Last week, DIW – the Deutsches Institut für Wirtschaftsforschung (German Institute for Economic Research) – an influential think tank, proposed an ingenious solution to the Euro Zone debt crisis. The German government should issue a Zwangsanleihe, a compulsory bond that every German with savings of €250,000 or more should be compelled to underwrite with 10 percent of his or her own money. Such measures could help the German state grab another €230 billion in resources from the private sector to support its bailout commitments, the DIW economists announced with apparent satisfaction.
Didn’t economists once used to explain the importance of clearly delineated and legally protected private property, of free and voluntary exchange, and of true market prices? By explaining how capitalism works, these economists also demonstrated the limits and dangers of state interference, which is the reason why those who prefer to put their faith in strong political leadership and governmental design rather than the spontaneous order of free markets derided economics – after Thomas Carlyle – as the ‘dismal science’.
Maybe this is a somewhat romanticized definition of the term ‘economist’. Many statists, socialists and cranks have also adopted the label over the past 300 years. Yet, the history of economics shows that its greatest and most enduring contributions have come from those social scientists who explained how the voluntary, contractual interaction of independent, self-interested individuals creates a system that works to the advantage of society overall, and I may be forgiven for having assumed – or hoped – that in the early 21st century certain insights would have been so completely accepted that they could function as some kind of common ground for civilized discussion. I am fully aware that as an Austrian School economist I am at the ‘extreme’ free market end of the spectrum of economic opinion but I had thought – again naively, I guess – that certain principles would be unquestioned even by those who are happy to assign a larger role to the state. After all, in most cases these economists still claim to be advocates of the market economy, at least in some broader definition of the term, and given this position I had assumed that they, too, must assign at least a certain importance to the concept of ‘private property’, and that any blatant violation of private property by the state must at least give them a moment’s pause.
Well, it could be said that if all these economists took private property really seriously, they would have already become ‘Austrians’, so maybe I should not be surprised by the willingness of ‘mainstream’ economists to sacrifice the private property of third parties. But surprised I am. Surprised at what seems to be a growing enthusiasm for government-friendly quick fixes that come with little regard for the principles of capitalism and the free society, and with no consideration for the long run consequences.
Dismal no more
Since the start of the ‘global financial crisis’, or ‘the great endgame of the global fiat money experiment’, as I like to call it, we have witnessed a merry anything-goes of economic interventionism, an increasingly desperate and shameless struggle by the bureaucracy to sustain the unsustainable. And simultaneously, what I consider to be an intellectual shift among the economics profession. Eager to no longer be ‘dismal scientists’ but to be politically relevant and pragmatic instead, the economists have quickly taken to devising ever more audacious policies to help the state escape the consequences of decades of habitual overspending, reckless borrowing, and artificial cheapening of credit. The end seems to justify the means, and the end is to maintain the status quo, regardless of how bizarrely unbalanced it has become.
That economists are still advocates of free markets and defenders of justly acquired private property is a myth, at least when we consider the economists who dominate the policy debate. Apart from those at think tanks, such as the DIW, this includes economists at the central banks, the IMF, the OECD, and in the nominally ‘private’ banking sector that has by now become a state protectorate. Here, nobody likes to hear about spontaneous interaction, voluntary exchange, and true market prices, but almost everybody seems to love debt monetization (‘quantitative easing’), the manipulation of specific asset prices (‘operation twist’ or ECB-imposed yield caps on sovereign bonds), substantial government ‘stimulus’ spending, ‘fiscal transfers’, and various other forms of market distortions and bureaucratic interference.
Take the alleged beauty of currency debasement. I find it remarkable how many economists claim that it would be preferable for Greece (and by implication for other countries) to be able to print her own local money and debase it to her heart’s content. Sure, devaluing the monetary unit may provide a shot in the arm to the local export industry and create a very short-lived illusion of competitiveness. These ‘benefits’ are fleeting and the group of beneficiaries is small. But debasement will make many people poorer. All those who save by holding domestic money balances will see their purchasing power diminished.
