Not many people are aware that on the 5th of April 1933, the US citizens were instructed to deliver up all their gold (money at the time) to the Federal Reserve and get less in purchasing power back. This confiscation of wealth would make even Emperor Nero or Henry VIII blush with its boldness.
Congressman Ron Paul has always campaigned for the Fed to open its books and have this gold counted as there are rumours that all of it is not there. An open audit would settle the matter. The Fed refuses. You can draw your own conclusions from this.
Rep. Ron Paul (R-Texas) said he plans to introduce legislation next year to force an audit of U.S. holdings of gold.
Paul, a longtime critic of the Federal Reserve and U.S. monetary policy, said he believes it’s “a possibility” that there might not actually be any gold in the vaults of Fort Knox or the New York Federal Reserve bank.
The libertarian lawmaker told Kitco News, a website tracking news about precious metals, that an audit was necessary to determine how much the U.S. maintains in gold reserves in case the government were to use gold to back the dollar.
“If there was no question about the gold being there, you think they would be anxious to prove gold is there,” he said.
“Our Federal Reserve admits to nothing, and they should prove all the gold is there. There is a reason to be suspicious and even if you are not suspicious why wouldn’t you have an audit?
“I think it is a possibility,” Paul said when asked if there was truth to rumors that there was actually no gold at Ft. Knox or the New York Fed.
Paul had been one of the Republicans to spearhead a broader audit of the Fed as part of the Wall Street reform bill passed through Congress this year. The provision, which was weakened somewhat in the final version, found Paul joining with a number of Democrats to require the Fed to open its books and outline its assets and liabilities.
The gold reserves, which Paul’s new bill would audit, are generally seen as a guarantee on a nation’s currency, but the U.S. moved the dollar away from being tied to the price of gold in 1972.
Paul stopped short of calling for the reinstitution of the gold standard and instead called for the government to allow the use of hard currency — gold and silver tender — alongside the use of the dollar.
“If people get tired of using the paper standard they can deal in gold or silver,” he said.
Desperate times lead to desperate measures and on a side note, I wonder what is being planned now. I remember being told at the start of my business career by a wise old multi millionaire, “remember, when the banks or the government need money, they can only come after you if you have money,” i.e. they can’t confiscate what you do not have.
A reader has sent in his thoughts about the recent proposals to reform the regulatory apparatus of the UK banking system:
Last Friday I had a quick view at the report by HM Treasure on a proposal to reshuffle the institutional setting for financial system regulation and oversight in the UK. The introduction (4 pages) is interesting but sometimes depressing. It openly recognised that UK authorities (Bank of England and FSA) failed to see the problems coming and to react adequately. Good. However, the solution it proposes is not to improve the understanding of the building up of bubbles and imbalances, or to reinvigorate the political will so it can make decisions even if those affect the banking status, or to stop trying to achieve the unachievable (a big apparatus able to foresee everything in the system as a whole), but… just rearranging chairs… (every one else in the world, G20, ECB, FED, is rearranging chairs too, so this reshuffling is quite mainstream). However, maybe in the case of the UK there is a possibility to introduce sound thinking in this new Bank of England-based structure (and stop the endogamic kind of thinking within current monetary authorities), through the external members of the newly created “Financial Policy Committee”. The report says (p. 17) among other things:
2.43 It will be important to ensure that the external members of the FPC are able to provide sufficient levels of expertise and challenge to the Committee’s deliberations – this will not only include experience of banking, but also other financial sectors such as insurance and investment banking and, of course, macroeconomic expertise.
2.44 In addition to the chief executive of the CPMA, the Chancellor will appoint four external members of the FPC using a similar recruitment process to that used for the MPC. The Government will look carefully at the best way to ensure that external members demonstrate ample relevant knowledge and experience and the ability to work constructively in a committee environment, without conflicts of interest that would prevent them participating fully in the work of the Committee.”
