Infinite stupidity

dollar notes falling from sky

Unlimited money! (Image by Salvatore Vuono)

“The unlimited resources” of the European Central Bank (ECB) is quickly becoming the new magic mantra in political commentary and financial market analysis, now that the bigger euro-dominos are beginning to wobble and everybody realizes that nobody has the firepower to bailout Italy, or to ‘recapitalize’ (i.e. bailout again) all the banks that lent to the country. So the chorus that demands that the printing press finally be put to good use is getting louder by the day.

Robert Peston, the BBC economics expert, last week claimed that the solution now lies with the ECB, and he spoke confidently of the ECB’s ‘unlimited resources.’ Yesterday Vince Cable demanded ‘unlimited powers’ for the central bank. He also shamelessly regurgitated the well-worn politician’s excuse for Europe’s problems, namely that these countries are under ‘speculative attack’. The advocates of large-scale ECB intervention now include many pundits and commentators plus a sizable group of financial market economists and strategists whom decency obliges me to leave nameless. “It is important to keep the ECB engaged,” as one economist put it, “as only the ECB has unlimited resources.”

Such proclamations immediately invoke Albert Einstein’s famous dictum: “Only two things are infinite, the universe and human stupidity, and I am not sure about the universe.”

Everything is going according to script.

Book cover for Paper money Collapse

Out now!

None of what is going on surprises me. It is perfectly in line with what I predicted in my book. However, I am ready to admit that I am a bit baffled by the quick willingness by so many people to embrace what is ultimately a sure road to complete economic destruction. In Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown I explain why systems of elastic money are always suboptimal, unstable and ultimately unsustainable. A monetary system like ours must, over time, accumulate dislocations and imbalances that will finally become so big that their liquidation through market forces is deemed politically unacceptable. Then, out of desperation, an unwinnable war against economic reality will be fought by means of the printing press. Ever more money will be created ever faster in a futile attempt to outrun the market’s urge to liquidate.

In chapter ten of my book, I describe the two final stages of a paper money system as Monetization of Debt and Inflationary Meltdown. We are now firmly in the Monetization of Debt phase. This process will accelerate in coming months and quarters. Not only in the Eurozone but also in the United States and in the UK. All of these central banks will continue to expand their balance sheets aggressively and use their ability to print money without limit to support banks, governments, and a wide range of asset classes.

Mario Draghi, ECB (photo by IMF/Stephen Jaffe)

Bernanke (Fed) and Draghi (ECB) pointed out in their respective press conferences recently that monetary policy is not a panacea for all economic ills. It doesn’t matter. Policy has no other tools left to postpone the inevitable or to make the status quo appear sustainable again. By the way, it is entirely immaterial what Bernanke or Draghi think and say. Their press conferences keep our dear Street and City economists busy. But these gentlemen are quickly becoming mere extras in a bigger political game, in which desperation rules, and in which they will simply perform their roles of fiat money producers.

When do we enter the final stage of inflationary meltdown? Difficult to say. It all depends on when the public loses faith in a form of paper money that is being printed in ever more bizarre quantities only to keep states and banks alive and to project some resemblance of normalcy to the masses.

I do not disagree with the mainstream economists on whether paper money central banks can create essentially unlimited amounts of money. Of course, they can. That is precisely why gold and silver as monetary assets were replaced with entirely flexible state money under central bank control in the first place. And I do not disagree that we will soon see more debt monetization by the ECB and other central banks around the world.

What is sheer lunacy, however, is to advocate such a policy as a solution, or part of a solution, to our problems. This is where I draw the line. It is simply beyond me how people who call themselves economic experts and who must have at least a basic understanding of monetary theory and some knowledge of economic history can seriously advocate debt monetization as a sensible policy tool.

Dr Strangelove – Or how I learned to love the printing press.

Printed money

Photographer Graeme Weatherston.

