The Money Monopoly

The MIT Cabal

By Pater Tenebrarum

Many of our readers have probably seen this widely circulated article at the WSJ: “Secret Talks Behind Central Banks' Bets”, in which the Fed's favorite  press mouthpiece Jon Hilsenrath talks about the 'secret meetings' the world's central bankers regularly hold in Basel at the BIS (the Bank for International Settlements, the nexus of global central banking).

So these unelected bureaucrats, who are among the most powerful men in the world due to their control over the fiat money system, hold 'secret meetings' where they discuss their policy steps and agree on coordinated actions far away from the glare of the public eye.

As is usually the case with mainstream articles of this sort, Hilsenrath's article is actually a kind of promotion: it is in not exactly critical of the fact that these men make decisions affecting the lives of billions of people in secret with no accountability whatsoever. After all, we are supposed to accept the State's monopoly on money without questioning, including the manner in which it is organized. As Hans-Hermann Hoppe writes on this topic:

“You can reach the desired independence of taxpayers and tax payments and of banks, if only you establish yourself first as a territorial monopolist of the production of money. On your territory, only you are permitted to produce money. But that is not sufficient. Because as long as money is a regular good that must be expensively produced, there is nothing in it for you except expenses. More importantly, then, you must use your monopoly position in order to lower the production cost and the quality of money as close as possible to zero. Instead of costly quality money such as gold or silver, you must see to it that worthless pieces of paper that can be produced at practically zero cost will become money. (Normally, no one would accept worthless pieces of paper as payment for anything. Pieces of paper are acceptable as payment only insofar as they are titles to something else, i.e., property titles. In other words then, you must replace pieces of paper that were titles to money with pieces of paper that are titles to nothing.)

Under competitive conditions, i.e., if everyone were free to produce money, a money that can be produced at almost zero cost would be produced up to a quantity where marginal revenue equals marginal cost, and because marginal cost is zero the marginal revenue, i.e., the purchasing power of this money, would be zero as well. Hence, the necessity to monopolize the production of paper money, so as to restrict its supply, in order to avoid hyperinflationary conditions and the disappearance of money from the market altogether (and a flight into "real values") — and the more so the cheaper the money commodity.

In a way, you have thus accomplished what all alchemists and their sponsors wanted to achieve: you have produced something valuable (money with purchasing power) out of something practically worthless. What an achievement. It costs you practically nothing and you can turn around and buy yourself something really valuable, such as a house or a Mercedes; and you can achieve these wonders not just for yourself but also for your friends and acquaintances, of which you discover that you have all of a sudden far more than you used to have (including many economists, who explain why your monopoly is really good for everyone).”

The important point here is that one should not make the mistake of believing that the money monopoly is an abstract, value-free arrangement. It benefits certain people and certain groups and that is the reason why it was established in the first place. There would be no requirement for such a monopoly in a truly free society; people would be free to choose for themselves what kind of money they wanted to use. That this monopoly exists proves ipso factothat our society is not truly free.

Along similar lines, one should refrain from regarding the State as somehow being synonymous with 'we' (that is to say, all of us). The State is not some abstract, inherently benevolent presence hovering around us in order to serve us. It is populated and led by people who have their own agendas and desires. It is the one actor in the economy that claims of itself to be fully legitimized to obtain resources by political instead of economic means – this is to say by coercion and the threat of violence instead of by voluntary exchange. That this is so is due to its historical roots: the State has come into being by means of violent conquest, the subjugation of one set of people by others by military means. Over the course of its development from its feudal antecedents to its  modern 'democratic' version, it has never lost its essential characteristics. No-one inhabiting a region over which a State claims a territorial monopoly can possibly 'opt out' from it. We also know from practical experience that the right to vote does not substantially alter this fact.

The money system too is ultimately enforced by the threat of violence. If we had competing currencies issued by private entities, then we would have freedom in monetary matters – however, as Hans-Hermann Hoppe relates above, a fiat money system cannot possibly hope to prevail as a viable alternative if it has to compete. Hence the coercive monopoly. 

The Same Errors All Over Again

We want to take a look at a few of the facets of modern-day monetary policy matters discussed in Mr. Hilsenrath's article. As Hilsenrath writes in connection with the agenda lately discussed at these secret talks:

“Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe's churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.

Their monetary strategy isn't found in standard textbooks. The central bankers are, in effect, conducting a high-stakes experiment, drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s.

While many national governments, including the U.S., have failed to agree on fiscal policy—how best to balance tax revenues with spending during slow growth—the central bankers have forged their own path, independent of voters and politicians, bound by frequent conversations and relationships stretching back to university days.

If the central bankers are correct, they will help the world economy avoid prolonged stagnation and a repeat of central banking mistakes in the 1930s. If they are wrong, they could kindle inflation or sow the seeds of another financial crisis. Failure also could lead to new restrictions on the power and independence of central banks, tools deemed crucial in such emergencies as the 2008-2009 financial crisis.

