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An Aide-Memoire For Boris: First, Deliver Brexit

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Authored by Alasdair Macleod via GoldMoney.com,

An instinctive free-trader, Boris Johnson, is almost certain to be elected as the next UK Prime Minister. His immediate mission will be to extricate the UK from the EU. If he does that successfully, his next task will be to stop and reverse the drift into socialism in Britain. If this is neglected, the prospect of a Marxist-led Labour Party forming a government will continue to grow. It will not be easy, but it can be done. He will have to take command of the free-market narrative and drive it away from state interference. It requires a clear political head informed by classical economics, not the Keynesian variety which has led us all to economic disaster. But first, he has to deliver Brexit.

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Delivering Brexit

Leaving the EU will not be a slam-dunk. The Government’s permanent staff, comprised of civil servants who know nothing else, are with few exceptions convinced Remainers. They have demonstrated they find it unnatural to regard Brexit positively. For this reason, Johnson must surround himself with ministers who are firm Brexiteers to ensure the Cabinet’s resolve remains intact through the process, despite conflicting advice from senior civil servants. And into the run-up to the leaving date (31 October), he must put first and foremost the legal and democratic case for leaving, playing down EU trade fears. To put it in context, in 2017 exports of British goods to the EU at £164bn represented only 6.25% of GDP. Yes, that’s what Mrs May wasted three years arguing about.

Project Fear is over, Project Positive must follow. That way, public controversy on Brexit will diminish as the leaving date approaches, leaving diehard Remainers in Parliament isolated.

While Project Fear is still with us, it is being touted that Johnson’s Brexit government will face a vote of No Confidence. With a handful of Remainer rebels threatening to resign the Conservative whip if he is elected, the arithmetic for his survival looks tricky. However, there is nowhere for Remainers to go, as the abject failure of the Change Party clearly demonstrated. Furthermore, there are Brexiteers on the Labour benches likely to ignore the Labour whip. In any event, Labour would probably not want to face a general election so long as their northern seats are likely to be lost to Farage’s Brexit Party. Nor would they want to have an uncompleted Brexit to deal with.

Johnson is therefore likely to have some breathing space. He should be able to capitalise on his mandate, turning it into a momentum for a clean Brexit. With the agreement of the EU, the strategy is likely to involve a standstill arrangement in accordance with GATT Article XXIV, which will permit current free trade to continue with the EU while negotiations for a permanent free trade agreement to be agreed. Without the agreement of the EU to Article XXIV and in the event of No Deal, the preparations for it have been done on both sides anyway.

Following 31 October, Brexit will no longer be an issue, and a Johnson government will face a future without a clear majority. With or without a general election, the objective then should be to destabilise the Labour Party, which can only be done by undermining socialism itself. It will require clarity of purpose, and an understanding of why people vote for socialism. To seek a consensus, which has been the traditional one-nation Tory approach to government, has always led to more socialism. Socialist myths versus free market reality must now be tackled head-on, because the unchallenged politics of the far-left is gaining electoral traction.

This article identifies two key issues out of many. If both free trade and the abolition of inflationary financing are Johnson’s guiding stars, the rest will follow. There almost certainly will be a global credit crisis before these fundamental matters are resolved, but that must not deflect a Johnson administration from its purpose. Rather, such a crisis is proof these policies are desperately needed.

Unravelling the socialist myth

First, a future Prime Minister must have a clear understanding of his enemy, the socialist myth, why it fails, and why free markets succeed.

Successful societies all have one thing in common: the freedom of individuals to cooperate socially in the pursuit of their needs and desires. Uniquely in the animal world, the human race deploys individual skills to produce what others want, and those others reward the individual on the basis of his or her ability to do so. Despite his inferior physical characteristics compared with other animals, it is through specialisation, the division of labour, that the human race has become dominant. The key to human success is the ultimate democracy inherent in the division of labour. It means the customer is king and all economic effort is expended towards his satisfaction. Individual success is rewarded by the improvement in living conditions for all. It defines human progress.

Truly, it is proof that free-market competition is more successful than any form of consensus.

The full economic potential of a free society is hardly ever realised. Island states, such as Hong Kong and Singapore have achieved it, but in the larger nations the development of true economic liberalism reached its zenith in Britain following the repeal of the Corn Laws and eventually all other tariffs. The improvement in living standards for the British people was truly remarkable, and the subsequent accumulation of productive wealth was unprecedented.

In twentieth-century Britain, the success of free markets bred a peculiar form of envy, based on the erroneous idea that the accumulation of wealth was at the expense of the labouring classes. It also played to intellectual and middle-class guilt. In defiance of all the evidence, it was popularised by the followers of Karl Marx. This was the basis upon which the Labour Party became a force in British politics.

Karl Marx held that all property should be ceded to the state and the state should direct the employment of individuals and allocate the distribution of all production. The Labour party was guided by these principles, sworn to nationalise all industry, and is now resuscitating these defunct ideals.

