Death Throws of a Dying System

It's all getting very interesting in the Eurozone, and even though I'm officially on holiday (in the EU if you're interested) I can't help but weigh in on the political up cry over rating agencies.

Schauble, Flassbeck and Borroso have all been floundering behind their throwns, looking for a scape goat rather than admitting defeat. And so they have all arrived at the ever more commonplace conclusion, to blame elements of the free-market. More specificly the evil "speculators" and rating agencies.

I've already discussed speculators/inveators at length and won't repeat myself, but what Borroso and his partners fail to realise is that rating agencies don't  perform a function that investors don't already do themselves. Anyone who invests their capital, wisely at least, assesses the likleyhood of return. Rating agencies, like Moody's, simply collect readily available information and publish it into a report for others to read more easily.  Essentially the credit worthyness of a country is already determined by economic factors regardless of whether rating agencies existed or not, they simply highlight the risks to the wider public.

Calling for a silencing of these bodies is nothing more than an attempt to cover up their own failure.  Borraso and his cleptomanical chums would love to opperate with complete secrecy; printing, borrowing and stealing whatever they like to keep the Euro sharade ticking over a little longet.  Fortuntaley for the rest of us the markets cannot be beaten, rating agencies just help us identify the bad eggs sooner rather than later.

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Debt Crisis: Greece Round 2

This is a consolidation of 3 posts I didn't quite get around to finishing over the recent days.  I was going to make the prediction that the EU was going to release funds to Greece, despite the medias over-reaction to a possible default, and that we would see an announcement of a further bailout package sometime in the next week.  All this was based on the fact that politicians have invested too much money & credibility into the bailout scheme now and that a default would be humiliating for both EU & national politicians.

Low & behold my predictions have come true, a further £100ish billion in the pipelines is set to prop up the failing Greek government for another few months.

If we take a step back at this and look at it from an objective point of view, what we have is a central government body (the EU) using its peoples own wealth to prop up a clearly faltering arm of this economic experiment.  It's not as though the Euro zone is an impartial body (like the IMF is supposed to be), it has a huge vested interest in the continuation of the Euro; in the form of currency control & thus more control over the individual EU nations.  It seems like a rather large moral hazard to make the tax payer foot the bill for a project which only really serves the interests of the politically powerful.

Further more, the bail outs are not even the cure for the problem, tax payers are just being charged for the pleasure of continuing this daft experiment a little longer.  As I and many others have mentioned before; more debt will not cure debt.

"Oh, but the stock markets are up, investors clearly think the bail outs are going to work."

Not really, all this tells us is that investors see positive short term prospects.  Investors can keep playing the game and continue trading in Europe a little longer so long as the banks are still functioning.  Knowing that the banks will be kept afloat simple returns some previously removed capital back to the markets.  This is certainly not a show of long term market strength, just investors leaping back in now that the conditions have been held temporarily stable.

Western economies have found themselves in this predicament by attempting to manipulate markets.  They fail to recognise that markets cannot be beaten, they will react to short term stimuli and incentives but as soon as they cease the investors take their profit and leave.  The greed of governments to be seen as economically important and capable of providing prosperity to their people has been exposed as the myth that it is and has inevitably become their downfall.

Don't be fooled by the near miss, nothing has fundamentally changed; the Euro still cripples Greece's ability to price its currency back into the market, the Greek government is still incapable of passing sufficient austerity measures to keep the debt at bay and even so the level of debt is still so extraordinarily high that there is an inevitable default looming on the horizon.

Disability Wage

I'm a little late to the party but would still like to weigh in my two cents on the disabled minimum wage hoo-har.  Personally I totally understand where Philip Davies is coming from, he raises an important point which not only affects the disabled but also traps young & unskilled workers in the unemployment cycle.  Labour's typical equality at any price response didn't surprise me (or anyone else I expect) but the response from "Conservative" MP Edward Leigh was much more surprising.

"Why actually should a disabled person work for less than £5.93 an hour. It is not a lot of money, is it?"

I guess this quote perfectly demonstrate the slightly different shades of red we get to vote for in the UK, politics is now all about who to redistribute to rather than whether we should even be redistributing.  But more importantly, Edward is so detached from reality that he would rather tax and steal from most of the population just to avoid subjecting a few people to what some would consider an "undesirable wage" (if such a thing exists, try saying that to a third world worker).  After all £3 an hour is still better than starving, but I guess benefits are even better if you don't have to lift a finger.

