The Cobden Centre

EU Referendum Campaign launched

Steven Baker MP — Wed, 08 Sep 2010 18:48:49 +0000

This post originally appeared on stevebaker.info.

Dan Hannan and Ruth Lea have launched the EU Referendum Campaign:

The EURC is an organisation that is determined that every adult in Britain should have the right to choose whether our country should be a politically independent self-governing country or a member of the European Union.

With the EU now making the vast majority of laws we must obey and with new plans to take control over the tax and spend policies of its member countries, the British people must be given the right to decide where ultimate political power lies: In Brussels or with our elected parliament.

Unless we win the right to vote on Britain’s membership of the EU within the near future, our democracy is in danger of falling under the total control of the Brussels elite and disappearing for all time.

For the Telegraph, Dan writes:

The question, these days, is not whether referendums are compatible with representative democracy, but what the next one will be about. If we are allowed a vote on how to elect our MPs, why not a vote on whether those MPs run the country? If we can have a referendum on whether to have a mayor in Hartlepool, what about one on whether the majority of our laws should be handed down from Brussels?

It’s official – the British government owes trillions

Toby Baxendale — Wed, 08 Sep 2010 15:59:43 +0000

Another great article from the IEA, this time by Nick Silver:

Earlier this year I published a report estimating British government debt at £4.8 trillion. However, over the summer the Office for National Statistics (ONS) published a paper which proves me wrong on two counts – firstly, I understated the true debt and secondly, rather than going bankrupt sometime in the future, the UK should probably already be calling in the receivers.

Taking account of the ONS figures, Mr Silver now reckons that “our gross national debt is about £6.5 trillion”

The ONS also calculate the country’s assets as approximately £3.5 trillion, if we include the banks’ balance sheets. We therefore have a hole of £3 trillion to be funded by future tax revenue. This is in addition to future government spending. To ensure the public finances are sustainable in the long term, the government will not only have to reduce the current budget deficit of 9% of GDP; it will also have to run a surplus to “pay off” the £3 trillion. And this assumes that the assets will also generate cash or could be sold off, both of which are pretty unlikely.

Looked at this way, the UK is effectively an enormous unfunded and effectively bankrupt pension scheme, with a large speculative holding in some banks and a sideline in running a small island state off the northern coast of France.

Slowly but surely, the message is getting out: The UK is Broke.

The question is, what is David Cameron going to do about it?

Roger W. Garrison: Austrian Theory of the Trade Cycle

Andy Duncan — Wed, 08 Sep 2010 13:42:18 +0000

Professor Roger Garrison, the main macro-economist in the Misesian wing of the Austrian School of economics, presented a superb hour-long lecture last month, at the 2010 Mises University, on the Austrian Theory of the Trade Cycle. In the lecture he employed a sequenced combination of insightful diagrams to explain the key differences between Austrian macroeconomics and Keynesian macroeconomics, and also explained why the Keynesian boom always turns into the Keynesian bust, and why and how the adoption of Austrian economics would prevent this destructive cycle:

[Look out for Alan Greenspan and Ben Bernanke making rogue appearances towards the end of the lecture.]

For anyone who wishes to examine his macroeconomic diagrams in more detail, Professor Garrison makes many of his University economics courses and PowerPoint presentations available for download at various locations within his home web page site.

Hack away – and smile while doing it, minister

Mark Littlewood — Wed, 08 Sep 2010 08:42:29 +0000

As the silly season comes to an end and the party conferences approach, the coalition government will find it needs to go beyond its deficit-cutting rhetoric to flesh out a wider philosophical basis for its thinking.

So far the central idea has been David Cameron’s vision of a big society — but it has left most commentators bewildered, it being wholly unclear whether Cameron is merely applauding the efforts of the voluntary sector or if he really does have a firm view about how to recalibrate the relationship between the individual and the state. If it’s the latter, the prime minister should use some of his remaining paternity leave to read the works of Friedrich Hayek.

