learn how to navigate currency crises for a soft landing

Very recently, on Thursday 20th November 2014, the British parliament debated money creation for the first time in over 170 years. The debate is embedded below.

During and after the debate I made some comments on youtube, and I’d also had some prior correspondence with a gentleman called Graham Hodgson who is one of the people behind Positive Money. I’d contacted them to get some clarity on who they thought the money-creation privilege should be given too and also to challenge them to consider the idea that may be no-one should have it, and that actually I thought they needed to take a step back and consider if money creation was needed at all.

So, I’ve decided to cobble bits and bobs together to bring together some of my thoughts pertaining to the debate directly and what I felt was missed out. It was two hours long but woefully short. The participation was shamefully low, and I tip my hat to every politician who bothered to turn up. Many admitted they knew so little about the subject and I appreciated their candour. Many of the more left-leaning politicians were veritably salivating over the prospect of being given the value-transferring, money-creation weapon. They see the huge advantage it gives to the holder of it and believe the government should wield that power.

My belief is that we need honest money and I strongly believe that no-one should have a monopoly privilege; it is far too powerful a privilege and transfers wealth to those who use it early on in the process. Most of the participants of the debate seemed to understand that creating more currency/loans results in more claims on wealth, which drives up prices; they recognised the UK housing market as a prime example. But what was not overtly recognised, with the exception of Steven Baker MP, was that the value attached to that credit came from everyone who held sterling. It’s my belief we must hold to that fact at all times when studying markets, lest we end up in a econometric, causal blind-alley.

Some, however, do recognise it as a hidden tax but still advocate for it. Positive money themselves simply think that the “tax” should go to the government and not to private banks. Many people have this belief that the government is us, and therefore we, through them, get to use it. Firstly, that is a hidden, non-consensual tax that overturns personal liberty in a terrible fashion. But it also means that politicians can meddle in our economy for whatever political reasons they wish. It was explicit and implicit bail-outs, artificially low interest rates and deposit insurance which allowed the imbalances to grow way beyond what a free market would allow. The free market requires one major regulator…. called failure. But since people want to pretend that deposits in a bank are theirs and actually sat there waiting to be used, and they are encouraged to look the other way because of deposit insurance, when a bank goes bust the depositors must be bailed out by the public. If someone actually took a loss, it would change behaviour. If failure was not outlawed, incentives would change to favour more prudent practices.

This next bit really needs to be said in the face of all the nonsense we see from every frequency of the political spectrum…. Government does NOT create jobs, they just redirect resources at a huge cost. When they “create” a job they get a pat on the back because it is seen. But the job that didn’t come into existence due to that rearrangement is not. The hubris required to believe that you can centrally plan such an impressively complex organism is staggering. Anyone doubting that should read “I, Pencil“, a short essay illuminating how the free market works. And anyone who thinks having the money creation privilege isn’t central planning should consider that money is one half of every trade. I am tired of the majority of politicians, who think they know best for the economy when it is categorically and demonstrably the opposite, unless it is getting out of the way, which almost never happens.

I agree we shouldn’t have debt-based currency, paid to a “quasi-public” institution with private owners, whose job it is to protect the collapse of what is a essentially a ponzi-scheme on steroids. Who will ultimately, until stopped, protect it at all costs and regardless of the quantity and ferociousness of the financial repression required to do so. No-one in this debate mentioned that QE was done to swap toxic garbage that can’t be sold, away from the private banks to the public. The excuse is to free up their capacity to lend, and in that instance having a solvent alternative who could lend would be much better. But there aren’t any, because we control interest rates, propagandise and coerce people to spend, as if saving and the process of creating capital is evil.

It wasn’t mentioned that central banks have paid interest on excess reserves. Imagine that! You borrow from the central bank at 0.5%, and get paid 4% to store your excess reserves. That 3.5% spread the bank gets…. where is it coming from?…. Other holders of sterling. The BofE even stated in a MPC meeting, the desirable thing would be negative real interest rates of 7% for 10 years to halve the national debt…. yes, and our standard of living and value of our money.

