FIAT MONEY, AUSTRIAN ECONOMICS, MILITARY
Updated: Apr 25, 2020
This post is to publish one of my retroactive papers, entitled “One Final Attempt at Morality”. This paper was originally sent out on January 5, 2020, which was prior to the COVID-19 virus outbreak and the resultant health and economic complications.
Have the global central bankers already reached the Point of No Return? Will further debts bring benefits and prosperity to society? Is the war card on the table for the US and Iran?
ONE FINAL ATTEMPT AT MORALITY
When will the folly of the global central banker’s massive credit expansion slow down and eventually cease? Like a heroin addict, the world’s central bankers have been opting for the easy money fix time and time again for decades now. The predictable and tragic consequences of their addiction have likely reached the final crossroads. The lethal combination of steadily increasing consumer prices and the compounding interest on borrowed money has caused personal, corporate and national debts to skyrocket to unsustainable levels. With the recent global debt increase of over $150 trillion dollars from 1999 to 2019, global debt now stands at $250 trillion, which is in excess of 300% of the global GDP. In the United States, national debt has increased uninterruptedly from $15 trillion in 2012 to $23 trillion in 2019.
The negative societal effects of this debt are evident in the following historic abnormalities.
· Zombie corporations that cannot even make interest payments on their accumulated debts
· Middle class households being eliminated due to excessive debts
· Asset bubbles fueled by margin debt and search for yield
· Future burden put on our children and grandchildren to repay today’s debts
· Skyrocketing college tuition and healthcare costs causing typical households to take on even more debt
So one may ask if these debts are healthy or dangerous. Capitalists and entrepreneurs have historically used debt to finance productive operations, services, assets and product creation desired by the masses, which is a great overall benefit to mankind. When debt is used in moderation and honestly paid back with interest by responsible parties, it can be advance society and improve the standard of living. Emphasis on the words “in moderation”, “honestly” and “responsible” above is necessary. But, debt does have a sinister side to it when used in excess or for inappropriate reasons. So we go back to the heroin addict analogy. The problem with a heroin addict is that the drug addiction becomes too much to overcome. The heroin use regrettably becomes “excessive”, “dishonest”, “irresponsible” and “chronic”. The addict will say that one more fix is harmless and that they have things under control, but rightfully we do not believe them. Eventually, the addict delivers that fatal dose. The necessary solution is to intervene early and frequently and immediately stop using heroin.
There is hope to believe that the world’s central bankers are finally recognizing their culpability with directly causing today’s global debt problems. Are they no better than the dishonest and irresponsible heroin addict that chronically and excessively destroys their own life and the people around them? Important to note is that debts are precisely linked to credits. If credit is expanded by central banks, then by definition, the other side of the transaction means that debt was also created by a similar amount. The dark plague engulfing the world today is excessive debts, exactly as Nikolai Kondratieff warned nearly 100 years ago. The elite rulers that controlled the money supply did not like Kondratieff’s conclusions and inferences, for which he paid the ultimate price. Kondratieff’s works are timeless and must be heeded today more than ever. Today, we have an excessive global debt problem that is threatening another predictable economic depression. The only question that remains is if the inevitable depression will be an inflationary or deflationary one. For this answer, we must look to the world’s central bankers, specifically the United States Federal Reserve Bank, which controls the money supply of the world’s reserve currency.
Before we get into the central banker’s current dilemma, an education about debts and the Law of Diminishing Marginal Productivity is necessary. There are extensive studies and analysis related to this topic, which are outside the scope of this writing. Suffice it to say, that there is a tipping point at which additional debts no longer generate productive and positive outcomes. Instead, greater and greater amounts of debt are required to generate a constant unit of growth. Debts are rapidly increased, but the resultant gains and benefits to society are not realized.The modern era proof of this economic law is evident in the declining productivity growth trend over the last several decades. What is ironic is that today’s economists and central bankers find the declining productivity as an enigma difficult to explain. With the unprecedented fossil fuel energies and informational technology (IT) so readily available over recent decades, one would think that productivity would be increasing.
Historically, the debt markets have signaled early trouble, e.g. the housing mortgage debt bubble that triggered a potential deflationary depression. Today, there are ominous debt warnings related to corporate, government and student loan debt markets. Further, the Federal Reserve Bank’s sudden reversal of policy normalization in early 2019 was then followed up with hundred billion dollar interventions in the repo markets in late 2019 that are anticipated to continue well into 2020. Because the world’s central bankers are the creators and enablers of all credit expansions (and resultant debts), they are at a critical crossroads and likely Point of No Return. The Point of No Return is a critical point that, if passed, allows for no reversal of direction or decision. The debts have become so excessive that an “honest” payback to creditors is unlikely. Assuming that a debt default by governments is not likely either, the one remaining option is to inflate away these debts. But much like the heroin addict, this option has great risks with the ultimate and predictable outcome being death. In the case of fiat money, the death is that the green paper dollar will revert back to its inherent value of worthlessness like the countless fiat paper currencies that litter history. Today’s central bankers astutely realize their current predicament. Ray Dalio’s recent publication “Big Debt Crises” provides historical parallels and further insight into the proverbial “debt trap”. Will the central bankers choose the dishonest and irresponsible path of a chronically increasing inflation of the currency, or will they choose the morally right path and immediately cease the credit expansion that is necessary to cure today’s ailments? For the disciples of “Helicopter” Ben Bernanke and his predecessors, their path will likely continue down the path of inflationary ruin. But hope should not be lost that today’s current central bankers truly recognize the need to normalize interest rates and reduce nominal debts, and immediately cease the credit expansion.
The year 2020 offers one final attempt at morality for the central bankers. Their current dilemma is perfectly summarized by the Austrian economist Ludwig von Mises. Will the central bankers “voluntarily” abandon a further credit expansion?
