"If the governments devalue the currency in order to betray all creditors, you politely call this procedure 'inflation'." ~ George Bernard Shaw
A Very Short Q&A on Money, Banking and the Great Recession
Column by Jakub Bozydar Wisniewski.
Exclusive to STR
Q: Why do states and their clients in the banking sector demand control of the money supply?
A: Because it allows them to:
1. Engage in the inflationary redistribution (taxation without legislation) of the purchasing power of money in their own direction.
2. Monetize (inflate away) their debts.
3. Create credit out of thin air and be paid interest on nothing.
4. Push taxpayers into higher income tax brackets by increasing their nominal (but not real) income.
Q: What are the side effects of initiating and sustaining the above processes?
A: 1. Falsification of economic calculation (inability to compare profits and losses of engaging in any given business activity).
2. Discouragement from saving (and thereby from healthy investment, savings being the source of sustainable business credit).
3. Continual erosion of real incomes.
4. Distortions in the capital structure (malinvestments) leading to boom-bust cycles.
Q: Do the above explanations account for the emergence of the current "Great Recession"?
Q: What should be done to get out of it as quickly as possible?
A: 1. The free enterprise profit-and-loss system should be allowed to bankrupt the insolvent banks and restructure their debts by auctioning off their assets and/or turning them into managed mutual funds.
2. Ditto for the insolvent governments.
3. No new money should be printed and/or created in the form of virtual bookkeeping entries (in order not to sustain the processes described in the answers to the first two questions).
4. No "government investments" should be undertaken, since these are necessarily at best zero-sum games, unconstrained by the proft-and-loss strictures, and would further drain the vital forces of the already weakened private, wealth-generating entrepreneurship.
5. Prices and wages should be allowed to fall to pre-boom levels (or even lower) in order to reflect the post-boom scarcities of goods, re-enable sound economic calculation to occur and allow the labor force misallocated during the boom period to be re-absorbed into the labor market.
6. Saving should be encouraged to allow efficient, but politically unconnected entrepreneurs to access the credit needed to reallocate the malinvested capital to the uses consistent with consumer preferences (especially time preferences).
Q: What should be done in order not to allow such recessions to happen again?
A: 1. Legal tender laws should be repealed.
2. Central banks should be abolished.
3. Taxes on commodities trading should be eliminated so that commodities might regain their position as sound monies.
4. Competitive currency issuance should be allowed.
5. The root causes of the above problems – the institutional apparatuses of violence, aggression and coercion – should be dismantled.
Q: Have the above solutions been tried and found effective?
A: Yes, most of them were followed during the most economically prosperous periods of human history. The spectacular economic downturns of the 20th and early 21st Century, including the Great Depression, the stagflation of the 1970s, the Dot-com Bubble, and the current Great Recession, are the result of moving away from them over the last 100 years. The implementation of point 5, however, still awaits its time.