Before we go any further I would like to address the politically correct crowd who are no doubt lurking in the shadows somewhere.  The "disabled people deserve the same wage an an able bodied person" is fine providing they are as good a worker as the able bodied person (the same argument applies to the feminists and affirmative action crowd too).  In other words is their labour as valuable?  For some disabled people it is, but the minimum wage doesn't affect the skilled workers, a wheelchair-bound lawyer for example has no problem practising law compared with his able bodied contemporaries.  However a one-armed individual who screws bulbs into lamps for a living may not be as efficient as his two armed co-workers.  So by forcing the employer to pay him a wage worth more than his labour can produce the company is loosing money and would eventually go out of business, the only choice is to fire the disabled worker.  This isn't pleasant but is a fact of life so the PC crowds opinion holds no weight here as it is economically un-viable.  The best solution which allows the disabled man to keep his job is to pay him a wage more aligned to the value of his labour.

Everybody hopefully understands that by enacting a minimum wage labourers who skills are valued below that price cannot enter the market, they therefore cannot gain skills to move up the employment ladder and hence become trapped in poverty.  To address this newly government created injustice we "grant" the now unemployed individuals benefits so that they can survive.  Eventually the do-gooders identify that the disabled people can't seem to find work (totally neglecting the fact that the minimum wage is stopping employers from hiring them) and bump up the benefits further to ensure a more fair & equal living standard for the unemployed disabled populace.  We've now reached the stage where earning less than the minimum wage is considered totally despicable & people often get offended if you suggest that disabled people should be allowed to earn what they are worth.

What annoys me most about this case (even more than the PC bullshit) is that the minimum wage doesn't even help to secure equality or a good standard of living for the disabled, yet we all pay the price for this failure.  By leaving disabled people with no choice but to take benefits they are not improving their workplace skills & thus will never be able to get over the initial minimum labour value hurdle.  Instead they will spend their lives dependant on handouts from Joe-pubic rather than improving themselves and moving on to bigger and better things.  The potential life prospects that have been wasted simply by being denied the opportunity to work is a far bigger injustice.

Further more the benefits are paid for by the rest of the public; draining resources from the economy (which could be invested in more jobs to help employ people of low labour value), decreasing individual spending power (thereby depriving other disabled and ordinary people of employment) and further increasing the cost of employment, courtesy of taxation, which deprives even more low skilled workers of potential life prospects.

The minimum wage, for both able bodied & disabled people, has and continues to create generations of welfare dependant, prospect deprived individuals with little more to look forward to than the next government cheque.  At the same time this injustice not only damages the lives of the dependant, but also deprives the working populace of their earnings and potential economic innovations which improve the lives of the whole country.  Three cheers for socialism.

Don't Fight the Markets

Having done a little more thinking on my previous post I've come to the conclusion that we are being fed total economic nonsense.  Pretty much everything spouted from the mouths of politicians in this country, continent & even across the pond, is complete bullshit.  They blame reckless speculators, tell us that stimulus is the cure and then force the few remaining savers to part with their capital in an inane attempt to revitalise the economy.  It's lies, all of it.

It is so hard to trawl through all the smokescreens, there are so many lies to debunk that I could type for a week straight, but the main point I would like to raise is 'why are the politicians fighting the markets'?

Re-visiting the bank lending issue I wrote about before got me thinking; the government honestly believes that they know better than the lenders!  The banks refusing to lend is telling us that they don't think the climate is right for their investments to see a decent return.  On the other hand the government believes that this credit is the shot in the arm the economy so desperately needs, but if this lending was to ensure a decent recovery wouldn't the banks be leaping at the opportunity to lend and secure a decent return?

What we have here is two opposing interests; the capital owners wanting to ensure they don't flush their wealth down the toilet & the government who want to be seen doing something to improve the economy for all us common-schmucks.  So who should be believe; the greedy, self-interested lenders or the greed, self-interested politicians?

Well at least we benefit from the lenders, but gain nothing from political "good will".  I guess my point is that if the lenders don't have enough faith in the economy to lend then perhaps the government should be looking for solutions to this problem rather than simply forcing them to loan out the money into the very economy they are hesitant about.  The fears banks and other lenders have are legitimate concerns about the prospects of their potential investments & therefore the economy, which don't go away simply by forcing them to lend the money out.

The same applies for "evil speculators" who were blamed for "messing up the markets" when the government was banking on them acting in a certain way to keep the economy moving along.  But speculators are investors (just like the banks the government seems so reliant on now) and again are concerned with the return on their risk, they are not blinding speculating but reacting to legitimate concerns about the economy.

