Self-Determination in a Europe of Empires: a Tale of Two Referenda

24th March 2014

Empires Collide

The latest phase of the Ukrainian crisis erupted with the ousting of President Yanukovich.  Those that took interim power in Kiev did so unconstitutionally (see Wikipedia for details how a President of the Ukraine can be removed from power). That fact however was ignored by the West’s political leaders and the mainstream media.

The ‘narrative’ they have used to shape public opinion against Russia was that Russia was the aggressor. According to Frau Merkel, President Putin was not “playing the game” by the rules of the 21st century. Citizens of EU countries are being persuaded to believe that Russia has reverted to old Cold War tactics, applying military force to achieve territorial gains.  That is, acting like an unreconstructed imperial power.

There is, in this narrative, no acknowledgement of the “soft power” tactics employed by the US and EU vis a vis Ukraine. Nor of the antagonisms likely to arise given the long history of political, economic, cultural and linguistic relations between Ukraine and Russia.

The USA and EU have funded, encouraged and mobilised  political opposition in the Ukraine. Powerful promises were made:  an Association Agreement with the EU; a massive Euro 11 billion loan, and finally, membership of the EU, and hence too membership of NATO.

In short, over the last 10 years, the EU deployed “soft power” tactics to extend its’ imperial political-territorial objectives. Over a longer period, the US – dominated by the neo-cons – pursued its’ military-strategic goal of isolating and surrounding Russia. Both the EU and the US have the political goal of separating Ukraine from the influence of, and economic dependency to, Russia.

That is, the EU and US both behaved as imperial powers.

Prospects for Self-Determination in Crimea

Last week, the Crimea returned to the Russian Federation after a referendum on secession from Ukraine. A resounding 93%  voted  in favour on a turn out of 86%.

In the West, the media and the political leaderships of the USA and leading European nations poured scorn on the result. They cried “foul” against the Russian “annexation”, and began imposing bans on leading Russian politicians as well as on Ukrainian oligarchs close to former President Yanukovich .

The organisation of the Crimea vote was hasty. But that should not detract from the facts on the ground. The Ukrainian Constitution  allows the Autonomous Region of Crimea to hold referenda. Doing so, a clear majority of Crimeans favoured integration with the Russian Federation.

The US and the EU wanted to delay and prevent the referendum. If that was not possible, then at least internationalise it so as to intervene and influence voters. That intent was made evident by the sending of OCSE observers to the Crimea. However, they were refused entry by the local authorities and ordered to leave.

While the people of Crimea did not vote for independence; they voted to leave Ukraine and make their future in a federated Russia.  That is self-determination.

President Putin, speaking 18th March to the deputies of both houses of the Russian Parliament before the signing ceremony of new legislation enabling the Russian Federation to fast track entry of new territories into the Federation, was scathing of the West’s hypocrisy in its dealings with Russia over the questions of Crimea, Ukraine and the West’s intolerance of others’ arguments. It merits quoting at length; it has received virtually no media coverage in the West:

“….what do we hear from our colleagues in Western Europe and North America? They say we are violating norms of international law…….. it’s a good thing that they at least remember that there exists such a thing as international law – better late than never.

Next, as it declared independence and decided to hold a referendum, the Supreme Council of Crimea referred to the United Nations Charter, which speaks of the right of nations to self-determination. Incidentally, I would like to remind you that when Ukraine seceded from the USSR it did exactly the same thing, almost word for word. Ukraine used this right, yet the residents of Crimea are denied it. Why is that?

Moreover, the Crimean authorities referred to the well-known Kosovo precedent – a precedent our Western colleagues created with their own hands in a very similar situation, when they agreed that the unilateral separation of Kosovo from Serbia, exactly what Crimea is doing now, was legitimate and did not require any permission from the country’s central authorities. Pursuant to Article 2, Chapter 1 of the United Nations Charter, the UN International Court agreed with this approach and made the following comment in its ruling of July 22, 2010, and I quote: “No general prohibition may be inferred from the practice of the Security Council with regard to declarations of independence,” and “General international law contains no prohibition on declarations of independence.” Crystal clear, as they say.

I do not like to resort to quotes, but in this case, I cannot help it. Here is a quote from another official document: the Written Statement of the United States America of April 17, 2009, submitted to the same UN International Court in connection with the hearings on Kosovo. Again, I quote: “Declarations of independence may, and often do, violate domestic legislation. However, this does not make them violations of international law.” End of quote.

They wrote this, disseminated it all over the world, had everyone agree and now they are outraged. Over what? The actions of Crimean people completely fit in with these instructions, as it were. For some reason, things that Kosovo Albanians (and we have full respect for them) were permitted to do, Russians, Ukrainians and Crimean Tatars in Crimea are not allowed. Again, one wonders why.

Our Western partners, led by the United States of America, prefer not to be guided by international law in their practical policies, but by the rule of the gun. They have come to believe in their exclusivity and exceptionalism, that they can decide the destinies of the world, that only they can ever be right. They act as they please: here and there, they use force against sovereign states, building coalitions based on the principle, “If you are not with us, you are against us.” To make this aggression look legitimate, they force the necessary resolutions from international organisations, and if for some reason this does not work, they simply ignore the UN Security Council and the UN overall.

They are constantly trying to sweep us into a corner because we have an independent position, because we maintain it and because we call things like they are and do not engage in hypocrisy.”      1/ 

Putin expressed commitment to assure that the relationship guarantees  rights for all Crimeans, whatever their ethnicity:

“I believe we should make all the necessary political and legislative decisions to finalise the rehabilitation of Crimean Tatars, restore them in their rights and clear their good name.

We have great respect for people of all the ethnic groups living in Crimea. This is their common home, their motherland, and it would be right – I know the local population supports this – for Crimea to have three equal national languages: Russian, Ukrainian and Tatar.”  2/

Prospects for Self-Determination in Europe

A long held aim of the EU (and its predecessor, the EEC) has been the subjugation and control of the sovereign nation states of Europe. The EEC’s original 6 member states have grown  periodically and today the EU has 27.

The ideological justification for this undemocratic power grab ( citizens of these countries were rarely allowed to vote in referenda whether they wanted to join) originated in the claim that a militarily defeated, but untrustworthy, Germany must be bound to France.

That apologia later transformed into another: that “nation states” were an anachronism in a late 20th century characterised by globalisation.  Nation states, so the argument, are ineffective at pursuing public policies that require international solutions.   The EU, a supranational state, must become the United States of Europe.

Thus, territorial expansion has been paralleled by the systematic deployment, and ever-expanding functional scope, of the “acquis communitaire”; that is, the European Commission’s monopoly power for proposing all EU legislation (directives and regulations), and also for ensuring its deployment, application and compliance. “Ever closer integration” (the words from the EEC’s founding treaty) would mean the accomplishment of political union by stealth: it would be the final phase, feasible only once the EU had arrogated to itself all executive powers over economic, fiscal, commercial, diplomatic, legal, and jurisprudential matters.

It must be admitted that the EU was already well down the road to meeting these goals until the financial crisis hit in 2008, followed and compounded by the Eurozone crisis of 2011/12. These crises were the catalysts for enduring economic recessions in the Eurozone countries; recessions which were characterised in particular by rapidly worsening structural unemployment, coupled with extremely serious sovereign debt problems in the “Club Med” countries and Ireland.

The EU, ECB and IMF handled the risks of sovereign debt default in Greece, Ireland, Italy and Cyprus through the uncompromising application of coercion and political blackmail. Where that was insufficient, they in effect engineered “coups” in Greece and Italy and installed caretaker governments subservient to Brussels.

These authoritarian initiatives have backfired. Sentiment in favour of the EU amongst the populace of the “Club Med” countries – riding high before the sovereign debt crises – has collapsed. The anti-democratic and coercive interventions of Brussels and the ECB have catalysed increasing political volatility within the countries concerned.

One manifestation of this is that the mainstream parties have been forced onto the defensive  by new minority parties adopting anti-EU policy positions. Another is that at the grassroots level, public opinion has moved beyond any accommodation with the “old guard” mainstream parties. They are all perceived as compromised; pawns under the tutelage of Brussels.

Enter the independence movements (eg. Basques, Bayern, Brittany, Catalunya, Lombardia, Sardinia, Scotland, Veneto).


Prospects for Self Determination: the Region of Veneto, Italy

Last week, an independence referendum was held online in the Region of Veneto, Italy.  Although it had no formal constitutional legitimacy, it was officially backed by the regional government. The result was a formidable majority of 73%  (2.36 million voters) in favour of independence.

The Veneto, like other northern provinces of Italy, has been a large and consistent net contributor to national budgets down the years. In contrast to Rome’s profligate spending, the Veneto has managed  its’ own finances prudentially. None of the Region’s local councils have any budget deficits.   Over the decades a groundswell of opposition has built to cronyism, corruption and wealth transfers by the national government.

This has been a catalyst for sentiment favouring regional independence culminating in last week’s resounding “yes” vote. Commenting on the referendum result, Governor of the Veneto Luca Zaia stated that “It is a great signal…..for independence which is ubiquitous across all social classes in Veneto.”   4/

The intention now is for the Region to leverage the result to introduce legislation that enables the goal of independence to be pursued constitutionally.

The Veneto Region is not alone in actively seeking self-determination. Others include Lombardy and Sardinia.

Giaccomo Sanna, President of the Sardinian Action Party, acknowledges the Veneto vote as a component in an important political trend : “The Veneto’s referendum success confirms the highly current political nature of this topic of independence and self government in Europe and in Italy.”


In our view, these two recent referenda are precursors to a challenging new political environment in Europe.

The Crimea result is an authentic expression of self-determination. The circumstances of its occurrence were forced by events; events that were partly the result of irresponsible adventurism by the US and EU, and partly immediate threats to Russia’s security interests . That Crimea’s self determination is expressed not as sovereign independence but rather membership of the Russian Federation is consistent with international law and with its historic ties.

The Veneto’s vote for independence is a powerful example of how local self organisation around a clear political aim can overcome the dominance of mainstream media and political parties in setting the political agenda.   Beyond that, it is a striking proof that, within a Europe swamped by unprecedented public debts, excessive money printing, and an anti-democratic authoritarian EU elite, there is a fast emerging movement demanding a return to small government and sound finances. Independence from the EU and from corrupt national politics is the means to those ends.




1/  “President Vladimir Putin delivers his speech at the Kremlin” 2014 03 18;

2/  ibid.


