Confiscation in the olden days: Brueghel's 'Paying the Tax' (wikimedia)
Last week, the Deutsches Institut für Wirtschaftsforschung (DIW), or German Institute for Economic Research, an influential think tank, proposed an ingenious solution to the Euro Zone debt crisis. The German government should issue a Zwangsanleihe, a compulsory bond that every German with savings of EUR250,000 or more should be compelled to underwrite with 10 percent of his or her own money. Such measures could help the German state grab another EUR230 billion in resources from the private sector to support its bailout commitments, the DIW economists announced with apparent satisfaction.
Didn’t economists once use to explain the importance of clearly delineated and legally protected private property, of free and voluntary exchange, and of true market prices? By explaining how capitalism works, these economists also demonstrated the limits and dangers of state interference, which is the reason why those who rather put their faith in strong political leadership and governmental design than the spontaneous order of free markets called economics – after Thomas Carlyle – the ‘dismal science’.
Maybe this is a somewhat romanticized definition of the term ‘economist’. Many statists, socialists and cranks have also adopted the label over the past 300 years. Yet, the history of economics shows that its greatest and most enduring contributions have come from those social scientists who explained how the voluntary, contractual interaction of independent, self-interested individuals creates a system that works to the advantage of society overall, and I may be forgiven for having assumed – or hoped – that in the early 21st century certain insights would have been so completely accepted that they could function as some kind of common ground for civilized discussion. I am fully aware that as an Austrian School economist I am at the ‘extreme’ free market end of the spectrum of economic opinion but I had thought – again naively, I guess – that certain principles would be unquestioned even by those who are happy to assign a larger role to the state. After all, in most cases these economists still claim to be advocates of the market economy, at least in some broader definition of the term, and given this position I had assumed that they, too, must assign at least a certain importance to the concept of ‘private property’, and that any blatant violation of private property by the state must at least give them a moment’s pause.
Well, it could be said that if all these economists took private property really seriously, they would have already become ‘Austrians’, so maybe I should not be surprised by the willingness of ‘mainstream’ economists to sacrifice the private property of third parties. But surprised I am. Surprised at what seems to be a growing enthusiasm for government-friendly quick fixes that come with little regard for the principles of capitalism and the free society, and with no consideration for the long run consequences.
Dismal no more
Since the start of the ‘global financial crisis’, or ‘the great endgame of the global fiat money experiment’, as I like to call it, we have witnessed a merry anything-goes of economic interventionism, an increasingly desperate and shameless struggle by the bureaucracy to sustain the unsustainable. And simultaneously, what I consider to be an intellectual shift among the economics profession. Eager to no longer be ‘dismal scientists’ but to be politically relevant and pragmatic instead, the economists have quickly taken to devising ever more audacious policies to help the state escape the consequences of decades of habitual overspending, reckless borrowing, and artificial cheapening of credit. The end seems to justify the means, and the end is to maintain the status quo, regardless of how bizarrely unbalanced it has become.
That economists are still advocates of free markets and defenders of justly acquired private property is a myth, at least when we consider the economists who dominate the policy debate. Apart from those at think tanks, such as the DIW, this includes economists at the central banks, the IMF, the OECD, and in the nominally ‘private’ banking sector that has by now become a state protectorate. Here, nobody likes to hear about spontaneous interaction, voluntary exchange, and true market prices, but almost everybody seems to love debt monetization (‘quantitative easing’), the manipulation of specific asset prices (‘operation twist’ or ECB-imposed yield caps on sovereign bonds), substantial government ‘stimulus’ spending, ‘fiscal transfers’, and various other forms of market distortions and bureaucratic interference.
Take the alleged beauty of currency debasement. I find it remarkable how many economists claim that it would be preferable for Greece (and by implication for other countries) to be able to print her own local money and debase it to her heart’s content. Sure, devaluing the monetary unit may provide a shot in the arm to the local export industry and create a very short-lived illusion of competitiveness. These ‘benefits’ are fleeting and the group of beneficiaries is small. But debasement will make many people poorer. All those who save by holding domestic money balances will see their purchasing power diminished.
That this is in the interest of ‘The Greeks’ has been amply refuted by the very actions of Greek savers. They are shifting deposits to banks in the Euro Zone core not only out of concern over local banks, but also in an attempt to protect the purchasing power of their savings, i.e. their property, from confiscation through inflation.
