Friedman Wisdom

You can find the rest of this dazzlingly wise, vitally significant interview by clicking on the video.

I truly hope it provides you with as much optimism as it's inspired in me. We haven't lost yet.

Carbon Junk Bonds

Carbon is universally ubiquitous. It is the fourth most abundant element in the cosmos and the fifteenth most common on this planet. It's the basis of all life as we know it. Yet it seems that this elegant combination of abundance and vital significance will not stop human beings, in their endless pursuit of ever greater levels of folly, from basing an entire new economic model on "trading" the stuff. It reminds me of the Golgafrinchans in The Hitchhiker's Guide to the Galaxy, where, having crash-landed on a primeval Planet Earth, decide to use tree leaves as currency, only to discover soon afterwards that they had a serious inflation problem. Their solution? Why, burn down the trees, of course.

So you would think that this comedy science fiction is just that, comedy science fiction. It could never happen in real life, could it? Well, yes, it could. Anthropogenic climate change hysteria (it was anthropogenic global warming, but since the warming abruptly ground to a halt a decade ago, the goalposts were conveniently moved) drummed-up by discredited, numbskull scientists and then exploited mercilessly by leftwing misanthropists and 'financial engineers' alike in pursut of their own agendas, is producing its own version of leaf-trading. Both groups have something in common: while their ultimate goals might be different, they both really don't give a toss about the environment. All the traders really care about is money and all the loony Trots really care about is power. About people in general, they both care nothing.

Leaving the Trots to their own devices for a moment, in Private Eye's latest edition is an interesting article on the father of derivatives trading (junk bonds to you and me), Richard Sander. For those that don't know, derivatives, in their many various forms, are the things that brought the global economy crashing down a couple of years ago, (beginning, interestingly, with Northern Rock in Britain (it didn't 'start in America', as such, you see)). Just to put things in some kind of perspective, the entire market, if memory serves, was worth an wapping $500Tn in 2007, while the real villain of the piece, the CDS (Credit Default Swap), which was a trading invention that effectively rewarded the trader who held them with a payout should there be a default over a set period of time on a 'bundle' of mortgages, which were sold as a package, was $50Tn dollars before the sub-prime crisis went off like a nuclear bomb and plunged half the world into depression.

Well, Sander's at it again. This expert in magicking money out of thin air by trading in worthless assets is the main mover behind all the new bit of 'financial engineering' currently known as 'carbon trading'. Private Eye has done what passes in that magazine for an expose on him, though its typically MSM-style, schizoid editorial stance on all-things climate change means that it doesn't seem to be able to reach any solid conclusions about where this latest global financial scam will take us. Anyway, click on the image to read the article, or on the link above:

Whatever the ins and outs of how this thing's mechanisms are expected to work, a few things stand out in particular. First, the usual suspects are involved (RBS etc). Second, it stinks. What CNBC's Federal Reserve expert, Steve Leisman, called in late 2008, at the height of the crisis, a decade of 'fake growth' amounting to $40Tn, is about to happen all over again. A worthless commodity, in this case a commodity that doesn't actually exist - these are bets designed to offset the 'production' of carbon, or, more accurately, carbon dioxide - (at least with sub-prime, there was a real house lying somewhere at the bottom of it all), will be traded furiously in a market that some are saying will be worth $100Tn (Christopher Booker for instance) before this decade is out. And they are not wrong: one decade was all it took in the case of sub-prime junk bonds, once Alan Greenspan and Bill Clinton (and Gordon Brown in Britain, of course) had created the CDS bonanza for their banking buddies. Lehman et al over there; Royal Bank of Scotland, Bank of Scotland, Northern Rock et al over here. So long as the tax rolled in, no one in government cared. They certainly did not have clue-one about the forces they had unleashed with their vandalism of carefully created regulatory systems. Brown certainly didn't, hence the biggest exposure was in Britain. Within a decade, that market had jumped from a few hundred million in the mid-nineties to trillions by the time of what I consequently like to call 'Brown's bust'.

