Saturday 29 July 2017

Turning gold into base metal

 There was a period in British politics where we all more or less agreed with each other. Tony Blair was a somewhat more Left-wing Thatcherite, while David Cameron was a somewhat more Right-wing Blairite. The two main parties shouted loudly at each other, but this just hid their fundamental agreement about nearly everything. At this point voting became largely a tribal matter. Did I belong to the red team or the blue team? In the end, competence or the lack of it mattered more than policies. Either party’s policies might lead to good results so long as the people in charge knew what they were doing, for in essence the policies didn’t differ. Each party simply agreed that the task was to grow the economy as much as possible and to then spend as much of that growth on the things that the voters wanted. But the age of agreement is over.

The dismantling of the consensus came about because of the referendums. The Scottish referendum taught the whole of Britain that politics could be divisive and that people could disagree about the fundamentals. Here was a choice that would lead to two radically different futures. Either Scotland would become independent and the United Kingdom would cease to exist or it wouldn’t. Suddenly politics mattered. The result mattered. There was no use pretending that each side believed the same as the other. They didn’t.

We had a further taste of division during the EU referendum. Again politics mattered. People cared about the result. Two different futures were being presented for Britain. No-one could pretend that the two sides agreed. They didn’t. They each presented a different vision of the future. Politics had become binary again. It had become a matter of Yes and No, Leave and Remain.

The British electorate gained a taste for difference. It became used to fundamental disagreement for the first time in decades. It expected political parties to differ and rewarded this difference. Once more we have a truly Left-wing Labour Party. Political commentators decided that a Labour Party with Jeremy Corbyn as leader were no hopers who couldn’t possibly defeat the mighty Conservatives. The majority of Labour MPs who continually tried to get rid of Mr Corbyn agreed with this commentary. But they all ignored that the public had come to like the fact that politics mattered and that it was about fundamental disagreement. The cosy consensus looked like an establishment stitch up.

It is for this reason that we must rethink the whole debate from the ground up. We must go back to first principles. Labour now has a clear ideology. Well so too must Conservatives be clear about what we believe and why we believe it.

David Cameron wanted to rebrand the Conservative Party, while Theresa May thought if only she could steal a few of Labour policies she would be bound to win over Labour voters. But neither has been willing to explore what Conservatism really is, nor have they been willing to really defend the essence of Conservatism. Well we have an opponent now and that opponent is clear about his beliefs. Mr Corbyn does not apologise for his Left-wing views because he thinks they are correct. It’s high time we explained once more to the public why Mr Corbyn and the Labour Party are wrong. It’s also high time we defended Conservatism both intellectually and morally. Only in this way can we begin to persuade the public.

To understand a thing you have to grasp its essence rather than its accidents. Too often we are blinded to the nature of a thing by qualities that are merely accidental. Many subjects are filled with jargon and with theorising that pretends to explain but actually seeks to confuse. This is especially the case with economics. It is this above all that makes it so dismal. It is vital to strip away the complexity and the best way to do this is to return to the subject to its roots.

What is the debate about EU membership really about? It’s about sovereignty and trade. Remain supporters think that it is worth it to share sovereignty with the EU because this benefits our ability to trade with Europe. Leave supporters think that it is not worth it and anyway we can trade freely without sharing sovereignty. That’s it. There is quite a lot of noise about other issues, but fundamentally the argument is one about trade. But has anyone actually looked at what trade really is fundamentally? As always it is necessary to return to the beginning.

Why do we have trade at all? At one point in human history there was minimal trade. We all hunted what we saw and gathered what we could find. But development depended on the idea that people would do different things. In this way one person would begin tilling land, while another would hunt animals and still another would go fishing. The person who grew crops would trade with the person who hunted the animals. Later as prosperity increased the person who built a wheel might sell what he made for food. The fundamental reason we have trade therefore is division of labour. I use my time and effort to do one thing, which means I don’t have the time to do something else. It benefits me to be able to sell the result of my labour for something I can’t make. But does it benefit only me? No it benefits the other person too. The person who spends all day hunting animals doesn’t have time to grow grain. So he benefits too.

This sort of society may seem very ancient and primitive, but it was common at least until the nineteenth century. Think of settlers who made their way to Oregon in the 1840s. The success or failure of each person depended primarily on his own endeavour. To begin with each settler would have focussed primarily on crops and hunting, but in a short time division of labour would have arrived because people needed blacksmiths, shop owners and teachers.

