Thereâs nothing like two lords going at it over the future of Britain in Europe, at least to an American like myself. What spectacle! What theatre! Harrumph!
Today, Iâll look at yesterdayâs debate between Lord Lawson and Lord Mandelson over whether Britain should remain in the European Union. Youâll also read some suggestions to the prime ministerâfree of chargeâover reforms to the EU that would make it the kind of club Britain is happy to be a member of.
But first, I owe China an apology. Last week I had a go at corrupt officials from the Chinese Communist Party (CCP) using the government-mandated bank card and payment system, UnionPay, to siphon off cash from the Chinese banking system. That was wrong. I should apologise for that. So I do.
Iâm sorry China
The truth is I have no idea whether the money the Chinese are getting out of the country was gotten legally or illegally. Odds are, there are a fair few corrupt business officials from state-owned enterprises (SOEs) who are using UnionPay to pilfer, embezzle, and flat out steal money from the system. But there are surely many other ordinary savers who are using the rules to save as much of their wealth while they can.
Whatâs more, from a purely rational point of view, youâd have every reason to get your life savings out of a country where the value of the currency was controlled by the state. Itâs your life savings. Who wouldnât want to put them into something solid, like real estate in Vancouver or the beautiful Australian Wedge Tail Eagle gold coin from the Perth Mint?
In any event, as of 1 October, itâs harder to use UnionPay to get your money out of the Chinese banking system. New regulations went into effect on 1 October. From now until the end of 2015, the maximum a Chinese citizen can withdraw overseas is „50,000, or ÂŁ5,145. For all of 2016, the limit will be „100,000, or ÂŁ10,290. A daily withdrawal limit of „10,000 per UnionPay card has also been imposed.
Not to get too philosophical, but the institution of capital controls prompts an obvious question: what is wealth? We all know what money is. Itâs a unit of account, a store of value, and a medium of exchange. But if you canât exchange it, if you canât even get it out of your account, itâs just paper which someone else has custody of. Itâs not even yours. Itâs certainly not wealth.
For money to be usable as wealth, it requires trust; trust in the currency, trust in the payment network, and trust in the counterparties. When that trust breaks down, as it is now all over the world, people scramble for other ways into which to store their wealth. Thatâs why there are so many vacant apartments in Sydney, Melbourne, and Vancouver owned by the Chinese. Better to own bricks and mortar in Brisbane than a bank account in Beijing, right?
IMF cuts global growth forecast
The capital flight from China would slow down if Chinese growth were to speed up. Thatâs not going to happen, according to the latest World Economic Outlook from the International Monetary Fund (IMF). For what itâs worth (which is probably not much), the Fund says China will grow at 6.8% for the rest of 2015, and 6.3% for the rest of the decade.
Get a load of that crystal ball!
How⊠courageous⊠it is to make a forecast for the next five years, especially the current (currency) crisis. But I suppose if youâre an economist at the IMF, you have to do something for a living. You might as well make a guess about Chinese GDP growth.
The IMF also downgraded its forecast for global growth this year to 3.1%. It was 3.5% in April. The Fund cited the capital flight from emerging markets, the knock-on effects from the collapse in commodity prices, and the slower-than-expected growth in the developed world. No surprises there.
On the last note, however, there is hope for stockmarket bulls. The IMF canât find too many reasons for the US Federal Reserve to raise interest this year. Or next year. Or perhaps ever.
In that scenario, where UK and US rates stay low indefinitely, equity bulls have free rein to borrow money and buy stocks. Keep an eye on margin debt. But also keep an eye on short interest ratios in the stock market!
Remember, itâs not paranoia if theyâre really out to get you. Even with the advent of high-frequency trading and algorithms, the game has always been the same. The insiders sell stocks and new financial products to the public with gusto during the bull market. Near the end, when credit peaks and the public is âall inâ, the insiders go short.
What then?
When the last buyer is in and the last shoeshine boy has made his last tip, there are no bids left. Prices fall. The market crashes. The public, acting emotionally, sells. The insiders buy back at the bottom for a song.
Wash, rinse, repeat. Wealth transfer complete. As the author of Ecclesiastes writes, thereâs nothing new under the sun. But you donât have to let it happen to you.
A European Union Britain can live with, and in
Lord Mandelson and Lord Lawson debated Britainâs future in Europe yesterday. Letâs give the decision to Lord Lawson on points, mainly because Lord Mandelson conceded heâd been wrong all these many years on the necessity and utility of monetary union with the rest of the EU.
It took him a long time to admit it. And Lord Lawson rightfully pointed out that if Lord Mandelson was so wrong about joining the euro, why should we trust his judgement on staying in the European Union as itâs currently configured? Good question!
In point of fact, of the 28 members of the European Union only 19 use the common currency. The nine that donât are: Bulgaria, the Czech Republic, Denmark, Hungary, Lithuania, Poland, Romania, Sweden, and of course the UK.