I suspect that many of them, at least the financial market economists, are talking their own book. Not in the sense that they personally invest in Greek or Italian sovereign debt. I know of no private individual who is this careless with his or her own hard-earned savings. Investing in these bond markets is now predominantly an institutional affair. Banks, insurance companies and pension funds own these securities (which means your own savings or retirement funds are probably at risk through the channels of professional money management). I don’t even want to imply that these institutions tell their economists to advocate debt monetization via the printing press so that they get bailed out – although I wouldn’t put it past them either. They don’t have to. I rather suspect that now that the fiat money model is approaching its endgame many economists, just like other people who built their careers in the financial markets of the past thirty years of cheap credit and ever-growing balance sheets, feel the ground move under their feet as established business models, career plans and the cherished benefits of sitting so close to the ceaseless fountain of easy money are all coming unglued. Our financial market economists now cling to anything that promises to buy them time and some stability, even if logic tells them that what they are advocating is exactly the opposite of what should be done. They are not unlike the gambler who knows he should quit but, out of sheer desperation, is rolling the dice one more time.

Of course, there are always those who are imbued in Keynesian economics and other sorts of interventionist myth to such a degree that they honestly think that there is no problem that cannot be fixed with government stimulus. If the medication hasn’t worked, just keep increasing the dose. Paul Krugman (Nobel laureate) and Christina Romer come to mind. But I don’t quite believe that all economists are in this camp.

But whatever their reasons and motivations, it is quite clear that all these economists are now mouthpieces for the establishment. They are all defenders of the status quo, or of what has passed for the status quo for the past thirty years. Government bonds should again be considered ‘risk-free’ assets, and banks should again be considered ‘too big to fail’ and ‘too important to fail’, so that risk premiums come back in and the symbiotic and clubby relationship between states and banks that a fiat money system fosters and that has been so mutually beneficial to the political class and the banks, can finally be restored. It is a sad spectacle to see people who call themselves economists and often even free-market economists to come up with ever more extreme recommendations of how we can fund Big Government.

To the broader public and the economy as a whole the collapse of this system would be painful first but ultimately hugely advantageous. It would allow a renaissance of real capitalism rather than the continuation of this system of monetary interventionism that has allowed the state to assume control over such vast resources and the financial sector to enjoy uninterrupted fiat-money-fuelled growth for decades.

goldWhat good do these economists expect to come out of ECB debt monetization? Do they really believe that once the ECB has committed itself to buying hundreds of billions worth of Italian government bonds in order to manipulate the yield on these bonds – against market forces – down to what the political class deems sustainable, let’s say 5 percent, that then Italian politicians will reform public finances in the country, that they will quickly bring down deficits and the debt load to sustainable levels, at which point Italy can borrow from the market again, the ECB can safely sell its bonds and reduce its balance sheet, and everybody lives happily ever after? Does anybody seriously suggest that this scenario is likely, probable or even possible?

Fact is that none of these governments can be trusted to bring their finances under control as long as they have access to cheap credit, i.e. to funds at ‘sustainable’ interest rates. Germany forced through the Stability and Growth Pact at the start of EMU (does anybody remember Theo Waigel?) that should have limited debt-to-GDP ratios to 60 percent, only to violate it herself. Germany’s ratio is now officially at 83 percent. The government is already on the hook for another EUR211 billion under its EFSF commitments, which are now all but guaranteed to come due as the bailout fund is supposed to cover first losses on bonds in order to maximize its ‘firepower’, meaning Germany is already set for more than 90 percent of debt to GDP. And that is supposed to be Europe’s “stability anchor.”

All rules and guidelines that were designed to guarantee the fiscal and monetary stability of EMU and were implemented at its start have by now been broken – without exception. Do you think that this will change once the politicians have obtained the unlimited support of the printing press?

 “Quantitative easing” in Japan, the United States, and the United Kingdom goes hand in hand with growing debt, not debt reduction. Providing a lender-of-last-resort and easy money and cheap credit to governments does not lead to deleveraging but to the opposite.

Only default and cutting off a government from additional borrowing will reform the government. That is why I say: Embrace default!