"Will history decide they did too little or too much? We don't know because it is still a work in progress," said Kenneth Rogoff, an economics professor at Harvard and co-author of a book, "This Time Is Different," examining financial crises over eight centuries. "They are taking risks because it is an experimental strategy." (emphasis added)

So this is a bunch of people who all went to the same university, where their views on economics were formed. They are engaged in an 'experiment' involving billions of people, of which it is allegedly not known yet what results it will bring (perhaps it is really not known to these central bankers, but economic theory does have something to say about it).

Then we are supposed to commiserate with the worries expressed by these central bankers regarding the possibility that they might eventually see their ability to do whatever they like constrained ('failure could lead to restrictions'). Mind, we happen to believe that there really is reason to worry that politicians will interfere with central banks, but not in the sense expressed here. Rather, what is emblematic for what to expect is e.g. Japan's new nationalist leader Shinzo Abe, whose main aim is not to 'restrain' the Bank of Japan, but rather the opposite. He wants it to inflate all out.

So what goals are these central bankers pursuing? And what is the 'secret sauce' on which they are basing their fateful decisions?

“The goal is to lower borrowing costs and stimulate stock markets to encourage spending and investment by households and business. But the method is untested on such a global scale, and central bankers have labored in behind-the-scenes meetings this year to size up the risks.

A day after their June dinner here, the central bankers were warned by one of their hosts in a speech to the group.

"Central banks find themselves caught in the middle, forced to be the policy makers of last resort. They are providing monetary stimulus on a massive scale," said Jaime Caruana, general manager of the Bank for International Settlements, where the dinners are held. "These emergency measures could have undesirable effects if continued for too long." (emphasis added)

So the goal is the simple, crude Keynesian precept of 'stimulating spending'. This is supposed to be achieved by altering the prices of securities through monetary pumping, by essentially creating falsified valuations.

This is utterly misguided. First of all, economic growth is not a result of consumption. It is the result of saving, investment and production. It should be obvious that one cannot consume oneself to wealth. In fact, it should be obvious that one cannot consume without first producing, period. The error in the thinking of these central bankers is that they believe that the economy's complex capital structure is a homogenous blob that will simply spring into action if only there is enough consumption spending. It is a variation on the 'accelerator principle' – it is assumed that higher spending on consumption will automatically lead to a kind of leveraged spending on capital goods. It is not pondered at all that the preceding credit boom has actually done very real damage to the structure of production. The boom altered relative prices in the economy: investments that would normally have been eschewed suddenly appeared to be profitable. Factors of production were drawn toward higher order stages of the production structure, with investments concentrating in the 'bubble sectors', chiefly housing and everything related to it. At the same time, a consumption boom got underway, as the higher valuations of houses allowed people to 'extract equity' by using them as collateral for vast amounts of credit. In other words,  we could observe the typical hallmarks of a credit boom: malinvestment of capital and overconsumption.  However, we know that the addition of fiduciary media to the economy could not possibly alter the amount of real resources available for all these investment and consumption activities. People were spending illusory profits: their wealth was a mirage.

So while the economic calculations of entrepreneurs were falsified by the credit boom and they were mistaken in their assumptions about the resources available to fund their investments in higher order goods production, consumers were equally deluded about their wealth and what they could afford to consume. This combination of factors leads effectively to the consumption of scarce capital. As Ludwig von Mises writes (in Human Action, p. 546 f.):

“It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption. One of its consequences is that it falsifies economic calculation and accounting.

It produces the phenomenon of imaginary or apparent profits. If the annual depreciation quotas are determined in such a way as not to pay full regard to the fact that the replacement of worn-out equipment will require higher costs than the amount for which it was purchased in the past, they are obviously insufficient. If in selling inventories and products the whole difference between the price spent for their acquisition and the price realized in the sale is entered in the books as a surplus, the error is the same.

If the rise in the prices of stocks and real estate is considered as a gain, the illusion is no less manifest. What makes people believe that inflation results in general prosperity is precisely such illusory gains. They feel lucky and become openhanded in spending and enjoying life. They embellish their homes, they build new mansions and patronize the entertainment business. In spending apparent gains, the fanciful result of false reckoning, they are consuming capital.

It does not matter who these spenders are. They may be businessmen or stock jobbers. They may be wage earners whose demand for higher pay is satisfied by the easygoing employers who think that they are getting richer from day to day. They may be people supported by taxes which usually absorb a great part of the apparent gains.” (emphasis added)

Hilsenrath writes “the goal is to lower borrowing costs and stimulate stock markets to encourage spending and investment by households and business”. In what way is this different from what was done in the  preceding boom? Is this not exactly the same error all over again? It most definitely is: people are once again to be deceived by illusory phantom profits into spending phantom wealth – which will inevitably result in the consumption of even more scarce capital. The problem is not, as Hilsenrath avers,  that this method is “untested on such a global scale”,  the problem is that the whole idea is harebrained from the outset.  If it succeeds in producing yet another boom, central bankers and their supporters will no doubt once again do premature victory laps and pat themselves on their backs for another 'mission accomplished' (as they did quite frequently in the period 2004 to 2006, while the housing bubble raged and 'all was good'). In reality though they will only have set an even bigger catastrophe into motion. A serious blunder indeed.