I strongly disagree with people like Peter Lilley MP, who to his credit had a good understanding of the mechanisms of banking and money, but who said that sometimes there just isn’t enough currency. What garbage! Inflating the money supply does not, has not and never will create wealth. Things don’t spring into existence when banks make loans (using money they don’t have). Actually in that debate, legitimate banking was barely discussed. Deposit banking and loan banking were once separate. If you were being paid interest you knew your money was lent-out. But various statutes overturned private property laws for the special case of money and it is no longer considered a bailment. But it showed his lack of respect or understanding for the pricing mechanism. Perhaps, in a world of centrally-planned interest rates, it is to be expected since the pricing mechanism is being kept in the dark because the messenger has been shot in the leg and isn’t feeling too well.

Stephen Baker MP didn’t get the opportunity to go into detail about price signals and how important they are. I think this aspect speaks directly to one of the premises from the positive money group’s “Full-Reserve Banking” paper.

“we may still need to increase the amount of money in the economy in line with rises in population, productivity or other fundamental changes in the economy.”

To me, this is the archetypal “conventional wisdom” and I believe it is wrong. It’s the equivalent of saying there isn’t enough gold. If prices are allowed to fluctuate the quantity of a money good is totally irrelevant. In fact, it hurts economic calculation to change it. Having a reasonably stable measure a free market would provide is very important. If we moved to non-credit-based money, any reasonable amount would do. As productivity increases, or people choose to hold money rather than other instruments of wealth, savings would become more valuable over time because there would be a mild secular deflation – which is a good thing! It encourages savings and available capital and ensuring prudent use. Interest rates would be cheaper because the lender would expect to get paid back in slightly appreciated currency. Without any sort of moral hazard, regulation, deposit insurance etc., failure alone would be the regulator and the system would be self-moderating and self-regulating. Interfering with the process and distorting these signals makes business more inefficient and results in more capital being mis-allocated.

It can be argued that we have an mis-educated public who would baulk at wage reductions even if they were become more wealthy because goods were falling faster – what Fisher and Keynes called the public’s “money illusion“. But psychology and ignorance aside, deflation isn’t a bad thing. A lot of hysteria is present in the “anything but deflation” camp. I think their arguments are wrong. History shows that with the exception of the great depression (for unique reasons) and the return to gold at the wrong parity, that of before the war and all the printing, both of which were extreme deflations, economies actually do better during deflation than inflation. The Austrian school can explain this perfectly with the theory of capital structure, something that other schools seem to overlook or ignore.

But, let’s just suppose they are right, and as the paper says “we may still need to increase the amount of money in the economy in line with rises in population, productivity or other fundamental changes in the economy.” Well, here is my issue… How does new money spring into existence without giving a massive subsidy to small groups? If the government or central bank create it, government and those who directly receive government spending, benefit. The inflation may represent the new productivity to keep prices stable (which as I said, I disagree strongly with) but how do you get the inflation to fairly account for the productivity it claims to represent? That is never addressed by proponents of this philosophy.

In addition, no government has ever been trustworthy in the long run, trusted to abide by fictional restrictions put into place by its people. If our government is still allowed to run a deficit and the difference comes from foreign borrowing, it wouldn’t be long before they turn to inflation rather than honestly defaulting. Without a real monetary collapse to precede it, I suspect they could change whatever laws they need to fairly easily, because most people have no idea anything is wrong. Thousands of new statutes are created every year and most of us have no idea what they are. It’s even very tempting to stop taxes altogether and to allow the government to pay it’s bills with a 0 balance. I just can’t see them self-moderating.

When the industrialists in Brummagem during the late 1700s and early 1800s, in the absence of good coins of small denominations stepped up to the plate, and minted their own, the government stepped in to eventually monopolize the issuance as governments have ever done throughout history. It is not even questioned.

We have a situation where corporate power, who lobby for regulation to protect them from competition, uses government like a sock puppet. That is not capitalism. If a truly benevolent and super-wise government could determine the quantity of money (stupid concept anyway for anyone who understands prices), the largesse and succubus class close to government would milk us dry.

That’s the problem with all government, they don’t see tax as theft; which it is. They take other people’s property by force to distribute as they see fit. The law doesn’t require consent because to breach it requires you to infringe on the lawful rights of others. But the legal framework and a nation’s statutes do. That legal statutes have the force of law when consented to is fine. But can anyone find the mechanism by which I can withdraw my consent? Sure.. I won’t receive the supposed benefits and privileges of the system but I would be free of most if not all taxes, liens etc. Maybe it isn’t desirable, but it is of paramount importance that the choice exists, or else we have no right to claim we live in a free country. I mean we all know we don’t – you don’t even have ownership of your own body or conciousness.

