Ludwig von Mises – Preston Poulter’s Blog

Chris Martenson’s Crash Course

Mark, frequent blog reader, recently commented:

Preston,
I agree that these trillions that have been injected into the system are going to be a problem. But the real problem is the size of the debt that these new bailouts are being added to.

A great graphical representation is available at Chris Martenson’s, The Crash Course particularly Chapter 11, How much is a trillion, and Chapter 12, Debt.

To convey how huge a trillion dollars is, Chris compares a trillion dollars to a billion dollars. He shows that a billion dollars, if composed of a stack of one thousand dollar bills, would reach just 358 feet, a third the way up a giant skyscraper. But a trillion dollars is a stack of one thousand dollar bills 67.9 MILES HIGH !!!

Then, in Chapter 12, we see the national debt (10.6 trillion dollars a few minutes ago, not including future obligations like social security, medicare, etc.) plotted since 1950. We’re on the ascending slope of a geometric progression, the straigt up off the chart portion (we’ve all heard of the amazing potential of compound interest When it’s applied to debt rather than savings its just as amazing). This will screw the dollar and turn the US into a very different country than the one we grew up in. (Edit: You can see Dr. Martenson’s work here.)

Other than that, have a nice weekend! -Mark

Mark was also studious enough to let us know that the lowest rates and best transparency he found for gold bullion storage was at www.bullionvault.com. Thank you very much for bringing us this information Mark.

I did some calculations on the size of the national debt for the last speech I gave. I have some pretty handy conversion factors, but I think we all understand how massive the size of the Federal Debt is. In fact, I was reflecting on the words of Henry Hazlitt this morning who said in his book The Failure of the New Economics that the relationship between expanding the money supply and expanding consumer prices is a complex one: when you first start to expand the money supply, consumer prices move by a far lower percentage, but as you add more and more money to circulation the consumer prices rise by greater and greater percentage. Eventually, the addition of small amounts of money (percentage wise) drive up consumer inflation more than you would expect.

That’s why Obama is calling for a trillion dollar deficit in the face of this economic downturn. Since we already have a national debt that is trillions of dollars, we’d need to start going in debt an increasingly large amount in order to see any stimulus effect from deficit spending. Ludwig von Mises also talks about this in his book Human Action: A Treatise on Economics where he says that:

In all countries where inflation has been rapid, it has been observed that the decrease in the value of the money has occurred faster than the increase in its quantity.

I love von Mises’s writing. He seemed to understand what was going on, but one thing I think he got wrong was people’s willingness to accept inflation and fiat money. Mises (also in Human Action) wrote that:

Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.

He also wrote (although I can’t find the quote offhand) that a government can only succeed in introducing a fiat money by a gradual perversion of a commodity money such as we saw here in the United States. But we’ve seen time and again in countries such as Venezuela and Zimbabwe that people will accept a new fiat currency that is introduced to replace a fiat money that has lost its value.

That people would willingly accept an inherently worthless money from the same people who provided them with the last money that has been show to be inherently worthless seemed an impossibility to Mises. I must say I can’t quite fathom it myself. When faced with the economic calamity that results from hyperinflation, would a people not demand a sound money? Apparently, they may want one, but will accept another fiat note issued by the same government that destroyed their last currency.

And so it is regarding inflationary expectations. Mises wrote that people only accept inflation because they believe that it is temporary and that soon it will end, but these days we know the truth of just what people will accept. We all accept that the dollars of next year are going to buy fewer goods than the dollars of this year, and if that isn’t so, it’s viewed as a calamitous deflation. The central banks of the world have done a superb job of convincing us inflation is just a part of modern living and to just ignore it.

In fact, central bankers don’t even talk about controlling inflation anymore, instead it’s just peoples expectations of inflation that need controlling. In so doing, central bankers blame the victim by saying that the root cause of inflation is that people are expecting it and that these “inflationary expectations” are what causes people to ask for higher prices today. That the root of the problem might just be more and more money made out of nothing and injected into the system gets nary a mention except by economists such as Ludwig von Mises.

It will be interesting to witness the collapse of the American dollar. Will Americans be as docile as Argentineans in accepting a new fiat currency issued by the same central government that bankrupted the last one? Or will they demand a return to sound money? I, for one, have and will continue to agitate people to demand sound money. I’m not surprised that people don’t pay much attention today, but I will be surprised if they don’t pay attention when faced with hyperinflation. Sound money has become one of those ideas such as personal responsibility and the free market: it’s an idea people like and politicians will therefore play to them, but no one seems to care that those same politicians do not carry out their promises of giving us sound money or free markets. And to witness American’s willingness to reject the notion of personal responsibility, we need look no further than the bailout of the auto industry.

