The General Theory of Authoritarianism

Posted by Bob Hoye in "The Address to the Spring Dinner of the Committee for Monetary Research & Education:

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Screen shot 2013-05-31 at 6.43.28 AMThere are any number of names that can be used to describe the Administration’s policies. However, in this polite assembly it is best to stay with what is printable and ask the question about which description fits best?

It is hard to avoid terms that have become derogatory epithets. Liberal is one, progressive-Democrat is another. And then there is communist, socialist, fascist and corporatist to list only a few. But all describe current U.S. policy.

Academics intensely debate the differences between Lenin and Trotsky. But it is more practical to review the similarities. Actually coercive political movements and their promotional labels are all the same in the quest for power. What’s more, the quest repeats in an all-too-real nightmare of Groundhog Day. Although burdened with nonsense about Obama ending the rise of oceans, in the West we remain thankful that the old and recurring political experiment in big government has avoided state murder.

So far it has just been the assassination of constitutional norms. And with remarkable irony, those that protest the assault and defend the traditions of freedom are called Nazis. This shows more passion than commonsense and suggests that all of the experiments of bullying political movements need a universal description.

The General Theory of Authoritarianism elegantly defines the experiment as “That which is not compulsory, is prohibited.” Of course, the corollary is “That which is not prohibited is compulsory.”

This can be applied to Marx, Lenin, Mao and Keynes. The latter’s The General Theory of Employment has assisted all manner of authoritarians in the West to finance the greatest experiment in intrusive government since the 1600s. Keynes’ own preface to the 1936 German version of his theories boasted that his recipes would work best in “conditions of the totalitarian state.” They have assisted such ambition.

Sadly, Keynes’ notion that an economy can be managed to avoid the nasty times that attend the business cycle was just a personal revelation, and not new. Keynes was lucid until the 1929 crash when he took a hit and discovered the liquidity preference. Edward Misselden had a similar revelation during the Crash of 1618. The revelation was also personally discovered by John Law in the turbulent early 1700s and by Walter Bagehot just at the start of the Great Depression that followed the 1873 Bubble. The essential recipe has been that throwing credit at credit contraction will make it go away.

The purpose of this address is to review the laws of the General Theory of Authoritarianism as derived from two previous examples. The distinction is that what follows is based upon how financial history actually works, rather than upon how it “ought” to work. The two previous examples of the senior economy going authoritarian brewed up in the Third Century and in the Sixteenth Century.

But, before expanding this, there are a couple of instructive ironies.

In the early 1600s the civic administration in Malines in Belgium made the cultivation and consumption of potatoes illegal.

Why? Because potatoes caused leprosy. Was this an example of Post-Medieval superstition or just plain stupidity?

There was more to it than either. It was bureaucratic absurdity as a great experiment in big government went out of control. Potatoes were new and it has always been easier for control freaks to deny the new than to change long-standing traditions.

On the last serious famine in Africa, America was quick to provide basic foods. Almost immediately, political activists protested such aid, as it could include grains genetically modified by evil corporations.

Why? Because genetically modified foods would impair the health of the starving. Is this an example of Post-Modern superstition or just plain stupidity?

Actually, it is all of the above and then some. Bureaucratic intrusion has always used superstition and slogans. As Rome was corrupted from a republic to a brutal police state ambitious leaders celebrated the “Genius of the Emperor”. On our experiment in big government, the politically ambitious have promoted the “Genius of the Federal Reserve”.

Mao used his Little Red Book to inspire the “Great Leap Forward”.

Today’s authoritarians have been equivalently ambitious in crafting a Big Red Book of “political correctness” which provides an endless list of issues on the way to perfect a progressive society.

Will they continue to dominate?

Not likely, as today’s frenetic policymaking is another example of ending action. The establishment claims the Republicans are finished, but a veteran trader would say that they have become very oversold as the Democrats have been the focus of a buying mania.

Some of the Main Stream Media are recovering their ability to criticize. Besides that, cheerleading a losing team is so yesterday.

Last week, even the Washington Post wrote that Obama is failing in his attempt to prove that “activist government could also be smart government”.

How important is this?

Beyond losing some of its support from ardent Main Stream Media, something much bigger has been going on. Essentially, the last Great Reformation was propelled by a printing industry that was independent of the authoritarians. This time around, the internet, talk radio and talk TV are definitely independent of the control freaks. Government institutions will be reformed.

The motivation for bureaucratic greed has been great wealth and prosperity. Other people’s.

