Samizdata

I have just posted the following review on Amazon.com of Paper Money Collapse. I only learned last night that the review embargo date had now arrived and that the time to be talking this book up is now, so this review was somewhat hastily written, although it is the result of quite a lot of thought. This was my very first review of any book on Amazon, and it shows, I’m afraid, particularly in my blundering attempts to italicise, which work here by those methods, but not there. Also, although I said I liked it, I didn’t tick the box saying that I liked it. Can I do anything about any of that? Probably not. (LATER: actually, I now learn that you can edit these reviews. The italics thing now makes no sense!) Oh well, blog and learn, review on Amazon and learn. I will be amazed if I don’t find myself wanting to say lots more about this book, but what follows is my first best shot.

An effort but definitely worth the effort – could be huge

I agree with the bit on the cover of this book where it says that this is not an easy read. For me, it has not been, and not just because the truths Schlichter spells out and explains are so not-easy to take. I am a huge fan of his, and have been ever since I first heard him talk about the analysis in this book in London about a year ago, but he makes me work hard. This book is heavy on logical exposition, much lighter on diverting anecdote. For the latter sort of Schlichter stuff, you must read his blog.  

One way to describe Paper Money Collapse might be to say that it is the sort of book that the great Austrian School economist and economic historian Murray Rothbard might have written, had he lived a bit longer. Last year I read Rothbard’s Man, Economy and State. While doing this, I kept hoping that I would read a theoretical analysis of our current financial woes, as opposed merely to Rothbard’s general take on Austrian Economics as a whole. I realise that this was a lot to ask of a book published several decades ago, and not surprisingly I was, although in general much educated, largely disappointed on that particular count. Well, what I was only hoping to read in that Rothbard book was what I did read in Detlev Schlichter’s much shorter book, which I heartily recommend to anyone willing to really get stuck into it. Here is a conceptual analysis, in very much the painstaking Rothbard manner, of how non-commodity-backed currencies behave when they collapse, and why they do collapse, always, inevitably. In other words it is about the times we now live in.  

I learned a lot from reading Paper Money Collapse. In particular, Schlichter has convinced me of the wrongness of the argument that since we want economic activity in the world to increase indefinitely, but gold is, barring a few trivial further discoveries, fixed in quantity, gold won’t work as the basis of currency. But non-elasticity is exactly why gold is such a good basis for currency. Totally elastic money, on the other hand, inevitably collapses, always and everywhere. Why should our elastic money be any different?  

Schlichter is not pointing the finger at individuals. This is not a detective story, where in the final chapter all the suspects are rounded up and Herr Schlichter points the finger at the guilty man. President Nixon’s decision to break the final link between the dollar and gold is deplored, and Ben Bernanke’s recent pronouncements are likewise disapproved of, but many of the decisions that lead to our current mess were made many, many decades ago, and by their nature they are the kind of decisions which are far easier to make than they are to reverse and clean up after.  

Nor does Schlichter believe that hyper-inflation now threatens us all because central bankers are unaware of the badness of hyper-inflation. They know that hyper-inflation is bad. Unfortunately, they also know that if the collapse that Schlichter describes occurs while they are in office, then that, for them, will be even worse than a bit more inflation or even quite a lot more inflation. So, they carry on printing money and postponing the resolution of the problem, which means that when nemesis does finally arrive, it will be all the worse. But, says Schlichter, they know what they are doing; they just don’t know how to stop. Schlichter telling them to stop will accomplish nothing.  

I suspect that Schlichter may be being rather kind about just how plain stupid some even quite high ranking central bankers now are, but clever or stupid, these people are now thoroughly boxed in by their previous decisions and by the decisions of their predecessors of earlier years and decades.  

I have been using the phrase “paper money”, as Schlichter himself does in his title. But as we all know, when central bankers now create yet more money, they are mostly putting numbers in electronically managed bank accounts. It is not the printing of bank notes that is the problem; it is the lack of a commodity base to control the process. By the same token, paper bank notes that refer to a currency that is solidly based on something like gold would be fine. But I am sure that Schlichter has thought long and hard about this phrase, and I gladly defer to his decision to call it “paper currency” in his title. I certainly don’t know a better way of putting it. “Fiat” money? “Elastic” money? (That’s the phrase that Schlichter switches to in the subtitle, also prominently displayed on the front cover.) Both are a bit more accurate than “paper” money, but are also a bit less attention-grabbing for the kind of intelligent and educated everyman whom Schlichter is trying to reach. “Paper” gets over the gist of the problem pretty well, I think. And you start learning what that means as soon as you read the sub-title.  

