In the Eye of the Storm

House prices are once again on the rise. London has seen the fastest increases to date with money slowly filtering out towards the rest of the country. Mark Carney, the Bank of England Governor, pays empty lip service to interest rate rises. Even if they were to go up tomorrow the damage is already done. It was done when they bailed out everyone, slashed rates and embarked onwards with Quantitative Easing. Raise interest rates tomorrow and we would be back where we started only worse. However history shows that central banks are always reluctant to raise their rates in a timely manner, even when they are raised they stagger it over months and it then takes months or years for the broader economy to feel the restriction of credit once more and fall back into a recession.

The 21st Century will view the central planning of money as an absolute disaster and free market alternatives will replace the current defunct system, good money always drives out bad and Government money is never good. Many Central Banks are using their faulty inflation rates as guidance as to when interest rates should rise but their metrics are critically flawed. 

Inflation is not just the price of staple goods such as milk, televisions, cheese or oil. If the price of the stock market rises that's inflation. If house prices rise that is inflation. If Gold rises that is inflation. If the price of a Picasso masterpiece rises, its inflation. If we take these items into account, the hard assets, then inflation is rising at increasingly faster rates. Its important to understand that the prices of these items are inflation the Central Banks just choose to ignore them in their indexes.

Another problem facing the planners is that interest rates can't rise or at least not by much. Many Governments don't want them to rise as it impacts on their already woeful deficits. It would hurt their tax receipts. It would ruin the "feel good" feeling in the run up to the UK election. People are beginning to stretch themselves once more and pile up debt on the low rates that are currently on offer. Mark Carney blames everything but loose monetary policy the real fuel to the fire that sparks off an asset price bubble. The same reasons that were cited during the previous boom are once more trumpeted to causing the recent house price rises:

• Too much Demand
• Too little Supply
• Not enough building

The real reason is excess credit. Its loose monetary policies that are causing house prices to rise once more. Demand and supply dynamics have changed no more than back in 2009, the difference is Central Banks have turned on the taps once more to release more credit and banks are once more recklessly lending to anyone with a pulse. Same with Gold. Same with art collectables or with vintage cars, the free market can not produce hard assets to keep up with inflation. Electronics and consumer goods hide real inflation as capitalism does such a wonderful job of providing these services in ever greater quantities at lower prices. We are not building more land. Houses are getting built but its the land they sit on that causes them to rise in value. 

So we are in the eye of the storm and if I'm a betting man it will go on for a few years at least. "Get it on tick" is once more a way of life for people. Once the tanker moves in one direction it generally holds course for longer then people can call it. When will the crash come? No one knows. What format will it take? Again no one can say for sure. All we do know is that the fundamentals are progressively deteriorating. When the 2000 stock market bubble popped the central banks re-leveraged the system, cranking down interest rates to low levels. Then 2007 and interest rates went to zero and monetisation actions were also taken. So once interest rates rise (if they do) then once more they will see-saw back to zero but it will be very hard to get credit moving with all the extra problems. Again monetisation of debt will happen, this time will see even more draconian manoeuvres. We could get "Bail-ins", similar to a Cyprus situation where money is simple taken from the wealthiest account holders (or even across the board) to try and bail out the system; a direct attack on freedom. One thing is for sure, it won't be pretty and it won't be moral.

The asset price bubble is global. This pod-cast with Krassimir Petrov highlights Asias problems and how it is creating reckless bubbles. House prices are rising there even faster than the UK, yet no doubt the same reasons are given, limited supply, too much demand not enough new builds and so forth. As mentioned near the end of the pod-cast central banking really does change the morality of people for the worse. Excessive credit does great harm to us all.

Growth vs Austerity

The battle between Growth and Austerity continues as economies have become stagnant with no end in sight for the current crisis. In one camp the solution is to grow our way out of trouble by increasing public spending, therefore trying to shrink the debt as the economies size increases. The other school states, we need to reduce spending and remodel the economy away from the old borrow and spend mentality. It's hard to know who to believe. On the one hand economies got into this mess because they spent beyond their means, increasing their GDPs to artificial levels therefore one could conclude that the logical outcome is to reduce spending, to set right these imbalances. However many nations have adopted Austerity, growth has flatlinned, even gone into reverse, and created higher unemployment with incomes being continually squeezed. 

Do our main political parties really offer options? In the UK the pro growth Labour Party claims we need to increase spending, while the Conservatives, the pro austerity party, claim we need to cut spending. Despite all the rhetoric the difference between cuts actually implemented by the Government and the cuts that would have been proposed by the opposition under Alistair Darling results in only a £9B difference, small in comparison with an economy estimated to be in that value of £1.5T.

The problem with both camps is that neither really offer solutions to the problems at hand. Greece has attempted to implement austerity but has not really addressed the core issue. That core issue is the fact that the country is bankrupt, and when something is bankrupt it needs to default and restructure. Without a default and restructure the debate on growth or austerity is irrelevant, Greece will never be able to get out of its current mess. The same goes for many nations facing similar issues, primarily spiralling Government spending with income from taxation not keeping pace.

The schools of thought can be summarised as follows.

Austerity

In order to solve deficits austerity proponents state that spending has got out of control, therefore Government spending must be cut. A lot of the cuts are half measures, cuts made on the fringes of the welfare system that don't amount to much and don't affect the majority of the people. 

Interest rates are still held exceptionally low, printing money is still deemed as austere and emergency loans from the ECB/IMF are considered to be tackling the spending crisis.

With the above, austerity is not really being implemented instead many countries are just postponing spending into the future.

Growth

The followers of pro-growth believe the false Socialist Keynesian fallacy that we need to increase Government spending in order to haul our economies out of this mess. They believe that Growth can come from the Government and this will alleviate the debt crisis. Its a simple solution, although fatally flawed and over the long term would have the complete opposite effect. The level of bankruptcy within the country would intensify over time, with peoples living standards eroded further.

