Free markets' last stand

Oct 20, 2022·Alasdair Macleod

The British government’s desperate dash towards free markets has failed, badly bungled. The establishment in Whitehall and Westminster is back and realigned with the international government consensus. The socialist wealth redistributors, the interventionists, and the anti-Brexit Remainers now formulate government policy. In Britain, free markets are dead. 

Citizens of other western nations should take note of these developments. The replacement of Kwasi Kwarteng as Chancellor of the Exchequer by Jeremy Hunt, an establishment man and deemed to be a safe pair of hands, is set to guarantee the continuing authority of the state over its electors. The underlying problem, that the electorate can no longer afford its government, is lost in the noise.

We must abandon any hope of a reversal of rapacious government policies that continually strip electors of their freedom and personal wealth. With a rapidly approaching financial crisis, which is now widely expected, the UK government will double down on its anti-market, anti-sound money policies. We can expect more price subsidies and price controls — paid for, of course, by yet more currency debasement.

It’s not just the UK. All advanced economies are approaching an endpoint in their governments’ anti-market policies. The global status quo can now only be challenged by markets. Rising interest rates, driven by collapsing purchasing powers of the major fiat currencies are bringing on that challenge, triggering a global financial and currency crisis. 

The destiny of financial markets is already becoming evident, with asset values in an intractable decline. The contraction of OTC derivative markets is in its earliest stages, a factor of which the public is generally unaware, but will have enormous consequences. Bank credit for the non-financial sector is in the firing line as well, leading with certainty to a slump in global GDP. And we can be sure that policymakers everywhere will do their utmost to rescue the failing system by new rounds of quantitative easing.

Welcome to an outlook dominated by the accumulated errors of the global establishment, all set to hit us at the same time. As for the return to free markets? Not until considerable volumes of political and intellectual water have flowed under the bridge.

An obituary for free markets     

After a long illness, the death last Friday of free markets was announced in London. Market freedom had been increasingly suppressed since the First World War. In its comatose state, the last flicker of life was extinguished by the sacking of the British Chancellor of the Exchequer, Kwasi Kwarteng, and the reversal of bungled policies designed to liberate the British economy from increasing state control. The Prime Minister might be be ousted as well — possibly even before the ink dries in this article.

There can be no doubt of the fate of this one last attempt at a return to free markets. The blob killed it off — an apt term for the amorphous Westminster (politicians) and Whitehall (civil service) establishment that tried to prevent Brexit. What was particularly striking was the collective attitude of the Conservative Parliamentary Party, which is now exposed as full-on socialistic in supporting tax redistribution from the haves and their businesses to the have-nots, and entirely interventionist in their anti-market policies. The legacy of Margaret Thatcher is long gone.

Whether Liz Truss survives this coup is now immaterial to the course of government. The blob would prefer to get rid of her so that it can pursue unfettered its agenda of increasing the state’s control over the people, closer integration with European governments, and even a reversal of Brexit. In the absence of unexpected developments, individual freedom only remains to be finally buried.

This sad outcome is enough to turn frustrated libertarians into anarchists, wishing for a collapse of the whole rotten system — the sooner the better. Fortunately, or unfortunately, the increasing progression of statist control and suppression of free markets has nearly run its course. A financial crisis of humungous proportions is lurking in the wings, which in this analyst’s opinion has a fair chance of wiping out all rapacious states’ income entirely by collapsing their fiat currencies. For with their authoritarianism, they have bred economic and catallactic ignorance, which will certainly lead to their destruction.

As Ludwig von Mises put it in an essay entitled A Critique of Interventionism written in 1930, 

“Only the naive inflationists could believe that government could enrich mankind through fiat money. Government cannot create anything; its orders cannot even evict anything from the world of reality, but they can evict from the world of the permissible. Government cannot make man richer, but it can make him poorer. “

Besides his close attention to valid economic theory, the authority for Mises’ thesis came from his experience in the post-war years, when he witnessed at first-hand the economics and politics of the Austrian hyperinflation, closely followed by that of Germany. In the century since, we have forgotten the lesson. So too, it appears, have the Austrian and German people whose forebears suffered catastrophic destruction of their wealth. Furthermore, it is almost certain that when the currency collapse becomes fact will we be ignorant of the follow-on consequences so vividly described in Hayek’s The Road to Serfdom. It chronicled the likely political developments that follow a government’s impoverishment of the masses by inflation.

