No way out – why policy advice is futile, and what you should do instead

Book cover for Paper money CollapseFirst of all, apologies appear to be in order. Over the past six weeks, my commentary on the Schlichter Files was somewhat sporadic. I spent most of the summer with my family in Italy where I voluntarily removed myself somewhat from the fitful convulsions of the financial system’s death-throes. Then, last week I attended the world conference of the International Society for Individual Liberty on the island of Vulcano where I gave a speech on my upcoming book. The conference was a very pleasant affair with many interesting presentations, and I met some fascinating people. I am back in London now. Normal service should resume, in particular as we are nearing the official publication date for Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown. In fact, in the United States the first copies are being shipped as I write this. The book should be available in the UK within the next four weeks.

The Washington Post recently featured my book in the Political Bookworm column of their online edition. You can see it here. Naturally, I am very pleased about this. There is, however, one sentence, the last in Steven Levingston’s article, that I should probably comment on:

“In all he says, it is hard to know if this [paper money collapse] is his wish or his fear.”

Now let me be very clear that I am convinced that paper money collapse is inevitable. Our present system of elastic money is not only suboptimal it is also unsustainable. As I show in my book through a systematic and fundamental analysis, elastic money must lead to the accumulation of imbalances, to capital misallocations, and to resource mis-pricings, and those must lead, over time, to economic disintegration and chaos.

The present system must end, it will end, it will now certainly end badly and probably soon. As it is inevitable it doesn’t matter what I wish. To wish that this would not happen would be as sensible as to wish that the present summer would not end, and that the days would not get shorter. I don’t wish it and I don’t fear it. The system must go. Good riddance. What I do fear, however, are the political consequences and the societal fall-out from the crisis, and I particularly fear the responses it will provoke from governments and state officials.

Of course, the fiat money crisis is not a natural catastrophe. It is entirely manmade. It is the direct consequence of political decisions and political action. In particular, it is the inevitable consequence of the decision to abandon a gold-based monetary system, a system of essentially inflexible and apolitical money, and to replace it with entirely elastic and constantly expanding paper money under the control of central banks. It is the direct consequence of the erroneous belief – which, sadly, is still the guiding principle of modern central banking and reflected in ninety percent of the financial commentary in the media– that low interest rates and additional credit are good regardless of whether they are the outcome of true saving and capital accumulation, or simply the outcome of fiat money creation.

I am quite glad that Levingston raised the question of my own personal attitude to what is going on because it gives me the opportunity to clarify my position. His point is also somewhat related to something I encounter more often now that I present my book to various audiences or that I give interviews on its subject matter. I think there often exists an assumption that one cannot simply predict some unpleasant outcome in the field of economics and not offer at least a bit of hope that things may turn out differently, of promising the possibility of a way out that would spare us all the painful consequences of past actions, of decades of misguided policy, of cheap credit and limitless money. There is the unspoken belief that after all my research on the topic I must have some good policy advice up my sleeves. Often people ask me, so what should be done? If what central bankers and politicians are doing presently is, as you say in your book and on your website, counterproductive, what should they do instead? What is the solution? Just as in the case of the Washington Post blog, I suspect that the fact that I speak so little about specific policy reforms leads people to believe that I don’t care about where we are going, or I might even look forward to the disaster.

What should be done

There is only one solution and that is to stop the printing of money and the artificial suppression of interest rates, to return to hard money, to allow interest rates and market prices to again reflect the true extent of voluntary savings, and to thus allow the liquidation of the accumulated imbalances from previous money expansion. But because we had a four-decade long period of unprecedented fiat money creation globally, these imbalances are now so big that the necessary liquidation would be very painful – too painful for the political class – which got us into this mess in the first place – to ever deem it acceptable. The overstretched banking industry, the overextended asset markets, insolvent governments – all of this is screaming for a cleansing liquidation and recalibration – and has done so for years. A crisis has now become unavoidable. But politicians still think that the power of the state is unlimited, that what they don’t find acceptable will simply not be allowed to occur. Only in the realm of politics is the belief widespread that reality is optional, and reality must simply be made to conform to the wishes of the political elite. Of course, policy cannot create a new reality. What policy does at the moment is try to postpone the inevitable correction ever further. “Not on my watch” is the modus operandi. This will make the final crisis even worse.