We would all be better off if politician's stop trying to blame and fight the capital owning portion of the economy and instead went with the markets, listened to concerns & made improvements which encourage legitimate lending rather than forcing it.

Post-Democracy

Where do we go from here?  I think it's pretty plain to see that democracy fails to protect us from an authoritarian centralised body of power.  Instead the worlds democratic systems have seized more & more power over the past century, simply to pander to every possible insecurity they can convince the public of.  The emergence of a power hungry  EU & the perseverance of Federal over State level law in the USA are just two examples of this decaying systems failure.

I suppose we have let this happen to ourselves, perhaps democracy requires a constantly vigilant populace, in which case we have only ourselves to blame.  But there are those of us who have resisted & attempted to convince the public of the dangers created by large government and who certainly don't deserve the same fate as the muppets who followed the blind over a cliff.  So what is the next step in governmental evolution, how do we improve upon the failures of democracy?  Personally I would see the whole pointless farce of government demolished but I doubt many others are so willing to give up their hard fought 'right to vote'.

Probably the most popular idea is localisation, make politicians more accountable and implement decisions by & for local people.  As good as this sounds it doesn't solve the problem of an overburdening central body and depends on just how far are people willing to take the idea of localisation.  Who decides taxation, crime/defence policies or personal liberty laws (drugs, sex, driving requirements, etc)?  Surely having local people decide on exactly what goes on in their surrounding area produces the happiest constituents, but then aren't we just talking about splitting the country up into smaller allied countries/states?

That sounds fine to me but the USA has shown that this doesn't really work to well in practise, at first it was a huge success don't misunderstand me, but the Federal/central government found a way to claw power away from the local level which has resulted in the nations current predicament.  If we are to learn anything from this century it is that we must do away with a central body of government as even limiting it by a set of rules (written constitution) doesn't seem to stop the monster's advance.

But then if we are dividing down into smaller local states how small do we go?  County, town or village size?  Surely the most satisfactory democracy, from the voters point of view, is one where a single vote has the biggest impact (you can see where I'm going with this), which essential would involve ruling over your own life and making your own decisions.  Oh look Anarchy, wonderful we made it, what a success; no government & total control over your own life.

On the other hand perhaps we may only get as far as limited localisation (which is still an improvement so I'd take it), or perhaps a system of digital referendums on all issues (no more MPs) or an altogether more bizarre system.  I suppose the real question is when, when do we finally free ourselves from this debacle and try something new?  I'm free tomorrow, how about you?

Credit isn't the Cure

Banks seems to have become a relatively hot topic again recently (or perhaps it's just me) as the media attempts to spin up more hatred for our financial service providers.  Whilst I don't hold the majority of these rent seekers in particularly high regard I am getting pretty sick of reading the bullshit being pedalled about economics and financing.

This week has seen the banking sector miss it's quarterly target of some £19billion in loans to be handed out to small business under the "Project Merlin" agreement (which is a hilariously apt name when you think about it).  Upon hearing the news Vince Cable unsurprisingly came out flinging criticism at the banks yet again.  This whole episode is based on the notion that lending will bring us out of recession, that without credit we will stagnate and may even enter a "deflationary spiral" where people hoard resources for a greater return later.  Which of course is just as rubbish as an inflationary spiral where wages keep rising to catchup with other peoples wage rises.

The idea that some level of credit is required to help an economy grow quickly is founded on truth, a loan is a much easier way to raise revenue than to save for decades, but it is far from the magic economic cure for our problems.  What worries me the most is that the '08 recession was brought on by easy credit, the boom in the US housing market which collapsed when the credit tab was reigned in, and we don't seem to be learning any lessons.  If anything the hesitation of the banks to lend so readily shows that they are slowly learning, although huge barriers to competition and taxpayer sponsored bail-outs are an obvious disincentive to act responsibly.  Meanwhile new regulations are imposing financial restrictions on banks which reduce their capacity to lend, so who really knows if lessons have been learned!

Anyway my point is that easy, incentivized & forced credit got us into this mess and certainly won't get us out of it.  What Vince and the rest of the political economists seem to ignore is that lending is fine providing you receive the return, I would even condone printing money to hand out to producers if you could guarantee that it would create more production than the costs.  But the point is there are no guarantees.  Encouraging/forcing the banks to meet lending quotas means nothing, they are just throwing money at businesses in a hope that there are more winners than losers.  This is little more than gambling, but with our savings and earnings put up as collateral if a bank hits the red line.