As spending increases, so do deficits. Governments over the long term can never create growth by arbitrary spending. Over time, taxes are raised to try and cover the gap caused by increased spending, undermining potential future growth further. Genuine capital for investment begins fleeing along with income from taxation as individuals stop paying taxes. The Government is put under further pressure and prints money to cover the shortfall. Inflation rises, living standards decrease, Entrepreneurship dwindles. In other words it becomes a vicious cycle where the Government finds themselves back at square one, however now in a more dire state of affairs. The Growth camp can only intensify the crisis further.

Default and Roll back of state

The other camp that remains out of the debate is one of default along with a roll back of what functions the state should perform. As Governments can not pay on the majority of their spending commitments they need to default on bond holders. If Greek debt stands at over 100% of GDP then the best way to reduce this is to default on much of it and liquidate capital, similar to private entities and companies. Billions of Dollars are liquidated all the time, either through share price falls or outright bankruptcy, yet the system is incredibly efficient and re-mobilises economic resources producing genuine long term future economic growth. 

The solution also involves rolling back the state and allowing free enterprise further reign in society to improve productivity and reduce costs. Healthcare, Schools, Government Pensions - the costs continue to rise while productivity falls. Private capital would solve many of these issues.

Default is politically unpopular and a banishment of the state is a banishment of politics. Many people still believe that state systems are "free" and that they benefit from them i.e. they take more from them then what they put into such systems, convincing many members of public that we need welfare. To default on loans is a political parties nightmare as this tarnishes the incumbent Government, despite helping to solve the spending problems by freeing up wasted lines of production. It is important to distinguish that a default will not solve the issue on its own, the Government has to take the correct action after the event, that's why a roll back of the state needs to occur with moves towards greater individual freedom and a smaller state.

In our current system only until market forces deem the situation so dire does bankruptcy come about. Currently the market is lenient as it realises debt can be monetised by Governments and inflation is historically low. It also realises that Governments control the rules and consequently can lend to itself or other Governments (as its been doing). Without the recent QE and low interest rates the market would have already started forcing bankruptcy upon many nations, fixing the ills we see. When Governments have such extraordinary control economic problems get out of hand, in comparison private companies go bust very quickly if they can't control expenditure versus income. Governments merely take or adjust the rules in play to avoid this scenario, thus continuing to put economic resources to bad use.

Default comes about when inflation gets out of control or Governments struggle to monetise the debts, then the markets deliver the killer blow  instigating a default. Britain went Bankrupt in 1976 because inflation was out of control meaning printing money would have been unacceptable to the public and markets refused to lend to a Government who couldn't control spending. The IMF bailed the UK out but it didn't fix anything, it just pushed the problems into the future. We should have just defaulted and rolled back the state. Of course the Government can still ignore these signals under a dictatorship and just print more money et al Robert Mugabe, leading to a world of misery. 

From a global point of view, the current fractional reserve system can deal with the odd small country defaulting, say Iceland, but when it comes to larger entities such as Italy, Spain, France, UK and so forth, then the true naked state of the system is shown. The interconnectedness of the current fractional reserve banking system comes down like a house of cards, calling into the question its very existence. People would then ask questions such as why do Governments have free reign on interest rates, money and permit fractional reserve banking? Why do we need Central Banks? Why do we need Governments? The ultimate solution is to remove all central powers, instead  empowering individuals with the freedom to run their own lives, free from third party interference.

Current state of affairs

So we find ourselves in the current predicament, no one really wants to do the right thing therefore the crisis is prolonged. Governments have great power through the monopoly they have in money so rather than accepting the situation they opt instead to push problems into the future. Bankruptcy and failure is nothing to fear or to avoid, it happens all the time in the free market and is an outcome of discovering prosperity. Until people are educated and aware in such matters then we will always have Government debt crisis throughout history on a regular basis. Austerity or Growth, both solutions do not fundamental solve the problems baked into the system. 

Where is the deflation?

"The Chinese government is expecting its economy to expand around 8% of gross domestic product in 2011, same as in recent years, but it has raised its inflation target to around 4%, indicating Beijing isn't willing to sacrifice growth even though fighting inflation is a top priority.

State television reported the new numbers Tuesday, citing Zhang Ping, the head of the National Development and Reform Commission. Next year's inflation target is a full percentage point higher than this year's target of 3%."

News that China will raise its Inflation target

If you were to believe the experts it is deflation we have to fear. Its just round the corner. Its a battle we must win. A depression must be avoided which apparently is caused by deflation. In the real world people are seeing costs rising all the time. Not just in the West but in emerging economies also. The Chinese authorities have raised their inflation targeting metrics in order to keep their bubble, sorry growth, moving up. A rule of life is governments always bend the rules. Its sets them. Free markets allow people as individuals to set the rules. Participants mutually trade with one another under an amicable agreement. The state takes at will and by force. Inflation is one such example, it benefits no one in society in the long run, only the government over the short term.

The fact that the target has been moved upwards should not be a surprise. This is what's going to happen everywhere, across the globe. Here in the UK our Inflation has risen yet again. Its now been above the target for over a year now and what are the "inflation fighters" (that is Mervyn King and his MPC comrades) doing about it, Nada. Zilch. They have already raised their inflation targets, they just haven't told the unsuspecting public. There's more price increases in the pipeline:

The increase in VAT from 17.5% to 20% that will come into effect next month will be used to "mask" more extensive price rises according to accountants at KPMG.

They claim almost two thirds of retailers and consumer product manufacturers plan to increase their prices by more than the planned VAT hike in January.

Martin Scott from KPMG told the BBC why he believed retailers would raise prices by more than just the VAT hike next month.

All this inflation is causing Government bond prices to stay high. Well I say high, but we haven't seen anything yet. They will go double digit over the course of this state induced disaster. Double Digit may seem high in today's environment buts that's what you would have thought when Interest Rates were single digit back in the seventies. In the US they eventually went above 20%. Ouch!

Well at least the banks are ok now. They were small fry. We have moved on to more impressive bailouts like, err, countries? Ireland, Portugal - what about when Italy and Spain need assistance? They in turn get bailed out by Germany or France or even the UK. Hang on, aren't we bust also? Yep. Fractional reserve banking, fiat state monopoly money, you have to admire it. The Governments legalised ponzi scheme. No one has the money for any of these bailouts. Deflation will never happen because Governments know this would be the end and a collapse of the system. Therefore they will print money. They will raise inflation targets. They won't even tell people they are doing this. Oil is at record high once more. Just like with any unwarranted inflation, peoples living standards are falling. Prices rise and real wages don't keep pace. 