In all forms of socialism, the state becomes the master of its people, instead of the democratic state being the servant and guarantor of a free society. This role-reversal is at the heart of the conflict in the Brexit debate, exposing British society as already enmeshed in statist chains. As the party whose mission has always been to protect personal property, the Conservative Party itself has been exposed as socialistic in all but name.

Socialism fails because it lacks the basis of economic calculation. Only free markets provide the means of establishing prices. With a knowledge of what sells and for how much an entrepreneur single-mindedly invests his resources in the production of tomorrow’s products. None of this hard-won skill is available to the socialising state. It has to refer to foreign capitalistic markets for guidance, in a tacit admission of failure.

Socialism is incapable of fostering progress, because it cannot exercise commercial judgement unfettered by non-commercial considerations. It is a monopoly becoming less efficient by the day. The state is only able to assume that what happened in the past will happen in the future. There is no room for progress in the state’s static calculations.

Progress is the defining feature of dynamic free markets. In socialism we observe the state removing productive resources from the individual by confiscating his property, and in free markets the individual in his own interests serves his fellow men to their greatest satisfaction. The baker bakes bread for the builder; the builder builds shelter for the tech entrepreneur; the tech entrepreneur provides the media for the baker and the builder to enjoy their leisure. The state simply cannot devise an economic role for itself by interposing in these transactions.

Public support for socialism is not based on reason, but emotion. It draws on Christian values and morality, in which a concern for the welfare of the common man is expressed. As a competitor to religion, socialism replaces the deity with the head of the state: this was Karl Marx’s creed, considering himself as the head of a unified world state and Engels as his enforcer. Christians were the useful idiots on the way to this godless nirvana.

By recruiting the masses with their Christian ethics, socialism abuses basic Christian decency, conflating religious morality with statist objectives. It plays on a comfort factor, offering an alternative to the perceived dangers of a free market jungle, while failing to mention that the alternative to rich variety is the waterless desert of socialism.

In combating socialism, a wise politician must understand the principles upon which it fails. Only then can he or she proceed with the potential for success. If we examine President Trump’s attempt to reverse the tide of socialism in America, the evidence suggests he has failed to grasp the fundamental qualities of free markets that must be preserved and enhanced. He appears to be guided more by his own beliefs and prejudices than he is by a rational understanding of free markets. He demonstrably fails to understand international trade and the importance of denying inflationary financing. He thinks that manipulating interest rates lower is an economic panacea. Trump is a statist.

If Boris Johnson is to succeed in “Making Britain Great Again” he must understand the fundamental differences between socialism and free markets. He must observe and learn from Trump’s errors to not fall into the traps Trump has set for himself. He must be guided by free market principles, despite the howls of outrage that will continue to be a feature of his premiership, just as they have been of Trump’s presidency. A nation is only successful despite its government.

Free markets thrive with free trade

Tariffs are a consumer tax, not a tax on foreign producers. They are protection for domestic producers against foreign competition. Consequently, a tariff regime makes domestic producers less competitive over time. The error is to associate a trade deficit with unfair competition. It is the result of a combination of monetary inflation and a lack of saving.

The EU has some 12,500 tariffs, protecting diverse EU-based producers. Dropping those on Brexit will give British consumers an immediate boost and producers will respond. It will not, as President Trump believes, lead to a surge in the trade deficit. That is a consequence of monetary inflation at the consumer level.

A politician who wishes to see a balance of trade in goods and services should introduce policies to favour increased savings and eliminate the budget deficit. Tariffs have no economic justification whatsoever. Though government revenue from tariffs is forgone by their abolition, the improvement in the economy from free trade more than makes up for its loss. That is the conclusion of properly thought-out economic theory and confirmed by empirical evidence. Both demonstrate that what is gained from the comparative advantage of buying goods and services from the most competitive supplier, irrespective of location, leads to the redeployment of uncompetitive production into other avenues for the greater benefit of society as a whole.

The theory of competitive advantage was convincingly proved through the abandonment of tariffs by the British Government in three steps: 1846, 1853 and 1860. Tariff-free trade drove the British economy enabling it to grow to dominate global trade. The standard of living for all Brits improved greatly. Furthermore, the British success encouraged much of Europe to adopt similar trade policies.

The freedom to trade without tariffs is the greatest legacy that Brexit offers. Only those who understand the benefits can prevail over the vested interests demanding continuing protectionism. Britain needs a reforming Robert Peel with a Churchillian determination.

Post-Brexit, it is anticipated that Britain will seek to secure trade deals, not only novating existing EU trade treaties, but entering into free trade agreements with the US, Commonwealth nations and others. That is a matter of practical politics, but by far the best economic solution is free trade without any agreements at all. That must be the end-objective.

