THE ECONOMIC CHASM CONFRONTING US – A LAYMAN’S ASSESSMENT

The huge economic harm caused by Covid-19 is seen and experienced clearly and directly on a daily basis. Less obvious is the damage wrought in every welfare-driven democracy whose government finds itself in the dual-role of protector and saviour. Today expectation and dependency are the norm, and prudent self-reliance is a quaint notion belonging to another age.

 When we hear the Chancellor’s reminder that economic sustainability requires a balanced budget, what we actually hear is St Augustine’s prayer “Lord make me chaste, but not yet”!

Most broken promises and wayward actions are now justified by Covid. Rishi Sunak’s dilemma is that he is impaled by (i) voter and peer pressure to alleviate suffering, and (ii) his acute awareness of the horrendous consequences of succumbing to that pressure.

Emergency aid to meet the need

It started out as a moral imperative to provide emergency funding in cases of dire need, but it has lapsed into a routine that represents a “new norm” with no end in sight – exactly as happened when Quantitative Easing was devised in 2009 as a short-term expedient for injecting liquidity into a market clogged with debt. Yet central banks everywhere caught the habit – and none of them have been able to ditch it.

There’s no difference now. Call it “support” for struggling businesses, “bounce-back loans”, furlough, tax reliefs, business interruption loans. If businesses are being mothballed by government action, it behoves government to provide compensation – so the welfare logic goes, and its application does not discriminate. No one knows which of those loans are supporting lame duck businesses that will fold as soon as the lolly is withdrawn. 

Diminished tax revenues will not allow for continuing largesse on this scale, and the funding gap will have to be met by the only device known to government – the electronic printing press. 

 Thus will it come to face the ultimate anomaly of a citizenry (i) increasingly dependent on its government’s money-printing habit, while (ii) recognizing that the more it is indulged, the less that the new money will buy!

Malfunction of a currency cannot cause a cessation of trade because none of us is self-sufficient. The necessity of trade is a human impulse and if a particular money-token fails as a catalyst for effecting exchange, even if it carries the imprimatur of “legal tender”, public trust will be lost and another medium will always be found.

I hear you telling me that I have been bleating about currency-collapse for so long that I risk a serious loss of credibility, especially as the official inflation figure is currently standing at only 1.6 per cent. My response is two-fold: (i) whenever in history a currency collapsed after succumbing to hyperinflation, the citizens using it didn’t expect it; and (ii) if you give credence to the official price indices you either work for the government or you haven’t been paying attention.

Yes, I hear you asking me what alternative the Chancellor has in the face of this crisis. It’s all a question of when the pain is to be felt, and in what degrees of severity. But it cannot be avoided – that is the great pretence. Sunak can carry on doling out the dosh in quantities that are vast but will never satisfy everyone nor relieve their pain. But a far greater pain will be felt by far more people when the money become worthless. There’s no complete escape, ever. In 2009 the alternative to QE was to let profligate banks go bust, causing much pain, and put the chiefs in jail (my preference) - or carry on as now, pretending that somehow there’s a way out. Until it’s clear at last that there’s no escape. “As ye sow, so shall ye reap!”

Cryptocurrency as a wealth protector

Many have resorted to cryptocurrencies such as Bitcoin as a hedge-investment to protect their wealth against the debasement of main national currencies. Investment advisers and corporate treasurers who previously ridiculed cryptos are now adopting them as serious ingredients of a balanced portfolio. 

Whatever the suitability of cryptos to meet the need, the main thrust of this development is a growing distrust of national currencies – and not only by domestic users. For decades foreign investors have held dollars as the world’s reserve currency, but now, in anticipation of its demise, foreign holders of dollar-denominated assets are liquidating them in favour of more stable alternatives. The ubiquitous abandonment of national currencies always prompts governments to protect their money from greater damage by raising interest rates on their bonds to make foreign-sourced investment more attractive.

But that strategy leads to anomaly number two: raised interest rates may support a currency on foreign exchanges, but they also mean massive increases in the cost of government borrowing.

The popularity of Bitcoin as a wealth-protection investment is obvious – but whatever its advocates proclaim, it hardly merits serious consideration as a practical means of exchange or as a lasting store of value. Being anchored in blockchain “mining” technology, with a built-in limitation on its issue, is clearly no antidote to wild volatility. Even now, as I write, it lost 25 per cent of yesterday’s market price virtually overnight.

Central banks are behind the curve in their plans to launch a national cryptocurrency, but the reality is that they don’t actually own any, which is something of an impediment when trying to promote it.

The sound-money alternative

The crypto situation stands in stark contrast to gold, which is the only rational sound-money contender in this context since it is owned by all the world’s leading central banks in varying, but adequate, quantities. Owning gold is a pre-requisite for any nation seeking to stabilise its currency’s purchasing power by establishing a “gold exchange standard” in which units of its currency are freely convertible into bullion in a predetermined ratio – but any country can adopt a “gold standard” by stabilising the existing exchange ratio between its national currency and gold and keeping that ratio stable - by, in familiar terms, not indulging in money-printing.

Any government bold enough to enact such a step on the virtuous path to monetary rectitude will hit a number of stumbling blocks, the principal one being the painful truth that maintaining the soundness of money will necessitate a dramatic reduction in government spending programmes. Yes, all those ambitious infrastructure projects, defence budgets, international aid, unbridled welfare – these and many others will have to be scrutinized in terms of economic calculation. Or, putting it in more meaningful terms: Would Joe Soap have done this if it had been his money?

EMILE WOOLF January 2021

[Acknowledging help from Alasdair Macleod and Patrick Barron]