Interview with Andrew Norman, Technical Analyst at

23rd March


Technical Analysis

Cantillon Observer: Andrew, you specialise in applying technical analysis to several key stock, precious metals, commodity, and currency, markets. You have a tool-box of techniques that you use, including Elliot Wave, volume, support/resistance, and Bollinger bands. At Cantillon Observer we have been following your work for nearly three years and have been impressed by the high degree of accuracy you have been achieving. Can you offer some insight into the way that you integrate these different techniques? Are there some key “lessons learnt” that you can share with us, as an advanced practitioner?

Andrew Norman:  Technical indicators are exactly that.  They are indicators.  We apply these indicators consistently.  Sometimes we are wrong.  More often than not our forecasts hold true.  Our approach is simple.


Cantillon Observer: Do you trade/invest solely on the basis of your approach to technical analysis, or do you also combine fundamental research ? Do you have a standard check list of criteria (eg. probable risk/reward) that have to be met when making buy/sell decisions, as a way of maintaining discipline ?

 Andrew Norman: We believe that technical analysis and market volatility (not shown in our charts) are key to making good trading / investing choices.  We also believe that market indexes determine mood of the markets and that having a bias regarding market indexes before choosing a stock is critical.


Macro-Economic Scene & Financial Markets

 Cantillon Observer: On a longer term perspective, as opposed to the intra-day, daily or weekly charts, what importance do you give to identifying and tracking secular trends ? Are they the ‘framework’ within which the shorter cycles are contained ? If so, do you place any credence in the idea of the markets now being near a “Supercycle” top ? Or, what Ludwig von Mises called a “crack-up boom” ?

Andrew Norman:  We think that individual investors are bombarded with information and opinion about markets when really all they want to know is if their investments are likely to go up or down.  We do look at elliott wave cycles which provide big picture perspective, but nothing beats day to day effort.  In our case, we provide the time consuming analysis for others to observe and analyze on their own if they choose.

Cantillon Observer: Commentators and analysts critical of the QE actions of the Federal Reserve, argue that there is a clear disconnect between the real economy and Wall Street. They point to many data trends such as falling labour market participation rates, falling business investment, falling real incomes, etc. to highlight the persistence of a recession, in contrast to the “asset bubble” that has been inflated in the Dow, S&P, Nasdaq, etc., which they attribute directly to speculative buying by banks and others using the new liquidity provided to them by the Fed. Do you agree with this view ? Is the primary driver of this 2009-2014 bull market in stocks QE-provided liquidity ?

 Andrew Norman:  Central banks around the world are providing excessive liquidity to their economies, creating massive debt, in the belief that the economy will catch up with the market.  The central banks are wrong and we are all going to literally pay for this.  We have seen that governments will steal from their people by seizing accounts in places like Cyprus and Turkey.  This is only the beginning.


CantillonObserver: Do you think the way the FOMC last week moved the goalposts changes the investment community’s risk/reward calculations, by advancing the date when they expect interest rates to rise ?

Andrew Norman: Centrals banks’ balance sheets have moved from billions to trillions in assets, over the last five years, with the idea that artificially moving the market higher would trigger the economy to recover.  This has failed badly.  Now the FOMC has to unwind these purchases by moving some of their inventory into a market.  When this starts, it should accelerate panic selling in equities.  Central banks influence rates, they don’t set them.  When the markets start to turn down, flight to safety will likely be the US dollar in the form of bonds and more likely T-bills (shorter term investments).  The Fed/FOMC may learn the hard way how little influence they really have.

Cantillon Observer: Looking at the shorter term price action on the US stock indexes, what do you see going forwards ? Are we near a final top ? (Wave 1 down in EW terms). Is there greater volatility around the corner ? Is there a trading opportunity to go short ? Or can the over-bought, over-bullish sentiment continue and drive the Indexes to new wave 5 highs before the end of 2014 ?

Andrew Norman:  We are likely to turn down sharply in Q2 2014.  There is too much debt out there and this debt is leveraged many times over – we will stop by saying that as many have their own opinion as to how leveraged up we actually are.  When de-leveraging occurs, likely this year, we will see sharp moves down.  Trading short and buying volatility will be the way to go.  Be mindful of the risks of both of these tactics.  Being short and buying volatility is very different than being long the market.  Ensure you have enough cash to manage positions if the markets turns back up


Cantillon Observer: Am I right Andrew that your coverage does not include the bond markets ? If so, any reason for that ? Would you agree that the trend in long term US Treasuries’ interest rates will eventually have a determining impact on the stock markets ? The Fed cannot control long term rates.

Andrew Norman:  We cover the 3 month T-Bill which the US prime rate follows.  The US prime rate is what we pay at banks for loans (plus a markup).  We have described this in detail in this section on our site.  Bond rates and yield curves have less of a day to day impact.  If the 10 year moves higher, it may affect borrowing costs at your banks.  If the 3 month T-Bill moves higher, it will directly affect bank lending rates almost immediately.


Gold & Silver Bull Markets

 Cantillon Observer: In a world of extreme monetary policy, with Central Banks printing trillions of dollars, investors worry about debasement of paper money. Many are turning to gold, both via ETFs and through physical buying. Yet the spot gold price hit a peak in November 2011 at $1,911 and then experienced decline of  nearly 40% to a low of $1,179 in June 2013. Since then we have seen a “double bottom” with gold at $1,180 last December followed by a steady rise during the first weeks of 2014 to attain $ 1,380. There is an increasing sentiment that the bottom is now in on gold. Tell us please your view, which I understand is different ?

Andrew Norman:  We expect to see gold move to near $1430 before it moves back down to below $1180.  If you look at our weekly gold charts, you will see support near $680.  A strengthening USD and weaken Euro will help this occur.  But this will not occur over night.  This process will unfold over the next year or two.  For now, we are still in a corrective move up – see our gold daily charts.


Cantillon Observer: With the recent price action in the precious metals it is noticeable that silver has been a laggard relative gold. The gold-silver ratio favours gold. How do you explain that ? Is it not the case that, in a new cyclical bull phase, silver usually leads gold ?

Andrew Norman: Historically, gold and silver have always had a lead lag relationship.  One leads and the other lags.


Cantillon Observer: What are your views on the potential crisis looming in the gold markets as between “paper” (ETFs) and physical ? It is said that there have been huge transfers of bullion from East to West in the last few years. Also, that reserves of bullion at the CME are at historical lows; certainly, inadequate to cover calls for physical delivery if holders of options contracts should demand that rather than cash payments. If that ‘default’ were to occur, what would be the implications for the gold price ?

Andrew Norman:  We keep reading this, but the price remains low.  If there was a supply problem, prices would climb sharply higher.


The US Dollar

 CantillonObserver: I know you place great store in the movements of the US dollar Andrew as a determinant of how other markets behave. Can you please elaborate ?

Andrew Norman:  Almost all commodities are priced in USD.  The USD is also the currency of choice for over 60% of the world’s transactions.  If the USD moves higher, commodities and indexes priced in USD are likely to move down to reflect the increased value in the USD.


CantillonObserver: Ludwig von Mises’ view on these relationships between economic/financial variables was that correlations are merely temporary and never continual. Would you subscribe to that view ?

Andrew Norman:  We don’t spend much time here.  We do know that von Mises / Hayek are customer centric believers and Keynes is government centric (which, after 80 years, seems to be failing badly).  We can only say that customers change their minds so it stands to reason that “markets are temporary”.  That being said, markets will also lead the economy by about 3 months  – a reason we believe central banks thought they could turn economies around by pumping the markets.  Markets reflect social mood and future potential.  Artificially creating liquidity as central banks have done is a handful of people trying to manipulate reality and we are watching that fail.


CantillonObserver: It seems to me, that applying EW rules and labelling to the currency charts is extremely difficult and subject to error. Amongst the specialist analysts, one can find diametrically opposed views as to what is the fundamental trend in cross-currency pairs like Euro-USD. Your thoughts please ?

Andrew Norman:  We cover indexes and not pairs.  Elliott wave exists at all degrees in all stocks and commodities.  Elliott wave is more difficult to apply to bonds / bills.


Cantillon Observer: Taking the USD Index, your technical charts currently are (probabilistically) showing that the next move for the $ is up. Is that to be a 5 wave impulse move ? If so, what is behind that forthcoming US$ strength, in your opinion ? The “death of the dollar” is still exaggerated at this time, despite QE ?

Andrew Norman: Actually it is wave 3 up, but who’s counting?  The USD is inversely correlated to six other currencies and they are all retracing tops.  When they move down, the USD will rise.  It really is that simple and that mechanical.


CantillonObserver: Andrew, many thanks indeed for this opportunity to delve into the work you are doing at BBM. It has been a pleasure to have your insights into these subjects. Andrew Norman: Thank you for inviting me.  It’s been fun.

Interview with Ronnie Stoeferle, Managing Partner at Incrementum A.G. Part III

Parts I & II of this Interview with Ronnie Stoeferle were published 4th and 10th March. They are found below this Part III


15th March

Cantillon Effects & the “Crack Up” Boom

CantillonObserver:  Here at we have a weather eye on the impacts that the injections of huge quantities of new money are having both on distribution of income and wealth, and on inflation. Austrian economics adopted and developed Cantillon’s original insights about new money benefitting first and foremost its’ early recipients before unleashing price inflation elsewhere in the economy.

Ronnie Stoeferle: First, I have to say that the root of the inequality is not “capitalism”, “greedy bankers” or “corrupt politicians” and so on, as I probably hear 100 times every day. The root cause is in our monetary system!!! However, listening to political discussions or reading newspapers (which I hardly do anymore) I can tell, that nobody talks about the real root causes of our whole mess.

Friedrich von Hayek once likened the Cantillon effect with the process of pouring honey into a saucer. The honey dollops in the middle first and only later it spreads out to the periphery. Prices also do not rise evenly. I think this is a beautiful analogy.

Typically price levels are higher in regions, which directly or indirectly benefit from monetary inflation. If you happen to live in a financial centre you may have noticed. On a global basis this also means that the issuer of the global reserve currency – in this case the US-dollar – benefits the most from inflationary policy and is the biggest beneficiary of the Cantillon effect!

Ludwig von Mises famously mentioned that “Inflation and credit expansion, the preferred methods of present day government open-handedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer.”

CantillonObserver:  Do you see these effects at work today ? Are growing inequalities of wealth between the top 0.1%, 1% and the rest of us the inevitable result of market capitalism ?

Ronnie Stoeferle: We all know and feel that the uneven distribution of incomes is currently escalating and that it is leading to growing social tensions. In the US, between 1979 and 2011 the average household’s income has risen by 64%, while the top income has increased by 300% and the income of the lowest quintile increased only by 18%. This rising inequality in wealth distribution can be gleaned from the GINI coefficient, which has reached historical extremes in many countries. In the US, the GINI is at the same level as in the 1920s prior to the Great Depression. Therefore I think that a major crash would be the normal correction of this inequality. However, due to moral hazard and the “too big to fail” policy, this market adjustment is prevented.