It's happening all over again, beginning this year. And there is nothing anyone with any political power will do to stop it. Why? Because of the propaganda that is fuelling the scheme's growth and the amount of egg on collective faces there would be should someone decide to hold his hand up and simply say, "Hang on a minute, do we really want to go down this road again?" So it isn't carbon capture we should be worrying about, it's media capture. It isn't money men like Sander we should be worrying about - he's just doing what he does best. It's the crooks in our own government.

It isn't climate change we should be worried about, it's the vast scale of the next bust, which will be inevitable if (or when) these immoral, undemocratic and economically retarded transnational carbon trading schemes are permitted to gain a grip on the world.

We do need alternative energy production systems, of course, and we must work harder to conserve and preserve the planet's ecosystem and protect it from humanity's impact (some would say that that is a human duty). What we certainly don't need is, first, insane, pseudo-scientific thought diseases that will result in real envoronmental damage (as has been seen already), and second, to pour hundreds of billions of pounds of wealth into the stratosphere based on that lie, wealth that could and should be used to modernise the world's infrastructure today.

It is time for people the world over, the vast majority of whom don't believe the climate lies any more in any case, to start shouting out loud: not in my name!

UK For Sale: Labour's Betrayal of Britain's Industry

This comprehensive, enormous post from excellent libertarian US economist (my favourite kind), J. Ricardo Valenzuala, on the subject of the vulnaribility of vast swathes of UK corporate assets to foreign takeover, is fascinating and an absolute must-read. In my view, however, and partially in contrast to Valenzuala's, the massive shift over the past decade to the foreign control of British manufacturers - large, medium and small - while certainly providing some temporary benefits in terms of stability and new investment (or, in Rover's case, a stay of execution), overall amounts to no more and no less than a deeply damning indictment of Labour's 13 disastrous years in charge of policy for the UK's manufacturing base, humiliation for the nation, and relegation to economic dependency.

The huge decline in UK manufacturing over the past decade or so simply cannot be hidden, no matter how much Labour's many liars and spinners lie and spin. Even before Brown's bust, his useless policies ensured that the manufacturing sector was either actually shrinking, or that corporations became too weak to defend themselves and stay in British hands, Cadbury being the latest case in point.

History shows that when foreign companies feel the pinch, they do not cut at home, and, if they must, then only as a last resort. They begin abroad. That, to them, means us. Remember Tata Steel and Redcar Corus? No one else seems to. The point is that if and when there is another downturn (though there must remain some uncertainty as to whether we're out of this one yet), Britain will be shockingly exposed because it will be the first country in the firing line for investment cuts by foreign companies. For instance, if Kraft begins to feel the pinch at some point in the fiture, it won't be American factories it will be closing first, it will be British ones. Cadbury, a healthy, profitable, productive and well-managed company, is now vulnerable.

For this reason, we simply must follow the examples of Germany, France and Italy and protect what remains of our homegrown, home-owned manufacturing base from easy foreign takeover. This can be achieved through German-style takeover legislation (remember Vodafone and Mannesman? Vodafone won in the end, but not without one hell of a fight with the German government, who secured enormous, locked-in investment commitments as a consequence, something the current British government has never even bothered to do) wherever such a takeover is deemed to be not in the national interest, the latter measure being transformed into a far sterner test of commitment. This country's highly productive manufacturing workforce deserves nothing less.

Sure, there will be extreme cases where loss-makers can be given a second chance with foreign money, but it's a long-term view for the country as a whole that should shape economic policy in this area from now on, not more of Labour's short-termism, which has always been about the cheap politics of making corporate headaches go away in an election year (ala Rover, 2005) that has doomed far more British industry either to ruin or to second class status than it has ever saved in the long term.

What's therefore crystal clear is that such a paradigm shift, from inept political pragmatism, sold to the British electorate under a false banner of 'globalisation', to an aggressive British enterprise culture which actually creates secure British manufacturing jobs, can't happen under Gordon Brown, but might happen under David Cameron. And that's the chance we can't afford not to take.

We have to take a chance on the Tories, because more of the same under Labour means game over for British industry, and that means game over for Britain.

The UK's Future: Social Unrest - and Better Music

I thought this conversation was fairly interesting, especially the parts where American former trader, Max Keiser, talks about the free market capitalism/democracy relationship and the major disappointment that is Barack Obama ("he's not a politician, he's a celebrity"). He's pretty good on the impact on our purchasing power of the explosion in money supply, too.

