“Giving money and power to government is like giving whiskey and car keys to teenage boys.” – P.J. O’Rourke
Q1 2021 hedge fund letters, conferences and more
The Dark Side of QE Infinity
Last week I wrote about how ultra easy monetary policy is destroying personal wealth, distorting markets and causing governments to do dumb things.
When you give a government infinite access to money, money itself ceases to be a measure of value. Without that measure, the state has no way of prioritising and no sense of proportion, leaving vested interests and personal biases to run amok.
There are many nasty consequences to this. The most worrying is the erosion of civil liberties. The freedom of Western democracies is something to be cherished. It was hard won: built by generations of courageous men and women who spoke for it, campaigned for it, fought for it and sometimes died for it.
Yet the concept of true freedom has always been a fragile one. And now, with the help of central banks, governments are taking those freedoms back.
How Free Market Economics Drives Liberty
If we look at the great civil rights achievements, they all have one commonality – an economic rationale.
This might surprise you, but it is not a new idea. Go back to the abolitionists of the 18th century, and the idea of personal freedom driving societal wealth was at the heart of their enlightened thinking.
Economics was also central to the US civil rights movement of the 50s and 60s. While a minority fought hard for the rights of African Americans and women, most people at the time were actually quite ambivalent. What got them over the line again and again was the promise of economic benefits. Including more people in society would drive worker participation, business formation, home ownership and ultimately wealth.
Simultaneously, UK Prime Minister Harold Wilson put through a raft of liberal reforms including legalising homosexuality. Surveys at the time showed the public were still strongly opposed to homosexuality. They just didn’t think the police and the courts (battling a wave of rising crime and shrinking budgets) should be wasting time and resources on it.
The end of South African apartheid was also precipitated by an increasingly troubled economy, as a result of international embargoes and growing unrest.
There is a good reason why freedom and economics go hand in hand. It’s because restricting people is so expensive. By the time someone sets foot in a criminal court room, the bill will already be well over $10,000. There is endless paperwork. Everything has to be meticulously recorded. As well as police there is security, clerks, judges, recorders and lawyers. A single prison place costs nearly $40,000 a year in the US, and over $60000 in the UK. Worse still, criminalising people usually makes them more likely to reoffend in future: introducing them to other criminals, leaving them socially isolated and blocking them from jobs and training.
By contrast, freeing people creates wealth. Providing they are not directly harming each other, free people go out into the world and do stuff: producing, consuming and creating at every turn.
This matters to governments, because governments are full of people who want to change things. Unfortunately, changing things is expensive, so governments always want more money. Normally that means they have to earn it, by freeing up resources and freeing up people.
I say normally, because that is not the case now. Instead, they have to do the opposite. Run the economy well, and the central bank will push against you with monetary tightening. Run it badly by restricting and regulating activity, and the central bank will write you bigger and bigger cheques. In the new age of Modern Monetary Theory (MMT), it pays to be a tyrant.
Drunk on Money, Drunk on Power
It was the historian Lord Acton who famously observed, “Power tends to corrupt, and absolute power corrupts absolutely.”
Since then, psychology has demonstrated how prolonged exposure to power turns pretty much everyone into a tyrant. The infamous Stanford Prison Experiment shows how giving well-educated students positions of power could transform their behaviour in a matter of days. The Daedalus trust is an organisation devoted entirely to the study of how prolonged exposure to power alters the functioning of people’s brains, down to its very architecture and chemical balances.[i]
What stops most people becoming tyrants is a combination of things; such as failures, democratic elections and crucially, lack of resources. Without those things to peg us back, the little dictator inside all of us would eventually emerge. This is what we are seeing now, largely as a result of MMT. Governments can now fund increasingly restrictive policies and ever more surveillance, with the costs and economic damage offset by fiat money. If a group of voters object, they can be bought off with more fiat money, either directly, or through new rounds benefits, jobs and government services.
The Rule of Lawyers
Perhaps the best example of this creeping tyranny is the explosion in regulation. You can see this in all the major economies, and it has been accelerating ever since central banks began their long path of monetary easing in the late 1980’s.
From 1970 to 2017, the number of words in the Code of Federal Regulations (CFR) nearly tripled from 35 million to over 103 million, amounting to over 168,000 pages. There are over 70 federal regulatory agencies, employing over a quarter of a million people to write and implement regulations. Every year, they issue about 3,500 new rules.
