America: A threat to liberty?

Portrait of Barack Obama

Barack Obama (photo: Pete Souza, The Obama-Biden Transition Project)

“Politics, as hopeful men practice it in the world, consists mainly of the delusion that a change in form is a change in substance,” as the incomparable H.L. Mencken observed more than 80 years ago. His observation applies to the United States of today in two ways. On one level, and the level Mencken intended, it reminds us of the fact that any form of government, whether democratic- republican or monarchical, is ultimately oppressive at heart. Every state is, qua state, a central depository of legalized violence, and thus stands in direct and unending opposition to individual freedom. Or, in the words of Ludwig von Mises: Government is essentially the negation of liberty.

But Mencken happened to use the words ‘hopeful’ and ‘change’ in this sentence, and the choice of words brings us quickly to the administration of Barack Obama and his promise – proclaimed particularly noisily for his first term – that his policies would mark a distinct change from the policies of his predecessor, George W. Bush. Assessing the situation now at the start of his second term, there is no escaping the fact that whatever change Obama brought was predominantly in appearances rather than in fundamentals, and that the most worrisome and offensive trend that characterized the Bush administration not only continued under President Obama, it even accelerated.

This trend is the rise of the American leviathan, the rapid expansion of state power and the ubiquitous curtailment of individual rights, whether they are rights to fair and open trial, property rights, or rights to privacy. The trend, everywhere in U.S politics, has been and still is towards big and interventionist government. While the media keep droning on about the apparently insurmountable divisions in US politics, the fact remains that a substantial de-facto consensus exists in Washington when it comes to giving the state more power. The increasingly expansive and expensive warfare-welfare state has been growing under Republican and Democrat presidents alike and is the one project that enjoys vast support across ‘the aisle’. The idea of limited government under the rule of law, historically a defining feature of America’s image of itself, lies dying, critically wounded by Baby Bush and now finished off by Obama. What Americans are destined for is an increasingly unconstrained government largely accountable to nobody but itself.

Leviathan rises

After 9/11, the Bush-Cheney White House considerably expanded the powers of the executive branch, mainly via the Patriot Act, arguing that the nation was now at war and that specific war-powers had to be granted, among them detention without trial and surveillance without warrants. These enlargements of state authority coupled with the hyper-interventionist economic policy that began after the financial crisis hit in 2007, have fundamentally changed the relationship of the American state with its citizenry.

Under Bush, Americans witnessed the weakening, if not outright suspension, of habeas corpus, the legal requirement that a prisoner be brought in front of a court or judge. This essential safeguard against unlawful detention without evidence has been a cornerstone of English common law for 800 years and of American law since the birth of the nation. Furthermore, Americans saw their country engage in new overseas wars, saw the launch of a new major federal agency, the unapologetically-Orwellian named ‘Department of Homeland Security’ which now has a staff of 240,000 and an annual budget of $60 billion. They witnessed the arrival of the $1 trillion dollar federal deficit, the ongoing expansion of the federal payroll, massive bank-bailouts and the nationalization of car companies and home finance, the injection of taxpayer funds into Wall Street, in some cases by force, they witnessed the arrival of zero interest rates and large-scale debt-monetization by the US central bank.

This vast accumulation of state power came with a slogan, the belligerent ‘We will do whatever it takes’. Hardly any proclamation could be more at odds with the American tradition of a strictly limited state, of individual freedom and free markets. Besides, all the grave problems facing America today are the result of politics, of previous policy errors committed by the very same Washington elites that are now robustly demanding more power from the American people ‘to fix this,’ and that want us to believe that ‘the ends justify the means’.

Any hope that Obama would take a different road, or any notion that, as his numerous supporters keep telling themselves, he simply needs more time to fix the mess that Bush left behind, now lies in tatters, destroyed by four years of actions that tell a different story: In the case of habeas corpus, the Obama administration has generously granted itself the wide interpretation of powers that Bush-Cheney had probably implicitly assumed but never spelled out. Since Obama signed the National Defence Authorization Act of 2012, it should be clear to every American that the U.S. military has indeed the right to indefinite detention — or detention until the end of hostilities, but as the War on Terror is as open-ended as ‘quantitative easing’ or the War on Drugs – or, as Doug Casey calls it more accurately, The War on Some Drugs – this means for all practical purposes indefinite detention without trial. Americans must also realize that this includes detention of American citizens on American soil. Additionally, the Obama administration has granted itself extensive freedoms for the surveillance of U.S. citizens. Thus, dear reader, 11 years after 9/11 and with Osama bin Laden dead, the US government keeps giving itself more powers to spy on its citizens, to detain them and interrogate them.

