WE ARE PRESENTED WITH A UNIQUE OPPORTUNITY

There is a tide in the affairs of men.

Which, taken at the flood, leads on to fortune;

Omitted, all the voyage of their life

Is bound in shallows and in miseries

On such a full sea are we now afloat,

And we must take the current when it serves,

Or lose our ventures.

Wherever you look right now, the predominant economic and political outlook is

bleak, even to optimists. To realists, it borders on apocalyptic. But there is a

saving grace: it offers a new beginning. The present opportunity lies in

recognising that the current economic situation is beyond conventional remedy.

But don't worry: we are in the process of establishing new leadership, with

unformed and uncrystallized policies, and the very lack of track record is actually

a blessing because it avoids the disappointment that always follows expectation

Something fresh can emerge

A few essays ago I noted that governments' tenacity in applying well-worn

sticking plasters is now entirely misplaced. Persevering with an outdated

panacea will make matters worse when what is needed is a powerful purgative -

nothing less than a clear-out of Augean Stables stuffed with failed economic

dogma. What is required is a paradigm-shift in economic thought, guided by bold

and determined, almost visionary, leadership - supported by a patient electorate.

But the fractured system that has now, literally, been tested to destruction must

first be consigned to overdue oblivion and Western democracies must view

economic issues through a fresh prism.

Not just an action-replay

And its reach is global. I can think of scarcely one country that will stand

unaffected by the economic convulsion that now looms - and it will, at very least,

present governments with an opportunity to rediscover their role in society.

Nor is the impending economic shakedown merely a replay of the crisis that

struck the financial world in 2008-2009. Ever since then uncomprehending

central banks, blind to their own role in creating that crisis, have been applying

policies of unbridled credit expansion in the belief that throwing more money at

a mountain of debt will save the banking system from the consequences of its

own follies. This debt, both national and corporate, has reached a level at which

major defaults are virtually guaranteed - despite interest rates having been

squashed into negative territory.

Debt and protectionism - a lethal cocktail

That, of course, sounds much like just another banking meltdown, comparable to

that which occurred in 2008-2009. But, as Alasdair Macleod, Head of Research at Goldmoney, has recently observed, the credit cycle induced by this epidemic of

money-printing is now reaching its peak at the very time that Presidents Trump

and Xi are testing each other's bravado by engaging in rampant and, ultimately,

mutually destructive protectionism.

2

This conjunction of a massive build-up of irredeemable debt and the menacing

spread of ultra-protectionist practices will break new territory in the field of

economic terrorism. Use of the protectionist weapon for political bullying is

evident close to home in the conduct of the EU, which threatens to impose tariffs

on Britain for having the temerity to re-establish its own independence and

accountability.

A managed economy will follow

When central banks are eventually compelled to face the fact that their loose-

money device of unlimited bond-buying has run into the sand, the risk remains

that a desperate government will step into the policy vacuum and, by default, fall

back on age-old routines for managing the economy: wage controls; price

controls; income controls; dividend controls; capital controls; sky-high tax levels

- in short, state nationalisation of the means of production. We see that the

inadvertent trajectory of central banks' policy is effectively a starring role as

Marx's useful idiots.

This hell-bound progression can be reversed only by allowing real interest rates

to rise to the point where they accord with consumers' underlying time

preference - as determined by financial markets freed from central bank

meddling.

What is the role of government?

If the above represents an approximation of how governments repeat the same

policy errors, it also highlights how they. should not a act. identifying some the

key principles our new leaders must hold to, and from which they deviate at

their, and our, peril, I draw inspiration from Alasdair's own encapsulation of how

our new leadership can turn the economy round.

As Einstein noted, the difference between genius and stupidity is that genius has

its limits. Take taxation. The governmental approach to taxation in the UK has

departed from anything resembling principle and is entirely unfit for purpose.