My take on this is that the external members of the FPC have to be radically different in make up than the internal members of the current MPC i.e. usually a academic, or some who has come from that background. Entrepreneurs, great business leaders and representatives from the SME sector , all who operate at the coal face would have more of an idea about what is and is not actually going on in the economy, better still, why not think about reforming the whole system anyway so we do not rely of 20 or so central planners to determine the value of our very currency, arguably with language, the foundation of civil , peaceful society.
Above all, if we are only tinkering and not radically reforming, he concluded “please appoint those WHO DID SEE it coming and who have a sound theoretical framework behind it (and kick out those who were clueless…)”
Bravo to that, we can name a number of Austrian School economists and Austrian influenced fund managers and entrepreneurs who could do this job.
Mortgage lending would be “capped” to stop borrowers taking out risky loans under radical Bank of England plans to prevent a repeat of the credit crisis, a senior official has disclosed.
But why did borrowers wish to borrow so much, so riskily? And why did lenders wish to lend so much, at such risk?
In the first place, credit has been too cheap for too long. Low interest rates are bound to encourage people to borrow more and save less. Therefore, people saved less and borrowed more. This was the result of the Bank of England’s decisions.
House prices kept rising because people kept borrowing and pumping money into housing. Housing was excluded from the Bank’s measure of inflation, so rates stayed low.
The appearance of inevitable and uninterrupted house price rises gave the impression that we were in a new era within which the old rules did not apply: borrowing caps could be raised to excessively risky levels and borrowers could rely on price increases to deal with the capital.
Lenders used models which fundamentally understated risk. For example, markets do not behave within the Gaussian or “normal” distribution: extreme events happen more often than a normal distribution predicts. Furthermore, the risk of mortgage default correlates across similar mortgages when the economic environment changes. Still, the models said risks were lower than they were, so more credit could be extended.
Since the lenders were neither, on the whole, mutuals or partnerships with open-ended liabilities and since the employees making the decisions shared only in the upside, there was insufficient motivation to manage to the true level of risk.
Moreover, securitisation of mortgage pools and so forth palmed off the risk onto hapless investors who probably trusted the risk models and the market environment created by excessively cheap credit. And, “Hey, look at the returns!” The personal touch was missing from the relationships between borrowers, ultimate lenders and intermediaries, further corrupting the system.
Of course when the pantomime ended, the taxpayer was forced to pick up the bill. And still bonuses were paid in bailed-out banks!
Now, having created the boom with cheap credit and moral hazard, the Bank plans, not to fix the root problems, but to pile intervention upon intervention…
There is much else to be said, for which I recommend The Alchemists of Loss and Money, Bank Credit, and Economic Cycles. However, on the face of it, the Bank’s present proposals merely extend the infantilisation of the financial services sector.
Later this week, I will indicate ten serious plans for financial reform.
Following his introduction to Mises, Dr Eamonn Butler has released his latest book, Austrian Economics – A Primer. I recommend it strongly if you want to grasp the fundamentals of the Austrian School of Economics as quickly as possible: at just 118 pages, this pamphlet can be tackled in one sitting.
With Keynesian-inspired policies which ‘spend your way out of recession’ clearly not working, the Austrian School provides a better explanation for recent events than more ‘mainstream’ thinking, whether Keynesian or Monetarist.
Over the course of the book, Eamonn explains the Austrian view of the importance of human agency, values and knowledge in shaping the markets, that is social cooperation. Vitally, it explains the origin of the present cycle of boom and bust: the government’s cheap credit policies, which encouraged people to borrow and discouraged saving, creating an artificial boom that inevitably ended.
For many years, the Austrian School of Economics has been sidelined, but it’s great to see that it is now rising in popularity as people become increasingly critical of the way governments and central banks have handled the economy.
Butler’s systematic and simple yet comprehensive primer is a great addition to a stable which also includes The Austrian School: Market Order and Entrepreneurial Creativity by Jesus Huerta de Soto. While Huerta de Soto’s first-class book is perhaps aimed at a more technical audience, Butler has made the Austrian School highly approachable. A strength shared by both works is to be measured and inclusive where “Austrians” can be confrontational.
Eamonn has made a superb job of outlining this important school of thought and his book should prove a great success. You can buy it here.