CantillonObserver:  Where injections of new money are concerned, the Central Banks are only a small part of the problem. Alistair Macleod, over at, has estimated that in addition to Fed Reserve M2 liquidity of $4 trillion, there is another $67 trillion in the US banking system and a similar sum on the banking systems of Emerging Markets. Yet, to date, limited levels of price inflation. Ronnie, what is going on here in your view ? Is von Mises’ theory being contradicted by events ? Or are we on the verge of a sea-change in inflation rates ?

Ronnie Stoeferle:

In our Chartbook on Monetary Tectonics we explained this very important topic. At the moment we are seeing massive monetary deflation in the broader monetary aggregates (including repo markets etc.) due to regulatory changes and sluggish credit growth. On the other hand we are seeing aggressive monetary inflation from central banks. They only (directly) are able to control a tiny part of the total effective liquidity and can only offset deflationary forces at the moment. Their primary aim is to prevent a deflationary collapse of this inverted monetary pyramid. I am not sure if they will succeed in the end, but by having a look at history, I can clearly state that no FIAT currency ever collapsed because of deflation.


“Austrian” Investment Strategy at the end of a Longwave

Cantillon Observer: You once told me that you are very keen on a semantic detail when it comes to inflation. Please explain!

Ronnie Stoeferle: Sure! From a semantic point of view, it is very important to distinguish between inflation and rising prices. Inflation describes the expansion of the uncovered money supply, whereas rising prices denote the increase in the general price level. In general linguistic usage the latter tends to get reduced to the segment of consumer prices. Inflation is the root cause of the devaluation of money, whereas price increases are just the result (in fact only one of the effects) of inflation.

Unfortunately, nowadays these two terms are used interchangeably. This blurred terminology comes with grave consequences. The linguistic desensitization thus prevents us from recognizing the cause-effect relationship and as a result keeps us from solving the problem. Instead, unsuitable measures such as price regulations and nationalizations have been demanded in order to fight the wave of rising prices, whilst in the background inflation continues to be fuelled.

Cantillon Observer: At Incrementum you have developed a model that you refer to as the “inflation/deflation seismograph”. Can you tell us more about that and how you use it ?

Ronnie Stoeferle: Yes. We all know that CPI statistics are bogus. This is why Ludwig von Mises once said that any housewife knows substantially more about purchasing power of money than official statistics could ever convey.

Therefore, at Incrementum we measure how much monetary inflation is spilling into the markets. We only use market-based indicators (prices), which are combined in a proprietary signal. This method of measurement can be compared to a monetary seismograph. This measurement results in the “Incrementum-Inflation Signal”, indicating the current momentum of inflation.

From our point of view, it is not the absolute level of inflation but rather the change of inflation that matters. According to the respective signal we position ourselves for rising, neutral or falling inflation trends. Based on our studies, the highest inflation sensitivity is clearly in commodities/energy and precious metals. This is our core competence and where we invest in. But only if the inflation environment is supportive.

Cantillon Observer: You are aware of the views of Kyle Bass regarding the future for Japanese Government bonds. He has already taken large short investment positions. Do you agree with this ? Is this the shorting opportunity of a lifetime ?

Ronnie Stoeferle: Haha, I think one should never disagree with Kyle Bass. I really like his approach and his views on Japan. He is one of the most successful hedge fund managers and definitely someone whose market calls should be followed closely.

In our fund, we are also able to establish tactical opportunities linked to inflation in Japan (and rising yields in Japan). We are very very critical of Abenomics and it’s 3 arrows. At the moment, it seems that only one arrow – the monetary arrow – really works. As Austrians, we know that they are in what we call the “Keynesian Endgame” and that this extremely aggressive reflation policy will end in tears. I am not sure if it will happen this year or only in 3 years from now, but I agree with Kyle that the risk reward ratio is outstanding.

CantillonObserver:  Assessment of timing and market sentiment are key components of most investors’ investing “toolkit”. In addition to your grounding in Austrian economics and use of the “inflation/deflation seismograph” in making investment decisions for your fund, do you also apply other recognised techniques ?

Ronnie Stoeferle: Sure. We know that Austrians have been very successful at anticipating major economic events like the Great Depression, the end of the Bretton Woods crisis and the Dotcom and Housing bubbles. However, it seems that Austrian economists’ judgments on timing are often very early, and this might end badly if you are investing based on this bearish view.

Therefore I try to use some technical tools like Commitments of Traders (CoTs), sentiment analysis, volume patterns, market breadth, put/call-ratios and some quantitative indicators to gauge the strength of a trend. I am also using lots of ratio-charts to analyse relative performance from different asset classes, sectors or indices. This gives me some sort of technical roadmap which fits very well in combination with the big picture view based on the Austrian School.

Reason for Optimism ?

CantillonObserver:  You said to me offline earlier that you felt there is a tendency amongst some Austrian economists to be too negative; like “perma bears”. They stick rigidly to Mises’ crack up boom outcome as inevitable. They fail to see the nuances in how actual, historically specific, booms evolve and crash. Can you elaborate for readers ? Where is cause for optimism in all these dire predictions of eventual hyperinflation, currency collapse and “global reset” ?

Ronnie Stoeferle: The Outlook is really dire. However, I often mention “The Ultimate Resource”, a wonderful book by Julian Simon. Simon was challenging the notion that humanity was running out of natural resources. Perhaps the most controversial claim in the book is that natural resources are infinite. Simon argues not that there is an infinite physical amount of, say, copper, but for human purposes that amount should be treated as infinite because it is not bounded or limited in any economic sense, because known reserves are of uncertain amounts, new reserves may become available either through discovery or via the development of new extraction techniques, recycling, more efficient utilization of existing reserves, the development of economic equivalents, e.g. optic fibre in the case of copper for telecommunications and so on.

Simon argues that for thousands of years, people have always worried about the end of civilization brought on by a crisis of resources. Simon lists several past unfounded environmental fears in order to back his claim that modern fears are nothing new and will also be disproven.

CantillonObserver:  Ronnie, it has been a pleasure having you with us. We wish you well with your new venture at Incrementum. Hopefully we can take another look with you before the end of 2014 how these critical themes evolve.

Many thanks for this interview. All the best and Tu ne cede malis, sed contra audentior ito!


Parts I & II are published below


March 4th

Interview Part I


We are delighted to welcome our first Guest Interviewee at, Ronnie Stoeferle. Ronnie has a professional background in research (gold, silver, energy) and banking.

Last June, he became a founding partner of Incrementum AG., a wealth management firm domiciled in Leichtenstein. The company has a unique and innovative investment framework anchored in a deep understanding of Austrian economics. All the Incrementum partners and managers are “Austrian” economists/asset managers. The fund that they are currently launching will invest in different asset classes based upon their careful monitoring of inflationary and deflationary tendencies in the global economy; tendencies aggravated by the extreme monetary policies of the worlds’ central banks.


CantillonObserver: Ronnie welcome and thanks for agreeing to come and talk to us. These must be exciting times. You have a start up firm, Incrementum AG, to nurture and grow. Can you tell us about the challenges and opportunities you see as an entrepreneur in the wealth management industry in these difficult times ?

Ronnie Stoeferle: Well, when I quitted my job at Erste Group a colleague told me “starting up a financial services company these days is like opening an ice cream parlour in November”. I agreed but said that spring will come every year and that you just have to offer exceptionally delicious ice cream and will create demand (referring to Say’s Law)…

However, you have to be extremely confident (or crazy) to start up a company in the financial services industry these days. The whole industry is highly regulated and the administrative barriers are plenty. On the other hand this also restricts competition and creates plenty of opportunities.

But to put it in a nutshell, after more than one year, I am very excited that Incrementum AG is doing so well.

CantillonObserver: Very interesting. Can you tell us a bit more about you and your partners approach and what differentiates you from mainstream asset managers?

Ronnie Stoeferle: Sure. Incrementum is an owner-managed asset manager & wealth manager based in the Principality of Liechtenstein. At the moment, we are 7 partners from Switzerland, Austria and Germany. Our partners practice what they preach – all our partners are invested in the funds they manage. This creates alignment of interest between our investors and us.

All of us sincerely believe, that the traditional way of thinking about financial markets and asset management is no longer beneficial for investors.

On our webpage we state “Ex scientia pecuniae libertas – Out of knowledge of money comes freedom.’” What we want to express thereby is, that we evaluate all our investments not only in perspective of the global economy but especially in the context of the current state of the global monetary regime.  This produces what we consider a truly holistic view of the state of financial markets.

As we know, over the longest periods of human history precious metals were used as money. Since over 40 years we are once again experiencing an exception to this rule. Nowadays money derives its value solely from government regulation or by law (‘fiat money’). Beginning in 2007, the current global financial system has entered an increasingly unstable stage, which from our point of view exhibits extreme risks and on the other hand exceptional opportunities for financial wealth.

CantillonObserver: Ronni you are actually from Austria but also a keen follower of the Austrian School. Can you tell me a bit more about your view on Austrian Investing?

Ronnie Stoeferle: Definitely. At Incrementum, we believe that only the Austrian School of Economics is able to provide us with the appropriate intellectual foundation in this world of monetary and political excess and insanity. Austrian thinking offers exceptional understanding and superior interpretation of the interdependencies between money supply and price inflation. This knowledge is valuable especially nowadays, as central bank policies massively distort and influence financial markets.

We all know that followers of the Austrian School have been extremely successful at anticipating major economic events like the Great Depression, the stagflationary environment of the 1970s, the Dotcom Bubble and the Housing Bubble. However, timing has often been too early as many Austrians often tend to be very pessimistic and dogmatic. Therefore we are trying to combine Austrian macro views with technical (sentiment, market structure) and quantitative timing-models as well as pre-defined market triggers.

CantillonObserver: Your investment management strategy is built upon your understanding of Austrian economics. What was your own personal journey of discovery into Austrian economics ? What got you started and why are you today a committed supporter of Austrian economic theories ?

Ronnie Stoeferle: I started writing about gold in 2006. My annual “In Gold We Trust” reports over the years became bigger and hopefully better. The Wall Street Journal once refered to it as the gold standard of gold research, which is obviously a flattering term for a gold report. However, at the beginning of my research work on gold, I only analysed the supply demand situation. As I am an avid reader, I started to read everything I could get my hands on about gold. Then somebody once mentioned “The Austrians” and quoted Ludwig von Mises: “If it were possible to calculate the future state of the market, the future would not be uncertain. There would be neither entrepreneurial loss nor profit. What people expect from the economists is beyond the power of any mortal man.” (from Human Action). This quote made me think a lot and it completely changed my view about my profession as an analyst.

