CRISIS: ECONOMIC ILLNESS AND
RECOVERY
Silvano Borruso
Abstract
By the term “crisis” Hippocrates meant the all-out
effort by a sick body to expel the retained toxins that cause illness. Success
would spell recovery; failure, death.
The economic body is intoxicated; false diagnoses have
suggested false remedies, and the year 2008 has marked the beginning of the
crisis. But since the economic body cannot die, a true diagnosis, followed by the
expulsion of toxic ideas, would send it on the road to recovery pretty fast.
The Truth of Things
The toxins causing the apparently intractable economic
crisis are to be sought in semantic confusion. No diagnosis can be true if the
symptoms are equivocally termed; no remedy can work from such a diagnosis. As
toxicity and confusion reinforce one another, identifying toxins is akin to sorting
out confusions, and vice versa.
Credit v. Money
The perennial scarcity of a medium of exchange, still
there from the days of precious metal money, led to using “credit.” Behind the
original meaning of credit as “belief, trust, good reputation”, this term hides
today a colossal, multiple, toxic fraud.
First fraud: the term “loan” no
longer implies renouncing something in order to allow another to use it. Banks
renounce nothing; they empower the
unsuspecting “borrower” to issue purchasing power created by them out of thin
air by printing two figures on the bank ledgers: one as “loan to Mr X” and the
other as “deposit from Mr X”. Every time Mr X issues a cheque, new purchasing power enters the economic
stream, privately issued and out of any official control. In truth, it is counterfeiting, but legal.
Second fraud: this purchasing power is assimilated to money by assigning to it
the same monetary units as the official currency. The result is a permanent confusion between credit and money. But
whereas a unit of currency is liquid by definition, in that it moves goods and
services for the amount of its nominal value every time it changes hands, credit is not: it moves goods and
services once, after which the
cheque becomes scrap paper and an army of clerks must be employed to keep track
of the exchanges. Those clerks produce nothing. Somehow or other the public is
forced to pay for this enormous parasitic activity. In the real world, we get lying plus stealing.
Third fraud: the “loan” is granted at interest.
What justifies it? With tangible
metal or paper money, the lender deprives
himself of the amount he loans. There is therefore some justification in demanding compensation for reasons of one of
the six theories of interest: fructification, productivity, utility,
abstinence, work, or exploitation. But credit’s only
tangibility is a few micrograms of ink in the bank’s ledgers. None of the theories of interest
applies. Let us call it legal extortion.
Fourth fraud: the “borrower” is empowered to issue the principal, but not the
interest. Result: if ten “borrowers” borrow 1000 units each and at the end of
the year they owe 11,000 collectively, the extra 1000 units must come either
from their increased exertions, or from swindling each other, or from borrowing
further in order to pay for the legal extortion euphemistically named interest.
Put another way, the system is designed to bankrupt someone sooner or later. The
bankrupt borrower must hand over real wealth, i.e. the physical result of his
exertion, to the “lender” who has done no more than creating purchasing power
at no cost to himself. The “borrower” suffers a double extortion: one of his exertions and another of his
“collateral.”
Fifth fraud: those without “collateral” are denied
credit. As such people are invariably in the majority, credit is
essentially and unequivocally antidemocratic.
Those so deprived have to make do with cash, kept permanently scarce. The ratio
cash/credit, in the UK alone, is 57 billion (3%) versus 2,200 billion (97%).
There is no need to go further to see this as the main reason behind widespread
poverty.
Sixth fraud: credit is “loaned” at compound
interest, which grows exponentially according to the formula I = (C + x)n,
where I = accrued interest; C = capital invested; x = rate of interest; n =
number of years. The formula is visibly unsustainable. Sooner or later, the
amount payable is bound to overtake the total amount of means of payment
available.
Seventh fraud: every now and then, the financial authorities purport to exercise
some degree of control on the economy by raising or lowering the interest rate.
Banks do the same but without fanfare. The result is that any economic forecast
based on such contradictions is bound to fail, whether by chance or by design
is anybody’s guess.