Failure is an option
The central problem in the present crisis – in Europe and elsewhere – is that states have assumed obligations they are unable to meet. So have many banks. In principle, this should only be of concern to the two parties to the contract – debtor and creditor. Ultimately, any entity can go bankrupt, including sovereign states, and there is no need to drag an ever larger group of innocent bystanders into this calamity. Specifically, there is no reason why a defaulted state would have to force its citizens to adopt a new currency. There is as little need for all Greeks to stop using the euro after the bankruptcy of the Greek government as there is for all Californians to stop using the dollar after the bankruptcy of the Californian government.
It is, of course, to be expected that a defaulted government would find it difficult to borrow again and that it, therefore, would have to live within the confines of its income from taxation. This is precisely why the political and bureaucratic class doesn’t like it – and why their intellectual handmaidens, the economists, come up with schemes to rather make everybody else pay. They happily impose an inflation tax on all money-users as long as it keeps the state borrowing and spending and living high on the hog on confiscated wealth, and as long as it keeps the banks from shrinking and asset prices from falling. The status quo must be protected at all cost.
All these interventions are inherently conservative in nature (they conserve the prices and structures of the preceding boom) and, without exception, they protect the reckless from the consequences of their mistakes, and they punish the prudent. Those who did not allow themselves to get seduced by ‘easy money’ during the ‘bubble’ years and who managed their finances conservatively and saved would – in a truly capitalist system – now be the beneficiaries of the ‘bust’ – and thus provide the raw material for a real recovery. They could pick up assets ‘on the cheap’ were it not for the various policies (zero interest rates, unlimited bank funding, QE) designed to keep the prices of such asset at artificially high levels for the benefit of their present owners, often the banks. As savers are thus barred from buying assets at appropriately lower prices, they have no choice but to stay on the sidelines, holding saving deposits in which their capital gets whittled away by negative real interest rates, another policy designed to protect banks and a debt-addicted public sector.
One of the advantages of basing an economy on private property is that the success and failure of actions can be (reasonably) clearly attributed and that responsibility is specific and limited, and not communal and open-ended. This requires that the failure of institutions and policies must be clearly visible and not hidden, and that the market must be allowed to liquidate failure. In the present debate, however, most economists seem to be of the view that what is to be avoided at all costs is the recognition of failure, the liquidation of imbalances, and the shrinkage of certain entities, regardless of the sheer silliness of their outsized liabilities.
Flooding the economy with new money is an attempt to mask the failure of various institutions and policies and to socialize the effects of such failure. Here is the dirty little secret of monetary policy: Printing limitless fiat money may be costless to the central banks but it is not costless to society.
“Hooray, we are inflating the debt away!”
But it is likely to get worse. The present stalemate is not making anybody happy. The economy is not being cleansed of its dislocations and neither is any sustainable growth momentum developing. Frustration and impatience are likely to rise. My concern is that most establishment economists are now intellectually prepared to embrace even more aggressive intervention, including a no holds barred monetary über ‘stimulus’ to break the gridlock and try and ‘inflate the imbalances away’. This is the final insult to anybody who believes in private property as it involves the wholesale expropriation of the saving classes. Such policies will require additional draconian market interventions. Large parts of the ‘private’ sector will have to be turned into captive holders of bonds, in particular government bonds. Highly regulated entities, such as banks, insurance companies and pension funds, are the obvious candidates, and they are already being lined up for this. Capital controls will be reintroduced. All of this will have disastrous consequences for the economy. Attempts to ‘inflate the debt away’ are a recipe for economic Armageddon. They do not lead to a balanced, deleveraged and cured economy but to total currency collapse, which tends to decimate the middle class. That such policies are even being contemplated now, I find shocking.
Such an outcome is, of course, not inevitable. Our future is not predetermined. There is always a chance that those in power will simple ignore these economists.
But maybe I am just being naïve again.
14 Responses to Happy interventionists: The economists’ attack on your property
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Very nicely expressed reminder of how the economics ‘profession’ (along with the mainstream media, regulators, and judiciary) has been captured by those who benefit from the status quo.
Economists routinely espouse ‘free markets’ but in the next breath start detailing all the ways it cannot function without government intervention. Here’s Jeffrey Sachs:
In short, we need new economic strategies to overhaul broken
systems of finance, labour markets, taxation, ecological
management, budget management and investment incentives.
Those challenges cannot be fixed through lowering taxes on
the rich or higher fiscal deficits to create aggregate demand.
The new approaches must be long-term, structural, sensitive
to inequalities of skills and education, aligned with the need
for more sustainable technologies and “smarter” infrastructure
(empowered by information technology) and congruent with long-term
demographic trends. It’s time we moved beyond the Republican
Party economics of the 1920s and the Democratic Party economics
of the 1930s, to a new macroeconomics for the 21st century.
and as our Dear Leader Obama made it clear
If you were successful, somebody along the line gave you some help.