Sean Corrigan has sent us one poem we missed by Thomas Moore that has much relevance today. Enjoy.
Toby Baxendale.
“The Ghost of Miltiades” is about Greek war bonds. As noted earlier, Greece had been fighting for independence from the Ottoman Turks since 1821. In 1824-5, the fledgling Greek government obtained two large, high-interest from English banks, which were then turned and floated as bonds on the London market. Andreas Luriottis was the Greek agent in London. The whole thing did not end well and the value of the Greek bonds collapsed accordingly — ending with the “Benthamite” trader wailing about his subsequent losses and trying to sell them back to the Greeks. “Jerry” is Jeremy Bentham, of course.
[Ah quoties dubius Scriptis exarsit amator! – ah, how often has a message inflamed a doubting lover - Ovid]
The Ghost of Miltiades came at night,
And he stood by the bed of the Benthamite,
And he said, in a voice, that thrill’d the frame,
“If ever the sound of Marathon’s name
Hath fir’d they blood or flush’d thy brow,
Lover of Liberty, rise thee now!”
The Benthamite, yawning, left his bed –
Away to the Stock Exchange he sped,
And he found the Scrip of Greece so high,
That it fir’d his blood, it flush’d his eye,
And oh, ’twas a sight to see,
For never was Greek more Greek than he!
And still as the premium higher went,
His ecstas rose – so much per cent.,
(As we see in a glass, that tells the weather,
The heat and the silver rise together,)
And Liberty sung from the patriot’s lip,
While a voice from pocket whisper’d “Scrip!”
The Ghost of Miltiades came again; –
He smil’d as the pale moon smiles through rain,
For his soul was glad at the patriot strain;
(And poor, dear ghost — how little he knew
The jobs and the tricks of the Philhellene crew!)
“Blessings and thanks!” was all he said,
Then, melting away, like a night-dream, fled!
The Benthamite hears — amaz’d that ghosts
Could be such fools — and away he posts,
A patriot still? Ah no, ah no –
Goddess of Freedom, thy scrip is low,
And, warm and fond as they lovers are,
Thou triest their passion, when under par.
The Benthamite’s ardour fast decays,
By turns he weeps, and swears, and prays,
And wishes the d–l had Crescent and Cross,
Ere he had been forc’d to sell at a loss.
They quote him the Stock of various nations,
But, spite of his classical associations,
Lord how he loathes the Greek quotations!
“Who’ll buy my Scrip! Who’ll buy my Scrip?”
Is now the theme of the patriot’s lip,
And he runs to tell how hard his lot is
To Messrs. Orlando and Luriottis,
And says, “Oh Greece, for Liberty’s sake,
Do buy my Scrip and I vow to break
Those dark, unholy bonds of thine –
If you’ll only consent to buy up mine!”
The Ghost of Miltiades came once more; –
His brow, like the night, was lowering o’er,
And he said, with a look that flash’d dismay,
“Of Liberty’s foes the worst are they
Who turn to a trade her cause divine,
And gamble for gold on Freedom’s shrine!”
Thus saying, the Ghost, as he took his flight,
Gave a Parthian kick to the Benthamite,
Which sent him, whimpering, off to Jerry –
And vanish’d away to the Stygian ferry!
Sean Corrigan has just sent me his views on the book “Dying of Money: Lessons of the Great German and American Inflations” which Andy Duncan wrote about here, setting off a number of interesting comments. Sean as ever helps put our thoughts straight on the matter. One does wonder if Ambrose Evans-Pritchard and the hordes of City people have actually read it.
Toby Baxendale.
Firstly, though I have to confess that I do use ‘velocity’ as a shorthand, now and again, the idea of using this aggregate twice-removed as more than a crude heuristic, much less as the lynchpin of one’s reasoning as Parsson seems to, is very suspect – see Mises and Rothbard on the topic.
Your ‘Dying of money’ man thinks that if the use of money in exchange were totally ‘efficient’, any amount of it would be inflationary – since ‘velocity’ would be infinite – and, conversely, that if all people wanted it for was as a store of ‘value’, we would need an infinite amount of it, since velocity would be zero.
