ECONOMIC PERSPECTIVES – 110

[DECEMBER 2021]

 

All this may be obvious now – but it didn’t start that way!

EMILE WOOLF

 

Why do I persist in writing these essays on economic issues? Certainly not to influence government policy – that would indeed be a forlorn hope, despite the strength of support coming from most of my readers. Equally forlorn would the hope of persuading members of my own family and their friends that their “progressive” beliefs, if enacted, would be the stepping stones on the path to state-capture on a scarcely imaginable scale.

 

No – let’s be clear: I have no thematic agenda, timetable nor deadline that might influence my subject-matter. What I write is always a response to an “itch”, and writing provides me with the “scratch” we all crave in order to assuage an itch.

 

The itch is invariably a provocation, and may be found in a magazine article bemoaning the unfairness of inequality in all its forms – whether of wealth, income, opportunity or aptitude. This psychological model is centred on the unthinking assumption that government action is warranted to address every perceived injustice. If all people are born equal, when manifestly they are not, that’s an injustice that’s surely entitled to suitably measured state intervention.

 

 

Can government cure every injustice?

 

 

Is it within the power or purpose of government to remedy that “injustice”? That people are not born equal is one of the most profound economic blessings, without which Say’s Law on the division of labour, underpinning the entire fabric of production and consumption, would have no application – and modern society would be consigned to the dark ages.

 

Nor is this competitive advantage confined to inequality of people. Striving, foolishly, to serve that idol, “equality”, is what lies behind every attempt by government to cadge votes in depressed regions by “levelling up” – a misguided and futile pursuit that disregards reality. Regional disparity is the very essence of specialisation and innovation – whether the context is steel mills in Yorkshire, hops farms in Kent, whisky in the Scottish isles or discounting bonds in the City of London. We are all the richer for these inequalities and the very notion of levelling them is a recipe for impoverishment and misuse of taxpayers’ money.

 

 

Geographical advantages too

 

 

The same principle applies to natural geographical advantages, from coffee beans growing at 500 meters in the mountains of Peru, figs in Greece and Turkey, or tobacco leaves in Cuba. Heaven preserve us from equality! The full measure of competitive advantage is harvested, of course, when markets are freely accessed and people are able to trade without impediment.

 

I could have added that free trade between commercial entities is conditional upon the existence of sound money – one of the least understood concepts in the field of economics, and hence one of the “itchiest”!

 

 

Currency destruction with a vengeance

 

Our central bank and treasury officials, whatever their declared policies may be, are hell-bent on currency destruction. It’s useless to measure that destruction against other state currencies because they too, in varying degrees, are being destroyed by their central banks and national treasuries. It’s therefore possible to ascertain an objective measure of currency destruction only by reference to a relatively stable yardstick such as gold.

 

Here’s a practical illustration. Twenty years ago you could purchase an ounce of gold for just under $300, whereas today that ounce will cost you close to $1,800. What should that tell you? Should it tell you that buying gold 20 years ago would have been a “good investment”? Maybe, but, more accurately, it enabled you to avoid the thumping loss of $1,500 you would have suffered by hanging on to the unbacked state currency. Therefore the difference between $300 and $1,800 should not to be thought of as a “profit” from investing in gold, but as the measure of the dollar’s loss of purchasing power over 20 years.

 

The chief instrument of destruction, as we know, is the unremitting printing of greater and greater tranches of unbacked currency, a process on which governments are now incurably hooked – an apt metaphor in the age of rampant addiction to substance abuse. Nor is there anything on the horizon to suggest a change of policy to one of fiscal rectitude, such as paying for what you consume. The popular process of debauching the currency by dispensing it indiscriminately in all directions, at zero cost, is therefore bound to continue until it reaches its predictable nemesis of worthlessness, and hence popular rejection.

 

 

Leading to…..what?

 

 

What then? Is history (including recent history) a guide? Yes, up to a point. Barter may serve in areas of limited homogeneity, but not beyond practical demand-and-supply proximity. Cryptocurrencies will have some traction, but their own temporally inconstant purchasing power will disqualify them for purposes of economic calculation at different production stages, or in the supply chain as a whole. Manufacturers and traders need a reliable degree of predictability. The trajectory of prices of Bitcoin, leader of the pack, may appear to be ever-upward – fine if you are seeking a fiat-antidote but not if you need to project financial risks and returns for a multifaceted production schedule over the next 6 months.

 

A government-created currency that has failed the tests of (i) purchasing power stability; (ii) value storage over time; and (iii) universal acceptability as a medium for exchanging one’s production for the goods and services we wish to consume – will obviously be replaced by one that emerges quite naturally as its users’ own choice, not one imposed by the state, which is always the kiss of death for any currency!

 

 

Inevitable migration to gold

 

 

There is nothing new about state-sponsored monetary destruction. The only feature that changes is the form it takes – whether adding common alloys to the melting mix; clipping the coins; printing unbacked tokens – every genre of counterfeit has been adopted over the annals of monetary history by monarchs, autocrats, dictators and even legitimate democracies – sooner or later they all succumb to the temptation of creating free money, adding testimony to Professor Patrick Barron’s dictum: Any government that can print money will print money.

 

The other 5,000-year-old constant is that after each such currency lapse the people’s natural choice migrated to precious metals, usually silver and gold. Such a development today would, firstly, replace fiat’s unpredictable purchasing power with relative certainty. Highly-prized metallic commodities can’t be printed into existence, or otherwise conjured out of thin air; and, historically, gold’s above-ground stocks have kept pace with population changes.

 

This change would at the same time establish gold as money in the public mind – not to be lugged around the shops, but to provide undiluted backing for fully convertible tokens supplied by its licensed custodians who, in turn, guarantee (i) to maintain a fixed ratio between the bullion they hold, and the face-amount of tokens they issue; (ii) to hold independent annual audits to confirm the continued existence of their gold holdings.

 

 

Interest rates too!

 

 

This development would also end the state’s hegemony over determination of interest rates, which would allow them to assume their natural role of measuring the non-coercive value placed by parties on their respective time-preferences with no external interference.

 

To get the full flavour, let’s return to that 20-year debauchment of the dollar’s purchasing power. If your currency is backed by gold it is not subject to volatility over time. Therefore the purchasing power of $300 twenty years ago would broadly possess the same purchasing power today, subject only to the effect on production overheads of innovation, component-scarcity and technology – but not the result of inflating the money supply. That, after all, can’t happen when money is tethered to gold in a fixed ratio. Imagine that – life without inflation!

 

 

Freedom is indivisible

 

 

At root, every “itch” represents a potential erosion of our liberties. But those liberties are indivisible and include even the freedom to choose cosseted subservience and government funded spoon-feeding. If the relative safety of paternalistic trade union membership is preferred to individual choice over working hours and conditions, so be it. Membership of the herd has its advantages, fragile and impermanent though they may be. And our freedom to choose servitude is also entitled to protection.

 

That was a good scratch!!

 

[EMILE WOOLF, DECEMBER 2021]