News & Analysis
Central Banks Can't Stop Global Unraveling
Don't go wobbly on us now, Ben Bernanke (left) ... Mervyn King, the Bank of England's Governor, seems strangely alone in ... seeing the absurdity of a recovery strategy where everybody tightens at once and surplus states keep on dumping excess capacity abroad. "I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can't be true of everybody," he said. The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract. ... Fed chairman Ben Bernanke told us in his 2002 speech "Deflation: Making Sure It Doesn't Happen Here" that: 1) Japan's slide into deflation was "entirely unexpected", and that it would be "imprudent" to rule out such a risk in America; 2) "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted"; 3) that a "determined government" has the means to stop deflation, if necessary by use of the "printing press". Yet here we are, facing exactly that risk, unless you think one good quarter of inventory rebuilding has conjured away our debt bubble. The one-off inflation blip caused by a doubling of oil prices is already fading, revealing once again the deeper forces of deflation. Core prices fell 0.1% in January. They plummet from here. So why has Bernanke broken ranks with King and begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008? Have critics in Congress and the media got to him? Has China vetoed QE, fearing a stealth default on Treasury debt? Don't go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench – as they must – their central banks must stay super-loose to cushion the blow. Otherwise we will all sink into deflationary quicksand. – UK Telegraph
Dominant Social Theme: Liquidity is necessary to avoid a deflationary depression.
Free-Market Analysis: This article by the Telegraph's best financial writer, Ambrose Evans-Pritchard, is a stunner because it shows us the fallacies of Keynesian economics in real time. The article, when we picked it up initially and decided to analyze it, wasn't getting a lot of play, but then the Drudge Report posted a link as well. But even though we try not to cover articles that are too well disseminated, we can't resist with this one. Does Evans-Pritchard believe what he writes in this article? We suppose it is obligatory if he wishes to keep his job. Mainstream media does not take kindly to free-market Austrian monetary analysis.
But we do not write for the Telegraph, and we don't have the pressures that Evans-Pritchard evidently writes under. We have come to quite different conclusions, therefore. We are learning as we go. Yes, every day we observe the differences between current reality and analyses of the Great Depression of the 1930s, especially as regards America. We are increasingly in a position to make a determination over what was covered up or twisted to buttress certain arguments. Since we have written about these issues – and speculated about them for several decades – the ability to live through them, while exceptionally painful is also in a sense gratifying.
For instance, there are those who maintain that the Roaring 20s was a time of monetary scarcity, and that a lack of money printing led to the market crash and the Depression. This in fact is a quasi-Keynesian argument so far as we can tell, designed to support the idea that more fiat money is always better (and if they'd only printed enough in the 1920s, the Depression would never have happened). But now, based on real-life observations in the 21st century of the current financial crunch (and others before it) the idea that the Roaring 20s was a time of monetary scarcity is hardly credible to us.
Then there is the monetarist perspective – that the Fed, by tightening in the 1930s, or at least not loosening enough, turned a downturn into a disaster. This was a far more feasible scenario to us and others, and has been vehemently debated for decades. But now we have had the opportunity to watch a major credit crisis unfold in the 21st century. Lo and behold, we have seen to our satisfaction that it has NOTHING to do with monetary policy after-the-fact and everything to do with an over-printing of fiat money for months, years, even decades, prior to the latest great unraveling.
Murray Rothbard and the Austrians had it right after all! Friedman had it wrong. It is the overprinting of money that causes the crash – not central bank tightening or other maneuvers late in the day that "trigger" what was actually unavoidable. It is the unrestrained build-up of fiat money in the system that causes the problem. Yet Evans-Pritchard – a reporter of incisive monetary vision – sees none of this. This article of his, excerpted above, is a funny combination of monetarist and Keynesian theory – for both theories attribute to central banks the ability to ameliorate or even avoid a lengthy depressive economy worldwide with the right series of monetary actions.
