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Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
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Corporatism in finance has brought ruin onto the world. Letting banks fail is messy, disruptive and ugly (though not as much as people think). But bailing them out creates moral hazard – it gives a blank cheque to reckless banks. Unless bad banks are allowed to fail, good ones cannot take their place. Preventing failure is good for established banks, but bad for everybody else.
Cheap credit created by central banks inflated the housing bubble that burst in 2008. The combination of artificially cheap credit and banks expecting a bailout led to the crisis. Money should emerge from markets, not be imposed by governments. Without radical changes to money and banking policy, we will sleepwalk into the next crisis, and it may be even bigger.
Somebody needs to speak up for the freedoms of the many against the protections of the few. Corporatism – not capitalism – was at the root of the last crisis and it will be at the root of the next one. Britain needs to reject protections for businesses. It needs a free market revolution.
– Sam Bowman
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.
Yes, Kevin Dowd’s Monday night tour de force for the Adam Smith Institute, which I wrote about here (and then some more here) has now been released into society in video form. Having attended the event itself I have not yet watched much of the video so I cannot vouch for its sound quality (what with all the extraneous mechanical noises on the night), but I hope and presume that it suffices.
The ASI’s Sam Bowman says that Dowd’s speech is …:
… essential viewing to anybody who thinks the worst is behind us.
Indeed. Looking back on it, the weirdest thing about that BBC Radio 4 Keynes v Hayek debate, which I attended and which Jonathan Pearce also wrote about here, is that the Keynesians at that debate were all assuming exactly this, that the worst was behind us, and that the argument was merely about which team would manage the recovery, assumed to be under way either now or Real Soon Now, in the nicest way. I don’t recall the Hayek team ever explicitly challenging this assumption. If that’s right, I think the reason was that the assumption was just there, but never spelled out. It was just being assumed that the worst was behind us.
I think that, literally within the last few weeks, in other words since that debate happened, that assumption has collapsed. I don’t think it’s just Kevin Dowd, Sam Bowman and I (and Paul Marks of course) who are now thinking this way.
Earlier this evening I attended a talk given by Kevin Dowd, organised by the Adam Smith Institute. It was being videoed, and although it may be of rather dubious technical quality (an air conditioning machine was making very strange noises), a video will, I was assured, be appearing on line. [LATER: Now available, here.]
In the past I have suspected Dowd of failing to do justice to the gravity of the world’s financial circumstances, by being a little too precise in his reform proposals, but there was not even that sort of optimism in Dowd’s speech this evening, which spelt out in some detail the truly horrible scale of the catastrophe. There was a bit at the end about rejigging the banks, but there was no suggestion that this on its own would suffice. Dowd’s central message was that the economic life of the West is now well and truly eff you sea kayed. Currencies tanking, banks bust, governments bust, current policies hastening the stampede towards the abyss. (Our own Johnathan Pearce was also present, so maybe he will tell us a bit more of the details of the doom we are all staring at.)
The odd thing was that Dowd’s speech made me strangely happy, and judging by the mood of the gratifyingly considerable throng that had gathered to hear Dowd’s prophecies of doom, I wasn’t the only one who was cheered up. Dowd himself understands this link between facing the truth in all its ghastliness and the strange elation that this can provoke. He even quoted a Noel Coward song which immortalises this sentiment: “There are bad times just around the corner. … Hurray! Hurray! Hurray!”
The thing is, when your world is staring catastrophe in the face, the people you want to listen to, because you want them to exist, are people who seem to have a serious and really quite detailed understanding of the nature of the catastrophe in question, all of it. You don’t want to be told that things are fine and will sort themselves out with only a little bit of grief, because you know that’s nonsense and who wants to waste time listening to an idiot saying things like that?
It is also necessary, if their audiences are to be made truly happy, for prophets of doom of the Dowd variety not to be total nutters, in the sense of being entirely disconnected from anything resembling polite society. Prophets of doom need at least some influence on events. Someone who is someone needs to be listening.
Steve Baker MP has already been chosen by the fickle finger of fate, by history, or by whatever else you want to call it, as one of the tiny handful of British public figures who are going to tell Britain what the true nature of the problem now is, and what Britain must do about it, rather in the way that Winston Churchill warned Britain about Hitler in the 1930s. And guess what, Steve Baker MP was present in Dowd’s audience this evening. He even asked a couple of questions.
After Dowd’s talk had finished I asked Dowd: Are you in fairly regular personal contact with Steve Baker MP? Is he getting his head around all this stuff, in the way that you already have? Yes, Dowd replied. We have had several meetings, Cobden Centre, de dum de dum. This made me even happier.