Inflationary financing into an economic dead-end

Before Margaret Thatcher became Prime Minister in 1979, Britain’s epithet was the sick man of Europe. The preceding drift into ever-greater socialism was accompanied by monetary inflation, which was driven in part by unionised labour in nationalised industries striking, or threatening to do so, for wages which were uneconomic. The differences between cause and effect during periods of monetary inflation only serve to conceal the root of the problem, and that is inflationary financing.

Without any factual basis, central bankers claim that some price inflation is a good thing. They set an inflation target to aim at, commonly agreed at two per cent. There is no control over the expansion of money and credit, which is permitted to run riot, so long as the inflation target is not too obviously violated. But the fact remains that inflationary financing has become central to the state’s finances.

Since 2010, the UK’s government debt has increased by 59% of 2010’s GDP. This has been financed by the expansion of money and bank credit. While statisticians often argue that so long as government borrowing is financed by private sector savings, it is non-inflationary. But this argument ignores the fact, that if savings are diverted from their use in the private sector, the gap is filled, one way or another, by the expansion of bank credit. And as we should know, the expansion of bank credit is simply monetary inflation.

Therefore, the expansion of both bank credit and base money is a good measure of the degree of a government’s inflationary financing, and we can confidently conclude that the dilution of people’s money is far greater than suggested by government price inflation statistics.

This lack of apparent price inflation can only be for two reasons. Either statistics fail to reflect the degree of loss of purchasing power of the currency, or people have collectively increased their preferences for money over goods and services. But given the increase in consumer debt and the inability of eight out of ten British workers to survive between paydays without credit, it is hard to see that preferences for money relative to goods have actually increased.[i]

Monetary inflation is barely understood by the public, which is why governments love printing money. They don’t let on that monetary inflation dilutes everyone’s earnings and savings. Instead, they promote a belief in easy money and cheap credit for businesses so they can employ more people. And because, as Keynes put it, not one man in a million will detect the theft, monetary inflation is irresistible to spendthrift governments.[ii]

We can put inflationary financing in the same category of nonsense as believing a weaker exchange rate makes exporters more competitive and stimulates job creation. But any economist with a modicum of observation will know that an economy with a strong currency, such as Germany and Japan in the post-war years, achieves a strong economy more successfully than a state which has a policy of weakening the currency.

Of course, the empirical evidence, that in the long run a sound currency is always better than a weak one, takes some explaining to a neo-Keynesian audience. Confusingly, Japan has managed to expand the quantity of yen in circulation without appearing to undermine its purchasing power. Much of the explanation is found in the Japanese propensity to save, which put another way is the same as saying the population of Japan uses the expansion of money and bank credit to increase their bank balances instead of spending it. This contrasts with Keynesian consumption theories that abhor saving, preferring inflationary financing. It has predictably resulted in persistent trade deficits and a weak currency.

In the UK, a combination of fiscal and monetary policies aimed at discouraging savings dissuades ordinary people from accumulating wealth through thrift. No wonder an estimated 78% of the UK’s working population have no financial reserves and are unable to make ends meet between pay-days. We appear to have arrived at the end-point in Keynesian economics.

Unless something is urgently done to reverse this trend, the economic condition of low-income Britons will worsen. Furthermore, in the slightest down-turn more of them will become dependent on the state. The state then scrambles for more revenue, taking it from the productive middle-classes by higher taxes and yet more monetary inflation. Wealth, the life-blood of any economy, is destroyed at an increasing pace, and with it the ability of society as a whole to maintain a reasonable standard of living.

The solution is to halt the destruction of wealth and savings and have faith in the ability of ordinary people to manage their own affairs without government intervention. Central to these free-market policies is sound money. There are other policies that must accompany it, such as eliminating taxes on savings. Government must be downsized. It must rescind the tide of regulation. The banking system must be reformed so as to address destructive cycles of credit expansion and contraction. But central to it all is sound money.

The greatest resistance to a sound money policy will come from neo-Keynesian economists, whose beliefs are riddled with contradictions. Thiers are the policies that have ensnared the UK and other welfare states in debt traps, from which there is no easy escape. They are already discredited by the results of their dogmas. The political task facing a Johnson government will be not so much to convince economists of their errors but to promote the concept of sound money and associated policies over their heads to the general public. Card-carrying socialists may not like it, but properly presented the silent majority almost certainly will.

It may be too late in the cycle to avoid an overdue credit crisis, likely to be made worse by American trade policies. In which case, a proper understanding of the destructive forces of monetary inflation compared with the economic benefits of sound money is urgently required. It has been done before: the UK emerged from the destruction and debt of the Napoleonic Wars to a gold standard under which the government reduced its debt burden and the economy boomed in an industrial revolution. It defied modern Keynesian explanation.

Conclusion

If it is to succeed, the magnitude of the task facing a Johnson government is enormous and goes well beyond Brexit. Patience and the passage of time will be required, because the establishment is heavily socialistic and will need to be steered firmly in a free-market direction. But free trade and sound money policies, spearheaded by a determination to avoid budget deficits, will do much of the heavy lifting, and the rest should naturally follow.


Source: zerohedge.com

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