The Future

When the ECB will have implemented its backstop for Italian government bonds it will end up buying vast amounts of these securities at above market prices. Draining equal amounts of liquidity from somewhere else in the system in order to minimize the inflationary impact will be illusionary. Inflation will creep higher. Concerns about sovereign solvency are, of course, not restricted to Italy. These concerns plus rising inflation will put upward pressure on the yields of other bond markets, in particular Spanish and French bonds. The ECB will have to expand its support program in order to stabilize these bond markets as well. Why should unlimited ECB support be limited to Italy? What is good in the case of Italy must be equally good for Spain and France!

Albert Einstein

Albert Einstein (Photo by Ferdinand Schmutzer)

The notion that the ECB could ever change course now and tighten policy in order to fight rising inflation pressure will appear increasingly fantastical. Market participants and the wider public that uses the euro will simply not believe it. Inflation expectations will rise rapidly. Money will become a hot potato. When money demand falls, inflation will shoot up quickly, which would require the central bank to establish markedly positive real interest rates in order to restore confidence in paper money. But this would mean allowing several governments that are now reliant on cheap central bank funding to go bankrupt. This will not be allowed to happen which will undermine confidence in paper money further. We will have reached the Inflationary Meltdown phase.

All complete paper money systems in history were established to fund the state. Our system is no exception as becomes increasingly clear. All paper money systems in history failed. Ours will be no exception either. Our system is the most ambitious. We had a global system of unrestricted fiat money production for forty years. The endgame is fast approaching.

I increasingly feel like an observer who predicts that a war is likely and even inevitable, and who is fearful of the consequences as both sides have a massive nuclear arsenal at their disposal. And everyday in the papers and in the research pamphlets of ‘experts’ what I encounter is not concern, calls for moderation and thoughtful inaction but the shouts of war-mongering chicken hawks: “Press the button! Press the button!”

Let’s quote Albert Einstein once more.”Insanity: doing the same thing over and over again and expecting different results.” On that definition, the advocates of unlimited ECB support can safely be called insane.

In the meantime, the debasement of paper money continues.

 

 

 

 

 

 

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Comments

  1. Christian says

    Another great article about the insanity of our monetary system.

    I have one question for you. The German Bundesbank president Jens Weidmann is quoted in the German paper Handelsblatt today as saying that there should be no further monetary support to Italy from the ECB. (Quote: “Monetary policy cannot and should not solve solvency problems of states and banks.”)
    He also goes on to, I believe erroneously, state that Italy is economically strong enough to solve its own problems. While he is wrong over Italy being able to solve its own problems he is right on the first statement, but does seem to be a very lone voice in this regard.
    Would there be anything Jens Weidmann could do to stop debt monetisation by the ECB if he were to be the only European central banker with this opinion? Does large scale debt monetisation “simply” require a majority of the EUR-Zone central banker’s support?

    Thanks,

    Christian

  2. Fred says

    Dear Detlev,

    Thank you much for your insightful website. While I generally totally agree with your viewpoint and the “Austrians” in general, there is one fundamental point though that I think needs to be considered in much more detail. When you say: “All complete paper money systems in history were established to fund the state”, there should be made one essential distinction. That is:

    Is the money printed by the government debt & interest free, as in the case of Zimbabwe?
    Or is it_loaned_to the government, with or without interest, by a central/private banking system and without any proper backing (in gold or other securities) other than the very same government bonds purchased by that banking system?

    In the first case (Zimbabwe), the government is imposing a direct tax through inflation – this seems to be what you always mean by “paper money systems”.
    In the second case (USA, UK, EU, Japan, …), the bank system_lends_money to the government, without proper backing, producing inflation AND debt.

