Dry end of the Titanic

“Shame on you!”

They spit the words into your face. Every hard case that arises must, of course, be solved immediately by state intervention with a new bureaucracy with sufficient staffing and a generous budget. Anything else would be ‘unfair’. And if you don’t agree, you should be ashamed of yourself. Never mind what it costs, we’ll make the rich pay for it. Anyone who has ever delved into the comments section of the Guardian or the New York Times will recognise the narrative. The effectiveness of this approach is that it completely bypasses logic and goes straight to emotion for its impact. And you know what?

We should be ashamed.

We have created in the last fifty years a multi-generation underclass that has never worked and will never acquire the habits of work. We used to have a proud working class where self sufficiency was prized, where dependency was considered pitiful by your peers, where personal advancement and education and community were valued, where the first member to enter university was a source of enormous pride for the entire family….

Until the dead hand of the state got involved. In the 1970’s, the new generation of baby boomers, in their hubris, voted for and many of them administered a vast new program of welfare in order to improve the conditions of the working class. In attempting to remove want, they decided that they, as only intellectuals could, were best placed to run the little people’s lives for them. Instead they removed all responsibility and turned adults into children. What they actually achieved was the decimation of the working class and the huge expansion of the underclass. Now we have the second and third generation of useless parasites that survive by a combination of welfare and petty crime. They destroy everything around them, make the lives of their working neighbours miserable through their defiant and unchecked antisocial behaviour, ruin the schools and fill the prisons. The self regulating communities that kept this misbehaviour in check has been displaced by a careerist, self interested and self perpetuating bureaucracy on full pay with generous benefits. You want thanks for the trillions that have been spent on them over the decades?

London riots last year and flash mobs in Walmarts. There’s your thanks.

Their anger has been encouraged by legions of grievance-mongers who absolve them of all personal responsibility and deflect the blame to ‘Society’. They have a white hot visceral hatred for you, (the poor working stiff who has to pay for this through ever increasing taxes) because deep down they recognise the dependant squalor they have been reduced to and they blame you for it. And as those 70’s radicals reach retirement age after a long and securely paid career with good pension benefits paid for by the (actually) working class, do they look back on their life’s work and reflect on the destruction their conceit has wrought? The hell they do.

Where is the shame?

The number of people on disability in the US has grown from 3m in 1990 to 9m now; in the UK it has grown from 0.4m to over 2m in the same period. Has there been an epidemic of work accidents these last 23 years that we all missed? No, of course not, with the move away from heavy industry to the service economy, most workers’ biggest physical risk is a nasty paper cut. It’s abundantly clear that politicians on both sides have cynically facilitated the transfer of the unemployed from dole to disability for their own ends. Those on the right did it to hide the embarrassingly large unemployment figures, while those on the left were more than happy to create a constituency of dependants who will forever vote in their interests to keep the welfare money coming. Look also at the breakdown of type of disability. The percentage with either back pain or mental illness went from 18% (of a then much smaller number) in 1961 to 53% in 2011. It is no coincidence that vague back pain or depression are the easiest ailments to fake.  So Mary does the rounds between doctors until she finds some doddery old fool who will sign off on her sub-Oscar performance of depression or her pantomime of back pain, and now she is set up for life to doze in front of the TV while the cheques roll in.

Where is the shame?

Since the Lehman’s debacle in 2007 the banking system worldwide has been on life support. True capitalism has two sides, those companies that provide genuine value to their customers should flourish and those that fail to do so should disappear. On this point, Occupy Wall Street are absolutely right, those banks that have singularly failed in their duties should go bankrupt. But no, the zombie banks that deserved to fail because of their mismanagement are kept alive by their bought and paid for politicians at the taxpayer’s expense. This is not the free market, it’s not true capitalism, it’s crony capitalism. We reward incompetence and put the taxpayer in hock to pay for the failures of the politically connected.

Where is the shame?

We are constantly inveigled by the mainstream media and the political class that the answer to all our economic problems is ever increasing amounts of stimulus spending in order to boost the economy. Classic Kenseynism, though we of course failed to build up the necessary reserves during the good times.

