person subjunctive form of the verb “fio”, meaning “let it be”. The Latin Bible tells us in Genesis, Chapter 1, Verse 3, that God said “fiat lux” – meaning “let there be light”; and there was light.
That should help to understand “fiat money”. The government, in the form of the Treasury, aided and abetted by its Central Bank, says “Let there be money; and, behold, there is money!”]
But, unlike light, the money is one-hundred-percent bogus. The money that the Bank of England uses to buy the government debt it helped to create, has been sucked out of thin air by a computer key.
Let’s call that Stage One of this gigantic fraud. Stage Two: the Bank of England launders the billions of counterfeit through insurance companies, pension funds, commercial banks and other City institutions in its close circle of cohorts, incidentally facilitating huge bonuses, dividends and similar awards of immense unearned wealth.
freshly minted billions must go somewhere
Stage Three: the freshly printed billions have got to go somewhere. They are lavished on every high-value asset that holders of new money can lay their hands on – luxury baubles, cars, yachts, high-end properties, racehorses and quoted shares, causing the prices of all non-financial assets to rise.
At Stage Four the new money eventually filters down into the wider economic community, causing a steady but unstoppable rise in prices of the goods and services required for everyday living. This completes the transfer of wealth from you and me, members of the wider community, to the favoured few who got their hands on it first. Fiat money, unfailingly, always divides communities, widening the gulf between rich and poor.
Rising prices? Or collapsing purchasing power?
It’s obvious that every upward shift in the general price level represents a fall in the purchasing power of money. But here’s a thought: this couldn’t happen if trading were conducted by barter, which does not rely on money at all. But since the inconvenience of barter is itself an impediment to economic activity, monetary stability must hinge on using a medium of exchange that cannot be conjured up fictionally – and is widely trusted!
Historically, every medium of exchange imposed by government on its citizens has succumbed to the abuse of dilution, leading to its ultimate destruction. Once public trust is lost, even enforcing its use under legal-tender laws has never saved it. When cash is toxic, citizens will prefer holding goods and any non-financial assets.
The survival instinct in action
Here’s the question: again, historically, whenever that loss of public trust has rendered a state-decreed currency unusable as a medium of exchange and store of value, what happened? Did trading revert to barter or simply grind to a halt? Did wages remain unpaid, were contracts breached, loans dishonoured? Did people starve? No – they found a way.
alternatives to facilitate trade
The human drive for survival is relentlessly resourceful. Today, in Zimbabwe, Venezuela, Sudan, Iran, Liberia, Haiti, Sierra Leone and Argentina people display a natural inventiveness to use alternative currencies to facilitate trade – even another fiat currency that’s depreciating more slowly, relative to that imposed by a corrupt and bankrupt state.
It matters not whether it happens to be gold or the US dollar or some other relatively stable unit. What matters is that its selection is made by its users – not the state, and without the largesse of state funding to match every expectation there would be an outpouring of practical support and charitable giving because that’s human instinct. There would also be much suffering, but the nation would survive, recover and, eventually, thrive once more.
Let’s conclude by focussing once more on fiat.
Fiat currencies inevitably fail the majority of their users, and the seeds of that failure are sown at the point of their creation. The process of their creation builds monumental piles of entirely unearned wealth for that notorious group, euphemistically titled “first receivers”. Their newly printed tokens are devoid of any of the backing that might qualify them for use as money.
In these times of virus-induced economic crisis governments are understandably expected to pull out all the stops and dispense piles of welfare to save jobs, industries, sectors, businesses – entire communities – without regard for the size of the bill or how it will be settled. The lack of any intelligent economic calculation hardly matters to a Chancellor besieged by an expectation to act as national saviour.
But all that happens is that the economic can is kicked further down the road, delaying the inescapable consequences of this folly. Just as haphazard anti-viral measures delay, but don’t cure, infections, so every furlough pushes inevitable job-losses indiscriminately further ahead. Every issue of free money gives a zombie business a few more weeks or months of sputtering life; and every “free” loan instils a spark of hope for a short period before being written off as “non-performing”. Apart from buying some time, what is achieved by printing these billions – around £875 billion at today’s count?
waking up – the only cure
The blind continue to lead the blind. All the cockamamie state freebies now have Revenue authorities running round in circles, prosecuting multiple frauds in sub-contractor schemes; restaurants’ eat-out-to help-out claims; grants to self-employed; and 27,000 fraudulent loan applications.
So – my wife asks me “What’s the cure for this madness?” I reply that the only cure is to wake up.
Or be woken up by the economic cataclysm that will surely unfold.