Obama has, of course, continued the overseas wars and maintained the Guantanamo Bay detention and interrogation camp. He ordered the killing of at least one American citizen without trial.

In the field of economic policy we also see nothing but a continuation of the policies of hyper-active interventionism. Zero interest rates and debt-monetization by the US central bank have, of course, continued, and not only have they continued they are now officially declared ‘open-ended’. Continued, too, has the mad Keynesian ‘stimulus’ policy of deficit-spending with Democrat hack, Paul Krugman, formerly known as a Nobel-prize winning economist, shouting, ‘more, more, more’ from the sidelines. Naturally, the $1 trillion budget deficits have continued, also. Indeed, Obama implemented even bigger ‘stimulus’ packages than Bush.

Of course, none of this has ended America’s depression, although short-term statistical growth spurts of barely 2 percent that persistent 8-10-percent deficits may help generate from time to time have allowed bean-counting economic statisticians to proclaim that a recovery was indeed in place. Only a handful of die-hard Keynesians, such as Krugman and Richard Koo, and a few financial writers believe in this absurd policy. Most business people know better, which is why they keep hunkering down. These policies are as likely to end America’s economic malaise as the War on Terror is likely to end terrorism, or the War on Drugs to end drug taking and thus the creation and distribution of drugs.

However, I suspect that the ends are no longer what matters. The means have become ends in themselves. Vast federal bureaucracies obtain resources, power and influence through the pursuit of these policies. These policies will not end because the people who are in charge of them do not want them to end. Their income, their power, their prestige, their careers depend on them.


I do not want to advance conspiracy theories here but if you just imagine, simply as a mental exercise, the existence of a Big-Government-War-Party that operates in the background, you would have to agree that, if such a party existed, it would be the party that had been calling the shots in the United States for the past 11 years and the party still in ascendancy today. Furthermore, it seems that such a party does better in many ways when fronted by a well-spoken cool African-American lawyer from Chicago than a rich, white and angry born-again Christian from Texas, or a white, rich Mormon ex-Wall Streeter. After all, there are many people to whom appearances seem to matter more than substance, not least among them the ‘liberal’ Hollywood crowd.

About 8 or 9 years ago, I was invited to the Baftas awards ceremony in London. For those of you who are not into movies, the Baftas is an awards ceremony as close to the Oscars as Britain got. Filmmakers and actors from Europe and plenty of movie royalty from Hollywood were in attendance, and as the Iraq war had just started, it was fashionable among the glitterati to demonstrate their sorrow, concern and disapproval at every opportunity. Pedro Almodovar treated us to a rendition of his most beloved Spanish poem. I think you get the idea. But all of this self-important indignation has now stopped. Since the Obamassiah has landed and has taken over the war effort, Hollywood has made peace with American militarism. George Clooney is a fan, so is Sarah Jessica Parker. Obama enjoys the support of Jay-Z and Beyonce. In 2010, at a time when Obama had already received the Nobel Peace prize for not being George W. Bush, the Washington Post reported that “Obama has ordered a dramatic increase in the pace of CIA drone-launched missile strikes into Pakistan in an effort to kill al-Qaeda and Taliban members in the ungoverned tribal areas along the Afghan border. There have been more such strikes in the first year of Obama’s administration than in the last three years under President George W. Bush, […].” But let us not quibble over such detail. For Hollywood, Obama is still our ‘Lord and Savior’, as actor Jamie Foxx proclaimed only last week.

Of course, none of these policies would have changed – in essence – if Romney had won. His supporters may tell themselves that a Romney vote was a vote for liberty and capitalism, as Romney wanted to cut taxes and attack the budget deficit. Yet, Romney promised to not cut military spending (of course not), and also to adopt a hard line on Iran, a potential next step to yet another war. By the same token, Obama supporters might believe that they voted for tolerance and freedom by rejecting Romney’s social conservatism. But I fear that political tribalism prevents most voters from seeing the big-government forest for all the gay-rights and abortion-rights trees.

If you are of a neo-con persuasion, you might want to argue that the militarism of presidents of all political stripes is only proof of the severity of the terrorist menace, that whatever their previous notions and beliefs, once they get into the White House and receive their first CIA briefing they realize how grave the threat really is, that all of us lesser mortals “can’t handle the truth”, and that it is therefore up to the president and his Col. Nathan R. Jessups to do what is needed, and by the way, sod those civil liberties.

Maybe. Maybe not.