To the comment that these policies are only harmful 'if continued for too long':    it is never too late to abandon an inflationary policy. The earlier it is abandoned, the better. However, this would immediately bring back the correction that the imposition of ultra-loose monetary policy has arrested and reversed. This is why it is highly likely that there will be no such abandonment of the policy until it is once again much too late. 

Dangerous 'Men of Science'

Hilsenrath then tells us a little more about the economic views held by these men and where they were acquired:

“Three of the world's most powerful central bankers launched their careers in a building known as "E52," home to the MIT economics department. Fed Chairman Ben Bernanke and ECB President Mario Draghi earned their Ph.D.s there in the late 1970s. Bank of England Governor Mervyn King taught briefly there in the 1980s, sharing an office with Mr. Bernanke.

Many economists emerged from MIT with a belief that government could help to smooth out economic downturns. Central banks play a particularly important role in this view, not only by setting interest rates but also by influencing public expectations through carefully worded statements.

While at MIT, the central bankers dreamed up mathematical models and discussed their ideas in seminar rooms and at cheap food joints in a rundown Boston-area neighborhood on the Charles River.” (emphasis added)

One can of course 'dream up mathematical models' all day long, but one will not take a single useful step in economic science that way. There is nothing in economics that cannot be formulated better in words. After all, it is a social science. It does not concern inanimate things, but thinking human beings acting with purpose.

As to the belief that “government could help smooth out economic downturns”, this is no different from what John Law and assorted inflationists that came after him have believed. It has never been true. Economic downturns are theresult of these attempts to 'smooth economic downturns out', as these invariably involve inflation of the supply of credit and money, which brings about all the phenomena that mark the boom-bust cycle. What happens is that for a while, inflation can create an illusion of 'helping the economy out', as resources are shifted into what ultimately turn out to be uneconomic bubble activities. The end result will always be impoverishment, in the sense that we will end up being poorer than we would have been had there been no boom-bust cycle.

Hilsenrath's tone of voice – which is why we call the article a 'promotion' – seems to subtly suggest that, well, even if those great minds are currently a bit stumped themselves, we should just let them work their magic. Who else could possibly be qualified to do what they are doing? After all, they know how to wield mathematical models and are MIT trained, no less! Even their 'carefully worded public statements' are powerful weaponry, like the magical incantations of a wizard in a fantasy video game. Mere mortals can only marvel at such sublime powers. Who are we to second-guess these wise men?

The reality is though that they are snake-oil sellers. All they have done was to repackage the same hoary inflationism that has been practiced for centuries to no avail in fancy new wrappings (for example with euphemisms such as 'quantitative easing' for what is nothing but plain old-fashioned money printing). If anything, they are witch doctors rather than scientists. As we have mentioned before, sometime in the 1930s economics took a decisively wrong turn and we suffer the results to this day. It is as though astronomers were to recant everything from Galileo onward,  threw their radio telescopes overboard and began to focus on astrology. At least that is how it appears to us –  if it is not magical thinking that informs these decision makers, then what is it?

At least one former central banker seems to have recognized though that something is askew. Hilsenrath quotes former Fed vice chair Donald Kohn as follows:

“There is a lot we don't understand," said Donald Kohn, the Fed's former vice chairman.”

Feel free to say that loud and often, Mr. Kohn. It might help if someone tried to return economic science back to the fork in the road where it began to veer off into meaninglessness and put it back on track. Just an idea.

BIS economists are also less than convinced that the current course will lead to anything good. They appear to speak from experience rather than a theoretical point of view, but at least someone there does take into account that even based on empirical evidence the whole enterprise is highly suspect.

“Economists at the BIS, meanwhile, have grown more skeptical about the central bank tilt. They say their warnings of a credit bubble were ignored before the financial crisis. "Nobody took it seriously," said William White, formerly the top BIS economist.

Now, he said, the central banks may again be steering toward long-term troubles in their elusive quest for short-term growth.”

In terms of their own ability to 'calculate', central banks are akin to socialist islands in the market economy's sea. None of their mathematical models can replicate the workings of the market. It is simply not possible for them to know what to do. That wouldn't bother us, if not for the fact that their activities have real-life consequences that concern all of us. Meanwhile, the mystique surrounding these bureaucrats with their 'secret meetings' and grand designs is wholly unwarranted. They are groping in the dark and in their ignorance are laying the foundations for crises of ever bigger amplitude.