Saturday, December 20, 2008

Gordon's Broonzi scheme beats Bernie Madoff's Ponzi

What does Gordon Brown have in common with the world’s greatest financial fraudster, Bernie Madoff, author of the £50bn hedge fund scam? Well, they are both running versions of a Ponzi scheme - a pyramid fraud named after Charles Ponzi, an Italin American confidence trickster from the 1920’s Only Gordon’s “Broonzi” scam is bigger.

A pyramid scheme involves paying returns not from income generated by the business itself - which is bankrupt - but from gullible future investors who think it isn’t. Everyone thought Bernie Madoff was a financial genius, who could produce high returns year after year, so more and more people entrusted the former Nasdaq chief with their money. But to keep the pyramid from collapsing he had to raise ever greater sums of cash from new mugs to pay off the old mugs. Eventually the sums grew too large and the scam collapsed leaving everyone broke.

Now look at Brown’s Britain. The government has been boosting public spending based on future tax receipts rather than from the government’s current tax earnings. Britain is essentially insolvent, but Brown has been financing his fiscal stimuli, like the VAT cut, by borrowing - a staggering £16bn last month alone. The longer this goes on, the more will have to be paid in by future generations to meet the payouts of the Broonzi scheme. It is a fraud perpetrated on our children, according to the Archbishop of Canterbury, Rowan Williams, who believes spending our way out of recession is essentially immoral - like curing an addict with more drugs.

But just imagine if Madoff had been able to print his own money. He would have been able to keep the scam going almost indefinitely. Well, we hear the government is preparing to do precisely this, following the American practice of “quantitative easing” - which sounds like a constipation cure but means electronically creating more and more credit in the hope that people will spend it in the shops. Finally imagine if Bernie could have borrowed money for nothing thanks to ZIRP, which stands for Zero Interest Rate Policy, and is also being pursued by governments to head off deflation. In theory this means Bernie could have borrowed from Uncle Sam to pay his clients without paying a penny in interest. Indeed, if he'd been able to keep going for a few more months, Bernie might have been eligible for the US government’s Troubled Asset Relief Programme. Well, his assets were certainly troubled since he didn’t have any.

Bernie Madoff is starting to look like an honest swindler in a nest of vipers. Politicians and central bankers will do anything in their power to avoid deflation, even if it means adopting the economic policies of Robert Mugabe. Get ready for the twenty billion pound note, which is what we’ll probably need to buy a loaf in 2015. The reason governments are afraid of deflation is because it can lead to unemployment - which returned to British politics with a bang last week with record numbers of job losses. If people aren’t buying, shops like Woolies close and the factories that provided them with their goods lay off workers. Most of these workers are in China, but nevermind. The government wants us to take on yet more debt to buy stuff in order to give them theri jobs back. And if we don’t the government will do it for us. In the middle of the greatest ever debt crisis we are being told that our patriotic duty is to borrow even more money we don’t have and to spend it on things we don’t need. This may make sense to economists, but to the rest of us it looks like the lunatics have taken over the asylum. The chairman of the Federal Reserve, Ben Bernanke, says that he would happily drop millions of dollars on American cities from helicopters if necessary, to get people spending in the shops. Doesn’t he realise how insane he sounds?

And no, I dont think unemployment is a “price worth paying” for stabilising the economy, as the former Tory Chancellor, Norman Lamont, put it back in 1992. Unemployment is never a price worth paying for anything, but nor is hyper-inflation a risk worth taking. The government is obsessed with falling house prices. You can make the biggest mortgages affordable if you reduce interest rates to zero, but does anyone seriously believe that another housing bubble would be a good thing? People aren’t as stupid as governments think they are, and they know that this will all have to be paid for. In a few years time, as the boss of Barclays, John Varley, let slip yesterday, interest rates will have to rise again, as the government tries to tackle inflation.

Anyone who buys a house or sets up a business on the basis of zero interest rates and free money is being conned as surely as one of Bernie Madoff’s clients. It is a pyramid scam which will collapse eventually into mass collective bankruptcy. The UK housing market was itself been a kind of Ponzi scheme, yet the only solution the government can see to revive the economy is to get it going again.

So, what do we do about unemployment? Well, the answer is surly to get the country back to work, proper work. There is a chronic housing shortage, huge waiting lists for social housing, and a construction industry going on the dole. Surely it doesn’t take a genius to work out what to do here. Then there is renewable energy - wind, wave and tidal power -; one of the great sunrise industries in which the UK, and Scotland in particular, could be a world leader. Better to build our own industry than buy nucler power stations off the peg from France.

We desperately need infrastructure appropriate for the post-carbon age - like fast rail links and the development of electric vechicles for cities. What we don’t need, surely, is a return to imports of consumer junk from China which ends up in landfill sites. We don’t need houses at seven times earnings. We don’t need gas guzzlers, yet the governemnt is using our money to subsidise Jaguar Rover - a firm which is owned by an Indian conglomerate, Tata. Nor do we need a bloated and parasitic financial services “industry” which merely manufactures debt.

The government now owns most of the British banking sector, so there should be no problem about financing the reconstruction of the UK economy using prudent borrowing rules. What is a problem is deliberately causing inflation to reduce debts and impoverish future generations. Bernie Madoff is alive and well and living in Downing Street. It’s time to call in the law.

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