The Government barely impeded on these people’s lives. It was thousands of miles away in Washington. There would have been a common effort to defend each settlement and no doubt the elderly and sick would have been looked after. But there would have been minimal sympathy for those who didn’t want to work or who drank away their wages. No-one would have expected to have been paid to do nothing. The “welfare state” was simply the kindness of your fellow settlers. They might feel a responsibility to look after you, but you didn’t have the right to it.

Inequality is a feature of such a society. Some settlers would do better than others. Some would work harder, some would be lucky. Over time as property is handed down this inequality would increase. It would also increase due to fundamental features of division of labour. If my skill is scarce, I can charge more for it than someone whose skill is common. If I have something to trade that is rare and in demand I can charge more for it than someone who has something that can be found without much effort.
When division of labour begins the means of exchange might be barter. I might exchange my grain for your venison. But what I am exchanging is perishable and therefore not a source of lasting value. In order to trade beyond the immediate community is necessary to use something that lasts. Initially this might be something that both sides of the transaction agree to be precious, such as pretty shells, diamonds or gold, but eventually as society develops according to the principles inherent in division of labour we arrive at money.

Money depends on confidence. I farm grain and sell it to someone else who gives me money. I then use that money to buy something that I can’t myself make. If I could not use the money I gained from selling to buy something else, I would not sell. I would keep the grain for myself. The whole transaction, the whole ability to move beyond barter depends on this confidence.

Trade in essence is simply the development further afield of the concept of division of labour. Firstly I pay my neighbour to fish for me, but later I pay someone who lives further away to sell me beaver pelts that I can’t even find where I live. In each case I am paying someone else to work for me.

There is a reason that Elizabeth the First sent ambassadors to meet Ivan the Terrible. It was a difficult journey, but the Russians had something that the Elizabethans wanted and couldn’t make for themselves. The Russians had furs. But the merchants who came from England to Russia brought with them things that the Russian’s wanted. These were manufactured goods or they were resources the Russians couldn’t themselves find or else they were money. The transaction only worked because the Russians could use this money to buy something else from someone else. The whole thing depended on confidence and trust.

Money is not in itself inherently valuable. Even gold and diamonds depend on confidence for their value. If an unlimited supply of gold were to be discovered, gold would cease to be valued. Alternatively if people simply decided that a soft yellow metal was no use to them then the value would collapse. If that is the case with a soft yellow metal it is still more the case with fragile pieces of paper.

So why go to all the trouble of making contact with civilisations that are far away in order to trade with them? Well I get things my society can’t easily make, but I also get money for the things that I am able to sell. This money I can use to buy other things that I can’t easily make. In essence I use my money to pay the wages of someone far away. He works for me, while when he buys what I make, I work for him. When we cease to buy from each other we in effect sack each other. It is all just the principle of division of labour, but instead of dividing the labour of a settlement we are now dividing the labour of the world.

The process of trading doesn’t just involve exchange, it involves profit. The Russians hope to sell their furs for bit more than the cost involved in hunting them. The English hope to sell their manufactured goods for more than it cost to make them. Who gains from this trade? Both sides do. If this were not the case then it is always likely that either side would consider the situation to be unfair.

Of course there are other ways to gain what I want other than trade. If I am stronger than my neighbour I could simply steal his meat or fish rather than trade for it. A country too could decide that it will simply conquer a neighbour rather than buy its goods. But there is a cost benefit issue here. Stealing is risky. Eventually I am liable to meet someone stronger. Anyway if everyone steals, society is unlikely to be peaceful and prosperous. The same is the case with countries. War is expensive. Worse still War is risky. I might lose. But most importantly of all if both sides gain from trade, war is unnecessary. If both make a profit, we all end up doing better than if we simply took from each other.

Trade is a function of the basic capitalistic nature of human beings. We each work in order to gain the things we want. We trade because we cannot get all the things we want by our own work so we use money to get others to work for us. Each of us is an employer. When I have my cabin and I want to trade with my neighbour, do I need to ask him to move in with me in order that we might trade? Obviously not. When people in two countries trade is it necessary that they have the same ruler for this trade to be mutually beneficial? If that had been the case, then trade would have required war. It would have meant that the Elizabethans would have sought to conquer the Russians in order to buy their furs. But far from causing war, trade makes war less likely. If trade benefits both parties why risk damaging the benefit by attacking the country that provides it? The idea that trade requires someone to rule over someone else turns trade into a matter of conquest. But this is to misunderstand the nature of trade. There is no need to conquer because trade benefits both of us, all of us.

