ECB, photograph by Florian K
Anybody with any knowledge of economics should feel uneasy at the sight of a country where half of recorded economic activity is conducted by the state. Are such semi-socialist societies operable, and if so, for how long? That complete socialism is impossible and that any attempt to establish it must fail, we know for sure since Ludwig von Mises explained it in detail in 1922 with his masterly Die Gemeinwirtschaft (Socialism). The only reasons that the Soviet Union did not collapse earlier but managed to drag out its persistent economic decline for seventy-odd years are that it introduced full socialization to no more than seventy percent of its economy, and that it had its bureaucrats constantly peek through the Iron Curtain and observe market prices in the capitalist West to be able to conduct at least a bare minimum of rational economic calculation at home. Without such capitalist crutches Lenin himself would for sure have witnessed the demise of the socialist state in his own lifetime.
On the basis of economic theory and historical experience, the life expectancy of a societal model with 50 percent or more government control over the economy does therefore not look promising. The taxing, resources-consuming state-parasite must constantly weaken and sooner or later kill the productive and wealth-creating market-host. When does this happen? Well, we are about to find out, as we are now all part of some gigantic real-life experiment, bravely conducted by the current policy establishment in Europe and elsewhere at our own expense and that of our children. Across the EU, the share of government spending in the economy is already around 50 percent, depending whose numbers you believe. If we could account for regulation and interventionist legislation, the state’s grip on economic decision-making is certainly larger. To call such an economy capitalist is a joke, albeit perhaps not as cruel a joke as the one the economy itself, with its persistently anaemic performance, is playing on the Keynesian economists and their ridiculous clamour for ever more government spending to boost ‘aggregate demand’.
Ludwig von Mises; photo by mises.org
The only thing you have to believe in is consequences and you will be able to see why we live in economies of stagnant real incomes, lacklustre growth and ever-growing public debt. So when a rating agency such as Standard & Poor’s comes out and knocks the credit ratings of some of Europe’s finest down to AA+, the only sensible reaction is to gasp in shock: “What?! These countries are still AA+!?” –Remember that the AAA-rating used to denote that the issuer was at NO risk of default. Whether that is a sensible assessment of any issuer is a different question but to assume that any of the European states should deserve this credit standing although all of them (and that includes Germany) embrace the European brand of socialism lite and are therefore on a slippery slope to fiscal disintegration, seems bizarre.
The bailout delusion
Yet, the news of the downgrades of France and Austria did shock the political establishment, which is not used to be confronted with the prospect of fiscal finality quite so bluntly and disrespectfully. In and of themselves, the downgrades are, of course, meaningless. They reflect just another opinion, and with its AA+ rating for these countries, Standard & Poor’s is still extremely generous. But the downgrades have now had a knock-on effect on the rating of the European Financial Stability Facility (EFSF) – no snickering please!
The EU bailout bazooka can hardly be rated better than the individual members that, collectively, foot its bill. With more and more countries approaching a fiscal paralysis of their own, the fund is facing a growing number of bailout candidates but a dwindling number of capable sponsors. This is, I would like to advance, pretty straightforward and should not require deep thinking. But for whatever reason this logic has escaped the mainstream up to now. For months and months, media commentators and numerous financial market economists have told us that the solution to the debt crisis involves ‘fiscal integration’. Just like ‘policy coordination’, ‘fiscal integration’ is one of those phrases that come with warm feelings of solidarity and fellowship. “If we all just pull together and help each other we will weather this storm.” Of course, all of this sounds quite different in parts of the English media, where it triggers fears of political centralization and the creation of a European super-state. No question, political centralization and bureaucratization will advance in coming years – at the further detriment of market forces and individual freedom. But in the context of the debt crisis, one thing is clear: ‘fiscal integration’ cannot logically constitute a solution to the current predicament. ALL members of EMU have fiscal issues of their own, and systematic and structural issues at that. ‘Integration’ would be conceivable (which does not mean it would be advisable) if only a few members faced fiscal challenges and the others were healthy. That is not the case.
Photograph by M. Bartosch
The differences between the fiscal trajectories of the various states are of degree only, not direction. Even the relatively stronger members of the club suffer from habitual overspending and self-inflicted fiscal decay. Last year the German state collected more taxes than ever, yet still ran a budget deficit. The idea that combining a number of sick states makes one healthy super-state is nonsense. Make no mistake, we will certainly get the European super-state but not because it solves the debt crisis, but only because further centralization of political decision-making suits the interests of the political establishment, and because it fits their belief that every problem requires political solutions and thus more government.