One thing is certain: that the executive branch would ever have such vast powers was never part of the original idea of American government, the concept of a limited state, and of the American people living under the rule of laws and not the rule of men. If you want to argue along the lines that the reality of today’s world requires extensive government privileges, you have to argue that America’s political principles and founding ideas are now outdated and that they should be openly discarded. I am not convinced that this is necessary but this is certainly what is happening.

But then ask yourself, if you really believe that everlasting peace requires everlasting war, and that prosperity comes from printing money and accumulating debt, and that individual freedom has to be curtailed to be protected.

But maybe there is another explanation:

The military-industrial complex

When I grew up in Germany and became politically aware in the late 70s, I always thought that the term ‘military-industrial complex’ was an invention of the Left, mainly used to tar capitalist enterprise with the brush of warmongering and war-profiteering. I was surprised to learn that the phrase had been coined and most effectively used by an American president, Dwight D. Eisenhower, who was a Republican, a West Point graduate and a general. Eisenhower was no Lefty and he wasn’t a small-state libertarian conservative either, having opposed the isolationism of Taft and then, as president, expanding social security and the interstate highway system. Yet, when he left office, he warned his fellow Americans in a televised farewell address of the rise of what he termed the military-industrial complex, the sizable military infrastructure that the wars of the 20th century had bestowed on American society, consisting of the military itself and the sprawling defence industry. You can see excerpts of his speech on youtube. Here is one quote:

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”

The recent 18-month, $6billion mega-version of American Idol, also known as the U.S. presidential election, had to do without a general, as it pitched the Community-Organizer-in-Chief against the slick ex-private-equity millionaire. Yet, notably, the military didn’t have to fear anything from either candidate. At this stage, the US military is all but untouchable, and I suspect that a majority of Americans are in sympathy with this. One can easily envision that as America continues to decline economically, the US public will embrace the military even more, as one last glorious reminder of the nation’s former vitality and global superiority. There is a ready analogy in Britain: Although nothing provides better short-hand for the type of hopelessly statist policies that killed British industry in the decades after the Second World War than the country’s socialist National Health Service, born in 1948 out of the then widespread belief that anything can be solved by the victorious British state organizing it centrally, the NHS is to this day the one institution that stirs national pride in the hearts of Britons, even those belonging to a younger generation. It has become an unmovable part of the British political landscape, and any reform-minded Prime Minister will attack it at his peril. The US military and the NHS are not just symptoms of their respective country’s maladies, they are among the causes, yet have moved beyond the reproach of serious political debate.

Arbitrary government

Speaking of socialist health services, the beginning nationalization of health care in America under Obama fits rather seamlessly into the overall picture of an increasingly assertive, hyperactive federal government that gets involved in every part of its citizens’ lives. It is simply another addition to the welfare-warfare-big-state project and not the ‘progressive’ policy outlier and symbol of a more caring and empathic government that Obamacare supporters want to see in it. This is naïve but maybe not as naïve as the hope that this project will make health care cheaper for the public. Nothing ever got cheaper by having the federal bureaucracy take control of it.

As part of Obamacare the state now boldly assumes the power to force citizens into commercial transactions, the purchases of health insurance, under a rather generous interpretation of the constitution that was recently approved by the Supreme Court. And while the government forces Americans to enter some contracts it also appropriates to itself the power to arbitrarily rip up others. When Obama bailed out Chrysler he simply tossed aside the legal rights of a group of bondholders that – entirely legally and perfectly justifiably – wanted to enact bankruptcy proceedings to protect their investments. Rather than protecting private property and securing legally binding contracts, as is one of the acknowledged primary tasks of any civil government, Obama chose to break contracts and to take money from bondholders to give it to the auto workers union. Political expediency and the wishes of the executive branch of government now trump the sanctity of private contracts in America.

What is coming

Wars, extensive surveillance, bailouts, ‘stimulus’, nationalized health care – all of this costs money, and the American state increasingly sees its citizenry as cash cows. The signs are everywhere. The US is the only country I know that has worldwide taxation for all its citizens. As long as you are a US citizen you have to file a US tax return, even if you live abroad and have not set foot in the country for years or decades. It remains your obligation to keep abreast of all changes to the tax code and those changes are numerous. As of recently, Americans have to report all foreign bank accounts – even if they are not income-generating – to the Internal Revenue Service, the powerful US tax authority. But it doesn’t stop there. As of next year, the infamous Foreign Account Tax Compliance Act (FATCA) will come into effect, which requires any bank anywhere in the world that invests in US securities or conducts business in the US to collect data on American customers overseas and pass this on to the IRS.