There was a great teacher somewhere in your life. Somebody helped to
create this unbelievable American system that we have that allowed you
to thrive. Somebody invested in roads and bridges. If you’ve got a
business — you didn’t build that. Somebody else made that happen.
the gloves are off. If you have any wealth, it belongs to the collective.
Thanks Detlev, keep ‘em coming!
Good thing in America the government can’t tell anyone what to buy! Oh, wait…
In the meantime, the debasement of money continues!!!!
In the meantime, the debasement of paper money continues.
Great article, Detlev.
I found this bit interesting:
They do not lead to a balanced, deleveraged and cured economy but to total currency collapse, which tends to decimate the middle class
Which historical examples do you have in mind? Is the modern British middle class as likely to be financially decimated as the middle class in Weimar Germany? My impression is that the former tend to be heavily indebted (primarily due to mortgages), and so might benefit from total currency collapse.
Apologies for the slow response. Yes, I do believe the UK middle class will get hurt very badly. Remember that to benefit from rising inflation or even hyperinflation, you need to lock in your funding rates for very long periods. I suspect that most British borrowers have their borrowing rates adjusted fairly frequently or need to refinance quite regularly. When inflation fears begin to rise, real interest rates will skyrocket. Anyone who has adjustable funding rates or needs to roll over existing debt will get crushed. Additionally, a lot of the wealth that people think they hold will evaporate: your savings at the bank, your corporate pension fund. And let’s not forget that even the middle class in Britain depends in many ways on the state. People think they are rich because they do not have to set any of their present income aside for health care or old age – “the state will cover that”. Good luck. — No, I think this will be quite bad for most people.
Detlev you hit the nail on the head again. We are witnessing the state(s) and its (their) minion’s desperate attempts to continue on their current path of dominating their inferiors – all the rest of us. The state must continue to grow at all costs.
To paraphrase Elvis Costello, I am both disgusted and amused. I think the saddest feature of this is seen in the United States, where enthusiasm for Romney and the Republicans ignores the certainty that they just may not drive the nation over the cliff quite as fast as Obama and the Democrats. These two parties are just two sides of the same debased coin.
DIW is led by Prof. Dr. Gert Wagner, a member of the Enquete-Commission on Growth, Wealth and Live Quality in the german federal parliament. So he is a “political professor” as well as Prof. Bopfinger from the University of Wuerzburg/Germany, who actually claimes for more money printing and lowering of the EZB-interest rate below 0.75% so “stimulate economy”.
Wagner’s “Zwangsanleihe” is a simple political partisanship for finance minister Schaeuble and Chancelor Merkel.
The Euro-sceptic IFO-Professor Hans Werner Sinn (IFO Institut is part of the high-ranking acedemical Leipniz-Society in Germany) points out here in german language -> http://www.youtube.com/watch?v=cdZySOtG_28 (see folia at minute 9:27 and minute 17:33) how catastrophic the real financial situation of germany is at the moment. We have 2.080 billions Euro’s states depth, additionally we have bank liabilities of about 7 trillions (!) in our banking system. We only have about 4 trillion of private assets (which is not only money, but non-money assets like real estate etc.).
The fact is (everybody can download the monthly and annual reports of the german bundesbank), that our bundesbank runs out of money. Its stocks in gold is only about 350 billion Euros, the total book value is only 883 billion and the target-credit problem represents about 465 billion at the end of 2011 (meanwhile more than 550 billion Euros). So german Bundesbank is at the end of it’s financial capacity and might collaps in the near future.
As everybody knows, germany gets negative interest rates on 2-years state bonds at the moment. This money is used to bail out other Euro-GIIPS states like Greece, Spain, Portugal, Italy, Ireland and meanwhile also France!
The reason, why obviously Schaeuble used Prof. Wagner to test the idea of “Zwangsanleihe” is simple. Schaeuble is simply broke and he has to give a signal to the Hedge-Fond marktes and big banks, that Germany gives security on his own (increasingly devaluating) bonds. And what is the best security for bonds? Well… the property of all german real estate, right?
So the signal of “Zwangsanleihe” is a signal of despair of Schaeule. He knows, that the Euro is broken and Germany is on the brink of financial collapse.