When it comes to Schlichter’s pessimism about him personally having any influence on the conduct of public policy, I agree with him, in the short run. But I think he may be proved wrong, in the longer run. I agree with him that there is nothing much he can say to the people now in charge of financial policy that will persuade them to do the right thing now, which basically means getting the collapse over and done with as soon as possible. But when this collapse starts seriously happening anyway, in just the manner and for precisely the reasons that Schlichter says, he could then become a very Big Cheese, as we say in my native England. In fact, if this book does half as well as I suspect it may, Schlichter will probably be accused, by various paper (fiat, elastic) money idiots who know only the title of this book but nothing of what it says, of having precipitated the catastrophe he describes. But other people, including politicians and central bankers, could also then be asking him: So, Schlichter, what the hell do we do now? I urge Schlichter to be ready for this moment. Suggested title for his next book: Now What? (Presumed answer: Let non-state controlled and non-state backed bankers supply currency, which they will back with gold. Get out of their way and let them get on with it.)  

Meanwhile, I urge anyone who thinks that he might find this book enlightening, and helpful for personally navigating through the mess, to go ahead and be enlightened. I think this book may become very big. It certainly deserves to.

I sometimes pick up quick-to-read paperbacks, either fiction or non-fiction, at airports to help pass the time during my flight. So, on a recent short break to Malta, I bought Dambisa Moyo’s How the West Was Lost, published a short while ago, which seeks to argue that for various reasons, good and bad, the West (essentially, Western Europe and North America) is in danger of losing out to the East. I was intrigued enough to pay a few quid for the book, but in the end I should have known better.

Moyo has a lot of things to say with which free marketeers might approve of: she denounces the way in which the banking system has encouraged over-use of debt financing, creating all manner of problems, culminating in the sub-prime mortgage disaster and associated asset price bubble; she also understands that modern Welfare States have created many problems. However, for all that she tries to accept that the rise of the former Third World nations from poverty is a Good Thing and to be applauded, I cannot help but feel that she does not really mean it very much. She’s a mercantilist who sees economics as a titanic fight between states and is hostile, or at least sceptical, about the capacity of people operating in markets under the rule of law. And she repeats the canard that the panic of 2008 demonstrated the dangers of unfettered capitalism, oblivious to the fact that the monetary policies of the Fed, etc, were policies of state institutions, as was the interference in the US and other housing markets by governments (Freddie Mac, etc).

In fact, she seems wedded to a sort of neo-Malthusian argument that says that the desire for prosperity and higher living standards in places such as China is unmitigated bad news for the West as there are finite resources in energy, etc, and that Eastern prosperity comes at the expense of the West’s. In other words, she is arguing that economics is, in some ways, a case of winners and losers. Indeed, she talks repeatedly about the idea of there being a race, often using the very word… “race”… to make her points.

Here is one typical paragraph in which she says the West is suffering from all that terrible selfish individualism and we should benefit from a bit more of that no-nonsense collectivism as seen in China (page 172):

“Frankly speaking, the constitutional framework that has defined the US for the past three centuries is not likely to be amended in order to hand over more power to the state. Yet arguably more power, more flexibility and fewer committees are exactly what is needed. What sense does it make in the depths of the financial crisis – a state of economic emergency by most accounts, which brought the country and the world to its knees – for the President of the United States to have to build consensus around a desperately needed fiscal stimulus package before he and his advisors can act?”

She seems curiously unaware of to what extent the powers of the Federal government in the US have already gone way beyond what was envisaged by the Founders – and that’s a bad thing – and that in other Western nations, such as the UK, the government of the day has considerable powers, or has yielded great powers to the European Union and its legions of unelected officials. And yet for Ms Moyo the problem is that is far too much of this pesky liberalism, checks and balances, and so forth. I hate to say it, but she’s coming close to flirting with a form of fascism.

There are other, equally poor, arguments. For instance, she argues that the vast majority of citizens in Western nations have only reaped a small share of the benefits of greater trade and so on because many of the profits earned are paid to shareholders. For instance: (page 178) “The only thing companies were interested in was the company’s profitability and therefore the shareholders’ return on capital.”