The first seems to envisage a kind of grand, instantaneous goods clearing house which, however, does not do away with the double coincidence of wants argument (since even the most transient clearing house receipts would be needed to open up trade to all buyers and sellers and so would effectively BE money); the second would mean that money had ceased to be money (i.e., that favoured present good which acts as the medium of exchange) in any meaningful sense of the word -and probably that it would therefore rapidly lose its value, in any case.
To say, also, that the later stages of Weimar inflation were all about ‘velocity’ - itself a mysterious, mass hysterical construct under his analysis – when Havenstein was publicly bragging about how many more bank notes (of increasingly surreal denominations) were being printed is only to confuse the fact that the mark was losing real value faster than it was being created.
He further seems to think that, given a stable ‘velocity’, an increase in money supply commensurate with an augmented supply of what he loosely terms ‘real values’, is therefore not inflationary – hence he would have had no objection to 1920s America, 1980s Japan, or the West in much of the late 1990s and early 2000s – and so would have been a typical Real Bills enthusiast of monstrous misallocations of capital.
In most of the work, he shows himself a slave to his oft-quoted Friedmanite style of aggregative thinking and ignores Austrian insights into the role of relative pricing, injection effects, and the ideal that improved productivity should be met with proportionately falling prices of those particular goods if we are to avoid confusing entrepreneurial assessments.
Apparently, also, if the government issues debt during an inflation, this is a good thing, for it somehow retards its effect (sic), and, conversely, a government surplus is inflationary by, wait for it, ‘reducing the supply of real value’!
My reading of his argument is that interest is not the price of money (true enough), but money the price of interest (!) though he gives no explanation as to why interest itself arises (hint: time preference).
As a result of this, fixed interest (contracts), he argues, are ‘just as much as gold, a barbarous relic of the 19th century’. Much better to have equity contracts (partly true) or constant-value lending ensured by reference to a price index… Crankdom at its finest.
Government’s main task of management, he goes on, is to use tax policy to introduce ‘balance’ into the flow between saving and consumption – each of ‘equal merit… and contributing equally to well-being’. An Austrian need really look no further than this for a critical concentration of both economic and ethical error.
Late stage capitalism has, of course, a tendency to ‘excess’ saving (why? we may ask in vain), so Keynes’ only mistake was to argue for more government investment, as an offset, rather than using fiscal policy to penalise saving and promote consumption.
Government expenditure, it seems, is also a ‘national dividend’ and it is only right that the state should ‘give away purchasing power to help support consumption’ and it is mere ‘nostalgia’ to pine for a day where everyone looked after himself and the state had little or no involvement.
No, Leviathan should provide a national dividend by giving away all basic services freely: food, clothing, housing, and medical care – out of the ’surplus prosperity’ – allowing people to concentrate ‘only’ on working to buy whatever else they need and not having to worry about being rendered technologically redundant.
I am only half way through this tract and already I have found more fallacies, inconsistencies, and shallow-thinking being marshalled behind a grandiose plan of reform, than I have seen in a long while. HG Wells would be proud of Parsson.
No wonder this tosh is out of print!!
All I can say is that this is typical of Evans-Pritchard’s Yellow journalism: everything we do is wrong and the whole system is always about to implode. But while we cannot let the Keynesians expand debt and deficits limitlessly, neither can we allow those horrible Liquidationists to cut back or, very soon, the 1930s will look like a picnic. We will have some form or other of ‘Flation (X-flation, perhaps) on some unspecified timescale or another – but, or course, it will be of an unimaginable magnitude when it does arrive, unless we stop everything we are doing now and yet intensify everything we are doing, at the same time.
One only regrets that Murray Rothbard is not still around to skewer the idiocies of such Swiftian buffoons as Parsson and his modern day brethren, AEP, Wolf, Kaletsky, Krugman, and Stiglitz – and to rebut the opposing follies of the self-loathing Guardianistas and Dollar-doom Michigan Militia, in general.