A far better solution in my opinion would be to let the markets find equilibrium again, lenders need to ensure they have hard assets to cover their loans (savings), interest rates need to adequately reward lending whilst discouraging poor investments (market prices) and we need an environment which encourages business to grow and invest (deregulation and less taxation).  Overall this is part of a much bigger problem where fractional reserve banking and government regulations are the key problems halting growth, not a lack of credit.

This whole easy lending issue becomes even more of a problem when we introduce low interest rates (further encouraging borrowing over saving), foreign bond markets and all the other regulatory & money printing tools the government, sorry I mean the Bank of England has at their disposal.  There has been no effort made on the part of government to facilitate sustainable growth, whilst forcing the banks to hand out money on their behalf and then criticising, heavily regulating and taxing them at every turn is totally hypocritical.  In my opinion this wreaks of desperation, when politicians don't know what to do just throw cash at the fools, blame somebody else and hopefully they won't notice who's responsible for our decline.

Wealth Redistribution = Guaranteed Inefficiency

[Right, it's time to deal with this backlog of writing, apologies again for my sporadic blogging.]

Ed Balls is a man who is either possesses the most incredible sarcastic wit or is utterly deluded & incredibly dangerous: 

"we need another fair tax on bank bonuses to get people off the dole and into work. It's the best way to get the deficit down"

 
A statement straight from the horses arse, but I just can't seem to get my head around it.  Does Balls honestly propose that a tax (an oxymoronic "fair tax" at that) will help youth unemployment and deal with the deficit?  I suppose his idea is to pillage money from the banks, kindly impart some of it to the unemployed in a way which encourages them to work (if he's found some miraculous cure for the welfare trap then I'd very much like to hear it) and then tax the new workers to sellotape over the crevasse in the public purse.

Such a ridiculous idea doesn't even stand up in theory, let alone when put into practise by the monstrously inefficient state.  Firstly, tax never encourages growth!  The Keynesian redistribution theory is nonsense, taking money from Person A's earnings (potential future investments) and using it to employ Person B does not produce any extra growth.  What Balls fails to understand is that Persons A's capital will either be spent in the way required by him (pumped back into the economy creating useful employment) or saved/invested in a way in which he secures the best result (Milton Friedman, you look after your own money best).  Either way Person A's earnings are being used in a fairly efficient manner, providing goods for himself and thereby employing people to provides these goods or tucked away to save/invest in a project which will produce a healthy return, which again is quite likely to produce sustainable employment for someone else at some point.

However if we take Person A's money and use it to conjure up employment for Person B (benefits obviously don't stimulate growth so we will assume Balls isn't that dumb), Mr A has less income to spend on things he likes, adding strain on the businesses he used to support, whilst Person B is now employed in a roll that no-body asked for.  You see neither Ed Balls, myself or anyone else can accurately predict the future demand for goods or services, trying to create jobs via redistribution takes resources available to fulfil actual demand and relocates them to parts of the economy where the demand is (at best) slightly lower than the market the resources came from.  This could be kindly described as inefficient but in reality is more like shooting yourself in the foot.

Regardless of whether we talk about taxing individuals or companies, either way you end up taking money from people and most likely the people at the bottom.  Who does Mr Balls really think will end up bearing the brunt of a bank bonus tax, the banker who loses a small percentage of his earnings or the dry cleaner who depends on it for business?  How does Ed think the economy will be better off when resources are no longer available to invest in new business ventures but instead we have subsidised factories churning out goods nobody wants?  With this socialist nonsensical economics no-one wins, we are all made poorer either through tax or lost potential innovation.  But I'm sure we'll all sleep soundly knowing we got revenge on the bankers 'ey?

Profit, a Force For Good

This morning I awoke to the bewailing of some NHS employee (I forget her exact position) about the profit motive involved in the despicable government scheme of using tax payers money to help fat, lazy fuckers lose some weight  (this was on BBC news, there is a related article posted here too).

But she doesn't seem to share the same complaints as me, in fact she was more than happy to explain the benefits achieved, courtesy of the taxation used to pay for this project.  What she was unhappy about was the profit made from this scheme by private companies.

I can understand that people may feel uneasy about individuals making profit of the sick, but people make a profit from many other more important aspects of living.  Farmers and supermarkets make millions from one of lives most essential requirements, food.  Various other companies make profit from water, fuel to keep your homes warm, etc.  Why is health care a forbidden fruit that private enterprise isn't allowed touch?  Personally I cannot see a good reason, simply some misguided attachment to an expensive and wasteful system.