Through all the bailouts and enlightened interventions, nothing has been solved. Its worse than before the crunch. Its the quiet before the storm, just like prior to the market collapse of 2008. Everything was fine until it happened. That's the problem with economic collapse caused by government mismanagement. You can't predict it, you just know it will come. And when it comes its always too late to act. We won't hit bottom until the market is allowed to cleanse itself, but that isn't going to occur. Until then, just know that inflation will always be there, always rising, even when it may seem its not. Deflation is just the Governments smoke screen.

Why we don't need Manufacturing

A common assumption among many commentators is that Western countries need a manufacturing base. We have these trade and budget deficits because we don't 'produce' anything tangible. I suppose 200 years ago the same people would have said we need an agricultural base and not this 'phoney' manufacturing industrialisation many nations embarked towards. I disagree with Peter Schiff, Americans don't need manufacturing any more than a country used to employ huge numbers of the population in the agricultural sector. They just need to do things that other nations can't. The service sector is not a drag on the economy, its a path to further prosperity and represents an increase to a nations living standards. 

The purpose of conducting trade on a global scale is take advantage of one another's skills. Argentina and New Zealand are rich in agricultural, so we import their produce as it is more efficient than producing our own. Japan has virtually no natural resources so they turned to electronics and car production and export such goods for the exchange of oil or steel for example. China has an army of low cost workers, impoverished by Mao's Communism, they now look to improve their living standards by using Western expertise in tooling, to produce goods we buy here in the West. America has been a nation of great entrepreneurship, producing some of the leading technologies we use throughout the world. Apple, Microsoft, Google - even Facebook - they all came from an American and throughout the world we all enjoy using their services in some instances for free.

The point is a country does not require manufacturing in order to prosper. American Manufacturing lost out to the first wave of Asian tigers such as Japan, South Korea, Taiwan - not because of 'Government Regulation' as Peter Schiff wrongly associates in the video, but because they could do the work better and cheaper than the Americans. They do it so well, that the US exports their Iron Ore for the South Koreas to use, then South Korea sells it back to America in its end form, and it is still cheaper than doing the work domestically. 

The decline of manufacturing in America is not an isolated case. Throughout the West - Germany, France and Britain, the sector has continually shrunk. That's nothing compared with Hong Kong. It's manufacturing base is 10% of the total economy. Yet Hong Kong is an impressive place. I was impressed by how efficient things worked when I visited. The service was excellent where ever I went and cheap. Hong Kong used to be predominately a manufacturing economy along with the other first wave of Asian Tiger economies - Singapore, Taiwan, Japan, South Korea. Now they have all to some degree expanded into a post industrial economy, into services, yet all these countries generally run trade and budget surpluses. 

The fact that the second wave of Asian tigers have picked up the manufacturing tasks - India, China, Vietnam, Indonesia, Malaysia and so forth shouldn't be something to fear, we should embrace it. We all benefit.

Its easy to use emotive arguments to state that paying Asian workers a dollar a day is immoral, but every society needs to begin somewhere, and history illustrates this. 200-150 years ago our Western ancestors lived in conditions we can't begin to imagine. They lived in fear of constant starvation, literally if the weather was bad that year people would starve, it was that bleak. We moved out of these conditions into the relative utopia today by our ancestors working, innovating and building the capital structure we inherit today. They built the infrastructure, knowledge and tools we use today. And as generations move on, a free market improves this process and each generation should be better off than the previous one (excluding Government stupidity).

Take for example a Chinese person. They are beginning this process our ancestors went through, however they can access a wealth of Western knowledge that will greatly speed up this process. For example the Chinese worker on a Dollar a day now, can feed himself and his family while in comparison under Mao millions starved. As China exports more to pay for technical imports they can build roads, lightening fast railways and improve their capital structure like we did. His Children then have access to more education, tools, computers - objects their father never had. Instead of working at the factory for a Dollar a day, they set up a company that competes with the Western firm. This is what happened in many places like South Korea and Taiwan. Now they have their own companies, HTC (I highly recommend their phones), LG, Samsung, which the Children of the similar hard working parents indirectly helped to create. 

The so called humanitarians are currently protesting against such wage rates, but wait another generation to see how it transforms the ancestors of the people who walked before them. It will be a different picture.

The common mistake is that when a manufacturing job is lost, this will deteriorate our living standards. When we joke that everything is made in China, we also talk about the decline of our living standards to come. The opposite is in fact true. Both sets of nations benefit. 

Think about it. Since China has become the manufacturing hub of the world every good conceivable has come down in price. This increases our purchasing power and living standards. It helps China move out of poverty. We move into work that pays better and exchange this other service based products for such goods.

That's not to say its all a bed of roses. People who previously had these types of jobs in the West are displaced. They need to find alternative work. With the advent of minimum wage rates and generous benefit options it has become increasing hard for such people to find alternative work. They are the forgotten minority, the underclass who become stuck in a vicious cycle, created by the plethora of Government experiments. A free market society would find jobs for such people. The Government hampers this process. 

Peter Schiff has also made comments in the past stating that China should send their push bikes to America (indicating a reverse in living standards for Americans as opposed to China). Peter is also wrong on this front and history again has the answer. The UK used to be like America, the most prosperous country in the world, ahead of the game. As we went into decline others became more prosperous. Now if we take like for like, Britain was once America and America was once the China of the world, do I now have lower living conditions than my great grandfather? Relative to Americans conditions may have declined, but over time both sets of peoples living conditions have risen. Its the same with the rise of Developing countries today. Just as America made huge innovations in technology and exported it to the world to use, Chinas rise will also benefit us all.

