Monday, September 30, 2013

Laissez-faire It Ain't


Dear J-A,

Thank you for your recent email. How you contrived to send it to me, under the circumstances, remains a mystery, but I shall do my best to defend the remarks I made.

Let us begin on common ground. Total economic collapse of the West is now inevitable. On that we are agreed. Owing to the irreversible increase in sovereign debt, your beloved USA is disintegrating before the world’s eyes. It saddens me too. I have loved its geography and culture since my first visit, in 1988, and will always admire the optimism and patriotism bursting ceaselessly from its people.

US sovereign debt has since risen from $2.6 trillion to $16.7 trillion dollars. It increases by approximately $2 billion per day – and that figure itself is rising fast. There are also trillions in off-balance-sheet liabilities, but that would be almost too terrifying to address. Anyhow, there are five ways a government can pay down its debt.

(1) Raise taxes. This would be universally unpopular, especially in such a precarious economic climate, and would probably prove counterproductive to recovery.

(2) Slash public expenditure. This would be political suicide for anyone even to suggest it. Net recipients, growing in number by the day, would almost certainly vote against, and one could hardly expect otherwise.

(3) Borrow (by issuance of government bonds). This works up to a point. However, the US is ‘maxed out’ and now unable to raise sufficient funds from the markets because its interest rates are unattractively low. However, increasing them would lead to an epidemic of bankruptcies, repossessions and, ultimately, a collapse of the banking system, so that option has been dismissed out of pure fear.

(4) Print money (by so-called ‘quantitative easing’). By so doing, the US is obliged to buy its own debt. This expands the money supply, fuelling inflation, which shrinks the debt in real terms. It is the modus operandi of insolvent governments and central banks. Having already taken this route, Federal Reserve chairman Ben Bernanke is left with two choices: continue QE and cause hyperinflation (a slow death); or switch off the printing presses and let interest rates spike upwards (a quick one). As much as Mr Bernanke talks about curbing QE, only the economically illiterate believe he will ever do so. He is simply buying time.

(5) Direct confiscation of private financial assets. The prospect of ‘bail-ins’ is indeed shocking, but a precedent has been set. Cypriot bank accounts have recently been raided, as have pension funds in Poland, and the Bank of England has drawn up detailed plans – – to confiscate anything upward of £85,000 from British bank accounts, with no obligation of prior warning.

Before you remind me, the UK, too, is sinking into the abyss. Few acknowledge it, though, and most people seem blissfully unaware of what lies ahead. Likewise most other European countries, whose public finances are equally dire.

From here, however, I must disagree with you. The imminent collapse does not reflect the failure of laissez-faire capitalism, which, for all its faults, is predicated on free markets. Today, in practice, this concept is non-existent, thanks to QE bailing out overleveraged banks, housing bubbles, gold-price manipulation and interest-rate suppression. There is nothing ‘free’ about any of it. The stock market, too, is a powerful case in point. QE has inflated share prices to artificial, unsustainable heights. Take, for example, the company for which I have worked since 2008. Since then, its annual profits have doubled (Figure 66.1), and yet its share price has rocketed almost five-fold (Figure 66.2). For those of us who invested in 2008, this is a wonderful bonus, but anyone currently considering buying its shares is risking substantial losses should the stock market revert to its natural state.

Figure 66.1: The companys profits have increased healthily in recent years, although I admit that its success is not entirely down to me! (You have no need to remind me that it paid no UK corporation tax in its last financial year; I already know.) EBITA, incidentally, stands for Earnings Before the deduction of Interest, Tax and Amortization expenses.

Copyright © 2013 Intertek plc

Figure 66.2: Stock market performance (2008-2013)

Copyright © 2013 Intertek plc

All of these are the unnatural consequences of blatant State and corporate intervention. We are witnessing the largest redistribution of wealth in human history – from the prudent to the profligate, and from ordinary working folk to the banksters and their cronies.

We could legitimately call it corporate fascism (Figure 66.3), or corporate socialism, but laissez-faire capitalism it most certainly ain’t.

Figure 66.3: As long ago as 1790, banking dynasty founder Mayer Amschel Bauer Rothschild (1744-1812) said: ‘Give me control of a nation’s money supply, and I care not who makes its laws.’ His dismissiveness was not mere conceit. Two centuries on, the world’s reserve currency, the US dollar, is being printed and thus debased to its intrinsic value – nothing – as all fiat currencies eventually are.

Copyright © 2012 Secrets of the Fed 

Yours ever,

El Escritor Inglés

Copyright © 2013 Paul Spradbery