At the dawn of trade when it was simply a means a matter of barter with my neighbour it didn’t matter that what I traded was perishable. Fish might rot, grain might spoil, but the traders would eat these things quickly. But when trade developed and became a matter between people who were far apart and who would never meet, then it was necessary to develop something that would not perish. It was necessary that we had something that kept its value. The problem we have today is that since 2008 we lack this something.

The financial crisis that began around 2008 and which continues pretty much unsolved is fundamentally about how money has become debased and has ceased to be a long term store of value. Where can I invest safely in order to guarantee a return greater than inflation? Of course I can beat inflation quite easily, but only if I am willing to take a risk. I can buy gold. But the gold price is very volatile. Investing in gold is one of the easiest ways to see my investment half in value over the course of a year, or alternatively double. I can invest in property. But property is a bubble that sees physical things, bricks and mortar double in price every few years. It is artificially held up by governments desperate to keep property holders happy. The rise and fall of interest rates are governed in part by the need to enable home owners to continue to pay their mortgages. But anyway we have seen from the examples of Ireland and Spain that property is not necessarily a store of value. Properties there lost half their value and were impossible to sell. We are very lucky indeed that the same did not happen here.

A combination of stocks and bonds held in as diversified a way as possible is the best hedge against inflation and the biggest chance of money retaining its value, but it comes with risk. The stock markets have been inflated artificially by central banks, while government bonds have ceased to be safe because government debt has risen to the stage where no-one expects it to be repaid. There will either be slow default by inflating the debt away, or quick default when investors cease refuse to loan to governments for this reason.  Neither stocks nor bonds are safe in the face of another financial crisis like 2008. The only alternative left is to hold cash in the bank, but with interest rates lower than inflation I am simply losing money gradually. Moreover who is to guarantee that if a bank fails its customers will be bailed out? Governments may guarantee, but what if debt reaches a point where investors cease to trust governments?

Since coming to power in 2010 the Conservative party has supposedly imposed austerity on the country. In fact it has done nothing of the kind. We still spend more than we earn and every day the size of our overall debt increases. In order for the Conservative Party to move forward it has to genuinely distinguish itself from Labour. It has to first cut the deficit to zero and then strive to eradicate the country’s debt by having us actually make a profit. A Conservative Party that leads the country to make a loss, as it has been doing for the past seven years, is not really conservative at all. It is simply mimicking Labour. It may not be mismanaging quite as badly as Labour did, but the difference is only one of degree.

If we were a small business we would have gone bust long ago. We are kept afloat merely because we are a country with a long history of repaying its debt and because we are able to create money ex nihilo. If a small business kept going in this way, by for instance setting up a printing press that printed pounds the owner would go to jail. But this the fundamental flaw of finance. If an individual trader working for a bank does something dubious, if he cons his customers or manipulates the market in an unfair way he will go to jail. But if the head of that bank develops policies that do the same thing he will get a knighthood if he succeeds and a large pension if he fails. In the same way governments are allowed to what would put individuals in jail. They are allowed to debase the currency.

The problem is this. Money is only a confidence trick. None of the things that we exchange have inherent value. As soon as people cease to have confidence in the means of exchange they cease to exchange. The correct response to currency inflation is to horde or else to barter. Why would I trade with someone far away if he gives me something that will perish? It is the equivalent of getting back rotting fish.

The essence of the difficulty can be explained in this way. Governments around the world faced with debts that they could never pay, because their electorates would never accept the “austerity” needed to pay them have only one choice left. They inflate away the debt. The key however is that they do this sufficiently gradually that no-one notices. The public would never accept so called cuts that left them losing half their income, but if their money loses half of its value over the course of ten years the public is blind to the fact. Finance develops complicated ways and arcane language to explain what it is doing, but the purpose really is to mystify. Just as lawyers write laws that only they can interpret because they are unclear and use words that no-one else knows, so too in finance we have to learn knew vocabularies such as “quantitative easing” and “option swap”. The whole process of stock markets and finance is deliberately made so complicated that none but the high priests have any clue about what is going on. The mystery is crucial, because without it the whole house of cards would come tumbling down.