While Iâm at it, let me point out that there are 16 countries in Europe proper who are neither members of the EU nor users of the common currency. Notable members of that group include Iceland, Norway, and Switzerland. They all seem to be doing just fine. The point?
It is possible to be in Europe and not in the European Union. Whatâs more, itâs possible to negotiate your own bi-lateral trade agreements, control your borders, maintain the sovereignty of your parliament and your laws, promote enterprise and liberty and equality, and not be a member of the European Union.
In her 1988 âBruges Speechâ Margaret Thatcher underlined, from her governmentâs perspective, the four principles that would be the foundation of the success of the European Union project in improving the quality of life of members of the Union. Itâs worth noting that the goal of âever closing unionâ doesnât itself imply a focus on the improvement in the quality of life for people who live in Europe. Thatcher sought to shift the goalposts set out vaguely in the Treaty of Rome. She shifted them in favour of classical liberal principles.
Accordingly, her four principles were simple. First, that Europe should be made up of willing and active sovereign states and not a Federal Europe. France should be France, Germany should be Germany, and Britain should be Britain. A union of equal sovereign states would lead to a stronger, safer, and more prosperous Europe.
Second, that the Union should focus on present problems in a practical way. Take border control for example. The current immigration crisis was surely a test of the EU. It will be a test again next summer, when the next wave of migration from the Middle East and North Africa comes again. Yet Germanyâs action, as a key member of the EU, was to suspend EU laws and take unilateral action. If the EU canât solve practical problems like border control, what is it good for?
Third, European Union policies should encourage individual enterprise and initiative and not resort to failed central planning, regulation, and control that donât work. You wouldnât think youâd have to repeat something like this today. The fall of the Soviet Empire was real proof that you canât manage the lives of millions of people at a minute level of detail and create prosperity. All you can do is create a kind of miserable, cowering equality in which the lawmakers and party members live by a different set of rules, enforced with the guns of the secret police.
Her fourth principle was that the European Union should not be a protectionist cartel designed to insulate certain industries from global competition. This is probably the trickiest one for people on both sides of the political spectrum. There is no greater force in the world for lifting people out of poverty than free trade. Yet to protect jobs in industries where labour is cheaper overseas, it is common for every country to impose tariffs on foreign-produced goods and services.
Even today, there is a common market within Europe and tariffs on goods produced without. This protects jobs. But letâs remember our Bastiat. What is âseenâ by the short-term politician and economist is the job that is protected, the wage secured, the vote earned.
What is unseen is that the job protected comes at the expense of higher prices for everyone else, who could otherwise buy the good or service more cheaply. Tariffs and protectionist policies protect labour in favoured industries, but they punish everyone else, and by doing so lower the quality of life for everyone.
Are there some industries, such as agriculture, that itâs in the national interest to protect, event at the cost of higher prices? Maybe so. But thatâs the debate we should have now.
Behind all four principles is a powerful argument thatâs been diluted in the focus group-tested modern political conversation. Free markets and free trade give more people more choices and lower prices. Less regulation and simpler laws promote free societies driven by personal liberty and voluntary trade. The European Union, at least in its current iteration, is dead-set against this philosophy of small government, low taxes, free trade, and sound money.
Of course the world Iâm describing doesnât exist either. But that doesnât mean we shouldnât argue for it on principle. Itâs perplexing that since the collapse of the Berlin Wall, the European Union has steadily embraced the same economic philosophies which led to so much misery and death for so many in Eastern Europe.
Britain should stay in the European Union, but on its own terms. EU regulations should not automatically become British law. The authority of British law lies in the Parliament deriving its power from the consent of the governed. Yet how many Britons know that as of today, a regulation promulgated by the European Commission or a law passed by the European Parliament has the force of British Law?
When Britain went hat-in-hand to the IMF in 1976 for a ÂŁ2.3bn loan, it was the culmination of tough decisions that had been put off too long. It was also the result of wrong-headed thinking about how to create prosperity and opportunity in a free society. Thatcher emerged from that morass and enjoyed remarkable success.
But remember last week when I talked about cultural memory? When you lose a direct, living connection with an experience, you lose all the urgency and immediacy of the lessons people learned the hard way. You make the same mistakes again.
Today, Britain is in a position of relative strength. I myself have grave concerns about the level of public and private debt. And even graver concerns about what happens to that debt when interest rate rise. But those issues are separate from Britainâs role in the European Union.
For Britain to stay, itâs the European Union that must change. And to get a European Union to change, the prime minister needs to say, in broad and principled terms, what he and Britain stand for. It is not enough to be against the small and petty tyrannies of bureaucracy that we all detest. Itâs time to stand up for something more.
Of course none of that is likely to happen. And our main concern here at Capital and Conflict is what you can do with your money, not public policy or the national interest. Still, somebody needs to say it. If you have a digital soap-box you might as well use it. Back to economics and stockmarkets tomorrow.
Harrumph!
Category: Brexit