But where is the money to come from? We didn’t create a rainy day fund during the boom times. We tried austerity, by reducing government spending, but the push-back from the public sector unions was too strong. We tried raising taxes, but the private sector started squealing and the tax take actually reduced with higher rates as the free economy was squeezed. We tried going back to the bond market, but they took a jaundiced view of our willingness or ability to ever pay it back, so they balked.

Which left us in limbo and so we took the coward’s way out with Quantitative Easing (QE). Let us be very clear what QE is, it is the Central Banks around the western world creating new money out of thin air and using it to purchase treasury bonds from their own bond markets. The basic economic law of supply and demand means that increased (artificial) demand increases the price of these bonds, which in turn, reduces their interest yield. This has the added benefit for governments that the reduced bond yield (i.e. interest rate), means that they can roll over their expiring bonds at reduced interest rates.

But, you say, surely we can’t keep adding printed money to the system without unleashing hyperinflation? And here we get to the crux of it, no we can’t, the coming hyperinflation will decimate the savings of the prudent, reduce the debt load of the indebted, so those who caused the problem will be, again, bailed out by government action and those who were prudent and had nothing to do with the problem will again be shafted.

Where is the shame?

We have become immune to the shaming language of the statists. Their remedies have failed and failed again.

They’re the ones who should be ashamed.

Next!

Good morning Sir, how can I help?…

Your wages have been halved you say, well let’s take a look at your file. Ahh yes, I see here that the new approved wage rate for your work category has been set at a new level…

Yes, it’s half what it was before…

No, I don’t know how you can feed your family on that amount…

Well you wouldn’t want to go back to the bad old days when footballers (hhhaaaach, spit), sorry, when footballers earned hundreds of times what a nurse earned, now would you? Under the new order, it’s been decided that footballers should earn one hundred pounds a week plus an orange at half time, which is less than what a nurse now earns, which is only fair, no?…

Your wife is a nurse you say, and now she earns one hundred and ten pounds a week…

She gets a free orange every week doesn’t she?…

Well yes, there are two oranges in my lunch box right there, but we government workers do a very important job and it’s only fair that we get extra oran…I mean…recognition…

Yes it is very good work if you can get it…

You want to work here you say? A very good choice Sir. Ahh, well I see here on your file that you were noted as holding um…unorthodox views, so no, you can’t apply for government work.

Next!

Every western government now owns a plethora of nationalised banks. How hard is it to pick one, make it an ultra-safe National Bank, ban it from being involved in stock market or derivative trading and demand that it maintain a massive capital adequacy ratio. Given its ultra conservative nature, it could offer the safest borrowers the best terms, its depositors the safest haven and offer the most secure, though not the most exciting, returns to shareholders. It would be a boring and stodgy but secure investment opportunity that would be very welcome to investors in the current volatile market. Most banks used to be like this a generation ago.

In the future, any bank that fails can have its serviced loans and any remaining deposits folded into the National Bank, as the FDIC does so efficiently in the U.S. currently. When the crisis is over, slowly divest the government’s shares in the National Bank to the widows and orphans investment market.

Anyone who wants better returns is free to go to the open market to find it, but should expect no government backed bailout. If you want easier credit terms, the market offers plenty of choice, but at significantly higher interest rates to cover the extra risk. If the deposit interest rates on offer are too dull, you’re free to put your money elsewhere on the understanding that you stand to lose every penny if your bank implodes. If the stock price gain and dividend is a big yawn, you’re free to go to the lightly regulated banks, but be fully aware that you could lose it all. Don’t come crying to the taxpayer via the government if it all goes tits up.

If any other bank wants to compete with the national leader and avail of government deposit insurance, and some building societies and credit unions may well do, no problem, so long as they are prepared to submit to the much higher capital ratios and more restrictive rules required for a National Bank. Leave the market open for any banks to do whatever they want, but make sure that its depositors, bondholders, shareholders and counterparties are fully aware that they are on their own if the bank implodes through mismanagement and that none of the losses will be covered by the taxpayer.

