THE BEAR'S
LAIR The
looting of savers By Martin
Hutchinson
The French and Greek elections
have made the "austerity" programs favored by
German Chancellor Angela Merkel and other sensible
policymakers seem politically highly unattractive
(never mind that the spending cuts proposed by the
austere have almost universally not happened,
while tax increases have been onerous).
Consequently, Keynesians worldwide are
recommending further bouts of government spending
combined with partial repudiation of debt. Like
the disgraceful monetary policies also peddled by
these people, these recommendations amount to the
wholesale looting of savers in favor of profligate
borrowers and bloated public sectors. It's worth
reminding ourselves of the long-term consequences
of such folly.
One of John Maynard Keynes'
principal crimes against sound
economics was his
demonization of savers. Calling for the
"euthanasia of the rentier", he proposed the
paradox of thrift, whereby savers in a recession
are supposed to damage the ability for the economy
to recover by depressing aggregate demand.
Like Keynes' equally spurious calls for
increased government spending as a stimulus, this
demonization of savers has been used by
intellectually dishonest politicians of the left
and squishy center to justify policies that have
the effect of robbing savers, whether through
inflation, excessive taxation or repudiation of
government debt.
In reality, saving is the
essential precondition for capital investment, and
therefore for economic growth. Societies with
inadequate savings cannot generally pull
themselves out of poverty, however abundant their
natural resources.
You only have to look
at the track record over the past half century of
Asian societies, which mostly have a high cultural
propensity to save, compared with Latin American
societies that do not. Whereas countries like
Argentina or Brazil were richer than Korea and
Taiwan, little poorer than Singapore or Japan and
far richer than China in 1960, today the
comparison has reversed.
One of my major
objections to the activities of the World Bank and
the International Monetary Fund is their
downgrading of the importance of saving. Those
institutions frequently propose high taxes on
investment returns, and seem to be under the
impression that the only way to start a new
company is with a government grant or an
investment by a major international private equity
fund, such as the World Bank's offshoot the
International Finance Corporation.
As the
Solyndra example in the United States showed, the
government is an exceptionally bad venture
capitalist. In addition, it can be stated with
considerable confidence that enterprises that
require US$500 million up-front investments before
having made a profit or even significant revenue
are very unlikely to succeed in the long term.
Middle-class saving is the key to
enterprise formation in any society. Even when
venture capital companies exist, as in the United
States, they rapidly get drawn away from genuine
venture capital towards the much easier money
available in leveraged buyouts. Mitt Romney's Bain
Capital, for example, began by providing genuine
venture capital to Tom Stemberg's Staples, but
rapidly discovered that most such investments were
too small and the returns too slow, and switched
to leveraged buyouts.
The vast majority of
new ventures, innovative or not, depend on the
savings of their founders and their founders'
network of relatives, friends and business
contacts, to get going before institutional
venture capitalists will look at them.
Nurturing middle-class savings is thus the
most important task of government. John Locke said
"Government has no other end, but the preservation
of property," and he didn't overstate the position
by much. Quite my most gratifying banking
experience was designing a simple bond law for the
Republic of Macedonia, which allowed 800,000
Macedonian savers, whose savings had been
expropriated 10 years earlier by the former
Yugoslavia, to get most of their savings back
immediately. The country's improvement in economic
performance following the implementation of that
law has been marked, and extremely pleasing.
Worldwide monetary policies, in place now
for almost four years, are uniquely unkind to
savers. By forcing interest rates, both short-term
and long-term below the rate of inflation, they
force savers to receive a negative real return or
take large risks to achieve a positive one. That's
the reason for the success of speculative bubbles
like that in Facebook shares, which have created a
market capitalization larger than General Motors
off a stream of advertising revenue only 4% the
size of the company's market capitalization.
One commentator described the Facebook IPO
as the largest "pump and dump" in stock market
history. It has a lot of company for that
distinction (when normed by contemporary gross
domestic product). Certainly the South Sea Company
and the Mississippi Company, those twin British
and French bubbles of 1719-20, had more commercial
reality to them. After all Robert Knight, the
South Sea Company cashier, who absconded to
Antwerp with the company's records, appeared
before potential investors in a well-powdered
periwig, not a hoodie!
The latest
Keynesian solution to the unwillingness of debt
markets to finance further bouts of government
spending is to spend yet more money, but to
finance it by monetary expansion and partial
repudiation of debt. This would get debt levels
down, but would close the markets to further debt
issues, since investors are not so foolish as to
lend to borrowers who have already defaulted on
their obligations.
Even Argentina, which
has enjoyed a remarkable economic boom since
defaulting on its debt in 2005, has not been able
to return to the capital markets, much to the
surprise of its leaders. Thus this approach, if
undertaken directly, is unlikely to lead to
success.
There is however an alternative
approach, which currently appears more and more
attractive to distraught Keynesians, and that is
financial repression. Under this technique, which
was most successfully applied by the British
government to work down its excessive debt level
at the end of World War II, regulations are used
to prevent domestic savers from moving their money
into international assets. Monetary authorities
are then encouraged to promote inflation, to the
extent that domestic interest rates are kept below
the rate of inflation.
Using this
technique, governments can run deficits for a
generation or more, while the value of their debts
is reduced by inflation. Add in a stiff income
tax, to penalize further the nominal interest
returns of savers foolish enough to buy government
debt, and the government's debt position can be
retrieved quite nicely over a 20-30-year period -
at the cost of the nation's savings and the rest
of the economy. Needless to say savers, especially
those fool enough to believe in the government's
promises to maintain a sound currency, were robbed
blind and ended their lives impoverished.
Repression is clearly in the sights of the
left at this time - after all, savers generally
tend to vote for the right. The idea of looting
their political opponents to increase public
spending, while having that looting proceed
invisibly, so that their fingers are not on the
weapon, is attractive to leftist politicians
everywhere - it is in a sense THE central flaw of
democracy. Of course, the most blame should attach
to those politicians like Harold Macmillan,
Richard Nixon and, it increasingly seems likely,
David Cameron, who rely on savers' votes to get
elected and then betray their own supporters.
Fiscal austerity is needed, but as France
and Greece have shown, it is unlikely to win its
proponents much electoral support. That is
particularly the case if, as in Britain, the
austerity consists primarily of tax increases, so
that the economy declines while the deficit
remains unaffected by the apparent austerity. In
any case fiscal austerity alone is not enough.
If it is not combined with sound monetary
policy, savings rates will decline and the savings
pool itself will be drained by negative real
interest rates. In the long term, that can only
lead to impoverishment; in a globalized world, the
skills of Western employees are not so superior to
those in emerging markets that they can expect to
retain higher living standards without a healthy
pool of capital to accompany them.
The
need now is thus for a revolution in monetary
policy that raises the risk-free interest rate
well above the rate of inflation, and allows
savers at last to receive a real return on their
money without investing in the likes of Facebook.
It probably won't happen until inflation gets
seriously out of hand, so my advice to savers is
this: make sure a substantial percentage of your
money is in gold, in order that you will survive
the painful burst of inflation that is needed
before global monetary authorities are brought to
their senses.
Martin Hutchinson
is the author of Great Conservatives
(Academica Press, 2005) - details can be found on
the website www.greatconservatives.com - and
co-author with Professor Kevin Dowd of
Alchemists of Loss (Wiley, 2010). Both are
now available on Amazon.com, Great
Conservatives only in a Kindle edition,
Alchemists of Loss in both Kindle and print
editions.
(Republished with permission
from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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