RETAINING A SEMBLANCE OF SANITY IN THE ASYLUM

ECONOMIC PERSPECTIVES - 125 [NOVEMBER 2O22]

Every time I start this essay I find the political background has shifted so dramatically that I have to start again. Only Ollie’s complaint to Stan seems to be an apt constant: “another fine mess you’ve gotten me into!”

Built-in contradictions

In this disjointed economic culture there is certainly no lack of demand (there never is!). But nor is there any rational connection between demands and means of satisfying them. That is why you hear about the urgency of net zero in the same breath as complaints about fuel bills; you hear simultaneous insistence on green-belt protection, together with horrors of escalating house prices. The rising cost of living must be compensated by more state welfare that in turn forces prices even higher. 

Increased state regulation is demanded while a maze of bureaucratic rules strangles productivity. Over 5 million people have dropped out of work into benefits, yet shop windows are thick with vacancy signs and entire sectors face closure for want of staff; police are feebly ungluing protesters from motorways while urban crime spirals out of control. 

We retain membership of every human-rights and refugee convention that prohibits us from passing our own laws on immigration and refugees, and compels us to accept the inward surge of migrants - some genuine asylum-seekers while others are law-breaking abusers. Any country that can’t secure its borders against arrivals in such numbers that it can’t cope with them has lost its integrity as a nation. Cause and effect are juxtaposed in this woeful descent into self-contradiction and the inability to think sequentially. 

Politicians carry a special burden of blame

All echelons of the political class are thus afflicted, one obvious manifestation being the tendency to “right” any perceived “wrong” by simply  banning, abolishing or restricting it. One of the most egregious illustrations of not “thinking things through” occurred in America when, in August 1971, President Nixon became so alarmed by the rate at which the USA’s gold reserves were being depleted by redemption of foreign-held dollars that he took the coward’s way out. At a stroke of the presidential pen he removed the USA from the “gold-exchange standard” and the convertibility of dollars into gold at $35 per ounce came to an abrupt end.

By any measure that was a truly “causal” event: it has had global consequences on a cataclysmic scale, way beyond anything contemplated by Nixon or the Fed. It was Keynesian doctrine writ large: the worshipful deity of “aggregate demand” was incarnated - and not just in the USA. The lure of unrestricted licence to create new money out of the ether proved irresistible to governments around the world and released their central banks from the discipline of backing their currencies with anything substantial and endurable. With that licence the culture of statist dependency was ushered in: as I said, there’s never a lack of demand - especially for “freebies” - and society suffers the deepening psychological consequences every day. 

There was a rational alternative

Nixon’s was the knee-jerk response to a problem caused by America living beyond its means. There was, however, a rational alternative. What the Federal Reserve could have done was (i) raise the convertibility ratio of $35 to the ounce to a more manageable level so that foreign holders of dollars would need more dollars to acquire an ounce of America’s gold;  while at the same time (ii) passing a law prohibiting the Fed from creating dollars beyond its ability to redeem them in gold at the revised ratio. On this basis the ratio agreed at Bretton Woods in July 1944 would have been breached, but the principle of  maintaining the integrity of the currency would have been retained. Yet since that fateful day the dollar has lost 98 pc. of its purchasing power.

The very idea of ‘gold-backing’ is invariably misunderstood. It’s quite possible for a country to protect its currency from the ravages of monetary debasement even if it has little or no gold in its central bank’s reserves. It could, for example, maintain a constant convertibility ratio between its own currency and that of another country whose currency is subject to rules that restrict profligate money-creation - even if those rules don’t include gold convertibility. When mere perception lends credibility to a currency, regimes in Zimbabwe, Cuba, Argentina, Chile, Venezuela, et al, may include the US dollar (or another nominated alternative) as legal tender when their thoroughly debased peso or ‘local dollar’ are no longer accepted as a trade settlement medium.

The South African story

There are many examples. Before South Africa became a republic in 1961 its currency was the British pound. In February of that year it celebrated its exit from the Commonwealth by launching its own currency, the ‘rand’, but retained the link to the British pound by fixing a ratio of 2 rand to the pound. After all, the pound sterling was regarded as a stable currency and the link would enable the rand to hold its worth in like terms. Indeed, its name, rand, is an abbreviation of “Witwatersrand”, the 35-mile escarpment near Johannesburg that holds one of the world's largest known gold reserves and has produced over 40,000 tons, representing about 22% of all the gold accounted for above the ground. The provenance conveyed by its name alone should have kept authorities at the South African mint on the straight-and-narrow!

Some hope! From its launch-ratio of 2 rand to the pound it is now over 20 - signifying a loss of purchasing power relative to the pound of some 90 per cent over the 60 years since its launch. But it’s actually far worse than that: the pound to which the rand was tethered has itself suffered a huge loss of purchasing power over the same period - much like tying your little dinghy, struggling against the current, to a steamer that’s also going backwards - although at a slower pace. To gauge a currency’s loss of purchasing power against real goods it therefore makes sense to use an objective measure, based on gold. 

