Posted by: cjenscook | 04/23/2009

All the King’s Horses…..

As I watched Alistair Darling presenting the UK Budget yesterday it was the fact that the Conservative opposition were genuinely irate – as opposed to the normal ersatz indignation – that made me realise that this time Humpty Dumpty cannot be put back together again.

It’s not because Darling has not the remotest idea how to solve the current problems that I was led to this conclusion. It was because the Opposition think that they have a solution, and that cutting expenditure is it.

For the last thirty years or so we have been in a recession disguised by the capability of the growing army of homeowners to use their homes as an ATM. This borrowing disguised the fact that most of the rewards from the technology productivity boom have gone to investors, and that earnings have been stagnant, at best.

We have seen the Mother of All Bubbles in property and private equity, caused by the outsourcing of credit risk by banks to “shadow bank” investors. The continuing deflation of this bubble, and the destruction of money which results, is a Black Hole draining credit out of the system.

No problem, say the voodoo policy makers. If the interest rate steering wheel has come away in our hands, we can still print as much money as we like and give the banks as much liquidity as they need by buying up their loans, including all the rubbish.

So now the banks are awash in funds, but they are still not lending. Why might that be?

A Lady Chatterley Moment

The answer is a form of financial pornography, which no decent newspaper would print until the Lehman Brothers bankruptcy saw the end of financial prurience about the mechanics of banks and banking in the Press. The Lehman debacle was a Lady Chatterley moment after which it has become successively both possible, and now almost mandatory, for journalists to heap ordure on the banks.

Now that governments are fully engaged in addressing the crisis, there is no shortage of credit. Treasuries and Central Banks between them can create as much credit as they like, and it may be spent or lent into circulation. Spending it on productive assets should help, for sure, but this won’t stem the haemorrhage of credit from the system. More to the point, it won’t make banks any more likely to lend.

The reason banks aren’t lending is simply that there are not enough creditworthy projects or people left. The reason that people are no longer creditworthy is a toxic combination of compound interest on debt with private ownership of the finite supply of land. This has achieved once again – in spectacular style – what it has done periodically for thousands of years and has concentrated wealth in the hands of the few, at the expense of the many.

Mr Darling has now run out of money to spend, because the tax base – which consists mainly of taxes on earned income both individual and corporate – is collapsing with the economy. The Budget showed that he dare not increase the planned deficit still further and thereby run up yet more debt.

Systemic Fiscal Reform

The only solution is a completely new approach to taxation and spending: Systemic Fiscal Reform.

We have been here before, in 1909, with Lloyd George’s People’s Budget. Historians tend to dwell on the successful introduction by that Budget of old age pensions, and the increase of income tax. But what led the the House of Lords to veto the Budget, for the first time in hundreds of years, was the proposed tax on Land Value, which was a direct attack on the privileges of the landed aristocracy who then comprised the Upper House.

This Land Value tax was the creation of perhaps the greatest political economist the United States ever produced – Henry George. The principle behind the tax is that those who have the privilege of exclusive rights of use of the Commons of land should compensate the rest of Society.

While this thinking was hugely popular – George’s book “Progress and Poverty” sold in the millions – the privileged struck back by funding over a period of years a complete new Neo-Classical economics which discredited both George and his ideas and airbrushed him from history.

This was achieved by making assumptions – for instance, that only labour is productive, and that money (apart from cash) necessarily consists of interest-bearing debt created by banks – that are totally detached from reality.

By way of example, we are led to believe that when a factory is automated, the sole remaining operative, who switches the factory on and off, has magically become infinitely “productive”. Worse, we have the Public/Private rhetoric that baldly assumes that a nurse working for the NHS is unproductive, while the minute she does the exact same job for the particular legal construct known as the Corporation then she is magically productive. This is complete nonsense and serves to justify the otherwise unjustifiable. Orwell would have been proud at this use of language.

In addition to taxing the privilege of the exclusive use of the Commons of land, we might now extend the principle to the Commons of non-renewable resources generally, and carbon fuels in particular. And we may also make a levy on the privilege of Limitation Of Liability through applying a levy on gross corporate revenues.

Such taxes or levies on privilege, rather than people, are simple, fair, and pretty much unavoidable. They could be used to sweep away virtually all other taxes and all the huge costs in the public and private sector associated with enforcing them.

I don’t expect either Mr Darling or the Conservatives to implement such a radical People’s Budget any time soon. So what happens now? The Conservative spending cuts would lead to further defaults, money destruction and Depression; whereas Mr Darling’s path of money creation, and quantitative easing of the rich, leads directly to Inflation.

I argue that it will not be either. The emergence of the direct Peer to Peer connections of the Internet will enable the financial system to be by-passed through a viral process I refer to as Napsterisation – after the disruptive software which has changed the music industry for ever.

To paraphrase John Gilmore:

“The Internet interprets privilege as damage and routes around it.”

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