Eighth fraud: the public is led into believing that banks lend the money of their
depositors. The reality is that on a minimal basis of cash they issue a
gigantic amount of newly created credit. In other words, no bank has the money
it says it has. The illusion is kept going by their ability to redeem a cheque
in cash, which is true for as long as no more than 10% or so of depositors
demand cash. Over the years people have been convinced/cajoled/deceived into
using less and less cash, and getting into deeper and deeper debt by recurring
to “credit”.
The sum total
of these eight frauds is known as the
fractional reserve. It has been
driving the economy of the world for the past 400 years, since the foundation
of the Bank of Amsterdam in 1609.
But starting in 1990 or thereabouts, things have gone
awry. In today’s UK 8% of credit, or 176 billion pounds, finance production; 92%, or 2,024 billion
pounds, fuel speculation, i.e. the
buying and selling of fancy pieces of paper with equally fancy names purporting
to be money, all of which inflate a financial bubble of humungous proportions.
Globally, the sum total of “credit”, which financed
nothing beyond itself, burst in 2008, marking the end of the line of the scam. No
wonder we are in a crisis.
Before proposing remedies, it is imperative first to unravel
the double meaning that practically
every term in economic use has acquired over these past 400 years. Let us begin
with “political economy” and “economics”.
Political Economy v. Economics
The term “political economy”, in use not too long ago,
used to be defined as “the science of production and distribution of wealth”. For
whatever reason, in the mid-20th century the term was dropped and
changed to “economics”, defined as the “allocation of scarce resources”. Let us
analyze the two words.
To understand political
economy it is necessary to define “wealth,” a term that has in turn
acquired a double meaning.
Frédéric Bastiat (1801-1850) defined wealth simply as
“services”. If services are incorporated into objects, such objects become
“goods”.
The Penguin
Dictionary of Economics defines wealth as “a stock of assets held by any
economic unit that yields, or has the potential for yielding, income.”
If by “income” we understand both monetary and
non-monetary inflow, the two definitions roughly coincide. If I enter a
canebrake and come out with a basket, that object incorporates a service, which
can be considered as my income.
The main issue in political economy, however, is not
that. It is that whereas the production
of wealth is a physical process
needing land, labour, and raw materials, its distribution is a moral
process, conditioned by how many hands succeed in taking a cut between
production and consumption. It offers difficulties of many kinds. Let us
register the fact and set it aside, concentrating instead on the term “economics”
as defined above.
The “allocation of scarce resources,” wittingly or not
introduces not just one but two
falsehoods in need of immediate rectification.
First: there
are no scarce resources. Every scarcity is artificial, caused by vested
interests. I will confine myself to what I consider the most outrageous example.
We earthlings are immersed in a cosmic sea of electric charges, or “plasma in
dark mode.” More than 100 years ago Nikola Tesla (1856-1943) had found ways and
means of conveying these charges into making them perform useful work, with the
idea of giving free electricity to the whole world. His Wardenclyffe tower was
the first of eight such, but powerful financial and oil interests got the US
government into destroying the tower. That is why the world is festooned today with
millions of ugly, unnecessary and at times dangerous pylons, millions of miles
of wires, transformers, hydroelectric schemes, etc. Had Tesla been heeded,
energy would be as free as the air, oil would be a historical curiosity and
nuclear energy a scientific hobby.
Second: the term “allocation” hides an innuendo. Who is supposed to “allocate”? In political economy, by applying the
principle of subsidiarity, the allocators are heads of families, the
self-employed, farmers, owners of small and medium-sized enterprises, and last
the State. In economics the
allocators are the self-appointed all-knowing, all-powerful bureaucrats, nosing
into areas that are none of their business to nose into.
Money Liquidity v. Credit
Liquidity
A paper currency, or cash, is “liquid by definition” as
Penguin avers. It means that simply
by changing hands, cash moves goods and services by the nominal amount written
on it.
Credit, as seen earlier, is not liquid by definition.
A certain sum moves from an account to another, once. But there is such a thing as credit liquidity, defined however
as the presence, in the market, of buyers and sellers of whatever pieces of
credit they buy and sell. For as long as both parties are present, credit is
liquid. What has happened after 2008 is that buyers have disappeared, and no
amount of “bailout” has succeeded in getting them back. Credit liquidity is at
the end of the line.
