Please find below an interesting article discussing the connection between fiat money and the current financial mess in the US, which will have reprecussions in the UK.]
Llewellyn H. Rockwell, Jr.
Saturday, September 20, 2008
What caused this? It is a simple question, and yet answers are all over the map, as you might expect. Here’s mine in two words: fiat money. The word fiat means: out of nothing. Money out of nothing is money that is eventually worth nothing. The possibility of precisely that happening emerged on August 15, 1971. Since Nixon severed the last tie of the dollar to gold, the world’s monetary system has not been restrained by anything physical. We’ve depended on the discretion of central bankers. We can’t trust that, and this crisis shows precisely why.
Of course there are subsidiary factors. The lifting of restrictions on Freddie and Fannie. Subsidized lending. The Fed’s artificially low interest rates. The Community Reinvestment Act. Financial “deregulation.” The war. Bush profligacy. Debt. There is much more besides. But fighting each of these forces individually is like battling down flies at the garbage dump. The core issue is that there is nothing to restrain money creation.
The first time that people hear this, they find their minds rather boggled, and they want to know more. My whole experience in this area is that once people start digging around the area of monetary theory, they find that 1) it is not as difficult a subject as it seems, 2) it is endlessly fascinating, and 3) it explains far more than they realized before.
It was F.A. Hayek who bore this burden most directly for those in the English-speaking world. His books on the source of the business cycle and what to do about it appeared in the late 1920s and throughout the 1930s. These works were cited by the Nobel Prize Committee in 1974 as his most important contribution to economic thought. His ideas are directly applicable to our current plight.
It has been a real tragedy that these works have been out of print. But this year, the Mises Institute made a hard push to get this book out in time for the current financial calamity. We set other projects aside and worked all hours to bring out the definitive collection. Here it is: Prices and Production and Other Works on Money, the Business Cycle and the Gold Standard, by F.A. Hayek.
The book is priceless in its content and presentation. Specifically, Hayek explains the mechanism by which loose credit generates false signals to investors, leading them to chase fads all over the market, and ending in sector-wide failures. He was writing at a time when the gold standard provided partial restraint on the government and the central bank. No more. So Hayek’s analysis of all of this is more penetrating than ever. The book also contains the complete text of his many battles with Keynes.
At this link, you can buy what we are calling the Crisis Book Kit at a deep discount. Just click the books you want and the discount happens.
At the same time he was writing, his mentor Ludwig von Mises was battling it out in Austria and the German-speaking world. He became the great opponent of not only inflationary finance but also the Continent’s version of the New Deal. The remarkable thing is that these essays were not translated until the 1980s and even then remained obscure. This book is really their first major debut, and it appeared only last year: The Causes of the Economic Crisis. You will see his expository virtuosity at work and also his amazing courage and passion.
It has been a major task of the Austrian school since 1912 to explain to people what money is, how it works, and how its corruption and distortion by the state is the source of both inflation and business cycles. The core book here is Mises’s own 1912 classic called The Theory of Money and Credit, written at the dawn of the central banking age. The prose is still crystal clear, and it continues to be the best textbook on money ever written.
In the American context of the Great Depression, one book captures the whole onset and response. It is Murray Rothbard’s America’s Great Depression. He shows that it wasn’t the 1929 crash that was the problem; it was the response to the crash that created the Depression. Bailouts. Price controls. Wage controls. Government programs. Trade restrictions. Crackdowns on the capital markets. And who did all this? It originated not with FDR but with Herbert Hoover – clear echoes of today. There is no understanding the present crisis without this book.
Finally we need to realize the problem of loose money and its effects are not new and not necessarily 20th century. The whole history of the American economy is littered with banking panics, bailouts, business cycles, and chaos, each with the same root. When the money goes bad, everything goes bad. Rothbard chronicles the long history of his marvelous book: History of Money and Banking in the United States.
The Mises Institute has sponsored research on this topic since it was created in 1982. Our first conference was on the gold standard. We’ve suffered for this choice. The best way to fall out of favor with the regime – or its libertarian and neocon supporters – is to question its central bankers. We’ve done that. But now, the work is done. It is available. The truth is out there. You only need to grab it, comprehend it, and spread it.
Please help. History hangs in the balance.
[For a rather morbid forecast of what could be happening in the UK soon please read this article that was published today in the Daily Mail.]
Apocalypse Now?: New world order could have devastating implications for Western nations
Last updated at 1:23 AM on 20th September 2008
Almost exactly seven years ago Al Qaeda terrorists targeted their hijacked planes into the Twin Towers at the heart of New York’s financial centre — and the world was transformed.
There were no deaths this week, but the effects of the carnage on the financialmarkets will be far more profound and destabilising than the 9/11 atrocity.
For almost all of us, it will, I predict, be a change for the worse, and for a largeminority the consequences will be extremely distressing.