Some will argue that what is really happening is not so much ‘fiscal integration’ but ‘austerity’ imposed by Germany. Well, it has to be said that the idea of drastically cutting these countries’ expenditures is a lot less silly than the idea of pump-priming their economies with cheap cash and funding government spending via the printing press. What is needed is indeed a drastic shrinking of the state as this is the only way to lower the debt burden and to reinvigorate the economy. Such a strategy would require wholesale withdrawal of state activity from large parts of the economy (I would recommend withdrawal of the state from all parts of the economy!) but that is not on the agenda at all. Instead, what is being tried is to lower these countries’ dependency on the debt market in the short term through a combination of expenditure cuts and tax increases (or more efficient tax collection and thus more state control over resources). This, it is hoped, should then calm down the bond market and lead to lower borrowing costs. So far, this strategy is not working, in my view, as it has not sufficiently impressed the bond market. These policies are just too little too late, even if they may look draconian against the backdrop of deep-rooted and unrealistic expectations of the limitless welfare state. The sporadic tightening of spreads in recent weeks was most certainly not in response to convincing ‘austerity’ measures but the result of the gigantic injection of new money from the ECB into the banking sector in December. By design a lot of this newly printed money has found its way into the respective local bond markets. It appears to me that most ‘austerity’ policy in troubled nations is conducted not so much for the benefit of bond investors but simply to demonstrate good behaviour to the Germans and to get them to loosen their purse strings further and rubber-stamp some additional QE from the ECB in return.
The ‘no-QE’ deceit
A. Merkel, Photo by World Economic Forum
The whole thing is a charade. Merkel appeases her domestic electorate by enforcing allegedly tough ‘fiscal pacts’ on Germany’s ‘European partners’ and by having her local central bank terrier publicly bark against ECB bond buying when fact is that Germany is already on the hook for massive amounts of transfer euros (all commitments will certainly come due) and the ECB is already printing like there’s no tomorrow. One of the most bizarre misconceptions out there, tirelessly regurgitated by the mainstream media and their economic commentators, is that the ECB is somewhat more restrictive than the happy QEers, the Fed and the Bank of England. This is nonsense. The quantitative easing is just indirect, via the banking system. In December, the ECB injected close to €500 billion into Europe’s struggling banks to the cheer of assorted inflationists in politics and media. A lifeline for the banks? A stimulus? Or simply more ‘kicking the can down the road’? Providing further proof that everything is now underwritten by the ECB, which happily accepts every bit of junk as collateral, the Wall Street Journal reported last week that Spanish banks’ present exposure to domestic property developers is unchanged from 2007 levels, and that further property development is being funded. The size of the ECB’s balance sheet (or the consolidated statement of the Eurosystem as of December 31) is already more than 30% of Eurozone GDP. The Fed’s balance sheet is around 20%.
And more money is on its way. In February, another round of money printing will be conducted, again not called QE but ‘long-term refinancing operation’. Rumours are its size is going to be another €500 billion but last week numbers as high as €1trillion were circulated in giddy financial markets. This will continue, and we know how it will end. Just as in the US and in Britain, the printing press is the last line of defence for bankrupt states and insolvent banks.
And apropos ‘kicking the can down the road’: With the EFSF now downgraded, it appears that the IMF is getting ready to provide more bailout money. As this money is also unlikely to be obtained from friendly aliens, it is clear that other governments will borrow it and central banks will print it.
Democratic delusions
Photographer Graeme Weatherston.
When I present my case for the inevitable collapse of the fiat money system and a return to hard and apolitical money, such as a proper gold standard, one of the push-backs I routinely get is that such a system would not be compatible with our democracies. Voters demand that the modern welfare democracy be maintained. The highly interventionist state that has grown in our societies over the past 50 years enjoys the support of majority opinion. Large parts of the public want the state to play a strong role in the economy. They are under the illusion that the state can guarantee growth, stability, security and social equality through its interventions. Restricting the state’s financial maneuverability, as a gold standard would do, is deemed politically unacceptable.
