The serfs have rebelled – Europe next?

Friday, November 18, 2016
By Paul Martin

By Alasdair Macleod
GoldSeek.com
Friday, 18 November 2016

Hayek’s The Road to Serfdom described how personal freedoms are progressively eroded by the state in the name of the common good.

His warning is more associated with totalitarianism and dictatorships, than modern democracies, but the statist attitudes he warned about still apply today and lead to the same loss of personal freedom and increase of state control. In the main, the serfs are patient and tolerant of their masters, but in a democracy, the establishment behind the state risks being challenged. And that has happened twice this year, first with Brexit and now with Trump in America.

We can be certain that the establishment in Britain and America will reinvent itself. Theresa May is not out to change the world, but is adapting to the new realities. Donald Trump is still mostly an unknown quantity, but the initial impression is one of appalling economic ignorance, dressed up as the new Reaganomics. He proposes substantial tax cuts and state-directed infrastructure spending “to make America great again”. But unless tax cuts and infrastructure commitments are made in lock-step with reductions in government spending, which seems extremely unlikely, the outcome will be to stimulate latent price inflation to a surprising degree.

The starting point for “Trumpenomics” could hardly be worse. The level of debt in both the government and private sectors is too high to be sustained already, and from this elevated base it is proposed to print and borrow much more. Payment for this profligacy can only come from credit creation, as banks mobilise and gear up on their excess reserves at the Fed to buy government bonds. The accumulation of latent fiat money since the financial crisis will at last be applied to driving up prices on Main Street, instead of mainly on Wall Street as heretofore. The status quo has concealed enormous economic and monetary distortions, the unwinding of which will have unexpected consequences for prices.

Private sector wealth and savings have already suffered considerable dilution from decades of the Fed’s monetary policies. Significant numbers of the American population are finding it hard to make ends meet, and have been in financial difficulties for many years. Accelerated government deficit spending is an added malevolent influence, which can be expected to drive up prices of ordinary goods, all other factors being equal. While Keynesians believe in economic stimulation, the reality is an added round of monetary debasement will increase the impoverishment of the “deplorables” who voted for Trump. It will turn out to be a destructive Keynesian policy additional to existing policy mistakes.

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