CantillonObserver: I have heard that you are very active in promoting Austrian ideas and “spreading the word”. What are you doing to educate your fellowmen about the Austrian tradition?

Ronnie Stoeferle: I really enjoy writing and holding presentations about my views on the markets and our monetary system. My partner Mark Valek as well as Rahim Taghizadegan – the founder of the Institute for value-based economics – and I will be publishing a book on Austrian Investing in June. Moreover we are holding seminars about Austrian Investing and we are trying to educate students and pupils about Austrian ideas. If Incrementum will continue to prosper,  we would love to finance a foundation to fund a professorship for Austrian Economics here in Vienna.

Interview Part II

March 10th

Extreme Monetary Policy

CantillonObserver: Since the financial crisis broke in 2008, central banks have subsequently embarked upon repeated programmes of unprecedented quantitative easing, coupled with “financial repression”. All of this, ostensibly, to stimulate economic growth. Ronnie, what is your assessment of the success of these policies (Fed Reserve, ECB, BoJ, BoE,PBoC) ? Do you believe that these Central Banks can ‘unwind’ their massively inflated balance sheets without causing great risks and volatility in financial markets ?

Ronnie Stoeferle:  Short answer: No

Longer answer: My countryman Friedrich August von Hayek once said that “If a policy is pursued over a long period which postpones and delays necessary movements, the result must be that what ought to have been a gradual process of change becomes in the end a problem of the necessity of mass transfers within a short period”. This basically says it all.

It is very sad that nowadays, the main factor influencing financial markets seems to be the anticipation of central bank actions. Market participants are conditioned to monetary stimuli like Pavlov’s dog! Historical market patterns have been radically altered over the recent years. Since 2009 the Fed has reacted to every economic slowdown by introducing fresh easing measures. As a result, we can observe the following paradoxical situation now: disappointing macroeconomic data lead to price increases in stocks, as a continuation of QE is priced in. Better than expected macroeconomic data on the other hand lead most of the time to price declines, as a reduction of future QE is anticipated.

Based on my observations in the last few years, I expect that financial repression in all its ugly facets is going to gain more and more in importance over the coming years. I regard this as a terrible long term strategy, as it will only achieve redistribution and a delay, but no solution to the problem. We already see that the whole “stimulus bubble” does not produce significant effects anymore, as we are experiencing declining marginal utility of additional debt.

 CantillonObserver:  Would you agree that the main, unspoken, reasons for central bank money printing are to fund government budget deficits and also keep afloat insolvent banks by buying up their loss-making mortgage securities and sovereign bonds ?

Ronnie Stoeferle: Yes, but as students of Austrian Economics we try to analyse the root of our current problems. I am firmly convinced that the origin of today’s debt/financial/systemic/political crisis can be traced back to the events of August 15, 1971, when Richard Nixon ended the Bretton Woods agreement with the words “Your dollar will be worth just as much tomorrow as it is today. The effect of this action is to stabilize the dollar” Since then the purchasing power of the dollar in terms of gold has declined from 0.75 grams per dollar to currently 23 milligrams.

We explained this interplay between inflation and deflation in our last Chartbook “Monetary Tectonics”: As Austrians we know that the natural market adjustment process of the current crisis would be highly deflationary. As the financial sector in most parts of the world reversed its preceding credit expansion, overall credit supply is reduced significantly. The reason for this lies within the fractional reserve banking system, as the largest part of money in circulation is created by credit within the commercial banking sector. The much smaller portion is created by central banks.

In a highly leveraged world like today, price deflation is – from a political viewpoint – a horror scenario that has to be averted whatever it takes, due to the following reasons:

-              Deleveraging leads to consumer price deflation and asset price deflation. Tax revenue declines significantly. Asset price inflation is taxed, asset price deflation cannot be.

-              Falling prices result in real appreciation of nominal denominated debt. Increasing amounts of debt can therefore no longer be serviced.

-              Debt liquidation and price deflation have fatal consequences for large parts of the banking system, in an over-indebted world.

-              Central banks also have the mandate to guarantee ‘financial market stability’ so they have to make sure “It” doesn’t happen here and keep inflating

Therefore this (credit) deflation, respectively deleveraging, is currently compensated by very expansionary central bank policies. In my opinion, this is an extremely delicate balancing act that will ultimately fail.


Future of Fiat Money

CantillonObserver:  Ronnie the prime theorist of Austrian economics, Ludwig von Mises, applied the term “fiat money” to paper money that is irredeemable in commodity money and “backed” only by a government monopoly on currency issuance. He consistently attacked fiat money for being subject to the whims and manipulation of politics and politicians. If von Mises were alive today, what do you think he would be saying and doing about the policies of the central banks ?

Ronnie Stoeferle: I think Mises would be very, very concerned. As he famously said “Continued inflation inevitably leads to catastrophe”. Another one of my favourite quotes is: “Inflation and credit expansion, the preferred methods of present day government openhandedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer.”… This is what we are seeing at the moment and I am absolutely certain that it will end in tears.

CantillonObserver:  At Incrementum you are very fortunate to have on your Board of Management the well known author of “Currency Wars”, Mr. Jim Rickards. He has recently written another book in which he takes his arguments to the next stage. He says that the current world monetary system of fiat monies is in the process of breaking down. It will be terminal and require introduction of a newly-designed global monetary system. What are your thoughts on his views ? Especially the possibility that such a new system might bring back some role for gold ? Also, is the US dollar doomed as a reserve currency ?

We are really delighted to have Jim Rickards on our advisory board. He’s a very smart, modest and likeable gentlemen and I really enjoy discussing investment ideas with him. Moreover, I am really looking forward to reading his new book “The death of money”.

I am absolutely certain, that the renaissance of gold in classical finance will continue. Last year, OMFIF, a global think tank for central banks and sovereign wealth funds, in a report argued in favour of a remonetisation of gold. In their view, gold should once again play a central role in the international currency system. It’s a really fascinating piece and shows strikingly that fundamental changes to the currency system are already being discussed at the highest levels.

There are many other interesting developments going on. In a study commissioned by the European parliament, author Ansgar Belke came to the conclusion that gold-backed bonds would be far more transparent, attractive for investors than government purchasing programs. According to Belke, gold-backed bonds would alleviate the sovereign debt crisis at least in the short term, as it should lower financing costs and restore the damaged confidence.

Regarding the US dollar, global confidence for it as reserve currency has definitely started to wane. Without a return to sound financial and monetary policy the US dollar sooner or later will be questioned sooner or later.

Therefore I believe that gold should continue to be an integral part of every investment portfolio, as it is the only liquid investment asset that neither involves a liability nor a creditor relationship. It is the only international means of payment independent of governments, and has survived every war and national bankruptcy. I truly believe that it’s monetary importance, which has established and manifested itself in the course of the past several centuries, is in the process of being rediscovered.

Editor’s Note:

OMFIF is the Official Monetary and Financial Institutions Forum


Facebook spends $19 bln on WhatsApp? Is this TechBubble 2.0 ?

News headlines have been made with the purchase by Facebook of WhatsApp? for $19 billion.

Journalists looking for story lines from this have certainly not been short-changed. For example, the human story: there is the fascinating history of Jan Koum, a Ukrainian who has become a multiple billionaire at age 37. Or, if you prefer, the business model story: a questionably high price is being paid for a company that has no profits and refuses to accept advertising revenues. Alternatively, what about the industry competition story: angst is emanating out of the telecoms industry about huge revenue losses as their users may migrate to Internet-based mobile services like WhatsApp? and away from their cellular networks.

So, is this the moment that mobile apps businesses are starting to “come of age” ? Or is it another “tech bubble”, like the one that blew up the Nasdaq back in year 2000 ?

To assess which of these scenarios is likely, it is helpful to consider the component parts of the techno-commercial evolution on top of which the mobile apps business is dependent: respectively, ICT1/-based product/service innovation; network-based positive externalities.

These components may be examined under four headings:

(a) product/service innovation in the ICT 1/ sector,

(b) network-based positive externalities,

(c) supply-demand fundamentals; and

(d)  new “digital age” business models that fuel Internet-enabled start ups such as WhatsApp?


ICT-based Product/Service Innovation

In the second decade of the 21st century, “ICT” is seen as a highly integrated global industrial complex.  That was not the case 30 years ago. From the early 1980s, forward-thinking specialists and business executives understood that “ICT” was a potential only. Its realisation would be a process of convergence based upon rapidly-evolving technology and massive capital investments.

That convergence was driven in part by deliberate efforts to design and adopt open network communications standards. The then prevailing proprietary internetworking protocols generated high operations costs; whereas open standards dramatically accelerated   network externalities (see next section).

Open standards were also premised on the expectation that network operators would be building fast, high capacity digital communications networks.2/

From a business/commercial perspective, traditional fixed network operators were amongst  the least dynamic players in the market process of industry convergence. Not only did they suffer from the curse of a monopolist’s management culture. They focused almost exclusively on their networks as a “pipe” for voice telephony, doing little to innovate new products and services.

This relative absence of entrepreneurial culture left the field open for competitive newcomers whose approach was to provide fixed network-delivered, innovative products and services to consumers and businesses. Information content and delivery began to take precedence over network engineering. The first wave of these businesses were the cable companies, delivering telephony, data, video and tv programming in high density metropolitan areas.

The old monopoly – recently privatised – fixed telcos had a reprieve from this onslaught by the cable companies through the introduction of 1st and 2nd generation (mainly GSM) mobile services mainly during the 1990s. Here they learnt about the need for innovation in products and services, tailored to create and serve customers’ demand.

But cellular mobile networks, although compatible to interoperate from the outset, were still analogue outside of the core network. Products and services were overwhelmingly limited to voice telephony, SMS and a few unsophisticated “value added” services using limited bandwidth and usually accessed from 3rd party service providers via “gateways”.

In parallel with the telco industry’s diversification into mobile networking and services, powerful competitors were constructing fast high capacity fibre optic fixed networks targeting large corporate customers with demand for transactions-based processing of data. Data services became a huge growth market, particularly for services industries like the financial and banking sectors.

While in the consumer sector, two complementary software innovations came together -the creation of effective database search engines and the use of hypertext – to enable end users to access remote information using standard user interfaces. These complementary software technologies were rapidly adopted by service developers worldwide, leveraging the underlying open Internal Protocols for network transport.   Companies like Google and Yahoo grew quickly out of this fertile technological complex, using business models that did not require the consumer to pay anything other than the network access fees, since these companies revenues relied instead on advertising.

