Friday, December 7, 2012

A Chat with Ambrose

The following is taken from The Matterhorn Interview of Ambrose Evans-Pritchard (AEP), December 2012

AEP gave a long and wide-ranging interview.  The entire interview is worth reading; I comment here on a few sections.

…I don’t really share the view that the banks were the cause of the great crisis of 2008/09 and the worldwide stagnation that we’ve had ever since. There are much deeper causes to it. The banks are simply the agents of this.

Agents!  Correct.  However, I have learned by now not to expect AEP to finger central banks as the root cause, despite his flirtatious language.

The real cause of the massive imbalances is in the capital and trade flows that occurred under globalisation over the last twenty years – the China effect if you like.

Good thing I didn’t get my hopes up. 

Let me get this straight: Chinese people, with an annual per capita income of maybe $5,000 today (and maybe $100 when the growth began twenty years ago) were somehow able to accumulate capital at the expense of American people, with per capita income of $50,000.  Does this sound like something that would occur naturally in the market, without any non-market influences involved? 

This is “the real cause of the massive imbalances”?

You could get capital for nothing, and you could get capital for nothing because the emerging economies were accumulating ten trillion dollars of excess reserves, and it had to go somewhere. Furthermore, you had the Japanese leaking about a trillion through the carry trade into the system. You had all these sources of capital.

In a normal, free-market, one without manipulation, is it really reasonable to expect that “you could get capital for nothing because the emerging economies were accumulating ten trillion dollars of excess reserves”?  The poor, underdeveloped, rapidly growing markets were able to accumulate capital as opposed to require capital to fund the growth?  This is the opposite of what every businessman with a new and growing project knows to be true.

Doesn’t this seem backwards?

There are certain things you need to do for reasons of social equity. You need to control the bonus structure of the banks, the payoff systems they get when they screw up, and the golden handshakes of vast sums of money; this is undermining popular consent for free market capitalism, the political consent for our economic structure.

How does AEP suggest that “[y]ou need to control the bonus structure of the banks, the payoff systems they get when they screw up, and the golden handshakes of vast sums of money…” and somehow continue to call such an environment “free market capitalism”?

They have so screwed up. The whole regulatory culture has made a total mess of it. They didn’t see the crisis coming, they allowed rampant credit growth, they allowed the shadow banking system to get out of control, they made so many mistakes – and then suddenly in panic they swing to the other extreme, they go wild and go do overkill at the worst possible moment, which is right now.

Who is this “they”?  Would things be better if we only had a better “they” in charge?  What about the market acting as the “they”?  Let’s see if this is where AEP takes us (don’t get your hopes up).

There seems to be no joined up thinking about this; people are not thinking through what are the implications of the banking regulations for the rest of their economic policies. So you’ve got fiscal policy, you’ve got fiscal austerity, you’ve got monetary policy, you’ve got banking regulation, and they are all being pursued independently of each other. Nobody is sort of thinking how do these interrelate, and this is the critique I have.

No, AEP is not looking to the markets to provide regulation; he is just dreaming of more perfect regulators.

[Regarding the BRICS nations’ complaints around the international monetary system]  I don’t have much sympathy for this. China pegs its currency to the dollar, it doesn’t have to peg it’s currency to the dollar. It could do what other countries do and have an independent floating currency and then it wouldn‘t have any of these problems, it wouldn’t then be importing American monetary policy which was too loose for them 2009/2010 when America cut rates to zero; it basically imported this monetary policy, causing a huge inflationary surge in China.

He is quite correct here.  A central bank controls monetary policy within its currency jurisdiction.  Inflation cannot be imported without the consent of the home central bank.

[Regarding the EU project] The problem is that they are concentrating more and more power in a structure that does not have any viable, working democratic institutions.

It is not that I see positive solutions via a democratic system, but this statement is correct.  At least the implementation of the EU structure is stripping away the fallacy that the people are somehow in charge in a democracy.

You’ve got a completely undemocratic structure, accumulating more and more power, and I don’t see how that could ever be made to function. You could make the whole leap forward to complete political union, you could replicate the United States with a genuine European parliament and an elected European president and so forth, but I think it is unworkable because there is no unified European people. There is no single language, there is no single way of looking at things, there is no shared political culture, it is a completely absurd project, and highly destructive for democracy.

Not only destructive for democracy, but destructive for any remaining semblance of freedom.  However, it seems clear that those in power will not give up on this attempt until the market and the uprisings force their hands.

I think the bond market is fantastically mis-priced. I think the relationship of sovereign bonds to equities is completely out of proportion. This is unprecedented. I know this continued to occur in Japan and people said back in the nineties that bond yields couldn’t fall any further, and here we are fifteen years later and they are still falling. You know they’ve gone below one percent on ten year bonds and so it could continue, but I don’t think the rest of the world is Japan. They think that Europe and America are not going to go that route; I think they will reflate, they will engage in massive monetary stimulus to get out of this, they will not allow deflation to take root. So the outcome is going to be different and that means bonds will be massacred.