It is embarrassingly absurd in my opinion, to accept the pretence that a mass vote every four or five years, of which you may not even participate, gives blanket consent to what are essentially private, legal contracts between you and the state. To bind you by contract without your explicit consent. And yet a letter of reply I received recently from the House of Commons Library took that position!

Maybe I’ll move into a tiny village, and get 9 of the 10 people who live there to “vote” to take the other person’s stuff.. Democracy in action… right?

Let the people decide what is money. Remove legal tender laws, deposit insurance and capital gains taxes on money-equivalents and let’s see how long people will continue to comply with their own robbery by using fiat currency.

Deposit insurance post on MoneySavingExpert

May 23rd, 2012 | Posted by admin in Uncategorized - (Comments Off)

I’m tried of hearing peoples’ fears being allayed by the nonsense of deposit insurance. I like Martin Lewis from Money Saving Expert – I think he does a great job of helping people manage their financial affairs and combating corporate marketing. But he totally misses the larger picture, which in this environment, is deadly…

My MSE Post – Deposit Insurance – the real story…

The Royal Institute of International Affairs reply…

April 26th, 2012 | Posted by admin in Uncategorized - (Comments Off)

/letters/2012-03-06_RIIA.html#reply_2012-04-04

I do appreciate the reply but none of the points in my letter were addressed. To be expected I suppose…

I just found this pathetic article about why the UK needs to devalue by 25% to help us all…

http://www.civitas.org.uk/wordpress/2012/04/13/strong-pound-still-hurting-britain/
Full Press Release

I posted the following as a comment over there. But in case it doesn’t pass moderation I’ve pasted it below. Well, it saves repeating myself…

Firstly, I can’t believe the blurb for the book says “Since the 1970s, free-market orthodoxy has dominated British monetary policy”.

You have got to be kidding me! Free market monetary policy!? Central banking, fiat currency, legal tender laws and deposit insurance are diametrically opposed to free markets. John Mills seems to think that the BofE is targeting inflation – how quaint and ridiculous. The BofE and the fractional reserve banking system are the inflation; they created and encouraged the moral hazard and the mispricing of risk that has destroyed the economy and he wants more of it…

Leaving the moral issue to one side for a brief minute, currency devaluations can only work when a handful of countries need growth. The whole world is looking for growth now – competitive devaluations are now a race to the bottom. We debase our currency so other countries do the same in an effort to steal growth from each other. The resulting currency war is a terrible result. We are a country that imports more than we export – debasing our currency will hurt us more than help us.

Now, here is the really important bit – the idea is morally repugnant. Firstly, what gives anyone the right to destroy the value of our savings via inflation and devaluation? Why are we so apathetic about the usurpation of this power. I venture it’s ignorance and that needs to change. Since we import most of the raw materials for what we manufacture what he’s actually saying is he wants wages to drop and rather than wages drop in nominal terms he wants it to happen dishonestly via inflation – thanks to what Keynes called the public’s “money illusion” – so he can more easily sell abroad for the 5 minutes it takes until our customers do the same and restore the previous equilibrium.

So here’s the thing… I could accept that policy if the UK were to drop capital gains tax on gold so I can protect my savings. I’d be 100% out of sterling faster than you can say “gold standard” and so would every saver in Britain – you know – the people who actually provide the capital for entrepreneurs. That would provide his 25% drop far more efficiently than any monetary policy could. Then when wages drop nominally at least I am in a position to negotiate with my employer without losing the purchasing power of what I’ve managed to save in my working life. No doubt lower real wages would increase employment but you know what – you could achieve that by getting rid of the minimum wage and allowing free markets to bring the supply and demand for labour into equilibrium.

What John Mills is recommending is theft – plain and simple. Inflationism isn’t new – his argument is the same tired old mantra from Keynesians and Monetarists – it’s been going on for 1000s of years in one form or another. And you know what? The government is already doing its best to steal savings via negative real interest rates or what is called “financial repression”. It’s the only way they can pay the debt without defaulting honestly so what’s his problem exactly? Are they not doing it fast enough!? Hey, why stop at 25% – if it works so well why not go further. How did it work out for the 3500 paper currencies in history that no longer exist? Argentina, Zimbabwe, Hungary, the Weimar Republic – they couldn’t export fast enough when their currency went down the toilet could they?. It’s a totally fallacious argument.