Whatever happens, 2010 will be one of the toughest years the UK has ever faced. The only silver linings, at least to me, are that Labour and the evil Brown stain, who caused the catastrophe in the first place and then prolonged it with a fake recovery (which has yet to materialise), will be kicked out of power, preferably forever - and popular music is likely to improve in inverse proportion to the social dislocation caused by the ongoing deterioration in the British economy, (otherwise known as The Clash Coefficient).

Star Trek Economics

I heard some quietly chilling news on the radio while driving into work this morning and have just got in to find that Guido has already written an excellent post on the subject of deflation or, to be more precise, inflation. Yup, as predicted on the more sensible financial blogs for months now, the latter's on the rise again. Be warned, however, this is just the beginning.

As Scottie would say on the Starship Enterprise to a captain screaming for Warp 12, "I canna' break the laws of physics, Cap'ain!" In this case, the chief engineer of the Starship Britain is Mervyn King (Alistair Darling is just the helmsman); its utterly reckless captain, who managed to navigate the ship straight into an economic black hole, is Brown (naturally); and the laws of physics are, unsurprisingly, the laws of economics which, by the same token, "canna' be broken."

You print money, you devalue it. You print bucketloads of it and, well, you are courting calamity. You go into massive debt, with a huge structural deficit bolted on, and you compound that potential devaluation and turn a calamity into a catastrophe. Simple as. They will tell you that it's the oil prices, that the money is still sound. They aren't just being dishonest, I'm beginning to wonder if they (these economics 'experts') actually know what the hell they are talking about. The temptation is to trust them - they're the boffins, after all - but the economic forces at work here are so powerful that, you know what, they might not have a clue. Either way, it will be very hard for the next (I hope sensible) captain to pull us out of the gravity vortex Brown has steered us into without stripping the vessel of all its masses of dead weight first, and then by reigniting the engines with the fresh plasma that is tax cuts and other incentives for wealth creation.

Fortunately, David Cameron wrote an excellent piece for the Times this morning which outlined those very things. If only he'd reconsider the 50% tax, too. It wouldn't signal a warp speed recovery, but it might send a vital message to wealth creators and investors that they won't be punished just for being successful and simply for doing what they do best: making money and then spending it.

Here's Guido's thoughts just in case you can't be bothered to click through:

Guido was more than sceptical when politicians and Labour luvvie economists like Gavyn Davis started talking up the bogeyman of deflation at the same time as the government was running up massive fiscal deficits. It seemed too handy a coincidence that they would print money on a scale never seen before at the same time as issuing debt on a scale never seen before. They subsequently, coincidentally, bought the debt using the money they had just printed.

This we were told was to stave off deflation which it was emphasised was very bad. Goods becoming less expensive was somehow worse than goods becoming more expensive. If we got deflation it would be the end of the good times for ever according to even monetarist economists. Guido was sceptical that deflation was necessarily bad, history shows that there have been times of increasing prosperity that coincided with deflation. Deflation happened several times in the nineteenth century. During that era of rapid economic development there were no central banks and money was calculated as a certain quantity of gold or silver.

Deflation was not necessarily a threat to our prosperity, in a situation where the money supply is stable it is the manifestation of prosperity and pensioners know that their standard of living would have improved. With inflation now upticking this experiment in Mugabenomics* has to be reversed without setting off hyper-inflation or collapsing the government debt market. The policy authorities have figured out how to prop up the gilt market – they are changing the regulations to force banks to buy government debt to the tune of hundreds of billions. It remains to be seen if they can avoid an inflationary catastrophe, surging record gold prices suggest the markets suspect not…

*©Vince Cable, who was against QE before he was in favour of it. God knows what he thinks now.

I have an idea: let's make Guido chancellor. At least he seems to know what he's talking about.

Spending Our Children's Money

My current, and I hope brief, 1992 fixation continues with this interesting presidential election debate from the day. How, on the strength of this performance, Clinton won that election is beyond me. Having said that, I recall watching it all on TV with an American friend of mine from Boston when I was at uni. and that I was as elated as she was when it became clear that Bill Clinton had triumphed. Political naiveté is the indulged privilege of callow youth, I guess.

