Cooking up Indigestion13th May 2013


I am a sucker for great food, and much of the foodie experience surrounds the environment, the ambience and the service … in short, the presentation. But the starting point is sound ingredients, respected and delivered with care, artistry and creativity. The heights to which our top chefs now strive is truly inspirational, and the process wonderful to behold.

In rather stark contrast, the efforts of those seeking to manipulate and control our economy, applying burnished presentation skills to promote their discredited techniques and poor ingredients, is neither a recipe for success nor something that we should put up with. In the short term much can be hidden with effective presentation, but eventually the truth will out.

Or will it? Last week I read the last blog of one great truth-teller, Terry Smith, CEO of Tullett Prebon, under the title “What’s the Point?” Clearly a bad day for him, and sadly he has “decided to cease commenting” in the face of “ignorance, indifference and prejudice” as “the process of commentary has become too politicised, too few people want to be told the truth, whilst much of the media has become totally unfit for purpose yet they are still believed”.

And yet there does seem to be a rising understanding that our masters really don’t have a clue what they are doing, as conceded by one Lorenzo Bini Smaghi, a former member of the European Central Bank’s executive board. He told the Spring meeting of the IMF “we don’t fully understand what is happening in advanced economies” Hoorah! So why do so many of his colleagues pretend that they do?

Jeremy Clarkson sees the light, and in his inimitable manner in the Sunday Times last week pointed out that GDP growth has arisen in Belgium, a country that has lacked a functioning Government for 541 days; “… no new taxes, no new regulations, no new quangos. And it worked.”

With this outbreak of free thinking we may even go on to question the economic policies foisted upon us. And right on cue, the excellent Stephen King (HSBC’s Group Chief Economist) recently asked in the FT “Our masters of money may hope that faster economic growth will arrive, but are they right to think that monetary policy can be recalibrated to deliver the goods?” As he goes on to say, the evidence to date is hardly encouraging, and rather than delivering a robust economy, monetary policy may only serve to redistribute the inevitable losses associated with the financial crisis. In short, that means (and these are my words) bungled policies spreading the pain amongst the innocent as we move further from a rational to a politicised economic environment.

In contrast to those who favour presentation rather than what is really on the plate, I expect to be on the receiving end of much good free-thinking this week, as my diary starts with exposure to the straight talking Ruth Lea of Arbuthnot and closes with the highly researched market views of Russell Napier at the Moneyweek Conference. I intend to share these experiences with my kind readers.

For the present, we must face the fact that we have to play with the cards we are dealt, and that is discredited policies and an unstable monetary system. We are left with a sobering world of sub-optimal growth and greater risk, and whilst there are many opportunities to be found by entrepreneurs, we can expect life to be harder than the merry days leading up to the crisis. Hope is not a strategy, and yet our masters continue to ply their unsound policies, wishing that this time or next they might work, even just a little bit. So they blow bubbles, causing indigestion all around.

If we are to return the kitchen to impeccable standards, the recipe includes restoring market interest rates to their true level, in order to reward savings, allowing mal-investment to fail, allowing assets to find a fair market price, enabling fresh investment, reducing financial leverage and cutting the incentive for the state to sustain debts and deficits at our expense. This can all be summed up as “sound money”, which carries the knock-on merits of giving the next generation a chance in life. Match that with some major fiscal incentives (lower, simpler tax and less government) and we miraculously become motivated, drive growth and society prospers.

Looking at what we can learn from history, the greatest study of America’s Great Depression by Murray Rothbard showed that recovery was nothing to do with the popular mythology of the “New Deal” or WW2. It was a shock, just as we have recently experienced, caused by rampant credit expansion, and not the consequence of a normal business cycle. In his words “If taxes and government spending are both slashed, then the salutary result will be to lower the parasitic burden … upon the productive activities of the private sector”.

His conclusion stands as a beacon set against the failed spend-and-borrow versus austerity argument, both sides arguing about the nuances and speed of switching from one to the other and back again, all designed to sustain a system that has been proven to fail us all.

Note that Rothbard proposes deficit reduction through tax cuts. Reducing tax stimulates economic activity. That’s lower taxes and cutting government spending, not next year, or the year-after, or some clever below-inflation increase, but big changes, now.

We need real political will to restore the merits of work, productivity and thrift. Time to change the chef?