    We in America, Europe or Japan, on top of the inflation tax you so rightfully denounce, owe a massive debt for money that is created “ex nihilo” by a banking system headed by our central banks. Those central banks are not audited and have only the shine of public institutions. They pretend to “manage” the massive wealth they acquire through direct money creation, such as when they acquire government bonds and securities through “Open Market Operations” or “Quantitative Easing”. However, those central banks do not seem to ever_destroy_the money they create, which would also be made apparent through deflationary trends that we never observe. Central banks appear to actually pile up immense wealth, without any practical control by the public. What they manage is sustainable looting, restraining themselves via maximum inflation thresholds in order to avoid hunger revolutions!

    So, we actually seem to be ripped off by that gang of high level racketeers and counterfeiters that run the private bank network and coordinate it through our dear central banks, are we not? Or does none dare to say loud that the Emperor is naked?

    If this is what happens to us, if we gave the amazing privilege to a network of private banks to print “our” money without proper backing since the end of the gold standard, then we may actually be better off playing the game the Mugabe style: take public possession of our Central Banks, revoke all money creation privileges throughout the banking system, and cancel a sizeable part of our public debt through repossession of assets unlawfully acquired and a grand bonfire of state bonds… The inflation damage is done already, but at least we can get rid of (part of) our debts! After this good deed is done by the public at large, all political and philosophical trends allied that stand for the public good, there will be ample time to reclaim the gold standard, revoke legal tender laws, allow (or not) specific and limited credit powers to our governments, and other practical arrangements…

    Thank you again for this space.

    • says

      I am not quite sure that your description of the Zimbabwean inflation process is correct. But what you call the ‘first case’ (Zimbabwe) and the ‘second case’ (everybody else) are two different procedures to run a fiat money system, with the second case being obviously the more common one today. It is not correct that my analysis – whether in my book or on my website- refers to the first case only. To the contrary. Large sections of my book refer to every system of elastic money but wherever I have to be more specific, my analysis is based on the modern system as operated in America, Britain, Europe today. Please see my book in this respect.

  3. says

    It’s good to see these views coming to prominence as more and more people are coming to realise the insanity of our economic system and the ultimately futile attempts by the state to resuscitate it. Our institutions, our governments need rethinking and redesigning. Those in power lack the will and imagination to make changes.

    Hopefully the future of money will be one where money works for people, rather than the other way around that we have today.

  4. David Goldstone says

    Meanwhile gilt and T bill yields go ever lower. I wonder who is madder; the people you describe or those who are piling into US and UK sovereign debt? Talk about Out Of The Frying Pan …..

  5. wolfgang Mueller says

    Dear Detlev,

    at the moment I am busy reading your book. When I put down the book for a while to the latest news from the European bond market and the respective calls for “bold actions of the ECB”(= extensive money printing)I wonder whether you see a “tipping point” regarding the amount of money out-of-thin -air that the ECB can print before a massive sell-off of the PIIGS-Bonds sets in.
    So far the ECB has monetised around 300 billion EUR, do you think they can do another 300 billion ( which is very much what Italy alone would need in 2012) or a billion or 1,5 ? Or is it impossible come up with any guess about that issue now?
    I would appreciate your opinion on that. Thanks Wolfgang
    PS: Is there any chance of your book coming out in a German version anytime soon?

    • says

      Wolfgang, unfortunately it is impossible to answer your question. Nobody can say where that tipping point is. Look at the UK: Once the Bank of England is done with its presently announced QE program, the central bank will hold more than 20 percent of outstanding government bonds. That’s already madness. Of course, the ECB is nowhere near that if we take all outstanding euro-area bonds into consideration. But the important point is this: once the ECB is guaranteeing a ‘sustainable’ yield level for Italy it will have to do the same for other countries. What applies to Italy applies to others as well, and the market will quickly test the ECB’s willingness to buy ‘unlimited’ amounts at above-market prices. We could be talking about some very big numbers here very quickly. We could then find out where that tipping point is. The whole thing is a complete mess. We are sitting on a gigantic powder keg and these ‘economists’ are playing with fire!

      My publishers, John Wiley & Sons, own the translation rights. To my knowledge the German rights have not been sold yet.