With 3 Billion people awakening from the shackles of Socialist or right wing Statist Military dictatorships, all that extra human labour will be a great boon for the global economy, just as it has been already. Historically the native Han Chinese are a very entrepreneurial people. When Mao took control, many such individuals fled - Singapore, Taiwan, Hong Kong, the West - and they all prospered. With Chinas embracement towards freer trade I'm willing to bet there are some smart people there that will have some great ideas, products that people will want, innovations that will make our lives better. Jobs we don't even know exist will be created from such ideas. Just as Americas innovators have made our lives better with their products, it will be the same with developing nations as they rise in prosperity. 

As more of the world becomes educated, more service jobs will be created. More wealth will be created at an ever increasing rate. There's only been hundreds of millions in the West over the past Century who have had free speech and markets. Imagine what another 3 Billion people can bring to the equation as they become increasingly educated and freer. 

To contrast markets to Governments look at the technology sector, the industry I work in. It is probably the most dynamic and fast paced industry continually making our lives easier and more productive. Its also one of the few sectors that has no Government interference at all. No regulation. No government agencies monitoring it. Yet it continually increases the quality of goods with more features. We are told that we need regulation and Governmental agencies to 'protect the consumer' condescending people that they are too stupid to manage their own interests. Yet the technology sector flies in the face of such logic. Bad products and companies go bust quickly, and quality always wins out at as consumers are rational and don't need an agency to co-ordinate such an activity. Contrast that with the financial sector - fractional reserve banking instigated by the Government, Regulation after Regulation, Agencies (Moody, S&P, FSA etc), price fixing of interest rates, currency monopolies - its no coincidence that its in a mess. It will always be in a terrible condition and a drag on society with the Governments involvement, meanwhile the technology counterpart continues to efficiently mobilise societies resources effectively using the free market. If you ever need to argue the merits of a free market then this is the example to choose and will stump anyone opposed to the concept of Capitalism. I don't even think the Socialists would dare contemplating nationalising this sector. On the other hand many financial service jobs we could do without. Just like propping up our Steel, Coal and Car industries of the seventies its with finance this time and its counter-productive.

I'm bullish for the Century to come. Sure we all know many Governments are walking head on towards the next crisis of their own doing - stagflation, trying to erode our capital structure and removing individual liberties. Its going to be rough for at least the next decade, probably slightly longer. Going forward however we have a lot to look forward too. Markets will be embraced further, people will see our Governments misdoings. The Socialist and Communist experiment is dead. Thatcher or Regan didn't kill the left, it was the free market. I don't agree with Peter Schiff, I personally align more with Warren Buffets recent statement where he said our children will have better lives than we did. So long as we allow markets not Governments to enhance our lives this will always be the case. Relative decline, sure, but as with the example of the UK's decline each generation has had a better standard of living because we never truly abandoned the free market despite a few wobbles along the way. Look forward to the future, the innovation revolution is only just beginning.

Cuts, its never that easy

Margaret Thatcher, Conservative party Conference, 1980

The subsequent 5 years resulted in unemployment doubling in the UK after this speech. After years of kicking the can a politician eventually got a grip making Britain competitive in the global market place once more. It wasn't easy. It wasn't pretty. It wasn't sadistic. In fact it was political suicide but Maggie held her nerve. 

Talks about public sector cuts with Prime Minister Cameron claiming that not only will the private sector take up the slack within his term - but actually there will be more jobs is ludicrous. Just as I expected, within a month of power I can see David Cameron is no Maggie. The Tories talk the talk, declare swaggering budget cuts but its all soundbites. Clegg, his coalition buddy, meanwhile states that "this won't be like Thatcher, we will do it differently", contradicting the recent budget given by George Osbourne which is much worse than anything Geoffrey Howe had to administer. 

There is no chance the Conservatives will be able to do what they state - they don't even have a majority government which is based on a shaky coalition. Even if they did it will take longer than a term. Back when Thatcher was in office, at the 1983 election unemployment was still rising (setting post war records), the pound was dropping like a rock and the economy was still in taters. It took well into her second term to see the effects of her earlier policies. 

The idea that the private sector will take up the slack is just political wordplay. Its takes years for these things to change, a change in peoples will, a change in peoples expectations. People expect the UK bubble to carry on. So until reality kicks in, people will want the politicians to maintain the mirage which will mean its the market that has to force the people into the correct line of thinking, just like it did with Thatcher. We are a way off this so Mr Cameron will play kick the can down the road until this moment.

What factors are different this time? For one Cameron has to contend with a stronger opposition, and competent at that. People didn't necessarily like Thatcher back in the early eighties, but they couldn't stand Michael Foot and Labour who had increasingly moved so far left they were within touching distance of Joe Stalin and Mao. It was the oppositions weakness that helped Thatcher pursue what she did. Labour was so broken, the party splintered creating the SDP which ripped its support base in two. Thatcher could have campaigned with Adolf Hitler as her minister for for Justice - she still would have won a landslide back in '83. 

Thatcher also had a majority from 1979 unlike the current government. You try and reduce public spending you have another recession. We've only just emerged from the worst depression since the all-mighty one back in the 1930's. People won't warm to this. Then the budget deficit gets bigger. It did with Thatcher - it will do the same for Cameron if this is the path he takes. This would bring into question with the public the competence of the Tories with the economic policies they are pursuing. I know and you probably know that its the right path to take but many who are told the Keynesian way of thinking will not see it that way. 

The Unions are coming, North Sea Oil and Gas is running drier by the day and higher interest rates are inevitable over the next decade. We haven't liquidated anything - just like the Japanese during their lost decade we have propped up the banks and ensured zombie loans are kept afloat. Like a junkie we tell everyone we are good for it - we just need more time. But time is our worst enemy.

The problem with the current coalition is how long will it last with cuts on the agenda? The Tories may be historically comfortable in this setting but how many grass root Lib Dem supporters are going to swallow the medicine? Defection of many to Labour is inevitable. And remember - "things were going 'well' under Brown". This could cast the Tories in the wilderness for a decade if they practice what they preach. There's only so long you came blame the previous government for the mess. Give it a year and people won't be seeing Labour mess but will instead switch their view to Tory mess. Just like Thatcher. People forgot the Labour mess in the 70's, they just remember the early eighties.