Taxation has become a tool of social engineering - for which there is always

endless scope - virtually guaranteeing state bankruptcy. When excesses of waste

and profligacy have ravaged its finances, both central and local, government's

knee-jerk it cloth. into reaction that is mess simply in thet to first dream place, up new things to tax, rather than examine

how got

and learn how to cut its coat according

to its

For instance, no matter how desperately short of tax-revenue it may be, it is not

the function of government to tax fatty foodstuffs. If people exercise their choices

in the direction of unhealthy indulgences, despite the nigh insane degree of state direction; and (i) the resulting economic stimulus will expand the tax base,

allowing for even lower rates in due course. In pursuit of this ethic, tax cuts must

be financed by reducing state spending rather than increasing the deficit (which

is precisely what the latest spending review will do).

Escaping the welfare trap

Taxes applied to welfare must be closely monitored and judiciously vetted by

reference to genuine need. Its dispensation should never engender a wide sense

of entitlement, nor hazard an increase in the level of dependency upon state

resources.

Western democracies, almost without exception, are now firmly in the grip of a

culture of dependency in which people generally, healthcare-institutions and

public authorities have developed. an irrational expectation of state support that

bears no relation to the discipline of affordability.

What better way is there to relieve the state of the impossible burden of such

widespread dependency, than to leave people with enough of their earnings to

become more self-reliant? But this becomes possible only with tax policies that

allow people to grow their savings by keeping more of what is truly theirs

anyway. For example, if ever there was a tax ripe for abolition it is inheritance

tax, a divisive intergenerational pestilence that penalises families for passing on

savings accumulated over decades, after they have already been taxed.

By the same token, capital gains tax, which entered the statute book as recently

as 1965, should go. The "gains" on which CGT is levied are notional anyway, not

being based on earnings or real values. Effectively, it is a tax on the inflation that

governments themselves generate through their mania for money-spinning

profligacy. Annual tax "reliefs" apply, of course, but that doesn't alter the

irrational nature of taxing something conceptually ephemeral and remote from

any legitimate tax target. The same goes for all counter-productive taxes whose

effect is to destroy the savings that alone can lift the community to true

independence.

How to fund state expenditure

Wiping out the panoply of destructive taxes begs the question of how the

necessary expenses of state are to be funded, a question I addressed fully in

Economic Perspectives 5 7, In essence, the classical principles established by Mill,

Smith and Ricardo are as valid today as when they were formulated. They take

the line that the capacity of businesses to bear taxation arises from the

economic rent" that those businesses enjoy by virtue of their proximity to the

community that provides their customer base; access to communications on

which they depend for survival; and the ready availability of a full range of

essential services.

That "rent" or economic surplus, or "added value" in modern terms, is the fairest

and most rational base on which to levy taxation, and because it is a huge number, a low rate will suffice. A shift in this direction would (i) remove the

burden of taxes on employment such as PAYE and NI; (ii) release the vast army

of tax inspectors, lawyers, accountants and the whole tax-avoidance jamboree

from the grind of this unproductive chore, providing them with a new

experience: work that creates value; and (ii) bring home to government, and

citizens, that the natural size and scope of the state is more limited than today's

bloated behemoth would suggest.

Free trade

Facilitating free trade is equally critical for achieving an economic renaissance.

Columnists persist in promulgating the notion that trade imbalances between

countries arise from currency differentials. It is therefore essential to recognise

that trade imbalances between countries, which are normal and unavoidable,

arise from the law of comparative advantage, the very same law that explains the

division of labour in the workplace.

None of us is self-sufficient in respect of economic needs and abilities. Quoting

Alasdair Macleod again: "If people are allowed to buy what they want from

providers of goods and services irrespective of location, capital resources will quite

naturally flow towards their most efficient use"

This brilliant encapsulation is echoed by Liz Truss, Secretary of State for

International Trade, who expressed it thus: "At its heart, the case for free trade is

the case for freedom. It's the ability for people to improve their lives by exchanging

goods and services without undue interference from the authorities."