As for us, while it’s always nice to think we are not an isolated remnant in the cause, perhaps we might be just a tad more considered in our endorsement of those who ostensibly seem to share some of our concerns, but who either lack intellectual consistency to draw the correct conclusions from them, or who use a shared criticism of some aspects of the modern institutional setting as the point of departure for a programme totally antithetical to our aims.
Over at CentreRight, I have set out briefly the mistake presently being made by policymakers in the US, which I expect to be mirrored in the UK later this morning. For example:
Injecting more new money, whether through QE or credit expansion in excess of real savings, will not “fight recession”. It will merely delay and worsen the eventual downturn, because injecting new money is bound to shift activity from sustainable economic action to action supported only by that new money.
Sooner or later, the mainstream economic paradigm must shift to accept the importance of time and hence a robust capital theory. Everyone’s prosperity depends upon it.
In a somewhat startlingly-named new video blog, Mr Schiff begins by discussing inflation trends within the US, with reference to Ben Bernanke and the perceived Keynesian belief that a ‘little bit of inflation’ is actually good for an economy.
Schiff contends that once the genie of monetary inflation is left to skip out of the bag, then it always proves highly difficult to squeeze it back into the magic lamp. He thus predicts that Ben Bernanke will fail in his attempt to walk an extremely high tightrope of falling asset prices and rising consumer prices.
Mr Schiff then reflects upon the interesting news that after a hundred years of America topping the energy usage charts, that China has now become the world’s largest consumer of energy. Schiff explains why he believes that this will prove a major single step on the long Chinese road to also generate a larger GDP than the United States, within the medium-term future.
To finish off his monologue, Schiff argues with the widespread idea that an even larger war than the current Iraq/Afghanistan/Pakistan imbroglio will get the United States out of a recession, in the same way that the murderous believers of this crazy Keynesian idea think that WWII got America out of the Hoover-Roosevelt depression.
[Of course, Gerald Celente's Trends Research Institute thinks that WWIII is already underway. You may also want to check out a Mises.org article which talks about the myth of WWII 'saving' us from the depression and how this myth is based upon Bastiat's broken window fallacy, writ large.]
Schiff expounds on this idea in an article which we have reproduced from his Euro Pacific Capital web site:
There is overwhelming agreement among economists that the Second World War was responsible for decisively ending the Great Depression. When asked why the wars in Iraq and Afghanistan are failing to make the same impact today, they often claim that the current conflicts are simply too small to be economically significant.
There is, of course, much irony here. No one argues that World War II, with its genocide, tens of millions of combatant casualties, and wholesale destruction of cities and regions, was good for humanity. But the improved American economy of the late 1940s seems to illustrate the benefits of large-scale government stimulus. This conundrum may be causing some to wonder how we could capture the good without the bad.
If one believes that government spending can create economic growth, then the answer should be simple: let’s have a huge pretend war that rivals the Second World War in size. However, this time, let’s not kill anyone.
Most economists believe that massive federal government spending on tanks, uniforms, bullets, and battleships used in World War II, as well the jobs created to actually wage the War, finally put to an end the paralyzing “deflationary trap” that had existed since the Crash of 1929. Many further argue that war spending succeeded where the much smaller New Deal programs of the 1930s had fallen short.
The numbers were indeed staggering. From 1940 to 1944, federal spending shot up more than six times from just $9.5 billion to $72 billion. This increase led to a corresponding $75 billion expansion of US nominal GDP, from $101 billion in 1940 to $175 billion by 1944. In other words, the war effort caused US GDP to increase close to 75% in just four years!
The War also wiped out the country’s chronic unemployment problems. In 1940, eleven years after the Crash, unemployment was still at a stubbornly high 8.1%. By 1944, the figure had dropped to less than 1%. The fresh influx of government spending and deployment of working-age men overseas drew women into the workforce in unprecedented numbers, thereby greatly expanding economic output. In addition, government spending on wartime technology produced a great many breakthroughs that impacted consumer goods production for decades.
So, why not have the United States declare a fake war on Russia (a grudge match that is, after all, long overdue)? Both countries could immediately order full employment and revitalize their respective manufacturing sectors. Instead of live munitions, we could build all varieties of paint guns, water balloons, and stink bombs.
