Note by Sean Gabb: This is one of the silliest articles ever submitted to the Libertarian Alliance Blog. I publish it so our regulars can have a good laugh. In due course, the scathing comments will come up in searches for the article and its author.
Briefly put, the objection to the article is that the cause of the 2008 collapse was a malinvestment boom. This had been brought on by an increase, after 2001, in an already unsustainable rate of money creation. The most appropriate policy response was to let interest rates rise to levels where demand for loans was equal to the supply of loans of money already in existence.
Also, government spending should have been cut.
The resulting depression would have enabled the liquidation of unwise investments, thereby clearing the way for a sustainable recovery. The policy adopted has led to massive indebtedness by governments, and the new money has financed booms in various financial assets and raw materials. The living standards of ordinary working people have stagnated or fallen. Anyone with savings and without the nerve or knowledge needed to gamble in the various financial casinos has been systematically plundered. I doubt that quantitative easing will ever be reversed.
What is most likely to happen is that central banks will write off government debts, and the new money will eventually leak into the consumer goods markets. The result will be a further hammering of everyone outside the Golden Classes. I doubt if there will be an actual collapse of the currencies affected, but this is possible.
If the European Central Bank is looking for advice, mine is to raise interest rates. The sharper the contraction, the sooner the recovery. Further advice to the British, American and other governments would be to avoid stagnation via the following:
* A 20 per cent cut in government spending;
* The limitation of all public sector salaries and pensions to not more than three times average earnings, and to publish the names and photographs and functions of everyone paid three times average earnings;
* The abolition of Value Added Tax;
* Cuts in other taxes, subject to balancing budgets;
* An end to “climate change” regulations;
* A return to the health and safety regulations of the 1980s;
* Reducing all other regulations to the general burden of the 1980s;
* An institutional commitment to balanced budgets;
* A policy of military non-intervention;
* A strategy to reduce government spending, within five years, to not more than 20 per cent of GDP.
This, of course, is a minimal programme. There was nothing wonderful about the 1980s. That just happened to be the last decade before the managerial state emerged in its present form. Longer term commitments would be helpful to reduce government spending to not more than ten per cent of GDP, and to establish a fully-convertible gold standard.
None of this, by the way, is inconsistent with maintaining a minimal welfare safety net, and honouring existing old age pension commitments. The majority of state spending at present goes as follows:
* The payment of welfare benefits that do, at best, almost nothing to help those who are genuinely in need;
* Salaries and pensions for direct state parasites;
* Various fees and rents to indirect state parasites.
None of this will be done, of course. But it is still worth recommending. SIG
Dear Sean,
I am writing to share a commentary with you on the recent debate around quantitative easing in Europe by Nuno Fernandes, professor of finance at the top-ranked IMD business school in Lausanne, Switzerland.
Fernandes says the European Central Bank is facing the last chance to avoid stagnation in Europe.
Please feel free to publish the article in its entirety, use quotes from it, or use it as a basis to contact Fernandes for more information. If you do publish it, we would appreciate it if you could include a link to the IMD website. You will find the article below my signature.
Please contact me if you would like more information.
Thanks for your consideration,
Best regards,
Michael Savage
Editor and Media Relations Specialist
The European Central Bank (ECB) is already late. It cannot postpone any longer, and must act decisively in buying government bonds to give some impetus to Europe’s stagnant economies. The ECB’s current measures—buying bonds that are backed by loans to companies or individuals, and offering cheap money to Eurozone banks—are simply not enough.
That’s the clear message from the ECB’s latest “liquidity auction” on December 11, when banks took up €130 billion, at the low end of expectations. The ECB is the only central bank in the world that has allowed its balance sheet to shrink over the past three years.
Under its current measures, it has so far managed to lend only a fraction of the €400 billion available to banks, despite the fact that these four-year loans have an interest rate of just 0.15%.
The disappointing result on December 11 confirms what I predicted in early September when ECB President Mario Draghi announced the bank’s latest steps to boost Europe’s economy. I said then that these measures would not be enough, and that the ECB needed to do much more.
So now the ECB must do what it should have done three or four years ago, and start buying government bonds. The US Federal Reserve was much bolder with its “quantitative easing,” buying trillions of dollars’ worth of bonds and helping the US to avoid European stagflation.
Purchases of government bonds are more complicated in the Euro zone than in the US, and the EU’s complex decision-making processes don’t help either. But the alternative is stagnation, and who wants that? We are getting dangerously close to the tipping point, but it is still possible to avoid a lost decade.
Nuno Fernandes is Professor of Finance at IMD, where he directs the Strategic Finance program. He is the author of Finance for Executives: A Practical Guide for Managers.
Discover more from The Libertarian Alliance
Subscribe to get the latest posts sent to your email.