Here comes the apocalpse: Is the Western world entering a nightmare scenario, as depicted by Edvard Munch?
The Western world — Britain, Europe and the U.S. — has moved from excess toausterity overnight. This week’s financial typhoon will savagely impact livingstandards. In due course, it will topple governments and lead to a permanent transfer ofeconomic and political power from Europe and America to the emergent and, in somecases, such as China, semi-barbarous economies in the East.
I know I will be accused of being unnecessarily apocalyptic and irresponsiblynegative, but I believe that the greatest mistake we can now make is todownplay the seriousness of the situation and bury our heads in the sand.The seismic events which have seen the near-destruction of the investment banking sector and the collapse of insurance giant AIG are on the scale of the Great Crash of 1929. That was such a disaster because it created conditions for the emergence of fascism in continental Europe and then World War II.
Although it is hard to predict the consequences, we should expect ramifications of equal significance — including the re-emergence of violent Far Right parties across the globe.
Some experts were talking this week as if the financial crisis was nearly over. Theycould not be more wrong. The downturn has only just begun — and for most citizensuninvolved with finance the consequences have not been felt at all.
But they will be felt very soon and very brutally. The British economy is in the same position as the Texan coast earlier this month as Hurricane Ike approached — apparently calm, with life going on as normal, but an almighty storm is raging justover the horizon and heading our way with terrifying speed.
We can expect a sharp increase in personal bankruptcies. Yet the numbers will not peak until this time next year at the earliest.Hundreds of thousands of people will lose their jobs, with many forced to sell their houses. Property prices will slump.There will be extreme human suffering, panic and despair. Many careers will bedestroyed. This is considerably worse than the downturn of the early 1990s.
The orthodoxy from the British Government, the Confederation of British Industry and elsewhere that there will be a mild slowdown ending late next year is nonsense.
This crisis is vicious, dynamic and only just beginning. Even those of us lucky enough not to lose our jobs and our homes will have friends and relatives who do. Let us examine, first, the fate of City bankers from firms such as Lehman Brothers — all summarily dismissed when their firm went under this week. They will receive no severance payment and almost no chance ever again of benefiting from the six-figure salaries and massive bonuses they have taken forgranted over the past few years. That means they cannot service the huge mortgages they have taken out on hugely expensive houses. So this weekend they have become forced sellers — which means that thousands of new For Sale signs will be going up in London and the South-Eastin the coming weeks.
Personal bankruptcy:Traders and investment bankers face an uncertain future
If these unemployed investment bankers had the misfortune to buy anywhere near the top of the market, they now face the prospect of personal bankruptcy.This is because they will find that their houses are worth much less than they paid forthem, and will therefore be unable to repay their loan.With so many vendors on the market obliged to sell at any price, it can be assumed that any London house will fetch 25 per cent less this weekend than it would have done this time last week.Many of the younger bankers — those in their 20s and 30s with young families — now face utter disaster. Of course, there is scant public sympathy for these former ‘masters of the universe’ who enjoyed good times.
But we already know that Thursday’s merger of Lloyds Bank and HBOS (supposing itis completed: contrary to statements by Chancellor Alistair Darling, this is by no means certain) will lead directly to the loss of some 40,000 jobs amongbank workers. There will be bloodletting on every High Street where there is both an HBOS and Lloyds outlet — one branch will undoubtedly be closed.
But that body-blow is just the start. Over the coming months, the financial typhoon will mercilessly spread outwards and wreak devastation on the economy.Banks will foreclose on thousands of small businesses.Massive corporate failures are inevitable.These disasters will then rebound on the financial sector, as company bankruptciesand plunging house prices force fresh balance sheet write-downs and yet more sackings.
Unemployment — already rising fast and up 80,000 over the summer — is set to surge ahead and will increase well above the two million predicted by economists.This will produce a vicious spiral. Every worker out of a job means less tax receipts and higher welfare payments.
In last March’s Budget (a work of fiction when it was published), Alistair Darling forecast borrowing this year of £43 billion. Even at the time, this figure was shockingly large.
It meant that only Egypt, Pakistan and Hungary among significant world economies had more profligate government spending than Britain.
As of this weekend, Government borrowing is out of control.
It will soar nearer £100 billion next year — more than double Darling’s estimate. This will cast doubt about Britain’s ability to finance our debt in the internationalcredit markets.
The International Monetary Fund has already warned Darling about his reckless spending. In the months to come, it will demand cuts in government spending, just as it did in the 1970s when the then Labour Chancellor, Denis Healey, had to beg for an IMF loan.
Warned: Government borrowing is twice Chancellor Alistair Darling's estimate and has bought a rebuke from the IMF, Darling will have to take urgent, painful action to reverse the splurge of recent expenditure — welcomed by financially ignorant Labour MPs — on public services, in particular health and education. And whereas the responsible wing of the Labour Government, as it did in the 1970s, will support this prudence, the Left will call for extra spending to save jobs.