The G8 or now the more relevant force the G20, have been putting austerity on the agenda. I think a basic illustration of economics is required to contrast spend and stimulus versus austerity, using the classic economic Crusoe example (there has been many takes on this over the years). Peter Schiff gives an excellent example in his latest book which I will list below. 


If we imagine a desert island with three people. These people all catch fish in order to survive and feed themselves. The problem is they have to use their hands, which is very time consuming so they spend all their time catching fish to live. However one day, one person decides to build a net. He spends a day constructing this, therefore foregoing current consumption and going with no food for that day. He is the entrepreneur within this small community and doesn't know if his endeavour will succeed. For the sake of argument his net is a success and he is now able to catch more fish in less time. So much so that he now has more leisure time and can eat more, thus consuming more. 

A simple example but it perfectly illustrates elementary economics. The current Keynesian thinking is that postponement of consumption is a bad thing but yet as we saw above this was in fact good. It is how society accumulates capital goods, tools, that enable us to enhance our productivity. Savings - the foregoing consumption should be embraced not deterred. The entrepreneurs risk taking has also benefited everyone. We should reward those who figure our how to do things more productively or cost effective, we all benefit over the long term. 

You see our recent solution was for the government to spend more, to destroy capital, to expropriate wealth from individuals. Raising taxes, printing money, raising deficits will never solve the economic question. Just like state planning never did. All it does is take away the net from the individual, remove incentives for innovations such as the net and encourage us to consume more rather than increase our productive capabilities. If the net breaks we can leave it and continue consuming our way out of trouble. That's why no amount of Paul Krugman stimulus will ever be enough because its the wrong thinking in the first place. He is saying we need to run faster just to stay still. I say we need to be leaner and think smarter to run just as fast only this time at a stroll.

The video of Thatcher at the start was right. However the left always like to use slogans of themselves such as compassionate, open, fairness, yet when an individual states they support the Conservatives they are ironically labelled Tory scum - and for what? Thatcher put us back in the global marketplace. She embraced Asia's awakening which enables us to buy many consumer goods for practically nothing. We moved out of mines with many of us into flexible workplaces, hours that suit us, working from home in relative luxury compared to how our ancestors had to work. The fact is the left still can't swallow the reality that Thatcher destroyed their ideological way of thinking in this country. John McDonnell's unwise words regarding wishing to assassinate her was not for her policies but rather that people like himself have no place in politics where 30 years ago they were everywhere in parliament. Was it nice that people had no jobs back during the early eighties? No, but this is the problem with statist elites. They cause the problems, blame markets, then ironically when things get that bad look to markets once more to solve the mess they made in the first instance. We still seem to be looking for state solutions. We have recently had hard talk, yes. But talk is cheap, when action is taken then the backtracking towards Keynes once more will commence. 

It's not a Greek Crisis

"There is no money. There is no one else’s pocket left to pick. You can’t borrow anymore, you can’t print anymore, and you can’t steal anymore from anyone else....You object to the bond market, but the bond market is just the voice of reality calling. It’s telling you that 2 plus 2 is still 4, no matter what your union bosses would have you believe. Your bosses tell you that ‘the people’ didn’t spend the money, but it’s not true. That’s exactly who has wasted the money, and now the bill is coming due....You’ve thrown your bottles, burned your flags, waved your signs and had your fun. Now it’s time for you to learn the lessons of history and abandon this idiocy before we finally lose our patience with you. Grow up – and get back to work."
Daily rant directed towards the recent Greek Protesters

It may be all Greek to you, but the effects of the bond bubble is here for all to view (already a wiki page has formed). As soon as the so called economic professors proclaimed the financial crisis to be over (the very same individuals who said 'What housing bubble?') another one has begun to erupt and its only just begun. The location or nation doesn't matter, the important point is no politician, government official or prominent academic has a clue what to do next. A 'bailout' is required to avoid financial contagion, horror stories of Lehman are retold. It doesn't matter that no one in the West can cope with their own domestic liabilities never mind take on others, instead a short term fix is proposed as the solution. In reality it can only exacerbate the problems down the line.

Euro bashing has taken center stage. All the Euro sceptics have suddenly come out of the closet. They never knew in the first place why the UK shouldn't join the Euro but recent events have given them the confidence to speak out once more. Is the Euro doomed? Wrong question. All fiat money is doomed. Despite what has been said regarding the Euro, the Germans hold the key to it. Their Deutschtum regarding sound monetary policy does not bode well for future bailouts towards the more irresponsible European nations. Germany should have got rid of Greece and let them fail. But politicians prefer short term fixes rather than the tough long term ones - they won't be around when they break again. Our old PM Tony Blair can attest to that.

Many falsely believe that Greece is the Canary down the coal mine. Put it this way, did we expect better of the Southern Mediterranean nations? We could list the historical facts, the Inquisition, Catholicism focus on the collective rather than the individual, corruption, even the hot weather but that's what history teaches you - what to expect. Greece isn't the canary down the coal mine, the drachma when it existed was very weak, and the Greeks vigilance at the printing press had a terrible history. Britain, as I have mentioned, is the canary down the coal mine from what I can gather. It is a member of the monetary core - nations such as Germany, Switzerland, the Scandinavian countries, the US - these countries have historically had relative sound money (a few periods of exception can be noted) and have respected individual liberties as early leaders of free markets. When the crisis spreads to the core then we will see real problems. Who will bailout the last resort? There is only one tool. A printing press, others such as China wait to see what destruction we can inflict on ourselves. They gave us cheep goods, gave us their savings to buy more of their goods and saturated us with consumption based debt as we have already struggled to grow our economies over the past decade. If you can't beat them militarily then use economics as a weapon, as Sun Tzu said, '...one hundred victories in one hundred battles is not the most skillful. Seizing the enemy without fighting is the most skillful'.

Portugal and Spain are showing signs of stress also, how long it takes to spread northwards remains to be seen. Eastwards Dr Faber says bubbles are forming in China, nothing I haven't observed but good to hear from the doom prophet whose practically called every bearish situation before it happened for the past 25 years. Where can an investor turn in times like these? The answer should now become obvious to anyone who is following such events closely.

