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The tyranny of banking deposit insurance is leading
young people to hate 'the market'...
WHY AREN'T young people
protesting against bailouts?
Younger
adults are usually pretty quick to protest injustices, but they're strangely
quiet on financial rescues. Few of them seem able to join the dots and see
that bailouts are clobbering them hardest.
#1. The British economy is currently
in a state of permanent government bailout. After spending all the money it
raises in taxes our government prints £15 of new money per working
person, per day, which it injects into the economy as public sector wages.
The amount of cash in our system increases daily by about £300 million,
as does the debt of the British government. If the tap were turned off we
would sink into depression and most of our banks would fail amid a whirl of
default and collapsing asset prices. That might be a bad thing, as most
people think, or a good thing. It depends on whether you already own some of
those assets, or whether you don't, but would like to one day.
#2. That daily money torrent prevents
a collapse, at least for the moment. The cash swirls around for a bit,
stimulating a little demand, before settling permanently in the bank accounts
of wealth accumulators – both individuals and companies. There is
nowhere else for it to go.
#3. Years ago, before this continuous
pumping of new money, banks had less investable cash. They had less scope to
lend it badly, and more motivation to seek the highest return by finding
productive outlets for the limited amount of savings available. They sought
out talented, ambitious people, who would have a long career in front of
them, sufficient to pay back a loan – with interest. Credit found its
way to the proto-entrepreneurs who would start and drive each new generation
of businesses.
#4. But with the modern money tap
stuck in the 'on' position a sort of natural selection has favoured a less
productive type of entrepreneur – typified by the property developer
– who uses money to acquire non-productive, rentable assets, and leaves
someone else to get on with the tedious business of producing something. The
wonder of workless income and capital gains has always spawned the search for
rent and capital growth. But it used to be much riskier, because market
forces usually kept prices in check with sharp periodic corrections. There
used not to be £300 million pounds of new cash settling daily into the
hands of wealth accumulators, and propping up the values of their assets.
#5. Regular price corrections, and
liquidations of overextended risk-takers, and their banks, used to
redistribute property away from rent seekers, and offer opportunity to people
who were productive. This was the market at work, regulating itself, and
oscillating in favour of the young and the productive instead of the old,
rich, and un-productive. It brought asset prices back to levels which
permitted sensible buying at sensible prices, and the sensible lending to
support it. That is not a bad re-allocation of capital, and it required no
special rules.
#6. But then a political shift created
an idea which is very beguiling – that 'innocent' depositors should
never lose money. This meant that banks should be guaranteed by central
government, no matter how poorly they had chosen their borrowers.
#7. This scheme is – like most
kinds of government protection – superficially attractive. But it turns
out to be very bad news for the young. It has the effect of refusing to allow
the price of assets to fall, so the bad lending decisions made by bankers are
never exposed to insolvency, the marketplace is never cleansed by
liquidation, and the re-allocation of capital to productive youth never
occurs. Eventually credit is only available to people who are already
asset-rich, and the gap between poor and rich grows wider.
#8. Nowadays at thirty, and forty, you
are forced to stay on in your salaried role, paying inflated housing rent,
and avoiding inflated commercial rent. Because of newly indestructible wealth
any shops, factories and land which used to have a capital value equivalent
to 1,000 days of your labour now cost 4,000 days of it. That four-fold
multiplier turns a sensible risk for a young buyer into a dangerous one for
both the buyer and his bank. It's no wonder younger people see the 'market'
as their enemy.
#9. Meanwhile the banks are swelling
with all the cancers which develop in state-run enterprises. They are no
longer effective intermediaries for capital because what they borrow at 1%
they distribute at 8%. They have become hopelessly inefficient at their core
function. Instead they are supported by government money to provide –
like corrupt governments – an increasingly politicised service while
distributing almost the entire benefit handed out by government to their own
staff. And as that pernicious drift to self-serving bureaucracy continues we
see government feeling forced to intervene again, to correct the monster it
has created, and direct banks to lend for political rather than business gain.
So
where credit used to flow naturally to real business people with credible and
productive plans, the government now mandates the distribution of silly
little sums to politically correct but frequently un-creditworthy borrowers.
Our bankers now spend their time rubber-stamping government guaranteed
lending decisions to offer £2,000 of credit to a college leaver whose
willingness to seek £2,000 via credit marks them as a poor risk in the
first place, but whose competence at form-filling defines them as a lending
prospect not to be discriminated against.