The best part of this thing, though, is the Ross Perot explanation of the necessity for a gas tax to help to pay down the deficit. It was a great idea - for Americans - but it was ignored. A decade or so before this debate, when I was an American, gas was 48 cents a gallon. So Perot was right: there was room for relatively painless tax levies on gasolene and had been for years. Unlike in Britain. Petrol has always been expensive here, especially during Labour years, so hiking taxes on petrol even further to deal with a debt crisis has never really been a serious option for us - (until Brown!).

The real point is, though, that Ross Perot was a decent, patriotic old man who was rightly worried about debt levels in the US economy in 1992. No one listened to him then and his predictions have all come true now - in America and in Britain. For him it was morally wrong to "spend our children's money" to service our own or our government's economic incompetence and excesses. And he was dead right.

But we in Britain, thanks to Brown, have mortgaged our children's futures. Lunatics like him have made absolutely sure of that, for whatever ideologically, politically perverse reason.

The upshot is that in 2010 we now have a clear choice: either we try to limit the damage to our children's futures that Brown has caused and choose a period of conservatism (and Conservatism), or we risk burdening our children to the point of their despair by choosing Labour.

I made my mind up a long time ago. I went with the rational choice.

To eject this catastrophic Labour government, I pray that enough other people make the right choice too when the time comes - and choose Cameron.

The Deflation Myth

Deflation, as demon, is a myth. At the very worst, it is a natural but potentially very painful bursting of a bubble, itself a metaphor for that desperately dangerous illusion that is fake growth. But the real danger is inflation, as this truly great economist reminds us.

I wonder if Brown, the man who really has put Britain on the road to serfdom after that terrible decade of his Chancellorship, which saw him deliberately overheat the economy, itself enabled by his precipitate deregulation of the banking industry, while he also indulged in politically motivated deficit-spending, has ever even bothered to read him. I very much doubt it. And if he has, it's clear Brown had no interest in comprehending him, even if he could.

It's certainly the case that St John of Deficit (Keynes), darling of the Left but totally misunderstood by them, would agree with Hayek, not Brown, on how to deal with the current slump which Brown, an economic illiterate, helped enormously to create. Printing money, route one to the creation of an inflationary timebomb, is not the answer. Facing reality and cutting back intelligently is.

I hate to think what Hayek himself would have to say about Brown's current, suicidal expansionism. It would be polite, but it would not be kind!

A World Not Really Developing

I have a huge amount of respect for Fred Harrison, regardless of what I suspect might be his political proclivities. He's a man of integrity, wisdom and intellectual authority - which is probably why he characterises himself as a "renegade economist".

He's so good, he saw the British property crash coming long before it happened - but no one in government listened to him, of course, so he certainly has no love for Brown. We have at least that in common.

Well, he's on special form with this truly chilling analysis of the current state of play in some of the southern African nations. South Africa, as I'd suspected, is (as Harrison says) a 'timebomb'. If South Africa goes the way of Zimbabwe, the socio-economic shock it will cause the world will be simply massive.

What Is 'A Tough Choice'?

It is finally beginning to dawn on people that national bankruptcy is now a real possibility, thanks to the gargantuan levels of public debt generated by the so-called short-term 'stimulus' packages and vast budget deficits designed to mask the effects of the recession. It seems our own government, incapable as it is of running an economy in a period of apparent, relative plenty let alone during a downturn, now that it has decided to cling on to power till the bitter end needs some urgent lessons in what constitutes a 'tough choice'. Janet Daley points out in her typically clear-headed article this evening that people are clammering for some fiscal and monetary conservatism. I fear her call will fall on the prejudiced and therefore deaf ears of a left wing government.

So which kind of "tough choices" do you fancy? The ones that involve spending – as in, which bits of government expenditure would you choose to cut – or the ones that mean tax rises? You may as well start thinking about this because those will be the options available to you at the next general election.

