You’ve got to pick a pocket or two

I postulated at the end of my last article that the government is going to steal lots of money from you – whether you have any savings or not – so an explanation of how that is going to happen may be helpful before we move onto what you can do to protect yourselves.

Let’s start with the question what is money? Whilst this may at first glance appear to be a case for Sherlock and his trusty sidekick Mr ‘No s**t’ – it’s actually fundamental to understanding what happens next. Money needs to have certain qualities to be money. So for example why not use peaches as money? Well you could wait 8 weeks and see if the person you are trying to pay is happy to accept this ‘attractive’ fungal infested ball of mush? So perhaps we would like our money to be inert? Or why not use steel girders as money? Have you tried picking one up recently? So money needs to be portable. You get the idea. For a more detailed understanding of why not so many elements can act as money watch this.

So following this line of logic we end up with money needing to fulfil the following criteria:

  1. Acts as a unit of account or a measure
  2. Is a convenient medium of exchange
  3. Easily divisible
  4. Is portable
  5. A standard – acts as a store of value i.e. holds its purchasing power over time
  6. Everyone has faith in it

Now paper currency generally manages the first four criteria quite well but often fails on point 5 which in extreme circumstances can lead to it also failing on point 6. So for example the British pound has over the last century lost more than 95% of its purchasing power. That’s called inflation but what you may not know is that it is often deliberately manufactured and ‘printing’ money is one way to guarantee it does. This has been called ‘legalised counterfeiting’ by Murray Rothbard and it’s the government’s number 1 stealth tax. Let’s take a moment to explain it before we get to exactly how insidious it really is.

Imagine you are a counterfeiter producing £5 notes. You are so good at your chosen profession that no-one can tell the difference between the fake £5 and the real ones. You print lots of £5 notes and start spending them. This has two effects:

  • The total money supply of the country increases, thus driving up prices because the purchasing power of the existing currency unit is decreased. This decrease is directly proportional to the amount of fake cash you put into circulation.
  • You get richer whilst everyone else gets poorer. You get to swop your paper for tangible goods of real value meaning if you are first in the chain you get the benefit

The same is true if the counterfeiter happens to be the government or the central bank. By diluting the money supply it acts as a wealth transfer mechanism to the state and/or the banks at the expense of the general populous i.e. they get the benefit and you suffer the consequences. Even if you do not have savings it lowers the value of your existing wages because they no longer buy what they did. It’s just you don’t notice it because it happens over as period of time. Covert daylight robbery anyone? Or as John Maynard Keynes put it

‘By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose’.

So in the paper money printing world you may think

£5 + £5 = £10

It doesn’t. If you double the total money supply overnight you halve the value of it. So you could say

£5 + £5 = £5

As a country you cannot get richer by printing money otherwise we could just print as many notes as required and everyone would be an overnight billionaire. Trust me, it’s been tried and has failed every single time. I recently bought a $100 trillion Zimbabwean note off EBay for £1.96. It fair to say not only has its purchasing power decreased a tad but no longer does anyone have any faith in it. It’s now defunct. Couldn’t happen here in the UK right?

Pinso 100 trillion

Well unfortunately it can and more to the point possibly will. Every paper currency system ever created fails over time – no exceptions. The problem is that the money supply can easily be stretched too far and this elasticity can and does get over egged. Elastic money is like elastic in knickers. You can have a lot of fun stretching it a long way but eventually it snaps and, just like the lingerie version, once it does, you are going to be severely embarrassed when it’s limply hanging around your ankles. It’s now worthless but fiddling with it proved irresistible.

“Men would first have to be capable of unlimited self-discipline to resist any temptation to increase money arbitrarily, even if their very existence were at stake” – Adolph Wagner, 1868

So to summarise there are two types of tax – one overt and one covert. Income tax is overt and redistributes wealth from the rich to the poor; and inflation, which is covert, transfers wealth from the poor to the rich – and guess which one is the more effective at performing its role?

Furthermore, our financial system is effectively a type of Ponzi scheme.

Everyone has been overpromised so much that the chances of escaping our debt without default look slim. If you add in unfunded liabilities it looks like a mathematical impossibility. Now the country can avoid default but it needs growth (as in an industrial revolution 2.0 sized growth!) – Which doesn’t look like its turning up anytime soon. So that leaves 3 other possibilities:

  1. Outright default (see Iceland) – bit tricky to pull this one off when, as in the case of the UK, your main country activity is banking.
  2. Default by stealth – print as much money as possible so the current debts get eroded to almost nothing. This is sometimes called a technical default.
  3. Overt theft (see Cyprus) – otherwise known as a ‘bail-in’.

So the most likely outcome is option 2. Anyone with any savings, pensions etc are going to have it stolen off them most probably via severe purchasing power destruction. It’s not that ‘the powers that be’ necessarily want to, it’s just that to maintain the status quo they won’t have any choice. As we said previously: ‘If you can’t pay, you won’t pay’.

Having savings or a £20,000 per year pension isn’t much help if it only buys a loaf of bread now is it? Of course you could take any savings you have out of paper currency and hold them in the some of the few assets that retain purchasing power over time. And we’ll get to what those are in a future post. Oh… and if you can time the deflation/inflation game correctly and use paper money to buy tangible assets before the value of the paper currency gets destroyed – you might do very well indeed.


One Response to You’ve got to pick a pocket or two

  1. Nicholas Duddy June 3, 2013 at 8:00 am

    Check this article out. It’s long and depressing but spot on.

    Also check out the book Aftershock!

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