No way out – Why policy advice is futile, and what you should do instead

G7 Finance Ministers, anno 2008

G7 Finance Ministers, anno 2008 (Photo: IMF)

First of all, apologies appear to be in order. Over the past six weeks, my commentary on the Schlichter Files was somewhat sporadic. I spent most of the summer with my family in Italy where I voluntarily removed myself somewhat from the fitful convulsions of the financial system’s death-throes. Then, last week I attended the world conference of the International Society for Individual Liberty on the island of Vulcano where I gave a speech on my upcoming book. The conference was a very pleasant affair with many interesting presentations, and I met some fascinating people. I am back in London now. Normal service should resume, in particular as we are nearing the official publication date for Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown. In fact, in the United States the first copies are being shipped as I write this. The book should be available in the UK within the next four weeks.

The Washington Post recently featured my book in the Political Bookworm column of their online edition. You can see it here. Naturally, I am very pleased about this. There is, however, one sentence, the last in Steven Levingston’s article, that I should probably comment on:

“In all he says, it is hard to know if this [paper money collapse] is his wish or his fear.”

Now let me be very clear that I am convinced that paper money collapse is inevitable. Our present system of elastic money is not only suboptimal it is also unsustainable. As I show in my book through a systematic and fundamental analysis, elastic money must lead to the accumulation of imbalances, to capital misallocations, and to resource mis-pricings, and those must lead, over time, to economic disintegration and chaos.

The present system must end, it will end, it will now certainly end badly and probably soon. As it is inevitable it doesn’t matter what I wish. To wish that this would not happen would be as sensible as to wish that the present summer would not end, and that the days would not get shorter. I don’t wish it and I don’t fear it. The system must go. Good riddance. What I do fear, however, are the political consequences and the societal fall-out from the crisis, and I particularly fear the responses it will provoke from governments and state officials.

Book cover for Paper money Collapse

Out now!

Of course, the fiat money crisis is not a natural catastrophe. It is entirely manmade. It is the direct consequence of political decisions and political action. In particular, it is the inevitable consequence of the decision to abandon a gold-based monetary system, a system of essentially inflexible and apolitical money, and to replace it with entirely elastic and constantly expanding paper money under the control of central banks. It is the direct consequence of the erroneous belief – which, sadly, is still the guiding principle of modern central banking and reflected in ninety percent of the financial commentary in the media- that low interest rates and additional credit are good regardless of whether they are the outcome of true saving and capital accumulation, or simply the outcome of fiat money creation.

I am quite glad that Levingston raised the question of my own personal attitude to what is going on because it gives me the opportunity to clarify my position. His point is also somewhat related to something I encounter more often now that I present my book to various audiences or that I give interviews on its subject matter. I think there often exists an assumption that one cannot simply predict some unpleasant outcome in the field of economics and not offer at least a bit of hope that things may turn out differently, of promising the possibility of a way out that would spare us all the painful consequences of past actions, of decades of misguided policy, of cheap credit and limitless money. There is the unspoken belief that after all my research on the topic I must have some good policy advice up my sleeves. Often people ask me, so what should be done? If what central bankers and politicians are doing presently is, as you say in your book and on your website, counterproductive, what should they do instead? What is the solution? Just as in the case of the Washington Post blog, I suspect that the fact that I speak so little about specific policy reforms leads people to believe that I don’t care about where we are going, or I might even look forward to the disaster.

What should be done

Mises in his library

Ludwig von Mises; photo by

There is only one solution and that is to stop the printing of money and the artificial suppression of interest rates, to return to hard money, to allow interest rates and market prices to again reflect the true extent of voluntary savings, and to thus allow the liquidation of the accumulated imbalances from previous money expansion. But because we had a four-decade long period of unprecedented fiat money creation globally, these imbalances are now so big that the necessary liquidation would be very painful – too painful for the political class – which got us into this mess in the first place – to ever deem it acceptable. The overstretched banking industry, the overextended asset markets, insolvent governments – all of this is screaming for a cleansing liquidation and recalibration – and has done so for years. A crisis has now become unavoidable. But politicians still think that the power of the state is unlimited, that what they don’t find acceptable will simply not be allowed to occur. Only in the realm of politics is the belief widespread that reality is optional, and reality must simply be made to conform to the wishes of the political elite. Of course, policy cannot create a new reality. What policy does at the moment is try to postpone the inevitable correction ever further. “Not on my watch” is the modus operandi. This will make the final crisis even worse.

