We are now five years into the Great
Fiat Money Endgame and our freedom is increasingly under attack from the state,
liberty’s eternal enemy. It is true that by any realistic measure most states
today are heading for bankruptcy. But it would be wrong to assume that
‘austerity’ policies must now lead to a diminishing of government influence and
a shrinking of state power. The opposite is true: The state asserts itself more
forcefully in the economy, and the political class feels licensed by the crisis
to abandon whatever restraint it may have adhered to in the past. Ever more
prices in financial markets are manipulated by the central banks, either
directly or indirectly; and through legislation, regulation, and taxation the
state takes more control of the employment of scarce means. An anti-wealth rhetoric
is seeping back into political discourse everywhere and is setting the stage
for more confiscation of wealth and income in the future.
War is the health of the state, and so
is financial crisis, ironically even a crisis in government finances. As the democratic
masses sense that their living standards are threatened, they authorize their
governments to do “whatever it takes” to arrest the collapse, prop up asset
prices, and to enforce some form of stability. The state is a gigantic hammer,
and at times of uncertainty the public wants nothing more than seeing
everything nailed to the floor. Saving the status quo and spreading the pain
are the dominant political postulates today, and they will shape policy for
years to come.
Unlimited fiat money is a political tool
A free society requires hard and
apolitical money. But the reality today is that money is merely a political
tool. Central banks around the world are getting ever bolder in using it to rig
markets and manipulate asset prices. The results are evident: Equities are
trading not far from historic highs, the bonds of reckless and clueless
governments are trading at record low interest rates, and corporate debt is
priced for perfection. While in the real economy the risks remain palpable and
the financial sector on life support from the central banks, my friends in
money management tell me that the biggest risk they have faced of late was the
risk of not being bullish enough and missing the rallies. Welcome to Planet QE.
I wish my friends luck but I am
concerned about the consequences. With free and unlimited fiat money at the
core of the financial industry, mis-allocations of capital will not diminish
but increase. The damage done to the economy will be spectacular in the final
assessment. There is no natural end to QE. Once it has propped up markets it
has to be continued ad infinitum to keep ‘prices’ where the authorities want
them. None of this is a one-off or temporary. It is a new form of finance
socialism. It will not end through the political process but via complete
currency collapse.
Not the buying and selling by the public
on free and uninhibited markets, but monetary authorities – central bank
bureaucrats – now determine where asset prices should be, which banks survive,
how fast they grow and who they lend to, and what the shape of the yield curve
should be. We are witnessing the destruction of financial markets and indeed of
capitalism itself.
While in the monetary sphere the
role of the state is increasing rapidly it is certainly not diminishing in the
sphere of fiscal policy. Under the misleading banner of ‘austerity’ states are
not rolling back government but simply changing the sources of state funding.
Seeing what has happened in Ireland and Portugal, and what is now happening in
Spain and in particular Greece, many governments want to reduce their
dependence on the bond market. They realize that once the bond market loses
confidence in the solvency of any state the game is up and insolvency quickly
becomes a reality. But the states that attempt to reduce deficits do usually
not reduce spending but raise revenues through higher taxes.
Sources of state funding
When states fund high degrees of
spending by borrowing they are tapping into the pool of society’s savings,
crowd out private competitors, and thus deprive the private sector of
resources. In the private sector, savings would have to be employed as
productive capital to be able repay the savers who provided these resources in
the first place at some point in the future. By contrast, governments mainly
consume the resources they obtain through borrowing in the present period. They
do not invest them in productive activities that generate new income streams
for society. Via deficit-spending governments channel savings mainly back into
consumption. Government bonds are not backed by productive capital but simply
by the state’s future expropriation of wealth-holders and income-earners.
Government deficits and government debt are always highly destructive for a
society. They are truly anti-social. Those who invest in government debt are
not funding future-oriented investment but present-day state consumption. They
expect to get repaid from future taxes on productive enterprise without ever
having invested in productive enterprise themselves. They do not support
capitalist production but simply acquire shares in the state’s privilege of
taxation.