Make every single bondholder, depositor and shareholder, read and sign a clear simple one page statement in plain English and large text that they understand this before their money can be accepted.

Let’s have a proper free market and not the crony capitalism we have now. Let investors diversify their investments according to their own risk appetite and not expect some other sucker to come in and bail out their bad decisions. It would be a salutary lesson in hubris and it’s consequences every decade or so. Let’s finally be rid of the cancer of the too big to fail banks.

John Maynard Keynes was an English economist and academic who lived from 1883 to 1946. He was hugely influential in the foundation of modern macroeconomics. This is the study of economics on a national and international level, as opposed to microeconomics which is the study of interactions between individuals or companies. His theories have given rise to the ‘Keynesian school’, one of the main schools of economics, though there are other competing ones such as the Chicago school and the Austrian school.

It is important to understand that, despite the fact that economists use highly intricate mathematical models and theories, theirs is not really a mechanistic science in the way that physics or chemistry is. People are not like machines where a given input equates to a predictable output. If there is one thing that we all know is that people are capricious. At times we move like great shoals of fish, seamlessly and in unison, and at other times it’s like trying to herd cats. We are given to extremes of emotion. We sometimes fall into a mania of overconfidence and greed and at other times we are paralyzed by fear and disillusion. Economics is really a social science, in that it describes both the initial actions of human beings and their reactions to economic incentives. At least, it tries to describe it and given the difficulty in doing so, a number of different theories have grown up around the study of these unpredictable creatures.

The Keynesian school is one of these theories. It follows Keynes’ theory of how to best understand it. His principal idea was that aggregate demand should be moderated by government action. Aggregate demand is an economist’s way of describing the economic cycle. When the economy is booming, it has high demand and when it is in recession it has low demand. Keynesian theory says that it’s a duty of government to act as a counter-cyclical agent to the economic cycle, so when the economy is booming, the government should draw down liquidity from the economy, meaning it should spend less than it receives in taxes and put the surplus aside into a rainy day fund. In practical terms this means that it should use the tax surplus to pay down national debt and once a reasonably small debt is left to facilitate the national pension fund market, say 20% of GDP, it should begin to create a sovereign wealth fund to put aside the surplus to invest abroad. At the same time, this drawing down of liquidity should moderate the boom.

The economic cycle will of course inevitably turn to recession. Then the government can make use of the surpluses it put aside during the good times. It can now draw down the money it had previously saved in order to stimulate the economy during the bad times. Given that the debt to GDP is at an ultralow level, there is plenty of room to maneuver, by raising debt, if required. It can now use this cash to, for instance, support the construction industry through a program of investment in infrastructure. It can build roads, bridges, hospitals and schools which provide direct and immediate employment to an under-utilized construction sector, while at the same time producing assets that have a positive value to the nation. This also has the positive effect of injecting much needed liquidity into the economy.

The problem is that the economy tends to run on a six to ten year cycle, but politics runs on a four or five year cycle. They are misaligned. A politician’s principle incentive is to get re-elected. So if during his tenure, the economy is booming, he damages his chances of re-election by ignoring calls to use the current surplus to spend on new social programs and new entitlements. It is very difficult politically to ignore calls for more spending on this or that new initiative while the national coffers are overflowing. ”It’s only fair”, his constituency and his opponent in the next election will say. A brave and principled politician would explain that the surplus needs to be set aside for the inevitable future downturn and should not be frittered away.

When was the last time you encountered a brave and principled politician?

So we now find ourselves where we are. No politician dared to put money aside during the good times because he was constantly watching his back, watching for his re-election chances. And thus no surplus was created. So now we hear the current crop of politicians saying, “Well, Keynes said we should be stimulating the economy during the downturn”.

True, but where’s the money you should have put aside in the good times to pay for this?

Keynesian economics is a two way proposition. You only have the right to call for deficit spending in the bad times if you had the balls to resist the call to overspend during the good times.

Where’s the wealth fund you should have created?

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Update: Click on the image above to view a cool video on the difference between the Keynsian School and the Austrian School of economics.