Great Expectations


In Britain there has been a steady stream of economic good news stories over the past couple of weeks:

  •  Unemployment is reported around 7% (which was the Bank of England’s supposed target for an interest rate correction)
  • The rate of inflation is calculated to be around 2% (which is the Bank of England’s long term target)
  • Chancellor of the Exchequer George Osborne is reported to be backing an 11% raise in the minimum wage to £7!

Like 1984 the viewscreeen is constantly telling us that everything is great and getting better;

‘Chocolate ration up by 10% comrades!’

‘15% increase in the production of utility household furniture!’

So are things actually getting better; and if they are, what’s not to like?

Those familiar with ‘1984’ will know that Winston Smith had direct knowledge that the chocolate ration was actually reduced in the weeks before it was increased by 10%. Orwell’s joke is that since even this previous ‘reduction’ was based on fabricated figures, the reduction was no more ‘true’ or ‘untrue’ than the supposed increase!

‘Who controls the past controls the present

Who controls the present controls the future

The future is really about expectation.

Controlling the future is all about managing expectations. Managing expectations is explicitly what MONETARISM is all about. The stated purpose of MONETARIST policy is to manage expectations with regards to inflation and in particular wage inflation.

The past is really about the terms of the debate.

Controlling the past is all about controlling the terms of the debate. Controlling the terms of the debate is explicitly what MONETARISM is all about. There is no official opposition allowed in Monetarist politics.

Lets look at the good news in terms of managed expectations and managing the terms of the debate.

Inflation is Down

 Only a minority of the public believe that the official inflation figures reflect the real changes in the standard of living in Britain and other developed economies. Everybody accepts that the inflation calculation is skewed-but how exactly? Controversy most often centres round the process of averaging the price change in of a basket of goods whose rising or falling prices are deemed as representing the rate of inflation. Deciding what does or does not go into this basket determines the rate of inflation. This part is in fact, uncontroversial. I expect that a majority of statisticians will readily concede that the choice of what goes into an average basket of goods is inevitably somewhat subjective.

What is more controversial is the argument that the choice is driven by a systematic desire to skew the result of the inflation calculation and in particular what this systematic desire might be. Is it to allow surreptitious inflation and confiscate wealth by stealth? Is it to mask increasing inequality?

This is to miss the bigger point

Crackernomics argues that Monetarism broke the post war consensus in that it was unwilling and unable to support a political and economic opposition in the Anglo Saxon world. Since there could be no opposition there could be no need for an impartial civil service to service two or more opposing conceptions and methods for running society and the economy.  As a consequence ‘independence’ in the context of civil administration has come to mean something else than independence from any particular party political influence.

Independence now means independent of anti- Monetarist establishment forces.

This is what I mean by changing the terms of the debate. Changing the terms of the debate means that the change is never debated

Once the new definition of ‘independence’ is established, the next step is inevitable. In Britain inflation was running way above the supposed independent target of 2% in the four years since the Credit Crunch. But since the ‘independent’ Bank of England was supposedly committed to bringing the rate down (without raising interest rates of course!), it was possible to have ‘good inflation’. Because the independent Bank of England said it good and necessary was and no one is allowed to question the Bank of England’s independence.

When inflation actually started to fall, both the Federal reserve and the Bank of England miraculously discovered that employment rates were the real metric by which to judge whether interest rates should rise or not. And now that employment has reached the nominal rate which might trigger a rise in Britiain, it turns out that it wasn’t employment that mattered after all- in fact it was something else! (Tune in to regular Bank of England bulletins to find out what that something else might turn out to be..)

The point to take away is not whether this period of inflation or that period of deflation is bad in principle.

The point to understand is that the independent Bank of England will allow inflation or not according to the strategic needs of the Monetarist project. You have conceded the point of ‘independence’.

That is to say independence from your needs as expressed through the political system.

And your expectations have been modified accordingly.

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5 More Questions 2014


1 Is the financial emergency caused by the Credit crunch over?

In the Anglo Saxon world the situation has stabilised rather than improved significantly.

But this stabilisation is political in nature, not economic.

This means there is now a broad consensus among the people who matter as to what had to be done to overcome the initial and secondary effects of the Credit Crunch. There is however, a significant divergence of opinion as to what to do after that.

