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On August 15, 1971,
President Richard Nixon declared that the United States would no longer honour
its promise to exchange US dollars held by foreign central banks for gold at a
fixed price of $35 an ounce. The innocuous term ‘Nixon closed the gold window’
that is now widely used to describe this act does not quite convey its
significance. (Was something to be stopped from going out or from coming in
through the window? Can the window be reopened again?)
What Nixon did was cut the last remaining official link between the
world’s leading reserve currency and gold and thus remove the last constraint
on fiat money creation.
Was this a big deal? – It was very big deal. In fact, we are only now
beginning to realize the full consequences of it. In fact, the present crisis
is nothing but the endgame of this system, or non-system, of this, mankind’s
latest and so far most ambitious, experiment with unrestricted fiat money. The
first truly global paper standard.
Nixon knew that it was big. On TV that day he felt compelled to reassure
the American public that this was only temporary and that the purchasing power
of the dollar was secure. Forty-one years later we are still on the same system
(or non-system), and the dollar has lost 80% of its purchasing power.
This wasn’t really a “system”, however. No one designed it. It was
merely the result of political opportunism. But, the mainstream economists, who
weren’t even involved in designing this system (or non-system) today tell us
that this system is great and that it is to our advantage. We should be
grateful for it.
The 80% drop in purchasing power quoted above isn’t the whole story.
That is only the consumer price index. For the past thirty years, a lot of the
newly created money was channeled predominantly not into the markets for
consumer goods but into the stock market, the bond market, the real estate
market, and again the bond market. This created illusions of wealth. It also
created a lot of debt, overstretched banks, a gigantic financial industry,
various bubbles, and yet more debt. It did so around the world. And whenever
this house of cards looks like it could come crashing down on us – we print
more money!
Simple. What could go wrong?
Of course, there was also real economic progress over those forty-one years. Entrepreneurship, trade, innovation, saving, and all that old fashioned stuff that modern, enlightened economists don’t talk about any more. But on top of that real prosperity an ever thicker layer of make-believe prosperity accumulated. And our economists have adapted to this new reality – a reality created not by them, or their theories, but simply borne out of cynical political expediency – and become experts in the various techniques of governments to create illusory prosperity and short-term growth spurts. Stimulus. Growth through low interest rates. Growth through more debt. Growth through currency debasement. Growth through fiscal policy. Growth through monetary policy.
Modern economists don’t know capitalism. They certainly don’t care about
it. If the economy grows it is because of good policy, which means low interest
rates and stimulus. If the economy doesn’t grow, it is because of bad policy,
which means interest rates are too high (even if they are zero) or the central
bank does not print enough money. Since Nixon ‘closed the gold window’, we have
progressively replaced savings with cheap credit, the market with policy, and
entrepreneurs and innovation with the FOMC and the G20.
Since 1971, the number and intensity of banking crises around the world has
gone up markedly, according to Carmen Reinhart and Kenneth Rogoff, hardly
anti-establishment economists. Debt levels exploded. The ten years up to the
start of this crisis in July 2007 have seen house prices in the US rise ten
times faster than over the previous one hundred years.
Look around the world today. Is it a coincidence that all major central
banks are at zero interest rates to support bankrupt banks and bankrupt
governments the world over?
Bizarrely, today it is the advocates of sound and hard money who are
made to explain their atavistic ideas. Gold standard? To establishment figures
like Lord Skidelsky, the advocates of a
gold anchor are like druids who dress in strange clothes
and worship ancient gods. An enlightened modern economist should worship at the
altar of Keynes, the IMF and big government. Ex-central banker DeAnne Julius simply knows that it would be foolish to
return to a gold standard. All power to the bureaucracy!
Even more bizarre is the willingness to absolve the political class of
their responsibility for the disaster they have inflicted on us. People
actually look to the political class to now save us from this ever-growing
mess.
There is something disturbing and sickening about the pathetic reverence
of commentators, analysts and economists for the policy bureaucracy, the
central bankers, the G20, the finance ministers; how every word they say is
scrutinized for any hint of another clever scheme, another policy initiative
that could make all our past mistakes go away and that could make the status
quo operable again. “The weak labour market could force the Fed into action,”
as if the Fed had the key to the solution in some drawer, as if all that was
needed now was another round of QE, another rate cut, another twisty price
manipulation.
I wonder if forty years of paper money have made the politicians bolder
and the economists dumber. But maybe at this stage they are both simply getting
more desperate.
Nothing is more dangerous to your personal and material well-being and
your liberty than desperate politicians. Desperate politicians think that the
end justifies the means. No constraints on their ad hoc decision-making can be
tolerated. Laws must be changed if they stand in the way.
On October 27, 2010, Chancellor Angela Merkel promised the German
parliament that the bailout fund EFSF (European Financial Stability Facility –
you couldn’t make this stuff up!) was a temporary thing. As temporary as
Nixon’s closed window, one assumes. In February of 2010, Greece had already
been bailed out the first time – in contravention of the no-bailout clause in
European treaties. Now a bailout fund was needed. But not to worry. This is
only temporary. And we know what we are doing.
Of course, as more bailouts were needed, the EFSF grew bigger. It will
now be replaced with the ESM – the European Stability Mechanism (no sniggering
please). And this thing is, of course, permanent. (The German Constitutional
Court will rubber-stamp it soon. Not to worry.)
What do our commentators and mainstream economists have to say about it?
– Great! We need a big bazooka! Merkel should do more!
EVERY law, regulation and restriction that was part of the original
set-up of EMU has now been broken.
The limits on budget deficits and overall public debt limits (Maastricht
Criteria)? –Ignored.
The no-bail out provision? – Ignored.
The ban on ECB buying sovereign bonds to support fiscal policy? –
Circumvented with the flimsiest of excuses.
Let’s face it. There is no master plan here. The political class is
losing control. There is not even a conspiracy. There is a lack of control, of
direction and of design. One quick-fix after another, and every one brings us a
step closer to a very nasty endgame.
For the final option is always the same, not only in the Euro Zone,
where new ‘hope’ just arrived in the form of Mario Draghi’s apparent
willingness to buy more government debt, but also in the US, the UK, Japan, and
China: print more money.
If you have no (or little) debt, if you are a productive citizen and if
you have saved a bit, you are already in the crosshairs of the policy
bureaucracy. Either your property will get taxed away or inflated away.
Probably both.
The biggest threat to your property and to your individual liberty does
not come from markets and not even from the bankers. It comes from politics.
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