I agree that such may be the expectations and wishes of the voting public. But as an economist I have to ask whether these are realistic expectations. Does modern democracy require us to ignore economic science and simple logic and arithmetic, and assume that whatever the democratic process articulates as the will of the people must somehow be realizable? Reality is not optional, and the laws of economics can be altered by the democratic vote as little as the laws of gravity.
Capitalism is the only tool we have for maintaining and improving our standard of living. Today’s brand of interventionism obstructs market forces and weakens the capitalist system’s ability for wealth-generation. This is to the detriment of everybody, and more and more people are beginning to feel it. That the present system has for so long appeared to so many to be stable – at least until recently -, and sustainable has largely been the result of a deceit. Constant expansion of fiat money, the accumulation of debt and other imbalances have created a mirage of prosperity and economic momentum while undermining the true wealth-generating power of the market economy. The delusion has thus come at an ever higher price, and the bill is due soon. Ultimately, printed money is no substitute for savings, artificially cheap credit no substitute for proper capital creation, and asset bubbles no substitute for entrepreneurship and real growth. But these have increasingly become the crutches of the modern welfare democracy.
Economists should educate the public about what really generates wealth but most of them seem content to come up with new and ever more outrageous schemes to prop up the present system a tad longer with more fiat money, more debt and more asset bubbles. Those who do not want to consider the inevitable endgame of this system but instead prefer to flatter democratic prejudices and feed irrational expectations do not do the public any service.
And by the way, just as democracy has not guaranteed rationality in economic policy, it will also be a poor protector of personal liberty. The democratic masses are now sufficiently conditioned to believe that politics and state action are the solution to every problem, and when the crisis intensifies and anxiety levels rise, the majority will happily sign away the remaining bits of individual freedom and property rights in a desperate but entirely counterproductive bid to stem the tide.
In the meantime, the debasement of paper money continues.
26 Responses to Deceits and delusions – Some thoughts on the euro-crisis and democracy
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{ Hello Jamie, I don't want to pile on. This is important stuff and there is... } – May 17, 3:57 PM
{ Hi Detlev, I recently bought and read your book. Wanted to start reading it again... } – May 17, 3:42 PM
{ Jamie, I do take that into account. Every week the US government has to borrow... } – May 17, 10:35 AM
{ Hi Detlev, Thanks for your detailed response. Obviously we have a difference of opinion on... } – May 17, 9:01 AM
Outstanding critique Detlev.
I believe that this slow motion train wreck is shaking people’s trust in government and will continue to do so. It will soon become apparent to most people that no governments can solve these massive problems using the same ideas and actions that have brought us here.
The truth and reality will impose itself regardless of people’s desires. We just have to make sure that the true alternatives to the conditions that are leading to this disaster are available for discovery. And thanks to you Detlev, and others, people are learning the truth. The sheep are not as ignorant as the wolves would hope and that will increase as this unfolds. There is much anger and distrust out there, but I am hopeful we can make this a peaceful revolution. But a political and intellectual revolution is what we need. Time will tell how it unfolds. Again thank you.
Excellent, as per your usual standards. I applaud your realistic tone regarding the likelihood of democracies to shed their last vestiges of entrepreneurial freedom in the coming crunch. While the inescapable march of reality ought to teach the masses a lesson in the value of free markets, the more likely result is that most will believe the false blame that will be heaped on capitalism as the system collapses under the twin mountains of worthless paper and debt.
The problem, as I see it Myno, is that no one under 50 has lived under free markets and the next oldest demographic experienced the Great Depression and truly believe that it was FDR’s policies that made their lives bearable. I fear the corrective, when it comes, will be an outrageous and frightening affront to the sensibilities of 95+% of the population, who have never endured true deprivation and haven’t the skills to mitigate even their most basic needs.
Dear Detlev.
Congratulations! Another great article from you! There is nothing better for me to read such a lucid and insighful logic applied to human action as you do! Please keep the good work and I do really appreciate the stoicism you showed in participating at BBC program! I can’t stand BBC!! It’s the same with Ron Paul…and I don’t really know how he can stand these silly debates he is on without a sense of sickness!!
But a real misesian has to follow his motto. Tu ne cede malis.
