Gordon Brown as the next head of the IMF? What a splendid idea – at least as long as Charlie Sheen is not available.
No seriously, the despicable, interventionist IMF and the unpopular etatist Brown – a perfect match –perfect, I hope for further discrediting the global paper money bureaucracy, the new political elite lording it over us at our expense, the guys who brought you the crisis and now promise to fix everything – with more paper money and more debt and more policy interventions.
Here is a man who was never elected Prime Minister by popular vote but put in that position by the kind of backroom-dealmaking that is the hallmark of such institutions as the IMF; a man who left his country in a veritable mess, first and foremost in a dreadful recession that Brown tirelessly blames on the bankers – conveniently forgetting that he himself bathed for a decade in cheap money, taking credit (no pun intended) for the get-rich-quick housing boom while vaingloriously pronouncing the ‘end of boom and bust’, and spending with cheerful abandon the borrowed billions that will now be a millstone around the necks of generations of British taxpayers. Under Blair/Brown the share of government spending in the overall economy has risen to levels higher than in World War I and only ever exceeded during the height of the war effort in World War II. In 2009, when the public sector spent more money than all private enterprises and private citizens combined, then Prime Minister Brown declared to his chums at The Guardian newspaper, “Laissez-faire has had its day.”
Well, maybe – under Gladstone.
And now he slips with ease into a senior position in the global paper money bureaucracy to make his expertise, knowledge and experience available to many nations around the world. As we have seen, under the state-bank alliance, for the bankers, failure is not an option. And for the politicians, after failure, there are many options.
As a friend of mine and former IMF insider told me once: The IMF exists for one purpose and one purpose only – for the benefit of those who work for it.
In 1976, the American economist and speculator, the late Howard S. Katz wrote a book that – albeit flawed – proved somewhat prophetic although it is now out of print and almost forgotten. The title was ‘The Paper Aristocracy’. In it, Katz predicted the rise of a new elite, a powerful new aristocracy, the unique privilege of which being the right to legally create money from nothing. This new aristocracy would exercise substantial control over the broader economy by printing paper money and thus providing credit from nothing– as opposed to backed by savings. This aristocracy consists of –naturally- the government, now no longer restricted in its spending by what it can collect in taxes which are never that popular; the state central bank that administers the state’s money monopoly; and the banking sector to which the paper-money franchise is generously extended. And, importantly, the Paper Aristocracy also includes a range of interventionist institutions, such as the World Bank, the IMF, the EBRD and others, that benefit from the paper money infrastructure, often by making it their job to apparently correct or ‘fix’ the various dislocations that the global patchwork of politicized local fiat monies necessarily creates but that are never openly linked back to the disruptive effects of paper money expansion.
Read more at Paper Money Collapse.
Katz has a point, but I disagree with his definitions. Creating money “out of thin air” is a pefectly acceptable way of doing things, and bypasses the need to draw upon existing savings.
If a bank magics up £1000 out of thin air for me and I spend it on a car the seller now has £1000 in savings and I have a £1000 debt. In other words his “savings” equal my debt. Arguing that savings are desireable whilst credit is a function of the Paper Bureacracy strikes me as a tab inconsistent.
You are forgetting one important detail. In a sound money economy there can be no credit intil there are already savings. Savings cannot exist until someone has earned something to save. Theft, scams and fraud aside, they cannot do this without exchanging goods and services (in demand by the population at large) in return for the money they save, thus creating real wealth. Borrowers compete for the available savings. If there are more borrowers than savers, this will drive up interest rates attracting savers, and vice versa. This creates a natural balance between credit and savings.
When the bank “magics up £1000 out of thin air” multiple problems arise:
1) The resultant inflation of the money supply causes prices of hard assets to be bid up.
2) As a result of (1), those nearest the creation of the money benefit immediately to the detriment of those further away. They can use the money to buy products and services before the prices rise. Those who suffer most are the ones on fixed salaries who must pay the higher prices before they receive correspondingly higher wages.
3) Since there is no natural balance between savings and borrowing, who sets the interest rate? Rates are set arbitrarily to meet political objectives. This is damaging to the economy and results in misallocation of resources, like that car that you may not be able to afford if the bank could not magic up £1000. Rates that are too low cause investments to be made that would not be viable if rates were allowed to reach their natural level. Think housing in Ireland and Spain.