The Endgame Begins

Despite the fact that I’m an avid gamer, my Chess game is pretty horrible. There was a one point in my life where I thought I might devote some time to it, but that never came to be. I do know through my limited reading on the subject that serious students of the game divide Chess into three parts: opening, midgame, and endgame. Because the game has so much history, and because the number of opening moves are very limited, much of the opening tends to follow historical convention of various “opens.” But the open only goes for the first handful of moves. Before too long, the game has broken from the predictable opening to the midgame where the players have now gone from “following the script” to making moves as best they see fit on their own accord. The midgame is where the players are forced to begin making entirely their own decisions, but the situation is also so dependent on the opening that an experienced player can look at a game in progress and reliably predict what opens both players used.

Then after most of the pieces have been taken, the endgame begins. In terms of moves, the endgame can be the longest part of the game. If played out to its conclusion, it can take quite a few moves to advance a pawn to the other end of the board, regain a queen, and checkmate the opposing king. But often good players will simply concede when they see that that is where the game is going. There are no specific markers that delineate opening from midgame from endgame. It’s more a subjective judegement that people can make when reading over the games moves, but there is, to my knowledge, no textbook definition upon which one can say “Ah, with this move, the endgame has begun.” And yet, it is something that experienced players can recognize immediately. In that way, Chess is a bit like global markets.

When compared to a game of chess, the current financial order can be said to have started back in 1944 when John Maynard Keynes led the Western Allies to agree upon a new financial system near Bretton Woods New Hampshire. As discussed in my book, the Bretton Woods agreement set about a new monetary order by which all of the currencies of the world would maintain pegs to the US Dollar which in turn would be fully redeemable in gold. In this way, all of the world’s currencies were indirectly redeemable in gold. More importantly to the United States, the US Dollar became “as good as gold” to the powers of the world. This is how the “game” of our current financial system opened, and the opening moves were indeed predictable.

The US Dollar became the strongest currency in the world. It was readily taken everywhere and all nations worked to develop a positive trade balance with the United States so that they could begin saving this new version of paper gold in the vaults of their central banks. The currencies of the world did not vary much against each other as each was pegged to a given amount of dollars. All appeared stable and predictable. But as the game advanced, the situation developed to where their became a strain on the gold reserves of the United States. The United States had enjoyed the ability to, in essence, print paper that others took as gold upon demand. No nation can be expected to not abuse such a monumental privilege. Particularly not when there was a Cold War going on. The 1960s say a huge inflationary expansion of the US Dollar as both LBJ and Nixon expanded social spending while financing an expensive war in Southeast Asia. Various nations of the world, particularly France, began presenting their dollars to the US Treasury and asking for gold. Either the United States would have to stop all of this spending or it would have to cease redeeming in gold. In 1971, Nixon chose the later and the midgame began.

As mentioned, in the midgame, the players have more ownership in their own decisions rather than following a pre-planned set of moves. Now the currencies of the world were free to “float” against each other. The conversion ratios between one nation and another fluctuated daily. Currency traders and not central bankers increasingly began to determine what a given currency was worth in terms of all other currencies. The US Dollar was now going to have to compete on the world marketplace, but because of how revered it had been at the start of the system, to many of the world’s central banks had too large a stake in it to allow it to collapse; remember, the opening has a huge influence on the development of the midgame. There were some scary times at the end of the 1970s where it seemed like the US Dollar was going to collapse, but ultimately it was simply too pervasive a currency and the economic and military power of the United States too strong to allow its currency to be treated like that of a banana republic- even if there was an amazing similarity between the policies of the two.

But eventually the midgame ends. After most of the pieces have been taken, the players try to surmise who has the advantage and plan accordingly. In our little game, the pieces have been falling all in a row lately. Whether its the housing market, the stock market, or commodities, one pieces after another has been taken off of the board as a safe place to put your money. Lately even the banking system itself, the equivalent of the king in our allegory, has been in danger of getting captured. The endgame is starting. The players of the world are looking at the board and have realized that the financial order of the last six decades is about to collapse. They are starting to plan accordingly. On October 10th, Italian Prime Minister Silvio Berlusconi announced that the world leaders were considering closing the financial markets of the world so that they would have time to “rewrite the rules of international finance.” He would later say that he was just speculating about a rumor, but one does have to wonder whether he was forced to recant by the other world leaders who had wanted more secrecy maintained around their meeting.