LATER (Tuesday morning): More from me, with a photo, about Dowd and his performance last night here.
Zerohedge has noted that the IMF is reactivating its New Arrangements to Borrow facility. This is a backdoor channel for bailing out an insolvent Eurozone. It is time for Great Britain to leave the IMF as it injects money into failure.
As the whole of the international architecture for finance is becoming a byword for bailouts, why stop at the IMF?
I get all sorts of emails, and this one, from a fairly well known money manager in the UK by the name of Terry Smith, is worth reading in full. It is the text of a letter he has sent to the Financial Times newspaper. The FT is behind a paywall so I reproduce it in full:
From Mr Terry Smith.
Sir, I refer to the debate being conducted in the pages of the Financial Times between those who propose further Keynesian measures, such as Martin Wolf (“Struggling with a great contraction”, August 31), and those who do not accept that they will work, such as Wolfgang Schäuble (“Austerity is the only cure for the eurozone”, September 6).
Such so-called Keynesian measures as advocated by, among others, Ed Balls, Samuel Brittan, Paul Krugman, George Magnus and Barack Obama as well as Mr Wolf have not worked to date, and they will not work. Their advocates seem to assume that their repeated failure to solve our economic problems just means that the medicine must be repeated, which reminds me of Richard Nixon’s motto that “if two wrongs don’t make a right, try three”.
I say “so-called” Keynesians because these advocates seem not to realise that Keynes’ theories did not rescue us from the Great Depression. They are also asymmetric in their application of his theories – calling for ever larger deficit spending, having overlooked the bit about running a surplus in a boom. But above all, they do not seem to realise that they cannot work in a period of debt deflation in which a recession is preceded by the collapse of the banking system, as their current failure is demonstrating.
To the ordinary person in the street, the idea that we can rescue ourselves from a crisis caused by excessive borrowing by borrowing even more must seem mad. In this respect they are possessed of far more common sense than those who are currently advocating just such a course of action and purport to be our leaders.
The first step in rectifying this situation should be to make a clear and unambiguous statement about the actual debt the UK is carrying.
To give a lead to this, today we have circulated to every member of parliament a tin can emblazoned with the UK debt figure – £3,589bn including commitments for public sector pension commitments, private finance initiative and banking sector guarantees, so that they can see what it is they are metaphorically “kicking down the road” with their present policies. This, ahead of the party conference season, I hope might spur some considered and honest debate on this issue.
It is time for those who wish to lead us out of this crisis to tell people how bad the current situation really is and the painful remedies which will be needed to remedy it.
Terry Smith, Chief Executive, Tullett Prebon, London EC2, UK
I get the impression that this man is not looking to be elevated to the peerage. Good.
To the ordinary person in the street, the idea that we can rescue ourselves from a crisis caused by excessive borrowing by borrowing even more must seem mad. In this respect they are [he/she is] possessed of far more common sense than those who are currently advocating just such a course of action and purport to be our leaders.
– Terry Smith
Just when we [have] the strongest possible proof that Keynsianism doesn’t work, someone yells for an encore
– Commenter “J Cuttance” on the Telegraph
One of the self-criticisms I hear a lot from Austrian economics devotees is that Austrianists don’t say what should now be done. They write book after book expounding what should not have been done, but most of their responses to the current mess consist of variations on the theme of: not that. Shouldn’t be starting from here.
So, when I read a report like this one, I get interested. Quote:
Within the next few weeks, signatures will be collected to launch an initial referendum that would require the Swiss National Bank to repatriate all of its gold holdings to within the borders of Switzerland, prohibit it from selling any more of its gold, and require a minimum 20% of its assets be gold.
This initiative is likely to be very popular. The Swiss remember that during World War II, the United States refused to provide access to their gold reserves. More important, since 2000, the SNB has sold 1550 tons of gold – more than a half of its total holdings – mostly at prices below $500 an ounce, and bought European government bonds that have plummeted in value by SF40 billion, compared to a total federal budget of SF60 billion.
This referendum will put the issue of gold as money on the political agenda. The next step is to offer a follow-on initiative permitting the free-coinage of GSF.
The creation of a Gold Swiss franc and the free coinage thereof, along with the repeal of taxation by the U.S. of gold and silver coins used as legal tender, would liberate market participants to generate spontaneously a new monetary order. With government barriers removed, people all over the world will find ways to use gold-backed money to facilitate the exchange of goods and services with their counterparts anywhere in the world, and to engage in saving and investing, lending and borrowing using monies whose value would be anchored in the remarkably stable and trustworthy purchasing power of gold.