Although one of the most influential thinkers of the 20th century, Hayek has never been a household name. Remarkably, for a man who was born at the tail end of the 19th century, won the Nobel prize for economics in 1974 and died nearly 20 years ago, that may be about to change. Thanks to an extensive feature on the wildly popular Glenn Beck television programme in America, Hayek’s masterpiece The Road to Serfdom zoomed to the top of Amazon’s bestseller charts in June.

This is unusual enough for a philosophical tract, but is astonishing for a book originally published in 1944. The condensed version from the Institute of Economic Affairs has been downloaded from our website tens of thousands of times over the summer.

This year also marks the 50th anniversary of the publication of another great Hayek text, The Constitution of Liberty. Anyone searching for an intellectual basis for a genuinely Liberal-Conservative approach to government should read it.

Hayek argues for strict limits on state activity and intervention. But he offers a very different take on the nature of the individual from that often — if wrongly — associated with free-market capitalism. Hayek sees individuals as intrinsically social beings. His vision of a free society is not one where men and women are trampling over one another in pursuit of narrow, venal self-interest, each using their own freedom of action to exploit others. Hayek believed each individual would benefit as much from the exercise of others’ freedom as their own.

This optimistic view of human nature should be what guides the British government as it grapples with the shocking state of the nation’s public finances and attempts to provide some coherence to its big society agenda. Too often the message appears to be that the upcoming cuts and austerity measures are a practical but unpleasant necessity to prevent the economy falling off the edge of a cliff.

There is undoubtedly a lot of truth in this assertion, but it is hardly an inspiring, grand narrative about the future of our nation. We shouldn’t just be seeking to reduce government expenditure and intervention because we have to, but rather because we want to.

The extension of public sector tentacles into almost every part of our lives is not just wasteful, but has the effect of crowding out more innovative initiatives carried out by individuals, the voluntary sector and community groups. The more the government is providing to your neighbours, friends, work colleagues and relatives, the less obligation you feel to act yourself. We need to rediscover in ourselves a confidence as citizens that we can find the solutions to problems on our own doorsteps.

The government needs to share in this confidence by removing itself entirely from the field of play in a whole range of areas and conducting a full-scale assault on the obscene raft of regulations and red tape that acts as a barrier to an active citizenry.

Supporters of smaller government need to stop being caricatured as mean-spirited scrooges who revel in increasing the suffering of the unfortunate. The truth is that the big government, welfare dependency culture that has been allowed to develop in Britain has ghettoised the poor and failed to improve social mobility. The state doesn’t engender a sense of community, it displaces it.

Of course, Hayek was rightly credited with providing the intellectual basis for much of Margaret Thatcher’s political thinking. She once banged down a copy of The Constitution of Liberty on the table and insisted to her colleagues: “This is what we believe.” But Hayek was adamant he was not a Conservative.

He believed conservatism was too often the enemy of individual freedom. He described himself as a Whig, referring back to the broad-based party that had pressed for free trade and the abolition of slavery.

The coalition government brings together elements of both liberal and Tory thought, but it should also seek to rediscover the best elements of this Whig tradition. The Constitution of Liberty is as relevant today as when it was published 50 years ago and members of the coalition government should embrace its author as their intellectual guide.

The article originally appeared in The Sunday Times on September 5th and can be viewed on The Sunday Times website (subscription required)

To mark the fiftieth anniversary of The Constitution of Liberty, the IEA will be publishing a primer on it by Eugene Miller on September 16th 2010.

Download The Road to Serfdom by Friedrich Hayek.

Two ways to promote wealth creation

Toby Baxendale — Tue, 07 Sep 2010 12:12:22 +0000

In an article yesterday I defined the only lawful way I know to create wealth as follows:

Wealth is only created when entrepreneurs make better goods and services, satisfying more of the needs of consumers, in better and more convenient and cheaper ways, via more capitalistic and hence more efficient methods of production. Both the capital investment and the subsequent purchase of the new goods and services should be supported by real savings (forgone consumption).