Doug Casey made an excellent observation: If you want to get an idea of what our future society will look like you can easily do so by visiting your nearest airport. The modern airport is the model-village of our society, the Orwellian theme park that gives you a glimpse into what will take shape in society at large in coming years, not only in the US, of course, but also in the EUSSR and elsewhere. It is a controlled environment, pleasingly temperate with lots of opportunities for harmless and pointless consumption but where you are under constant surveillance, where your every move is being monitored and recorded forever, increasingly with the use of face-recognition technology, where you will occasionally be searched, where you can’t smoke, and where the calming background music is frequently interrupted by loudspeaker messages that remind you to stay alert and to report any suspicious behaviour to the authorities.

So far, the public is happy to go along with this. I am frequently amazed by the sheepish obedience on display at airports where long lines of travellers stand quietly and patiently, taking off their shoes, calmly observing security personnel rummaging through their luggage, carefully making the prescribed moves in the new scanners as if they are about to enter a nuclear plant. If you see movies of the 1970s or 1980s, or even 1990s, with scenes at airports in them, you will find that they give you an impression of almost frivolous free-spiritedness by comparison. These procedures could not have been introduced in one big swoop. The public would have objected. They had to be introduced piecemeal, one new regulation and procedure at a time.

The same procedure applies to tax surveillance and capital controls. The screws will be tightened slowly so that the public gets used to ever tighter monitoring and ever closer controls. And fear remains an important factor. Large sections of the public believe that their prosperity and their economic future are at risk from unregulated bankers and tax-cheating millionaires who do not pay ‘their fair share’, and they believe that their very lives are constantly at risk from terrorist attacks. They see the government as their guardian and as the necessary regulator, and being under the democratic delusion that as voters they ultimately remain in control of the government, they are happy to sign their freedoms away. As Frank Karsten and Karel Beckman astutely observed, voting is the illusion of influence in exchange for the loss of freedom.

Maybe this statist nightmare will end at some point. Maybe Americans will rediscover their tradition of independence, self-reliance and personal freedom, and of suspicion of any form of state authority. Germany has not a great sense of personal freedom in its national DNA. Britain has, and America even more so. Maybe recent developments will one day look in retrospect as strange as the prohibition era or the confiscation of private gold in 1933 and the suppression of gold ownership until 1974 do today: blots on the CV of a nation that sees itself as the land of the free. Maybe. But for the foreseeable future I remain pessimistic. For our generation the American Dream may be dead.


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Some personal thoughts on surviving the monetary meltdown


  1. David Clark says

    Excellent article. I look forward to each of your blog posts, they are uniformly interesting, informative, and well written.

    One minor correction, “Inland Revenue Service” should be “Internal Revenue Service.”

  2. TheFlyOnTheWall says

    As I see it the USA is now weaker than ever before in recent history and pictures itself in a dogfight–mainly with China, then Russia, Brazil, India, etc. and other emerging economic powers–so they’re digging in their foxholes and rolling up their sleeves, turning nastier and more openly ruthless in terms of their respect for life, liberty and private property. The ramping-up of the interventions from the welfare/warfare state will only expedite the inevitable collapse of the American Empire, of course, but who’s to say that this is a net ‘bad thing’ in the long run.

    • says

      Anon, I think I have already addressed all the points in Aslund’s paper. I have certainly done so extensively in my book but also numerous times in articles on this website. So I will try and keep my answer short.
      Aslund, like many others who write about money, mistake poorly analyzed historical anecdote for proper economics. Inflation and hyperinflation are economic phenomena and they have economic causes. Here is a quote from Aslund’s paper:

      “Cagan’s fundamental insight was that hyperinflation is a modern phenomenon. It requires excessive emission of fiat money. Otherwise it cannot arise.”

      This was hardly Cagan’s discovery but never mind, otherwise this statement is correct and it is obviously in support of my key thesis. (Inflation and currency collapses occurred in ancient China, so I would correct Aslund/Cagan on the point of this being a modern phenomenon as well. But money printing is easier with modern banking and that is why hyperinflations are largely modern phenomena. Please read my book!) The excessive creation of money is the reason for inflation and ultimately hyperinflation. That is it. Period. That is the one proper, logical economic explanation. A few pages later Aslund makes this statement, however:

      “There is no historical evidence of monetary easing or even quantitative easing leading to hyperinflation.”