Excellent as always. The demands of the mob will simply guarantee a less than orderly crunch. We will certainly need to explain the problems and solutions at that time as capitalism will certainly get the blame, and the sheep will beg for more government. Convincing the people that seperation of economy and state is the answer is my mission and it will grow more and more important and difficult as time passes. I hope we can win this intellectual battle for the liberty of mankind. We see in America the government taking our liberty over security fears, however, that will pale in comparison to the liberty they can take over hunger and displacement brought about by inflation and currency collapse.
Once again, an excellent read. Thank you for clearing the fog and exposing things for what they are, with clear and well delineated thoughts.
So…are you saying that the captalist system will start paying its CEO’s their massive wage increases and huge bonuses in gold, rather than fiat money.
So they continue to succeed in the system set up for them to continue to reap BILLIONS, and keep their workers on the same wage.?
In capitalism you make money by serving the consumer. You have to produce goods and services the buying public willingly purchases, or you have to help produce these goods and services. That’s the only way to generate income. The consumer, through his decisions to buy or to abstain from buying, decides what gets produced. Profit and loss are the tools by which the consumer directs production (hint: WE, the consumers, have made Microsoft and Apple big, and WE have made Bill Gates and Steve Jobs billionaires). In such a system, some people will be more successful than others. Nobody can say what income distribution will look like. It won’t be the same income for everybody, that is for sure. But something else we can say with certainty: this is the only system by which we can constantly improve the material position of everybody. Society overall gets wealthier, although some will certainly advance faster than others. Such a system requires working markets and those require hard money, as I explained in my book. In the system we have presently, a system of constant expansion of fiat money, the market gets distorted. During the fiat money expansion phase (the last 40 years), the banking and financial industry has benefited disproportionately. So have the holders of certain assets, the prices of which get lifted more rapidly by the inflationary process (in particular real estate). But this system is now in its endgame. That the banks now get bailouts can hardly be blamed on capitalism. For capitalism to work, we need hard money.
Sally, if you think we should all earn the same, or should earn incomes within certain predetermined ranges, then you have to abandon the market economy. But tell me, who is to decide how much I or you are allowed to earn? The government? The majority of voters? Wages are prices. You want to fix prices. If you start to do that somewhere in the economy, you will have to do it ultimately everywhere. You will have to move to a centrally managed system. The government will then not only decide how much a CEO is allowed to earn but also what is being produced. You would have disenfranchised the consumer. Economics can show that this does not work at all.
‘And by the way, just as democracy has not guaranteed rationality in economic policy, it will also be a poor protector of personal liberty. The democratic masses are now sufficiently conditioned to believe that politics and state action are the solution to every problem, and when the crisis intensifies and anxiety levels rise, the majority will happily sign away the remaining bits of individual freedom and property rights in a desperate but entirely counterproductive bid to stem the tide.’
I think what people will find very disturbing, as this crisis deepens, is that poorest and the most vulerable people in our society will be affected the most. Our modern democracies have tried to even wealth distribution so that children,the disabled etc have a similar chance to succeed. The government gives this group some protection from exploitation and a great many would applaud this. To be a part of a society governed purely by market forces where the educated and affluent are able to assert and maintain their position in society over the more vulnerable may not be avoidable but it does make me uneasy.
I agree that the crisis will affect the weaker members of society most. This is, sadly, the case in every crisis. Although I would add that an inflationary crisis usually affects the middle class most. These are the people who save in the form of bank deposits, fiat money, bonds and pension fund assets. In hyperinflations it is the middle class that gets wiped out. But I strongly disagree with your description of democratic government and of capitalism. You say that democratic government protects the weak from exploitation under capitalism. I think this characterization, although very common, is not only naive, it is fundamentally wrong. Capitalism is not a zero-sum game. Capitalism, rightly understood, is a tool for extensive human cooperation. Under a capitalistic system every member of society – whatever his or her qualifications or natural abilities – can mix his or her labor with the labor and skill of a vast number of other people (most of which, of course, we never meet or even know about) and with a vast stock of accumulated capital. Such a system allows a higher productivity of labor for everybody, and, importantly, allows for productivity to constantly rise. Why is such a system of extensive human cooperation to the disadvantage of the less skilled, or those who you consider weak? (Please see Ricardo’s Law of Association, or Law of comparative cost, that explains how you benefit from the market system even if everything you can do can be done by somebody else better.) How do they get “exploited” by this system? A system that constantly advances living standards must be in the interest of the “weak” and of children and the disabled, no? By contrast, the democratic process pits different groups in society against one another in what is, by definition, a negative sum game.