Rome had accumulated enormous wealth through conquest and tribute. Even enhanced by massive depreciation, the ability to fund unlimited government eventually became impossible. Plagued by decades of predation, what was left of the productive sector departed to Northern Italy. Seeking sustenance, the bureaucracy moved to Istanbul which is still an important commercial center. Rome was not located at a natural trading point and from a population of some 1 million it collapsed in a few hundred years to only 80,000. Trying to support some 400,000 on welfare in a city of one million was uneconomic.

The next accumulation of enough wealth to provoke another such experiment started in the early 1500s. It was inspired by the unprecedented windfall of gold and silver from the New World. Spain was the dominant power and its administration went out of control. The massive flow of real money was not enough to satisfy the demands of unlimited government, which borrowed endless amounts and “printed” endless amounts of money. Spain defaulted at least three times on its way to becoming a lesser power.

Ambitious bureaucracy needed even a bigger organization than those of one or two countries and eventually corrupted the Catholic Church. The Protestant Reformation involved religion but the main theme was productive individuals and families reforming in-your-face government. Political power devolved from central authority to regions as well as to the individual.

The next accumulation of wealth was not based upon conquest or windfall treasure, but upon productive work in an essentially free-market economy. Despite the testimony of millions of economic text books, the enormous rise in prosperity had nothing to do with the “Genius of the Federal Reserve”. It had everything to do with private initiative introducing science and technology to producers and consumers.

Sadly, unprecedented increases in the overall standard of living have earned the hostility of authoritarians. Envy and greed have again driven confiscatory taxation and as that has always been inadequate to the demands of unlimited government. Naturally, to satisfy its ambition the state turns to currency depreciation.

The inquiring mind may wonder how long demented central bankers can go before they turn towards responsibility?

Yes we can all wonder, but it won’t be voluntary. Political and market changes will force all agencies of big government into accountability. Chagrin can provide forceful instruction and this is getting close.

Culmination of the two earlier examples of inflation and bullying politics could provide the “ending action” model. After a hundred and fifty years of relatively stable prices to 1500, purchasing power eroded from 682 to 100 in the early 1600s. Prices went up by a factor of seven.

Since the Fed opened its doors in January 1914, purchasing power has plunged from 100 to 4.3. Prices have soared by a factor of twenty plus and, yet on May 2nd, Paul Krugman, the socialist running-dog, said that there is “Not enough inflation”.

Some may be thinking that we are in a political trap as described by Orwell or Rand. This suggests it will not end.

Tocqueville had a good handle on today’s governing classes and their supporters distressing the producing classes.

“Society was cut in two: those who had nothing united in envy; those who had anything united in common terror.”

This also suggests bullying without end.

This would have been the grave concerns of the productive classes on two previous examples, but after a hundred years of barely enduring the financial assault the public suddenly became more critical. Then government did something incredibly and acutely stupid.

Diocletian was a well-organized dictator and was reckless with his depreciation and became very concerned about rampant price inflation. He did not have economists to lay the blame on the public with “inflation expectations”. Stupid Policy # 1 was severe depreciation. Stupid # 2 was price and wage controls imposed in 301 AD. Stupid # 3 was backing up price and wage controls with the sword.

There were numbers of approved religions and cults. They did not criticize big government. Only one was indifferent and it was banned and persecuted.

The Edict on Prices was effective in rapidly collapsing the economy so as a diversion it was followed by the Edict against Christians, otherwise known as the “Great Persecution”.

Perhaps concerned about the injustice and sensing the collapse of bureaucratic edicts, Constantine moved in 306 to legalize Christianity and to return confiscated property.

The frenzy of radical policymaking came to a shuddering halt.

For much of this time the term barbarian meant stranger or Christian and mainly meant class distinction. Somewhat similar to the way that today’s establishment looks down on non-liberals. Many ordinary Romans began to admire those from the Northern Provinces as “innovative” and thrifty. Also admired were Northern fashions of long trousers and blonde hair. These were upsetting to the establishment and were banned. The dictates of fashion prevailed.

The contrasts then would be similar to the governing classes in Washington DC and to those of the typical Texan today. If you can appreciate this you can understand the collapse of the Roman bureaucracy.

The next great experiment in authoritarian political correctness began its end in the early 1600s and evolved more clearly in England than in Europe.

A distinctly grand, but stupid policy erupted in England in the early 1600s. A decade of boom times, rising prices and prosperity was followed by a recession and rising unemployment. The folly includes three key players: King James, Alderman Cockayne and the Archbishop, who recorded the meetings.