Government
intervention has suppressed the price of credit, inflated asset prices, and
directed ever larger sums of credit to the already-rich. It has made a
mockery of what was previously a credit market. We rarely see markets
operating any more; we see government regulating
and dictating supply and price. The reason free choice through the market is
not now working well is because previous interventions have broken the
ability of free choice to apply its regulatory magic. So government blames
the market, rather than their own clumsy manipulation of it, and they stack
interventions one on top of the other trying to tame the beast of their
creation. But that just makes it bigger and uglier than before.
Wouldn't
it be wonderful to hear a new generation demanding the market be allowed to
function properly? Wouldn't it be wonderful if a couple of million people
under thirty finally got the fact that, far from being their oppressor, the
unspoiled market is by far and away the best method of delivering practical
democracy, freedom, choice and both individual and collective advancement?
Ten
times a day or so, each of us chooses how our personal resources are
deployed. In Britain the marketplace can thus count half a billion trivially
small votes cast by 50 million people daily. The sum total of our economic
votes grows the things we approve of and consigns the things we disapprove of
to the dustbin. This is how we protect and promote minorities; by allowing
smallness to be adequately supported by a small and enthusiastic
constituency. It is the mechanism of the market which supports
specialisation, diversity, choice, liberty and – let's not forget
– efficiency. Government simply cannot compare.
But
it can certainly obstruct.
Every
time the government takes a pound of tax from you it re-directs it into a
state run intervention which will never be tested by your freedom to choose.
If you are a middle-income earner, already more than half your income is now
taken from you and dropped into inefficient and ill-considered government
schemes. You – meanwhile – are reduced to subsistence; because it
is impossible for you to save. You can neither accumulate capital nor vote
your money toward your own preferred minority interest, because the
government takes all your discretionary spend from you for its officially
righteous, publicly endorsed projects.
The
government took responsibility for our after-school club. It is now
overstaffed and half-empty, because they put it in the wrong place, and with
state-assured funding there is no market vote forcing it to re-locate to
where willing customers would pay to fill it up.
The
nearest sports ground is 4 miles away, put there by
a non-sports-playing bureaucrat to stimulate a run-down area which is too
poor to support any jobs because the return on employment (and the cost of
living) are below the government's minimum wage. That's why – instead
of supporting low cost services delivered with low overheads – the area
has become a complete job desert and a demand void.
There,
the local pub closed for the last time last month. Government taxes a
business premises at 5 times the rate of a private residence – mainly
because the business has no quintennial vote. The
market on the other hand used to count the pub's vote too, because its demand
automatically allocated resources to things which served the business, like
local staff. But that ability to vote by paying for the things it needed was
eliminated by government imposing tax rise after tax rise on its premises
(business rates), on its staff (Employers' National Insurance), on its product
(sin taxes), or on anything else which does not get experienced directly by
significant numbers of voters.
So
jobs are lost and choices are removed. And soon the pub will be a local
eyesore, and that's because of another intervention. You can't just buy it,
fix it up, and live there. You need a change of use licence, which won't be
granted because the owner has to pay the five-fold elevated council business
rates on the property until it's condemned – a process which forces the
landlord to pay while 'encouraging' its drift into ruin. So it'll be dragging
down the neighbourhood for years.
Everywhere
you look government interventions stifle our choices in free exchange and
trade. We've forgotten that democracy is not centred on a quintennial
popularity contest at election time. Real democracy is about organising
things so that as far as is possible those 500 million daily economic choices
of free people cause society to re-shape itself according to what people
want. It is through the private decisions of un-regulated free exchange and
trade, with its self-adjusting expansions and contractions, that government
of the people, by the people, and for the people is properly implemented. The
market is where you vote.
Oh
dear. Having set out to explain that deposit protection is not benign I find
I have wandered a little off topic. I seem to have ended where I so often end
these days, feeling increasingly desperate and wondering why people cannot
see it. We are falling into the oppressive command economy, where all property,
price and process are government business, and where nothing happens except
slowly, and inefficiently, with explicit government approval.
Even
as I finish writing, the public voice of intelligence – BBC radio's
Today program – spits out the word 'un-regulated' with its standard
contemporary implication of cheating and shoddiness. They too have fallen
completely into the trap.
Paul Tustain
Founder
and CEO
BullionVault
Settlement-systems
specialist Paul Tustain
launched BullionVault in 2005 to make the security
and cost-efficiencies of the professional wholesale gold market available to
private investors. Designed specifically to meet his own needs as a
risk-averse investor, BullionVault now cares for 30
tonnes of client gold property, all of it privately owned in the user's
choice of low-cost, market-accredited facilities in London, New York or
Zurich.
(c) BullionVault 2012
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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