David Cameron was last week forced to make a choice in Brussels, but
not on Europe...
The MARKETS are telling us that there is a painful abscess
in Europe, with the Euro at its core, writes Paul Tustain, founder and
director of BullionVault.
We believe it is driving Germany and France a little mad, and that they are
abusing their European partners as a result. They are about to commit an injustice
which will strip away the profound goodwill which they have built up over 50
years, and they risk tearing Europe apart.
All our European friends are today irritated by Britain's refusal to come
with them. Not for the first time we are the odd man out, and being pointed
at by the shallowest politicians in Europe. It's OK. We can live with a
little name-calling for the moment, and we look forward to quietly rebuilding
our friendships with every one of you in the future. We hope it will be soon,
although we fear it may not be.
You are right. Our British financial system contributed – in part – to the
mess we are in. But you are wrong as to the reason and the solution.
What really happened is that over a period of years the political classes in
New York and Europe (including the British) worked together to hold down the
cost of credit. Ever since 2001 western politicians suppressed the will of
the market to enter into a mild recession. What is this 'market will'? It is
the combined message from a thousand million transactions a day, expressing
the free choices of 400 million people. Looming recession is the evidence
that free people think it sensible to cut back a bit.
In 2001/2 that's what western people chose to do. But the politicians wanted
them to go on spending. "Put off recession to ensure re-election"
said their advisors. How? By making central bank money available cheaply to
the banks.
Of course we agree that bankers' bonuses are a problem which badly needs
addressing. But politicians, not bankers, created the febrile and ultimately
ruinous deal-making atmosphere of 2004-2006. They skewed the economic
landscape by continually releasing funny money from the central banks, and
opposing the tendency to mild recession which was the judgement of the
market; that means our judgement.
Politicians created a world where the only bankers who could keep their jobs
were credit addicts. The villages around London are full of redundant and
cautious 60 year old bankers who lost their jobs when their natural
risk-aversion allowed credit-fuelled junior banks to win all the business,
take them over, and clean out the old guard. Easy, state-sponsored credit
found its home under the control of inexperienced and overenthusiastic
bankers. They thrived only because politicians had skewed the economic
landscape in their favour.
Yes, we can blame 'the free market' because those who acquired credit got it
freely in trade with a supplier of credit. But to take this line is to
wilfully misunderstand what the market is. The market is your freedom to
choose. The marketplace is what you get when one billion purchasing decisions
are made every day by 400 million individuals who are exercising free choice.
The problems occur when people exercise those choices unwisely, which they
will certainly do if they are being pushed and shoved into purchasing
decisions which suit politicians seeking re-election.
Ever since 2007 the market – that is everyone who has made a choice about it
– has been waking up to the deep contradictions within the Euro. Gordon Brown
(let's give him some rare credit) was one of the first. He had understood
that no-one was asking the key question of how the Euro could hold together
when the weaker nations were bound into union with the extra-ordinary productivity
of Germany.
In Europe nothing so simple as an awkward question is allowed to get in the
way of government progress. They marched forward regardless, and now the
pesky market is expressing the opinion of a billion votes a day that the Euro
is going to fail. Why? What went wrong?
This did. The false market in borrowed money which the politicians created
back in 2002 made money accessible mostly to people who were a good risk to
lenders – which means mostly older, richer people. To begin with they bought
houses, which dragged the price up to impossible levels for first time
buyers. The money continued to be pumped in by the central banks. Next to
bubble was investment assets, and once again it suited those who were already
wealthy. Poorer people got to keep their jobs, but investment assets, the
bedrock of a retirement income, were becoming ever more expensive, making
nice capital profits for richer people but yielding less and less in income.
So it was again profiting those who already had money, and condemning
hard-working people to a lifetime of slog, crowned with a tiny pension.
Yet whenever the government looked at the numbers there always seemed a risk
that if they took their foot of the monetary accelerator the economy would
stall; and it would have. So still the money was pumped in, and now bond
yields descended to 1.5% as their values bubbled (a bubble which remains
un-pricked) and hundreds of billions started accumulating at the banks.
Houses and a comfortable retirement were by now out of reach of hard-working,
deserving and particularly younger people. But the enemy was not the free
market, still the only practical embodiment of their freedom; the problem was
the corruption of the market by monetary politics.
It was the irresponsible and self-serving policy of elected representatives -
seeking re-election all over the western world – which is without any doubt
the root cause of the explosion of credit which we now have to pay for.
Politicians have hoodwinked you if you believe 'the market' or 'the bankers'
are at fault, and you should not be taken in. The market is not a thing you
can meaningfully blame. It is simply an expression of a billion private votes
cast every day in what appears to both buyer and seller to be sensible and
private trade, under the prevailing conditions set by the politicians. The
problem was the prevailing conditions set by the politicians, not the
mechanism of the market which was, as it always is, simply an expression of
the judgement of free people.