Here, AEP is quite correct: he points out the mispricing of bonds; the inability to time the necessary adjustment (by pointing to Japan); and mostly in the fact that there will not be deflation in the west.  Whenever deflation threatens, central banks will monetize.  With the US alone having over $200 trillion present value of unfunded liabilities, there will be plenty for the Fed to buy in the coming years. 

Ignore those who advocate that a general price deflation is coming.  Certainly not until we live through the crack-up boom, and even then not in the same currency unit.

This paper by the IMF is a revival of the Chicago plan from the 1930s….They are basically arguing you could cure the entire debt crisis at one stroke. You simply change the whole monetary system, you force the banks to hold one hundred percent reserves. The government then gives them money as an equity stake. It is kind of complicated, but essentially just wipe out the debt at one stroke and America would not have any public debt – you know, you could do it in ten minutes. Same for all the western European countries, just eliminate your debt.

Here he is referring to the possibility of replacing debt-based currency with nothing-based currency, and use the nothing-based currency to pay off the debts.  Just like that, a miracle cure.

There are no miracles in economics.  There is the market, and there is political manipulation.  Each path comes with its own set of possible outcomes.  Via the market, real growth is possible and sustainable.  Via political manipulation, system-wide booms and busts are commonplace.  This “miracle cure” is nothing more than default by a different name.

I was also suspicious, whenever you concentrate more power in the state you create potential for some form of abuse later and I’m a libertarian personally and I think the power of the state should be limited always, should be carefully controlled. Every time you give further powers to the state you have to have a very clear argument in my view about to why this is being done. My natural reflex is one of the foundations of English common law which is that you should be able to do anything you want unless the law specifically prohibits it and the law must have a very good reason for prohibiting it and that should be the foundation of our legal and political system; that’s a libertarian perspective.

This is not a libertarian perspective.  A libertarian perspective is based on the non-aggression principle.  There is no room for the idea of having “a very clear argument” about why some new intervention “is being done,” or how something can be prohibited as long as someone has “a very good reason” for doing so.

You could have what von Hayek called a “catallaxy of currencies”, you have competing currencies. You throw it all open and say right, well, if the state is running a bad currency let somebody else run a good one and see if people use that one instead – the good will displace the bad. If you have monopolies like this and you say only the state can do it and nobody else can do it then you know, well, ok if you have a good state fine, if you have a bad state it goes horribly wrong. You have no alternative that can hold the state to account.

Here, AEP demonstrates the most wisdom.  Open up currencies to free-market competition.  Remove all regulation and laws favoring one currency over another, eliminate tax consequences from currency transactions, and allow tax payments to government in any currency.

Yes. I mean, oddly enough the British Chancellor Exchequer Nigel Lawson proposed a version of [competitive currencies]. He was suggesting having a sort of competing currency, you could have a European currency that operated alongside the national currencies and if it worked it worked. That actually was a very good idea; it would be a lot better than what they did. I’m not against this sort of idea, this “catallaxy of money”; I’m all in favour of creative solutions, and if it’s good money and people accept it – excellent, just let the market decide.

If I recall correctly, this British idea was to allow each country in the Euro-zone to continue to issue its national currency alongside the new Euro, with the various national currencies accepted in all Euro-based countries.  This would have been a good idea, as far is it went – only that private alternatives should also be available.

This is another reason I’m against the gold standard, I think it is good to have free gold that is not controlled by any government, and instead of trying to use it as a foundation for currency which they will try to manipulate. It is better to have it as free, as a store of value and it holds public currencies to account – people can see gold rising against other currencies and that tells you something. It is the final reproach for the other currencies; it is sort of the umpire if you like. It sits there as a store of value and it goes up and down and by its movement it tells you about the other currencies. It holds governments to account. The last thing you want is gold to be concentrated in the hands of the government, who then say we have a gold standard; worst possible thing. You want gold to be completely free.

AEP is more right here than most gold defenders might give him credit for.  A government-managed gold standard might be slightly better in some ways than the current system, but still offers no market functionality.  Better for individuals to be able to buy and sell gold freely than have it controlled by the state in such a manner.

It was precisely because gold backed the currency that FDR confiscated the gold.  Absent the gold-backed currency, he would have had no reason to do this (which is one reason why I don’t believe such a thing will happen today).  Better to be able to hold gold without this additional issue hanging over the gold like a black cloud – gold, waiting to be confiscated when the government’s mismanagement of the currency demands such an action.

I will suggest reading the entire interview.  AEP is a well-informed and well-spoken (written?) commentator, despite his failures in pointing out many of the true roots and therefor the true solutions to the current economic catastrophe.

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