  6. Steve Thompson says

    Here is an article that outlines the story behind the largest sovereign debt default in history and how IMF policy was clearly behind the failure:

    http://viableopposition.blogspot.com/2011/11/sovereign-debt-default-learning-lessons.html

    It is interesting to note that, despite the fact that 10 years have passed, Argentina is still negotiating with creditors over paying back nearly 25 percent of the defaulted debt. This precedent bodes badly for investors who will be negotiating with future Eurozone defaults.

    Welcome to our future.

  7. David Goldstone says

    The “unlimited resources ” of the ECB are a bit like the old fairy tale of the Magic Porridge Pot. An endless supply of free porridge but eventually we will end up drowning in the bloody stuff.

  8. Myno says

    If there was a poison that made you ever more manic depressive, in turns wildly enthusiastic and dreadfully depressed where you might commit suicide, and someone told you when you’re in that depressed state that you needed more of the drug, what would you think? Gimme!?

  9. Jamie says

    Detlev,
    Presumably you predicted hyperinflation back in 2009 when QE first started – why do you think that has not happened yet and why do you think it will be different this time, especially as inflation and GDP growth appear to be falling not rising across the developed world ? Also, could I ask you whether you have read any of the MMT economists and whether you agree with any of their ideas?

    • says

      Jamie, no, I did not predict hyperinflation in 2009. I do not even predict hyperinflation for the immediate future. Here is what I predict: My analysis shows that debt monetization/QE/money printing will not solve any problems. It will lead to more debt and more of the other dislocations the economy presently suffers from, as a consequence of which even more debt monetization/QE/money printing will be ‘required’ in the future. What we are seeing now is only the beginning. The central banks won’t get out of this. They will have to do more and more. Hyperinflation will kick in when money demand drops, i.e. when the public loses confidence in paper money. Where that tipping point is, nobody knows but politicians, central bankers and mainstream economists are adamant to find out. MMT has an entirely flawed and erroneous concept of the economy from the start. MMT economists treat the economy like a machine that they can control from above via ‘adjustments’ of interest rates, money supply, taxes and government spending. With these tools they believe they can control ‘aggregate demand’. Well, good luck! This is playing around with the large wholes of national account statistics without any appreciation of the underlying drivers of economic activity: individual human action, human cooperation on markets, relative prices and time preference.

  10. Leandro says

    Detlev,

    I came across your website a few weeks ago and since then I’ve become addicted to it since it makes so much sense. I’m looking forward to reading your book too.
    I presume you’re a very busy person and maybe will not have enough time to reply to my message but if you do have some spare minutes, I’d very much appreciate it.
    I’m an ordinary middle-class brazilian who’s struggled in the past few years to make some decent savings and now I’m sitting here watching inflation eat them all away. As any other retards in power, politicians in Brazil are ‘boosting’ our economy by the means of money printing. Needless to say, inflation is skyrocketing and it’s being outrageously masked by the government statistics. In the past a good hedge against inflation was buying dollars, but I’m reluctant to do so. I feel an urge to transform my hard-earned savings into hard assets before it’s all vanished, but buying gold in Brazil is (purposely) extremely bureaucratic and heavily taxed, the government wants to keep people with paper money and hinders gold purchase. To top it off, we’re living here in an enourmous real estate price bubble, with house prices ridiculously expensive never seen before (tripled in the past 3 years). Do you think there might be other alternatives other than gold/silver/real estate?
    Thanks.

    • says

      Leandro, I am sorry but I do not have any good advice for you. I think gold and silver are the essential self defense assets in this crisis, and whereever (and whenever) they get banned, taxed and regulated (and we will see much more of that around the world) savers will become defenseless. Real estate is often, sadly, a poor alternative for the reasons you quoted, and also because real estate will become a prime target for confiscatory taxation now that many states are about to go broke. I worry about the same things that you do and unfortunately there is no easy answer.

  11. Jason says

    Dear Detlev,

    I am pleased that I discovered your website. Like a lot of people I am trying to make sense of the escalating financial crisis, and your analysis is well-argued and makes a lot of sense to me.