Tonight we have the election here in the UK. Will we have a hung parliament? I hope it lives up to its promises as the most exciting election in a generation. The last two were very boring for a neutral like me, I was too young for the elections previous to these. On that note its time to go watch what Government will 'solve' our domestic crisis. Unfortunately as the quote hints at the start, no politician or bailout offers a cure. Only ourselves as individuals can put things right. Politicians will just keep putting our problems back for the next guy to solve.

Vote for Gordon

"Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."
Ludwig Von Mises, Human Action

The prospect of a hung parliament. The prospect of a Labour victory. The prospect of divided politics once more. With the British polls showing a narrowing between the Tories and Labour, markets have begun to get the UK jitters once more. David Camerons indecivness on issues such as the deficit and the inflationist policies of the current Government have casted doubts in the British peoples minds. With so many of the populace aboard the Government Gravy train, do we really want cuts? Maybe the government can inflate their way out of this mess resulting in us all obtaining our free lunch, living in endless prosperity? I'm afraid the laws of economics are the same as the laws of gravity. It doesn't matter which way you jump off a cliff, or in this case how the government chooses to inflate, the end result is the same, just like gravity pulling you towards the earth the free market demands the required correction. All the government can do is lower our standards of living for the long term. The more it fights the free market, the worse the end correction will be.

Vote for Gordon may seem like an odd title, as Gordon Brown and the Labour party are carrying out the worst policies listed above, a contarian view if you may. It's important for me to state that I have no political affliation. All parties are as clear as mud, all with agendas to infringe on peoples liberties, distorting markets and impovishing people. Get rid of Government I say, but that is seperate topic for discussion. We need Labour to win the next election. We need another term to discredit statist policies. I fear if the Conservatives win, the UK will be in serious problems.

If, as the Conservatives say, they will cut spending as should happen, this will spark off a further deflationary collapse. This is the required medicine, however the majority will not see it this way. As Ludwig Von Misses states above, "...inflationary policy is a boon for the treasury and very popular with the ignorant". Another quote that has stood the test of time. Recently it has been stated in the news that the UK may not need to borrow as much as initially forecast. 'Economists' talk about the recovery, people say the recession is not that bad, the malinvestments are proped up providing the illusion that its business as usual, all of course are the product of an inflationary mirage. Governments have convinced themselves that all we need to do is drive down interest rates as low as possible and print money to fix our problems. We can avoid the required adjustments by simply trying to continue consuming and borrowing, the exact measures that created the problems.

People have very short term memories and short term outlooks which I have witnessed throughout my life. For example people always state what a disaster Thatcherism was, as they looked at the short term effects, high unemployment, less government support for individuals, the acceleration of industrial decline. Over the long term of course, it was for the benefit of Britain, my generation are all Thatchers children. We all benefit from goods that we used to make, that are now made in China at a lower cost. We have all moved into other areas of employment, better jobs in many cases.

Its peoples short term memory that is dangerous. If the conservatives win at the next election, will the squeeze provoke the public to turn to the left? "We were doing fine under Brown before he left?" - remember "people say the recession is not that bad", the required corrections would be painful. There is so much imbalance, I don't think the Tories could correct the mess in one term. I also think they don't have the spine or the conviction to go through with the required medicine. The temptation to eventually inflate after initial cuts will be too great, the short term benefits will give the government room for manove. This in turn would confuse the people, believing that cuts are the last thing we need, we need further Government action to solve the issues. A resurgance of left wing politics once more could take place. The free market will be blamed once more for the problems.

However if Brown were to win a second term, cuts would not be on the agenda nearly as much. Further inflationist policies will be carried out as the Government spends its way to popularity. The market would not tolerate this, instead capital would flee, interest rates would rise, currency instability or a full blown currency crisis would occur. Its better that this happens on Labours watch rather than the Tories. People would have a clearer picture of what caused the mess - continued Government intervention - "We need the free market to solve our issues, no matter what the cost".

You see the Tories are a classic scapegoat, they generally tell people the truth, that we need disipline. Labour are the weak parent, who give in to their children and let them run riot. We need labour to continue in power so that the Tories can say "Told you so". The end game is a deflationay collapse, hard times?, sure but good for the moral character. The only other alternative is the quote at the top of the blog, monetary collapse.

How likely is Hyperinflation?

It's a topic that comes up in various articles, with authors proclaiming its just around the corner, weeks or months away. Truth is Hyperinflation will happen if we as a nation wish it to happen, which is exactly the path we are walking towards. An excellent article has been published by Dr. Krassimir Petrov detailing the road to hyperinflation. It is only a road and at any point we are free to turn off it, but only if we wish to do so. Vote for Brown, it will build the moral fibre we need to avert such a situation and as Dr. Krassimir Petrov points out, buy some Gold in the meantime.

Keynes and Hayek (Accompanied by General Ramblings)

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
John Maynard Keynes
The General Theory of Employment, Interest and Money


“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
F A Hayek
The Fatal Conceit

Both quotes above are taken from the recent econstories rap video that has been showing up all around the Internet which can be viewed here. A very lucid video crammed with factual information, so don't be put off by it's format as a rap song. As we start a new decade, more people will see the ill's of our economic system and formats such as this will help inform people on all levels, as I realise many people find history and economics a very dry and boring subject.

The video contains many subtle messages. The receptionist not recognising Hayek, Keynes book in place of the bible in the hotel room, a party at the FED - the old alcoholic analogy along with "Tim" and "Ben" as the bar tenders. It compares our current solutions to nothing more than the 'hair of the dog', painting a clear picture of what needs to be done. The video is not biased either, with a fair representation of Keynesian economics.

Back in the real world Greece finds itself on the ropes once more, the bond vigilante's are turning up the heat sending rates upwards meaning rollover default is becoming a real danger. As quick as the pansy states will be able to cut their budgets, the rates on their bonds will rise over the long term negating all of the spending cuts. Portugal was thrown in the same gladiatorial arena, as the med club cousin found it couldn't find buyers for some of its bonds. Who's next - Spain, Italy, Japan, the UK, the landscapes getting ugly as distress in the bond bubble is on display for all to see. The Euro fell, but the Germans seem to be having no Southern Shenanigans. Staunchly opposed to any bailouts instead demanding nations begin to get their house in order as their Bunds still look as solid as any other government debt instrument out there. Could the Chinese bail the Greeks out? Yu Yongding doesn't believe so declaring the assets as unsafe.