Confidence in currency is only maintained because of lack of understanding about what is happening. When faced with the financial crisis of 2008 most people were scared but didn’t even try to understand. All they wanted was reassurance and for life to go on more or less the same. This was achieved. The process of QE worked, up to a point, the economy kept going, confidence was maintained even as our debts reached a point where we couldn’t even theoretically pay them. But nothing was solved. We are still not living within our means. We still have debts that we can’t pay. Meanwhile none of us have a risk free store of value. Why then do we trade? Because for the moment confidence is retained. The reason for this is that the Central Bank response to 2008 to a large extent worked. Debasing the world’s currencies, printing money and the continual attempt to have a lower exchange rate than your neighbour has led to the patient continuing to live. But we have not been able to ground our economy on bedrock. No-one has. The risk is as great now as it was in 2008, more so really because debt levels are higher and we haven’t a long term strategy to remove or even lessen the risk. We have successfully been smoking in a gunpowder factory congratulating ourselves on the fact that none of the matches we throw on the floor have blown us up yet.

If I build a house and it doubles in price after five years, I am delighted. I feel rich, I can go on expensive holidays and spend what I please. If in the next five years it doubles again I feel super rich. I must have done very well. I must have worked super hard to be so successful. But bricks and mortar don’t grow. This sort of growth is simply a bubble. For as long as it continues there is confidence. Why not? We are all getting rich. But the whole proposition depends on the idea that something like bricks and something like mortar can continually double in price indefinitely. This is self-evidently false. It is simply a Ponzi scheme that depends on confidence. Governments can prop up economies and generate growth by printing money. So long as we all feel wealthy there is no problem. But it is the same confidence trick. It is the same Ponzi scheme. It is not grounded in sound money. We lack a long term store of value. We only think we have it because it is being debased slowly. The confidence that keeps everything going is dependent on governments and central banks debasing the currency still further while keeping the public happy with a house that is built on sand.

It may be that there isn’t a problem. Money is fundamentally a matter of confidence. It may be that economics has been built on sand ever since we began to trade with people far away. Gold has no more fundamental value than paper. The bedrock is the things that I need to survive, food, shelter, warmth and the things that give me meaning in my life and make it comfortable. These are the same fundamentally today as they were when we lived in caves. Only time will tell if the latest confidence trick in the history of economics can be sustained. But we are all in the same difficulty. Most of the major economies of the world have been in the same crisis since 2008. We keep going by having confidence in each other and by trade. This is the confidence parcel that we pass and we must continue to pass it and the music must never stop. If it did we would wake up to a world where there wasn’t any confidence at all and therefore there wasn’t any money at all.

It is in this context that we have to try to understand the present relationship between the EU and the UK. For all its fundamental economic faults shared with every major economy the UK remains the fifth largest economy in the world. We need to trade with the EU in order to maintain our prosperity and also to keep the game of confidence going, but so too do they need to trade with us. At the moment the EU sells rather more to Britain than the other way round. Moreover many more EU citizens want to work in the UK than UK citizens want to work in the EU. Our citizens tend to retire to Spain, but few indeed are the Brits who work in Poland.

The fundamental of the relationship between the EU and the UK is that we are a market that they need. Moreover, we don’t have to buy their goods. Mercedes are nice cars, but they are not the only cars. We could buy from Japan or Korea and just as easily drive to work. Many of us could not tell the difference between a red wine from France or one from Chile.

But more importantly as has become clear, trade benefits both parties. It gives each something that they want and can’t make themselves and it provides each with a profit. The UK economy is vulnerable to shock, but so too is the EU economy. Neither needs any sort of trade war as it would simply damage each of them.

The failure of one bank that no-one had ever heard of in 2008 brought the world economy to its knees, what would the failure of the fifth largest economy look like? Alternatively what would the failure of the eighth largest economy (Italy) do to the economies of Japan, Britain and the USA? We are all in this confidence trick together. We cannot hang separately because we all will hang together.