Once new armies have been drafted and properly outfitted with harmless weaponry, our two countries could stage exciting war games. Perhaps the US could mount an amphibious invasion of Kamchatka (just like in Risk!). As far as the destruction goes, let’s just bring in Pixar and James Cameron. With limitless funds from Washington, these Hollywood magicians could surely produce simulated mayhem more spectacular than Pearl Harbor or D-Day. The spectacle could be televised- with advertising revenue going straight to the government.
The competition could be extended so that the winner of the pseudo-conflict could challenge another country to an all-out fake war. I’m sure France or Italy wouldn’t mind putting a few notches in the ‘win’ column. The stimulus could be never-ending.
If the US can’t find any willing international partners, we could always re-create the Civil War. Missed the Monitor vs. the Merrimack the first time? No worries, we’ll do it again!
But to repeat the impact of World War II today would require a truly massive effort. Replicating the six-fold increase in the federal budget that was seen in the early 1940s would result in a nearly $20 trillion budget today. That equates to $67,000 for every man, woman, and child in the country. Surely, the tremendous GDP growth created by such spending would make short work of the so-called Great Recession.
The big question is how to pay for it. To a degree that will surprise many, the US funded its World War II effort largely by raising taxes and tapping into Americans’ personal savings. Both of those avenues are nowhere near as promising today as they were in 1941.
Current tax burdens are now much higher than they were before the War, so raising taxes today would be much more difficult. The “Victory Tax” of 1942 sharply raised income tax rates and allowed, for the first time in our nation’s history, taxes to be withheld directly from paychecks. The hikes were originally intended to be temporary but have, of course, far outlasted their purpose. It would be unlikely that Americans would accept higher taxes today to fund a real war, let alone a pretend one.
That leaves savings, which was the War’s primary source of funding. During the War, Americans purchased approximately $186 billion worth of war bonds, accounting for nearly three quarters of total federal spending from 1941-1945. Today, we don’t have the savings to pay for our current spending, let alone any significant expansions. Even if we could convince the Chinese to loan us a large chunk of the $20 trillion (on top of the $1 trillion we already owe them), how could we ever pay them back?
If all of this seems absurd, that’s because it is. War is a great way to destroy things, but it’s a terrible way to grow an economy.
What is often overlooked is that war creates hardship, and not just for those who endure the violence. Yes, US production increased during the Second World War, but very little of that was of use to anyone but soldiers. Consumers can’t use a bomber to take a family vacation.
The goal of an economy is to raise living standards. During the War, as productive output was diverted to the front, consumer goods were rationed back home and living standards fell. While it’s easy to see the numerical results of wartime spending, it is much harder to see the civilian cutbacks that enabled it.
The truth is that we cannot spend our way out of our current crisis, no matter how great a spectacle we create. Even if we spent on infrastructure rather than war, we would still have no means to fund it, and there would still be no guarantee that the economy would grow as a result.
What we need is more savings, more free enterprise, more production, and a return of American competitiveness in the global economy. Yes, we need Rosie the Riveter – but this time she has to work in the private sector making things that don’t explode. To do this, we need less government spending, not more.
Prof J Guido Hülsmann of the University of Angers gave a private talk on the 10th of July called “Honest Savings and Dishonest Money” The slides of the talk are available below (PDF). I strongly recommend a flick through them. Unfortunately the talk was not recorded, however I give you my personal take on what was said at the time.
Slides 2-4: Consumption v Savings
If you consume only, you will enjoy yourself for sure, but not putting anything else away means you can only consume out of current income. I explain to my Keynesian friends that if we can not save and only consume from income, we need to be an inter galactic hedge fudge manager or some super star celebrity to be able to afford to by a car or a house out of current income!
Savings are a voluntary act of forgoing consumption so that you can spend on consumption in the future.
When you save, someone is investing those savings to produce goods for you to buy in the future.