What seems to have surprised many is the speed of events and how the Greek economy has fallen into the abyss. Well this is what happens when a government runs out of bullets, the market always catches up with you. It took near 80 years for it to catch up with Communist Russia but when it did, it fell in spectacular fashion. The decades of decay are still there for all to see.

Pimcos Bill Gross has given a big no, no on UK Government Gilts as he sees not only real rates of return as an issue but the devaluation dilemma. When the UK politicians still have access to devalue, investors wisen up and realise its not just the interest rate you need to worry about, its a question of will the currency still be worth the same 10 years down the line? Italians used to perform this form of default when the basket case lira was around, nonetheless international money gets smart and knew not to trust an Italian Government. Similar to their driving, reckless.

In Britain it goes from bad to quite simply awful. Over in America Obama has felt the peoples backlash of late, with all the Wall Street bailouts and excessive government intervention coming back to bite him. Meanwhile the 'Great' British public reward Gordon Brown, increasing his bounce in the polls, even though the current Labour government are doing all they can to make the fundamentals worse. That's the British for you, we believe in the free lunch and that Government can solve the issues of the day. We like illusions, inflation, governments and think there's not enough spending on public services despite our gigantic deficit. Americans talk of dollar death, they should think about coming over to Europe and see how to really mess things up! Sorry Peter Schiff, its not just America that's the 'Caboose', its pretty much the whole of the West.

Japan has been in the news a fair amount lately, with many commentators declaring default could occur there first. While Japan is a basket case, their savings rate is not what it was and they are all getting a lot older, they still have a lot of currency reserves, second only to China. They will sell these first to pay for the latest Government who are following Keynes advice just like the previous Government did for the past 20 years. They will also stop buying US Treasuries at some point, which they still seem to have an appetite for, instead buying their domestic bonds. Of course they will go pop at some point. You don't build up 200% of government debt and not pay for it. Any slight move in rates would be fatal, therefore expect the above actions to be taken first.

Switching gears, Shells profits collapsed forcing the sale of its assets and job losses for the oil giant due to oils lower price. You always hear about price rises in the media, but never hear about the falls. When oil was around $148 a barrel, it was the 'evil' oil companies that was causing the price to rise, profiteering at the expense of the public. When it collapsed, the same reasoning didn't add up as the same companies were scrambling to mend their books. 'Why didn't the price of oil fall at the pump substantially when its price fell from $148 to $40' - simple its hedged. The free market insulates consumers from the volatility in the commodities markets by using futures contracts to hedge against price spikes and dips. Hence the price at the pump stays fairly stable in comparison. The only reason the price rises over the long term is from Government Monetary mismanagement. Of course the government likes to blame speculators, oil companies, Arabs and the public generally buys the lies. Against gold of course oils price doesn't really move anywhere over the long term, but enough on minor details such as these.

Reports again come out detailing inequality is larger than it was thirty years ago. As Milton Friedman once said "We all start the race from the same point, but each one of us has a different finishing line". Markets enable us all to prosper and follow our own goals, using our available talents. Governments are the ones who ensure further inequality. The monopoly on money ensures the currency is inflated, enriching the asset rich at the expense of the asset poor. Lower incomes are also crushed further as a larger chunk of money is used to buy everyday goods, food, energy and so forth. The Government welfare state has meant the 'why work?' culture further expands creating an increased disillusioned underclass stuck in a vicious circle. Charity starts at home and the only way to help people is to allow them to help themselves. Who says the free market can't run a social welfare system? They already exist in the form of voluntary organisations who gain donations or Church organisations. People are more reluctant to claim if they can see the people providing the handouts, rather than some faceless factory system, where the government churns out the public's money. Of course we only get widespread unemployment when the free market tries to correct the governments wrong doings. Otherwise shocks to the whole system wouldn't occur, outside of a natural disaster of course.

Coming full circle back to Hayek and Keynes, I always find history is full of interesting stories. One such story is before Keynes wrote his famous book in 1936 becoming the de-facto textbook in economics, Hayek had critiqued Keynes previous works. In Keynes previous work, Hayek had done such a good job that Keynes declared to him that he no longer believed in what he wrote and had gone back to the drawing board to write his famous general theories. When this later book was released Hayek decided not to critique it as he didn't wish to waste his time again and felt everyone would see it to be as flawed as his previous works. The rest, they say, is history.

Britain, the Canary down the Western Coal Mine

"We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step."

Jim Callaghan - Speech at the Labour Party Conference, 28 September 1976

Gold prices had been on the rise for weeks, then all of a sudden fell back with a thud as we were told that only 11,000 jobs were lost in the US during November. Another Brown bounce in the polls left Cameron backtracking, austerity is so last month, instead 'growth' by government spending is now acceptable as policy is dictated by focus groups. The Middle Easts version of Las Vegas got a helping hand which was good news for many UK banks, however only a mere $80 Billion would have been at stake. Years ago it would have meant something, not today with Trillion dollar bailouts. China's vice governor at the peoples bank declared 'We must watch out for bubbles forming on certain assets, and be careful in those areas' referring to golds recent upward trajectory. Nice try, that deceit may wash with CNBC but those of us in the loop know full well that China would love to transfer much of their paper assets into hard assets such as Gold.

It's sometimes easy to forget what the average person thinks in relation to financial matters. Articles posted here are certainly not consistent with mainstream thinking. People are still on the same broken record, 'Buy a house now while prices are cheap before you get priced out', 'We are past the worst now and good times are ahead', 'The government will make a good profit for the taxpayers with the bank bailouts'. Ask people who read the financial sections of broadsheet newspapers about gold and you get told 'The price can go up as well as down' as though this is a unique quality that does not apply to other assets such as bonds, real estate or stocks. Indeed it is important to remember just what people are thinking, because you don't want to be on the same page as them. 'Repeat after me, Gold is a bubble, Central Banks can 'tame' markets, the sustainable recovery is here and there is no inflation! There is no spoon!' There's no analysis of the thunderstorm that is brewing in the distance.