      He is obviously contradicting his earlier statement. The economic explanation for inflation/hyperinflation is printing money but there is no historical evidence for money printing leading to inflation or hyperinflation? The hyperinflation in Germany in 1923 or in Zimbabwe in 2008 were NOT the result of massive money printing (another term for monetary easing or quantitative easing)?!? How can he arrive at this strange statement that obviously contradicts Cagan? The answer is this: On the way from statement one to statement two, Aslund has correlated the occurrence of hyperinflations in history with certain other “events” or “characteristics” of the societal backdrop at the time, such as wars, revolutions, populist policies, the madness of the the rulers (I am not kidding, he makes that point). His correlations are arbitrary and highly suspicious: The 1922/23 inflation in Germany – the highest on record before the Serbian one in the 1990s – occurred 4 to 5 years after WW1 had concluded and also 4 years after the numerous local socialist “revolutions” in Germany. At the time of the inflation, Germany had a republican-democratic government, albeit a weak one. So what caused the inflation? The war and the revolutions that had ended 4 years earlier, or the massive money printing under the Weimar Republic? And wasn’t Mugabe mad before 2008? How did his madness suddenly cause inflation? Maybe via his central bank printing lots of money?

      Aslund could have arrived at a different conclusion and this one I would have supported gladly: Economics tells us that money printing causes inflation and, in extremis, hyperinflation. Historically, many/most hyperinflations occurred when war and revolutions greatly increased the government’s need for extra funds, and when states thus resorted to the printing of paper money. (As an aside, before the modern welfare state arrived, most governments only needed a huge chunk of money when they went to war!) Other hyperinflations occurred when populist or even outright mad politicians (often but not always dictators) needed extra funds to buy the support of the people and printed money.
      This conclusion would be accurate. It combines a correct economic explanation of inflations/hyperinflations with an accurate interpretation of the historical record, and both are not contradictory. Here is another important point: To move from high inflation to hyperinflation you need a breakdown of public confidence. Wars, revolutions, breakups of currency unions, government default — these are all the type of events that have the potential to trigger loss of confidence in the state’s fiat money (but are they the only ones?), and it explains why hyperinflations often occur at these points in history. Again, this is a correct observation by Aslund or Cagan. But this does not mean that war, revolution, crazy rulers, or some other societal dysfuntion are the CAUSE of the inflation, and that these specific circumstances are necessary requirements to have a hyperinflation. They may, of course, function as catalysts, and often important catalysts. None of this certainly means that we can print money at our hearts content and never run the risk of inflation and hyperinflation as long as we don’t also have a war or a revolution on our hands. And besides, in the case of Latin America, pure political populism was enough to destroy currencies numerous times as Aslund concedes. Is it so difficult to imagine that this present crisis intensifies to the point where ever more fiat money will be printed by ever ever more desperate (mad?) politicians so that finally the public loses confidence?
      For a hyperinflation to occur you need lost of money printing and, at some point, a loss of confidence on the part of the public. In my view this is where we are heading in most developed countries.
      Here is Aslund’s most naive statement:

      “As we have seen from the historical record, hyperinflation does not arise by mistake but because of major mismanagement. Moreover, if inflation does rise, the US Federal Reserve
      and other central banks have ample opportunities to react with sufficient speed. Thus, we should forget the risk of hyperinflation as an irrelevant concern for ordinary monetary policy.”

      Again, history without proper economic theory does not tell us ANYTHING! The first part of his first sentence is simply wrong. The point about major mismanagement is correct and that is what we are seeing today, in my assessment. Major mismanagement of monetary policy. The second sentence is but a pious hope than a statement of fact. Do the central banks really have ample opportunities to react with “sufficient speed”? What makes Aslund so sure? What would such a response look like? – If inflation or even inflation expectations were to rise and the velocity of money were to accelerate, could the Fed simply hike interest rates and liquidate their $1trillion dollar Treasury bond portfolio in order to tighten monetary conditions? Remember, at this point the bond market would already be selling off, so the Fed would sell bonds into a falling bond market. What would happen to the banking system if the Fed hiked rates and sold bonds to the market in a quick reversal of their past QE-operations? What would happen to the budget deficit if interest rates shot up and the Fed would no longer be a buyer of bonds but a seller?
      As I keep saying, with their current policy the central banks have maneuvered themselves into a corner. Aslund believes that this is all temporary and can be unwound. Good luck!
      I disagree with him on Europe. Default would be the better option for most states.

  3. KevinR says

    Thanks Detlev, another excellent article which definitely matches my own views of where America is heading. But not only America. Many Americans seem to have a desire to vote for socialism/statism to really prove to themselves that it’s as bad as we keep telling them. I wrote this elsewhere only yesterday: “there is no way back from socialism without economic/societal collapse and/or revolution. Because when people vote to roll back socialism they’re always outnumbered by those in receipt of the State’s largesse who want ever more socialism. That is how socialism operates.”