    I am curious though how you respond to the various counter-arguments that are presently very popular with mainstream economic commentators. They all seem to castigate Germany for its irrational inflation-phobia, and advocate the ECB stepping in to “back-stop” eurozone sovereign debt. I mean arguments like these:

    1. Being a lender-of-last-resort to the government is “normal” central banking, so there is nothing irresponsible about it. It long predates the break-up of the Bretton Woods System, and before that the abandonment of the gold standard, so shouldn’t be conflated with the evils of fiat money. The Economist magazine (that bastion of the free-market!), recently pointed out that it is what the Bank of England has been doing ever since it was formed in 1694. Doesn’t a central bank that foregoes this function unnecessarily hobble itself and undermine market confidence?

    http://www.project-syndicate.org/commentary/delong119/English
    http://www.economist.com/node/21536567

    2. The Economist also pointed out that Britain has much lower borrowing costs than Spain, despite similar levels of debt and a bigger deficit, which the Economist attributed to the fact that Britain has the back-up of its own central bank which Spain does not. Evidence of the benefits from having a central bank “back-stop”?

    3. Doesn’t the experience of Japan disprove the argument that quantitative easing debases the currency and causes inflation? Japan expanded its base money supply for years without this having any appreciable impact on inflation. On the contrary, it still struggled to prevent deflation. Doesn’t that show that “Austrian” economists are “crying “Fire! Fire!” in Noah’s flood”?

    http://www.moneyweek.com/news-and-charts/economics/lessons-from-japan-why-quantitative-easing-wont-lead-to-inflation-42730

    I am just trotting out these arguments because I see them so often in response to the kind of fears that you are raising.

    • says

      Jason, I am of course familiar with these mainstream objections to my arguments, or better, the mainstream defenses and apologies for the present system. It would take too long to refute these arguments here in full. I have done so in detail in my book and also in various blogs on this website. Let me at this stage just make the following points. What does it mean to say that being a lender-of-last resort is “normal” for central banks? That is no rational argument for anything. It only means that this is what central banks are there for. They have been founded and are being supported by the state in order to allow the printing of money to bail out the state and the banks and to generate artificial money-induced growth spurts that always end in recessions. Sure, call it a lender of last resort. The question is, does it make sense and is it ultimately sustainable? The Bank of England is a strange role model, and the fact that The Economist magazine cites it as an example of how central banks should be run only proves how little understanding the folks at The Economist have of monetary theory and how little knowledge of monetary history. Let me be very clear here: The Economist is not a free-market paper. It is mainstream social democratic. It is largely statist and pro-Establishment. Its defense of freedom and free markets is lukewarm and moderate so not to offend those in power. It regurgitates a lot of mainstream rubbish. The Bank of England was founded in 1694 for one purpose and one purpose only: to fund the Crown which was in low standing with its private creditors (no AAA-rating here!) and needed cash. The Bank of England’s elevated position in the nascent British banking system was cemented from the start through numerous legal privileges. In the twentieth century, in particular since the shackles of the gold standard had come off, the BoE presided over one of the most spectacular and still ongoing debasements of money. Since WWII, the loss in purchasing power of the pound has been truly astonishing. This has hurt generations of British savers and undermined the British economy for the better part of a century. The BoE is not a role model but a curse on British capitalism. The full bill will be presented to British society over the coming years. But the folks at The Economist are obviously happy if the British government can fund its ever-growing deficits at a lower interest rate than the Spanish government – hurray!- while the British public gets zero interest rates on their savings, no real wage gains but a 5%-plus inflation rate. Do you need additional proof that The Economist is more concerned about the state than the public? By the way, my prediction is that the borrowing costs of the British state are soon to rise.
      Do yourself a favor, Jason, stop reading The Economist. You will save money and time.
      Japan. The Bank of Japan has done much less in QE than the BoE. All the major central banks are presently out-QE-ing the Bank of Japan. That does not mean that the situation in Japan is stable. Far from it. The massive public deficits have largely been funded by savings over the past twenty years (the reason the state could waste so many resources for so long) but now the Japanese savings rate has dropped substantially. I believe the BoJ will soon be ‘asked’ to support government debt and the banks more forcefully. Japan is a massive accident waiting to happen. The largest debt to GDP ratio (in excess of 200 percent) and the fastest aging population in the world. The choice for the state is the same as elsewhere: default or inflate.

