When up is down - how capitalism has turned itself on its head

Jim Grant is an economist of the Austrian School and writer, this week he wrote:

 “The modern financial animal is wont to assume that he or she lives in an age of science. Just peruse the economic research that the great central banks produce. Even the titles of the papers are incomprehensible. Surely, the wit of man and woman has conquered the mysteries of money. The truth is we live in an age of pseudoscience. The central banks’ forecasting models have failed to predict the future. Quantitative easing and zero per cent interest rates — policy centrepieces of the post-2008 era — have failed to restore what we used to call prosperity.

Far from dealing in science, central bankers, and, to a degree, investment bankers and security analysts, employ magical thinking. What they have conquered is scepticism.”

Wow! What he is saying is the most powerful people in the financial world do not know what they are doing, but they have succeeded in fooling most people that they do.

Is he right? There is plenty of evidence to say he is. In the UK in the early part of this century the TV was full of ads asking us to take out a second mortgage to “consolidate all your debts into one monthly payment”. After the 2008 crash these ads disappeared, part of the sub-prime disaster that plunged the world into a banking meltdown.

And what was the answer that our financial masters came up with to sort out the banks and the world economy that had been brought down by issuing debt that could not be repaid? Easy create more debt. Except this time the debt is not being issued by banks and financial institutions it is government debt that has to be re-paid, under the current system, by government surpluses i.e. the taxpayer  

In order to run a surplus government revenue must exceed government spending. In the UK in the last 50 years this has happened just six times, a total surplus of £45billion. The total deficit in those years comes to over £1 trillion. The government debt since the 2008 crisis has increased by £800 billion. Given these figures it is easy to see that the debt will never be paid off by running surpluses.

Another way debt has been reduced in the past is by inflation. If I lend you £100 and you promise to pay me back in one year with 5% interest (£105) that sounds good but if inflation is running at 10% per year then you would need to pay me back £110 just to re-pay the capital. So inflation can reduce debt – the problem with government debt is that as inflation rises so does the amount of interest governments have to offer to sell their debt.

Of course there is another way (the government preferred way) to look at national debt. This is to use a percentage of GDP. If I earn £10,000 per year I am going to struggle to pay a loan of £5000 back in 1 year as it is 50% of my income, but if I earn £50,000 then at 10% of my income I could probably pay back that loan back in one year.  So as GDP increases then the national debt is more manageable. The problem with this is, growth in GDP depends on an increase in the amount of money available to be spent into that economy.  And as to increase money supply you must create more debt we are back to square one. 

The debt cannot be re-paid, but we must not say this out loud, instead we must pretend that it is manageable and to keep people from seeing the truth we will impose austerity whilst at the same time making sure the status qou is maintained by rigid control of asset values. 

Jim Grant says later in his article “. Prices should be discovered in the market, not administered by a government”

Essentially in order to properly run a free market capitalist economy then you cannot buck the market, but since the 2008 crash the central bankers have had to control every market (FX, Property, Bonds, Commodities and Equities). Because if left to themselves all the bubbles would burst and prices (and asset values) would plummet.

So essentially we are living in a capitalist utopia that is being run under centralised control rather in the same way as the USSR was all those years ago. With exactly the same result. The proletariat are suffering and are paying for the elite to maintain their lifestyles.

And we all know how that ended.