I quoted Ludwig von Mises on this on a couple of occasions but I will do it again. In his magnum opus of 1949, Human Action, the grand master of Austrian School economics said:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

The endgame will be “a final and total catastrophe of the currency system”, and “later” may indeed be soon. Remember, we have been postponing the liquidation for decades and happily piled new debt and new imbalances on top of the old debt and the old imbalances. By not stopping the printing of money and the accumulation of debt and capital misallocations, and by adding to them instead, the policy establishment is making sure that the final crisis will only be worse. This is why I consider it pointless to come up with policy recommendations. What would be the purpose of presenting a detailed plan of converting to a gold standard, which is what should be done? Mainstream economists, politicians and central bankers will either ridicule or ignore it. They still believe that the answer to all these money-induced imbalances is – more money! They are hell-bent on creating a total currency catastrophe. And they will get it.

A whiff of Weimar Germany

Chart of German Hyperinflation

A touch of Weimar? (Chart Greenburger)

Let’s just take a casual look at the events of the past month: While I was hiking in the Dolomites or relaxing in Tuscany, the destroyers of paper money did not rest. The ECB completed a U-turn of embarrassing proportions and switched from exit strategy to buying more PIIGS-bonds funded by the printing press – a policy that continues to this day and that will not end! And here is Dartmouth College Professor and ex-Bank of England money-debaser David Blanchflower arguing for more quantitative easing from the Fed. When asked how much, the good professor showed his generous side: $ 1 trillion or $ 2 trillion, just print until things look better. We will show this economy who is boss!

And in this column, British pundit Ambrose Evans-Pritchard argues that real monetary stimulus hasn’t even been tried yet. He recommends some globally co-ordinated monetary blitz – what if all central banks opened their monetary floodgates simultaneously? Surely, that is going to buy us a nice recovery.

If you thought that this lunacy is being greeted with unbelieving embarrassment, as it should, think again. As I write this, the Swiss government has declared that international cooperation in monetary debasement is a splendid idea – and has just pegged the Swiss franc, formerly the gold-rimmed version of paper money, to the PIIGS. Congratulations!

Make no mistake: They will all get what they are asking for. But to expect me – or anybody else who sees the writing on the wall – to engage with a policy establishment beholden to the myth that prosperity and jobs can be had through constant monetary manipulation, through artificially low rates, money printing and asset bubbles – that is asking a bit too much. And let’s face it: it is not as if any of them would even want to listen to what I have to say. I put my case out there – it is for others to decide what to do with it.

Here is another, less well-known quote from the great man, Mises:

“Political ideas that have dominated the public mind for decades cannot be refuted through rational arguments. They must run their course in life and cannot collapse otherwise than in great catastrophes…”

We are approaching such a catastrophe with full force – and rather than coming up with a monetary reform (and there is only one true reform: a return to gold) that will certainly be rejected by the powers that be, I think the most sensible thing one can try and do is to protect oneself, one’s family and one’s wealth as best as one can from the ensuing fall-out. My recommendation has been and still is to reduce exposure to banks and to governments – the two grotesquely bloated entities that have for decades benefitted from their privilege to be unconstrained paper money producers and who are now close to OD’-ing on that privilege. Hold gold (and maybe silver) instead of paper money, bank deposits and fixed income securities. Real assets, not paper assets.

The coming monetary meltdown will wipe out vast amounts of paper wealth, and it will facilitate one of the largest transfers of real wealth in human history. Many people will lose a lot – sadly, it will be mainly those who produce more than they consume and who save the difference – and then save it in the form of cash, bank deposits and bonds. All paper money collapses decimate the middle class. No, I certainly don’t wish for this but the chance of this being avoided is practically zero.

Short of the century – coming soon!

