Wednesday, 14 June 2017

Politicians Desperately Hope You Never Get To Find Out About Things Like This

The General Election has been fun and entertaining, but the biggest national problem we face is way bigger than any party politics or distribution of seats across Parliament. Compared with what I'm going to talk about, the question of which party has the most seats in the House of Commons is fairly inconsequential - although for reasons that will become clear, there is the case of a lesser of two evils.

When young people turned out in their masses to vote for a radical left wing party in the hope that they will cure society of its economic ills, what they were doing is the equivalent of going down to the engine room on the Titanic with their screwdrivers and spanners looking for ways to increase the ship's nautical miles per hour.  

Before you read on, just click on this web page – it illustrates the remarkable national debt rise of £5,000 per second. You'll also notice a statement that says that the national debt equates to "£78,000 for every person in the UK". Hidden behind this is something very important, and it's related to all the things voters were dismayed about when they voted, and the fact that they would be utterly shocked to find the real source of their unhappiness. 

Let me now explain why with something that many of you will not know. Politicians are ruining things for us far more than they hope you'll ever realise, because the truth is, it is actually a combination of debt, borrowing and currency inflation that is causing the vast majority of the things people have been complaining about and squabbling over in this election – from the public sector crisis, to the NHS, to social care, to low wages, to levels of taxation, to the difficulties of the JAMs (those just about managing) – all of those election issues are secondary to the primary problem that affects society, and that is the immense harm that politicians do to the value of money.  

To begin, let me explain how lending actually creates new money. Only about 2% of the money in Britain and America is cash, the rest is electronic - it is 1s and 0s on computers. Under the gold standard the money supply is limited (as there is a limited amount of gold in the world), but under the digital system there is nothing to constrain the amount of money created in fiat currency.

Banks no longer make loans by attaching it to gold stored in its vault. Now it's pretty much all digital, meaning that even if you are merely an individual customer looking for a loan in your own bank, as long as a prospective borrower does not literally want the actual notes as a term in the loan, the bank doesn't need to have the money before it makes a loan.

On a much larger scale, the money the government creates is a fraction of all the money created in circulation in terms of loans. As all this new money is created, the money already in circulation is devalued, which means people who hold the current money, that's you and me, are made worse off. We must add to this the problem of centrally created interest rates, which is the price of borrowing money. The market system of pricing of goods and services is the most effective way of setting prices, and the same should be true of the price of money, which when all is considered is the most important price of all.

Money is now a political football for politicians to play around with as they see fit for their short-term interests. All this money created has pushed up prices, so when wages rise less frequently your pay packet buys you less than before, which makes day to day living seem more expensive. And this is pretty much all the government's fault - they have done more than anyone to create the JAMs. 

To see why, imagine an island of 100 people. Of those, 50 people have £20 and the other 50 have no money but assets worth £20 per person. The islanders will freely buy and sell these assets at £20 a time. If more assets appear on the island the price of assets will drop. Now suppose instead of more assets there is the same amount of assets but more money thanks to the appearance of a man with £1000. As there is now double the money in the economy, selling an asset for £20 seems too cheap, because the £20 is now devalued. Asset prices rise to reflect the fact that there is now £2,000 in the economy, which reduces the purchasing power of all the rest of the islanders with £20 to spend.

This is what has been happening to our developed economies over the past few decades. Wages cannot keep up with inflation because the government's injection of extra money into the economy negatively impacts people's purchasing power through money devaluation. A good illustration of this can be seen by looking at the housing market and the difference between old and young people. For young people the cost of getting on the housing ladder has risen to reflect all the additional money that has been put in circulation. Older people got to buy their houses prior to this, so they benefit from higher house prices disproportionately higher than they originally paid.

And of course, with crony capitalism the money pumped into the economy by central banks is not finding its way to the everyday member of the public, it is going to people in the banking industry with special political interests and politicians on side to ensure the money supply is inflated to fulfil their mutual interests. By way of analogy, it is rather like when aid money is given to Zimbabwe or Sudan but only a small proportion of it makes its way to the neediest people because it is filtered through corrupt officials.

All the ways the economy is devalued, through printing money, through excessive borrowing, and through deficit spending, society is being turned into part Ponzi scheme part credit-pumping pyramid scheme where those nearest the new currency gain the most and those furthest away from it lose out, because by the time all this extra money reaches them it comes in the form of higher prices for goods and services relative to their wages.

I said that this disproportionately affects the young more than the old. And naturally the younger you are the worse this affects you, because you currently have no assets, just a national debt that you and the millions of unborn people will have to pay back. Okay, you don't literally pay it back in the same way you would a friend who'd lent you £10 in the pub last Saturday, but you pay it back more subtlety in the shape of less purchasing power, more things being unaffordable, and state-based initiatives that skew the wealth from the bottom of the pyramid towards the top.

