Failing states and strangled economies

by Alasdair Macleod, GoldMoney:

Fickle markets have stopped worrying about inflation and begun to worry about recession. Both the financial establishment and investors seem incapable of understanding that it is not either one or the other, but both together.

Behind the inevitable crisis which is now emerging is a lack of understanding that it is not supply chain failures, or an evil President of Russia that have caused our current predicament, but our previous monetary excesses. And to add to our troubles we have elected a weak political class incapable of even preserving a scintilla of moral standards. In addition to the re-education required of our leaders, it renders a resolution of the developing credit and currency crisis virtually impossible.


We face a downturn of exceptional destruction in the bank credit cycle, even rivalling that of the 1930s. With today’s fiat currencies and governments determined to bail out everyone from the consequences of their actions, we have a global systemic and currency crisis without the wise heads required to steer us through it. 

The lessons from history are clear. Currencies and the entire credit system are staring collapse in the face, which will ensure the impoverishment of nearly everyone. These are the conditions which lead to calls for strong leadership, for leaders willing to ride roughshod over vested interests. A different form of socialism will be called for instead of free markets. These are the conditions that led Germany, Italy, and Spain in the 1920s into fascist dictatorships.

To understand and hopefully avoid these dangers, it is time to reprise Hayek’s “The Road to Serfdom”, and to understand that if nations are not steered wisely through the forthcoming financial hurricane, the long run political consequences will also be dire.

The decline and fall of the West

We are seeing, perhaps, a rerun of Rome’s multi-century decline ourselves, but our socio-economic decline is progressing at a far quicker pace. Though there have been some examples of old-fashioned barbarity in our wider spheres of influence, we are not so much driven by a Nero or a Caligula, but by the absence of statesmen, denial of capitalism, and the promotion of wishy-washy socialism. Our decline is evidenced in the erosion of our work ethic, hate of capitalism, and a widespread belief in entitlement for which the state is expected to provide. It threatens to be a terminal decline in established morality based on Judeo-Christian values.

Politicians are aiding and abetting the trend by refusing to address it. They even refuse to stand up for established definitions of gender. Presumably, they don’t want to encourage hate mail from a very vociferous but miniscule minority — anything for an easy life. But creeping anti-morality has adverse consequences. Government departments now have “diversity advisers”, and other woke police, and are bound through regulations to adhere to their irrelevant strictures. Universities are riddled with woke nonsense, and no one in authority has the authority to stop it. History is being rewritten to include new biases, political correctness being more important than historical facts.

It infects business. Publishers and filmmakers are raking in money from the Harry Potter series but refuse to acknowledge the author whose only crime was to point out that a woman is a woman, and a man is a man. 

It is symptomatic of moral decline, leading to societal breakdown, and a political system incapable of dealing with adverse headwinds. This baloney is indicative of a deep malaise affecting all Western nations. I take as an example the moral decline of the UK, because that is where I live. I ask readers elsewhere to compare their experience with that of Britain, and I’m sure they will see similarities. 

Today it is a far cry from what was expected at the UK’s general election in December 2019. A Conservative government was elected on a free market manifesto. Brexit was to be done and Britain was to be unshackled from the EU customs area. Freeports were to spring up as centres of excellence. Britain had a prosperous future to look forward to as an entrepôt. Bureaucratic wastage was to be eliminated and the civil service to be made more focused upon outcomes. A bonfire of EU regulations was to be lit. With the Johnson government having collapsed this morning, he is not being rejected due to his failure to deliver on his manifesto, and a replacement administration is likely to be no better.

It is easy to blame the Conservative government’s change of heart about free markets on the unexpected diversion by the covid pandemic. But that has passed, and we see no signs of the earlier manifesto pledges being respected. If anything, being able to exercise even greater power over its population has gone to ministers’ heads. Instead, the British government has been grandstanding, first on climate change, and more recently on something which has very little to do with UK citizens and made their lives even more difficult thanks to sanctions — the war in Ukraine. Anything other than addressing the issues upon which the government was elected was the policy. Instead of responsibly managing the burden of the state upon its people, it is far easier for a government to throw money at day-to-day problems.

