At a drinks party in around 2011 or 2012, I had the ear of Andrew Feldman, aka Baron Feldman of Elstree, former Chairman of the Conservative Party—he of “swivel-eyed loons” fame, though he never actually said that. (Andrew is a friend, by the way.)
“Tell George Osborne to buy back the gold Gordon Brown sold,” I advised.
“At these prices?” smiled Andrew with a mix of incredulity, amusement, and polite condescension.
“Yes!” I said. “It might be good publicity, even. Or do it secretly, and announce it afterward. The important thing is getting the gold back. We will need it at some point. Why not just quantitatively ease the money and buy it back? You’re doing that and buying bonds.”
Andrew laughed at my joke, which wasn’t a joke, and then wandered off in search of someone more sane to talk to.
Given the government has this extraordinary power to create money out of nothing, why don’t they just print money and buy hard assets with it?
Park that thought for a moment.
A couple of months ago, I was at Liz Truss’s book launch—aren’t you impressed with all this name-dropping?—and I ran into Mark Littlewood, former director of the IEA and now of PopCon. I started bending his ear about the media’s failure to report on the Bank of England and how it had shafted Truss with its advanced notice of gilt sales, Quantitative Tightening, which began the day before Kwasi Kwarteng’s budget and led to a collapse in the gilt market, the blame for which was then left at Kwasi Kwarteng’s doorstep. Mark nodded. “Do you think I don’t know?” said Liz.
“I would love to be able to grill Andrew Bailey in public,” I said. “Or just ask him one question with people watching. I know exactly what I’d ask him.”
“What?” said Mark.
“If the Bank of England can print money, why do we need taxes?”
Mark laughed and, thinking I was asking him that question, replied, “Money illusion.”
Money illusion is one of those economic terms that is pretty self-explanatory, but here is an example. Most of know a hundred pounds does not buy you today what it bought you ten years ago, but we still think in terms of past prices. (Old people do this more, for obvious reasons). A worker might feel great with a 5% raise, but if inflation is 7%, he is actually earning less than before. This has been an ongoing process for decades with the result that, in real terms, wages are lower.
Here’s the Wikipedia definition (edited by me):
In economics, money illusion, or price illusion, is a cognitive bias where money is thought of in nominal, rather than real, terms. In other words, the face value (nominal value) of money is mistaken for its purchasing power (real value) at a previous point in time. The term was coined by Irving Fisher in Stabilizing the Dollar, and popularized by John Maynard Keynes in the early twentieth century. Fisher also wrote a book on the subject, The Money Illusion, in 1928.
Mark and I both doubted that Bailey would give that as the answer, even if he thought it, which we doubted he would. If governments started printing money and buying assets, many would start questioning money, and faith in fiat might quickly evaporate. If governments worldwide started doing it (eg Britain prints money and starts buying land in France) you are in race-to-the-bottom territory. It would be a race to the bottom for fiat currency.
Even if Bailey thought money illusion was the answer, he certainly wouldn’t say it because that in itself undermines fiat.
Modern money has nominal value, but not intrinsic value. It relies on illusion (and the law) to function. The more you debase it, the less likely that illusion is to hold. Maybe money delusion is more accurate. Obviously, the backing of the law makes a great difference, as does the fact that taxes must be collected in this money, but, boy, is the system vulnerable. Illusions can last a long time. But when they shatter, they shatter very quickly, and then there is nothing.
I don’t say the system will pop. It has been going on for a long time. But I do observe that it very easily could.
It’s why I recommend both gold and bitcoin. Both are money in and of themselves: one is the product of nature, the other the product of extraordinary amounts of computer power. Neither relies on anyone else.
If you are interested in buying gold, check out my recent report. I have a feeling it is going to come in very handy.
Life After the State - Why We Don’t Need Government (2013), my first book, is now back in print - with the audiobook here: Audible UK, Audible US, Apple Books. I recommend the audiobook ;)
And if you are in the Scottish neck of the woods this August, look out for me at the Edinburgh Fringe. I’ll be performing one of my “lectures with funny bits”. This one is all about the history of mining. As always, I shall be delivering it at Panmure House, where Adam Smith wrote Wealth of Nations. It’s at 2pm most afternoons. You can get tickets here.
Great piece Dominic, thanks.
thank you :)
Let's go further and perhaps ask Bailey: "Why do we need the BoE to print money when the Treasury is capable of doing this?" After all the Treasury is just as independent or NOT as the BoE is.
very true.