The outlines of the parties' campaigns have now become clear. Labour, whoever is leading it, will be fighting the last war: trying to revive the demonic vision of "Tory cuts", as if they were somehow more fearsome than the Labour cuts that are already in the pipeline simply by virtue of being Conservative and hence inherently evil. But what even Labour spokesmen will be forced to admit, as indeed some of them did last week, is that – in the absence of serious spending reductions – the only way to fill the cavernous hole in the public finances will be through substantial tax rises. So while both parties will talk of having to make "tough decisions" – which is to say, of you having to endure some unpleasantness – they will mean rather different things by it.

She carries on by pointing-out (rather better) what yours-truly said a few days ago: Labour are being utterly dishonest in suggesting they are not going to have to cut spending - indeed have planned to do so already, but wish to fudge the issue by cutting spending stealthily. Brown's nail-chewed gnarly fingers are all over this approach. It's certainly not his second choice (and second rate) Chancellor's desire to hide from the public the scale of the problem the nation faces, as his consistent drift away from 'the message' has amply demonstrated, something that very, very nearly cost him job. But Brown and his stealth cuts are what we will have to endure. The problem is, they will not go far enough and will not be managed properly.

Daley then turns to the issue of tax rises, which is what this is fundamentally all about. Spending cuts, whichever way they arrive, as far as I'm concerned are a fait accompli. Even with the outlandish 'trampoline recovery' suggested by Darling, cuts are inevitable. As the budget deficit spirals to 110% of GDP and total debt liabilities rocket to upwards of $10 trillion-plus (380%+ of GDP) there is no alternative: you just can't sustain that level of borrowing because the likelihood of the plug being pulled by the bond market and the whole rickety framework coming crashing down increases with every new sale. It's got to be paid down at some point no matter what happens. Without aggressive spending cuts, tax rises are inevitable but their impact on an economy in recession will be to kill a fragile recovery in 2010/11. Another downturn - the dreaded double-dip recession - will become a forgone conclusion. Unemployment will begin to shoot-up even further and tax revenues will decrease even more in spite of the higher rates. It would be a disastrous course to pursue, and yet Labour in their folly seem set to do just that. Hopeless.

It's perhaps better to look at a less partisan publication, then, for a bit of guidance on this subject. There's no better or worse place to look than The Economist. In this article of June 11th, the alternatives not just for Britain, but for the US too, are made crystal clear. It's worth a read, but here's the key part:

Broadly, governments should pledge to clean up their public finances by cutting future spending rather than raising taxes. Most European countries have scant room for higher taxes. In several, the government already hoovers up well over 40% of GDP. Tax reform will be necessary—particularly in places, such as Britain and Ireland, which relied far too much on revenues from frothy financial markets and housing bubbles. Even in the United States, where tax revenues add up to less than 30% of GDP, simply raising tax rates is not the best answer. There too, spending control should take priority, though there is certainly room for efficiency-enhancing tax reforms, such as eliminating the preferential tax treatment of housing and the deductibility of employer-provided health insurance.

The next step is to boost the credibility of these principles with rules and institutions to reinforce future politicians’ resolve. Britain’s Conservative Party cleverly wants to create an independent “Office for Budgetary Responsibility” to give an impartial assessment of the government’s plans. Germany is poised to pass a constitutional amendment limiting its structural budget deficit to 0.35% of GDP from 2016. Barack Obama’s team wants to resurrect deficit-control rules (see article). Such corsets need to be carefully designed—and Germany’s may prove too rigid. But experience from Chile to Switzerland suggests that the right budgetary girdles can restrain profligacy.

Yet nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care. America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasised control of costs as much as the expansion of coverage that Barack Obama rightly wants.

All this is a tall order. Politicians have failed to control the costs of ageing populations for years. Paradoxically, the financial bust, by adding so much debt, may boost the chances of a breakthrough. If not, another financial catastrophe looms.

Can anyone imagine Gordon Brown, the man who destroyed pensions in this country in the first place, with his phantom 'moral compass' and his precarious standing within his own party, being the right man to take such radical action as raising the retirement age in Britain to, say, 70? There is no way, either, that he can be the right man because he is incapable of opting for what is, to socialists at least, the counterintuitive move of boosting output by actually lowering tax rates, thereby increasing tax revenues. Neither is he the man to cut spending aggressively across the board for a couple of years in order to lend the country some sort of financial credibility again, after he encouraged with pathological self-righteousness a credit-driven boom to overheat beyond the limits of sanity and for the economy to fly apart as a consequence. It seems there is no way he can be the 'right man' in any sense whatsoever for any job associated with the UK economy.