No amount of creating more money units itself produces more of the above. I would usually then say that we should seriously consider ending corporation tax so that companies can invest their own money in more capitalistic methods of production to produce more goods and services at cheaper prices that people want. This is a particularly salient point at this credit starved part of the business cycle, when banks are not lending. Through excessive taxation, the government makes companies reliant on debt financing. They then use this reliance to argue that the banks must be bailed out and supported with taxpayers’ money. Despite the massive public subsidy, banks are still reluctant to lend. Why not let the companies keep their own money, and finance themselves? We would see a growth-led entrepreneurial revolution.

Another positive step the government could take would be to abolish all copyright laws. Here is a very interesting article supporting the theory that the German Industrial Revolution was significantly propelled by the absence of copyright laws.

The legal theorist Stephan Kinsella highlights the German experience in his list of “Innovations that thrive without IP“:

According to Robert Groezinger, “This article in Der Spiegel is all about how the absence of copyright in Germany led to an “explosion of knowledge” in the 19th century. The reason there was no copyright law was that there was no central government until 1871. This contrasts with the UK, where there had been copyright since 1710, and the number of publications was lower by a factor of 10 compared to Germany. Also, the number of copies printed was much, much lower in the UK (hundreds as compared to ten thousand or so). The article claims that this is the main reason that Germany’s production and industry had caught up with everyone else by 1900.”

Radical times call for radical solutions, and abolition of corporation tax and copyright laws should be given serious consideration.

Halligan: West should concede on Doha

Toby Baxendale — Tue, 07 Sep 2010 07:25:20 +0000

There was an excellent article from Liam Halligan in Sunday’s Telegraph:

The stark underlying message from these WTO numbers is that the West’s inability to recover is holding back the rest of the world much less than many predicted. Rather than being reliant on American and European demand, the emerging markets are increasingly making the global economic weather – generating growth organically, by trading among themselves.

Brazil’s biggest trading partner is no longer the US, but China. The same applies in Japan, where rather than being dependent on American demand as they have been for fifty years, Japanese companies are burying the historical hatchet and shackling their economy to that of the People’s Republic. Intra-Asian commerce is the fastest-growing component of global trade.

For a long time now, Economic Agenda has banged-on about the need for the leaders of the world’s biggest economies – particularly those in the West – to show the courage needed to face-down domestic vested interests and make the compromises necessary to secure an over-arching trade liberalization agreement among the WTO’s 153 member-states.

Halligan concludes:

The European Union espouses free trade. America espouses free trade. Yet between them, these two massive trading blocs maintain a vast, sprawling web of barriers and subsidies that not only dump agricultural goods on world markets, condemning countless peasant farmers to poverty, but also seriously undermine global commerce more broadly.

The Chinese needs to compromise to secure Doha. So do the Indians, South Africans and Brazilians. But the West should be leading the charge when it comes to freeing-up world trade – not in the name of charity or “development”, but as a result of cool, dispassionate analysis combined with naked economic self-interest.

We recommend the whole article.

Jim Rickards: The Golden Bullet

Andy Duncan — Mon, 06 Sep 2010 17:35:48 +0000

I think it’s time to dust off those old Sean Connery Goldfinger DVDs again, because Jim Rickards of Omnis has suggested a new tool for the Federal Reserve to adopt, that they probably don’t even realise they can use, especially if they become the official financial agent for the US Treasury’s gold supplies in Fort Knox and New York.

In a King World News interview, Rickards predicts that the Federal Reserve will engage in Quantitative Easing again (QE2) after the US November elections, but that this will once again fail to work.

When people don’t know how to change something, they often start searching for a way to justify failure, rather than thinking about how they could try doing something different to make it work.