The term “liquidity” therefore, should always be qualified. To use it
indiscriminately can only be due to either unawareness or fraud. Neither is
commendable in scientific discourse.
Interest v. Usury
The “principle” according to which money begets money
is evidently pragmatic, i.e. imposed by law. It is not a natural principle.
Only living things beget living things after their own kind.
The first attempt at defining the two was made by Pope
Benedict XIV in his 1745 Encyclical Vix
Pervenit. It defines interest as the fee that a lender may legitimately charge for his service, and
usury as the price of money seen as
a commodity. The distinction is useful and legitimate, but not conclusive. In
any case it is not accepted by the world of economics.
Silvio Gesell (1862-1930) was the first to define
usury as the tribute that he who
needs money as a medium of exchange must
pay to the one who hoards it as a store of value. He located the origin of
usury in the function as store of value
begun with the monetization of precious metals, and retained by paper money.
Usury therefore appears at the exchanges
and only secondarily at the loans. Removing the function of store of value
would get rid of both usury and interest, thus rendering the distinction unnecessary.
Investment in Production
v. “Investment” in Speculation
Penguin defines “investment” as “real capital formation”, later adding “the
physical change in stocks”. The result is that a character spending days before
an array of computer screens speculating on “changes in stocks” is called an
“investor” at par with the one who has made his calculations on how to organize
an agricultural or industrial concern.
Speculation, whether in money or in commodities, is a
canker that should be extirpated from the economy without compunction, starting
by calling it by its real name: thieving
by proxy, where the proxy is the computer screen.
Work, Employment (Jobs)
and Economic Freedom
None of the above terms gets defined either by
old-fashioned Political Economy or by modern Economics. It is important,
however, to do so if we truly desire to get rid of semantic hurdles, especially
confusion.
·
Work is any human activity that produces
wealth as defined earlier.
·
A job is a paid activity, which may, or may not, produce wealth.
·
Economic freedom is the choice between
working independently and for an employer.
With the above terms undefined, the distinction between
work and employment is not made. Economists routinely consider employment as
the only admissible form of work. Penguin
has an entry Employment, full
defined as “a situation in which everyone in the labour force who is willing to
work at the market rate for his type of labour has a job.” Independents are styled
“self-employed”, which statistics
tell us have increased (in the UK) from 1.9 (1979) to 3.4 (1990) to 4.1 million
(2011).
This trend is not seen as positive. Columnists put it
this way:
“Soaring unemployment
is forcing many workers who lose
their job to become self-employed”.
“It may well be [that] some, having lost their jobs, categorize themselves
as self-employed but really are unemployed or at least under-employed”.
“I
do not think there has been a sudden surge of entrepreneurial zeal. This is
people who cannot get a job picking
up bits and pieces of work. It is a sign of economic weakness, rather than
strength”.
“The
jump is likely to reflect people resorting
to working for themselves”.
“The
latest figures show some signs that the labour market is stabilizing, but the increase in unemployment is ‘unwelcome”.
The
priorities could not be clearer. The common innuendo is that no one in his sane
mind would opt for self-employment given the choice. To have a “job” is seen in
all cases preferable to working independently. But a perceptive reader remarks:
“The only way you can go self
employed or start a business these days is if you have money. The only way you can
have money is if you steal it, win it or have it left. Try talking to your bank
about a start up loan even if you have a good business plan and see where it
gets you.”
The cat is out of the bag.
“Credit” is denied to those who would
rather work for themselves. The road to freedom is blocked. Work = employment
and that is that.
This view is so embedded in everybody’s
mind, would-be reformers included, as to propose, as the only way out, to
institutionalize beggary by handing out what they call Citizen’s dividends.
The argument runs that modern advances in technology have made unemployment
structural, and therefore inevitable. What people therefore need is an income,
regardless of whether they work for it or not.
No “expert” stops to think that
what has forced people out of running small concerns like farming or
artisanship has not been “progress” but artificial strictures on cash
liquidity. The artisan cannot sell the products of his labour “on credit”. He
needs cash on delivery to buy raw
materials and pay the wages of his few dependants and apprentices. Ditto for a farmer: he cannot afford to
travel miles to cash “cheques”.
The conclusion, once again, is
that “credit” is more like a spanner in the works than a help for a healthy
economy and full employment. We shall harp on the same subject later.