Whether the meeting was real, or whether it isn’t it does beg the question of when one is going to happen. I say when, because I just don’t see how the powers of the world are going to sit by and watch this deflationary collapse unfold without a fight. Confidence has become shaken in the banks of the world, and part of the reason for this is because the banks of the world have far more liabilities than they have assets when the market actions of the past year have been taken into account. A new plan whereby a large block of nations pledged a significant portion of assets to back their banking system would restore confidence in that banks structure and that nation might thereby gain an advantage in prestige over the other nations of the world. A new economic order to replace the now defunct Bretton Woods agreement must be in the works somewhere; if nothing else, it would be needed as a contingency against further collapse of confidence.

This all spells the end of the dollar. Like a chess game, the players of the world know that its just a matter of time (a matter of moves) before the once almighty dollar is reduced to far less than the paper its printed on. We are about to once again discover the words of Ludwig von Mises who wrote that “”Government is the only institution that can take a valuable commodity like paper, and make it worthless by applying ink.”

This Is Some Rescue

“This is some rescue. When you came in here didn’t you have a plan for getting out?”
– Princess Leia, Star Wars (1978)

And what a rescue it is. What started as a three-page plan to buy troubled assets has grown to a 451 page mess that includes everything from Indian Employment Credits to adding a Seven-Year Cost Recovery Period for Motorsports Racing Track Facility. I guess in the future we know how to get recalcitrant Republican Congressman to reverse course- include more pork. We should all remember for future reference that the government rides to our rescue by way of hurriedly passing a bill no one had a chance to read that includes more spending of money they don’t have.

I’m not sure if this was the kind of rescue that the American people were counting on, but given how they were reacting to this plan (about 90 to 1 against judging from people calling in), it was probably the one that they were expecting. And the thing that no one seems to want to being up is that the government caused this problem to begin with. If not for the government created entities of Fannie Mae and Freddie Mac, we would not have had so extreme a credit explosion in the housing market. If not for the government created entity of the Federal Reserve and it’s nasty habit of keeping interest rates low and solving every problem by throwing more fiat paper at it we would not have had this orgy of credit and speculation to begin with.

Each of these entities was created by the government to rescue the free market:

– the Federal Reserve was created by the government in response to the Panic of 1907 and the desire to have a “lender of last resort” with an “elastic currency” that could bailout any troubled bank.

– Fannie Mae was created by the Roosevelt Administration in an effort to provide credit to the housing market to stimulate the economy. Except that now that had created a government sponsored monopoly of sorts. So in order to fix the situation, they created yet another entity, Freddie Mac, in 1970.

And here we are, now having to create more programs in order to save our would-be rescuers. Can there be any doubt of the wisdom of Ludwig von Mises in his Critique of Interventionism where he argues that all government interference in the operations of the free market will merely lead to bigger problems later, which the government must then solve with even more interference. According to Mises, all attempts at intervention lead to the same place, Socialism. And here we are. Watching the Republicans, the champions of the “free market”, back the biggest interventionist step ever proposed.

Life is full of ironies, but not greater than the ironies of the public sphere. Some hypocrisies are to be expected. After all, this is politics. But I’m sure that the Japanese, who were advised by the Americans to just let the chips fall where they may when their crisis hit, are noticing that we don’t take out own advice very well. But for me it goes beyond irony and hypocrisy that the Republicans continually berate the Democrat’s for being Socialist as they aggressively expand the size and scope of the federal government. To me it proves that the American people have lost the political will to force their politicians to own up to their promises. Thus we are left with people’s perceptions of their government and its actions determined not by the actions themselves but rather what the politicians tell the people their actions mean. According to the Republicans, bailing out a failure caused by three government created entities is merely what must be done to save the “free market” from itself.

I started this piece with a quote from Star Wars. As a science fiction person I would like to close it with a quote from another piece of SciFi, George Orwell’s 1984. Orwell, like Mises, foresaw the government’s continual encroachment into our lives, just as he foresaw that the government would shape people’s perceptions by telling them that something was it’s opposite. And so I want you to keep in mind our “free market” Republicans, their “War on Terror”, and their often trumpeted habit of being fiscally responsible when you hear that:

WAR IS PEACE
FREEDOM IS SLAVERY
IGNORANCE IS STRENGTH