I'm getting quite sick an tired of hearing this pointless complaint to be honest, profit is not some phenomenon of "corporate greed", we all do it.  The pay check that NHS employees (and all other employed people for that matter) take home at the end of the month doesn't just cover the costs of necessities required for you to work (food, transportation costs, etc).  You are paid a little more (or maybe substantially more) to spend on life's luxuries like a holiday, a new kitchen or to save for a rainy day, this may be familiar to you as disposable income.

How does this differ from a company retaining extra profit on top of its basic running costs?  It doesn't!  Businesses make a profit to help them through tough trading periods (savings), to buy a new factory or increase productivity (just like a new kitchen) or to reward employees and shareholders with a bonus (just like your holiday).  Is this really that great an evil?  Businesses are run by people, for people, they don't just appear to suck up cash for the sake of it.

Referring back to the BBC article, the profit motive is helping to providing a service that the NHS can't.  Even though I disagree with the principle of this scheme it demonstrates a clear example of the free market benefits constantly touted by intelligent economists.  The potential reward and risk reimbursement earned by the people who developed these weight loss products & schedules is the only reason they exist.  Without the profit motive who would be providing these services, certainly not the NHS?

There are many other benefits associated with a free market system, not all of them profit motivated, which perhaps I'll get into another time.

It's Good to be Back

I can't believe where the last month has gone, university is finally over and now the unshielded challenges of life really begin.  The lack of blogging over the past month has been due to an absolutely manic scramble to complete my dissertation, hand in a mountain of essays and plough through exams fuelled on little more than red bull.  But its all over, and what a relief.

A lot has happened in my absence and a great deal of writing opportunity has been missed; Rally Against Debt, a huge correction in the price of silver, announcements of Republican Presidential candidates (Ron Paul in particular), further Greek debt woes, protests in Spain, the killing of Bin Laden, the introduction of the minimum wage in Hong Kong and many other events I can't recall off the top of my head.   I won't be taking the time to back track on all this though, plenty of other bloggers have covered these topics to death already, but that doesn't mean I don't have plenty to write about.

I'd like to restart this blog with a little section on university education (a rather fitting topic I suppose), although the issue of tuition fees has fallen from the headlines I would like to offer some advice to any students looking towards a future in higher education.

My experience at a pretty average university has taught me a lot of things and not just course related material.  Firstly that even at just £3000 a year (plus tax later in life of course) the education I received was probably not worth it.  I've learnt a great deal but mainly from books and reading in my own time, my lecturers were intelligent and helpful enough but I found the whole experience rather unchallenging.  This probably doesn't apply to some of the better universities and you certainly can't practise medicine or law without a degree, so keep what I write in context.

I honestly believe, at least academically, I would have been better off spending £3000 on books and equipment of my own and just experimenting with electronics myself.  It would have cost less and probably taken a fraction of the time to learn what I have.  There is of course the obvious benefit of being able to take any problems you have to a lecturer and the nice certificate at the end of the course to prove you can do it, but so what?  The Internet is awash with experts and sources of knowledge far exceeding that of a single university and the proof of your ability is in what you can build (in my case) and demonstrate to potential employers, why not just build a website advertising your abilities to the world?

I suppose it boils down to how you want to spend your life, I have found that I have very little desire to work for anybody else so my academic study may just go to waste.  My interests, passions and views on my life have changed drastically over the last three years, in fact probably over the last couple of months too.  I have over £21,000 worth of debt and gained very little that I could not have found out myself & I'm left with knowledge I may not even decide to use, I do feel like a little bit of a chump. 

Looking back there are so many better things I feel that I could have done with my time and a debt this large, so this would have to be my warning to other potential students.  University is an expensive way to discover your passions, your life's ambitions and I probably think this is a natural part of the transition to adulthood.  Perhaps you could argue that my time at university helped me grow and realise all this (I would agree to some extent), but at a cost of over £40,000 for a student starting next year I would urge you to carefully consider exactly what you want to get out of the three years, not just academically but with a view to sculpting the rest of your life.  University is a big decision and three years of youth that you can never get back.

Standard & Poor's revise US debt outlook to 'negative'

It's not even been a week since gold broke the £900 barrier here in the UK and today sees it making new highs at £921 an ounce whilst the Dow Jones tumbled 222 points.  This comes as Standard & Poor's announced today that they are downgrading their outlook on the US's long term debt from stable to 'negative' due to the scale and indecision surrounding the nations problem.  The US retained its 'AAA' ranking, but this does raise more concerns over the nations debt problem.