As always, some will win, and there is no shame in trying to be among them. Apart from the rise in the gold price and certain other commodities, I think that there is another money-making (no pun intended!) opportunity: fixed income markets will soon be the short of the century. Those out there who think the world will be just like Japan for the next twenty years are wrong, in my view. Japan’s present state is not stable and it doesn’t constitute an endgame. It is collapse in super-slow-motion. The ongoing fiscal deterioration and the mind-boggling accumulation of public debt mean that the ultimate endgame there will be inflation and paper money collapse, too. And I doubt that the U.S. and Europe will manage to stretch this out for quite as long as Japan has.

goldBut here is what I fear, and it leads me back to my recent trip to Vulcano. I am very concerned about the political fall-out from the crisis. Although it will ultimately mark the end of state paper money, of politically controlled interest rates, and government-manipulated asset markets, don’t expect the state to leave the economic stage without a fight. For the immediate future at least, I expect more interference with markets, more regulation, more confiscation via taxation, capital controls and curtailment of property rights and individual freedom. In a crisis, many will demand more government and more state action, not more freedom and markets.

When I spoke to a libertarian audience in Vulcano I was speaking to friends, to like-minded people; people who, like me, value personal freedom and free markets. I sensed that they, too, would have loved me to give them a bit more of an uplifting message. Many of these libertarians believe that what they are involved in is simply a battle of ideas, and that they can, if they try hard enough, convince others of the benefits of a free society and of capitalism. I don’t think that this is entirely wrong. But I fear that many of them underestimate the opposing forces that the present crisis may unleash.

In the meantime, the debasement of paper money continues.

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The bureaucracy versus you
Reuters Television interview


  1. says

    “…don’t expect the state to leave the economic stage without a fight.”

    This is why I see a problem with your advice to purchase gold: there is ample historical precedent for governments deciding to confiscate privately owned gold.

    Assuming an eventual switch back to gold-pegged currencies issued by central banks, an individual who continues to hold gold until the monetary switch occurs will surely be vulnerable to a program of State confiscation.

    Now it may be that any eventual monetary switch back to gold is achieved without the involvement of central banks. As you say, the market is spontaneously remonetizing gold now – at least as a store of value. Yet what is there to prevent States from simply announcing a new gold-pegged currency and then seizing private holdings of gold?

    What am I missing?

    • says

      The scenario you describe – a voluntary return to a gold standard – is the least risky for the gold owner in that there is no incentive for the state to confiscate gold. In such a system gold is money – you can always exchange banknotes or deposits for gold, or you can pay with gold. Confiscating gold or banning its private ownership stands in logical conflict with the principles of such a system. If the state was willing to abide by the discipline of a gold standard the gold owner would have nothing to fear. Gold confiscations occur whenever the state wants to fund itself or support its banks by printing paper money. Then, gold is a constant threat to the acceptance of paper money as it offers an alternative. The point is, however, fairly academic at present. A voluntary return to a gold standard is very unlikely. And that is precisely why there is growing risk of state intervention in the gold market, of taxes on gold ownership or transactions, and even a risk of outright confiscation. But what alternatives do you have? Do you want to hold paper money and deposits at shaky banks? You KNOW that paper money gets devalued. It is official policy! And you know that they will have to print more and more as they are unwilling to endure a correction. But you are not holding gold or silver because of the POSSIBILITY of confiscation?
      I am not saying you should buy gold and then you can relax and stop worrying. Anybody who has a bit of wealth has to constantly try and be a step ahead of the redistributors, confiscators, interventionists and enemies of freedom and private property. For the time being, I see little alternative to holding a considerable portion of your wealth in gold. That is my view at least.

  2. Sinner says

    When the currency crashes, basically everyone will be issued around $1000 in the new currency – all existing deposits cancelled. This is what happened in Germany at the start of the Deutschmark, in Korea when the new Won came in, in Argentina, etc. That’s the way its done.

    Yet what is there to prevent States from simply announcing a new gold-pegged currency and then seizing private holdings of gold?

    Absolutely nothing – and again historically this is what will happen
    See 1932′s Executive Order 6102 which confiscated private and corporate US gold “hoards”. Clearly, anyone holding “gold” investments, promisory notes, etc, will lose all this once the currency collapses. If you’re going to hold gold, hold the physical metal personally; keep those holdings away from the US government; maintain sufficient defense capacity to defend your holdings.