Read it for yourself. Central banks, he writes, have to print money fast and furiously and make sure that there is enough credit and money available to avoid a dread "contraction." Has he been living through the same financial crisis we have? There are several obvious problems with this analysis, in our opinion. First, according to Austrian monetary theory it is GOOD if there is disinflation or even deflation during an economic downturn. This means the money that people have lasts longer and gives them additional capital opportunities. Second, and perhaps more important, central banks have no ability to stuff the cooked carcass of a moribund economy, locally or globally, with cash and expect it to waddle to its feet and take flight.
This has been the most important insight. And doubtless many Bell readers and feedbackers have reached the same conclusions we have simply by living through this horrid experience. There is no way, as we see it, that central banks can print enough money to make things right. The distortions of the economy go back a half-century or more. The amount of material goods, of wrong-headed industrial and investment decisions, of misaligned resources are deeply rooted indeed. To some degree, printing money may prop up some of the worst of these excesses for a period of time. But once the economy has decided to purge – it will purge. Does anyone believe for instance that GM is going to survive and thrive by building tiny, green, government-mandated cars?
Mercantilist central banks can print all the money they want, but in a Great Unraveling such as we have today there is nowhere for that money to go. People have realized that there is ruin all around them. The scales have fallen from their eyes and they understand for the first time in years – perhaps in their entire lives – that much of what they understood to be normal and natural in society was the product of the overprinting of fiat money, of monetary stimulation in fact. Many cannot put it into words, exactly, but they "feel" it nonetheless and act accordingly. They pay down debt. They do without. They live simper lives.
We are paleontologists transported back to the age of dinosaurs. We can see clearly now, what we only speculated about before. The Austrians were correct. Evans-Pritchard is wrong. Once an economy has been driven fully off a cliff by fiat money there is no way to salvage it by printing yet more money. These are fictions prated by Keynes after-the-fact in the 1930s to justify whatever it was that politicians wanted to do at the time. Neat fictions wrapped in impenetrable numerology and other mumbo jumbo.
Central banks can print all the money they want. But there is nowhere for the money to go. Economies must purge themselves. Government "stimulus" programs only prolong the pain by propping up businesses that need to fail – simply put, they will attract capital that ought to go to healthy new businesses. Depressions and recessions are economic signals too, and their messages are easy to foul up. Let government inject trillions in jobs programs, let central banks distribute more trillions to too-big-to-fail entities, and the market itself will grow confused and aimless. Real capital will be dissipated. Growth will never occur, save in the most artificial and manipulated sectors of the marketplace –equity markets and in multinational sectors where globalist entities do government business or are involved in various military and security endeavors.
Conclusion: This is what happened in Japan. This is what is happening now in America. This will surely happen in Europe as EU-crats prepare to bail out Greece and Lord knows how many other countries. A short, terrible downturn may have been turned into a decade's worth of agony or worse. Of course, it doesn't have to be that bad for everyone. We can still buy gold and silver and take delivery. We can trim our debts and streamline our finances. We can do for ourselves, all the sensible things that government – and those who stand behind it – will not.
Posted by Eric on 03/04/10 09:34 PM
Sadly we have been building the "public works projects such a the CCC and WPA but have reintroduced them as "unemployment insurance" (which more honorable in times past would not accept - it being the public dole). The military not only doesn't produce valueable goods but destroys them. The boarder patrol produces nothing but consumes. TSA clones who again produce nothing and on and on. Make work "jobs". The recognition of these "jobs programs" seem to be lost on the many.Where does that put us in context to the last memorable depression?
Posted by John Regan on 03/04/10 06:39 PM
To John Accord:
If you're interested, I have drafted a constitutional amendment for the US to basically cancel pretty much all debt. You would have to amend the constitution, though:
See Amendment 14, section 4.
If you wanna read it email me:
jregan3@Click to view link
Posted by Chris on 03/04/10 05:01 PM
Finally someone takes up AEP for this neo-Keynesian stimulus pablum. He has actually been writing this kind of analysis in many articles for a while, and it always comes to the same conclusion.
So, he must believe it, or show real fealty to the masters.
One quibble: "'This is what happened in Japan."
Yes and no. It did, but the circumstances were quite different.
When they started down this road 20 years ago, and even up to today, the country was one of savers, with large real savings.
Balance of payments, they had large surpluses.