"We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013."  "If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."

Fortunately the Republicans (some of them at least) are starting to get the ball rolling, scalping Obama for a few cuts in exchange for averting a Government shut-down the other week.  A 2013 deadline also gives them time for another presidential election, where no doubt the issue of sovereign debt will be a hotly contested issue.  If however the US was to loose its triple A rating it would substantially increase its costs of borrowing from foreign investors, putting even more pressure on the nations already struggling finances and currency.  This is a pretty bad start to the decade for the worlds reserve currency & biggest economy.

Marginal Producivity of Debt

 The other day I came across a very interesting tool and way of looking at an economy, the ability to measure the GDP generated yearly against the level of debt taken on by the nation.  In other words how has every £ added in debt helped the economy grow?

Unfortunately I could only find this statistic for the USA so I've comprised my own charts for the United Kingdoms public & private debt levels using various public resources (including the 2011 budget).

The first chart belows shows how public level of debt reflect changes in the UKs GDP since 1988, this information was collected courtesy of UKPublicSpending and the 2011 Budget.  The total deficit line (blue) comprises of the economies total borrowings for each year (public and private liabilities) vs changes in GDP and the total public debt line (red) demonstrates the total net government debt vs changes in GDP.

Clearly in the 2008/9 recession there was a negative change in GDP therefore every £ spent results in a negative return, this is not to say that the spending was the cause of the recession (although there is probably some truth in that) just an analysis of the return for every £ added in debt.  Interestingly both of the data lines show downward trends towards 0 (where adding debt is no longer adding towards GDP growth), with total yearly debt reaching the line before total government debt.  In fact the economies total liabilities, including private debt (mortgages, business loans, etc), has shown a much more consistently downward momentum than total government debt.

This diminishing return on borrowing may be down to a number of factors; the increased availability of cheap loans diverting resources to less productive areas of the economy, loss of purchasing power in the £ (currency devaluation/inflation) or perhaps even market saturation with credit.  If the total yearly economic deficit line is to be believed this year we will find that more borrowing (in both public and private sectors) is actually going to start negatively affect the economy (another recession), however the BoEs low interest rates continue to encourage borrowing over saving.

 

This above chart shows the change in GDP compared to total public debt since 1921 with  a 15 year moving average and the % change in debt levels (deficits & surplus).  Interestingly not since the Great Depression and WW2 have we seen the GDP Change/Debt ratio dip below the 0 mark and never before has it coincided with such a huge leap in government debt.  Even in the recessions of the 80s and 90s (where you can see a nice bubble), despite large declines in the return on borrowing, we never fell close to the 0 return mark.  However in 2008 as borrowing doesn't seem to have had such a positive effect stimulating GDP as it had in previous years the recession pushed us below the 0 return line and into negative GDP for the first time since 1945.

So what does all this tell us?  From the looks of things we are moving into quite uncharted territory, we have worked up a substantial debt over the past 40 years (constant percentage increases in debt) and our trend lines suggest that the ability to borrow and stimulate growth has been and continues to diminish.  It's quite difficult to predict exactly what this all means, the next few years will show us whether 2008 was a blip or the start of a new trend; where borrowing in either the public or private sector struggles to produce sizeable levels of growth.  When you combine this with the wider picture; currency devaluation, trade deficits, food shortages and the other stuff BoE economists have been "holding at bay" for years, it certainly looks like we are in for a rough ride.

Security in an Anarchistic Society

Being an open Anarco-Capitalist in discussions I often attract very similar remarks when talking about the issue of security & the police.

"Oh my god you moron, don't you realise that without police crack heads will rob your house and kill your family."

The above is a fairly typical response to the idea that we don't need state provided police, my response is that I have never actually witnesses police offers stopping a crime in progress.  Most criminals are smart enough to take a quick look around before smashing in a window.
 
I have however witnessed many police offers harassing teenagers, punishing those who don't wish to purchase car insurance & cracking the skulls of those who's opinions differ from that of the state.  Meanwhile store security staff detain shoplifters, private security personal protect corporate & private property & ordinary citizens tackle armed robbers.  This is not to say that the police don't perform an important function, just a function that can be performed equally well, if not better, by private citizens.