You can't employ a wolf as a shepherd. We need a change of government - and how!

Incidentally, if you think Britain's debt levels are catastrophic, spare a thought for the poor old Yanks (who've just hired a wolf of their own). According to this article, the true figure for US debt liabilities is now so large once 'off balance sheet' numbers such as pensions and healthcare are taken into account, it has long since overtaken the capacity of metaphorical hyperbole to illustrate its scale. US debt levels have now transcended the space-time continuum and blasted off into hyperspace. The figure is so large now, it's forming its own gravity well and everyone and everything is being sucked into it.

According to Richard W. Fisher, the president and CEO of the Federal Reserve Bank of Dallas, the unfunded liabilities of the US Social Security and Medicare system stand at $99.2 trillion today. That figure is not a misprint. If the US government plans to keep operating the Social Security system and the Medicare system, then the official federal debt really is $11.3 trillion plus $99.2 trillion, or $110.5 trillion. Why does our government state that its federal deficit is only slightly north of $11 trillion (with the term “only” a relative term, given that the true US deficit is about ten times greater than the “official” government figure)? Over the years, the US government has stated several reasons why they don’t include unfunded obligations in their official debt figures, with one of the most common reasons being that these programs are optional and can be cut at any time.

However, this practice is tantamount to a corporation omitting the cost of its health benefits program from its operational expenses even though it has promised its employees health care benefits. If the government is omitting the expense of the nationwide Social Security and Medicare programs from its budget, is this an admission that these programs will soon be history? Given the fact that a $110.5 trillion deficit puts every American family of four on the hook for more than $1.45 million, it seems unlikely that those of us that have paid a lifetime of Social Security taxes but are still many years away from eligibility will actually live to see the benefits of doing so.

This article's conclusions ring true for a UK facing problems just as grave - if not moreso because our economy simply does not have the capacity, flexibility or the potential for rapid growth that a superpower like America still most certainly does.

The government may attempt to implement the tax solution but it is probably more likely that when push comes to shove in the political arena, they will have to axe either the Social Security and Medicare programs, or maybe even both. If you think this outcome is unfathomable, consider that for these two programs and their associate benefits to survive, $99.2 trillion either has to be raised through taxation or cut from programs that have already promised funds. There is no other solution to this problem, other than to attempt to inflate the $110 trillion deficit away. Furthermore, when debating the realm of discretionary spending cuts to refill the government’s coffers, this avenue, in reality, is not viable either, simply because cuts from any other programs other than from those of national defense and national security won’t be large enough to make an impact. In the end, it seems as though most of us still believe that a bankrupt government can provide the backbone for an economic recovery.

"Axe social security and health care. Are they mad?" you hear the Labourists cry. No, not mad, my delusional lefty compatriots. Just broke.

As a friend wrote me the other day, summing-up the lunacy of our respective governments pretty neatly:

10 trillion dollars here, 10 trillion dollars there, pretty soon you're talking real money...

It's worth remembering, folks, historically things have turned out very badly over a lot less than a massive international debt crisis. Someone somewhere needs to get a grip. David Cameron must be the first.

The Radical Fix

'Renegade Economist' Fred Harrison has seldom been wrong about where our governments, particularly this one, utterly failed to 'go right'. Last month I wrote this little piece about his plan for a radical fix. This time, I'll just leave it to him to explain what we have to do as a nation to get ourselves out of the mire - and avoid the Thirties solution, which was World War II.



I don't entirely agree with him on the land tax issue (there are over-population and transition factors he doesn't seem to take into account with any rigour in his daring escape plan), but I totally agree with him on at least one thing: the first step is to cast off this government and force the next one to get it right. I also agree heart and soul that debt is our real enemy, and a powerful one at that. To defeat debt, the radical fix has to begin right away.

PS: And if you really care, read this (even though he's wrong about Thatcher).