There is a lot of posturing in the negotiations between the EU and the UK and there is a lot of negativity from those Brits who wanted us to remain in the EU. But the fundamentals remain clear. You don’t need to be ruled by someone in order to trade with them freely. Sovereign nation states can have free trade agreements with each other. There are loads of these. Moreover trade benefits both parties. The EU may strive to punish Britain in order to demonstrate that leaving the EU is a bad idea, but it will simply be punishing itself. If the UK economy were damaged by this punishment, we would be able to buy less goods from the EU. Moreover, we can do quite a lot to punish the EU in return. The UK could turn itself into a low tax, low regulation competitor to the EU. We could make free trade deals with the rest of the world and do all we could to undercut the EU. We could decide that given that the EU is acting in an unfriendly way we would cease to provide it with military or intelligence security. Let them pay for these things themselves rather than rely on us.

But all this would prove once more is how much we needed each other. Any damage that the UK could do to our European neighbours would simply mean that they would buy less of our goods and services. If we were able to damage them enough we might even be able to push Italy over the cliff edge. But we are joined to Italy by a chain that would see us dragged over it too.

Given that it is not necessary to be ruled by someone in order to trade freely with them, why do we have the model developed by the EU at all? Why don’t European nation states simply develop trade agreements? The reason for this has little to do with economics and more to do with history.

Between 1870 and 1945 Germany invaded France on three occasions and the consequences of this were catastrophic for everyone. The purpose of the EU was firstly to bind Germany to France in order to prevent any further invasion and to compensate France for the decline that had begun in 1870 and which culminated in the debacle of 1940. The reparations that Germany was forced to pay from 1918 onwards had bankrupted the German economy and the next decades had not gone well for France as a consequence. A new method of paying reparations had to be devised. This was called the EU. Since the beginning of the EU Germany in effect has been subsidising France and has enabled France to maintain a lifestyle that it otherwise could not. Rather than reform along British Thatcherite lines the French have been able to work relatively short working weeks, take long holidays and retire early. They could not do this on their own, but they can with their German reparations that enable uneconomic French farming to continue without reform.

The other fundamental is that it was German democracy that gave us the Third Reich and so long as it was winning the Germans were absolutely delighted. Hitler would have won an election by a landslide if he had held one in 1940. It is for this reason that the EU was set up so as to prevent the Germans, indeed any European from having a real democratic choice. There would be the appearance of democracy, but the reality would be that all important decisions would be taken by those who could be trusted.
The nation states of Europe would never have signed up to this if it had been clear to them that they were choosing to cease to exist. For this reason a confidence trick has been played. When the UK joined the EU we were told that it was simply a trading arrangement. We would lose no power whatsoever. No doubt similar stories were told to every other electorate. But it was not true. Immediately on joining we agreed that European law would supersede UK law. Right from the beginning the intention has been that the EU would become a nation state like the USA. But this would happen gradually. So gradually that no-one would notice. We would inflate away the nation state just as we debased our currency.

Poles who had been part of various empires until 1918 would never have signed up to the EU if they had truly believed that they were joining another Empire. But that is exactly what the EU has become. The EU has joined Germany to France in the same way that Karl der Große did when he was the first Holy Roman Emperor. But then it really becomes simply a matter of counting up to four.

Germany lost the heart and soul of its country in 1945. It lost the essence of Germanness, (Prussia). Well it has got it back. The Fourth Reich stretches “Von der Maas bis an die Memel” [From the Meuse to the Memel] and indeed it stretches rather further. The German lost lands are now ruled by Germans in effect. The Poles may think they retain control, but it is Mrs Merkel who tells them who they must allow into their country and how their country must be governed. In the United States Supreme Court judges are chosen by the President in combination with the Senate, but Poles risk losing their voting EU voting rights if their politicians do likewise. Soon Poland will not even have the illusion of sovereignty. It will have been traded it for 30 pieces of Euro. The złoty [literally golden] will have been turned into the basest of metals.
But none of this applies to Britain. Historically we have not been threatened by Germany. There was no fundamental desire on Germany’s part to go to war with Britain in either 1918 or 1939. We could have avoided each of these conflicts quite easily. It may well have been beneficial for everyone if we had. France would have lost in 1914 or early 1915. It would have lost a little territory and have declined a little further. But we might have avoided the Russian revolution and 70 years of tyranny. So too in 1939. We might have been able simply to skip to 1941 and let Germany beat its brains out against the USSR without our involvement. The result would have been the same.

