Tuesday, November 18, 2008

Your money for nothing and your chicks for free

Just what exactly is wrong with price deflation? I like price deflation. I like prices dropping. It’s the only good thing in a recession and it helps the rest of us survive as our incomes fall. Price deflation has happened in the computing industry for years. If you can’t afford a 100 gig hard drive laptop, just wait six months and there it will be, dropping at 20% per annum, until you can afford it, as it has done since the laptop was invented, with ever more features, power, and functions, at ever-decreasing prices. Does anyone ever complain when computer hardware gets cheaper? Do computer companies go bust? (Yes, bad ones). Do computer stores go bust? (Yes, bad ones.) But good computer companies and good computer stores prosper, especially as the regular price drops keep wiping out their poor competition. Yet somehow this pricing model, with which we are all familiar, must not be allowed to happen to the sacred cows of the car industries of the world or other related corporate welfare junkies (especially those employing lots of voters in marginals).

But people will stop BUYING, screams Ambrose Pritchard-Evans, in the Torygraph. Yes, Ambrose, people will stop consuming what they don’t need and only buy what they truly need. What is so wrong with that? Will they drop dead in the street because they don’t purchase a plasma high definition TV and stick for a while with the old 30 inch one?

With the money they have left over they can save, and their savings will grow in value, as prices drop, so they will become wealthier. And as they save, and clear their debts, they will also become less dependent on money lenders and debt. People who have borrowed to consume will find it tougher, but since when did those who consume without producing ever deserve to suck the lifeblood out of the rest of us to help these feckless spend monkeys?

Businesses which have over-extended and which have invested in the wrong product and service lines will go bankrupt. Good. The resources under their control will then be released to come under the control of better entrepreneurs who will supply the rest of us with what we truly need. People will still exist. The resources will still exist. All that will change will be those managing these people and these resources. Bad entrepreneurs will become employees again. And those employees who want to chance their arm at becoming dragonishish den entrepreneurs will get their chance.

Deflation cleanses. And here’s the rub. It’s GREAT for poor people. As the cost of consumables drops, POOR people can afford to buy more. Deflation brings them out of poverty. They can now afford to buy or rent houses. Deflation helps solve the problem of homelessness. As bad companies go bankrupt, good companies can spring up to replace them, to bring even better cheaper services to the rest of us, and then provide the UNEMPLOYED with work as they manage scarce resources better. The entire nineteenth century, when Britain and America were both on the gold standard, supplied a CENTURY of deflation, with prices in all businesses constantly dropping for almost 100 years. Did the Victorians complain that the price of every consumable kept constantly dropping in price, for decade after glorious decade? That transport prices kept dropping? That service prices kept dropping? To ask these questions is to know the answer.

And let’s just think about what Gordon Brown is saying. He is trying to keep housing prices UP. This will keep houses out of the reach of the aspirational poor. But isn’t socialism ABOUT helping the aspirational poor? I must have misheard if it wasn’t.

And here’s the best bit. As prices drop, people come to resent paying fixed amounts in taxes, such as property taxes. Governments then come under pressure to cut their spending, by sacking their useless staff. Of course I would be glad if most government staff were simply useless. Most of them, however, such as jobsworth regulators, are positively HARMFUL to the economy. So as the government’s income drops, it must sack these harmful people, thereby also encouraging the fresh shoots of economic recovery. These people can then find something useful to do in the private sector, once again helping us to recover.

Deflation is a good gardener. It prunes. It weeds. It tidies. Of course all the weeds protest, especially as we lay them into the bonfire, and it is painful for over-extended plants in the garden as it clips them with its brutal shears. But with the ash from the fire, or the compost from the waste, we can create fertiliser to create a much healthier and cleaner garden. And relatively quickly.

The pain of deflation can be over with quickly, if the government gets out of the way. The problem comes when the necessary friction of deflation is made to drag on beyond its natural span. Most people can survive a few months of unemployment. As a self-employed person I know exactly what that’s like. But when governments drag out this pain out to last long needless years, real long-term suffering ensues, just as it did in the 1930s and as it has recently in Japan. We only get these dreadful long-term depressions when we follow the tenets of Keynesianism. Before Keynesianism we had central bank inspired crashes, yes, and the tulip mania brought on by the Bank of Amsterdam in a related fashion with its cack-handed manipulation of the silver supply in Europe, but we never got these years-long depressions until the followers of Keynes took roost in the heart of government. Keynesianism is at the heart of the problem, yet somehow its prophets, such as Paul Krugman, still seem to be the ones with their hands on the tiller, even after causing all of the financial calamities in the twentieth century.

