Toby Birch

Articles:

Reformation requires Deformation

By Trevor Roberts March 2008 EU Bankers

Phase I: Breakdown

We are in the early stages of a downturn where the problem is an addiction to debt. We are only just beginning the hangover and we have yet to experience the drudgery of detox and rehab. When a bad system turns sour, few are radical or visionary enough to throw it out and start again. It is human nature to cling to the familiar, even when it has failed. This is why a cathartic end to a corrupted country or currency is a necessary precursor to evolution.

One of many examples of a debt crisis precipitating an uprising can be seen
in eighteenth century France. Through her funding of the American War of
Independence, the country had become highly indebted. The subsequent tax burden and food shortages made the effete aristocracy an easy target for the revolting peasants: a lesson that should not be forgotten today. Napoleon Bonaparte (who witnessed the Revolution first hand) summed up the dangers of debt when he studied an interest rate table and said the deadly facts herein lead me to wonder that this monster interest has not devoured the whole human race. It would have done so long ago if bankruptcy and revolution had not been the counter-poisons.

The classic response to an end-of-era crisis is to apply the same old
mistaken methods, with ever-greater zeal, in a bid to recapture the good old
days. The combination of yet more debt issuance coupled with rate cuts at every opportunity has left western economies addled with over-stimulation. In the new millennium banks forgot the old lessons of self-control and became the tools of their own self-destruction: stewardship was replaced by salesmanship when the public were sold an impossible dream. Negligible wage growth, coupled with inflation and a devaluation of the dollar is leading to a re-balancing of wealth from West to East, at the expense of American consumers.

Capitalism appears to have mutated and deformed, like a spring that is
stretched too far and can never recover its useful purpose. Ironically, the US
Federal Reserve has betrayed the basic doctrine of free enterprise in three
ways: First, the act of repeated rate cuts to protect the financial system from
endemic failure has only served to undermine it. Second, it has allowed money supply to surge which has fermented inflation. Third, by orchestrating a private takeover of Bear Stearns they have destroyed shareholder value. The market should determine the survival of the financially fittest through a form of natural selection and should also decide the break-up price for a failed concern. The message this intervention sends to foreign investors who fund the US current account deficit and prop up the dollar is highly disturbing. It says that investors rights will be subsumed by the national interests of the government. There can be no clearer example of protectionist behaviour; the antithesis to free trade. Given that Sovereign Wealth Funds have already been bailing out US banks, they may be more reluctant to do so in future.