That this is in the interest of ‘The Greeks’ has been amply refuted by the very actions of Greek savers. They are shifting deposits to banks in the Euro Zone core not only out of concern over local banks, but also in an attempt to protect the purchasing power of their savings, i.e. their property, from confiscation through inflation.
Failure is an option
The central problem in the present crisis – in Europe and elsewhere – is that states have assumed obligations they are unable to meet. So have many banks. In principle, this should only be of concern to the two parties to the contract – debtor and creditor. Ultimately, any entity can go bankrupt, including sovereign states, and there is no need to drag an ever larger group of innocent bystanders into this calamity. Specifically, there is no reason why a defaulted state would have to force its citizens to adopt a new currency. There is as little need for all Greeks to stop using the euro after the bankruptcy of the Greek government as there is for all Californians to stop using the dollar after the bankruptcy of the Californian government.
It is, of course, to be expected that a defaulted government would find it difficult to borrow again and that it, therefore, would have to live within the confines of its income from taxation. This is precisely why the political and bureaucratic class doesn’t like it – and why their intellectual handmaidens, the economists, come up with schemes to instead make everybody else pay. They’ll happily impose an inflation tax on all money-users as long as it keeps the state borrowing and spending and living high on the hog on confiscated wealth, and as long as it keeps the banks from shrinking and asset prices from falling. The status quo must be protected at all cost.
All these interventions are inherently conservative in nature (they conserve the prices and structures of the preceding boom) and, without exception, they protect the reckless from the consequences of their mistakes, and they punish the prudent. Those who did not allow themselves to get seduced by ‘easy money’ during the ‘bubble’ years and who managed their finances conservatively and saved would – in a truly capitalist system – now be the beneficiaries of the ‘bust’ – and thus provide the raw material for a real recovery. They could pick up assets ‘on the cheap’ were it not for the various policies (zero interest rates, unlimited bank funding, QE) designed to keep the prices of such assets at artificially high levels for the benefit of their present owners, often the banks. As savers are thus barred from buying assets at appropriately lower prices, they have no choice but to stay on the sidelines, holding saving deposits in which their capital gets whittled away by negative real interest rates, another policy designed to protect banks and a debt-addicted public sector.
One of the advantages of basing an economy on private property is that the success and failure of actions can be (reasonably) clearly attributed and that responsibility is specific and limited, and not communal and open-ended. This requires that the failure of institutions and policies must be clearly visible and not hidden, and that the market must be allowed to liquidate failure. In the present debate, however, most economists seem to be of the view that what is to be avoided at all costs is the recognition of failure, the liquidation of imbalances, and the shrinkage of certain entities, regardless of the sheer silliness of their outsized liabilities.
Flooding the economy with new money is an attempt to mask the failure of various institutions and policies and to socialize the effects of such failure. Here is the dirty little secret of monetary policy: printing limitless fiat money may be costless to the central banks but it is not costless to society.
“Hooray, we are inflating the debt away!”
But it is likely to get worse. The present stalemate is not making anybody happy. The economy is not being cleansed of its dislocations and neither is any sustainable growth momentum developing. Frustration and impatience are likely to rise. My concern is that most establishment economists are now intellectually prepared to embrace even more aggressive intervention, including a no holds barred monetary über ‘stimulus’ to break the gridlock and try and ‘inflate the imbalances away’. This is the final insult to anybody who believes in private property as it involves the wholesale expropriation of the saving classes. Such policies will require additional draconian market interventions. Large parts of the ‘private’ sector will have to be turned into captive holders of bonds, in particular government bonds. Highly regulated entities, such as banks, insurance companies and pension funds, are the obvious candidates, and they are already being lined up for this. Capital controls will be reintroduced. All of this will have disastrous consequences for the economy. Attempts to ‘inflate the debt away’ are a recipe for economic Armageddon. They do not lead to a balanced, deleveraged and cured economy but to total currency collapse, which tends to decimate the middle class. That such policies are even being contemplated now, I find shocking.
Such an outcome is, of course, not inevitable. Our future is not predetermined. There is always a chance that those in power will simple ignore these economists.
But maybe I am just being naïve again.
This article was previously published at Paper Money Collapse.