The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. 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.
Recent speeches from numerous global central bankers provide hope! Their speeches warn of today’s financial imbalances and risks, i.e. excessive debts, and also offer their intentions to normalize interest rate policy and undo their prior emergency (and temporary) monetary actions that desperately followed the crisis of 2008 that originated in the United States. The uniqueness about their current speeches is that that they are “warning” about the impending risks and possible bad outcomes. When the next crisis does arrive (and it will), the central bankers can tell everyone that “we told you so but you didn’t listen”. Their warnings today are very much unlike 2008 when almost no one saw that crisis coming! The irony is that the crisis of 2008 was predicted by several wise economists that understood the Austrian Business Cycle Theory (ABCT) or the Kondratieff Long Wave analysis. There is reason to believe that the central bankers and many others on Wall Street did understand the risks and likelihood of a very bad outcome prior to the 2008 crisis, but much like the heroin addict, they were dishonest, hoping to cover up their damaging excessiveness and blaming others for their abuses. The classic response that “animal spirits” were responsible for this housing and equity bubble and all preceding bubbles throughout history should be finally refuted once and for all. Yes, there were speculative animal spirits that contributed to the excessive bubbles, but the real culprit that facilitated and enabled the excessive debts that fueled the asset bubbles should be obvious.
The highlights below are summarized from recent central banker speeches and papers and appear to have common themes that are consistently mentioned. This strict consistency implies that the world’s central bankers are in very close coordination and collusion. The ominous collusion of central bankers is another unfortunate affair that will continue to inhibit free market capitalism that has propelled mankind to greatness throughout history. Similar to the previously mentioned Law of Diminishing Marginal Productivity, further education about central banker collusion is recommended. But beware, since the beginnings of the mulberry bark being used as a fiat currency, violence has been the common theme associated with fiat currencies throughout history.
· Global trade tensions and supply chain disruptions
· China and European Union growth slowing
· Brexit complications
· Banks less profitable (so less ability to issue loans)
· Zombie corporations
· Italian government conflict
· Corporate and private debt imbalances / Leveraged loans (ironically no mention of national government debts)
· Need for other levers to be used, i.e. fiscal and structural reforms like productive infrastructure projects
· Monetary policy needs to normalize and reduce slack when times are good
· Declining productivity trends need to be reversed
· Financial imbalances and potentially overvalued equity markets
· Uncertainty with corporate earnings
· Looming bankruptcies and defaults with shale oil companies
· Misallocation of capital
The world’s central bankers need an intervention now. They need help and guidance so they can finally make the right and moral decisions that affect all of humanity. Their history of credit expansion and market interventions for the past many decades has created the Point of No Return decision point where they stand today. Hopefully, their addiction to power and control over the world’s peoples can be overcome for humanity’s sake. If the wrong decision is made yet again, perhaps the conclusion is that the central bankers will never “voluntarily” abandon their credit creation. If that is the case, then is the only remaining alternative for an involuntary abandonment of their great privileges? Perhaps a Green Paper Revolution will be the story of this decade? Does anyone really believe the recent “Fed Listens” events will precipitate the right, moral and “voluntary” results that are necessary to correct today’s massive debt imbalances?
Soon enough, the chosen path of the central bankers will be obvious. Hopefully, that decision does not take us down an irreversible inflationary depression path. Decisions by the central bankers appear to be oblivious or apathetic to Henry Hazlitt’s great lesson that economic policies must consider the effects on all peoples and at all times. Are the central bankers and other government decision makers properly considering the predictable impacts of their decisions today on the future children and grandchildren of our great republic?
One final comment is to be vigilant that any central banker action must be sustainable and not temporary. There have been countless examples over the past many decades where temporary credit tightening were almost immediately followed by another credit expansion much greater than the previous tightening. The result has been interest rates going consistently down from the double digit teens in the 1980s to zero and even the perverse negative interest rates today that have never before existed in the history of money and banking. That thought in itself should scare all of us. One further point of vigilance is to make sure that other inflationary fiscal policies are not implemented to offset any temporary monetary tightening episode. The monetary, fiscal and “wealth effect” policies are not mutually exclusive, and instead operate in very close coordination. This three-headed monster can be very deceptive with very few recognizing this dynamic, as the inflationary heads will shift their actions in temporary fashion creating confusion as to who exactly is creating the inflation.
In the truly desperate need to increase production in the economy, the “war” card cannot be ruled out. With ironic timing, this paper was originally drafted days before the US assassination of Iran’s Maj. Gen. Qassem Soleimani. Throughout history, war has provided economic stimulation; however, the thought of initiating a war for this reason would be quite disturbing. Another consideration related to this assassination is one similar to the fate of Iraq’s Saddam Hussein. Similar to Iraq, Iran’s continued push selling oil in non-US dollar currencies would be an unacceptable act to be dealt with through violence. The readers can study history and develop their own conclusion. The United States appears to be in the regrettable position that is must grow or die from its enormous debt service burden. With the economy again approaching the critical 2% stall speed, additional growth is desired. However, infinite growth on a finite planet of resources is absurdity. Natural, human and financial capital all have their limitations, which will become increasingly evident in the not too distant future.
Keep your eyes and ears open for a possible blow off top and trigger event that may spark an overvalued equity market sell-off in 2020. Any equity market sell-off should be viewed as a very positive event, implying that the world’s central bankers have chosen the right and moral path, even if that path proves to be very temporary. Central bank interventions during past equity market sell-offs is deserving of its own writing for another day. The reason should be obvious, as these interventions prevent an honest repayment of debt to materialize, which would have far reaching economic impacts. The thought of monetizing the accumulated debts is a very scary one to be avoided.