4) Most perverse, and most infrequently evoked is the fact that the fiat paper money system creates money out of debt, unlike a sound money system where money just is, and continues to be. When all money is created throught debt, interest is accruing on every single pound in circulation. Consequently the sum of all outstanding principal and interest is greater than the sum of all money in circulation, a bizarre and unnatural situation. So much for “savings equals debt”. As the interest payments suck money out of circulation, more money must be created to replace it through debt. Ultimately the debt market becomes saturated and even with interest rates at near zero there is no one who can borrow because they are all borrowed to the hilt. This leads to the famous credit contraction. Houses and other hard assets are seized and foreclosed because there is no other way to write down the total debt, there just isn’t enough money in circulation. Note: as contrived as this system is, the contraction and resultant foreclosures and seizures are necessary to purge the system and bring outstanding interest payments back into line. QE and similar measures attempt to circumvent this but it should be obvious that the interest to principal ration cannot continue to rise indefinately. It has to break sooner or later.
So no, there is nothing inconsitent in the position you refer to. It is not being argued that credit in and of itself is undesireable, only the creation of money through credit.
Peter, your vision of the economy presents something of a paradox. If savings can only exist when “something has been earned to save” it begs the question: where do these savings come from? £’s don’t exist in nature so they cannot be accumulated and saved by going out to work, they’re a human construct. For one person to be able to save somebody else needs to get into debt, we require no previous stock of savings to make this happen: each credit/debt “contract” can exist independently of every other.
This may be a bummer for savers because it means they’re not as vital to the economy as they first thought (and consequently their savings attract less interest), but the upside is that everyone else is able to trade freely bypassing these potential rent seekers.
Having recently read Schiff’s excellent How an Economy Grows and Why it Crashes I’m familiar with the points you raise, but I don’t think they fully address the economic reality. The system broke down because not because there was too little money in the system, but because housing costs outstripped our collective ability to pay. This ruined banks’ balance sheets and drove most of them to insolvency.
PS. the fiat system always balances. If somebody owes £1000+5% interest conversely somebody has an asset worth £1000+5% interest, if the debt exists then by it’s very nature the means to pay that debt also exists. It’s only when debtors default or assets go bad that we run into trouble.
Chef, no paradox at all. Money is a product of the market place. It facilitates barter. In the village market place you trade your eggs for the most commonlly bartered commodity which you in turn trade for timber, because you may not find a timber merchant who wants your eggs (double coincidence of needs). This most commonly bartered commodity becomes “money”. Ideally it should be of high value (ie no need to carry tons of it) divisible, durable and universally accepted. Historically gold and silver come out on top as the best commodity for money.
So to answer your savings conundrum, to get your timber and “save” it in your shed you would first have to produce eggs and the timber merchant would have to cut some trees. Both cause wealth to be created. When the economy evolves to a bimetallic standard, you would probably save gold and silver rather than timber, but they too would have to be mined and refined which requires work and creates wealth. I trust you can see the difference between this process and a central bank creating £1 billion out of nothing.
As to your remark:
“the fiat system always balances. If somebody owes £1000+5% interest conversely somebody has an asset worth £1000+5% interest, if the debt exists then by it’s very nature the means to pay that debt also exists. It’s only when debtors default or assets go bad that we run into trouble.”
This is where you are mistaken (and you are not alone). To make the point I will give a very contrived example. Imagine a Monday morning, all the shops are open and everyone is ready for business. Just one thing is missing: there is no money. Everyone’s bank balance is exactly zero. They want to do business but there is no medium of exchange. Someone HAS to borrow money or there will be none to use in transactions. To simplify things, let’s say you go to the bank and borrow £1000 at 12% per annum. The money is created for the purpose of the loan. Your loan application is a promise to pay which is used as an asset to back the creation of the money*. Now everyone can buy and sell as your money works its way through the economy. And to further simplify things let’s say no one else borrows. Your £1000 is enough to make the economy work.
Fast forward one month. How much money is in circulation? £1000. How much money is owed to the bank? £1000 plus 1% or £1010. In other words there is 1% more money owed to the bank than there is money in existence. Are there equivalent assets to the debt? Of course there are. But that is a different matter to the one we are facing. For the £1010 to be paid to the bank in pounds sterling, someone somewhere in the economy must borrow more money into existence. This leads to the exponential increase in outstanding debt (paying interest on the money we borrowed to pay the interest) and the credit crunch. At that point somebody somewhere MUST default. It is a mathematical requirement. There is no other solution.
So saying it’s only when debtors default or assets go bad that we run into trouble is like saying it’s only when 1 + 1 = 2 that we run into trouble. Why do debtors default? Because someone has to default. Why do assets go bad? Because they were overvalued. Why were they overvalued? Because of easy credit that comes from fiat money.