Taxing Value-added v. Taxing Value-subtracted
It is obvious that governments
need money to cover their expenditure. But there are two ways of going about it.
In the juridico-positivist framework, in which legal = morally binding,
the State arbitrarily chooses the tax base, the rate of tax and the amount, demanding
it from the taxpayer without consulting him. Like a god of the marketplace, the
State has rights, but no duties.
In the juridico-naturalist framework, however,
the State has well-defined duties,
to finance which it needs money. The duties are: government, the administration
of justice, law and order, defence, representation abroad and finance, including
issuing a means of payment for people to pay taxes. Only this last duty is
under scrutiny here.
As things stand, the
modern State does not fulfil this duty. Instead, and without consulting the
public, the State borrows credit issued
by private banks, and taxes value added by people’s work to pay the
interest demanded. In so doing, the State institutionalizes seven of the eight
frauds mentioned earlier. The mathematically certain result of this practice is
that the total debt will sooner or later overtake the amount of money
available, eventually killing the goose that lays the golden egg.
The State extorts what
is due to people’s labour to give it to some who write on a piece of paper “You
owe me so much,” with the only toil of hitting a few keys on a computer keyboard.
Such extortion occurs in
four tried and true ways that suck blood out of the economy of production to
convey it to unproductive elements, a number of them with power of arrest and
detention over those who feel unjustly squeezed of their due. Not surprisingly,
those who can, defend themselves by ingeniously evading tax. The four ways of
State extortion are:
1.
Income
Tax, which hits production;
2.
Indirect
taxation, which hits consumption;
3.
Customs
and Excise, which hits international trade;
4.
And
VAT, which hits domestic trade, and of which below.
That VAT is the most absurd and counterproductive
of all taxes was known in 16th century Spain, where it was called alcabala. It quickly became clear that compliance costs exceeded the revenue, and
so it was scrapped, given the evident hurt to the economy.
This remains true, but
the modern State bypasses the problem by imposing
the compliance costs on the economic operators, without paying them. In other words it re-introduces slavery, which
surreptitiously returns through the window after having been shown the door
during the previous millennium. VAT further cripples the economy of production,
since the economic operators are forced to divert their attention from their
work to carry out the tasks imposed on them by the Revenue Authority. As James
Robertson (1928-) put it:
“After paradise lost,
you can almost imagine Satan sitting down with Beelzebub, Moloch, Belial and
the rest of his cabinet, to design the most damaging tax system they could
persuade the human race to adopt. Could they have done much better than what we
have now?
Let us now ask: is it
possible to innovate taxation:
·
According
to justice, i.e. that gives
everyone, including the State, one’s due?
·
Cheaply, i.e. without having to employ an army of
non-productive bureaucrats?
·
Efficiently to the point of enticing the
taxpayers into paying without even considering evasion?
As a working hypothesis,
let us imagine shifting the tax base from
value added by human exertion to
value subtracted from the country’s
natural resources, and therefore from State sovereignty. Let me explain.
Such natural or common resources are land, water, air, the electromagnetic spectrum and airspace. I shall
consider land only.
The owner of a car
parked in a central zone pays for the right to occupy a surface area of about
10 square metres. At £1/h, eight hours of occupation would cost £8/day, or 80
pence/m2 x day.
It is a just tax. The quid pro quo is immediate and obvious. The motorist does not own the 10m2; he
temporarily occupies them. And whether he parks a Rolls Royce or a jalopy near
to scrapping, he pays his 80 pence/m2 x day.
Suppose now that the
same zone sported 10km2 of commercial buildings, each assimilable to
a permanently parked car. At the same rate, these buildings would contribute
£80 million/day to the municipal coffers.
The important point is not the figures but the principle. The ground rent, regardless of what stands on it, is brought into existence not by the motorist, but by the exertions of those who work around the area, i.e. by population. Justice demands, therefore, that 100% of the fruits of labour should go to those who labour, and 100 % of the ground rent should be taxed and returned to the comunity that has created it.
This is the solution
of Henry George (1839-1897) going back 130 years and reaffirmed by Silvio
Gesell (1862-1930) in his Natural
Economic Order at the beginning of last century.
