The threat posed by free money

Another good article by Allister Heath for City A.M.:

If you want proof that the global economy’s woes are increasing, as a result of extreme imbalances, look no further than some countries’ borrowing costs. Germany has set a zero per cent coupon on its 2-year government bonds (or Schatz) due to be sold today – in other words, borrowers will not be paid for the privilege of lending money to the German state.

Strange times indeed. I recommend the whole article.

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19 replies on “The threat posed by free money”
  1. says: Paul Marks

    In spite of the credit-money bubble of 2008 people (including Presdents and Prime Ministers) are STILL going on about “monetary stimulus” and “low interest rates”.

    So much for empirical experience influencing people. So much less difficult to blame “deregulation” for the economic crises than to face the truth that the current crises is the direct result of government backed credit-money expansion.

    Sadly, it was ever thus.

    For example Irving Fisher learned nothing by the bursting of a massive credit money bubble in 1921.

    There has been no great “increase in the price level” in the year or so before – so, according to his theory, all was. Instead a massive bust took place.

    What did he learn?


    In the late 1920s (the time of the Ben Strong credit-money bubble) Fisher of Yale was still going round saying all was well, because the “price level” was not going up.

    Indeed even after the crash of 1929 Fisher confidently predicted that prosperity was just round the corner.

    “But at least Fisher was discredited” – not at all (apart from some “advanced intellectuals” saying he was not statist enough). For example Milton Friedman (yes – it is not just the Keynesians at fault) said that Fisher was the “greatest American economist of the 20th century”.

    Of course – and a I am a male model.

    Sadly we can not count on “empirical evidence” (experience) teaching people anything.

    The hard slog of teaching sound economics (i.e. the economics of the Austrian School) can not be avoided.

    Not to save the world was we know it – that is beyond saving.

    But to help rebuild civil society after the present financial structure comes crashing down.

  2. I guess I missed it.
    The money is already in existence.
    It is just being lent to the government at the agreed market rate.
    This is a threat, why?

  3. says: Rob Thorpe

    “Germany has set a zero per cent coupon on its 2-year government bonds (or Schatz) due to be sold today – in other words, borrowers will not be paid for the privilege of lending money to the German state.”

    But the bonds are being *auctioned off*. A person doesn’t buy a bond that pays £100 for £100 they pay whatever price is determined by the auction, which will be lower than £100.

    There is nothing special about this, treasury bills in the US and the bills the BoE issue in the UK work exactly the same way. The only difference is they have shorter durations, normally a year or less.

    As I understand it, before the 19th century most government debt was sold this way. It had zero coupon and a fixed capital payment due after some number of months. The auction to sell the debt decided the interest rate the government paid.

  4. says: Paul Marks


    The credit money expansion was created – the money was NOT “already in existence”.

    Nor is it being lent at a market rate of interest.

    There is no free market if there is monetary expansion – the whole point of a monetary expansion is to reduce interest rates below MARKET RATES.

    I strongly suspect this “Joe” person is a troll.

    1. says: Rob Thorpe

      Worse, he’s a post-Keynesian. He posts here quite a lot, under a different name normally, but with Henry Ford as his avatar.

    1. says: Rob Thorpe

      Sorry about that. I didn’t realise you’d switched to using your real name.

  5. Paul,
    Excuse me?
    (That should be in caps.)
    What are we saying here?
    Is it that when governments borrow or refinance that they do not borrow already existing money ?????
    This is from the whole article:

    ” … borrowers will not be paid for the privilege of lending money to the German state. They will provide their funds for free – or actually at a loss, given that inflation will eat away at the real value of their assets.”

    That posting is, in fact, in error.
    It is not the ‘borrowers’ who will lend their money, but the investors.
    “They will provide their funds for free….”.

    So, what part of that “provide their funds” do you not get, Paul Marks?

    It’s “their funds” that “are already in existence” that they will lend to the government – ostensibly for free.

    To claim that this is not a free-market transaction must be hyperbole.
    Nobody can force anyone to lend their own money at any rate.
    It happens in a free market.

    And, how could you call me a troll?
    I try very hard to engage Austrians in honest, open, intelligent(?) discussion.

    I was formerly posting on this site, Mises, etc. as joebhed with my same email and website.
    I am just using my real name.
    Is that trolling?

    1. says: Robert Sadler


      Any transaction involving the government is not a free-market transaction. With respect to debt, there is no good reason why a government should borrow money. Secondly, the government repays debt (were this to ever actually happen) using funds gained by coercion. Last, the government is not a free-market institution.

      Central banks have been known to indirectly buy government bonds (QE?). This would in effect be creating new money to buy the bonds.

  6. says: Paul Marks

    I would advise people not to waste their time with the shameless liar “Joe”.

    Possibly the only thing heis telling the truth about is his own name (in order to keep within the rules).

    However, it would not astonish me if he was even lying about that.

  7. This is to Paul and everyone.
    I have no idea why Paul calls me a shameless liar.
    It seems THAT should be against the rules.

    I have often posted on Cobden because I think debate about money is helpful.
    I don’t believe you need to use your name.
    But I am glad to do so.

    For those with whom I have a discussion, I am grateful.
    Respectfully and truthfully submitted.