    And if those of us in Europe cannot now look to America as the leader in throwing off this vile and growing totalitarianism, who do we look to? It certainly won’t be any one of the BRICS.

    The future is not good.

  4. mava says


    Absolutely correct. I too, keep telling and explaining this little understood principle to Americans, but I feel that no one believes me. There is this general understanding that everything is reversible. They do not understand that almost all of communitarianism lies beyond of point of no return.

    I take a step back and now think that there is some major deficiency in their logic. To presume that everything you do is reversible, is to propose that there is then nothing to avoid.

    My personal experience (grew up in USSR) tells me that going socialist is in fact, one of the irreversible things, like, say, jumping under the freight train.

    Glad to see someone knowing the same thing I know…

  5. David Goldstone says

    Another excellent article. I see no hope in the US and none in the UK either. Osborne pronounced today that “Its got to be done fairly. That means, yes, the richest have to bear their fair share – and they will – and that does mean more than they’re paying at the moment.” The man has no clue and Labour and the Lib Dummies are worse. I fear for my children in this country, And the most frustrating thing is that it is all so avoidable. A friend of mine once said that politicians should be thrown to the lions. I thought that was a bit extreme. Now I’m not so sure.

    • Gill O’Teen says

      Why does your friend hate lions so? Personally, I favor glacially slow toe-first easing into an industrial strength wood chipper, but I digress. Make no mistake, once Lady Liberty’s torch of freedom is finally extinguished by foolish Americans, and I am one, it will not be lit again in this world for at least a thousand years and only after a heavy investment of blood, sweat and tears. There may be isolated pockets of resistance scattered like early Christians into latter day catacombs, but that’s it. Our unalienable rights endowed by OUR Creator will be declared null and void by mere men who will possess the military might to make their decree right. And don’t count on God to save our sorry anatomies. Read 1 Samuel 8, especially verses 7 and 18, and know what He said about choosing the law of man over His law.

      • Rob says

        Sadly I think Gill’s analysis is right. The real loss is not really going to be our money, as bad as that will be, but the loss of freedom, or a sense of it, to over-powerful governments with might on their side crushing the ordinary citizen under their heel. Only great suffering and bloodshed will bring about the end of such government, who will not let go the reins of power without a fight. But maybe that is where we have to go to once again to learn the lessons the founding fathers of the US understood only too well.

  6. Peter Jackson says


    I emotionally agree with your analysis in the sense that I also dislike the totalitarianism of top-down state socialism and of an economy “organised” for “fairness” rather than admitting merit, chance, and ultimately (“illogical” thing that it is!) “freedom” into the mix. The socialist approach instinctually seems to be a road to serfdom.

    Nevertheless, it is useful to challenge one’s instincts and pre-suppositions (to some extent). In respect to economics (about which I know practically nothing) we have the fact of “quantitative easing” and of money-printing to “boost” the economy which seems illogical and immoral – you cannot produce “value” out of thin air and then “distribute” it – but the alternative view is as linked below:

    “By the method known as Quantitative Easing (QE), the Bank invents money with which to buy government bonds off pension funds, insurance companies etc. They then use that money to invest in things that earn more, hoping to get the economy moving. The wheeze is a godsend for Mr Osborne: he can shift gilts, seemingly without pain, to fund his deficit. So far, the Bank has conjured up £375 billion. Britain’s QE experiment is, proportionately, even bigger than that of the United States or Japan.”

    The question I have is: if governments do create fiat money out of thin air (I note that Aristotle interestingly noted that money in Greek is “nomisma” from “nomos” or “law”), maybe it is the new paradigm that governments and corporations can manage the world economy and “distribute” benefits? Maybe our lords and masters could (for instance) just print and give lots of dollars to Africa ($50,000 dollars to each person!) to create a “boost” to the global economy?

    Maybe the modern system is the converse of the Soviet Union but it manages and “distributes” consumption rather than production? I fear a situation in which the government controls the economy since the free market was the only bastion which held out against Marxism in the West – but this does not mean that a state-run economy is necessary not viable. Any comments would be appreciated.

    • KevinR says

      Here’s a coupla comments from me, Detlev and others will probably give more expert opinions…

      Charles Moore is a good guy but he might have spelt out some of the actuals regarding QE. When QE was first introduced, Mervyn King categorically stated it was to be split between buying gilts and priming the banks with money to lend to SMEs and householders etc. In practice, it has been overwhelming used to buy gilts, mostly from the banks and other financial institutions on the secondary market (buying on the primary market is what banana republics usually do, but officially we don’t allow it).