Slide 6
Savings are 2/3rds more than current GDP. Remember, as we strip out all intermediate goods in the formation of GDP statistics, we do not measure the savings that support the whole productive apparatus of the economy . I buy my fish off a boat, I cut and prepare it and sell it to a fish and chip shop who batters it, puts it in some paper and adds chips and sells fish and chips to you, the end consumer. What gets measured is fish and chips only, the rest of the production sectors of the economy whose engine is driven by savings is totally discounted as far as virtually all economists are concerned because of their erroneous understanding of capital and what constitutes a double count. To really make this clear, what the current regime of economists are telling us is that when we eat fish and chips, from an economic point of view, we eat the difference (incremental gain) between the cutting of the fish, the battering of it and the paper and the chips. This consumption envy drives the way people think at the expense of understanding the role of savings and is supported by an odd measure of the economy at the outset.
Without constant replenishment of this pool of productive savings, we will consume our way into oblivion.
This graph I have added which shows that in early 2008, a few months before the “Lehman event” we had gone into negative savings and started to hollow out the kitchen cupboards! If this graph is not “case proven My Lord” to everyone that 100% consumption is very bad for the economy, I do not know what is!
Slide 8
Savings is the wellspring of growth, innovation in technology, finance, science etc. No savings and none of the former to sustain the activities of all those engaged in those activities. Savings facilitates the massive universal division of labour. More correctly stated this is the universal division of knowledge of intellect. This latter point is the culmination of what Hayek (and to a certain extent Mises) means when he points out that the knowledge is held in many dispersed formats in peoples minds across a multiplicity of capital and time structures. This dispersement of knowledge in fact precedes the division of labour which is only a manifestation of the universal division of knowledge.
Slide 9
Sophism 1: A “leak” in the circuit of spending? – In Glory of Hoarding
To Keynes, a act of savings is a leak from the economy. If I choose to sit on all my money under a matters then I increase the purchasing power of all the money in ownership of others not under my mattress. I enrich people by an act of hoarding as their money units have more command on the same level of goods offered for sale.
Sophism 2: “The Paradox of Savings” – Circular Flow of Income
One man’s spending is another man’s income. Save, i.e. cut back on spending in the economy as a whole, and the workers’ income will fall. This will cause a depression. If the arguments in the above do not solve this then you must add, what matters is not that income will fall, but the relative difference between the level of costs and profits is the thing that really matters. If incomes all fall and thus the costs of labour has fallen, the companies costs positions go down in a greater percentage to their overall cost base, so they remain profitable, then there is no system wide depression as this adjustment process (bringing costs into line with expenditure and making business profitable once more) takes place. Relative cost and income matters, not absolute cost and income.
Slide 12: Immaterial Money
This is government-created money, created out of thin air, and private sector-created money created via the banking system (i.e. bank credit). The issue of this new money allows the holders of these instruments to consume something that they have not have had to work for; they give up nothing in exchange. This allows the State and its principal agents, the bankers, to be lawful counterfeiters.
This can never increase wealth. Only by the productive efforts of entrepreneurship, producing more goods in better ways, using less or more efficient factors of production, can we produce more wealth. If it was not so, and immaterial money was the answer, then world poverty could be ended today in one second with the opening electronically of zillions of demand deposits for the poor of the world.
Only a money rooted in a commodity (or a series of them) could prevent this. Since the dawn of man, the preferred commodity for use as money was gold. The government can’t create gold out of thin air; it is material, it is honest.
Slide 13: Consumption Envy = Debt Default
The push for consumption at the expense of savings means that we have funded this activity by more immaterial debt, credit, created ex nihilo. When people realised it was impossible to pay for all of this mess, there was a banking crisis. The State stepped in and bailed out the banks with promises of the minting of more immaterial money and indeed the printing of some as well . The result is that we now have a sovereign debt crisis. The only way out is to print more immaterial money i.e. monetise the debt which will decrease the purchasing power of all, to default, or to extract more money from the people via the tax system. As income tax only produces £142 bn PA and the deficit is larger than this, let alone any consideration to actually paying down any of the national debt itself, it is likely that our government will resort to monetisation or default.
These are my personal notes and thoughts on the presentation of Prof Hülsmann. The slides and presentation were excellent.
