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Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

The Detlev Schlichter book

“The boost to growth from more monetary easing and more deficit spending – naturally always transitory and the source of further misallocation of resources – will be ever more faint and short-lived. Instead of igniting a new false boom, a progressively larger share of the policy stimulus will simply evaporate in the service of maintaining the accumulated misallocations, of avoiding a correction of artificially raised asset prices and of bloated balance sheets. As the manufactured recoveries get weaker, fiscal deficits get larger as a result of the combination of ongoing welfare state outlays and futile Keynesian stimulus spending.”

(204-205)

“Given the theoretical analysis in this book and the consistently devastating historical record of state paper money, it is remarkable that those who advocate commodity money today are either marginalised as slightly eccentric or made to extensively explain their strange and atavistic-sounding proposals while the public readily accepts a system of book entry money in which the state can create money without limit. The global financial crisis that commenced in 2007 is a case in point. The crisis constitutes a thorough and illustrative indictment of the alliance of state and financial industry, of a system of expanding state paper money and government-supported fractional reserve banking. Yet, the political class and the media managed to put the blame on capitalism and on greedy bankers.”

Paper Money Collapse, page 243, by Detlev Schlichter. I single out these quotes for touching on two key issues: the declining effectiveness of Keynesian stimulus spending – assuming it was ever valid in the first place – and the fact that the public, aided by the political classes, have, with some exceptions, managed to completely misunderstand our present crisis.

This book is not comforting reading, nor is it always easy to read. You have to concentrate. But it is a “must-read”. For me, one of the most valuable insights of this book is how it explains how the general price level in an economy can appear to be stable but that injections of fiat money into the system can derange relative prices for consumption, intermediate and production goods. This point is vital. It explains why those central banks, such as the Bank of England, got dangerously complacent in the 90s and noughties when the inflation targets they had been set appeared to behave. But all the while, the surges in money supply growth created a bloated financial sector and property market bubble.

He also rebuts the argument, sometimes used by opponents of commodity, or “inelastic” money, that a growing economy needs a growing supply of money to ensure stability. Untrue. At most, an expanding economy, with growing innovation, division of labour and productivity growth, should see a mild deflation over time (which is good for people who want to save by holding cash). But as Schlichter explains, there is no reason in logic or evidence why a mild price deflation should hamper economic progress once people get used to the idea that their money will buy a rising stock of goods and services through time. He uses the analogy of computers. In recent times, the hourly wages needed to buy, say, a mobile phone have slumped. Has that stopped people from going out and buying these devices? Of course not.

Schlichter’s explanation of how fractional supply banking works is crystal clear and, in my view, he explains it slightly better than say, Murray Rothbard did in his The Mystery of Banking, although the latter book is still well worth reading. And Schlichter’s style is more sober and less brash in its tone than the approach adopted by Thomas E Woods in his book about the crash, although Woods’ explanation of Austrian business cycle theory is pretty good.

All these books are useful for driving home key points about how we have arrived in our current pass. Schlichter, precisely because he used to work in the investment management business for so long, speaks not as an ivory tower academic, but as someone who has been on the practical side of finance. He knows that much of what appears to be “free market banking” is anything but; in fact, as he describes it, much of what now goes on in Wall Street, the City or wherever is a hybrid of market and state planning. In its way, it is profoundly corrupt. Schlichter also mentions how such a large chunk of the economics profession is locked into the philosophy that drives the current system – without it, many of these people would have to do something else for a living.

Perhaps the scariest part of his book is when Schlichter points out that the derangement of the capital system in the West is worse than in the late 1970s, when the-then Fed chairman, Paul Volcker, pushed up interest rates to record highs to purge some of the malinvestment and rottenness from the system. The cigar-chomping Volcker was a brave man, and he had the support of the-then presidents Carter and Reagan (Carter sometimes needs more credit than he gets). I cannot see any such central banker now receiving such support for this sort of thing. Instead, we’ve got ourselves “Helicopter Ben”.

Paper Money Collapse is one of the best books to come out of the financial crisis, maybe the best so far.

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2 comments to The Detlev Schlichter book

  • Julius Blumfeld

    My fondest hope is that Schlichter is completely wrong.

    Trouble is …..

  • Paul Marks

    Hope for something else Julius – as Schlichter is not wrong.

    Even if a fiat money system and credit bubble banking could work, in theory, everything the various governments are doing (and have been doing for years) in taking it all to an insane extreme means it will not work (i.e. survive) in practice.

    This is the “joke” it is the establishment (not us) who are destroying their own system.

    And, of course, taking everyone else down with them.

    I have not yet read Schlichter’s book (although I have seen him speak – via the wonders of the internet), but I have read Thomas Woods’ book.

    But like Peter S. (and so many others) the warning of Woods (about how NOT to respond to the crises of 2008 – itself caused by credit money expansion) has been ignored.

    The establishment have (without knowing it) followed a line of policy which will bring down their own system

    I know I have already typed that – but it is a fact that needs to be repeated (again and again) till (just possibly) it is understood by the general population.

    Of course some of the rulers actually know all the above – for example Barack Obama knows it.

    He understands (with his Marxist training over a period of decades) that Keynesianism can not really save the system – on the contrary that it will destroy it.

    And that is exactly what it wants.

    If the crash comes after November 2012, then he will use it as a excuse for “Emergency” measures.

    And if it comes before November 2012?

    Well then a Republican will win the election – but it will, most likely, be a Republican who has not got a clue what to do.

    So the Comrades win anyway.

    This is his reasoning – and it seems fairly sound to me (I only wish it was not).

    As for Britain (and France and …..) all the little Keynesian politicians – with their faith in “keeping up demand”.

    Oh God have mercy upon us, for the minds of our rulers are consumed by folly.