Last but not least, learning from the commercial success of global GSM network expansion and the associated astonishing speed of penetration of mobile handset sales, major consumer electronics companies quickly adopted the latest generation of miniaturised integrated circuits, touch screen technologies and OS platforms during the first decade of the 21st century to roll out smartphones, tablets, ipads etc on a global scale. For the 2nd quarter 2012 global sales of smartphones was around 160 million devices, and the trend increasing. Critical mass had already been achieved.

Network-based Positive Externalities

There is a universal and fundamental characteristic of all networks: their utility grows exponentially as their user numbers grow arithmetically. This truth became a commonplace with the arrival, and subsequent diffusion, of telephones and telephone networks. So long as a user can identify who is on a network (eg. through directory services), the value to each and all increases dramatically as more people (and devices) connect.

In economics this characteristic of networks is referred to as a “positive externality”, because it is an added benefit to each and every user arising independently of any individual. It is  embedded instead in the growth of potential connections of devices and people.

Supply-Demand Fundamentals

In an “Information Age”, where information services are delivered over networks, there is a now a combined effect of, on the one hand, network-based positive externalities and, on the other, the socioeconomics of crowd behaviour.

Socioeconomics is a new field. It uses advances from behavioural economics and related disciplines to explain individuals’ psychological responses in (mainly) financial markets.  These responses are aggregatively measured as “sentiment”. There is a pervasive tendency either towards “bullishness” (over-optimism; over-buying) or “bearishness” (over-pessimism, over-selling).

Generalising this pattern to consumer markets, we have the phenomenon of “best sellers” in publishing and Internet-accessed videos “go viral” – both expressions of the same “winner takes all” rewards as psychology drives different groups of consumers into a mania of “must-have” buying.

When this psychological behaviour pattern plays out over an open, global network (the Internet), then the speed of adoption/diffusion is indeed “viral”. More importantly, the demand economics of this type of information exhibit not diminishing marginal utility, but the opposite. Perceived value to the individual is increased by belonging to the group who identify with the brand/product/image.

The supply side of this demand-supply relation is equally important: massively increasing returns to scale since the production costs of the information service do not grow proportionately to the increased quantity of demand.

Furthermore, there is a valuable bi-product for the supplier: a rapidly growing database of the transactions history of all its users’ purchasing, calls, and web-accessing history, providing the input for conducting data mining and profiling of consumers preferences which can either be sold to third parties and/or leveraged for developing new information services offerings (in the marketing jargon: “improving the user experience”)

By the middle of the first decade of the 21st century, the business opportunities to leverage the Internet and associated mobile device operating platforms to supply service innovations to consumers and business were at a “take off” stage. The knowledge of how to capture “winner takes all” returns from such service innovations was widely understood. The challenge was to design and push new generations of network-ennabled products and services that users (particularly consumers) would desire to adopt as must-have mobile services.

“Take off” is reflected by the facts that, by 2013, there were over 300,000 mobile apps software developers working in the 28 countries of the European Union 3/; while by July of that year over 1 million applications had been written for the Android platform. The latter number reflects both the low costs of entry into the sector for suppliers, as well as the “mania” of demand from consumers and businesses to use and/or offer such capabilities to their customers. What remains to be seen over the long term is how many of these service propositions make money and develop into market leaders.

Which returns us to the question of WhatsApp ? Has it, with its current mobile app offering – which is essentially an Instant Messaging service – found the Holy Grail for profitability ?


“Information Age” Business Models

Under a capitalist economic system, private enterprises either make profits or else they eventually go bust. However, today’s advanced capitalist economies form a complex globalised whole characterised by an unprecedented social division of labour as well as centuries of accumulated wealth embodied in a dynamic capital structure. Two aspects merit highlighting about this, both essential to understanding how today’s business models are changing.

One of those is the existence of specialist venture capitalists focus on identifying private start ups that need capital ( fund R&D, product development and organisation expansion). Young small tech-based companies that are unprofitable yet have promising product or service innovations are frequently targeted and offered huge sums of money for investment by such venture capital firms.

Innovative software companies are frequent beneficiaries. Whether these capital injections aide or hinder their progress towards profitability is contingent on many factors, not least whether or not the original innovators remain at the company and in the driving seat as concerns product innovation. However, this venture capitalist segment of the capital markets is almost synonymous with the emergence of a dynamic ICT complex from the early 1980s. In providing previously undercapitalised start ups with additional funds for product development, this sourcing potentially cushions the innovators from the immediate risks of negative cash flow and too few customers.

The second reality that requires attention is not new, at least from the perspective of economics. It entails the operation of Say’s Law, which states that supply generates demand, which creates the income to purchase the new supply’s products and services. The fundamental truth and importance of this economic law is that it demonstrates there is no such thing as either “underconsumption” or “overproduction” at the aggregate level.

But in the context of the evolution of the global ICT industry, it also explains that, although revenues and profitability are ultimately dependent on consumers’ demand and preferences for products and services, there are also important ‘intermediate’ goods and services that are created/innovated as the dynamic structure of the ICT sector evolves and matures.

One example of such an intermediate product is a network-enabled customer base. Another is a data repository of your customer bases’ call behaviour couple with a complete directory of all their call numbers. As of December 2013, WhatsApp?? claimed to have 450 million active users.  It also had downloaded from all its customers their entire contact databases off their smartphones.5/

WhatsApp?? currently charges their customers a mere US$1 per year to use their Instant Messaging Service. The company has stated, in a press conference call subsequent to the announcement of their purchase by Facebook, that they have no plans yet to introduce a fee-paying subscription, nor to allow paid-for advertising onto their application. All of which has generated provoked critical ripostes from business journalists and commentators, dismissive of their lack of revenue-generating capability.

Yet Facebook, or any other market leader in the Internet-based information industries for that matter, does not spend US$ 19 billion with having done due diligence and financial forecasting (net present value calculations of break even and beyond). They will have run scenarios of future growth of WhatsApp??’s customer base and messaging volumes. They also will have plans for further product development and cross-fertilisation of Facebook’s capabilities with those of WhatsApp?? And they will have estimated the US$ value of the potential global market, taking account of the opportunity to in the meantime kill off the telco operators’ SMS market. The possibilities of advertising and subscriber revenues as options for the future will be held in abeyance.

The $19 billion price tag for WhatsApp?? translates into $42 per current WhatsApp??? service user. That may turn out to be a very cheap price viewed 10 years hence. Alternatively, it might be turn into an exceptional accounting write down, due to risks unfolding which today are not known.

Regardless, Say’s Law applies. There is a market demand for WhatsApp??. It is an input product for Facebook’s own enterprise expansion which includes leveraging the positive externalities of the Mobile Internet and the returns to scale of monetising customer data.



1/ “ICT” stands for Information, Communications and Telecommunications industries.

2/  In 2014 it is easy to forget that even in the early 1980s, most telecom network operators across the globe were public sector monopolies and that digital lines available to businesses were of no more than 2 Megabits capacity

3/ “Mobile applications development”, Wikipedia


European Banking Crisis: the calm before the storm ?

Austrian business cycle theory explains that the “bust” phase of that cycle is created by extension of cheap and plentiful credit by a fractional reserve banking (FRB) system.  A FRB  system is inherently fragile during the bust phase as its’ leverage(lending as % of own capital) exposes the banks to the emerging tsunami of non-performing loans and impaired collateral that are the manifestations of malinvestment.

Yet, in today’s  protected and regulated banking industry, the “bust” phase of the cycle is delayed and distorted by the wide-ranging interventionism of regulators, central banks and governments. The ongoing crisis in the European banking sector is evidence of this. Its’ problems of insolvency are unresolved. The ECB is at the centre of interventionist efforts to stall and mitigate a European  banking sector collapse that looks increasingly likely within the next 18 months. 1/

Last week the ECB kept interest rates unchanged at 0.25 %. The exchange value of the euro rose and the mainstream media and  financial industry pundits  all bemoaned Mr Draghi’s immobilism in the face of worsening price deflation 2/. As my November 2013 commentary indicated 3/, there is growing political pressure on the ECB from southern European governments to launch a new round of Eurozone members’ sovereign  bond purchases.4/ , as public debt to GDP ratios are increasing for countries on the periphery; and menacingly high too even for some core member countries.

So why has the ECB President kept his powder dry, and is the European banking crisis contained or still perilously at risk ?

Mr Draghi diplomatically hedged at a press conference, claiming that the data available failed to show definitively a confirmed deflationary trend  and that though officially measured price inflation at 0.8% was below the Bank’s mandated target 2%, there was no convincing evidence of a Japanese-style deflation in the Eurozone.

The Bank President’s words are meant to buy time, while two related processes -  one political, the other regulatory – play out.

The political process is to determine the how Eurozone governments proceed  (attempting) to manage the twin crises of growing sovereign debts and growing systemic insolvency risk in the banking sector.  The latest event in that process is the  German Constitutional Court’s ruling last week that it does not consider that the ECB has been acting within its mandate when conducting debt monetisation  – thus allying itself to the view of Jens Wiedmann the Bundesbank President – although it did not explicitly rule that the ECB broke the German Constitution, preferring to pass the parcel on to the European Court of Justice for a definitive ruling.

These legal challenges are a mere proxy war for the real political one between the “Teutonic” bloc led by  Germany and the “Club Med” periphery which currently also includes France.

Which returns us to the ECB, whose Governing Council members are composed of a clear majority from the “Club Med” faction.  Knowing he has this majority ready to vote eventually for a new round of asset purchases, Mr Draghi is playing a long game.

With ECB benchmark rates already negative in real terms, he is well aware that reducing nominal rates further does little to encourage bank lending. Even with effectively “free” credit, bank lending to businesses is down; as is inter-bank lending.  This lack of lending has multiple proximate  reasons, but the fundamental one is banks’ own continuing struggle to remain solvent since the onset of the financial crisis in 2007/08.  This is where the newest regulatory process comes in.

The ECB is soon to take on so-called “macroprudential” oversight of the Eurozone banking system – a new interventionist approach championed by the G20, IMF and Bank of International Settlements’ (BIS) to reduce risks of failure in the banking system by imposing higher core capital ratios.

Complementary to the EU Commission’s plans to establish a Banking Union (including a Special Resolution Mechanism –SRM – for “bailing in” failing banks), and the BIS’s  work to revise and tighten the Basel Rules on bank capital, the ECB is about to embark upon a massive exercise of stress testing all European banks. 5/ A previous round of such tests in 2010 was ridiculed as far too lax.  This time the bar has been set higher. It is expected  that some banks will fail the stress test, and interested parties are already speculating which, and attempting to guestimate the likely outcome in terms of new capital requirements . 6/

How rigorous these stress tests are is a critical matter for the ECB. Its’ supervisory responsibility for all Eurozone banks enters in force once the SRM measure is finalised later this year . The benchmarks applied for the tests are themselves partly derived from the work of the Basle Committee on Banking Supervision in defining banks’ permitted  leverage ratio. Mr Draghi is the chairman of the Group of Governors and Heads of Supervision which oversees these Basle regulators. Interestingly, they recently relaxed the rules on the definition of banks’ leverage, following feedback from the industry that the new rules would entail banks having to raise at least $200 billion in new capital to comply7/

The challenge that these regulatory initiatives attempt to address is the massive build-up of leverage in the banking system as a whole. The Eurozone’s banks are the most vulnerable, but the problem is global. Hence the pivotal role of the BIS in defining a common approach.

