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Hardly nice while it lasted,
austerity is running out
of friends fast...
IT'S A COMMON MYTH
that the Labour government
in power when the Great Depression
went global in 1931 was forced to resign by a banker's ramp, writes Adrian Ash at
BullionVault.
The British prime minister, Ramsay Macdonald, denied it at the time. Close academic study has since found evidence
lacking, too. But the idea of millionaires in top hats conspiring to weaken both the Pound and
British debt (then
consuls, now gilts) still lingers.
By demanding gold for their
paper at the Bank of England, these interwar illuminati effectively handed a direct demand to London, ordering a cut in welfare payments so severe that
Labour politicians – elected
by the "working man" – had no choice but to stand
down. Or so the
narrative runs. That left
an emergency coalition led by the top-hatted Conservatives to impose those
same cuts with impunity.
So who's playing the top-hatted villain today – and where has
gold gone?
First, step forward the
IMF. Founded on the monetary
rubble of WWII, the International Monetary Fund has since come to represent the monied interest in debt resolution worldwide. It finds default intolerable. Repayment in full
– if not now, then years into the future – can be the only
choice if a country wants
IMF money to finance current spending
when the markets refuse.
Today the IMF is most famous for bossing Asia about in the late 1990s. Those tigers learnt their lesson, building war-chests of foreign currency – and seeking to
block inflows of "hot" money from Western speculators
– all through the 21st century
thus far. Thailand, South
Korea and the rest learnt their lesson so well,
in fact, that the global financial crisis, and the Eurozone catastrophe in particular,
arrived just in time. Because after scolding wayward spenders like an English aristo's nanny for 60 years, the IMF found its own
finances shot through by the start
of 2008. Thanks on one hand to a lack of business, plus an over-staffed
bureaucracy on the other.
Praise be for Greece!
The IMF has been busy dispensing
budget advice to pretty much all other Western governments too, whether they want it or not. Sometimes they do, sometimes they don't. It depends on domestic concerns – meaning which way domestic voters are blowing on government spending themselves. Back in Britain,
for instance, today's Conservative-led coalition – taking
power in 2010 after
Labour yet again screwed things up – was only too
happy to cite the
IMF's advice as support for its
package of lower spending,
higher taxes.
The stated aim was to fix the mess left by Labour. But to what
end? The Conservatives
actually denied having a bigger agenda, of aiming to shrink the state for good. So why
bother in the short run? Because this couldn't go on.
![](http://www.24hgold.com/24hpmdata/articles/2012/10/img/20121011els113.jpg)
Our chart shows gross UK debt – gross as in like grody to the max. Public debt has more than doubled since 2007. Private-sector debt couldn't keep pace, but starting from a much higher base it's now worth
156% of the UK's annual economic output all by itself. Swelling above £2.7
trillion as the financial crisis
really kicked in, it even proved
too much for Britain's insatiable consumers
to swallow. They have actually raised their savings and cut their debt
from the record levels of
spring 2010, just before the Conservative-led
coalition took power, closing
the shortfall between savings and debt by
£119bn in two and a half
years.
That's equal to 2.9% of
GDP each and every year – and it's what makes this
no ordinary recession, as
Nomura economist Richard Koo
constantly reminds
us.
"A large portion of the private sector is actually minimizing
debt...[and] when the private sector deleverages in spite of zero interest rates, the economy enters a deflationary spiral."
Keep smiling! Consumers will no longer
consume more than they earn, whether or not interest rates are at zero, the central bank prints money, or commercial lenders
will actually lend them more money. Such household austerity chimed with the Conservatives' election
platform of spring 2010,
or at least chimed enough to give the Tories enough of the vote to invite the Lib-Democrats
to play muggins in
coalition. So did the IMF's
po-faced advice...as well as raw common
sense...and the entire history of out-sized debt since France and England tried and failed to continue spending when already bust at the start
of the 18th century.
Richard Koo, however, keeps at it:
"This is
no time to embark on fiscal consolidation. Such measures must wait until it
is certain the private sector has finished deleveraging and is ready to borrow and spend the savings that would be
left un-borrowed by the government under an austerity program."
The logic
is plain. For all I know he
may well be right. And besides, sticking the course is hard, as
Angela Merkel said in Athens this week,
before dodging the riots and getting back on her plane to fly home to
Germany. It's hard even
for international policy wonks
hoping to get a senior banking job if not academic
tenure when all this blows over.
"The International Monetary Fund has moved a step closer to withdrawing its support for the UK's economic strategy,"
reports the top-hats' former favorite daily, the Financial
Times, "advising the government to redraw its fiscal tightening plan if growth disappoints in the coming quarters.
"The IMF said in its
Fiscal Monitor report, published on Tuesday, that Britain should relax its fiscal
consolidation strategy, aimed
at cancelling the UK’s structural deficit
by 2017, if the economy remained
weak."
The IMF used
to think austerity would be its
own reward, with Britain's GDP quietly recovering its pre-crisis levels as the government cut spending and raised taxes. But the UK economy
won't play along – most obviously, everyone now thinks, because
the government cut spending and raised taxes. True or not doesn't matter, and we'll never get to find out anyway. Because even though UK households still have a further gap of
£66 billion to close between their aggregate savings and debt, the consensus
on austerity – or what
passed for it – is starting to crack. Which brings us back to gold.
Today, just as in the
1930s, anyone choosing to
Buy Gold with at least a chunk of their savings will first need to have savings to defend. What they don't
need is formal evening dress and a monocle. Just a little – or a lot – stashed
away. Such people don't usually vote for higher taxes or bigger government deficits. Because both are bad for your wealth, the first by eating it directly, the second by inviting later governments to eat it through inflation.
We don't know any UK gold investors who voted Labour in 2010, for instance. We doubt there are many in the US who'll be voting for Obama next month either.
(That doesn't mean they'll bring themselves to vote Romney.) Yet
in both economies, gold
has gone AWOL from the debate.
Gold remains oddly absent
from the Eurozone debt crisis too,
even though the single currency zone is the world's heaviest holder as a portion of central-bank
reserves outside the almighty United States.
Ron Paul's exit from the
White House race has kept gold off the Republican platform.
Gold still only tips up in UK politics when the Tory press feels the urge to remind everyone how stupid, arrogant and utterly lacking in historical sense former Labour chancellor
and then prime minister
Gordon Brown was when he sold half
the UK's bullion reserves at what
proved the very bottom of a 20-year bear market. Yet for die-hard gold
bugs, such Labourite or
"liberal" policies
(in the US sense) as helped
get us all into this mess are plainly good for
gold prices. Because they encourage other savers to fear for their money, and rightly so.
Seeking refuge outside currency and outside debt, gold buyers helps push Gold Prices higher. So too – we fear – will voting for any political party in Europe,
the UK or US this decade.
Not voting won't save the Western economies either, of course. But rolling
back state spending, and cutting
back state deficits, is proving beyond the British
Tories. It's proving too tough for even the
International Monetary Fund.
The top hats look ready
to quit the field.
Picture the chart above with deficit state spending on top. Now picture UK gilt prices and the value of Sterling five years
ahead.
Adrian
Ash
Adrian Ash
is head of research at BullionVault
– the secure, low-cost
gold and silver market
for private investors
online, where you can buy physical
gold today vaulted in
Zurich on $3 spreads and 0.8% dealing
fees.
(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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