But we can only consider one thing at a time. Borne out of statist ignorance and intellectual arrogance, today’s disregard by governments for the rights and individual freedoms of their peoples is responsible for the economic and catallactic crisis now before us. Our political leaders, hiding their coordinated attack on everyone’s freedom, are beginning to realise that their tenure is ending in crisis. Like those of a car whose brakes have suddenly failed while dashing downhill, the levers of power no longer function.

Arranging a reset is increasingly talked about. The current bankrupt system is expected to be replaced with another, allowing the political and bureaucratic classes to retain their power and control. In their new reset, they are even planning to take total control of bank credit away from commercial banks by the introduction of central bank digital currencies. They say a CBDC will be used to control and direct our spending for greater economic effect. Those of us in the authorities’ favour will get more state credit, while those who are not, such as those suspected of tax evasion, will be denied it. Some say we will be chipped like dogs and traced through our actions. If this seems extreme, these plans are echoed by the World Economic Forum, one of which’s acolytes told us we will own nothing and be happy. 

We must dismiss these utopian fantasies of socialising interventionist politicians seeking to jump ship from their current failing system. They lack the ideological pull of Marxism, required to persuade the intelligentsia and the middle classes. They will never overcome nationalism, never get their long-suffering populaces to support them. Instead, they only inspire conspiracy theories. 

The current political system mixes socialist intentions with interventionist policies. But as policies they differ distinctly. Socialism seeks to achieve its ends by seizing command of the factors of production: that’s what Marx intended. But western governments currently do not intend to nationalise swathes of industry. Instead, they wish to regulate them, leaving possession of property in private hands. It is interventionism that has killed off free markets.

The long road to ultimate failure

Particularly since covid lockdowns, it has become fashionable for politicians to tell us to “follow the science”. But what if the science is flawed? What if the politicians have selected a theory that suits them, rather than having properly considered its validity? This is what has happened in the field of economics, starting with interventionist policies.

The history of these errors is as long as ruling classes have existed. In its modern form it started in America in the 1920s when the Fed began to manage credit, culminating in the disastrous boom and bust of 1927—1932. While the Fed was manipulating credit, as Secretary of Commerce Herbert Hoover was trying to manipulate the economy. He became the first truly interventionist president, taking over from a laissez-faire Calvin Coolidge. In 1928, Coolidge is reputed to have said of Hoover, “That man has offered me unsolicited advice for the last six years, all of it bad.”

Hoover’s interventionist policies were so bad that he was thrown out in a 1932 landslide win by Franklin Roosevelt, who merely doubled down on Hoover’s economic intervention. The depression was prolonged as the process of creative destruction, the redistribution of capital to more productive means, was obstructed. This was despite a 40% devaluation of the dollar in 1934, which by countering declining prices was intended to be a proto-Keynesian stimulus.

Looking at the economic situation from a statist viewpoint, the evidence was that despite pulling on all the levers of power, the depression continued. At that point, if not before, politicians turn to advisors. Naturally, as a politician you pick advisors who agree with your basic premise of interventionism. And if you intervene, you need to be able to measure outcomes. This gave birth to econometrics during the 1930s depression, which sought to measure the unmeasurable. All that was then needed was a credible economic argument, and that was provided by Keynes.

The son of a university professor at Cambridge, John Maynard Keynes was a noted author on economics. He was a member of the fashionable Bloomsbury set and pursued a successful career in the UK’s Treasury ministry as a leading economic adviser. But his intellectual discipline was mathematics. As a mathematician and at the heart of the establishment, it would be understandable for him to seek a new mathematics-based way to promote the role of the state in economic affairs. The task he set for himself was to overturn the rationale and supremacy of free markets, by replacing the theory of the division of labour embodied in Say’s law. Macroeconomics was created, which somehow would soar above the petty prejudices of savers and entrepreneurs. This is what his General Theory, published in 1936 was all about.