So what about this Gold bubble then? People are right, however they are 5, 10, 15 years too early in calling it. People are buying the stuff because one day it will be a bubble as the Worlds Central Banks are busy blowing the next bubbles as I write. The currency and Government Bond bubbles will eventually burst causing mass inflation and creating the next bubble, commodities and precious metals. As Bernanke and Company try to assess how best to deal with bubbles, they fool the public as though these events are some mystical force that no one can control. I have a simple solution, how about stop printing so much money. We instead move from bubble to bubble, the Centrals banks policy after one pops is to inject further easy money into the system. Like some drunk who throws up after a bottle of vodka, 'I best have another to sort myself out'.

Could the US unemployment figures signal the turn with people getting back to work? Maybe in the short term, but I don't think this will be a long term trend. You have to remember governments everywhere are printing huge amounts of money and this is bound to give the so called 'prosperity' effect in the short term but it won't last, the free market hasn't healed. During the coming stagflation a lot of conventional indicators will seem to be healing when in fact the underlying fundamentals are deteriorating. For ten years after the credit crunch in 1973/74 the unemployment rate in the UK kept rising.

It didn't move up in a straight line, with periods of consolidation and even movements to the downside. When the correct path was taken it took years to fall. Numbered estimates in the news are useless, three million, four million, all have been given as figures for the short term, however no one can say for certain, all we do know is that history says it will keep rising over the long term.

For a developed country the British people sure do love their inflation. While many other nations inflation indices have plummeting like many a British Banks shares, the UK's inflation rate has remained remarkably 'sticky'. Whether its the appreciation of our assets, our rising incomes, our increased levels of debt or the fallacy that we believe the weak pound is good, we really do want to beat other nations in the race to the bottom. The yanks scream 'bloody murder' watching their beloved dollars debasement from the powers that be, not realising that one hundred years ago a British pound used to be worth $5. Anything you can do across the pond, we can do it much worse. Over the next decade I'm sure we will show the developed world what not to do. The problem I see is that British people want inflation. We want to see rising prices, we believe that this is a healthy state of affairs and will thus allow a greater level of leniency towards our policymakers compared with other nations when it comes to expansive monetary policy.

Will the BoE raise interest rates when the market forces their hand? Contrary to what people believe it is the market that controls long term interest rates. We may like to think of central banks under a paternalistic viewpoint, our saviours there to insulate us from financial destruction and chaos, to solve economic issues should they arise. Central bankers are just like their Communist Central Planning counterparts, eventually market forces get the better of them where eventually they follow the market, not set the tempo as they would have us all believe.

In order to understand how markets dictate prices such as interest rates its easier to compare the lowering of interest rates to say lowering the price of bread. If the government declared rather than liquidity not been easily accessible that the issue was now high bread prices, they therefore set forth a policy to fix the price lowering it below the market one. As suppliers begin making losses they shut down production, at the same time people consume more as they can purchase more of the product. Eventually the country runs out of bread with all stocks depleted. Rather than bite the bullet immediately the government would in all probability resort to rationing rather than admit the error of their ways with bread queues becoming a common occurrence. A black market may appear as people under their free will and against the governments law begin selling bread to one another for a price set by people, the marketplace. If however the government wishes to fix the state of affairs they must liberate the price once more, allowing the market to determine the price of production. As suppliers closed down long ago abandoning their supply networks it takes a short while for supply to meet demand once more. During this period the price of bread goes into the stratosphere as people bid up the cost of the present scarce bread. Eventually market forces will drive the cost down over time to a point of equilibrium.

How does bread relate to interest rates? Its the same principle. Governments can set the price low but eventually the market will force its hand to raise the price, with the price going into the stratosphere. This is why we had 18% interest rates when Thatcher tried to put things right, or when Paul Volker put US rates above 20%. The policy makers were just chasing the market, trying to reign in inflation which was driving the free markets interest rates haywire. During the 1973/74 credit crunch Central Banks had the same idea as now, that is they lowered interest rates in response to the recession, but the longer and lower you try to hold down these prices the higher and sharper they have to eventually rise as many an older reader will painfully remember.

The BoE could be forced to raise interest rates under a number of scenarios. They may have to raise rates if there is a currency crisis with the pound falling as investors flee. Like the bread situation above, they will put off the price liberation, instead they will put currency controls or limits on capital (like bread rationing) in order to try and provide a short term fix. Eventually the market beats them and they have to hike rates as over the long run a lack of foreign investment creates a less dynamic economy and higher inflation.

It could be forced to raise rates if inflation got out of hand with the free market demanding increased real rates of return to negate the depreciation of the currency. Even if central banks keep buying government debt at artificially low rates, private banks still lend to all of us, with this mortgage rates could rise for example. Its similar to what we see now, despite base rates at near zero average mortgage rates are far higher as the free market realises there are inflation risks over the medium to long term. They are also hedging against their potential losses as the government props them up.

However they could do none of the above. They could keep rates low, spurring on more inflation as the government can no longer afford increased rates on the ever expanding debt. They by pass the market and lend to individuals themselves at these rates. They print money directly to cover the shortfall in the various government payrolls. Currency collapse is ensured at this point as it becomes clear to all that its time to pack your suitcase. Marc Faber believes this is the conundrum America will face at some point in which its policymakers will not rise to challenge, instead they will shirk away from the correct action to take, opting for runaway inflation. At some point the stock market of such a country would be a screaming buy, just at the depths of the seemingly never ending hyperinflation when the average person has lost all confidence.

Could the UK be the Canary down the Western coal mine? There are many other nations with serious issues that have faced or will face issues sooner, but I wouldn't put them in the same tier as Britain, a nation who still has a recent innovative and industrious past. She could however, be the warning signal for many other Western nations that mass inflation and/or interest rate rises are just around the corner. Either option ain't pretty.