In case you haven’t noticed during our recent videos with Nigel Farage, there’s a picture hanging on the wall behind me. It’s a black and white portrait of the economist Milton Friedman. He’s grinning away mischievously, and his signature appears underneath. Don’t tell anyone, but the signature is just printed on. At least, that’s what my friends told me when they gave it to me. So, it could be real…
The quote on a placard below his image says, “Governments never learn. Only people learn.” But Milton got it wrong. People don’t seem to learn at all. At least, not enough of them.
2022 has been the year of economic fallacies. These have returned like never before, with governments repeating so many of their past mistakes that it’s tough for me to keep up with them all.
Some of the blunders are so obvious I didn’t expect to see them again. So many policies thought to be dead and buried have made a comeback. Ideas assigned to the dustbin of economic history are now front-page news once more.
And, quite frankly, I don’t see any Milton Friedman or F.A. Hayek there to argue our way out of this mess for us. There’s no true free-market champion to turn to. And people are too scared after the last two-and-a-half years of government-imposed chaos to listen carefully to the less-charismatic free marketeers.
Maybe I should add some meat to the bones of my argument before we look at where all this is going…
Exhibit number one has been the attempt by governments around the world to alleviate inflation by spending more money.
This is so dumb that even the politicians who imposed the same policy on their supporters in the past had to abandon it. Back then, they even figured out and explained why it was a bad idea, rather than just appointing another politician with a different economic adviser.
James Callaghan explained it to the Labour Party in Blackpool in 1976:
We will fail […] if we think we can buy our way out by printing what Denis Healey calls ‘confetti money’ to pay ourselves more than we produce.
Today, governments are trying to do precisely that again. They’re printing money to solve an energy shortage crisis.
But we’ve covered that enough. Consider the more obvious and simple blunders.
In Austria and the US, governments have launched stimulus spending to help people with inflation. Bloomberg: “Austria Offers 1,000 Euro Handouts to Quash Inflation Discontent”. This is like the old saying, “The beatings will continue until morale improves.” The government spending will continue until inflation improves…
In the United States, the oxymoronic and moronic Inflation Reduction Act will not reduce inflation according to the government’s own figures, but it could increase it. I think it will increase it substantially.
The Americans are also busy forgiving student loans – a blatantly inflationary policy. The monetisation of debt is pretty much the most direct way of expanding the money supply.
Not to be outdone, the Bank of England is bailing out energy companies using its own balance sheet – which is more or less the definition of inflation. This headline from the Telegraph made me chuckle: “Bank of England to lend energy industry £40bn to deal with surging prices”. Causing inflation by lending to the government isn’t inflationary enough anymore. So the central bank is now lending to the private sector, too.
In Australia, the government has been busily bidding up the property market in order to solve the unaffordable housing crisis. Read that again carefully if you’re not weeping or laughing about it.
Enough journalists and economists called the government’s “first homeowner’s grant” the “home vendor’s grant” for there to be no excuses. Everyone knows government programmes are the cause of the unaffordable property in the first place. But politicians tend to own homes…
Having pushed property to an unaffordable new level with past programmes, the latest scheme from the Australian government takes things to a whole new level. It is offering to take a 40% equity stake in the homes of new buyers! As if that won’t just increase prices by a corresponding amount.
Another good example was beautifully exposed in a very Milton Friedmanesque way. When the Inflation Reduction Act promised EV credits of $7,500 for new cars, car companies promptly raised prices by almost as much…
The Europeans, meanwhile, have lost it completely. Instead of just applying windfall taxes on those still producing and providing evil oil and gas to Europe, they’ve gone after their own as well. Renewable energy providers are now also being targeted with windfall taxes.
CNN: “On Wednesday, the European Commission proposed capping the profits of renewable and nuclear electricity producers, and taxing the windfall earnings of oil and gas companies.”
Why? Because the EU’s energy market design bases electricity market prices on gas prices. At least, that’s how it usually unfolds when market prices are set. Which is insane, given where that gas is coming from… or rather was coming from.
Anyway, when gas prices went berserk, so, too, did electricity prices and, thereby, the profits which electricity producers – who don’t use expensive gas – can make. But only because of the way the EU market is set up.
EU Commission President Ursula von der Leyen explained, “These companies are making revenues they never accounted for, they never even dreamt of.” And so she proposes reform. After the energy crisis has begun.
But the high prices are ultimately because of a lack of energy. How do you get more energy online? By taxing those making a profit by providing it?
As Milton Friedman explained to countless people during his career changing minds, it is the profit of today’s energy producers that makes tomorrow’s energy. The huge profits reflect the desperate need to get more energy, and they are also the huge incentive. Government windfall taxes reduce the incentive and will reduce energy supplied. That is, after all, why there’s a lack of energy in the EU in the first place.
In the UK, financial support for energy bills will, of course, just increase prices further. There’s a reason energy prices are spiking, after all. There’s not enough of it. Supply and demand always clear. It’s just a question of how.
If prices are artificially cheap by way of a price cap or subsidy, this disincentivises production and incentivises over-usage.
The only thing worse than high prices is shortages and rationing. But imposing price caps delivers precisely that…
The good news is that the EU’s price cap on Russian oil and gas was cancelled in the end. Enough national governments who are actually accountable to voters decided it was just too obvious a blunder with too severe consequences.
Instead, the plan is to cut energy usage. Which is more obvious and more severe in outcome…
It’s also a wonderful example of putting the cart before the horse – a fallacy that predates even Milton Friedman.
Of course, there are less obvious debacles being caused by governments too. Lessons that people like Friedman taught for years, but which require some thought.
For example, Europe may have upended the world’s gas markets. But the wealthy continent can largely afford higher fuel and food prices.
Right now, it’s paying terrifying amounts to fill its gas-storage sites. Which is why electricity prices have spiked and why, given the way the energy markets are structured in the EU, renewable energy producers are making so much money.
When you and I hoard something, driving up its price, that’s evil. When the government does it, it’s good…
Back to the story. When there’s a shortage of energy and food, Europe will be able to keep its lights on and people fed. It will just pay a high price.
The real question is, who can’t pay? Whose gas and fare is Europe buying to fill its storage and keep food on the table?
We’re going to find out. But I suspect the humanitarian consequences will be worse than the catastrophe in Ukraine.
So that’s the meat on the bones of the argument. We’ve seen all this before. All these government policies were proven to be a nightmare countless times throughout history.
The good news is that this makes their consequences predictable, too. Which is why investors need to be prepared for those consequences.
The real point is that you can’t defeat the laws of supply and demand, which set prices as they do for a reason. If you meddle with prices, you mess with the equilibrium. And that only creates bigger problems.
Nick Hubble
Editor, Fortune & Freedom
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