What has to be factored in here is not simply banks’ traditional business and real estate lending, important though those are to understanding actual and potential loan losses. Far bigger in scale are the  banks’ exposures to the shadow banking sector; their off balance sheet losses; and the recent likely losses on FX futures contracts and interest rate swaps caused by the sell off in Emerging Markets.

Derivatives positions in FX and interest rate swaps are staggering and the total derivatives market is estimated at $700 trillion. Amongst large European banks, Deutsche Bank is said to have Euro 55.6 trillion of gross notional derivatives exposure on its books.  This figure is some 200%+ greater than Germany’s annual GDP !  8/ Note, these are not losses, just exposures. Nevertheless, it would take only a very small proportion of these contracts to turn sour for Deutsche Bank’s entire core capital to be wiped out.

The BIS-defined leverage ratio  aims to limit banks’ reliance on debt, using a minimum standard for how much capital they must hold as a percentage of all assets on their books. However, the BIS found that “a quarter of large global lenders would have failed to meet a June version of the  leverage limit had it been in force at the end of 2012.” 9/

There is a perfect storm developing then in the European banking sector.

First, there is the increasing likelihood that the ECB will unleash a new round of asset purchases from the banks to flood them with the liquidity they need to buy up their respective national governments’ sovereign bonds and so hold bond yields down.

Second, there is a Eurozone-wide regulatory initiative to recapitalise the banks likely, following on from the results of the ECB’s bank stress tests. Third, there is an increasing chance of a deep stock market correction happening this summer. All three, taken collectively,  could trigger a crisis of confidence in the  banking sector. An  insolvency crisis too should not be ruled out in the event of some large banks failing to recover from derivatives markets exposures in an increasingly volatile currency, interest rate and stock markets environment.



1/ Using technical analysis and Austrian economic theory, it is being predicted that a stock market “crack up boom” is due some time near Christmas 2014, followed by a fiat currency collapse. Before that, a deep market correction is foreseen starting by the summer. see“The Globalisation Trap: full report”, Gordon T, 2014 01 15

2/ “Split ECB paralysed as deflation draws closer” A. Evans Pritchard,,7th  February 2014

3/ “Eurozone’s Debt Crisis: is the next phase of the ECB’s “large scale asset purchases” imminent ?” November 2013,

4/ A few days after my commentary was published, the ECB’s executive board member Peter Praet let markets know that stimulus measures were on the menu via comments in a November 13th Wall Street Journal interview. “ ECB Bank Stress Tests: Catalyst Of The Final EU Crisis?”,, 2013 11 17

5/ “ECB Bank stess tests: catalyst of the final EU crisis ?”, 2013 11 17

6/  “Eurozone banks face £42bn ‘capital black hole’”, Kamal Ahmed,, 8th February 2014

7/“Basel Regulators Ease Leverage-Ratio Rule for Banks”, Jim Brunsden , Bloomberg .com,   2014 01 13

8/ “On Death and Derivatives”, 29 January 2014,

9/ op. cit., Bloomberg .com,   2014 01 13

Eurozone’s Debt Crisis:

the next phase of the ECB’s “large scale asset purchases” imminent ?


There was relatively good news for consumers in the Eurozone last week. Data released for the consumer price index (CPI) during October showed that the rate of inflation fell from 1.1% to 0.7%.

At a time when unemployment is high and increasing and taxation is on the rise, this brings some small relief to cash-strapped households whose real disposable incomes have been in decline for at least 5 years. Small relief only though. The CPI is designed in such a way as to deliberately exclude key consumer necessities like food and energy which, if included, would push the measured price inflation rate higher.

The fall in the CPI was probably caused to a degree by the rising exchange value of the euro over the period, which will have reduced the cost of imported consumer goods. That rising exchange value was itself a result of aggressive money supply increases of other major currencies, notably the US dollar and the Japanese yen. Over the same period, the ECB kept its powder dry due to the election campaign in Germany over the summer. 1/

Publication of this CPI data was seized upon by financial market analysts, central bankers and mainstream media reporters with something close to panic.  Writing in the Daily Telegraph 2/ Evans Pritchard reported that the data stunned the markets. He quotes remarks from a number of financial market analysts who called this a  “debt deflation trap”.3/

Evans Pritchard also marshals the authority of an unnamed former governor of the ECB who is quoted criticising the ECB for not acting to head off the deflation threat through provision of more liquidity to the financial markets and further reduction in the interest rate.

So what is going on here ? How does a reduction in consumer price inflation become “deflation” ? How does a minor improvement in the purchasing power of consumers become a problem for liquidity in the financial markets ? Austrian economic thinking, which understands that new money is never neutral in its effects, offers insight:

“…the crux of deflation is that it does not hide the redistribution going hand in hand with changes in the quantity of money…”4/

European  politicians and central bank policy-makers are concerned not  about consumer  price reductions but about real (money supply reduction) deflation as  it would force governments to abandon  permanent budget deficit monetisation . That is why they adhere to monopoly over the power to create money and to control where it enters the economy.  In the current conjuncture in the Eurozone they manifest this adherence in two ways.

First, they are all – with the sole exception of the Bundesbank -  “inflationists” when it comes to monetary policy. Inflation (that is, an increase in the money supply) steadily reduces the purchasing power of a fiat money and, in parallel, eases the burden of debt repayments over time as nominal sums become progressively of less relative value.

Such price inflation benefits debtors at the expense of creditors. Hence, for highly indebted Eurozone governments, price inflation is the perceived “get out of jail” card, permitting them to meet their debt   obligations with a falling share of government expenditures.

Second, at least amongst the political elites in the “PIIGS” (Portugal, Italy, Ireland, Greece, Spain)  and in France,  they espouse  “reflation” plans  using the ECB’s money creation powers which would ratchet up to another degree inflation of the money supply, monetisation of government debt, and increase in total government debts and thereby   protect and enhance the economic power and privileges of governments and the state. The current dip in price inflation is not what concerns them, it just provides an expedient way of proselytising their reflation aims.5/

Yet growth of PIIGS governments’ debts as a proportion of GDP (Table 1) have now crossed above the critical 90% ratio advised by Rogoff and Reinhart as being the threshold above which   growth rates irrevocably decline 6/,choked by excessive and unpayable debts. The inflationists are deaf to these insights.

Table 1. Gross Government Debt as Per cent of GDP 2008-14 for Eurozone and selected member countries

(adapted from: IMF Fiscal Monitor: Taxing Times, p16.  October 2013)

2008 2010 2012 2014   (forecast)
Eurozone 70.3 85.7 93.0 96.1
Spain 40.2 61.7 85.9 99.1
Italy 106.1 119.1 127.0 133.1
Portugal 71.7 94.0 123.8 125.3
Ireland 44.2 91.2 117.4 121.0


There is though a potential  implementation problem for reflation by means of  ECB debt monetisation via the banks .   European commercial banks may be too fragile to fulfil their allotted role.    Draghi himself has initiated another round of stress testing European banks’ balance sheets against external shocks, a sign that the ECB itself has doubts about systemic stability in the banking sector.  But this testing has hardly begun. Here are four risk factors in play:

First, there has been large scale flight of deposits from  banks operating within the PIIGS’  towards  banks of other Eurozone countries7/ , as well as outside the Eurozone entirely. This phenomenon is caused by elevated risk of seizures, consequent upon the forced losses on bondholders at Greek banks  and the recent ‘bail-in’ of depositors at the Bank of Cyprus.

Second, many PIIGS’ domestic banks still hold on their books bad loans arising from the  boom years (2000-2007). Failure to deleverage and liquidate losses is prolonging the banks’ adjustment process .

Third, they already hold huge quantities of sovereign debt (treasury bonds) from Eurozone governments from previous rounds of buying. Banks have had to increase their risk weightings on such debt holdings as Ratings Agencies have downgraded these  investments to comply with Basel II.  This constrains their forward capacity for lending to these governments.

Fourth, there is concern for rising interest rates. Since the famous “Draghi put’ in July 2012, real  rates remain  low and yields on PIIGS’ sovereign bonds fell back closer to German bunds. But this summer yields on US Treasury bonds with long maturities started to rise on Fed taper talk. 8/  Negative surprises knock confidence in the international bond markets. The risk of massive  losses should bond prices drop is one that the European-based banks cannot afford given their still low capital reserves and boom phase legacy of over-leveraging.

Implementation impediments aside, a new phase of aggressive easy money policy from the ECB is both probable and imminent. _____________________________________________________________________________


1/ More precisely, there is a simmering dispute with the Bundesbank over the legality of the ECB’s Outright Market Transactions   programme.

2/ “Europe moves nearer Japanese style deflation trap” Daily Telegraph, 31st Oct 2013

3/ This is a reference to the work of Irving Fischer who  characterised the 1930s Great Depression in this manner. Fischer’s analysis provided a theoretical platform on which later generations of economists – most recently, Ben Bernanke -have justified  liquidity injections by central banks whenever price inflation drops below some  “acceptable” threshold.

Irving Fischer, “The Debt Deflation Theory of Great Depressions”, Econometrica 1, no.4, October 1933

4/ J.G. Hulsmann, Debt & Liberty (2008) p27

5/ “Morgan Stanley said the ECB must take immediate and pre-emptive action to head off the risk of full-blown deflation by next year.” from Daily Telegraph, 31st Oct 2013

6/K. Rogoff and C. Reinhardt (2010), Growth in a Time of Debt

Reported that among 20 developed countries studied, average annual GDP growth was 3–4% when debt was relatively moderate or low (i.e., under 60% of GDP), but it dipped to just 1.6% when debt was high (i.e., above 90% of GDP)

7/ As demonstrated by reduced  growth of M2 (cash deposits and cash equivalents)

8/ the Fed Reserve’s ongoing Operation Twist programme is targeted at lowering yields at the long end of the yield curve.