As events have now proved, Keynes’s new mathematically based macroeconomic science was badly flawed. Authorised by Keynes, governments pull their new levers of economic power to create short-term benefits, resulting in medium- and longer-term crises. No matter: with governments having assumed control of education, the new, mathematical Keynesian economics was promoted to the exclusion of the classical, which few state-educated economists believe is relevant today.

The error is to regard economics as a natural science, subject to the laws of mathematics; and not a human science, having its roots in psychology. And every time this misconception is challenged by markets, the statist answer is to impose more restrictions on humanity. In monetary policy, the first stage was the gradual and then final removal of the people’s money, legally that is gold, from any role in state-controlled currency and credit. This allowed a gradual, and then accelerating drift away from sound monetary policies, when government budgets were entirely funded through taxation, to an increasing (and accelerating) element of state finances funded through monetary inflation. And it’s not just domestic spending: there is the funding of expensive military ventures abroad. But by a combination of reallocating tax revenues notionally collected for other priorities and through funding by inflationary means, foreign policies can be pursued that would not otherwise be permitted by taxpayers in a true democracy.

The blob, the establishment that controls governments, now enforces its authority through fear of the consequences of any divergence from its groupthink. The amorphous blob’s control extends to international cooperation with similar statist organisations. G20 meetings are the ultimate in groupthink synchronisation, where meetings between leaders, as well as subsidiary meetings between finance ministers and central bankers, coordinate mutually agreed state control on the world stage. Any leader who does not conform to the script comes in for condemnation. 

This was the fate faced by Liz Truss and her then chancellor, Kwasi Kwarteng. The IMF quickly denounced their break for free markets and favour for Hayekian policies. Joe Biden was dismissive, breaking the taboo not to comment on another country’s economic policies. The Archbishop of Canterbury weighed in with his establishment view. And suddenly, we find that the majority of Conservative MPs, fearing for the loss of their seats, have overwhelmingly rejected this attempt to return to free markets.

We can point out that liberty is not collective, but personal. All liberty is individual liberty, as President Coolidge once said. But today, this truism is deeply buried. The political reality is that we have ventured down the rabbit hole of interventionism too far to turn back without facing serious economic consequences. Statist desires for dominance over free markets have led to self-serving beliefs, a pig-on-pork error upon error, and increasingly intense efforts to maintain control. It is not just Britain; it is every western nation that is on a common path leading inexorably towards a financial version of mutually assured destruction.

The reversion to the status quo ante

The hurriedly appointed new Chancellor of the Exchequer, Jeremy Hunt, has reversed nearly all of Kwarteng’s tax cut proposals. His get-out clause was to reassure markets. And indeed, gilt yields initially fell sharply and sterling rallied. For the very short-term at least, it was estimated to have saved the government £20bn in interest costs, assuming the initial 0.4% fall in the yield on the 10-year gilt holds.

This is not so much evidence that the markets are right, but simply confirms that the investment world is dominated by Keynesian actors who see risk in that context. But they cannot ignore a new trend of rising interest rates and the withdrawal of commercial bank credit, driving financial assets into an intractable bear market. Bond investors are now acutely fearful of anything that disrupts their rosy assumptions: hence their panicked reaction to Kwarteng’s budget and their relief at its reversal by Hunt.

Putting these short-term sentiments aside, what Hunt is doing is returning to the status quo ante, the continuing drift into higher taxation and increasing government spending as a proportion of the total economy. In his promises to MPs, we have heard similar statements from previous Chancellors time and again: 

“We are a country that funds our promises and pays our debts and when that is questioned, as it has been, this Government will take the difficult decisions necessary to ensure there is trust and confidence in our national finances. That means decisions of eye-watering difficulty.”

It is meaningless claptrap. It should be noted that “funding our promises and paying our debts” are achieved by debauching the currency. And the use of “difficult” as an adjective has become a cliché repeatedly deployed by all government ministers, depriving the word of its meaning. 