  12. Christian says

    Hi Detlev,
    is there anything German Bundesbank President Jens Weidmann could do to stop debt monetisation by the ECB if he was the only European central banker with the opinion that it is a bad idea? Does large scale debt monetisation simply require a majority of the EUR-Zone central banker’s support or does it have to be unanimous?

    • says

      We are talking institutional arrangements within the ECB here. Whatever they are now, they can and will be changed. To my knowledge, unanimity is not required, although the ECB board likes to present its decisions as unanimous to the outside world regardless of how much arm-twisting and horse-trading occurred behind closed doors. Here is my question: If Weber and Stark, who were both opposed to ECB bond buying, felt that this was something they could simply vote down internally at board meetings, why did they feel compelled to resign? — Good luck to Weidmann but I don’t think he stands a chance. Maybe German opposition may hold up the ECB in the short to medium term but certainly not in the long run.

      • Christian says

        Thanks very much for the reply, your point about Weber and Stark makes perfect sense. Makes it all the more worrying.

    • Eveready says

      Yes, I agree, our problem is we haven’t had Keynesians like Krugman in positions of influence in the world’s governments and central banks. I mean Krugman just can’t get any air time anywhere. I mean we can all just roll off the tongue all the Hayekians making the morning news rounds.
      What did Nixon say, “we’re all Hayekians now”?
      Besides if Krugman is wrong, then the Germans would have problems selling bonds which we all know just couldn’t happen–WAIT! What’s that I’m seeing on the news this morning. Impossible! Germans having trouble selling bonds???

  13. says

    A system of fiat money, fractional reserve banking and democratic governments can avoid an unsustainable boom and an eventual financial bust ,if and only if, you have strong vigilant central bankers, governments who run balanced budgets or very small debts and avoid excessive welfare (and other spending and avoid the temptation to start financially ruinous wars or other imperial expansions) and prudent commercial bankers who run their banks with a strong credit culture and who eschew excessive leverage and excessive risk.

    However a combination of these paragons of virtue is very very hard to find and maintain for any length of time and therefore excessive debt , asset bubbles, currency weakness and the eventual collapse of paper money are almost always the result. The one notable exception would be Germany between 1945 and at least 2000. There, a particular combination of circumstances serves, to explain the exception.

    First the experience of the Weimar hyperinflation and the end of the Reichsmark in the 1930s was a powerful personal heartfelt lesson on the dangers of infinite money printing. Second the post-war Germany was blessed with fiscally conservative governments and very cautious bankers. Thirdly there was no question of military expansion abroad or huge defence expenditures.

    Contrast this with the situation of the USA today.

    In general the point stands and paper money , fractional reserve banking leads to debt driven booms and excessive credit and a the decline in the purchasing power of money.

  14. John Quelch says

    Detlev: Thank you for your clear insights into the current world economic environment–I have very much enjoyed reading your posts. I am puzzled by one thing, though, that I was hoping you would comment on. With all of the bond rate turmoil in the EU currently and talk of the possible break up of Euro currency union, why is it that gold and silver have performed so poorly over that last number of weeks?

    • Fred says

      I would say John that the gold and silver markets are as prone to manipulation as any other markets. If the “Big Boys” who have very strong positions on gold and silver decide to delay the explosion, they can sell some of their gold & silver to keep the price down for a while, and wait for the right moment to let the dam burst… Blocking a gold or silver surge sends a signal to the market that the big tide is not for now, and keeps the other players waiting for the flag to be dropped before the race starts.

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