Richard Bandler, co-founder of Neuro Linguistic Programming

Rickards suggests that the Fed might adopt a new tool to devalue the dollar, which he calls ‘The Golden Bullet’:

Jim Rickards, King World News, September 4th, MP3

That tool is for the Fed to engage in open market operations in gold and for the Fed to pick a number, say $1,500 dollars an ounce, and then to buy gold at $1,495 and then to sell gold at $1,505. Once the price goes over $1,500, Fort Knox will then start emptying [if there's actually any deliverable gold still in there], so the Fed would then set a new mark of $1,750 and then re-iterate the same game, to re-fill Fort Knox.

This process would keep on going until a market level for the gold price in dollars is discovered (for example, $2,500 dollars an ounce). The Fed would have effectively deflated the dollar down by 100%, thereby carrying out the deflation that the free market is trying to engage in anyway, without having let prices come down, and without the same failure risk as quantitative easing;

[Although Rickards is actually opposed to such interventions by the Fed, his circle-squaring plan is so cunning you could almost brush your gold-filled teeth with it.]

Rickards would himself prefer a ‘proper’ deflation, to clear out the malinvestments of the Greenspan and Bernanke bubbles, but he is surprised that his ‘Golden Bullet’ tool hasn’t made the light of day yet.

Who knows? It may yet come into operation. And surely if it does there has to be a James Bond script in there somewhere too.

You never know, Mervyn King could even take an unlikely cameo role as ‘M’.

Would Pussy Galore come back too? I think for that to happen we would have to be dreaming.

Dangerous Defeatism?

Toby Baxendale — Mon, 06 Sep 2010 13:50:09 +0000

Readers of this site will immediately realise that this recent article by Telegraph journalist Ambrose Evans-Pritchard is most confused. Much of our work aims to refute such muddy thinking.

I would love to hear from AEP, or from Prof Congdon, exactly how creating money is supposed to create wealth.

If the Central Banks of the world buy private sector bank debt, they create new demand-deposit money that the private sector banking system can then lend. So more money units chase the same goods and services? Where is the new wealth?

Many people associate rising money supply measures with rising GDP and increased prosperity. Mistaking correlation for causation, they view an increasing money supply as the source of prosperity. This puts the cart before the horse.

Wealth is only created when entrepreneurs make better goods and services, satisfying more of the needs of consumers, in better and more convenient and cheaper ways, via more capitalistic and hence more efficient methods of production. Both the capital investment and the subsequent purchase of the new goods and services should be supported by real savings (forgone consumption).

If such genuine wealth creation occurs, it will prompt banks to increase lending, and under our current system of fractional reserve banking this will necessarily entail an expansion of the money supply. This expansion is the result, not the cause, of wealth creation. Artificially increasing the supply of money will not create wealth, any more than injecting mercury into your thermometer will cause a rise in temperature.

As it is wealth we need to get us out of this hole, all policy should be directed at lowering taxes and reducing the burdens on entrepreneurs.

When it comes to central bankers, it is not dangerous defeatism we should fear, but catastrophic hubris.

Peter Schiff: The Bernanke and Krugman Show

Andy Duncan — Mon, 06 Sep 2010 08:46:22 +0000

Since our last roundup, Mr Schiff has produced three more videoblogs for all of us slavish Austro-Schiff diarists to view, discuss, and annotate. Let’s tackle each in turn:

Friday, August 27th: 2nd Qtr. GDP, Bernanke, economists, gold stocks, my crib

In this first report, a rather wide-eyed Peter Schiff opines into a fish-eye lens about the remarkable and completely unpredictable news on how the US government recently revised its GDP projections downwards. He next analyses those Bernanke statements, from out of Jackson Hole, which promised that this clueless Greenspan disciple would stand manfully by the ‘print’ button on the Fed’s printing press, under all possible circumstances, and how Nouriel Roubini has hedged his bets on predicting a double-dip recession, squeezing half a buttock over the fence by now predicting a 40% chance of such a thing occurring.