I’m happy that the Euro will break down in the near future. But I’m afraid, we won’t get a real D-Mark back together with a politically independent Bundesbank. I’m afraid that the keynesianian idiots in our government will inflate the Euro-Zone massively and after that, Euro will collapse. After the Euro will gone broke, the Yen, the british Sterling and at the end the US-Dollar will break as well. Perhaps, the extremly indebted China might break as well. But China might connect Rinmimbi/Yuan on an Gold/Silver- or perhaps a cupper-standard to keep it’s economy on the international market.
If so, perhaps the US must connect 10-40% of the “New Dollar” also on Gold, but at the end, there’s not enough gold do connect even the Deutschmark with 100% on gold. We will see, what future will bring.
I hope, the FED will break down and we get rid of the inflated US-Dollar and the other inflated currencies.
[...] article was previously published at Paper Money Collapse. Detlev S. Schlichter is a writer and Austrian School economist. He had a 19-year career in [...]
As Austrians, I think we would all hope that after a while, people will “see sense” and recognise that monetisation of debt, higher taxes and more intervention of all kinds will simply lead to further economic failure.
Sadly, I think the more likely outcome is that socialistic thinking will gain in popularity. Ironically, the chances of this are all the greater thanks to the policies of faux austerity pursued in the UK and elsewhere, which daily give sound economics a bad name.
So, although I hope I am wrong, I think we must be prepared for things to get a lot worse before they get better. This means that in addition to the draconian economic measures outlined above, we must also expect draconian political initiatives as elites look for suitable scapegoats to blame as their economic policies fail.
Today’s fiat money system is central to the bloated western welfare-warfare state, without which these elites would be nothing. They will soon come to see those who challenge it as the “enemy within”; none of us should imagine that they will not act accordingly.
Another well thought out piece Detlev. Your analytical skills are most remarkable.
I found the following assertions unique & appealing:
“Those who did not allow themselves to get seduced by ‘easy money’ during the ‘bubble’ years and who managed their finances conservatively and saved would now be the beneficiaries of the ‘bust’. They could pick up assets ‘on the cheap’…”
“… savers are thus barred from buying assets at appropriately lower prices…”
There’s a concept here that’s much deeper than I suspect most people realize. I believe it should be expounded upon and brought to the attention of those who should care about such things (as opposed to the statists who couldn’t care less). Imho not one person in a thousand understands this point, and it’s this: Individuals who acted fiscally responsible and economically prudent by saving in dollars during the past decade or so should have been rewarded, financially. Alternatively, those who fell for the lure of cheap borrowing, and those who bought into the stupid notion that somehow debt is a good thing by spending themselves into oblivion (enabling them to keep up with the Jones’), should have been appropriately & financially punished by the marketplace (many, unfortunately, were not, but that’s a topic for another day).
So how & why was it that the fiscally prudent weren’t rewarded in the aftermath of the recession/depression? Because the expected & obvious “price deflation” that should have occurred during an economic recession/depression didn’t happen, it wasn’t allowed to happen. And why was this? Because the Federal Reserve gleefully stepped in with their printing presses and dramatically inflated the currency. The end result was that those who held savings in dollars were systematically looted. They were deprived of a just, deserved, and rightful higher standard of living that should have occurred as a result of a much higher value of their currency, in this case dollars. People with savings were stolen from by the Fed just as surely as by an armed thief on the street. Because of this illegal, immoral, and fraudulent manipulation, the value of the currency was inflated & devalued to prevent the economy from making its normal corrections that occur naturally during periods of economic contraction.
So if you are one of the large majority of uninformed individual savers that thinks he has been “spared” from the nasty effects of inflation, you simply do not understand what’s been happening to you. Don’t feel so bad, you have lots of company, even many (most?) of those who espouse Laissez-faire capitalism.
“As savers are thus barred from buying assets at appropriately lower prices, they have no choice but to stay on the sidelines, holding saving deposits in which their capital gets whittled away by negative real interest rates, another policy designed to protect banks and a debt-addicted public sector.”
This (and the sentences just prior to it) formed an important point I had not previously appreciated. Thank you, Detlev, for your continued explanation of the present ongoing disaster.
Financial repression is alive and well, the onyl answer is to hold gold and silver (physical not paper ETF’s) the banksters hate it and even now are trying every trick in the book to get people away from this and back to their Fiat rubbish (even saw an article in the UK’s Telepgraph trying in vein to tell people that gold is set to fall).
What the DIW propose is the thin end of the wedge. If the Keynesians get away with this, if they try it, it will soon become apparent that it is not enough to prop the house of cards up. Then they will progress to other means of confiscation to those with lesser amounts than £250,000k. It is a kite flying exercise to see how far they can go before there is a reaction.