By Conrad Black
Thursday’s federal
budget was a commendable effort that plausibly forecasts a modest surplus in
two years, along with a federal debt level that amounts to 28% of GDP (barely a
quarter of where the corresponding U.S. figure will be). My own view is that
the government should further stabilize the country’s finances by raising the
sales tax on elective spending and cut the income tax (in a way that also
serves to discourage income-tax increases by the provinces). But since the
federal fiscal policy generally has been sensible since the Mulroney years, a
steady-on course is not a bad thing — especially as the world around us hobbles
toward the finish line in the 80-year devaluation of money.
An examination of
the writing of a British 18th Century author such as Dr. Johnson, and a writer
from 100 years later, such as Charles Dickens, reveals that there was no
increase in that time in the cost of a loaf of bread or the rental of a simple
but respectable residential room in London. There were soaring economic bubbles
and bone-cracking depressions, and prices followed supply and demand, but the
essential currency value was constant. Unfortunately, that would change: There
was no way to pay for the appalling hecatomb of the First World War, where
almost the whole populations of all the Great Powers except the United States
and Japan were at total war for over four years, except to increase the money
supply by printing more of it.
In the Roaring
Twenties, the New York stock market, especially, was a bubble, fed by the
fraudulent notion that permanent growth was assured, and based largely on
borrowings secured, in circular fashion, by the stock that was acquired with
the borrowed funds. As soon as the market turned, it came down hard. Forced
sales of the pledged stocks accelerated and broadened the plunge. Eventually,
governments inflated the currencies by flooding the private sector with borrowed
money.
The profusion of
new, unearned money generates increased demand and starts to push prices and
wages higher, but in currency of deteriorating value. This practice has stalked
and haunted the world ever since.
This is
essentially the trade-off that our civilization has made: Destitution will be
spared all but a few people, but savings, investment, and the quest for
security will be an endless treadmill on which he who earns and tries to
accumulate wealth is in a constant race with the deterioration in the buying
power of the currency in which he measures his wealth. Meanwhile, most useful,
durable assets, such as homes and fine arts, given some astuteness on the part
of the acquirer, increase in value, though they endure severe fluctuations in
marketability, according to changing tastes and economic conditions.
Let us be under no
illusions about the implications of these trends. Even a Cézanne painting of a
bowl of fruit costs 200 times what it did 50 years ago. And, at the risk of
seeming an unutterable philistine, great artist though Cezanne was, his bowl of
fruit was not a better depiction than the real thing, which with a comparable
bowl could be replenished with fresh fruit from the local super market, at today’s
prices, for 200,000 years for less than what the Cézanne canvas would cost.
Bubbles occur in
almost every area and are corrected eventually. The great housing bubble of
2008 was created in part by the desire of the Clinton administration to promote
family home ownership (and befriend the building-trades unions and the residential
real-estate developers). But the chief beneficiaries were those who bought five
housing units or more at a time, paid almost nothing for them, enjoyed
tax-deductibility for mortgage interest payments, flipped the properties at a
profit if their value went up, and abandoned them to the mortgage-holders if
they didn’t. This isn’t really home ownership.
A former senior
official at the largest American bank explained his business’ participation in
the mania this way: “When the music’s playing, everybody has to dance.” No they
don’t, but they did, and almost the entire banking sectors of the United States,
the United Kingdom, and much of Western Europe and Australia was saved from
bankruptcy only by government intervention. (Canada was spared that fate only
by the fact that Canadian banking is a tightly regulated six-bank cartel, not
by the genius of our bankers — contrary to their frequent insinuations
otherwise).
The rating
agencies, meanwhile, dutifully certified trillions of dollars of worthless
real-estate backed debt as investment-grade, and, as a result, now are being
investigated, and in one case indicted, by governments (most of whose credit
ratings themselves have been reduced). It is financial guerrilla war between
combatants that are equally undeserving of trust.
The core of the
conundrum is that capitalism is the only economic system that works, because it
is the only one that is aligned to the almost universal human ambition for
more. It is a myth that people really want to share (other than to a limited
degree for charitable reasons; among close-knit groups such as families and
some associations; or in over-arching emergencies such as serious wars and
national disasters). But it is in the nature of capitalism to incite people to
foolhardy risks, causing economic calamity with broad collateral damage. And
then only government can address the resulting crisis. This is not because
governments have any aptitude to do so — in general, politicians and government
officials are even less competent than lions of finance and captains of
industry. But the government has the power to legislate, enforce laws and
control the money supply.
The federal
government debt of the United States has increased by 70% in four years
compared to what it was after the first 232 years of independence up to the
installation of the current administration in 2009. The remaining hard-currency
countries are limited to Canada, Australia, Singapore, the bloc of German and
Baltic countries, the Dutch, Poles and Czechs. As for Europe’s fiscal
failures,only the Icelanders and the Irish, first in and last out, are tracing
a recovery path worthy of emulation.
Of the rest,
Cyprus, a haven for financial fugitives and scoundrels, has gone to the front
of the line: a collapsed banking system that the government proposed to salvage
by taxing bank deposits (an inordinate number of which belong to crooks from
other countries). That is the deposits would vanish in taxes rather than to pay
for the bank’s bad loans. The people revolted this week, and the government
deserted its own measure, making the negative parliamentary vote on it
unsuspensefully unanimous. The Cypriot finance ministry adopted Plan B and went
to Moscow to offer the banking system and natural resources of Cyprus to
Putin’s gangster state in the same week that Russia produced a guilty verdict
on a heroic exposeur of the government’s corruption, whom the state murdered
three years ago (Sergei Magnitsky). Those who would conduct a kangaroo trial of
the dead are expected to be saviours of the Cypriot banking industry,
This charade has
gone on so long, and with such affected solemnity, that few seem to realize
what volcano most countries are sitting on. Even relatively strong countries
such as Germany have reached for the nearer cookie jars, like securitizing debt
with pensions. Arizona has sold its state capitol, and is a tenant there. As a
distinguished and witty economist (Herbert Stein) famously said, “If something
can’t go on, it won’t.”
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