Reducing deficits is thus to be
encouraged at all times, and the Keynesian nonsense that deficit-spending
enhances society’s productiveness is to be rejected entirely. However, most
states are not aiming to reduce deficits by cutting back on spending, and those
that do, do so only marginally. They mainly replace borrowing with taxes. This
means the state no longer takes the detour via the bond market but confiscates
directly and instantly what it needs to sustain its outsized spending. In any
case, the states’ heavy control over a large chunk of society’s scarce means is
not reduced. It is evident, that this strategy, too, obstructs the efficient
and productive use of resources. It is a disincentive for investment and the
build-up of a productive capital stock. It is a killer of growth and
prosperity.
47 percent, then 52 percent, then 90
percent…
Why do states not cut spending? – I
would suggest three answers: First, it is not in the interest of politicians of
bureaucrats to reduce spending as spending is the prime source of their power
and prestige. Second, there is still a pathetic belief in the Keynesian myth
that government spending ‘reboots’ the economy. But the third is maybe the most
important one: In all advanced welfare democracies large sections of the public
have come to rely on the state, and in our mass democracies it now means
political suicide to try and roll back the state.
Mitt Romney’s comment that 47% of
Americans would not appreciate his message of cutting taxes and vote for him
because they do not pay taxes and instead rely on government handouts, may not
have been politically astute and tactically clever but there was a lot of truth
in it.
In Britain, more than 50 percent of
households are now net receivers of state transfers, up 10 percent from a
decade ago. In Scotland it is allegedly a staggering 90 percent of households.
Large sections of British society have become wards of the state.
Against this backdrop state spending is
more likely to grow than shrink. This will mean higher taxes, more central bank
intervention (debt monetization, ‘quantitative easing’), more regulatory
intervention to force institutional investors into the government bond market,
and ultimately capital controls.
Eat the Rich!
In order to legitimize the further
confiscation of private income and private wealth to fund ongoing state
expenditure, the need for a new political narrative arose. This narrative
claims that the problem with government finances is not out-of-control spending
but the lack of solidarity by the rich, wealthy and most productive, who do not
contribute ‘their fair share’.
An Eat-the-Rich rhetoric is discernible
everywhere, and it is getting louder. In Britain, Deputy Prime Minister Nick
Clegg wants to introduce a special ‘mansion tax’ on high-end private property.
This is being rejected by the Tories but, according to opinion polls, supported
by a majority of Brits. (I wager a guess that it is popular in Scotland.) In
Germany, Angela Merkel’s challenger for the chancellorship, Peer Steinbrueck,
wants to raise capital gains taxes if elected. In Switzerland of all places, a
conservative (!) politician recently proposed that extra taxes should be levied
on wealthy pensioners so that they make their ‘fair’ contribution to the public
weal.
France on an economic suicide mission
The above trends are all nicely
epitomized by developments in France. In 2012, President Hollande has not
reduced state spending at all but raised taxes. For 2013 he proposed an
‘austerity’ budget that would cut the deficit by €30 billion, of which €10
billion would come from spending cuts and €20 billion would be generated in
extra income through higher taxes on corporations and on high income earners.
The top tax rate will rise from 41% to 45%, and those that earn more than €1
million a year will be subject to a new 75% marginal tax rate. With all these
market-crippling measures France will still run a budget deficit and will have
to borrow more from the bond market to fund its outsized state spending
programs, which still account for 56% of registered GDP.
If you ask me, the market is not bearish
enough on France. This version of socialism will not work, just as no other
version of socialism has ever worked. But when it fails, it will be blamed on
‘austerity’ and the euro, not on socialism.
As
usual, the international commentariat does not ‘get it’. Political analysts are
profoundly uninterested in the difference between reducing spending and increasing
taxes, it is all just ‘austerity’ to them, and, to make it worse, allegedly
enforced by the Germans. The Daily Telegraph’s Ambrose Evans-Pritchard labels
‘austerity’ ‘1930s
policies imposed by Germany’, which is of dubious historical and
economic accuracy but suitable, I guess, to make a political point.
Most commentators are all too happy to
cite the alleged negative effect of ‘austerity’ on GDP, ignoring that in a
heavily state-run economy like France’s, official GDP says as little about the
public’s material wellbeing as does a rallying equity market in an economy
fuelled by unlimited QE. If the government spent money on hiring people to
sweep the streets with toothbrushes this, too, would boost GDP and could thus
be labelled economic progress.
