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.