“Four Legs Good, Two Legs Better”: the ideology of the Inflationists for the PIIGS

24th October 2013


In his masterful novel Animal Farm, which is a devastating critique of how ideology is used by an authoritarian elite to control and subordinate the people, George Orwell has the elite pigs who control the farm as the only ones able to walk around on two feet. This ability is the symbolic proof of their superiority over the other animals on the farm as evidenced in their appropriation of all the best available resources. The other four-legged animals are progressively conditioned  to believe that the chant “four legs good, two legs better” is the truth and that the practice of walking on two feet is legitimate only for the elite. While they, the majority, are destined to walk on four feet and be subservient to, and acquiesce in, suffering the consequences of their ”consensual”  enslavement.

This allegory of the erosion of freedom and concomitant rise of a self-perpetuating elite monopolising the reins of economic power was Orwell’s insightful way of revealing the evils of communism in Europe in the 1930s. Nevertheless it resonates powerfully today in the context of Great Depression 2, where the dominant ideology both of governments and central banks is the necessity for “easy money” monetary policy – aka “inflation”-  as the mandatory antidote to the anathema which is deflation. “Sound money good; cheap money better.”

Five years on from the financial crisis of 2008, the Eurozone countries – particularly those ironically called the PIIGS (Portugal, Ireland, Italy, Greece, Spain) – are mired in economic depression. Efforts at revitalising their economies through EU-financed bail outs (e.g. Greece, Ireland, Portugal), massive ECB buying of government bonds from PIIGS’ domestic banks, and raising of tax levels on the rich (France), have all failed to catalyse sustainable growth. In parallel, the relative strength of the euro has constrained the capacity of private sector companies within the eurozone to expand exports outside that zone; deepening trade deficits. And monetary union itself prevented any currency devaluation initiative to make exports cheaper.

A rational observer might conclude then that these policies have failed. That giving taxpayer-backed bailout money to spendthrift governments creates “moral hazard” rather than resolves the structural problem of their budget deficits. Likewise, that the ECB’s buying up of domestic banks’ portfolio of sovereign bonds as a means of providing them with additional liquidity is counterproductive. After all, it results in the ECB’s own balance sheet becoming loaded up with overpriced government bonds which can only suffer capital losses once  interest rates inevitably start to rise. While the new money (created ‘out of thin air’ by the ECB) thus transferred to domestic banks in the PIIGS is  recycled into purchasing more of their respective governments’ debt (foreign buyers having long ago departed, having prudently  re-assessed risk), thereby both perpetuating the growth of public debt and loading up again the banks’ own balance sheets with more of their government’s  increasingly “at risk” bonds.

Such rational views are not part of the agenda of today’s European governmental and central banker elites, with the sole exception of the Bundesbank which is the ‘custodian’ of Germany’s collective experience of hyperinflation in the 1920s. For the rest, they are all inflationists intent on imitating in Europe the extreme monetary policies being practiced already by the Federal Reserve in the USA and the BoJ in Japan. The battle is currently engaged to imbue amongst the population the understanding that “four legs good, two legs better” is ineluctable destiny, necessitating a new round of massive money creation by the ECB to avert deflation and install a ‘benign’ regime of price inflation.

Keynesian economists, policy-makers and mainstream media journalists act as the mouthpieces for explaining and amplifying this message. Thus, Evans Pritchard in the Daily Telegraph1/  invokes the work of monetarist economist  Irving Fischer on debt deflation as the authoritative explanation of the 1930s Depression and the justification for reflation through central bank money printing:

“The EU authorities would do well to study Professor Irving Fisher’s seminal paper from Econometrica in 1933, The Debt Deflation Theory of Great Depressions. The central argument should by now be self-evident, though a certain sort of mind had trouble grasping it then, just as it does today. If the price level is falling – the “swelling dollar” in Hoover’s America – the real burden of the debt keeps rising.”     

To emphasise his call to arms to fight the immediate threat of price deflation in Europe, Evans Pritchard marshalls support from a report – “The Euro Area’s Tightrope Walk”  - published by a Brussels think tank which argues:

“that debt dynamics are acutely sensitive to the slightest changes in inflation… that the current downward drift risks pushing Italy and Spain into a “runaway debt trajectory”. The closer to deflation, the worse it gets.”


To put the final seal of authoritative legitimacy on the urgent necessity for massive ECB intervention, he invokes Professor Bernanke, arch inflationist in chief:

“As Fed chair Ben Bernanke famously said in his 2002 speech, “Deflation: Making Sure ‘It’ Doesn’t Happen Here”, it is unforgivable for any central bank to let this happen. “Sustained deflation can be highly destructive to a modern economy and should be strongly resisted”.“

Modern Austrian economics is the sole branch of economics to give the lie to this statement.  It makes a clear and necessary distinction between “price inflation” and “inflation”. The latter refers exclusively to an increase in the money base. In a fiat money system, only the monetary authority can cause the creation of paper and/or digital money. Hence it has unique power deciding and acting to whom such newly created money reaches first.

As Cantilllon first showed, new money is not neutral in its effects. It benefits those who first receive it and employ it to buy goods, services and financial assets ahead of others. The latter, then operating in a market with increased money supply, suffer reductions in purchasing power expressed as price inflation.

Deflation, defined as a “reduction of the quantity of base money, or of financial titles that are redeemable into base money on demand…” 2/ raises the purchasing power of money holders and causes price deflation. Its impact is beneficial to those who are not indebted, but is potentially punitive to those who hold imprudent debt levels since they may be forced to liquidate assets at a loss to facilitate debt repayment. This does not mean though, as Irving Fischer wrongly asserted in 1933 that “the (debt) liquidation defeats itself”. For there are two positive outcomes: the real resources sold to repay debts are now in the hands of viable new owners  able to put them to productive use; and the old owner’s debt is liquidated or written off in default. Both effects accelerate economic adjustment and an exit from a debt spiral.

By stark contrast, inflation’s impact is insidious on the population at large with the exception of the elites benefiting from the new money injections:

“…inflation is a secret rip off and the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law.” 3/    

In short, the combined effects of new money creation are to raise progressively the wealth and income of its early recipients while inversely reducing that of the rest. In the context of the current monetary policies of central banks, on the benefits side of this equation clearly are governments and those who receive their increased spending , as well as banks and other financial institutions who are able to invest at negative real interest rates in all manner of financial assets with additional liquidity that they otherwise would not have had.

Ergo, any call today for an enlarged programme of “reflation” in Europe by means of massive money creation by the ECB, is to be a party to the further inflation of the money supply to the direct and immediate benefit of the elites in government and the regulated banking and financial institutions. They thereby can intensify their purchases of assets and monetisation of debts at the expense of the impoverishment of the population.

But don’t worry, do your duty. Just repeat: “Four legs good; two legs better. Sound money good; cheap money better.”


1/ A. Evans Pritchard “Europe already has one foot in ‘Japanese’ deflation grave “, Daily Telegraph, 24th October 2013

2/ Jorg G Hulsmann, “Debt and Liberty” (2008), p11.

3/ Jorg G. Hulsmann, op.cit., p27.

Its Official ! QE is working in the UK says Bank of England’s retiring Deputy Governor


Interviewed by the Daily Telegraph Friday 19th October, the outgoing deputy governor of the Bank of England Mr Tucker claimed that the Bank’s policy of quantitative easing (QE), that has pumped £ 375 billion into the UK economy by means of purchases of UK government bonds from financial institutions, is finally working.

He was quoted as saying: “We’ve provided an extraordinary degree of monetary stimulus and the whole euro area crisis was like switching it off. I felt that as soon as [fears] receded, spirits would revive and the existing monetary stimulus would gain traction. And I think that’s what has happened.”

Like all central bankers these days, Mr Tucker is a “data driven” economic soothsayer. The credibility of his claim hinges on the UK’s officially  recorded 2nd quarter 2013 GDP growth rate of 0.7% and the soon to be published 3rd quarter rate which is expected to be  0.8%.

So are there now grounds for optimism first, of a genuinely sustainable economic recovery in the UK; and secondly, that the Bank of England’s QE policy is vindicated ? Or is the outgoing Deputy Governor  “talking his book” in an attempt at protecting his legacy role in the Bank’s management of monetary policy in the period following the financial crisis of summer 2008 ?

What of the purported recovery in the UK economy then ?  In the private sector it is evident that there is increased activity in the housing market, with house prices returning to pre-crisis highs in London and much of the south east of England. However the rise in buying and selling is being driven primarily by a change in lending policy by banks and building societies who, recently gifted £80 billion spending money from the Chancellor of the Exchequer in the “Help to Buy” scheme, have substantially increased mortgage lending at low rates of interest for the first time since withdrawing mortgage credit from the housing market in the aftermath of the last burst “bubble” of 2009.  This has little or nothing to do with QE.

Elsewhere in the private sector, there is no evidence of improvement in either exports or private business investment. The Chairman of the Office for Budget Responsibility, Robert Chote, stated earlier this month that private investment, particularly from business, had been “almost completely absent” since the outbreak of the financial crisis. His statement is supported by revised data for the 2nd quarter of 2013 published by the Office of National Statistics regarding gross fixed capital formation (GFCF), of which business investment is one part.

Whereas GFCF for that 2nd quarter did rise 0.8% compared to the previous quarter, all of that increase was accounted for by a massive 14.1% growth in “General Government” spending. Furthermore, 2nd quarter GFCF was 5.3% lower when compared to the quarterly figure 12 months previously.  The category suffering the greatest per cent fall in capital formation was “other machinery and equipment” with a collapse of 11.2%.

To summarise, in the real economy investment still trends lower with the sole exception of the government’s own spending. The worst hit category of investment is precisely the one that has the greatest potential to generate productivity gains, namely machinery and equipment. The upturn in the private housing market has all the characteristics of an incipient “bubble” blown by the £80 billion largesse of cheap money supplied by the UK government to banks to fund mortgage credit. Lastly, any GDP growth effect from consumer demand is merely transient driven by rising personal debt levels and reduced savings ratios. The bigger trend for households is a continuing decline in real disposable incomes.

An exclusive focus on the recent performance of the UK’s real economy is not, of course, the whole picture if the aim is to assess the “success” of QE. A very different dynamic emerges if we consider the stock market, bond markets and the financial sector.

Nevertheless, both central bankers and governments are determined to sell to the public at large the belief that there is a recovery in the real economy; one that they have engineered and should be applauded for as the next pre-electoral cycle shifts into gear. Their own published data – suitably sanitised and manipulated – fails to support their argument.

PART TWO to follow

EU-imposed immigration and welfare policies in the UK

An example of the economic costs and political
incompatibility of EU membership

13th October 2013

For all EU member states, immigration policy is a functional domain that has long been governed by the EU in so far as it concerns intra-EU mobility by the member states’ citizens. EU control over member states’ social welfare policy is not yet quite so solidly founded (especially in the UK with its “opt out” of the “social chapter” of the Maastricht Treaty) but in both policy domains it can be said that  legislative authority has been ceded to Brussels.  That is, more “acquis communautaire”, or centralisation of EU political power.