Paul,
Im sure Mr. Schilchter can better answer your thoughts but I just want to say this very quickly at the risk of turning this into a message board:
Capitalism is the best thing to ever happen to the poor and underprivelaged. The poorest in America today live much better than the European Kings of centuries past. Also, the educated and affluent are not necessarily the most successful individuals within a capitalist system. There is a place for everyone in capitalism and good ideas can make one wealthy regardless of background or physical stature. Consumers rarely consider the education or the affluence of the creator of the products or services they purchase. You are correct in that the poor will be affected most as this crisis deepens. The coming crisis is one of inflation, and the poor are absolutely affected more by inflation. The State via fiscal extravegance and monetary insanity will do much more damage to the poor than the market forces you seem to fear.
The use of State issued paper pre-printed tickets as money probably means most States have already long been insolvent, with the Central banks acting as administrators. If Greece et al ‘default’ they are defaulting on a previous debt arrangement with their creditors.
In other words, there is not enough substance money, real savings or equity at hand to even begin to pay off debts such incurred on inflated madhouse asset prices and public sector pension aspirations etc, let alone maintain standards of living of the past.
A hard rain is gonna fall.
A glossary would be helpful in any future editions of your book Detlev.
Greetings from Australia.
Democracy has done the opposite of guarantee rational economic policy: it has guaranteed deeply irrational and myopic economic policy. Hans-Hermann Hoppe explains well the differing incentives facing hereditary monarchies and democratic governments and the resulting differing propensities towards inflation and interventionism. His arguments convince me we will only see a return to sound money and free markets with a return to something akin to hereditary monarchy…Perhaps a monetary collapse would eventually make this possible, although I shudder to think of the process we would have to go through.
Detlev, greatly enjoyed your book and insights. What I’m interested in is how you see this playing out. Essentially the superset of most likely outcomes and their triggers. Isn’t it simply either massive inflation and currency destruction or very large interest rate rises as investors start to realise that the debt they’re owed is about to be diluted by inflation. But what will trigger this realisation? I would have thought that the only way out of this is for all/most countries with huge debt to grow at large rates. Has anyone attempted to calculate what sort of growth rates are required to keep this balancing act going, and whether this is realistic? And if not realistic shouldn’t the general level of interest rate being demanded by holders of debt be going up rather than just for the Euro ‘peripheral’ states?
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In computing there is the concept of a “race condition”. This occurs when two processes are running simultaneously and the outcome depends on the order in which they finish. It is impossible to predict what the order will be without knowing every detail of the internal state of the system, which in practice cannot be known.
Our society is now in a race condition. The first process is the paper money collapse described by Detlev Schlichter. The second is the loss of confidence in government referred to by John Campbell in the comment above. The outcome depends on how long each process takes to run.
If the economic disaster arrives before trust in government has declined sufficiently then the result will be a sudden lurch into authoritarianism. The majority will willingly surrender their remaining freedoms in the misguided belief that the state which caused the crisis can somehow save them from it. It will be the fascism of fools.
If the other process wins then the economic crisis will become the final crisis of Big Government. The majority will rapidly go from distrusting the state to believing that the state is ruining their lives. The crisis will still be very painful but it will clear the way for a better society to emerge.
But to predict which process will complete first we would have to know the exact internal state of the system, which would mean understanding the thoughts and feelings of millions of individuals and the result of all their interactions. In practice that cannot be known.
Andrew – Interesting thoughts. My money would be on economic disaster occurring first. This is because most OECD countries have such a large percentage of their populations who are dependent on their Govt’s for their welfare. And I agree that the result of this will not be pretty.
Detlev,
Great artcile as usual. Can I make a simple suggestion? Could you add a subscribe feature to your site so that we can get an e-mail when you post an article?
Keep up the great work!
Rob
Rob, I will check with my web-designers. Thanks for the suggestion.
Rob, FWIW, I use http://www.changedetection.com, which alerts me whenever a blog I follow (such as this one) has a change.
Great post again Detlev great insight and good feedback from the commenters too.
I have to admit I came pretty late to understanding this crisis and never really followed the monetary system until 2008.