Why should we pay reparations to France? We haven’t fought France since Waterloo. Why should we prop them up? The EU thinks that it is necessary to pay reparations (the EU subscription fee) in order to trade freely. But we have already shown that free trade does not require this. Why should the UK subsidise France in order to trade freely with France? It simply is not in our interest to do so. The French may get angry if we withdraw the subsidy, they may for a time not want to trade with us, or punish us in some other way. But the fundamentals remain the same. Free trade does not require you to be ruled by someone else, nor does it require that you pay tribute. Indeed if you must pay a tribute it is not free trade at all.

When we joined the EU it looked like a good deal. The Europeans seemed more prosperous than us. But this is no longer the case. The UK reformed (Thatcher) and ceased to decline from 1979 onwards. Much of the EU did not reform, but instead developed protectionist tendencies.  Worse still it attempted currency union without political union. This has meant that EU growth has been much less than it otherwise would have been. The EU has declined as a market, while the rest of the world, such as China, has become vastly more important. Why pay a tribute in order to trade with a market that is anyway less important than it was? Why pay that tribute and also give up your sovereignty in order to gain less than you were getting when you joined?

The EU was designed to be antidemocratic because the history of much of Europe was one of tyranny. Democracy is very skin deep in much of the EU. There were tyrants in Spain, Portugal and Greece until the 1970s. Much of Eastern Europe has only a little experience with democracy. Both Germany and France have a taste for the strong man as leader. The EU was set up to regulate and control these places and keep them on the “democratic path”, but they could only be kept on this path by giving them the illusion of democracy rather than the substance.

But Britain doesn’t need this. We chopped the head off the last tyrant who tried to rule us and no-one has tried since. We don’t need to be made to conform to human rights because we invented them. We don’t need to be forced to trade freely or be economically liberal. We had these things before anyone else did.

There may be a short term point for Eastern Europeans to choose to be in the EU. They gain subsidy and they gain the right to work freely elsewhere. They do so at the price of being vassals, but they do at least gain. But why would the UK give up its sovereignty and pay tribute in order to trade with someone. Why have someone else tell us what our rights are when we told the world what these rights were in the first place?

The EU is following the conqueror’s model of “trade”. Why buy something from my neighbour if I can simply conquer him and rule over him. Then I get everything he has for free. Germany ultimately failed to conquer Europe by means of warfare, but it has succeeded by means of the EU. Far from preventing France being invaded and conquered by Germany, the EU has instead enabled it. Mr Macron may wave a flag that is blue and had gold stars, but he might as well have been flying one that was red, yellow and black.

But you don’t need to conquer in order to trade. This was a lesson we learned at the dawn of time when we discovered that war was costly. This is why the EU model will ultimately fail. It is as if Europeans are colonising their own continent just as previously we colonised Africa. The EU is imposing a colonial power from Portugal to Poland. It gives them money and it gives them missionaries, but it doesn’t allow them to be free. If you want the food, you have to accept the EU religion.

But Poles who rebelled against Soviet rule will not ultimately submit to EU rule once it becomes clear that it is undemocratic and that it makes Poland become no more than Vermont. This is the flaw in the EU model. It is trying to unite people who are too diverse and who lack a common identity. In the end people want to live with those who are similar and who speak the same language and have the same culture and identity. There is no European identity and for this reason the EU will ultimately fail.

The fundamentals of trade are quite simple. Once we understand them, then it becomes self-evident that it is not necessary to be a member of the EU in order to trade freely. The mistake that the EU is making is that it is trying to create a state made up of people who don’t think of themselves as being from the same nation. It is trying to merge that which has been separate and wishes to remain separate. It is trying to do this by means of bribes and by means of force.

Britain has rebelled because the fundamentals of trade mean that EU model is not in essence advantageous to us. It is unnecessary and does not provide us with enough added value. In the long term we will trade freely once more with the EU without being ruled by them. It may take a while to reach this stage. They may punish us, but it will be worth it. The problem for the EU is that once we show the other members that free trade does not depend on being ruled by Brussels, they too will throw off their colonial rulers. In this way just as the three previous Reichs failed, so too will the fourth Reich. Neither the Poles nor the Portuguese will submit to Pax Germanica when the Brits show that it is neither necessary nor desirable. The very nature of trade shows that they have no need to do so.