Coming back to the earlier satirical response, the notion that crime rates will increase in the absence of state police is nonsense.  "Crack heads" are still quite capable of robbing and killing you if they want even if you throw an extra 100 community support officers onto the streets.  The police simply cannot be everywhere at once and unless one happens to be swandering down your street whilst your house is being robbed there is little chance that a squad car will arrive before your TV has found its way into someone elses living room.  But even so everybodies house is not being robbed.

I think this issue really boils down to a failure to understand what deters people from committing crimes.  I can identify two factors; firstly and most obviously peoples sense of moral decency.  Most people find the thought of killing somebody terrible not just because it is against the law, but because they feel bad about ending another persons life.  The same moral conscience applies to most crimes; theft, rape, etc.

Secondly, for those who's moral conscience is either non existent or temporarily impaired, the prospect of being caught and suffering punishment is the only other deterrent.  If someone misses both of the above criteria then they would have no issue with harming another individual; hence why no matter how many laws or police you have some people will always commit crimes.  However do either of these factors evaporate if state police were to disappear?

No; moral conscience is not maintained by the state, it is instilled in each individual through upbringing and social standards.  Does the deterrent to commit crimes suddenly disintegrate in the absense of the state? I agree that with an absolute abolishment of security there would be no punishment & therefore every reason to commit a crime, beside your own sense of decency.  However that sort of scenario is absurd, people could and would provide their own security & punishments through the use of local private security/police forces or self-defense.

Local neighbourhoods could pitch in for a "bobby" or two "on the beat", bigger security firms could provide larger areas of call-out coverage to protect people form crimes in progress, private-investigators or bounty hunters could be used to tracking down criminals.  All of this can be provided with several added benefits over state provided policing.  Those who would rather take the risk and defend themselves can save their money, local areas can bluster up security if they wish without having to wait for a state prescription & there would be no absolute position of power to persecute the populace as competitive firms would keep each other in check (e.g. CompanyA is behaving in a way I don't approve of, I'll take my business to CompanyB).

Does anyone honestly believe that community support officers are a necessity to prevent the country from breaking out into a crime spree?

Gold, a Quick Review

With more global turmoil & financial pressure since I first took a look at buying gold let us take a quick look at how our investment has done.  The spot gold price was £854 on the 18th February and today is reaching new highs of just over £900.

 

Now granted, there are purchasing costs involved but with the cheapest I found, 3.5%, an investment in gold at £854 would already be yielding roughly a 2% return so far this year.  To put this in perspective banks are offering a typical interest rate of 3% - 3.25% for a tax free ISA, gold has outperformed the banks yearly rate in under two months.  Whilst a small gold investor may have only recently covered their purchasing costs there are still another 10 months to go in the year, just how high can gold go?

Originally we were not really looking at making much of a real term profit with gold, only protecting ourselves from inflation and fiat currency devaluation, but there are whisperings which suggest that gold could shoot much higher (not anytime soon though).  There is very little doubt that the bull market in precious metals will continue so long as the Western world devalues its currencies, takes on more debt and tries to print/stimulate their way out of this mess (which could easily last several more years).  But we must also consider the current real lack of demand for precious metals amongst the general populace, even many investors are still mainly steering clear of gold in favour of the propped up stock market.  When the fiat currency problems really get under way, inflation goes through the roof and savers (the few who are left) can't get a good enough return from the banks, you would expect to see a much larger leap into gold, thus increasing the price much faster.

Once/if this happens we must begin to beware of a bubble, with over eager investors leaping into gold assuming that it is a guaranteed money maker (see the housing or .com bubbles) the real fun begins and we can ride the bubble as high as and as riskily as you like before selling and taking a nice profit, leaving the suckers with an overvalued commodity.  The real problem here however is that the currency issues probably won't be over at this point, so it would be worthwhile moving your profits into a different investment, perhaps other commodities or related stocks.  This scenario may seem a little fanciful to some and its certainly a little way off, but we are starting to see the results of inflation rear its ugly head, the Euro zone continues to struggle with debt it simply can't repay and the US still has the printing presses on full blast.  Seems to me that this is a good enough reason to stay in precious metals, but just beware of the public at large eventually catching wind and blowing up the bull (if the BBC starts talking about gold investment then it's probably a good time to start looking for a way out).

Just a little mention, take a look at silvers recent performance.  Before leaping on this wagon beware of a potential correction and read up on it first.  As before a little disclaimer, investments are risky; just because gold has had a good year so far doesn't mean that it will continue to do so.    Personally I'm in gold for the long game as I believe in an eventual explosion of currency problems and I don't want my money to be a part of it.  Predicting the market is virtually impossible we can only make educated guesses and this is something for you to make up your own mind on.