In times like these Gold is the ultimate hedge however, it is really expensive too but at the same time I don’t trust these governments one bit and especially the UK gov. and the BoE to do the right thing.
Gold is touted as a form of wealth preservation but I was wondering what your thoughts are on stockpiling of foreign countries that will not undergo currency devaluation if we face a second banking crisis. I’m not sure what form this could take but currently it’s looking like this Euro crisis or it may be some other that we do not yet know of.
I have heard that Norway, Sweden, Singapore, hongkong, Canada and a few others have the best chances of still being around in the event of another crisis and as I am at the mercy of UK banks and the BoE, this situation is really stressful. I am part of the middleclass like most of us here and as you say we would be hit hardest as our savings get wipes in high inflation or hyperinflation.
So my thoughts are about whether it is worth looking into holding foreign currency in those countries mentioned above. I know you don’t deal with investing as you’ve stated in previous blogs and are purely focussed on the monetary system but do you think this is another valid way we can safeguard our wealth?
While I share your sentiments with a gold standard I believe that there is nothing wrong with the current system. In my limited knowledge I think the main cause of our monetary crisis is not the system itself. It’s the deregulation and absurd laws written in to make legalise processes and actions that to any sound mind, would constitute as a moral-hazard.
With any system whether it be gold, silver or anything else you can think of governments will always corrupt the system up. The only way to ensure the monetary system, in whatever form it takes, will never undergo a crisis such that we have seen in history related to hyperinflation and huge debts is to basically keep it out of the hands of government. Probably a large part of the population may object to this because in their minds government represents “democracy” in some sort of way because then the harsh reality would dawn on them that they are “alone”. This is not so and I think the current way of life has contributed to this way of thinking. As a commenter mentioned above the poorest in the presenttime lives as good a life as a king a few hundred years ago and it’d made us idependant and haughty. We think we do not need to rely on others’ but, as this crisis intensifies we’ll be appreciating that local economies and communities will have to come back into reality. At the moment we’re still in this “government can fix any problem” frame of mind but it will dawn on us that if we work together as communities then this will ultimately be best for us and we can work to form some kind of social-safety net that we believe only governments can satisfy. Afterall who who better to heed the misgivings of the local community than those nearest to you rather than government who is situated far from us and doesn’t know of care about our plights anyway. The only best use of government is to act as a sort of srbiter for local communities in law and justice and we would hope the government could manage this since it would now be fairly small and have less issues to deal with.
Anyway I just wanted to say that any law, as good as it might be in theory will always look bad when it’s put into the hands of bad or evil people and even a gold standard would fall to the level of the current system if it were reinstiagted. This is one thing that government is good at and will always find way’s along with their partners in crime (bankers and corporations) to get around. Not all governments are dastardly like the USA, UK and Europe and some countries like those I mentioned above are on a much more sounder footing however, unfortunately they might be dragged down along with those aforementioned ones due to the whole interconnectedness of the current system.
The Savings and Loan crisis set the precedent for the illegailities that started to unfold in the current system and then the revoking of Glass Steagle Act was the next major milestone. Also lets not forget the laws that preclude derivatives from being touched in a banktruptacy but everything else from bonds to deposit money is fair game. The corruption certainly has had the time to worm it’s way through the system via datsradly individuals who set the wheels in motion that would lead to this and earlier crisis. if these laws were not instigated I do not believe we would be living this crisis we have today. So I think this Economic Crisis stems first and predominantly from laws which are in nature illegal, subsequently made legal and much less to do with the flaws in this monetary system. I’m not saying the monetary system itself is totally sound – it isn’t but, ultimately its the laws which have allowed corruption and deciet to override moral-hazard.
***Sorry for posting twice, went through without proof reading***
Great post again Detlev great insight and good feedback from the commenters too.
I have to admit I came pretty late to understanding this crisis and never really followed the monetary system until 2008.
In times like these Gold is the ultimate hedge however, it is really expensive too but at the same time I don’t trust these governments one bit and especially the UK gov. and the BoE to do the right thing.
Gold is touted as a form of wealth preservation but I was wondering what your thoughts are on stockpiling of foreign countries that will not hopefully undergo currency devaluation if we face a second banking crisis. I’m not sure what form this could take but currently it’s looking like this Euro crisis or it may be some other that we do not yet know of.