Initially, such efforts would have little economic consequence. However, in a world of voluntary exchange, good money chases out bad money, turning Gresham’s law upside down. That is why when the dollar’s value was stable, it was the currency of choice throughout the world.
No one can forecast how this process will evolve. However, we can anticipate that the creation of a Gold Swiss franc and the repeal of tax and legal barriers to the use of gold and silver coins as legal tender will be the antecedent to the reform of today’s paper money system – in the U.S and throughout the world.
Assuming that enough Swiss folks vote for such arrangements, will they do any good? Or does such politicking merely flag up the problem, without going any way towards solving it? No doubt the current Rulers of the World will disapprove of such contrivings and do all they can to abort them, but this kind of thing at least might give the rest of us something to vote for, i.e. against the current Rulers of the World. Mightn’t it?
Something Must Be Done This Is Something Therefore We Should Do It is a powerful force in politics. Schemes like this partake of this force. At the very least, they challenge others to do better.
My thanks to Steven Baker MP for the email that alerted me to this. It’s good to know that he is keeping an eye out for such things, don’t you think?
This piece, about how people are moving from states in the USA governed according to lefty principles, towards states governed by somewhat less lefty principles, reminded me of this piece I recently did here, about people moving from country to country in the world. As in the world as a whole, so in the USA.
Come the next round of elections, the numbers of Americans on the move, and the unmistakable direction in which they are moving, will be hard for the lefties to explain away.
In the emerging presidential campaign, it’s easy to see a version of these questions dominating the debate. Why should anyone choose to endorse liberal, Democratic policies when a single year (2009-10) saw 880,000 residents packing up their belongings to place Barack Obama’s Illinois in their rear-view mirror, while 782,000 new arrivals helped drive the robust economy in Rick Perry’s Texas?
California, so the piece says, lost two million people in the years 2009 and 2010. The promised land no more, it would seem.
I’d be interested to hear what American readers make of Governor Rick Perry. Will I like him, as and when I learn more about him? I’ve read people saying that Perry sounds too much like President Bush Junior. But I’m thinking that people are in the mood to listen to what is actually being said, next time around, rather than fussing about the mere manner in which it is said. Or is that being too optimistic?
The Chairman of the Federal Reserve, Ben Bernanke, is due to speak in Jackson Hole, Wyoming, later today and according to some of the investment notes that I receive, he is expected to commit that central bank to a third round of credit creation from thin air, otherwise known in these mealy-mouthed days as “quantitative easing.” There are doubters out there about the wisdom, or lack thereof, of this. We can of course expect the usual devotees of hard money to scoff at this, but what intrigues me is how some economists in the commercial world are hostile. Take this from Steen Jakobsen , chief economist at Denmark-based Saxo Bank:
“When talking about the impact from Quantitative Easing (QE) one has to realise that most academic studies show that the biggest “impact” from QE on markets comes from the actual announcement of it rather than the execution of it. An analysis of the two prior QE introductions point to a 50 to 100 basis point reduction on bond yields and subsequent inflation of equities via “a feel good” factor – the so-called wealth effect.”
“But realistically, what has been the net impact of QE1 and QE2? Chairman Bernanke has used 3,000 billion US Dollars to create what? Nothing! Unemployment is still above 9.0 per cent, the housing market is still in a slump, and now the only successful thing going for the Fed is the stock market’s rise from the floor at 666.00 in March 2009. But now there’s talk of an interbank funding crisis and unrealised losses. It certainly smells like 2008, doesn’t it? Or what about August 2010? – Yes! It is almost a 100 per cent analogy to last year. It’s actually like watching the movie Groundhog Day.”
I like his final paragraph:
“There is another political theory stating that the best environment to create growth in is one in which politicians have no power to pass legislation (similar to the U.S. situation for now until the U.S. elections). Think about Clinton: he had a major “programme” coming in as President, yet failed to get anything whatsoever done in his eight years in the White House which then led to the biggest growth period in U.S. history. What does this tell us? Total radio silence works as the micro-economy – investors, consumers and companies – adjust their behaviour and consumption to the new reality and then start moving forward. The last thing that we need is “political noise” and promises of better days ahead with nothing to back them up.”
I can think of a good book on the collapse of paper money that I can send this man.
A graph on the growth of the regulatory state, courtesy of the National Review Corner blog.
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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