Well, yes, my view is that a recession will always eventually cause a shake-out that solves the problem – even Greece is back to growth now. Had Japan not embarked on raising public debt from nearly nothing in the 1980s to 270% of GDP now, they might have had a deeper recession years ago – and got it all over and one with. Government’s can spend their way out of a recession – but only by “kicking the tin can along the road” – making the next crisis worse. I fear that is what has been happening all over the West.
I find myself in general agreement with Sean Gabb – well these things happen, both of us will try and survive the horror of the experience.
I also agree with what Mr Webb has written.
The only thing I would correct is that military spending, in Britain, is only about 2% of the economy anyway – people who want to reduce government spending will not find many savings in this area. Of course the MOD is a vast bureaucracy – but they are not going to cut themselves. And real military reformers, such as Philip II (the father of Alexander the Great) who insisted that there be only one person in administration and logistics for every ten combat soldiers, are rare. Even the Israeli “teeth to tail” ratio is more like 1 for 1, and the British and American ratio is more like ten for one – THE OTHER WAY.
Still I agree with British military non-intervention – not because I am a Rothbardian (I most certainly am not), but because the British military has already been so cut that, I believe, if it was sent against a serious opponent now it would be cut to pieces. Not because of lack of courage (they have plenty of that) – but because of lack of numbers and firepower.
On the correct response to a credit bubble bust – quite so.
President Warren Harding massively cut government spending in response to the credit bubble bust (the end of the fake World War One economy) – and he was quite right to do so.
And, no, Economist magazine – there was NOT an easy money policy from the Federal Reserve in 1921. Interest rates eventually fell because prices had – there was no easy money policy, no policy of monetary expansionism, in 1921.
Our masters (mostly actually well meaning – contrary to what is often argued) have chosen a very different course – both in “fiscal” policy and in “monetary” policy.
The E.U. Central Bank is not really different from the Bank of England, the Bank of Japan, and the Federal Reserve – the idea that it is more “hard money” is a myth.
They are all Keynesians – sincere Keynesians.
And they are all sincerely wrong.
Am I being stupid, or… would it be a little bit helpful to include a link to the article Sean is critiquing?
/It was sent without a link. The PR hack who sent it won’t be pleased.
/
May I climb on Neil Lock’s shoulders and ask for a copy of the “silliest article” to be posted in full, i.e. without a link?
Have done. See below
I suspect that I am being very dim … but I cannot find the silliest article.
Click the read more butt
My apologies. It dropped off the Blog, and I didn’t notice. It is now there if you click on the continue reading button.
To be fair to Dr Gabb adding “the article” did not add anything.
It just showed that the establishment types want the “ECB” to (against “European Law”) buy even more government debt than it already is buying. By government debt with money that the Euro Zone Central Bank would create – from nothing.
No government, anywhere, appears to be sane – not the West and not the enemies of the West either.
For example, as Rothbard would point out if he was alive, Mr Putin could stop action against his regime, stop it dead, by defining the Russian currency as a physical amount of gold – by dividing the number of “rubles” by the actual physical amount of gold (of a set purity) in the physical possession of the Russian government – and give this amount of gold to anyone who handed in a physical ruble note to be destroyed. The “ruble” would not be worth much (as even the Russian government does not have much physical gold in relation to all the currency slushing about), but it would be clearly be worth something (and the printing presses and book keeping fraud would have to stop).
Of course there is very little chance that Mr Putin will do this – which is why it is safe for me to write about it.
In the zillion to one chance that anyone in the Putin regime read the idea of just making the currency physical gold (which would crush operations against the regime dead – stone dead) they would not do it. They are as addicted to credit bubble finance as the West is.
After all their own boy, Max Keiser, could tell them what I have just written (and, most likely, has) – but he exists to attack the West (for which he is well paid), not to give advice to the Putin regime itself.
As for Dr Gabb’s idea that government spending can be cut, in a major way, without suffering – sorry that is wrong.
Civil society has been undermined for many years. In education civil society has been undermined since at least 1870. As E.G. West pointed out in his book “Education and the State” (1965) the major effect of government schools was to undermine and destroy private schools (charitable and other) for the poor – and to undermine the habit (the emerging cultural tradition) of voluntary finance in education. As for old age, medical care and income support – civil society has been undermined for more than a century (since the antics of David Lloyd George years before the First World War) – with each decade that has past so the cultural traditions of independence and voluntary cooperation have declined, undermined.
Many (most?) people in the United Kingdom are dependent on the state for the necessities of life and have no idea how they would get by without a massive state (and cultural traditions, long undermined and ridiculed, can not be restored over night). So suffering, terrible suffering, is inevitable – at least once the credit bubble economy collapses. The credit bubble economy (the creation of the Bank of England) is often called “welfare for the rich” – and so it is, but the poor will suffer also (indeed suffer far more) when it collapses.
In case any Americans are smiling at this……..
Please observe how your own society has changed since 1960. With “Food Stamps”, “Medicare”, “Medicaid”, “earned income tax credit” (which tends to go to people who do NOT pay income tax) and on and on…….
The strong “functional” society of the days of Ike are long gone.