2. So what has been agreed?:

The first problem faced by Monetarists was how to prevent the complete devaluation of derivatives (democratised money) and the subsequent bankruptcy of the big banks.

Why was this important ?

Because it would have resulted in the collapse of the Monetarist project that had been underway since the 1970’s and the triumph of ‘socialism’!

What was the solution they came up with?

To lower the value of state issued money (the exchange rate) in relation to derivatives (democratised money) by:

Buying democratised money from the banks at a rate of one to one

Lowering interest rates to below zero and giving free money to the banks –  a process known as Quantitive Easing. Remember this policy was carried out globally – an unprecedented event!

This devaluation solved the initial problem but created a couple of new problems:

1. How to deal with the glaring political contradiction between a completely state run system (socialism for the rich),  created by a supposedly right wing small government movement (Monetarism)

2. How to stabilise the system in the medium to long term. In other words how to normalise the crashes that are now built into the system.

The agreed solution was

1. To make banks hold more state currency reserves as a proportion of the democratised money they hold. This makes banks truly sovereign entities, like mini countries that have to hold foreign currency to regulate the value of their own currency

2. Create a new regulatory  framework that transforms state institutions into arbiters between different sovereign Democratised Money creators. A clear example of this is the Trans Pacific Partnership (TPP)

3.  What has not been agreed yet?

What to do about the problem of inflation.

Some sections of the elite are arguing that there is not enough of it, or rather not enough generalised inflation. They argue that without a sustained bout of generalised inflation, (or alternatively the writing off debt on a massive scale), no recovery/restructuring of the economy is possible.


Here is THE key point :


Think carefully about this for a moment, what did Monetarist Chancellor of the Exchequer Gordon Brown mean when he famously proclaimed that there would be:


‘No More Boom and Bust’?

He meant that through Monetarist control of the money supply there would never again be the kind of periodic crises that had dogged the system for the previous century. He meant that Monetarists had literally abolished what had been called the Economic Cycle, and in a perverse way he was right. The trouble is, the Monetarists created an entirely new kind of Economic Cycle with its own periodic crises!

In other words predictable crises of over production that occurred every ten years or so are now replaced with unpredictable financial crises that occur on an unpredictable time scale.

Now that Monetarist fellow travellers are faced with the true consequences of the Monetarist plan, some of them are belatedly trying to introduce some of the old world back into the mix


Monetarism has destroyed all the mechanisms for creating generalised wage inflation. Trades unions, employment rights, ‘left wing’ political parties have all been destroyed!

Supply side economics has come home with a vengence. So for those who are trying to row back on the worst effects of the New World Order the question has become:

4. How do you get money into the system? How will the inflation problem be dealt with?

Over the past couple of years a number of attempts have been made to inject money into the various economic systems that make up the developed world. The nature of these attempts has tended to be spasmodic and coloured by national politics.

So for instance, in the USA Obama has given money to car manufacturers while in England Cameron has attempted to give to small business and for mortgages. The most bizarre and extreme example so far has been Abenomics in Japan which deserves a separate piece all on its own.

However, these attempts just create localised asset bubbles and even if something actually succeeded in creating inflation it would immediately spark a firelight with Monetarists who would scream that Weimar Germany hyper-inflation was on the way.

So the elite has a political problem; the split between Monetarist fundamentalists for whom the fight against inflation is a jihad and the moderates who want to row back a little bit. So far, the solution has been to avoid confrontation while continuing the QE that keeps the banks solvent.  But this cannot continue forever; neither the Monetarist jihadis or the moderates believe that we can have a continual state of emergency; the system has to be stabilised.

5. So what is going to happen?

As emergency measures (QE) are dialled back, there will be a rise in interest rates. If the moderates get their way, there will a concomitant rise in inflation; in particular wage inflation. This will stabilise the economy at something more like the pre- nineties state.

If the Monetarist jihad’s get their way, interest rates will rise without a rise in wages. There will be an inevitable housing crisis and a consequential banking crisis. And then everybody will find out if the new banking regulations that have been put in place are sufficient to prevent the banking system imploding.

This is the Acid Test.

If the banking sector stands up, then the Monetarists will have won the argument and the new Democratised Money system will be tried, tested and firmly in place.