Why? Because Keynesianism appeals to government, because government takes pride of place in the Keynesian universe. Governments and Keynesians also hate deflation, because it destroys government power. Government income decreases, as spending taxes decrease, and as wages taxes decrease, and as people’s resentment of fixed taxes increases. Their ability to borrow is also cut because people will not lend out their precious resources at low rates of interest. Therefore of the three great methods to finance government consumption spending, only inflation is left. So all excuses are used to defend this heinous practice, along with its accompanying low-pegged interest rates, which then also enable the government to keep borrowing.

High-return-demanding savers, who are pushing up things like LIBOR rates, are therefore attacked, and clever wheezes are invented to tax these savers to hand over their loot to feckless consumers, the most stupid of these processes being to increase government borrowing to hand out consumption bribes, with the unsaid promise being made that taxes will increase later to pay for this credit card style binge. These are the hand-to-mouth economics of the Stone Age. Civilisation began when the first Cro-Magnon saved up some food, and did not consume it, to later give themselves enough time to create a better flint knife for butchering animals more quickly, thereby allowing more consumption in the future. This civilisation grew until the invention of monetary inflation, and later central banks to manage this inflation, which destroyed value and destroyed wealth, against the countervailing trend of the rest of the civilisation, until, as now, this public sector wealth destructive process has even outpaced the wealth creation of the private sector.

We are now going backwards into decivilisation, brought on by socialism, and will continue to do so until something dramatic happens to remove the socialists from our backs.

What I find most laughable about this situation is that everybody in the country, except perhaps a few wealthy government fonctionnaires, is saving at the moment, while all are being exhorted to consume. People are choosing NOT to go to a restaurant tonight, or at least to “try that delightful cheap-and-cheerful Italian”, rather than the fancy French restaurant they usually frequent. They are booking CHEAPER holidays, letting their three-year-old car do another year, spending just that little bit LESS on consumer electronics, and PUTTING OFF moving until their dream house gets cheap enough. Nobody is obeying Gordon. All are saving. So our money is to be handed to the most feckless and short-sighted in society, because they alone at least can be trusted to waste this largesse on whisky, fags, and curries, with no second eye on even the immediate future. All hail to the feckless! For they shall be our saviours!

The boom of the last decade designed by Gordon “King Canute” Brown to win several elections for the red socialists, and engineered by his happy workers in the open market operations division of the Bank of England, has come to an end and the unnaturally high prices it generated want to drop. The natural tides and forces of economics and the iron laws of supply and demand are insisting that these prices drop.

It is no good Gordon trying to prevent these drops, as he sits on his throne up to his waist in the waves, and the longer he tries to defy these waves, even with his pets at the Bank of England setting interest rates to 0%, the worse the final calamitous Tsunami will be.

These prices will drop whether Gordon Brown wants them to or not. The only choice is how quickly they do it, and how much pain we have to suffer until the correction of this recession is over. So just let them drop to where they want to go, and then let’s deal with the consequences.

The alternative of pumping in twice as much money, so that prices which want to drop by half ‘appear’ to stay the same, is ludicrous, stupid, and destructive. Yes, it temporarily helps the government and its friends for the reasons described above. But the government is only ever helped by preying on the rest of us.

They should be stopped in their tracks before they destroy our lives completely and drag us into another depression, a Japanese style stagflation, or even a Weimar republic nightmare. Dare I whisper Zimbabwe anyone?

Not that I have much hope of Gordon being brought to task. He is back in his Stalinist bombast mode and none of the intellectual pygmies in the Tory party or the British press seem capable of pricking his gargantuan pomposity. Today the BBC even told me that I should be thankful that prices rose last month at a slower rate than they rose the month before. Gordon’s plan is obviously working then! I think we should all be taken out and thrashed for listening to this gall and for actually wanting to believe that the solution to a crisis brought on by too much government borrowing, spending, and inflation, is for us to allow government to go on yet another tax-fed binge of borrowing, spending, and inflation.

If it gets much worse, I’m going to have to stop buying Bombay Sapphire gin and will need to shift down to the revolting Gordon’s gin. At that point, my friends, I think we will just about be ready for revolution. Or at least, I will.

And so, as the last of my Bombay Sapphire calls me from where I placed it earlier in the fridge, along with its accompanying lemon and Schweppes, I can only say one thing. Cheers!

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