Modern money is neither a fantasy or an illusion but certainly complicated enough to seem so. Modern money is promises to pay something in the future, a promise that will always be less valuable tomorrow than it is today in terms of what it will buy but not loosing value too quickly or no one would hold it or accept it all. It would be clearer if the notes were issued at a face value and then lost a certain percentage each time they changed hands. I suppose that's coming as a feature of CBDC's of some kind then the game can become still more complicated but perhaps more honest. Modern money is debt circulated for use in payment that should in theory disappear once used for payment but in practice circulates forever becoming less and less valuable over the course of time as more and more of it accumulates in the market.
Dominic did you see the investigation in the times about drug dealers and gold in Dubai? Do you think this is large enough to impact the price like you said in your previous post?
I haven’t looked at the story but Dubai has always been something of a centre for gold smuggling especially in the late 60s and 70s fwiw
Interesting article. What price do you see BTC at the top of this cycle? Don't worry, won't hold you to it!
"When you are ready, Neo, you won't be valuing BTC in dollars anymore..."
Very true
$150-200k
Yeah, I think $145k minimum
Dominic, have a look at step 6
https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-box-3/content/income-box-3-on-2024-provisional-assessment
Regarding the article on "How to protect your wealth under Labour" have a look under the proposed wealth tax " box 3 " in the Netherlands. It is interesting concept on how the Dutch are going to approach this tax. The proposed 36% tax on your total wealth ( property, savings, shares, crypto) includes unrealised profits on your equity and crypto portfolio! So essentially, the Dutch fiscus at a particular point in time takes a mark-to-market position and levies 36% on your total value, despite not having realised any gains potentially. This clearly doesn't bode well for a healthy investment environment as people end up having to liquidate positions in order to pay the levied tax.
I can't believe they'll be able to levy a 36% wealth tax but I shall take a look
I'm going to take the unpopular side and disagree with a few points.
Neither gold nor Bitcoin function as money without another person. Nothing does. Money is a purely social technology.
Money is also not an illusion, nor a delusion. It's the foundation of civilization. And civilization is not based on a collective delusion, but on a shared reality. As corrupted and exploited as that reality has become, it began in a completely logical and sound manner.
Money is not wealth. Conflating money and wealth is the corruption of reality that leads to all the horrible exploitation of money we see today.
https://open.substack.com/pub/f0xr/p/money-is-not-wealth?r=3i492j&selection=a6a3c1e6-a466-4440-9052-3d77605abc0d&utm_campaign=post-share-selection&utm_medium=web
Thanks for your comments. There is some conflation between store of value and medium of exchange here, even so I accept your point about social construct - enforced by law. Gold and bitcoin are nobody's liability and both occupy the status they enjoy without coercion, that makes them superior.
Definitely agree with you on the superior forms of money.
"So what makes money function? Why would someone accept a piece of paper with a picture of a dead president in exchange for a very real and very valuable good or service? Well, the obvious answer is that they can be certain they'll be able to exchange that piece of paper with someone else and get an equally valuable good or service in the future. This is circular logic though, and leads some economists to mistakenly attribute the value of money to a "collective delusion". But since every known advanced civilization has used some form of money, calling it a delusion is both inaccurate and boorishly pretentious."
no need to be rude
A quote from my article from a few months ago, not directed at you my friend, just thought of it reading through your article.
You indicated that you would put in a link for the best financial newsletter, but I did not see. Could you give it to me?
Thanks
Welcome to Africa, and we didn’t even need a boat this time!
On “Life after the State” - all good. 1 and a half quibbles - why “administrate” and not “administer”, which seems to me a perfectly good English word? Or do you draw a distinction? And, I haven’t yet finished the book, but no mention thus far of a turnover tax (obviously to be levied at the same flat low rate as all other taxes). It seems to me this is the perfect solution to the likes of Amazon (billions of sales in the uk but very little tax paid), zombie companies turning over lots of cash but not actually being very productive or profitable, and the book cooking that any company does, using the 12,000 pages of tax law, to reduce their declared profits to near zero. Very hard to hide your actual sales, unlike your profits. And companies that make all or most of their sales overseas would pay little or no tax in the UK (their employees and shareholders would, of course).
Administer is right. I was young and stupid.
Turnover tax complicated in practice. LVT much better
Seems to me the attraction of both is the same. You can’t move land offshore, and you can’t pretend you didn’t send item X to a UK address. Perhaps I’m missing something.
Turnover tax penalises low margin businesses
You could as easily say turnover tax encourages high margin businesses (which I would have thought was a good thing)
but eliminates no-margin businesses pretty quick
Meanwhile Novavax is going gangbusters, Condor Gold not so much, but thank you.
It’s time will come :)
I’m still holding 😂
Illuminating as ever Dominic. I remember you explaining to me how (fiat) money isn’t real a long time ago. And I’ve been scared ever since. Thanks for that.
Any time. Fiat isn’t real but demons are