It is likely that the Labour Party will split on this issue — just as it did in the aftermath of the Crash in 1931 and again at the start of the 1980s. In the medium term, the only resolution to this debt crisis is a rise in inflation, as governments are forced to print money to fend off depression.
Savers should thus brace themselves for the return of double-digit price rises not seen since the early 1980s. Driven by poverty, crime will also soar — particularly crimes against property. We should also brace ourselves for a return of political violence to the streets. Certainly the British National Party will use the economic downturn to agitate againstimmigrants, accusing them of having ‘stolen British jobs’.The BNP made some striking gains at last May’s elections, and these will continue in the European elections next June.
This is the troubling prospect we face. But the worldwide consequences are just as significant and we can expect the Euro to fail under the strain of economic collapse.The Euro has never been tested by adversity. The single currency’s architects made one foolish mistake when they set it up ten years ago: they established monetary union ahead of political union.
In long-established democracies such as Britain and the United States, it is natural for one area of the country to help the other in times of difficulty. For instance, there was no strong objection when taxpayers in the South were asked to bail out Northern Rock, even though its operations were concentrated in the North-East.
Fascist threat: Far right parties such as Jean-Marie Le Pen's FN in France could exploit the situation. However, that is not the case in mainland Europe where French taxpayers would refuse to contribute huge sums to bail out, say, the Italian banking sector. That is why the Euro is likely to be destroyed by the coming economic storm — just as Britain’s membership of the European monetary system was smashed on Black Wednesday 1992. The truth is that this week’s seismic events will come as a crashing humiliation to the European political class.
Like in Britain, this crisis will be exploited by the Far Right in countries such as France, Holland and Austria. These countries have powerful neo-fascist parties which will relish recession, in particular singling out for blame ethnic minorities, just as the Nazis did in Germany after the 1929 crash.
The good news is that Britain — despite the efforts of Tony Blair and others — remains outside the Euro. It means we can control our interest rates and allow the pound to depreciate, unlike so many European countries, some of which (such as Ireland) are already being devoured by recession.
Wall Street Crash: The US became more insular after the stock market crashed in 1929
But the biggest worry is what will happen in the U.S. Ever since the end of World War II, America has been the world’s policeman. It has been able to play this role, and see off perceived enemies, such as Soviet Russia and Saddam Hussein’s Iraq, because for the past 60 years it has been the greatest global economic power. The most important question facing the world today is whether the U.S. — already crippled by the estimated $2 trillion cost of financing the Iraq occupation — can afford to continue its global role.
The historical precedent is far from encouraging. After the 1929 crash, the U.S. turned in on itself, resorting to protectionism. It re-engaged with the world only after the attack by Japan at Pearl Harbour in December 1941. It is too early to say for sure, but it is possible that America is at a similar turning point in its history. President Bush’s decision to pour taxpayers’ money into so many bankrupt financial institutions has led to an explosion of U.S. national debt which will be hugely exacerbated by yesterday’s move in Washington. As a result, U.S. global creditworthiness is in jeopardy, and it is likely that at some stage over the next decade the dollar will lose its unchallenged status as the world’s reserve currency.
There are signs that this process has already begun. For this weakening of the currency was the fate of sterling in the economic crisis of the 1930s. Indeed, the subsequent decision to take the pound off the Gold Standard in 1931 marked the effective end of the British Empire.
Rising power: China has emerged as a threat to US power, and the recent Beijing Olympics have only added to its stature America’s global dominance — already threatened by the emergence of rival economic powers such as China — may soon be coming to its end. The U.S. will probably retreat inwardly, becoming isolationist, at any rate temporarily — opening the way to a new and even more menacing global order. It is inevitable that America will soon withdraw from Iraq, leaving its bitter enemy, Iran, unchallenged as the dominant regional power.
China will become ever more assertive and will want to humiliate Washington by seizing control of Taiwan, something the White House will be powerless to resist. It will move on to threaten nearby India.
Africa will become the scene of proxy wars between China and the West, just as it was the scene of proxy wars between the United States and Soviet Russia for much of the post-war period.
China, much to U.S. fury, will also start to meddle in Latin America. The world that will emerge from the Great Crash of 2008, therefore, will be dark and unpredictable.
This weekend, all sensible families will go through their finances, anticipate the inevitable problems that lie ahead, and cut back at once on unnecessary spending such as eating out, second cars and foreign holidays. For the past 25 years we have lived through a glorious party.
We have all — governments, companies, banks and, of course, consumers — lived beyond our means and are paying the price.
This weekend the hangover begins. It will be prolonged.
Life will be much closer to the austerity that followed World War II than the frenzied, debt-fuelled boom of the past two decades. Perhaps our lives will be none the worse for all this. Our values will certainly change — many will say not before time.
Material objects should count for much less. Almost overnight we have entered a new world, and we must learn to make the best of it.
[And Allah knows best!]