Why can’t Roubini make a solid prediction, asks Schiff, who himself is predicting a 100% probability of a double-dip recession?

Our Connecticut hero then pours scorn upon the scare stories of the Keynesian/Monetarist deflationists who have all forgotten that the maximum period of economic growth in both the UK and the US occurred in a century of monetary price deflation between the end of Napoleon in 1815 and the creation of the Federal Reserve in 1913.

In playful mood, Schiff also offers us a couple of anti-Keynesian economist jokes, my favourite of which was:

Q: What do you get when you cross a [Keynesian] economist with a Mafia Godfather?

A: An offer you can’t understand.

Schiff then covers a short-term fall in bond prices combined with increasing commodity prices.

[This reminded me of a Cassandrine prediction of the coming day when hyperinflation will suddenly happen in the US, which I read recently, written by Gonzalo Lira.]

Here is the BBC interview, mentioned above by Mr Schiff, which includes the segment with the unintentionally-hilarious Laura Tyson; Schiff appears at 3:55 minutes.

[On a personal note, it's really good to see that Schiff-style Austrianism is making inroads, for the first time to my knowledge, into a tax-consuming statist bastion like the BBC.]

Monday, August 30th: Markets, Obama, Krugman, Reich

In his second video blog, shot three days later, Schiff discusses one of the worst ever August periods for the US stock markets and contrasts this news with gold stocks hitting 52-week highs.

Moving on from there, Schiff thinks that a global recovery is real but that the US will de-couple from this and fall away into recession, especially when a fourth planned ’stimulus’ package fails to work any better than the first three.

He finishes off by pointing out Obama’s confusion between savings and credit, and wonders if Paul Krugman is even more confused.

[Krugman probably needs to read either Frédéric Bastiat's essay on The Broken Window or its more modern treatment in Henry Hazlitt's Economics in One Lesson if he wants to know why Schiff is laughing at him so much.]

Friday, September 3rd: Jobs, global economy, SBA loans, stimulus, GI bill

Here’s a short synopsis covering the third member of this triumvirate of excellent Peter Schiff video blogs:

Schiff discusses the latest US jobs figures, including the loss of a further 27,000 manufacturing jobs, which Obama has been crowing over because these figures weren’t as bad as they had been predicted to be
The need for Obama to shrink his consumptive government and to lift the burden of taxation, business loan micro-management, and regulation, to allow US production to grow
The wasteful dangers of trying to stimulate the US economy by funding ex-GI soldiers from the Iraq war to study liberal arts degrees at over-priced colleges which can afford to over-charge for study due to government guarantees on student loans

Throwing good money after bad

Sean Corrigan — Fri, 03 Sep 2010 17:00:56 +0000

There is an old military dictum (seemingly more honoured in the breach than the observance, these days) that one should never reinforce failure – the financial equivalent of which is that one should try to avoid throwing ‘good money after bad’.

Sadly, our modern cognoscenti – the policy advisors and pundits who hog the headlines – either have no truck with the wisdom encapsulated in this injunction, or are stubbornly unable to realise that their original policy analysis could ever be wrong.

How otherwise to reckon the latest effusion from the FT’s Martin Wolf when he argues that the lack of palpable recovery, despite all the trillions spent and market-shattering interventions undertaken, represents not a resounding refutation of his Keynesian misapprehensions, but, rather, a Nietzschean lack of will on the part of the Obama administration, who did not follow this sage’s supposed advice with sufficient ‘aggression’?

“The direction of policy was not wrong,” our Oracle intones: “policymakers – though not all economists – had learnt a great deal from the 1930s. Sensible people knew that aggressive monetary and fiscal expansion was needed, together with reconstruction of the financial sector.”

Well, actually, the really sensible people – though not all Austrians (!) – warned well ahead of time, not only of the impending bust which completely blindsided the likes of Mr. Wolf, but also that, instead of drawing the correct lessons from the 1930s – namely that the New Deal perpetuated, rather than truncated, the slump – the state-worshippers would repeat many of the errors which condemned our grandfathers to the traumas of that long, dark decade.

