WHEN SUPPLIERS PREFER THEIR GOODS TO OUR POUNDS

[ECONOMIC PERSPECTIVES 106 – OCTOBER 2021]

 

Following his interview with Vladimir Lenin on the subject of inflation in 1919, John Maynard Keynes quoted the Russian as having said “The best way to destroy the capitalist system is to debauch its currency”, and Keynes included Lenin’s comment in his book “The Economic Consequences of the Peace”.
Keynes himself may not have explicitly set out to debauch the currencies of capitalist countries, but his recipe for reviving a flagging economy – public spending to stimulate “aggregate demand” – has achieved Lenin’s aspirational objective admirably.
President Nixon’s decision, exactly 50 years ago, to terminate dollar/gold convertibility, unleashed inflationary consequences that have now reached catastrophic proportions, spelling disaster to countless citizens, notably savers. Government will, of course, rely on any available statistical lie to disguise the inexorable decline in the purchasing power of its currency, but they are now having to face up to what is increasingly obvious to every member of the public. Tendentious announcements by the Governor of the Bank of England, claiming that the current inflation spike is merely “transitory”, are patently products of governmental wishful thinking, and anyone lending them credence simply hasn’t been paying attention. Employees, investors and pensioners have been watching the withering of real incomes due to that hidden tax – inflation. Indeed, it is less “hidden” by the day!

Ending gold convertibility opened the door to currency destruction

Ending the restraint of gold convertibility gave governments the go-ahead they always crave – to be remembered for their acts of heroic magnanimity, whether in the form of infrastructure projects that no one voted for, or saving the NHS, or paying the wages of workers on furlough, or initiating yet another unctuous state handout or tax relief – while never forgetting to exploit the popularity of “windfall” taxes on the super-rich. Governments fall prey to the spending addiction because “taking care of the less fortunate members of society” is a sure-fire vote-catcher. They don’t recognise, until too late, that it also breeds a mental malfunction in society called welfare dependency, or a reliance on the state to satisfy every need, even including a basic income. The natural incentive to work has been exchanged for an incentive to claim. Why work?
At the Conservative Party conference this week our Health Secretary, Sajid Javid, saw fit to plead with the electorate to call on their own family first when in need; then on their own community; and, as a last resort, the state benefits system. He bemoaned the fact that in far too many cases now the first instinct is to tap the state’s infinite beneficence. This is hardly surprising. The addiction for more and more government help knows no limit – but the question of affordability never enters the treasury’s equation: unbridled freedom to lavish money on vote-catching projects, that the natural limitations of a gold-backed currency would render impossible, proves an irresistible lure for treasury officials once they have the keys to the printing-press, notwithstanding all their protestations of financial chastity.
As Claudio Grass notes in his recent essay, the dark side of unlimited, “free”, unbacked money is the ease with which its tentacles will reach into every crevice of society, even overcoming moral constraints. As he puts it, “whoever controls the currency controls everything else too”. Limitless zillions of fiat money, counterfeited into existence by the click of a computer mouse – all of 10 minutes ago – now facilitates all the restrictive and coercive elements of a lockdown without any need for the excuse of a virus attack.

But it’s only “temporary”? Believe that and you’ll believe anything

And, as you will have observed, the regulatory justification for inflicting a condition of house-arrest on the nation is that “it’s a temporary measure enacted in the face of an emergency”. But where do you find a government equally eager to dismantle that power when the emergency has passed? If the state can engineer a society of submissive interns by the device of unbridled printing, borrowing and spending, the “magic money-tree” fable becomes irresistibly within the grasp of officialdom. Claudio quotes Jim Reid, Head of Thematic Research at Deutsche Bank: “There is no way we could have locked down whole economies and furloughed employees in the pandemic under a gold-based system.”

 

We know there is no free lunch. Putting it another way, you cannot conjure virtually limitless amounts of money out of thin air without it having an economic impact. Yet that is exactly what quantitative easing (QE) attempts to achieve. Under the rules of that game, government increases the national debt by flooding financial institutions with term-based promissory notes, bonds and Treasury Bills, while at the same time instructing its “independent” servant, the Bank of England, (i) to buy that debt with newly printed money; and (ii) to keep interest rates suppressed – not difficult with all that money sloshing about.

This new money does not stay idle, of course, but inflates prices in every market it enters – predominantly stocks and shares, fixed-interest bonds, domestic and commercial property, commodities and every class of investment, from electric cars and crypto-currencies to “non-fungible tokens” (NFTs) – the latest device for anyone who still wants proof that the world has gone stark-raving nuts. The hordes of nouveau riche naturally require financial advice from that new breed – “wealth managers” – whose masterful expertise is advertised in every Sunday supplement. The big law and accounting firms are growing fat on fees for arranging “deals” – Deloitte has just announced that each of its 700+ partners will take home £1 million for Christmas! As I have said before, the mountains of fiat must go somewhere!

When the scales fall from people’s eyes the denouement will hit – hard

 

Governments know there is a limit to the suffering that pensioners, lenders and savers will endure. Inflation depletes their hard-earned savings without any compensatory interest. This is a wealth-transfer that sees savers effectively paying off the national debt, widening the gulf between rich and poor. No wonder governments steadfastly insist that the rise in price inflation is merely a temporary “spike” – they love it!  It will end only when a risk-rated bond market forces up real interest rates. The Chancellor knows that an increase in interest from its present level of 0.25% to just 1% will cost the exchequer another £40 billion – per annum!

 

This government is running on empty – not just fuel, but ideas. Their mechanical knee-jerking that passes as policy leads to anti-market interference such as the energy price cap – responsible for wiping out smaller operators unable to recover their own increased costs from customers. The government’s claim that the cost of renewables is plunging is seen to be another lie when you take account of the subsidies it pays to energy generators via consumer levies – currently over £10 billion a year.

The end-game of currency destruction will manifest when our suppliers feel better off holding on to their goods – rather than exchange them for the tokens of a failing currency. Maybe then we’ll understand the consequences of Nixon’s unilateral severance act, 50 years ago.

EMILE WOOLF [7 October 2021]