The root of the problem is twofold: a) fiat money that politicians and their banker friends can create at will, and b) the creation of money through debt.
* The fact that your loan application is accepted as a promise to pay is testimony to the deliberate fraud being perpetrated on you when you take out the loan. The bank accepts a promise to pay £1120 pounds with full knowledge that there are only £1000 in existence!!! They know in advance that they are going to “get” you… or somebody else.
Peter, come off it! I read about (and subsequently discarded) that theory years ago. There’s absolutely no evidence to suggest that a lack of money caused the Credit Crunch. As Austrians have been keen to point out, the money supply has been growing for a number of years now so there’s been ample opportunity to pay back those debts.
But for arguments sake lets say you’re correct, somebody takes out a £1000 loan + interest from the bank and discovers that there’s not enough cash in existence to make that final repayment, what can we do? My suggestion is for the debtor to perform £10s worth of work for the bank, for them to give him a £10 ‘token’ for him to then hand it back, hey presto! We’ve extinguished the debt. This isn’t a moral or economic problem, it’s nothing more than a design flaw that may or may not exist. Design flaws can always be rectified.
I found your point about gold refinement interesting, but once again disagree. If we’re only going to be using that gold for monetary purposes which would be easier? To find a mine and then use a large quantity of our scarce resources to extract that metal, or get exactly the same result by writing something down on a ledger? If it were upto you would you rather sit in a office or go to work down that mine to acquire those precious metals?
Not to mention the fact that we’d then be subject to shortgages or massive inflation if new mines were discovered or we exhausted our domestic reseves. We’d then be at the mercy of foreign (possibly hostile) powers.
The money out of thin air system is actually a very good system, this is all too often overlooked.
I did not suggest for one moment that the the credit crunch was caused by a lack of money in circulation. You missed the point. Or apolgies if I lacked clarity. Do the maths yourself. Fire up your spreadsheet and work out what would happen if the interest rate paid by the public were 5% pa and just enough money were borrowed each year to maintain a constant money supply. Calculate the sum of all principal owed to the banks as compared to the monetary base after, say, 16 years.
“Design flaws can always be rectified”. Yes… when the flaw is in the foundation you tear the edifice down. Your notions about sound money are not based in fact, but on fanciful notions frequently bandied about by interested parties. There are many good resources that explain sound money well, but alas the signal to noise ratio is very low.
Anyway, if you can qualify as a “very good system” one that allows a small number of unelected officials to manipulate the monetary base to their own personal benefit and that of their cronies, but to the detriment of society at large, that silently transfers wealth from the poor to the rich through inflation, that accepts as normal business practice in one sector of the economy what would be prosecuted as fraud resulting in prison sentences in any other then I guess you and I have very different sets of values.
Peter, the amount of money in existence is immaterial, all that matters is that it’s recorded accurately; this is what the banking system does so well. You could pay a one million pound debt with a pound coin if you wanted to (you just perform £1’s worth of work a million times and keep exchanging the coin), so this interest thing is a bit of a red herring. The Bank of England has been around since 1694 so I think we’d have discovered this design flaw by now if it existed! Ok we’ve had recessions and a couple of bank runs in that time, but they havn’t been caused by debt repayment and a subsequent lack of cash. It’s always the complete opposite of this, too much debt overwhelms the banking sector plunging us into a crisis.
These are the facts, I’m sorry if they don’t tally with Austrian monetary theory. Don’t shoot the messenger as they say.
A tad one sided perhaps? We could pick anything a make a case like that. Take cars for instance, these maim and kill thousands of innocent people each year, cause pollution and degrade the quality of life in our cities, kill animals etc etc etc
I’m not saying the banking sector is perfect, of course it’s not. But it’s not the root cause of financial injustice either, the meltdown has been caused by a group of rent seekers that used the banking system to hollow out the economy and extract bags of our cash.
Monetary reform won’t stop them doing it next time around.
A tad one-sided? No, completely one sided… the side of rule of law and protection of property rights.
Could they do it next time around? How could they if they were behind bars? Because that’s where they would be if bankers were subject to the same laws as the rest of us.
Unfortunately, as long as the average person, like yourself, is oblivious to the causes of the malaise, and continues to defend tooth and claw the system that is ripping them off, there will be no reform. The world economy will have to crash and burn first.
I have enjoyed this dialogue. I rarely post more than one comment… ;^)
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