Once again, we punish the people who did the right things, and reward the people who did the wrong things. History shows that countries can have strong currencies, high wages and still be competitive – but you know what?… it requires a healthy dose of free market capitalism, and we’ve not had any of that for decades…

Either he doesn’t understand how free markets work and why fiat currency and fractional reserve banking are sucking the lifeblood out of the economy and the people who comprise it or he’s knowingly advocating theft on a national scale.

“Challenges conventional thinking” – give me a break – his is the epitome of conventional thinking. He’s an apologist for irredeemable fiduciary media and like most think tanks – they think inside the box and aim to legitimise policy with a managed debate.

Disgusting…

US Bailout Propaganda

April 16th, 2012 | Posted by admin in Uncategorized - (Comments Off)

So the US treasury is claiming they’ll make money from the bailouts and the BBC are floating the story with no critique to ensure we all think our own bailouts were a good thing. What a ludicrous situation. I have no doubt that some money will be “made” from the bailouts but the real cost far outweighs any nominal, apparent gains.

First of all, as debts are paid currency is destroyed and the currency supply shrinks, which will eventually result in its increased purchasing power, so it sounds great on the surface. But actually , our money supply is being increased all the time – so that benefit is moot.

The key to economics is to understand what is not seen. If governments spend taxes to create jobs, it’s easy to see those jobs and give them credit for it. But what about the jobs that were destroyed or prevented from being created by redirecting resources away from the private sector? Government spending is simply organising the economy around political motives, not how the individuals who make up society would choose to spend their money. After all, if peoples’ desires were aligned with these political motives in the first place, there would be no need for government spending.

The bailouts have been a unmitigated disaster. They’ve attempted to arrest the liquidation of debt which is desperately needed, they’ve engineered a frightening massive moral hazard with implicit bailouts and perhaps, most disturbingly, they’ve mis-priced risk for market participants AGAIN… one of the major causes of the crisis. Governments and central banking got us in this mess and they are making things worse by preventing the correction. They can only delay its onset or slow down the correction and make it drag on for years. My feeling is they are setting us up for a day when interventions will no longer work, and the sudden crash will be far worse than what would have occurred had they not interfered. But what do we expect? If they hadn’t interfered we wouldn’t be in this mess in the first place. Doing nothing doesn’t sell well to the public, who for the most part have no idea what’s really going on with irredeemable paper money.

Once again, governments and their mainstream mouthpieces show how little they know about economics. There could not be a more striking example of faulty logic, enshrined in Bastiat’s broken window fallacy, than this…

http://www.bbc.co.uk/news/business-17720012

Robert Peston continues to muddy the water

March 14th, 2012 | Posted by admin in Uncategorized - (Comments Off)

How about this ridiculous comment from the BBC’s Bilderberger-in-chief Robert Peston in response to the UK chancellor George Osborne’s plan to sucker any willing victim into 100 year bonds…

“Even so, as taxpayers we should probably be grateful that gilt yields – the implicit interest rate paid by the government – are so low at the moment. It means there’s more of our tax money available to fund squeezed public services.”
http://www.bbc.co.uk/news/business-17350397

For a start it’s a nonsense sentence because it assumes that yields are low because of natural market phenomena. We know that yields are only low because the Bank of England is holding them down at all costs, and the way it does this is by creating more money. When interest rates are controlled in this manner, it means the pound is being devalued. So what you don’t lose in overt taxes with representation, you lose in the much more damaging inflation tax, which is without representation.

Apparently we’re also supposed to be grateful that our government is being enticed to borrow more money and that it’s suckering in the public who blindly trust them.

The BBC just carries on confusing the issue. I once wondered if they had a backwards understanding of the economy but I think it’s clear their “mistakes” or “oversights” are deliberate, as can be seen from my recent exchange with them…

14/10/2011 letter to British Broadcasting Corporation

More BBC financial nonsense…

November 28th, 2011 | Posted by admin in Uncategorized - (Comments Off)

Reporting on the £275bn programme of UK government debt purchases the BofE are engaging, yet again the BBC completely mislead…

“It is designed to put more cash into the UK financial system, to reduce long-term borrowing costs, and to push up the value of assets such as shares and house prices.”

Inflation does not increase values. It increases prices. Anyone reading that sentence who doesn’t understand money (and that’s most people unfortunately) would assume that it is unequivocally good – why not do more? Why not buy all our debt so our houses are worth billions and trillions – then we can all be rich? Pathetic. The BBC are getting more and more ridiculous in gatekeeping for the cartel of bankers and their political minions.