Many leftists believe that all these things like unaffordable housing, higher levels of inflation, stagnant wages and increased struggling to make ends meet are because of capitalism and the way that the market makes the rich richer at the expense of the poor. It is simply a lie - these things are not caused by free markets where people buy and sell in accordance with the marginal value of the goods, services and labour - they are caused by governments and crony capitalism which consist of rent-seekers that rig the system to favour the elite over the rest. This sort of financial skewing would not happen in a freer market where the price of money was conditioned by supply and demand and where the ability to add more money into circulation was quelled.

A phenomenon called Wagner's Law states that as the economy develops over time, the activities and functions of the government increase. As progressive nations expand their economic growth, the proportion of money that goes into the public sector grows too, because there is more economic growth for politicians to get fat off in the shape of transfers of wealth. What you have to remember is that the state doesn't create anything of value, it merely reallocates sideways money that has already been earned by private sector value being created. That's not to say the state provides nothing of value to society - I don't mean that at all - I mean that the state doesn't create value by inventing things or by innovating.

Here is a fact that ought to absolutely startle you. The state is now approximately 25% of the entire country's workforce, and yet less than 15% of new currency goes into the private sector. Imagine all the talent, innovation and prosperity that could have come in the shape of value-creation if the state hadn't creamed off so many of the nation's resources for politicians' own gains.

Here's how things should be
Picture the scene: imagine you live in a society in which no central bank or government can add more money into circulation, and no government can run a deficit (UK governments have run a deficit for literally 95% of the past 40 years - 38 years out of 40), meaning they can only spend what they collect in taxes. And further, imagine they can only tax with utmost transparency - there are no more stealth taxes, and every tax they take has to be justified with visible recorded expenditure accessible to everyone.

In other words, the state has to play by the same rules as everyone else - only spending what they have and only spending money on things that people want them to spend it on because they value that expenditure more than alternatives. Even wars, like the ones in Iraq and Libya could not go ahead unless taxpayers voted with their wallets and provided the funds for the government. If you take away the government's ability to spend excessively you force them to only spend money on projects and services that people value. At present there is very little stopping them printing whatever money they need to action whatever cause they like.

Since the Nixon shock of 1971 when the link of money to a gold standard was discontinued, we have had a system built on borrowing and credit and printing of money that has left us all drowning in a reservoir of debt and deficit. Because of politicians' short-term aims, they manipulate currency to carve our their own political career knowing that most of this activity goes on out of focus of the naked eye of the electorate and at a rate that will do most damage to people who will be working long after their political careers have ended (a good example is the effects of the Nixon shock that played a huge part in the 2008 financial crisis that occurred 14 years after Richard Nixon's death).

Gold as the money standard was a good method for ensuring a limited and therefore more civilised government, whereas unlimited fiat money leads to uncontrolled currency expansion that thins out the value of money. We talked about house prices going out of control a moment ago thanks to currency inflation, but also supply and demand problems. Have a look at a product that doesn't have the same kind of supply and demand problems as houses - I'm talking about oil. Here you can map the price of a barrel of oil from 1946 to the present day. Look at how stable the price of oil was when the dollar was linked to gold, and look at how it fluctuates at a much higher level afterwards. The price of oil if measured in gold hasn't changed much at all since 1946, whereas the price of oil in dollars or pounds has shot up drastically.

The same goes for most consumable goods - their prices have risen far higher than they would have if the government had been kept in check with its careless handling of the money supply - prices of goods have risen higher than average earnings. Had government activity been wedded to the gold standard and prices of goods, services and money been more in line with supply and demand, the link between average earnings and prices of consumables wouldn't have been so out of line, and the relative value of things would be clearer for all to see. You may not realise this but many businesses either suffer hard times or go bust altogether because of distorted currencies where the supply of money created by governments is not constrained enough, or in some cases not at all.

Have you ever thought about the cost of government quantitative easing in terms of families in the UK?

"Both the Bank of England and the US Federal Reserve embarked on QE in the wake of the 2008 financial crisis in an attempt to stimulate economic growth. Between 2008 and 2015, the US Federal Reserve in total bought bonds worth more than $3.7 trillion. The UK created £375bn ($550bn) of new money in its QE programme between 2009 and 2012."

With approximately 25 million families in the UK, the cost of the state's quantitative easing program works out at just under £15,000 per family. Someone is going to have pay for that. But the thing is, can you imagine Theresa May held a referendum on whether families would each be prepared to fork out £15,000 in higher prices for the government's money creation scheme. I think we're sure people would vote with a big fat no.

This series of problems can only be put right when the monopoly politicians have on the money supply is thwarted. Only when the state operates by the same ordinances as the market prices of supply and demand will things be better for our children and grandchildren.

If this election is anything to go by, it seems young people's appetite for voting has been seriously whetted, as they came out in bigger numbers than before. Unfortunately what they voted for is more of the same kind of crises but on an even larger scale under Corbyn's Labour. We've engaged the young in politics; now we need to teach them the basics of market freedom, supply and demand, and about the damage politicians have been doing to their future for a long time now.