The Bear’s Lair: How can property rights best be secured?

The death of Antonin Scalia throws the future of the U.S. Supreme Court into flux, while Donald Trump and Bernie Sanders are achieving some electoral success while proudly flouting their contempt for property rights. With year upon year of zero or even negative interest rates worldwide, Maynard Keynes’ “euthanasia of the rentier” seems ever closer. Yet the U.S. has a short and comprehensible written constitution, often cited as a reason why property rights in Britain and the EU are a bit wobbly. In a world where the masses are populist and elites believe crazed economic theories, protecting property rights securely is damn difficult.

In the United States, Thomas Jefferson queered the pitch right at the start. John Locke had defined the fundamental rights of civilized man as “life, liberty and property” – a practical formulation, albeit one reflecting the radical Whig circles in which Locke moved. Locke’s formula was thus entirely suitable for the radical Whigs who made up the American revolutionaries, with no taint of the “Church and King” Toryism that was still the majority belief system in Britain, but which most of the American colonists rejected.

However, Jefferson was an immensely vain man, well-schooled in the airy maunderings of the fashionable French “philosophes.” Hence Locke’s down to earth formulation was not good enough for him; he wanted something more uplifting, above the understanding of mere practical men such as had given him the commission of drafting an independence document. Hence “pursuit of happiness” – a phrase that commits the state to nothing, prevents it from no excess, indeed allows every kind of state overreaching in the name of pursuing whatever the elite’s latest fashionable conceit holds will give the lower orders happiness.

Had Jefferson stuck to Locke’s “life, liberty and property,” and had the drafters of the Constitution incorporated that phrase prominently in their draft, property rights would be very much safer than they are. Even the worst distorters of the Constitution such as Roger Taney, William O. Douglas and Harry Blackmun would not have been able to twist those words into a meaning they plainly did not have.

The alternative British approach to property rights has them enshrined in common law, built up over a millennium or so. This worked very well when politics itself respected the common law and political structures changed only at a glacial pace. It lost its saliency with the Whig gerrymander “Reform Bill” of 1832, which without moving the country significantly closer to democracy ensured that traditional barriers to assaults on property were broken down. As Robert Cecil, later Lord Salisbury, wrote in 1859: “The classes that represent civilization, the holders of accumulated capital and accumulated thought have a right to require securities to protect them from being overwhelmed by hordes who have neither knowledge to guide them nor stake in the Commonwealth to control them.” Unfortunately, after the error of 1832 those securities were no longer available.

The position was made considerably worse, not so much by the nationalizations and uber-taxation of Clement Attlee (1945-51), which could be and were reversed, but by the structural vandalism of Tony Blair (1997-2007), which tore down institutions such as the existing House of Lords and Lord Chancellorship that had protected property rights, albeit sometimes ineffectively, for more than a millennium. A government that abolishes the office central to the British constitution since AD604 and replaces it with a Ministry of Justice like any Sovietized East European republic is a menace to civilization, let alone property rights.

Economically even more than politically, property rights are essential. My work in the countries of former Yugoslavia shows why. Under Yugoslav Communism, individuals were allowed to have foreign currency savings accounts (the only savings that were worth anything given the frequent bursts of hyperinflation and collapse of the dinar) but the foreign currencies themselves were forcibly remitted to the Yugoslav central bank in Belgrade. In 1991, when Yugoslavia broke up, the central bank kept the foreign currency, thus leaving local banks outside Serbia with foreign currency liabilities to their savers unmatched by assets.

Slovenia replaced its citizens’ foreign currency accounts in cash (it could afford to), Croatia replaced them with foreign currency bonds in 1995, Macedonia replaced them with foreign currency bonds in 2000 (helped by me) and Bosnia never replaced them as from 1996 its finances were run by a U.S. Treasury/IMF cartel of Keynesian foreign advisors who failed to realize the importance of local savings. As a result, Slovenia’s economy resumed growth immediately, Croatia’s resumed growth in 1996, Macedonia after a lost decade resumed growth in 2001 and Bosnia’s economy has languished for the past two decades and counting.

Middle class savings, and middle-class property rights in general, are essential to economic health. In countries where they have been disregarded, such as Argentina (mostly through the government printing money and allowing inflation, but sometimes through outright expropriation) living standards have been far lower than one would expect from the available factors of production and the education quality of the people.

Since 2008, middle class savers’ rights have been under attack worldwide. By subjecting the world’s savers to negative risk-free rates of return, central banks are destroying the world’s capital base and eating the seed corn that will feed the next generation of wealth-creating small business. It’s little wonder the rate of small business formation in the U.S. has been below the rate of small business death for the last seven years; the savings available to start small businesses have been badly depleted. Artificial stock market and real estate bubbles have disguised the pain of this, and have been assisted by a further tsunami of consumer leverage, but at some point the bubbles and leverage will reverse and the true destruction will be revealed.

Even in rich countries, this is not the first time middle class property rights have been assaulted through inflation and interest rates. In Britain in 1945-79 the enormous government debt was brought down largely at the expense of middle class savers, whose savings were eroded by interest rates consistently below the rate of inflation (and subjected to tax on top of that) with draconian exchange controls used to prevent savers from escaping the government’s destructive economic policies. The result was a rapid decline in Britain’s relative wealth, only reversed when the Thatcher government brought an era of sharply positive real interest rates, lower inflation and freedom from exchange controls.

In the United States today, it looks very much as if the assault on property rights is about to be intensified. Fed chairman Janet Yellen, from her testimony last week, is clearly considering trying the experiment of negative interest rates, an even more direct assault on the remaining pathetic hordes of assets owned by the middle class. The middle classes will at least have one alternative: investment in gold, which has bounced nicely since the potential further assault by central bankers became apparent around the start of the year. Gold’s critics claim that it is an entirely passive asset, which yields no return. That still makes it superior to stock markets which contain only inflated values and bonds whose risk (of default, or of price falls from interest rate rises) exceeds their minimal return. If the authorities will not give us properly sound money with a Gold Standard or a proper Volckerized Fed, we will have to create it on our own.

There is also now the chance that the Supreme Court, deprived of the admirable Justice Scalia, will become cemented with a firm block of five Justices who believe in Keynesian economics and violation of property rights. It has gone through such periods before, notably under the Chief Justiceship of Earl Warren from 1953 through about 1975. However, it is quite clear from the primary election results that after nearly a decade of massive budget deficits and funny money the generally admirable U.S. electorate now has no clue whatever which set of economic policies is likely to give them a stable and improving standard of living.

Hence even if the Supreme Court switch is delayed until after November’s election, it is probably inevitable eventually. There is currently nothing clear in the United States’ governing documents preventing the Supreme Court from making up “rights” depriving the middle classes of their property (and Kelo v. New London in 2005 showed that even with a good Supreme Court, property rights are not inviolate.)

There is no full solution to the problem of preserving property rights, but there are at least better defenses. By a formal Constitutional amendment, passed by Congress and 38 states, John Locke’s “Life, liberty and property” must be written into the Constitution in the first paragraph, preferably with a red addendum: “SUPREME COURT: THIS MEANS YOU!”

Then the Federal Reserve’s charter must be amended to remove the unemployment mandate and insert a second mandate, beyond preventing inflation, making the preservation of middle class savings an explicit Congressionally-mandated objective of the Fed. With an inflation/savings dual mandate, instead of the current leftist inflation/unemployment one, the Fed will be forced to do its job properly.

Don’t hold your breath. Meanwhile gold remains, as it has been for millennia, the only secure way of preserving your savings against government assault.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)