Key Characteristics of the EU as an emerging State

Let’s briefly rehearse this process of EU power centralisation before addressing the subject at hand.  Only the EU Commission (the EU’s bureaucracy) can make proposals for new EU policy areas and laws; an approach to policy-making which is contrary to democratic political traditions in the UK and most other European countries. The subterfuge behind it is this: when initiating proposals either to enter new policy areas or to extend and deepen existing ones, the EU Commission initially drafts high level “framework” documents for (weighted majority voting) approval by the Council of Ministers. These make reference to previous EU law and Council of Ministers decisions as the justification for capturing control of the targeted policy domain. This method has been  incessantly repeated down the years and has incrementally expanded and deepened  the scope and  competence of EU law and legislation. Illimitable growth of EU law – and hence too political power -  is in-built to the design of the EU state.

Further, once voted for by the EU Council of Ministers and the EU Parliament, all subsequent detailed law – “Directives” – is mandatory for acceptance and application by member states’ national parliaments.   This has the effect both of strangling their parliamentary democracy and coercing obedience by national executive governments. Outliers of nascent resistance by occasional government ministers are quashed by  their  legal advisors who invariably counsel the impossibility of counter-acting the “precedence” of supranational EU law.

In effect this is a relation of pure domination-subordination between on the one hand unelected judiciary and officialdom in the EU and on the other the executive and legislative arms of the member states.

Needless to say, the ordinary citizen and voter is entirely written out of this script; another telling indictment of the coercive, unaccountable powers of the EU state.



Some Consequences of Free Circulation of Labour in a Hampered Market Economy

With persistent economic recession afflicting the UK since the outbreak of the 2008 financial crisis (GDP today remains below that in 2008), immigration and immigration policy have been at the forefront of political debate in the UK. A public outcry arose as the data on massive net immigration filtered into the public domain via the media. The prolonged 2008-2013 recession has taken place after the enlargement of the EU to include new member states from central and eastern Europe with average incomes per capita well below those of the “core” EU member states (Benelux, Germany, France, UK, Italy).

Now a new report produced for the EU and published last week 1/  reveals that immigration by “non-active” (i.e. unemployed) migrants from other EU countries into the UK during the period 2006-12 increased to 611,779 last year from 431,687. A 42% rise. So, notwithstanding  the declared intentions of the current UK  government to tighten up on abuses,  the volume of immigration into the UK from EU countries proceeds unabated.

For those who support “free markets”, what is wrong with increased immigration ? After all, critics of continental Europe’s economic malaise have for decades called for liberalisation of highly regulated labour markets, including measures to improve the mobility of labour. This would facilitate the spatial alignment of labour availability to actual employment opportunities, thereby reducing the use of idle labour resources and their associated social security and welfare payments, while also increasing output and wage incomes.

“Austrian” economists, amongst others, would endorse such a view, ceteris paribus.  So what is not to like with this trend of mainly young able-bodied EU citizens coming to reside and seek work, in the UK ?

Two fundamental objections arise; both premised on the factual state of affairs in the UK and in other EU member states.  First, it is evident that the purposive actions of those individuals coming to the UK are not driven exclusively by the search for employment. Many of these unemployed seek to  arbitrage between the unemployment and welfare benefits available in their home country and the significantly higher equivalent payments on offer in the UK. The latter are explained by the respective historically different levels of economic development and wealth accumulation of the UK on the one hand and the main countries of origin of the immigrants on the other (eg. Poland, Slovakia, Spain).

The reverse side of this same reality is the de facto “dumping” of unemployed labour by the governments of the migrants’ countries of origin. The above-mentioned report states  that the number of EU migrants coming to Britain without a job increased by 73 per cent in the three years to 2011. With persistently high and steadily increasing unemployment in the Eurozone nations, these governments welcome the exodus of young unemployed nationals abroad. This alleviates the severity of unemployment whilst reducing the potential costs to government: unemployment and social benefits are less than would otherwise be the case and this has the secondary impact of contributing some containment of these governments’  fiscal deficits (ceteris paribus) in the face of static or falling real tax revenues .

In addition, in so far as the emigrants may later gain employment, there develops too an increasing stream of remittances from them back to family and dependents at home which has a beneficial impact on domestic consumer expenditure (expenditure financed at the expense of the UK tax payer).

The second objection concerns the indirect dissuasive impact that the mass influx of EU immigrants has on the UK’s indigenous unemployed.  The latter are characterised, to a substantial degree, as long term unemployed and/or unskilled and semi-skilled job seekers. As such their potential job opportunities are predominantly in the relatively low paid segment of the labour market.  It is a long acknowledged problem that the level of aggregate entitlement payments available to them relative to the wage levels offered for manual and low-skilled jobs creates an incentive not to seek formal employment.

Even if the potential wages offered by an employer are marginally in excess of the entitlement payments received, many such unemployed persons’ preference will be to take the lower income together with the accompanying unconstrained leisure or, perhaps, “black market” work which supplements their state-received income to levels over and above that possible in the formal labour market . This is economically rational behaviour, viewed from the income choices available to the unemployed individual. But it is both  an entrenchment of dependency on state transfer payments and an impairment of  wealth production at the level of the national economy.

This disincentive to join the labour market by the indigenous unskilled and semi-skilled unemployed obviously is not one that can be attributed directly to the EU job-seeking immigrants. Nevertheless there is an important connection. The fact is that both unemployed groups are competing, broadly, in the same segments of the labour market such as construction, domestic services and hotels and catering.  UK employers, long suffering from unfilled job vacancies in these submarkets yet unable to raise pay rates (due to high fixed costs and low profitability) to attract indigenous unemployed, have willingly hired EU immigrants instead. The latter accept these pay levels as they are higher than they could earn in their home country.

In consequence, the percent of unfilled job vacancies at the low end of the UK labour market has stopped rising.  This benefits both the employers and the newly economically active immigrants.  A direct  result of this improved alignment of demand for, and supply of, low skilled labour is a dampening of wage price inflation in the affected segments.

The unintended side effect however is that it impedes the effectiveness of the current government’s reforms introduced by the Minister for Work and Pensions.   The aim of the latter is to bring more of the UK’s indigenous long term and low skilled unemployed back into the active labour force. The means applied include withdrawing and reducing the level of entitlement payments to an extent that such people’s desire to work is increased.  Their expected income from employment will exceed, by a more significant margin than heretofore , their entitlement payments from the state.

Those who recognise the economic benefits of improving the labour market by reducing/eliminating the hampering effects of governmental policies and interventions, should welcome the UK government’s reforms.  However, they are highly likely to be overridden by the EU.


Fundamental Incompatibility of EU “Social” Model and Open Markets

Long before the demise of the USSR, L udwig von Mises definitely and lucidly explained the impossibility of socialism as an economic system. Furthermore, he stated that any sustainable “third way” between socialism and capitalism is an illusion.  Or, more precisely, state interventionism as a means to achieving “redistributional justice”  is counterproductive because of its unintended consequences as well as its’ destruction of wealth effects. The EU’s “social model”, one with great affinity to the French “social model” which has manifestly failed, can be characterised as an instantiation of this illusory “third way”.   Let us return then to the case at hand.

Laszlo Andor, the socialist EU commissioner for employment and social inclusion is bringing a court case against the UK government in the European Court of Justice (ECJ).  According to the Sunday Telegraph, “He will challenge a scheme that makes certain benefits available only to migrants from the EU who are “economically active” and is intended to make Britain less attractive to so-called benefit tourists.” 1/

In considering the commissioner’s impending legal initiative, bear in mind the following:

  • The “scheme” he is challenging is one being executed by a democratically elected UK government which, as part of the official policy that brought it to power, aims to curb social welfare spending so as to bring it within the bounds of affordability relative to the government’s spending constraints.
  • The costs of the court case on the EU side are funded by EU tax payers, including those of the UK. The costs of the UK government’s defence will also be courtesy of the UK tax payer.
  • The judges who preside at the ECJ will assess the merits of the arguments purely from the viewpoint of EU law since that is the only law that is applicable to their judgements.
  • European law says all EU citizens in a member country must have the same rights, so it is inevitable that these judges will decide that it is illegal to stop migrants from other EU countries claiming the same welfare benefits as British citizens. It will ignore completely the fact that in the UK benefits are far easier to claim. They are means-tested rather than requiring proof of having paid national insurance.
  • There is evident “moral hazard” in this approach to law enforcement, since the judges are not accountable for the costs and/or the omissions of their decisions.
  • As a socialist, the EU Commissioner is in good company . The majority complexion of both of the ECJ and EU Parliament is either socialist or social democrat.  The default political philosophy of the majority of placemen in the EU institutions is to defend, uphold and reinforce the “social model” of the state. Which is to say, an interventionist “tax and spend” state populated by “progressives” who exercise power over spending and re-distributing other people’s money according to their own preferred values and preferences.  “Equal Rights”, meaning entitlements, take precedence over personal and economic freedom.


The incremental effects of these attacks on UK sovereignty is insidious, pervasive and downright perilous.  It is shocking that all but a few professional UK politicians and their policy-makers have fully comprehended the damage that has been inflicted.  Or understand that worse is to come.

So long as the nation’s law-makers and executive government kow tow to the “precedence” of EU law there is no level playing field in the pursuit of independent and effective policies designed to accomplish free market- oriented goals .

There are two possible routes out of this impasse. One is secession using Article 50 of the Lisbon Treaty. The other is to introduce a UK written constitution which expressly forbids ANY jurisdiction outside of the UK to impose the application of it’s law within this country; and to require this restriction to be applied retrospectively .

Until or unless one of these two avenues towards a recapture of political and juridical sovereignty is taken, the UK government is condemned to remain what it has in all but name become:  a mere administrator of coercive EU law.

The goals and track record of the EU, assessed from the norms of free market capitalism, have always been poor. In the last 15 years or so, that assessment has deteriorated to “extremely poor” as the EU has arrogated to itself more and more functional scope, intensified centralising powers and increased budgetary and spending means. The EU has become one massive wealth transfer and wealth destruction mechanism.

In the continuation of these misbegotten ends it has no intention of letting one of its richest subaltern regions – the UK – escape from its grasp. This is partly because of its rapacious demands for political power to attain the end of full fiscal and political integration. That goes hand in hand with its intent for political interventionism to control markets. It cannot abide much longer  any vestige of national sovereignty or of  the precedence of voluntary economic cooperation amongst free agents in free and unhampered markets.


1/ “True scale of European immigration”  Robert Mendick, and Claire Duffin, The Sunday Telegraph, 12th October 2013