      This has had (at least) the following effects:

      - it has pushed up bond prices, thereby reducing UK bond yields to less than 2%. Low bond yields have caused annuity rates to plummet, so older people now buying an annuity with their pension pot are being royally screwed, beyond belief. Annuities are fixed for life.
      - reduced the interest rates being paid to savers. These also are mainly the older generation who played little or no part in creating the financial crises.
      - reduced pressure/incentive on government to apply genuine austerity by cutting spending.
      Why would any govt slash spending — with all the social unrest that might cause — if it can borrow money at less than 2% and carry on spending? This is what Osborne is doing.
      - seriously raised the risk of even higher consumer inflation, perhaps hyperinflation if/when the QE funny money finds its way into the economy proper as many think it will do.
      - I see no evidence that it is doing anything beneficial to the economy. Claims from King/BoE and others about the risk of deflation are inventions IMHO, simply to justify QE.

  7. Rafael Wagner says

    Hi Detlev,

    I continue to enjoy your writings, thank you.

    Regarding your personal thoughts on individual financial prudence, I do not remember seeing you cite crude oil as a possible asset to be considered. Putting weekly price fluctuations aside, would oil not be a decent price inflation hedge, as well as USD debasing insurance, and an asset that is nicely supported by a longer term growth in demand (again putting aside the ubiquitous debate on peak oil etc)?

    Furthermore on gold, is it true that as of Jan 2013 the new Basel rules will allow banks to book-keep gold holdings as Tier 1? If true, it’s an intriguing comment on gold’s Phoenician capital treatment. But also, could this fuel bank lending growth (a possible motivation behind the move)?

    Thanks for this, best R

  8. Single Acts of Tyranny says

    As I understand it, the current ruse with QE is to print money electronically and buy government gilts. This allows the government to maintain the fiction that this is just like any other borrowing which will at some point be paid back. They pretend that this isn’t straight monetisation of debt from the Mugabe school of economics and there’s no real gilt strike etc everything is tickety-boo.

    However, I have now heard it muted in some circles that the government should simply order the Bank of England to extinguish its QE financed gilts. If we assume QE printing is about £350B the government could then claim to have reduced the national debt by this level. It is further suggested that far from creating a flight from gilts, this would make UK gilts scarce and thus increase the price of them, thus lowering the yield.

    I take an entirely opposite view arguing that this would be straight monetisation of debt a la Mugabe and the crisis of confidence this could cause would be catastrophic for UK gilts because of possible investor flight.

    I would be most interested in your thoughts.

  9. says


    Great article. In your reply to Anon above, you make the very valid point that the Fed has no way to reverse its vast and egregious purchases of bonds. Any sudden reversal would send bond yields spiralling and the terminal point comes at about 13% when the annual interest rate on the current $16T debt amounts to $2.1T which is level of annual IRS tax receipts i.e. every single cent of tax receipts goes to pay interest on the national debt, leaving nothing to run the country. The only two choices then are default or hyperinflation.

    US Treasury bond yields went to 15% in 1981.

    Since inflation is the change in prices (P = MV/Q), the only reason that we have not seen massive inflation so far is the vast increase in M, money supply has been roughly balanced by the drop in V, money velocity. However money velocity is at its lowest point since the 1960s and looks dangerously close to an upward inflection point.

    What, in your opinion, will trigger the rise in money velocity which will be the start of hyperinflation?

    • says

      Velocity (V) will rise when people want to reduce money balances and begin to spend their cash (again) on non-money goods. What can trigger this change? 1) Prices of non-money goods have dropped sufficiently so people get out of cash and back into production and consumption goods. This would by now be the case, in my view, were it not for the central banks stemming themselves with all their might against deflation instead of allowing a corrective drop in prices to occur (i.e. a rise in money’s purchasing power which is always the ‘normal’ effect of rising money demand), 2) although prices of non-money goods have not dropped, and non-money goods are far from cheap, concerns about the future purchasing power of money intensify and these concerns begin to dominate previous concerns over price declines. People rather spend the money on non-money goods now than stay in money and risk losing wealth through inflation. In short: rising inflation expectations. For the situation today, 2) is more relevant in my view.

      What can cause rising inflation expectations? Funny enough, rising inflation. Remember that, as part of QE, the central banks created massive amounts of new bank reserves to bail out the banks but not to expand circulating media in the broader economy. Still, enough money is “dripping” into the broader economy to keep inflation going. In fact, inflation has been positive and uncomfortably high – in particular considering the weak economy – but it has not been perceived as a major threat, and the public – so far – continues to hang on to cash, still preferring it to most non-money goods. As I keep saying, the present policy will not lead to a self-sustaining recovery so this policy will have to be continued. Inflation will also continue. Additionally, policy makers are losing patience. In the US, QE3 is now targeted at raising broad economic growth, not at saving banks. Going forward central banks will increasingly want to see the broader aggregates rise as well and they will run policy accordingly. Thus, inflation will rise on trend, albeit marginally at first. When the public gets scared about the future value of their cash, velocity can rise quickly, which then quickly leads to higher actual inflation, and thus to even higher inflation expectations. This is every central banker’s nightmare.