I have heard that Norway, Sweden, Singapore, hongkong, Canada and a few others have the best chances of still being around in the event of another crisis and as I am at the mercy of UK banks and the BoE, this situation is really stressful. I am part of the middleclass like most of us here and as you say we would be hit hardest as our savings get wipes in high inflation or hyperinflation.
So my thoughts are about whether it is worth looking into holding foreign currency in those countries mentioned above. I know you don’t deal with investing as you’ve stated in previous blogs and are purely focussed on the monetary system but do you think this is another valid way we can safeguard our wealth?
While I share your sentiments with a gold standard I believe that there is nothing wrong with the current system. In my limited knowledge I think the main cause of our monetary crisis is not the system itself. It’s the deregulation and absurd laws written in to make legal processes and actions that to any sound mind, would constitute as a moral-hazard.
With any system whether it be gold, silver or anything else you can think of, governments will always corrupt the system up. The only way to ensure the monetary system, in whatever form it takes, will never undergo a crisis such that we have seen in history related to hyperinflation and huge debts is to basically keep it out of the hands of government. A large part of the population may object to this because in their minds government represents “democracy” in some sort of perverse way because then the harsh reality would dawn on them that they are “alone”. This is not so and I think the current way of life has contributed to this way of thinking. As a commenter mentioned above the poorest in the present time lives as good a life as a king a few hundred years ago and this is what has made us feel independant but haughty. We think we do not need to rely on others’ but, as this crisis intensifies we’ll be appreciating that local economies and communities will have to come back into reality. At the moment we’re still in this “government can fix any problem” frame of mind but it will dawn on us that if we work together as communities then this will ultimately be best for us and we can work to form some kind of social-safety net that we falsely believe only governments can satisfy. Afterall who who better to understand the misgivings of the local community than those nearest to you rather than government who is situated far from us and doesn’t know or cares little about our plights anyway. The only best use of government is to act as a sort of arbiter for local communities in issues relating to law and fairplay in all spheres of life, and we would hope the government could atleast get this right and manage this since it would now be fairly small and have less issues to deal with now.
Anyway I just wanted to say that any law, as good as it might be in theory will always look bad when it’s put into the hands of bad or evil people and even a gold standard would fall to the level of the current system if it were reinstigated. This is one thing that government is good at and will always find way’s along with their partners in crime (bankers and corporations) to get around. Not all governments are dastardly like the USA, UK and Europe and some countries like those I mentioned above are on a much more sounder footing because they are better human beings or atleast their leaders emphathise more with their people however, unfortunately they too might be dragged down along with those aforementioned ones due to the whole interconnectedness of the current system.
The Savings and Loan crisis set the precedent for the illegailities that started to unfold in the current system and then the revoking of Glass Steagle Act was the next major milestone. Also lets not forget the laws that preclude derivatives from being touched in a banktruptacy but everything else from bonds to deposit money is fair game. The corruption certainly has had the time to worm it’s way through the system via dastardly individuals who set the wheels in motion that would lead to this and earlier crisis. if these laws were not instigated I do not believe we would be living this crisis we have today. So I think this Economic Crisis stems first and predominantly from laws which are in nature illegal, subsequently made legal and much less to do with the flaws in this monetary system. I’m not saying the monetary system itself is totally sound – it isn’t. I fully share your view that asset bubbles, speculation and FIRE economy need to be kept to a minimum and more focus on the productive side but, ultimately its the laws which have allowed corruption and deceit to override moral-hazard.
Dear Detlev,
You provide a link to the ECB’s balance sheet, and I must admit that I am completely baffled by the numbers: our central bank holds assets worth 2,735,628 million (2.7 trillion) Euros !
Now my question is: whose money is this? It does not seem to appear on the balance sheet of the governments.
Is there any possible justification for such immense wealth being held by supposedly independent actors, who create our “public” money out of nothing and then lend it out to our governments? Am I the only one to find this absurdly criminal?
The only rationale I can think of, is that this made sense only as long as notes from the central banks were backed by gold. The end of the gold standard has thus been the most gigantic scam on this planet: all bank note liabilities of the central banks were converted overnight into assets! With the end of the gold standard, the only limit to money counterfeiting by the central banks is the inflation the population is willing to accept… Or do I miss something here?
Thank you again for your excellent insights.
@Rob & @Laird
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