Hunt’s statement was followed by a Treasury statement that every ministry would be instructed to find savings in their spending, and that health and defence would not be exempt. When have we not heard that before? Hunt also announced the establishment of a new economic advisory council populated with independent economists. We can be sure that if any appointee is not a Keynesian — a monetarist for example — he or she is bound to be outnumbered, making his or her dissentions irrelevant. We can be certain that at the Treasury, in line with the Bank of England, a common Keynesian groupthink will prevail.

These are the actions of a so-called competent establishment man, a Remainer who called for a second referendum to reverse Brexit. As a supposedly safe pair of hands, he is bound to get on well with that other appointee as a safe pair of hands, Andrew Bailey, Governor of the Bank of England. Between them, they are likely to ensure the establishment view prevails unchallenged, and any drift towards free markets is strictly curtailed.

The economic background to Hunt’s U-turn is beyond any government’s control, because driven by rising prices and rising interest rates, bank credit is now contracting globally and will continue to undermine not just financial asset values, but bank lending to non-financial actors as well. 

Hunt’s policy reversal is short-termism, realigning with the economic and monetary policies of other governments in Europe and North America. The stranglehold on private sector activity will continue to intensify. Britain is condemned to sink along with its international peers into financial depression, a full-blown production slump, depression levels of unemployment, and assuming the political imperative to prevent all this by inflationary funding prevails, a final destruction of the currency.

It may not have been much different if Kwarteng’s budget had stood. But at least it was worth a try.

Rising interest rates are set to collapse the establishment

While interest rates were in long-term decline, the consequences of increasing state dominance appeared benign. Put crudely, so long as falling interest rates were driving financial asset values ever higher, the global investment community happily turned a blind eye to the inevitable consequences of Keynesian macroeconomics. Investors were content to buy government debt in the knowledge that values were underwritten by monetary policy.

Now that the inflationary consequences have finally arrived in the form of consumer and producer prices rising out of control, the spell of zero and negative interest rates has been shattered, and investors face growing losses and a widespread loss of confidence in the future.

Banks enter a phase of rising interest rates and falling asset values with overleveraged balance sheets. Bank directors are duty-bound to protect their shareholders from these changed circumstances. They have started to do so by reducing their exposure to financial assets, notably including bonds and collateralised loan obligations. They have also reduced their exposure to margin accounts used by speculators to leverage gains.

We are beginning to see activity in the $600 trillion mountain of OTC derivatives being curtailed. Troubled banks, such as Credit Suisse, are axing trading desks, and as part of its restructuring said to be looking to sell its structured products unit.[i] Though it is in its early stages, the withdrawal of OTC paper supply will have profound effects on markets and commodities. Market participants will have to adapt to other strategies for hedging risk. And the removal of paper supply of energy and commodities will divert demand into physical stocks, driving prices yet higher. Failure to meet margin calls will become a serious problem. 

So far, non-financial businesses, Main Street as opposed to Wall Street, have generally found that their bankers are reluctant to extend loan and overdraft facilities. But the banks are so highly leveraged, particularly in Europe, Japan, and Britain, that the contraction of bank credit is bound to undermine their GDPs. Other commercial banking networks less leveraged are bound to follow. 

The contraction of GDP is because commercial bank credit in the form of customer deposits settles nearly all transaction payments recorded in GDP, with the exception of a relatively minor proportion of payments settled in banknotes — which for our purposes can be ignored. When bank credit deployed in GDP contracts, GDP itself contracts as well. It is the contraction of bank credit which drives the fall in GDP, not a reluctance of economic actors to act. Irrespective of economic and monetary policies, contraction of bank credit is evidenced in a slump. It becomes a self-fulfilling event, with bankers increasingly acting as a cohort. 

The initial rise in interest rates currently experienced exposes malinvestments, and bankers’ commercial information informs them of deteriorating lending conditions. Therefore, they are further discouraged to extend loan finance and will seek to liquidate loans to businesses generally. What starts off as a prudent policy of risk containment rapidly degenerates into a bankers’ panic, driven by fear of losing all shareholders’ capital. And the higher the balance sheet leverage, the greater is the fear.