At this point it may be worth adding
that despite all the talk of ‘austerity’ many governments are still spending
and borrowing like never before, first and foremost, the Unites States, which
is running the largest civil government mankind has ever seen. For 5
consecutive years annual deficits have been way in excess of $1,000 billion,
which means the US government borrows an additional $4 billion on every day the
markets are open. The US is running budget deficits to the tune of 8-10% per
annum to allegedly boost growth by a meagre 2% at best.
Regulation and more regulation
Fiscal and monetary actions by states
will increasingly be flanked by aggressive regulatory and legislative
intervention in markets. Governments are controlling the big pools of savings
via their regulatory powers over banks, insurance companies and pension funds.
Existing regulations already force all these entities into heavy allocations of
government bonds. This will continue going forward and intensify. The states
must ensure that they continue to have access to cheap funding.
Not only do I expect regulation that
ties institutional investors to the government bond market to continue, I think
it will be made ever more difficult for the individual to ‘opt out’ of these
schemes, i.e. to arrange his financial affairs outside the heavily
state-regulated banking, insurance, and pension fund industry. The astutely
spread myth that the financial crisis resulted from ‘unregulated markets’
rather than constant expansion of state fiat money and artificially cheap
credit from state central banks, has opened the door for more aggressive
regulatory interference in markets.
The War on Offshore
Part and parcel of this trend is the War
on Offshore, epitomized by new and tough double-taxation treaties between the
UK and Switzerland and Germany and Switzerland. You are naïve if you think that
attacks on Swiss banking and on other ‘offshore’ banking destinations are only
aimed at tax-dodgers. An important side effect of these campaigns is
this: it gets ever more cumbersome for citizens from these countries to conduct
their private banking business in Switzerland and other countries, and ever
more expensive and risky for Swiss and other banks to service these clients.
For those of us who are tax-honest but prefer to have our assets diversified
politically, and who are attracted to certain banking and legal traditions and
a deeper commitment to private property rights in places such as Switzerland,
banking away from our home country gets more difficult. This is intentional I
believe.
The United States of America have taken
this strategy to its logical extreme. The concept of global taxation for all
Americans, regardless where they live, coupled with aggressive litigation and
threat of reprisal against foreign financial institutions that may – deliberately
or inadvertently – assist Americans in lowering their tax burden, have made it
very expensive and even risky for many banks to deal with American citizens, or
even with holders of US green cards or holders of US social security numbers.
Americans will find it difficult to open bank accounts in certain countries.
This is certainly the case for Switzerland but a friend of mine even struggled
obtaining full banking services in Singapore. I know of private banks in the UK
that have terminated banking relationships with US citizens, even when they
were longstanding clients. All of this is going to get worse next year when
FATCA becomes effective – the Foreign Account Tax Compliance Act, by which the
entire global financial system will become the extended arm of the US Internal
Revenue System. US citizens are subject to de facto capital controls. I believe
this is only a precursor to real capital controls being implemented in the not
too distant future.
When Johann Wolfgang von Goethe wrote
that “none are more hopelessly enslaved than those who falsely believe they are
free” he anticipated the modern USA.
And to round it all off, there is the
War on Cash. In many European countries there are now legal limits for cash
transactions, and Italy is considering restrictions for daily cash withdrawals.
Again, the official explanation is to fight tax evasion but surely these
restrictions will come in handy when the state-sponsored and highly geared
banking sector in Europe wobbles again, and depositors try to pull out their
money.
“I’ve seen the future, and it will be…”
So here is the future as I see it:
Central banks are now committed to printing unlimited amounts of fiat money to
artificially prop up various asset prices forever and maintain illusions of
stability. Governments will use their legislative and regulatory power to make
sure that your bank, your insurance company and your pension fund keep funding
the state, and will make it difficult for you to disengage from these
institutions. Taxes will rise on trend, and it will be more and more difficult
to keep your savings in cash or move them abroad.
Now you may not consider yourself to be
rich. You may not own or live in a house that Nick Clegg would consider a
‘mansion’. You may not want to ever bank in Switzerland or hold assets abroad.
You may only have a small pension fund and not care much how many government
bonds it holds. You may even be one those people who regularly stand in front
of me in the line at Starbucks and pay for their semi-skinned, decaf latte with
their credit or debit card, so you may not care about restrictions on using
cash. But if you care about living in a free society you should be concerned.
And I sure believe you should care about living in a functioning market
economy.
This will end
badly.
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