In her own valediction, ex-White House pet intellectual (sorry: ‘advisor’), Christina Romer, catalogued all the surprises and unforeseen developments thrown up by what she plaintively termed, ‘Not my Father’s Recession’, before airlifting yet more divisions into the ideological Stalingrad she and her ilk are defending, by stating that:

While we would all love to find the inexpensive magic bullet to our economic troubles, the truth is, it almost surely doesn’t exist. The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts.

For his part, the Wisest Fool in Christendom, Chairman Bernanke, offered a predictably self-exculpatory address to the Financial Crisis Inquiry Commission in Washington in which he claimed that it was ‘frankly quite difficult to determine the causes of booms and busts in asset prices…’ He also conveniently shifted the blame to European banks, rather than those coming under the purview of the Fed itself: ‘Notably, European institutions issued large amounts of debt in the United States, using the proceeds to buy… securitized products… The strength of the demand for [this]… helped to maintain downward pressure on U.S. credit spreads, thereby reducing the costs… [and] increasing… demand for loans. Denying that the Fed could have acted at any stage to restrain the Bubble, he also re-cycled the hoary old myth that perversely underconsuming foreigners were also at fault: ‘… the excess savings of Asian nations have predominantly been put into U.S. government and agency debt and MBS…’

When confronted by such an obstinate display of perverse logic, one cannot resist the comparison with the old trial by ordeal method of repeatedly ducking a presumed witch, under the somewhat flawed judicial premise that if she drowned, she was innocent, but if she survived she was clearly a bride of Satan!

Incidentally, in writing in the 1940s of the critical events of two decades before, the long time chief economist at the Chase National Bank, Benjamin Anderson, had already exploded this ‘saving glut’ nonsense, long before Blackhawk Ben came to plead it in his defence, mistaking an ex post accounting identity for an ex ante causative factor, as he did.

One must here protest against the dangerous identification of bank expansion with savings, which is part of the Keynesian doctrine… [this is] particularly dangerous today when we find our vast increase in money and bank deposits, growing out of war finance, described as “savings” just because someone happens to hold them at any given moment. On this doctrine, the greater the inflation, the greater the savings! The alleged excess of savings over investment in the period 1924-29 was merely a failure to invest all of the rapidly expanding bank credit. All of the real savings of this period was invested and far too much new bank credit in addition.

In addition to wilful blindness at the top, rational investors are also up against the incredible speculative whirl that, according to the latest BIS Triennial survey, has seen daily foreign exchange turnover explode to $4 trillion a day – something equivalent to turning over the whole world’s daily merchandise trade flows in the space of just 20 minutes – and that of interest rate derivatives jump to over $10 trillion a day – meaning a sum equal to the entire existing stock of debt securities is being turned over in less than two weeks, total net new issuance being accounted for in under 15 hours.

Put another way, in a world where the admittedly v-e-r-y broad brush estimate of income per head of the ~6.9 billion population is some $9,000 a year, the churn in these two categories alone – hence with no reference to activity involving equity or commodity derivatives or physical securities trading – amounts to $520,000 per person per year, $260 per working hour, or 58 times their average income.

If you think all of this mindless to-ing and fro-ing is based upon clinically rational expectations; that it is amenable to exact quantifications of risk; that it engenders an instantly disseminated perception of the ‘fundamentals’ underlying each of its constituent parts, as well as those pertaining to their combined interactions: if you imagine that the enormities it visits upon us with monotonous regularity have nothing to do with the pernicious financial architecture presided over by Mr. Bernanke and endorsed (barring a few regulatory quibbles) by the likes of Mr. Wolf and Ms. Romer, then I have a CDO-squared based on the receipts from an LBO-driven, sale-and-leaseback of a certain bridge in Brooklyn to sell you!