The reality behind government spending is it rarely achieves its intended objective, making things worse not better. As Milton Friedman famously quipped, if the government oversaw the Sahara, there’d be a shortage of sand. 

The largest sinkhole for state spending is the UK’s national health system, and every crisis demands more money, more regulation and more bureaucracy. The reasons doctors are leaving the profession are not just stress and burnout. Public heath doctors “are buried in vaccination programmes, time-consuming and impersonal remote consultations, overwhelming bureaucracy, and failing management”.[i] And what applies to doctors applies to nursing staff as well.

These are professionals who joined the health service with a sense of vocation, only to find all their altruism driven out of them under the supervision of highly paid administrators and bureaucrats. A combination of lack of staff, high sickness levels of those employed, low morale, and stultifying bureaucracy is leading to a systemic breakdown. The government’s response is reminiscent of Nero: where he debased the coinage to pay his bills, today’s sterling is debased for a similar purpose. Debased currency is fed into the National Health Service along with additional bureaucracy to administer it.

Not only is the state failing the common man, but it has become an impossibly costly burden upon him. It is a failing state. The problem is common to all other nations whose populations believe the state exists to provide them with a living and free services.

The mistake of underappreciating economic evolution

In early 2020. the world stopped as governments mutually agreed to lockdown their populations completely in response to the covid pandemic. All but the most basic of economic activities were to cease. With further lockdowns, it was not until eighteen months passed that these restrictions on human activity gradually ended — though some restrictions remain in place and China still shuts down whole cities in response to minor outbreaks of the virus.

Governments everywhere appear to have assumed that after lockdowns everything would just return to normal, where it had left off. They acted as if human activity had been cryogenically suspended. Besides the teething troubles of returning to normal, no account had been taken of the change in the attitudes of ordinary people. Many of them didn’t want to return to work, and where they could, often opted for early retirement. Others decided they could continue to work from home for a far less stressful life than the daily commute and are refusing to return to their offices. Some reflected that those long hours for pay that fails to keep pace with rising prices were not worth turning up for. Covid lockdowns seem to have got workers facing the drudgery of earning a living anew to just jack it in.

To the frustration of government economists, economies have not returned to where they were when locked down as they had hoped. Nothing was in the right place: shipping containers, foreign production, domestic labour. Working from their computer models, they failed to understand that it is human desires, which are at the root of all demand, and they don’t stop evolving. And apart from the inevitable supply disruptions, an economy after prolonged lockdowns is bound to be materially different from before.

Supply chains remain disrupted, and shortages have replaced a previous abundance. Hire car firms illustrate this point. Before lockdowns, operators obtained fleets of unsold cars at substantial price discounts, and now have to pay full retail prices for cars, if they are available which often, they are not. With all other costs of running a car hire business, it means that hire car rates in the US have doubled, and according to The Guardian (30 May), the price of car hire in Tenerife booked for August has risen by 220% over August 2021.

Despite the evidence, governments still insist that these are temporary difficulties, which will disappear in time and that normality will return. Government economists feel no need to revise their expectations that the disruption of rising prices will pass. It’s just taking a bit longer than they expected for us to conform with their computer models.

This line of thinking has been seen before. Karl Wirth, the German Chancellor in 1922 along with his cabinet colleagues, the Reichsbank, parliament and the press all denied any connection between soaring prices and the paper mark’s debasement.[ii] We look back on those times with utter disbelief at the German establishment’s naivety. 

This wilful ignorance was not confined to Germany during its hyperinflation. Today, it is common groupthink across all Western nations. And like the German establishment’s naivety at that time, we fail to recognise the root cause of our own inflation-driven problems today.

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