    But there is an ever better way to profit from the coming banking collapse: borrow to buy real assets – real estate, nonperhsiable food, long-term phyical assets. When the monetary system is restarted, the banks crash, the debts are cancelled and you keep the assets. Again, this worked very well in Weimar, in Argentina, etc.

  3. says

    My question was motivated by academic rather than practical interest; I agree with you on gold and silver as comparatively safe investments.

    Yet I’m still not entirely clear on the confiscation point. Yes, conversion of gold holdings into other assets under a gold-standard would be easy, but Roosevelt’s 1933 executive order, for example, was for the confiscation of gold “hoardings” even though the dollar was still pegged to gold at the time. The President apparently believed that his order would help to boost the economy somehow.

    I appreciate your patience on this point.

    • says

      To Michael Fagan. Michael, please accept my apologies for not responding sooner. At the risk of oversimplifying things let me try and give a short answer. From 1879 to 1933 America was on a gold standard. Over the same period American banks conducted fractional-reserve banking on a growing scale, meaning they issued fiduciary media, that is, claims on money proper (gold) that are only partially (fractionally) backed by gold, such as uncovered banknotes and bank deposits. While hardly a new practice, the banks received important encouragement from the state to do this, not least by the founding of a lender-of-last-resort central bank in 1913: The U.S. Federal Reserve. As long as the public accepts these fiduciary media and treats them just as the public treats money proper, the banks are de facto money producers. More “money” is circulated, more credit is available, interest rates are lower. The U.S. enjoyed a credit boom. We know that such an artificial boom must end in a bust – and, of course, it did. When that happens, the public is no longer so keen on fiduciary media but wants again to hold money proper. This causes problems for the banks. They don’t have enough gold to pay these claims. Enter Roosevelt. By stigmatizing the holding of money proper (gold) as a social evil and calling it “hoarding” and by confiscating it and banning its private ownership, Roosevelt wanted to help the banks and force the public into holding fiduciary media again. In all but name the gold standard was abandoned in 1933.
      Gold is an inelastic form of money. Governments and banks are interested in elastic forms of money – money, that they can create. Manipulating the gold market, taxing or banning gold ownership or even confiscating gold is always an attempt to obstruct or prohibit the public’s use of the best alternative to limitless state paper money or deposit money.

  4. David Goldstone says

    I recall reading somewhere that the practical consequences of the Roosevelt gold confiscation were fairly limited. Not surprisingly, it was never really practical for the Government to search under the beds of 150 million people. I think more of a problem might be capital controls, including gold. So whilst the risk of domestic confiscation is fairly low, there may well be real problems in terms of moving gold across borders in future.

  5. Archie Dean says

    “Although it will ultimately mark the end of state paper money, of politically controlled interest rates, and government-manipulated asset markets………………”

    Wishful thinking I fear Detlev. Has a single historical collapse ever resulted in the State
    exiting stage left whispering “OK, we was wrong and we give in!! It’s time to try (properly) free markets and State free exchange mechanisms this time – over to you guys!” ?

    Not once that I am aware of. That the backlash to the current woes will certainly not be libertarian is precisely what worries me the most. Most people do not blame the State for this crisis – it’s the Bankers or the Profiteers or just Capitalism that is really to blame!! In any case, the end of something does not of necessity result in the birth of a new paradigm. More often than not, the whole cycle simply starts over. It will start over this time too, sad to say.

    “..don’t expect the state to leave the economic stage without a fight.”

    Indeed not, but, to effectively repeat myself, the woeful fact of the matter is that most people still cannot conceive of any alternative to the State as societal arbiter, and until very large numbers of us do recognise the reality of the State as being an anti-social, evil institution – the best possible stage for vested interests to masquerade as moral principle indeed – nothing much of substance will change.

  6. E.T. says

    Enjoyed reading this- good to know we have economists with their heads screwed on correctly! As a monetarily uninformed engineer I have a couple of questions- a.) could the fed not peg the dollar to gold and silver in name now, and then undertake some form of reverse fractional reserving until the whole currency is completely bimetallically underwritten? & b.) what effect would the fact that we now use gold in electronics (including a lot in spacecraft which is intrinsically irretrievable) have on the standard? It strikes me that we would get to a point at which all of the metal the currency was pegged to would be in use and so unavailable to fill bank vaults with.


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