What does this mean for the real economy? According to the Adam Smith Institute:
“Federal regulations added over the past fifty years have reduced real output growth by about two percentage points on average...It's worth thinking about that for a moment. Each individual American, the society as a whole, would be three times richer than they are if there had not been that explosion of regulation of the economy since WWII. That sort of increase in wealth buys quite a lot of people harmed by the lack of regulation.”[ii]
Tragically, studies have also shown that over-regulation disproportionately impacts lower-income households and leads to greater inequality. This is often down to ‘regulatory capture’ whereby regulations favour large, established corporations and impose barriers to entry, stifling competition and entrepreneurism. It is no surprise that states with the most regulation also have the highest poverty rates.[iii]
But it’s not just over-regulation and bureaucracy; there are signs of real tyranny emerging. My home country, the UK, has historically been a beacon of civil liberties. Yet it also had one of the most draconian lockdowns in the world, effectively imprisoning people in their homes for over a year, with no access to culture, education, sports or social activities. Punishments include a ten year jail sentence for anyone arriving in the UK and not following quarantine protocols correctly. Further, many of the measures were not supported by any scientific rationale – so in spite of this, we still had among the worse Covid death rates in the world.
To add to the sense of autocracy, the media regulator, Ofcom, warned broadcasters not to stray from the government line. Hence, critiques of the UK’s handling of the pandemic have had to be published in non-UK media outlets.
Then last month, the government passed a 300 page policing bill that heavily regulates public protests, to the point of making them near impossible. This comes on the back of 2016 legislation which put surveillance powers effectively on a par with China. Scotland meanwhile, passed a ‘Hate Crimes’ bill, that criminalises almost any speech that could be seen as offensive. The legislation is so broad that someone reading aloud any of the world’s major religious texts in their own home could find themselves jailed for seven years! And now there is a campaign to make wolf-whistling or chatting someone up in the street a crime!
To put these measures in perspective, the terrorist who blew up Pan-Am Flight 103, killing 243 people, served eight years before being released by the Scottish Government. Usman Khan, the London Bridge terrorist, was jailed for seven years for training as a terrorist with the aim of blowing up multiple crowded buildings, including Parliament and several synagogues.
Let’s think about this for a moment. Imagine a terrorist boards a plane for the UK, shouts ‘death to Non-Muslims,’ before blowing up the plane, parachuting out and running off. If he were caught, he would serve as long for hate speech and even longer for skipping quarantine rules, as he would for murdering all the passengers!
Normally, the regulatory cycle is like a pendulum. When there is too much, the economy shrinks, unemployment rises, governments run short of money, and voters push for more liberty. Unfortunately, endless cycles of monetary easing mean we never get that signal. Instead, damaging tyranny grows unchecked. The more this hurts the economy, the more central banks reward it with cheaper and cheaper money. Thus, governments can offset the damage with round after round of spending and welfare packages. As more and more voters become reliant on government jobs, welfare, pensions and healthcare, they are effectively bribed into submission.
Conclusion
Last week I wrote about how MMT was leading to the enormous misallocation of societies’ resources, destroying economic growth and personal wealth. But the gradual appropriation of our hard-won freedoms is yet another example of the insidiousness of new-age central bank policies, under the banner of Modern Monetary Theory.
The cost and value of money is one of the most important checks on government power and a guardian of our freedoms.
Without it, there is no sense of proportion, and crucially no feedback. MMT acts like an anaesthetic, effectively allowing us to harm ourselves without sensing the damage. In fact MMT actually promotes over-regulation and economic destruction, stepping in to subsidise economic failure and to punish liberalising and pro-growth measures.
Furthermore, state tyranny is cruellest on the poor – those most likely to end up on the wrong side of the law, and those who suffer most from rising inequality.
This is not what economists and central bankers theorized, let alone desired; yet greater state control and even tyranny is the result of their policies.
For an entire generation there has been a gradual dismantling of the great pillars of Western democracy: Freedom and wealth creation.
Without them, the West has lost its purpose. To rediscover that purpose, we must rediscover the value of money.
[i] Daedalus Trust | DaedalusTrust.com committed to raising Hubris Awareness
How having power is like having brain damage: a new book explains why systems fail | Daedalus Trust
[ii] The costs of regulation and why we're not creating enough jobs — Adam Smith Institute [iii] How Too Much Regulation Hurts America's Poor (forbes.com)