I quoted Ludwig von Mises on this on a couple of occasions but I will do it again. In his magnum opus of 1949, Human Action, the grand master of Austrian School economics said:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

The endgame will be “a final and total catastrophe of the currency system”, and “later” may indeed be soon. Remember, we have been postponing the liquidation for decades and happily piled new debt and new imbalances on top of the old debt and the old imbalances. By not stopping the printing of money and the accumulation of debt and capital misallocations, and by adding to them instead, the policy establishment is making sure that the final crisis will only be worse. This is why I consider it pointless to come up with policy recommendations. What would be the purpose of presenting a detailed plan of converting to a gold standard, which is what should be done? Mainstream economists, politicians and central bankers will either ridicule or ignore it. They still believe that the answer to all these money-induced imbalances is – more money! They are hell-bent on creating a total currency catastrophe. And they will get it.

A whiff of Weimar Germany

Chart of German Hyperinflation

Let’s just take a casual look at the events of the past month: While I was hiking in the Dolomites or relaxing in Tuscany, the destroyers of paper money did not rest. The ECB completed a U-turn of embarrassing proportions and switched from exit strategy to buying more PIIGS-bonds funded by the printing press – a policy that continues to this day and that will not end! And here is Dartmouth College Professor and ex-Bank of England money-debaser David Blanchflower arguing for more quantitative easing from the Fed. When asked how much, the good professor showed his generous side: $ 1 trillion or $ 2 trillion, just print until things look better. We will show this economy who is boss!

And in this column, British pundit Ambrose Evans-Pritchard argues that real monetary stimulus hasn’t even been tried yet. He recommends some globally co-ordinated monetary blitz – what if all central banks opened their monetary floodgates simultaneously? Surely, that is going to buy us a nice recovery.

If you thought that this lunacy is being greeted with unbelieving embarrassment, as it should, think again. As I write this, the Swiss government has declared that international cooperation in monetary debasement is a splendid idea – and has just pegged the Swiss franc, formerly the gold-rimmed version of paper money, to the PIIGS. Congratulations!

Make no mistake: They will all get what they are asking for. But to expect me – or anybody else who sees the writing on the wall – to engage with a policy establishment beholden to the myth that prosperity and jobs can be had through constant monetary manipulation, through artificially low rates, money printing and asset bubbles – that is asking a bit too much. And let’s face it: it is not as if any of them would even want to listen to what I have to say. I put my case out there – it is for others to decide what to do with it.

Here is another, less well-known quote from the great man, Mises:

“Political ideas that have dominated the public mind for decades cannot be refuted through rational arguments. They must run their course in life and cannot collapse otherwise than in great catastrophes…”

We are approaching such a catastrophe with full force – and rather than coming up with a monetary reform (and there is only one true reform: a return to gold) that will certainly be rejected by the powers that be, I think the most sensible thing one can try and do is to protect oneself, one’s family and one’s wealth as best as one can from the ensuing fall-out. My recommendation has been and still is to reduce exposure to banks and to governments – the two grotesquely bloated entities that have for decades benefitted from their privilege to be unconstrained paper money producers and who are now close to OD’-ing on that privilege. Hold gold (and maybe silver) instead of paper money, bank deposits and fixed income securities. Real assets, not paper assets.

The coming monetary meltdown will wipe out vast amounts of paper wealth, and it will facilitate one of the largest transfers of real wealth in human history. Many people will lose a lot – sadly, it will be mainly those who produce more than they consume and who save the difference – and then save it in the form of cash, bank deposits and bonds. All paper money collapses decimate the middle class. No, I certainly don’t wish for this but the chance of this being avoided is practically zero.

Continue reading at Paper Money Collapse.


  • Ian Edwards says:

    This analysis is bang on the money, Mises sums it all up perfectly, not only the error but the fact that politicians and financiers will not see the error until after the catastrophe. Money Week magazine and many others have been warning us about what’s coming for a long time. Smart people are moving their wealth out of fiat paper and into something that will hold its value ahead of the curve in anticipation of the market corrections that will take place, I’m thinking commodities mostly and metals in particular. Currencies such as the Euro and the US dollar are going to crash and bring economic misery to all not prepared.

  • Croydonius says:

    Does anyone know when and where Detlev Schlichter will next be speaking publicly in London? Is there a book launch or lecture?

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