Dispelling Cost-Push "Inflation"

I think we need to set this straight, my favourite of all public services, the BBC, has published an article on the Bank of Englands decision to keep interest rates at only 0.5%.  They goes on to discuss inflation and supposedly how the BoEs interest rates affects it.  However they seem to have confused themselves and are giving the public the wrong end of the stick.

Inflation, in the true economic sense of the word, is an increase in the money supply.  This is sometimes referred to as Monetary Inflation to distinguish it from what I suppose the BBC is getting at: Price Inflation.

With the nations most popular broadcaster spouting claims like "Inflation continues to be boosted by rising commodities prices" it is no wonder that Mervyn King can still scalp the British public for his utterly useless services.  In order to debunk this myth please follow me through a couple of simple examples, using only the economics 101 supply & demand graph as our aide (for those unfamiliar with this law of economics have a quick look here).

The confusion with inflation comes from assuming that price increases are the cause of inflation, but this is a fallacy; higher prices are a result of inflation.  Let us first consider a scenario based around this mistake, where a company (or several) put their prices up whilst the money supply is kept constant.  Our supply & demand chart shows us what happens when a company increases its prices, either we can move towards equilibrium (the point where supply & demand are balanced) or away from it.

For the first scenario we must remember that a company cannot increase prices to infinity as demand will keep on decreasing, they must strike a balance between price and demand which results in a sustainable profit.  The same rule applies equally for when a price increase moves towards equilibrium, it is only viable so far as income remains fixed or increases.  So if we assume that company A increases prices, then a higher proportion of the total money supply (which is fixed) will be spend on product A, which means that other companies will witness falling demand (less money available to be spent on their goods).

Contrary to the popular belief in spiralling wage hikes to keep up with increased costs of goods, company B will find that it can no longer afford to pay its employees such high wages (as the money supply is fixed where could they magic up the extra cash?).  Therefore higher prices in company A may also see it witness further falling demand.  In order for any price increase to be sustainable it can only go up providing other sectors of the economy can still afford to buy its goods whilst witnessing falling demand for their own product.  The fixed money supply means that a balance will naturally occur, where one sector increases only to a sustainable amount at the expense of other sectors in the economy.

The often proposed "inflationary spiral" where prices increase, so workers demand higher wages, so price increase, to infinitum simply cannot occur without an increase in the money supply.  Where does the extra money come from to increase the price in all goods or the salaries of the workers to purchase these goods?  Can you have more than 100% money supply?  This is a zero sum game, although prices have changed there has been no overall increase in the cost of money, a.k.a no inflation.  So where does inflation actually come from?

There are two possible causes: firstly we haven't accommodated for growth or recession, which we can easily identify as the economies output vs money supply.  In the case of growth we are producing more goods, therefore if the money supply is kept constant then we will witness deflation in the value of the currency.  The chart below may go some way to help picture this:

Consider 1x multiplayer as your economies current state, as it grows the multiplier increases and goods seem cheaper (purchasing power increases) and in recession your economy contracts (decimal multiplier is a shrinking economy) and goods seem to cost more (decreased purchasing power).  Note how as your economy doubles goods cost half as much, or when it shrinks by half (0.5 multiplier) goods cost twice as much.   (Any mathematicians may have noticed this would form a perfect asymptote, y=1/x.)

To best understand this form of inflation is to consider currency as a good just like any other, in recession the number of other goods is declining (increasing demand) whilst the supply of currency remains constant.  Therefore consulting our supply & demand chart will show us that prices will increase in recession & decrease in growth.

The only variable we have haven't altered yet is the actual money supply, this is delt with very simply by our favourite chart.  Demand for money stays the same, although I could argue that it actually falls, but as supply increases the equilibrium has shifted lower.

This reduction in the value of money reduces the purchasing power of all goods due to comparative value (e.g a car represents more labour and materials than a paper clip even without currency).  This could also been seen as an increase in the demand for currency (as you require more of it to buy the same item) on the above charts for growth and recession.  If you increase the supply of one good vs another then the one of limited supply will be traded for more of the readily available good, which we view as increasing prices.  This is true inflation as prices have increased for all goods in the economy compared to the currency, even though they maintain value compared to one another.

So there you have it, true inflation can only be caused by one of two things: excess money supply or recession (only where the number of goods actually shrinks).  Increasing prices are a result of inflation not a cause; perhaps I'll send this essay to the BBC.