Thursday, September 8, 2011
Monetary Policy Spawns Paper Money Collapse
Detlev Schlichter is not alone when he writes that "the individual decision maker is a driver of economics," but he is clearly in the minority.
The fact stands to reason. During our most recent fiscal upheaval in the United States, one out of every two economists with a job drew his or her paycheck from a government institution.
Your economist, your elected official and your friendly neighborhood bureaucrat, your policy wonk, and even your favorite mainstream journalist believes that you -- the individual -- couldn't possibly know what you are doing with your own money.
They think you're too stupid to make the right decision when faced with choices in the marketplace. If you agree with them, then I'd respectfully advise you to stop reading right now. You'll only take offense at what Mr. Schlichter has to say.
If, on the other hand, you believe that you're capable of making a decision on your own...if you believe you can safely buy the goods and services you need when you need (or want) them, then you'll take to and welcome Detlev Schlichter right away.
"The market economy is not a superior organism that has its own goals," Detlev writes. The economy does not exist to "generate positive GDP" for the good of a nation. Nor are we servants subject to the whim of the formerly omnipotent "Masters of the Universe" who run trading desks on Wall Street.
We use money -- our money -- to make transactions. That's it. All else that follows in this book begins from that simple starting point.
Once you ignore the conventional method of viewing the economy...of measuring growth and counting the unemployed...a funny thing happens. "Failure" and "bankruptcy" become natural events even in a smoothly sailing economy. Viewed in proper context, "failure" is not something to be prevented. It's a vital tool on the way to success. We all make mistakes from time to time. There's no one to blame. But there's a heck of a lot to be learned...
Blasphemy, for some. A godsend, for others. I'll assume that for the time being, you're in the latter group.
In this book, Detlev doesn't hold back any punches in exposing the flawed concept that is paper currency. I admire his rigor and clarity as he straddles this unpleasant territory with ease. He doesn't name names. He doesn't bog us down with details. He doesn't enlist GDP charts from across the globe. He leaves the devilish details to other books boasting "financial crisis" in their title.
He's not likely to land an HBO contract for the effort, so I suggest you get started with Chapter 1.
If you're of the right mind-set, it will be a pleasant experience, I assure you. Detlev's crisp algebraic prose recalls one of the best systematic financial writers to tackle banking: Murray Rothbard, whose The Mystery of Banking offers a succinct account of what began ailing the economy in the 20th century.
Unlike Rothbard, Detlev is a practitioner, not an academic.
You have to admire a man from the City who worked 19 years in high-yield income, pursuing the oft-maligned Austrian economics as a hobby at night.
Sometime in 2007, the hobby became his vocation. But his first real wakeup call came in 1998, post-ruble collapse and the LTCM failure. The events themselves weren't the problem, Detlev began to see. How government-supported firms reacted is; they got bailed out and sought to manipulate interest rates.
A decade on...and "bailouts" have become the norm. Bankers expect them. And place their bets accordingly. The implied "safety net" has become the Achilles' heel of the entire system.
Today, even as economists, the media and policymakers search for causes of the financial collapse in 2008 (and dream up new regulations to "prevent it from ever happening again"), those same imbalances and misperceptions are building to yet another climax.
In this fine work Detlev bursts through the notion that "everybody" benefits from stimulus. And he sets out to dethrone the economic god of the 20th century: monetary policy.
Not only is the present monetary system less than optimal, it's also unsustainable. To put it in the words of the technically literate: GIGO -- garbage in, garbage out. The current monetary system can lead only to volatile and unsustainable economics. Forget all the macroeconomic theories and statistical validations for this or that political motive.
In a chapter in my own Demise of the Dollar, I had an eye-opening, if entertaining, experience documenting what I ultimately entitled the "Short Unhappy Episodes in Monetary History." The first "modern" experiment with paper money occurred in ninth-century China. After several hundred years, the Chinese gave up on "flying money" because it proved to be subject to political whims and gave rise to disastrous inflation in consumer prices.
And yet even with numerous examples at our fingertips -- France in 1717-1720 under John Law's scheme, in which paper money lost 90% of its value; Abe Lincoln's financing of the Civil War sparking inflation, which turned Americans off paper money until 1913; Peron's Argentinian coup in 1943, which ushered in paper and destroyed gold reserves; and, of course, Weimar-era hyperinflation -- we have engaged in another experiment with paper money, this time on an epic scale.
The litany of crises we've endured from LTCM through the mortgage meltdown share DNA. Other books seeking to understand the precarious situation we find ourselves in miss the single root: our ongoing currency crisis. Digging deep, Detlev explains why we're more in danger today than ever before. This fact alone should place this book at the top of the pile at your bedside you've been "meaning to read."
Detlev's work could be the resource for a new generation of young economists.
As the next crises unfold, we'll need a hearty breed ready to pick apart the myths and turn toward clear, basic tenets of what keeps money working for us -- not politicians and central bankers.