The rand’s real loss of purchasing power

When the rand was launched as an independent currency in 1961 an ounce of gold could have been bought for £12.50, or 25 rand. That same ounce of gold would now cost £1,400, or 30,000 rand. Let’s spell out the maths, with the help of Professor Barron,  of the full extent of the currency’s decline:

Today you would need 30,000 rand to buy something that cost 25 rand in 1961. This shows that the rand’s value, measured in gold, has dropped to less than one-tenth-of-one-per-cent of its 1961 value - or, it has lost 99.9 pc of its gold value since 1961.

The currency always mirrors the wider economy: inflation, once entrenched, has a life of its own. When Ludwig von Mises, the Austrian economist, was asked which of the many necessary economic reforms he would select if only one were permitted, he was unequivocal: sound money. When money fails it becomes useless - to citizens and their government alike. To citizens, normal life becomes unaffordable, while unreformed governments can’t even pay interest on the debt they create via the printing press.

Yet weak minds are incapable of tracing effects back to their causes. Our new PM proclaims his determination to allocate another £12 billion to help clear the NHS backlog. £12 billion? From where? Tax increases or spending cuts? Or resorting to the same debt-issuing mechanism he deployed during lockdown when people fell for his kidology that furlough, eat-out-to-help-out, ‘help-to-buy’, his innumerable awards, grants and loans schemes for people and businesses of all sizes and stripes - would somehow be paid for. 

The magic rishi-tree

Maybe you’ve forgotten his own words as Chancellor? “I am making available an initial £330 billion of guarantees – equivalent to 15% of our GDP. Any business that needs access to cash to pay their rent, the salaries, suppliers, or purchase stock, will be able to access a government-backed loan, on attractive terms. And if demand is greater than the initial £330 billion I’m making available today, I will go further and provide as much capacity as required. I said whatever it takes –and I meant it!”

Hooray for Rishi and his thundering rhetoric. Thundering, but empty. Truss and Kwarteng were poor communicators because they didn’t fully understand the workings of supply-side economics and the money-markets dismissed the ill-explained libertarian backcloth they mouthed so unconvincingly - and they didn’t heed its substance either. But remember - those same market operators were complicit in the 12-year monetary debacle that almost sank the economy completely!

Spending cuts? Tax rises are easier

Rishi Sunak’s latest foray shuns any reference to governmental spending cuts - after all, that would make him unpopular with the civil service and his own MPs. So he prefers to waffle on about tax rises - a sure sign of interregnum panic. After getting through more home secretaries, chancellors and PMs than hot dinners, the public is growing weary. 

His unoriginal tax changes include: increasing capital gains tax [a tax on the inflation he helped to stoke when chancellor]; increasing national insurance [a tax on the sin of employing people]; increasing corporation tax by 30 pc next year [sold as a tax on big business but actually passed on to you in prices], social care levies [sounds good - if you’re mug-enough to believe it]; increasing inheritance tax [a tax on money that’s already been taxed]. And today he’s talking about another manifesto-busting increase in income tax - and so on. What all this has in common: it’s all utterly unprincipled. And he still describes himself as a “tax-cutting Conservative”. Yet this is the tripe “the markets” fall for!

Ample scope for spending cuts at every level of government

It's not as if there’s no scope for the spending cuts without which there’s no possibility of balancing the budget. The NHS, just allocated £12 billion to clear its waiting lists, is advertising vacancies for 16 roles that focus on “diversity, equality, inclusion and wellbeing”. Last year it spent £57 million on “communications”. The TaxPayers’ Alliance commented “Taxpayers are sick of seeing precious resources used to pay for NHS diversity hires. While health bosses complain that hospitals are understaffed [something that every luckless patient can confirm!] NHS bodies continue pumping out ads for yet more diversity demagogues”. 

Even the government’s own research & innovation body (UKRI), having failed to achieve the efficiencies it was set up to oversee, is increasing the number of bureaucrats it employs. Its current schedule of projects includes a “UK-China transnational strategic partnership for immersive storytelling in museums and cultural institutions” [No! I am not making this up!] and a project called “Girls’ eye-view: Girlhood on the Italian Screen since the 1950s”. The combined budget for these two specimens of idiotic state-squander: more than £1.1 million pounds!

And finally…. 

While this deranged hogwash rages in every stratum of government there is no point in delineating it any further. While the “Environmental, Social and Governance” faction expresses more interest in diversity than investing in new products or factories; and pushes firms to prioritise any objective other than profitability; arguing for employee “wellness” over productive expansion - the few still capable of joined-up thinking must sit it out. Remember - this rubbish contains the seeds of its own destruction and it cannot last!

But while the public believes it we must be patient - the alternative is a long stretch in the “funny-farm”.

[EMILE WOOLF  November 2022]

Read more at: www.emilewoolfwrites.co.uk