    1. says: Robert Sadler

      Btw Joe I have checked out your website. You seem like a kindly fellow. How is the weather up in Vermont?

  8. To Robert Sadler.
    My definition of free-market transactions includes the government as a free-will party to a transaction.
    One party has something to sell.
    Another party wants to buy something.
    They agree on a price.
    A free-market transaction.
    I respect your disagreement on that.

    1. says: Robert Sadler

      I agree with what you say except as concerns the government. The impact and implications of a govenment making a purchase, borrowing or taking investment action are far different to when you or I, as individuals do the same.

  9. To Robert Sadler.

    Oops, forgot.

    QE doesn’t really create new money.
    All it does is increase bank excess reserves.
    Reserves are the basis for lending in the insanity of fractional-reserve banking.
    When the banks USE those reserves to make loans, THEN new money is crated – by the banks.
    As always.

    1. says: Robert Sadler

      Your argument here appears to be a little specious. Obviously a crucial part of this “money creation” is the initial purchases of those bonds by the central bank. That is where the process gets started of the central bank increasing the money supply. In the case of QE, could banks increase the money supply without the central bank? No.

  10. says: Paul Marks

    “I have no idea why Paul calls me a shameless liar”

    “Shameless” is obivious.

    So I will just deal with “liar”.

    The increase in government spending since the crises of 2007-8 “meagre”.

    A LIE – as a look at the figures would show.

    Turning to the money supply….

    “The money is already in existance”.

    A LIE – as Central Banks (the Federal Reserve, the Bank of England, the Eurpean Central Banks) have been creating (from nothing) vast sums of extra money.

    And they have been doing this (in part) because they do not want a free market rate of interest – they want a lower one (and have chosen to try and create one via monetary expansion).

    George Bush the “deregulator”.

    A LIE – as looking a the size of the Federal Register of regulations in 2000 and 2008 shows.

    George Bush the “conservative”.

    A LIE – as looking the size of government spending in 2000 and 2008 shows.

    “Oh I did not mean fiscal conservative, I meant social conservative”.

    No one was talking about abortion or anything else – this site is about economic policy.

    You were just lying – as you do on just about everything.

    You lie blatently and without shame.

    Hence the words “shameless liar”.

  11. says: Paul Marks

    Paul Krugman calls the Austrian theory of boom-busts a “moral theory”.

    The interesting thing about him when he does that is that (intentially or not) he always says the word “moral” (when talking about a moral theory) with a SNEER.

    Ludwig Von Mises said that economics was value free – not that there were no values bound up in the study of it (for example if a “scholar” is not interested in TRUTH he or she is not a scholar and no true scholarship is possible) but because economics just tells us what the results of a policy will be – not what we should do (for that we need ethics – not just economics).

    For example, economics teaches us that if one imposes rent control (below the market rent levels) then, over time, there is likely to be an increase in homelessness.

    And economics teaches us that if one imposes a minimum wage law (at a level which is above the market clearing wage) then, over time, there is likely to be an incease in unemployment.

    Basic price theory – supply and demand. The foundation of economics.

    Economics does NOT teach us whether increasing homelessnss and unemployment (as, for example, the interventionist polcices of Mayor Wager and others did, over time, in New York City) is a good thing or a bad thing. For this we need ethics (morality) – not just economics.

    That is why Mises tended to use the words “moral” and “morality” with respect. And the fact that people like Paul Krugman use such words with a SNEER (whether or not they know they are using a sneering tone of voice when they use such words) should tell even a layman all he (or she) needs to know about them.

    The little smile, the sneer in the voice.

    Saul Alinsky may be physically dead – but his ways live on.

    It was much the same little smile, much the same sneer in the voice when Bill Ayers walked from the court room (by the way the last killing by the Weather Underground was in 1981 – so much for Vietnam).

    “Guilty as Hell, but free as a bird – you have got to love America” sneered Comrade William.

    Before he (and fellow terroist Mrs Ayers) went off into academia (Mr Jones went off into policy work in New York – figuring he could do more harm with the “Apollo Alliance” [direct connections to the Tides Foundation and the Centre for American Progress – of course], for example crafting the “Stimulus” Bill for Barack, than he have could have done letting off bombs).

    A practical example?

    The writing (many times) about “savage cuts” in government spending in Europe since the economic criss started in 2007-2008.

    Then one looks at the actual government spending figures for Britain, France, Germany and so on….

    A professional economist (indeed a Nobel Price winner) who writes about big government spending cuts in the major E.U. nations since the financial crises started is not making an “intellectual” error (they know perfectly well what they write is not true) they are making a MORAL error (they are betraying truth) that is why they use the words “moral” and “morality” with a sneer.

    The left are not just “bad economists” – i.e. people with a poor understanding of economic theory.

    They often (NOT ALWAYS) are BAD PEOPLE also (like the long line of New York Times writers covering up for Stalin, Mao, Castro…..). They are often highly intelligent (sometimes incredibly so – their cunning astonishes me), but there is something missing – some part of a human being that just is not there in them (or has been crushed somehow).

    And this fact (and it is a fact) should be kept in mind when dealing with them.

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