The perceived problem and opportunity was that British exports of cloth were finished in the Netherlands, which was the commercial centre. The alderman persuaded the king that England deserved the “value-added” and persuaded him to duplicate facilities already existing in Europe.

Unfortunately the weak economy and unemployment continued and in 1618 the king became concerned. Particularly as successful merchants were calling the scheme as “a Sepulcher – attractive without, Dead bones within”.

Then in November of that fateful year, which was seasonally appropriate for financial calamity, credit markets crashed. The archbishop recorded that the king told the alderman “in could bloude before ye Council Table that if he had abused him by wrong information his 4 quarters would pay for it.” As this meant “hanged, drawn and quartered”, the archbishop continued with “Ye poore Alderman stood infinitely amazed”.

A pamphleteer by the name of Chamberlain observed that it was strange that the “wisdom of the state could be induced [to rely upon] the vaine promises of ydle braines”.

Well, be that as it may, but outside of this assembly there are too many idle brains employed by today’s exceptionally intrusive government. Saul Alynsky, wherever he is, will be looking up and nodding his approval.

Now there is a saying from the old and dreadful Vancouver Stock Exchange that applies to today’s weird world.

“So long as the stock is going up, the public will believe the most preposterous of stories.”

And then when it goes down belief vaporizes and is replaced by chagrin and eventually condemnation of the promoters.

The next credit crisis will demonstrate that all of the “stimulus” was a futile waste of taxpayer money. Let’s call it Stupid Policy # 1, and it will be recognized as such.

How much has financial history been changed by the massive “stimulation”?

The discovery of problems at Bear Stearns in June 2007 stimulated, well, a massive stimulation that did not prevent the worst financial disaster since 1929. The Crash was a classic and the consequent severe recession and weak business recovery are characteristic of a lengthy post-bubble contraction.

Remember that in 2007 the establishment boasted that “nothing could go wrong”. The Fed had the dream team of economists but the establishment did not anticipate the worst Crash since 1929.

At four years this recovery is showing signs of maturity and as it rolls over, the public will realize that interventionist remedies have not worked.

The recognition of Stupid # 2 involves the promotion of man-caused global warming. This has been underway for some 15 years as the amount of atmospheric CO2 continues to increase but global temperatures have not. The supreme blunder has been that the promoters have argued that global warming has been due to only one influence and nothing else.

Ironically, the “nothing else” is what really drives climate that has been the sun. Since the mid-1990s some solar physicists have been calling for diminishing output from the sun. The recent solar minimum has been the deepest since 1913 and the current up cycle has been the weakest in over a hundred years. North America has clocked the second coolest spring on data back to the late 1800s. Northern Europe and England recorded the coolest winter and spring in decades.

The establishment did not anticipate the turn to a quieter sun.

However, some government agencies have been forced to admit that warming isn’t what it was hyped to be.

By way of summary, the worst of times for the individual have been the best of times for statists. But I’m very optimistic that this sordid social contract is about to fall apart.

In the Western World, independent opinion has been ridiculed to the greatest degree since the early 1600s. Regrettably, nineteenth-century liberalism has become a state religion and once again bureaucrats have become dedicated to “That which is not compulsory is prohibited”.

In the Western World, for the first time since the early 1600s independent scientific inquiry has been condemned by the arbitrary dictates of a state religion. Man-caused global warming is the modern equivalent of the Vatican insisting that the solar system rotates around the Earth. While glaringly erroneous in real time, the ambition was to control thought not the climate. The Church’s interest in the economy made no attempts to control it. But was mainly focused upon “fairness”, “usury” and venally finding ways to confiscate private savings.

Today’s ambition by control freaks shows audacity away beyond precedent. Communists limited themselves to merely making the perfect man. Now political leaders demand not just a managed economy but also a managed climate.

Mother Nature has been doing something else about the climate and the trading floor cynic observes that politics and financial markets have both been corrupted. Mister Margin knows that brokerage accounts are leveraged at levels not seen since 2007 and that the bubble in lower-grade bonds is unprecedented.

At the climax of any speculative fury, the power shifts from the Fed to the margin clerks – every time. Each has a vastly different job description. The Fed’s task has been to get the accounts leveraged. Mister Margin’s job is to get the accounts in line.

On the political side, America has an outstanding record of self-governance and is not ungovernable, now. It is the frenetic Administration that has become ungovernable.

I trust that everyone in this assembly is prepared to enjoy a fabulous change in politics and in the markets. In so many words, the veteran trader is calling for a lengthy bear market for authoritarian ritual, and a new bull market for commonsense.