Wow, the owners of firms want to make a profit (as opposed to making a whacking great loss, presumably). But even this line ignores the fact that by “shareholder”, we do not just mean a few isolated fat, capitalist bastards in suits; no, we also mean all the millions of people – including people a bit like Ms Moyo – who have savings plans, 401K plans, mutual funds, pension pots, etc. This line of hers also does rather beg the question of what should happen to these profits – should they be taxed in “reinvested” by governments? In several instances, she praises the behaviour of governments, such as oil-rich states, and their massive “sovereign wealth funds”, arguing that these are used to benefit domestic populations. Well they may be in some cases, but even a cursory awareness of public choice economics should alert Ms Moyo to the dangers of corruption, mis-allocation of capital, political favouritism and faddism that often comes when government agencies disburse vast sums. The flashy public spending projects of the past have often brought dubious rewards.

And I just knew I had wasted my aircraft reading time when she scorned Ricardo’s Law of Comparative Advantage, arguing that unless all countries play “fair” (which never happens), then the argument for free trade that the LCA underpins is chucked away.

This argument – that free trade is only beneficial if everyone plays nice – has been demolished time and again. A good example comes from Deepak Lal, in his book, Reviving the Invisible Hand.

Here is a passage:

“a country will benefit from removing its own tariffs and import restrictions even if all its trading partners maintain theirs. For as long as the domestic prices of goods in our country under autarky differ from those at which they can be imported and exported under free trade, the country will be able to obtain the gains from trade both by obtaining imported goods at a lower cost than they are produced at home (the consumption gain) and by specialising in producing and exporting those goods in which it has a comparative advantage and importing the others (the production gain), irrespective of the tariff applied by their trading partners. For these trade restrictions only damage the protectionist country’s welfare, and it would be senseless not to improve one’s own welfare just because someone else is damaging theirs. There is no point throwing rocks into one’s harbour just because others are throwing rocks into theirs. Hence, there is an incontrovertible case for every country to unilaterally adopt free trade, irrespective of the protectionist policies of other countries – with one exception. Suppose that a country is the only producer of some good – say, oil.”

He goes on to explain this case but says that in fact, retaliatory trade practices and other issues take the edge off this argument also.

It is all such a pity. She started well, but I really wish I had read that new Lee Child thriller instead.

Tim Worstall has a new book out, Chasing Rainbows, which sets out what he regards as the economic fallacies of much of the Green movement. Such fallacies, he argues, actually get in the way of solving or at least trying to handle the genuine problems that may exist.

What is good about Tim’s book is that he is not some sort of cliched “denier”; he does not base his argument on the idea that AGW is some sort of evil collectivist con-trick or piece of doomsterish nonsense (although I am sure some commenters will want to raise that point). Rather, he says if there are problems caused by a buildup of CO2 in the atmosphere, and there are costs of such problems, then let’s use the tools of economics. For instance, he talks about carbon taxes. I am not a fan of taxes, but I can see a certain logic. They are far better than carbon credits and carbon trading, in my view.

Like Nigel Lawson, I see the idea of a market in carbon credits not as a solution to AGW but as something with great potential for fraud. The question I have about carbon tax, however, is what happens to the revenues. If they are levied by nation states, then clearly there will be demands for such taxes to be “harmonised” and levied by some sort of single organisation. And then the question arises as to what happens to such revenues?

Much of the book bears many of the trademarks of Tim Worstall’s own excellent blog: lots of data flecked with his caustic wit, often at the expense of such buffoons like George Monbiot and Jonathan Porritt, and on tax, the appalling Richard Murphy, who gets a solid going over at least once a day. There is a touch of PJ O’Rourke in how Tim likes to use a quip to make a serious point. I particularly like the way he gets hold of important concepts, such as the Law of Comparative Advantage, or the idea of opportunity costs, using examples of how forcing households to recycle waste imposes unpaid labour costs, which if added up, can be shown to represent a large cost. Being a good student of the great French classical liberal Frederick Bastiat, Tim understands the point about “what is seen and what is unseen” – understanding that the visible costs of environmental degradation need to be balanced against the unseen costs of trying to deal with it. Bastiat is one of those writers who ought, in a sane world, to be on the compulsory reading list of every school pupil.

The central message of this book is that there are problems, but there are also rational approaches to them, and that the Green movement, or at least its most collectivist parts, are blocking rational reforms. It is a similar point to that made by Matt Ridley in his book, the Rational Optimist, to which I have referred before. By their one-eyed focus on AGW alarmism, and by adopting a reactionary, command and control approach to the issue, they are blocking sensible alternatives, and also crowding out other issues, such as alleviation of poverty, which can be made worse by such foolish ventures as subsidies to biofuels, for example.

Chasing Rainbows makes for a good stocking filler this Christmas. Go on, do it for the children and for Tim’s bank balance.