The all round
advantages of such taxation would be huge:
·
There
would be a return to collectively bargained
taxation, which was normal before the revolutionary State overturned it;
·
It
would be infinitely easier and cheaper to collect tax from a few thousand
municipalities than having to rummage into the pockets of millions of taxpayers;
·
Evasion
would be impossible: land cannot be hidden;
·
Ditto
for speculation. The occupiers of an empty plot would be forced to develop it
so as not to pay in vain, or would cede it, but at cost;
·
Recalcitrant
landlords would be punished simply by withdrawing protection from their occupied
areas and by denying them bureaucratic public services;
·
The
fiscal unit: square metre in town, hectare or acre in the countryside or even
square kilometre in uninhabited wasteland, would turn the entire national
territory into a fiscally productive area;
·
The
rent would be minimal and perfectly adjustable to public expenditure, given the
size of the tax base;
·
Two
equal surfaces in the same area would
pay the same amount, so that the
more wealth one produced the less tax one would pay proportionally.
·
And
the four forms of extortion that usurp the name of “tax” could easily be
scrapped.
Value subtracted by
hoarding could also be taxed, as was famously done in 1932-33 by the mayor of Wörgl,
the little Alpine town that flaunted stability of prices and prosperity in the
face of the Great Depression. The locally issued Work Certificates were free of debt, for being issued by the municipality,
and free of interest, for having zero store of value and thus being a pure
medium of exchange.
One-Size-fits-All v. Monetary Flexibility
The Eurozone crisis is
a laughable example of the consequences of the Procrustean principle applied to
monetary policy.
In times when people
were freer to think and to act, they had realized that no currency could
possibly attain stability at once with domestic prices and with foreign
exchange rates. They had therefore devised multiple currency systems: In
France, for instance, the king’s money, made of precious metal and accepted in
payment of taxes, was supplemented by many types of méreaux made of leather, glass, lead and other non-precious metals
to serve the local markets.
Between 1865 and 1915
a more practical method was resorted to. Five European countries: France,
Belgium, Italy, Switzerland and Greece formed the Latin Currency Union. Alongside
their national currencies, they adopted a single five-franc silver piece as
legal tender, used exclusively for foreign transactions among themselves. The
five-franc piece accounted for about 40% of the monetary mass in each country.
Excess or defect of the piece indicated a trade imbalance, to be corrected by
adjusting prices so as to restore the balance. The Great War caused the Union
to collapse.
Silvio Gesell (1862-1930)
mentions the Union in his Natural
Economic Order (1906), where he points out that the function of the
five-franc piece was not due to its being made of silver, as the accepted
superstition believed, and that it could have functioned just as well had it
been made of paper. He proposed an International Valuta Association working on
the same principle.
At Bretton Woods John
Maynard Keynes (1883-1946) resurrected the idea, calling the international
currency Bancor. As is well known the
idea was shot down, and the US dollar was imposed on the world as reserve
currency. The results are before our eyes.
In 2001 the Euro was
similarly imposed on a number of European countries, which have increased to 17
to date. The structural impossibility of its performing the two functions has
remained, and again the results are before our eyes.
The question is: why
not re-apply the principle of the Latin Currency Union with the Euro as the
five-franc piece alongside each
country’s national currency? The solution worked for 50 years. What destroyed
it was the war, not intrinsic defects. Why wouldn’t that be possible?
The problem is that
“possible” does not mean “feasible”. Vested interests of all kinds would oppose
not only just taxation, but also the much needed reforms mooted above and
listed below:
1.
Extirpate bank credit, giving back to “credit” its time-honoured meaning;
2.
Tax value subtracted from natural resources;
3.
Issue double currency: domestic currency free of
debt and of interest and trade currency at least free of debt.
As Lord Acton (1834-1902) said
when Lord Chief Justice of England, 1875:
“The issue which has swept down the centuries and which will have to be
fought sooner or later is The People vs. The Banks.”
The proposed remedies would mark the
victory of the people. Applying anything else would mark that of the banks.
Silvano Borruso
20th January
2012
Vicky Redwood,
chief UK economist at the consultancy Capital Economics.
Chris Grayling, employment Minister, UK.