      The whole thing is a confidence game. As long as the public keeps trusting the central bankers they can probably push this further but the very moment the public gets concerned and velocity rises, the central banks have to turn policy on a dime. Suppressing inflation fears, once they have gripped the public and articulated themselves in consumer and investor behavior, is very difficult. It requires high real interest rates and a demonstrated commitment to accepting the economic fallout from such a tough policy.

      Inflation and inflation expectations are the most powerful triggers. Another – and more indirect – trigger could be concerns about sovereign solvency of a major country. If a major government bond market sold off – Treasurys, UK Gilts, Japanese government bonds (JGBs), or Bunds – the respective central bank would have to accelerate QE and buy government bonds aggressively to try and avoid a rise in yields which has the potential to bankrupt the banks and the government. Accelerated money printing to keep the banks and governments in business would most probably undermine confidence in the future purchasing power of money, raise inflation expectations, and cause velocity to accelerate.

      The bond market is key. Bonds are a bubble, in my view. When that bubble pops, the fallout will be meaningful.

      • KevinR says

        Detlev, at the risk of showing myself up as a non-economics expert, when you say “…to try and avoid a rise in yields which has the potential to bankrupt the banks and the government” …I can see that a falling bond market and the rise in yields might bankrupt government, but is it the associated fall in bond prices that would bankrupt the banks?

        • says

          Quickly rising real yields would be a challenge to the banking system, in my view. Demand for new loans would dry up, default rates would rise, and many asset prices would decline, not least bond prices. There are some mitigating factors here: many assets on bank balance sheets are not marked-to-market but held at book cost or maturity value, this includes many bond holdings that are considered investment positions rather than trading positions. Also, it has frequently been pointed out that low yields coupled with a very flat yield curve are a negative for banks. A steeper yield curve – particularly for short maturities – would be advantageous. Nevertheless, quickly rising real yields are not in the interest of any highly geared business. But even more importantly, when inflation expectations rise the central banks would have to tighten policy meaningfully if they wanted to defend their fiat monies,and this would pose a gigantic problem for the banking system. Remember that the banks are still to a large degree on life support from the central banks: (practically) unlimited funding at zero cost, repeated asset purchase programs (QE), generous collateral rules – all of this has been a massive boon to the banks.

  10. Robert O"Regan says

    Your book offers a clear understanding of the present economic situation. It should be a MUST read on any coursework in Economics. The mystery to me is that the American public are apparently unaware of the danger ~

  11. anil wadhwani says

    the u.s govt trying to grow economy t
    hrough bailout , tax relief , stimulus etc. But debt ridden people want only immunity from debt. Why the u s govt not making u.s people debt free ?

  12. John Howard says

    It appears to be human nature to collectively form into a small gang of ruthless parasites hiding behind their enforcers while robbing and ruling everyone else. The ruling elite will call themselves emperors, or presidents, or kings or prime ministers or congress or the plitburo, but they will always work to acquire more and more power until they utterly enslave and finally destroy their own civilizations.

    During this process, ‘intellectuals’ will debate the details but never question the basic pattern of a small gang feeding on everyone else.

    Some day, we can hope, more people will become Rothbardian Anarchists and call for the elimination of ANY ruling class. Until then, humanity will be locked into endless variations of an ancient nightmare where the victims argue about who will rule them but forget to wonder what it would be like to be unruled.

  13. Whig says

    As far as the US military is symbolic – yes, it’s a valid point. But really US military spending is at 3-5% of GDP and isn’t going to grow rapidly any time soon, barring a major disaster. Despite a recent rise it is now declining (and will do so with the end of the Afghan conflict) and this represents part of a general downward trend since the mid ’50s. If the US had only defence spending to worry about it would be sitting pretty, especially as GDP would be growing so much faster in the absence of all that other state confiscation of resources. The real issue in the US, from a fiscal perspective (aside from all the monetary and regulatory activism in which governments are now involved), as in all major developed economies, is the other spending in which they are involved and which are not only as large if not larger than defence but are on a general and virtually inevitable upward trend – especially health, welfare and pensions. That’s not to take away from a great article and a troubling set of circumstances.


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