But still easy money aggregates to richer people, not poorer ones, and we had
ended up with an enormous pile of their savings. It had already bought
houses, and investments, and still more kept on coming. Eventually vast
quantities accumulated at banks, and for want of remaining opportunities it
was lent to underfunded governments. As it turned out this was extremely
unwise, because those governments are now threatened by default. That always
looked possible, because none of them could keep up with German economic
growth.
Bad lending happens from time to time. Usually it means the creditors lose
their money, and gain some wisdom. Only this time some of the creditors –
particularly Germany and France – don't want to lose their money. Rather than
see their banks suffer they want to force two or three generations of Greeks,
Irish, Portuguese, Italians, Spanish and Belgians to pay, pay, pay. Germany
and France lent stupidly to your father, yet you become the indentured slave.
That should never be how bad money-lending is resolved. The lender should
take the hit when the borrower cannot repay; it helps to focus his mind
before he lends. In Britain we got rid of inter-generational debt servitude
200 years ago, and it is not progress to return to it.
But default now would be particularly bad for German and French banks, so our
European friends are deluding themselves that what is at fault here is 'the
market', which is why they are trying to devise ways to tame it. What they
want to do is to stop it from making its judgement against the Euro, so that
they can follow on with their agenda, controlling first one market, then the
other, and always with the officers of Brussels making the decisions which
are ordinarily made by people exercising their free market choices. The
current European plan is to disenfranchise your judgement upon them by making
the financial marketplace somewhere which is too expensive for you to cast a
vote, because it will be taxed by them.
Right now they have the financial services market in their sights. If - they
reason - they can stop those votes being cast in the marketplace then they
can carry on doing what they do (which obviously must be right) and no-one
and nothing will hold them to account.
To be fair that is not their conscious intention. They are simply trying to
repair a difficult situation of massive debt. But they are failing to make
the intellectual connection between free choice and markets. That is a common
weakness in governments, and this is what caused David Cameron to be hauled
before his Franco-German counterparts and be instructed to accept a tax on
financial services.
As it happens in Britain we made the same policy errors as Europe, we created
the same mountain of money, we have a similarly bust government, and so we
have in one country a microcosm of the entire European mess. But we are going
to resolve it in a very different way. We are not going to turn into slaves
the subordinates and the children of people who borrowed our money. Nor are
we going to take the money explicitly from those who lent it (though perhaps
we should). That won't happen because that would mean our government would go
into default, which it will not do while it controls the issue of money. So,
instead, we will use a third way.
Our government is going to live with a profound devaluation of Sterling,
which will eliminate the government's own debt without explicit default. In
this way it will share the pain of default across all creditors. All savers -
even those whose debtors are perfectly solvent - are going to share in
setting this thing back on a sustainable course.
At different stages through this process of adjustment we will experience
interest rate hikes, currency crises, and sharp inflation, which will
continue until twenty five years of savings, and twenty five years of a
credit-fuelled house price bubble, have been removed from the system by
devaluation. By the time it ends the creditors - taken collectively - will
have paid. By then houses will be again affordable by anyone with a half
decent job, the bond market bubble will have burst, long standing pension
savings will be near worthless, equities will again yield sensible dividends,
student loans will have inflated to irrelevance, our freedom to choose our
private actions in our marketplace will have been preserved, and Britain will
again be a great deal fairer than it currently is. It's going to be a very
unpleasant journey and it looks like we are making it alone.
In Europe many will doubtless laugh quietly as all this happens to us. But
they will have no reason to hate us for our problems, which will be wholly
independent of theirs. Besides, they will probably be too busy hating each
other. The creation of the Euro has caused 1,000 years of carefully
constructed and often hard fought mutual independence to be sacrificed on the
altar of monetary union. We think that Europe's political class is making a
monumental error in holding on to it because it carries all their political
credibility. Their resulting policy is to enslave half of Europe, and to kill
the messenger - the financial market. This happens to be the section of the
European economy which we in the UK have specialised in, while we have been
buying German cars, and French aeroplanes. So let's be clear, David Cameron
did not have much of a choice.
In summary then, the proposed Franco-German policy is built on the lie that
it is the market which is the cause of the problem. We think their policy is
dangerously brutal to European debtors, that it is unfair to Britain, and
that it transgresses the existing treaties whose laws were designed to stop
governments doing exactly what the leaders of France and Germany now want -
which is to suppress the rest of Europe into servitude. We think it will end
in deep loathing of Franco-German power, and destroy the one part of Europe
which we wanted to join, and which can be saved if we stick to the existing
treaties. That is the single market. To us it is a single market of free
choices which guarantees the freedom and the prosperity of our continent, yet
that is what is being destroyed in an effort to cling on to the Euro.
Contrary to popular belief most of the British love Europe and the Europeans.
But we also love our free market and the way it exposes the vanities of
overreaching politicians. Last week Germany and France forced David Cameron
to choose between the two, and he chose well.