Faced with rapidly contracting bank credit, the establishment blobs around the world are sure to coordinate their actions in an attempt to save market values and offset contracting GDP. With a high degree of confidence, we can forecast that they will reintroduce quantitative easing, offer banks loan guarantees, rescue failing banks and double down on supressing interest rates. They are already managing prices and subsidising production in energy, actions likely to be extended to other consumer products. They might even try to suppress ownership of gold. In short, they will do whatever it takes for the financial and non-financial status quo to survive.

Government establishments need to take these actions for their own survival. The common factor in these policies will be an accelerating debasement of government-issued fiat currencies. It is a trend already apparent. Sterling, the euro, the yen, and China’s yuan are all sliding against the world’s reserve currency, the dollar. 

But the dollar’s strength is an illusion because its debasement is happening too. The Fed’s intention to quantitative tighten will shortly be abandoned: after all, these are hardly the conditions for it to contract credit. Instead, along with the other major central banks, the Fed will seek to replace contracting commercial bank credit with expanding central bank credit and provide support for collapsing bond markets. And when observers see the Fed coordinating its policies with the other central banks, its safe haven status as the world’s reserve currency will be exposed for what it truly is — just another fiat currency facing infinite inflation.

After the currency apocalypse

Following the collapse of fiat currencies, will libertarianism arise from its grave? The politics suggest that is unlikely, but there are positive outcomes. Even if a currency loses almost its entire utility as a medium of exchange, it will still be useful as a mechanism for distributing its replacement. Tying it however tenuously to legal money, which today is only physical gold, can be expected to stabilise the situation. Subsequent economic and monetary policies will then determine whether a replacement currency will last.

The global groupthink that currently coordinates and drives economic and monetary policies will not survive a currency collapse. Nor, it can be said, will the Keynesian economic beliefs which got us into this mess. The evidence from eighteenth century France, which experienced the collapse of John Law’s livre in 1720, is that his proto-Keynesianism was discredited. And it wasn’t until the French revolution in 1789 that the new revolutionary government, against widespread doubts in the French Parliament, resorted to issuing assignats to address the revolutionary state’s imminent bankruptcy. They quickly became worthless.

As was demonstrated in both Germany in 1923 and Hong Kong after the Japanese military yen collapsed, the only use for a discredited currency is to facilitate the public distribution of a replacement. Plucking figures out of the air, we might see a million fiat currency units refixed to an ounce of gold. Remembering that the true legal position is that gold is money and currency no more than credit, the task is to turn a currency into a sound money substitute. But it is likely that that will only happen as a last resort when the monetary authorities have no other option.

Initially, the public will want any scheme to be successful. On 15 November 1923, a combination of a notional fix of one trillion German reichsmarks to one rentenmark, backed by a promise that the quantity of rentenmark would be strictly limited, was sufficient to stabilise the currency situation. But there is no guarantee that statist attempts to restore confidence in the currency will work today. A key difference from 1923 Germany is in the level of mandated state commitments to wealth redistribution and intervention. That must be abolished by any government wanting a new currency regime to stick.

Instead, the inflationists might be tempted to merely lop noughts of the currency, as Turkey did with the new lira replacing a million old lira in January 2005. At that time, Turkey could still raise funds in foreign currencies despite its own currency sliding. But Turkey’s monetary situation was entirely different from the one we now face, where every major western currency faces a groupthink coordinated collapse. 

We should note two things about a global currency reset. The first is that despite current beliefs that they will be a function of government, it will be brought about by markets reflecting the actions of ordinary people. Therefore, government abuse of currencies will be firmly rejected. Secondly, it must be admitted that some nations will do a better job of stabilising their currencies than others. And some countries will resort to intensive nationalism, a kneejerk reaction as chronicled in Hayek’s The Road to Serfdom

By destroying the ability of nations to finance wars by inflationary means, perhaps America and others will alter their foreign policies to stop interfering in business which is not theirs. Above all, fiat currencies facilitate wars. Without ruling out Hayek’s warning, on balance the demise of fiat currencies can be expected to contribute to a more peaceful world. 

And as for free markets rising Phoenix-like from the ashes of fiat currency destruction — that cannot be taken for granted. It is far too early to consider a resurrection of practical economics, sound money, or economic progress based on free markets.





[i] See



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