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The consensus opinion among investment
managers, strategists and economists is that economic recovery may be
disappointing, but that it will occur, perhaps more slowly than originally hoped.
These professionals adhere to Keynesian and/or monetarist theories, so they
have been taught to believe the economic medicine being meted out will
eventually work. So an alternative approach is called for if this elite is
to be made aware of an impending economic crunch, not drawing overly on
contentious economic arguments but more on political realities.
Electorates
generally believe that governments are a continuing source of welfare, which
will guarantee their education, health, pensions and protection from hard
times. Governments have fostered this belief. Both parties believe that
government has the money, or at least can obtain the money from the rich and
from profitable businesses, particularly the banks, to discharge these
functions. After all this is the commonly accepted objective of a civilised
modern society. And the majority of people assume they are net beneficiaries
of the welfare state, the value of the benefits being greater than the taxes
they pay.
Besides
miscalculation and omitting many indirect taxes in this assessment, people
rarely take into account the invisible tax on their savings through
inflation. They are only aware of it through the general disincentive to
save, and have naturally responded by reducing their savings to a minus
figure (by going into debt) or at best to a level insufficient to provide
themselves with financial security without assistance from the state.
The
escape from this problem is to believe the state will provide. The state
reinforces this belief through the actual implementation of welfare, because
to qualify for it there is usually some form of means test. The effect is to
further discourage savings, because people with savings are denied access to
many state benefits. This has led to the widespread understanding that
you are better off relying on the state for your health and old age.
This
is dangerously wrong. Governments do not have the resources to pay for
welfare. But what government really has is ultimate power over its citizens.
Governments
exercise this power to obtain revenue in the form of taxes. Over time,
they require increasing amounts from taxpayers, since the possession of
ultimate power always leads to an increase in its use. Governments justify
this expansion of its power as being in the public interest. It makes a
virtue of its self-appointed tasks. These tasks, whether they are defending
territory and trade or expanding welfare for deserving cases, increase
government spending further to the point where simple taxation becomes
insufficient.
At
this point there arises a growing disconnection between the objectives of
government and the interests of its people. This is overcome in a number of
ways: government uses propaganda to make its objectives appear to serve the
electorate’s interests, it withholds information, it misleads, it
penalises wealthy minorities and it relies on inflation.
This
situation can continue for some time with little apparent harm. However
governments today have a major problem. Having convinced their
electorates that they are entitled to all those welfare benefits, the cost is
now too great to be borne out of taxation or from penalties on minorities.
The UK government has become aware of this problem, while it seems the US
government has not.
The
dilemma for the UK is that there is not much the government can do to bridge
the gap between reality and the electorate’s commitment to welfare. It
is too late to persuade the electorate that the direction of welfare has to
be reversed by cutting education, health, unemployment benefits and state
pensions: these are now accepted as the people’s rights, and in
recognition, all politicians agree that welfare should be protected while
somehow needless bureaucracy is cut. Only this week in the UK, a proposal to
cut school milk for children under five, a questionable benefit, was
countermanded by Downing Street. There is no attempt to tell the truth and
every attempt to duck it: that government does not itself have and cannot
raise the money.
The
problem for the US is if anything worse. The newly elected president is still
trying to expand his way out of trouble. The Federal Government is actively
increasing its role as welfare provider, putting further distance between the
actuality and the welfare expectations of the electorate.
So,
to summarise the position, both these governments have a disconnection
between what they can do and what their citizens believe they can provide.
Neither government is able to correct this misconception. In this respect,
both economies are now destabilised, there being no politically acceptable
retreat from this position.
It
is commonly agreed that a government’s most likely weapon when facing
these difficulties is further monetary inflation. Keynesians and monetarists
are even recommending it for other reasons. The attraction of monetary
inflation as a policy tool is simple: the public does not understand it.
Furthermore, politicians have delegated control of money to the central
banks, so they do not have to understand it either. As a stealth tax it is
perfect.
Whichever
way one looks at it, the outcome is simple. If governments cannot address the
expectations of their electorates, they will have to continue to fund the
disconnection between them. The relationship has moved from stability to
instability, and accelerating monetary inflation is now the only significant
source of funds. But this becomes self-defeating since monetary inflation
will eventually increase the cost of welfare further through the inevitable
price inflation.
The
idea that this accelerating trend can be avoided or somehow replaced with
increasing amounts of government debt is defeated by simple arithmetic and
political reality. The day-to-day economic problems that have occupied
most of our waking thoughts are only a part of the crisis facing us.
Implementing supposed remedies for the economy without a grasp of the wider
problem leads to a severe myopia.
So
we must treat the optimistic forecasts of conventional economists, investment
strategists and fund managers with scepticism. And they should at least have
the honesty, after reflecting, to not mislead us all with their unfounded
optimism.
Alasdair McLeod
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