The actions taken do mirror though, however, we have not yet seen the large public works projects. Here all that money was diverted to Wall Street, they diverted into concrete in the hills.
Posted by David C. on 03/04/10 04:10 PM
The manic debt build-up was forecast in 1978 by Robert Prechter and A.J. Frost in their "Elliott Wave Principle." Prechter note(d) that public embrace of such things is cyclical in a fractal pattern, and that the degree of trend we would top after the bull market (in social mood, reflected by asset markets) was ending a 200 year uptrend.
If the notion that mass psychology plays a role in all human social behavior (economics, politics, fashion, pop culture) appeals to you, you owe it to yourself to examine the info at Click to view link where much of Prechter's greater exposition is available for free.
The last time Western Civilization experienced a top at this same degree of trend was characterized by John Law's Mississippi Scheme in France followed by the South Sea Bubble in England in 1720. The latter ushered in a 68 year bear market during which several depressions and lots of political upheaval occurred. One could make the case that the Terror of the French Revolution was a latent result of France's ensuing social troubles after John Law wreaked havoc on its finances.
Food for thought.
Posted by Anonymouse on 03/04/10 11:44 AM
We are not going to fascism, fascism was a combination of utopianism, ultra-violence and racism, absolutely specific to the early 20th century.
Nothing like that exists today. What's really happening is that an oligarchy is stealing everything. It doesn't even have anything modern about it!
"Common ownership of the political system is impossible where the people have nothing in common. It can only result in massive corruption and ultimate bankruptcy of the system. With nothing left in common with the people, or each other, the political oligarchies are intent on looting the state as quickly as they can, sending public finances into a tailspin. They are no longer concerned as a class about the long-term survival of the system that preserves their power, as they can always move on to some other home with the wealth they have plundered."
Click to view link
Posted by Cathy on 03/04/10 09:06 AM
You state the "emergence of a non democratic system ie fascism with simplistic solutions" is a worry for you. I entirely agree except that this is precisely what is happening in the U.S. at the moment. In fact, the fascism that resulted from the weak and socialist government of Germany in the 1920s was elected democratically.
If you take the time to read F.A. Hayek's Road to Serfdom, you will find references to the nationalization of the German and Italian economies at the time that are eerily similar to what is happening currently around the world. Also, this totalitarianism was not the result of a short, sharp downturn. Rather, it was the result of years of depression and false promises by a weak and floundering government. Precisely what the Obama administration represents.
Posted by Mikha'el on 03/04/10 09:05 AM
As a student of the bible I see two relevant things here.
1) God forbids making interest off money. I suppose people here will try and talk about how interest rates are logical because if investors didn't lend that money, they would be able to put it to use for themselves, thereby making more money. However, look at the world around you. Fractional reserve lending and interest make this world a daunting place for the poor (people and nations). It is no wonder the rich get richer and the poor get poorer. Living according to the biblical rules of money (there are over 2000 passages in the bible concerning money) would make this world a better place for all. If you say, well, nobody would lend...well, that would make prices more reasonable. If you want examples of this, see: college education costs and health care costs.
2) No political system will ever work. In I Kings, Israel wanted to install a man to rule over the people. God accounted it to Israel as wickedness and gave them their leader. You see the same attitude in most people today. They desire a leader. Where do the blind lead the blind? Should not God rule over you instead of man on this day? If you say, I don't believe in God and I don't want a theocracy, I would tell you, fine, go live in peace, but no other system will ever work and this world is a painful example of what happens when man doesn't follow God's teachings. Yes libertarianism would work far better than any armed statist 'representation', but if libertarianism were such a viable ideology, why hasn't any territory tried it?
Is it any wonder Jesus called money filthy and whipped the money changers? Let he who has an ear, listen.
Posted by Andrew on 03/04/10 08:48 AM
Ah, what I could not put into words. Thank you.
Posted by LibertyVini on 03/04/10 07:17 AM
"For the Keynesian the economy is managed by human intervention and whirring printing presses for "publishing" money, while the Austrian School claims with Adam Smith that the invisible hands of God and Greed will somehow prevent all economic instability, to be sure after "adjustment problems"."
Hi Andrew,The Austrian School, as I understand it, says no such thing. It does say that sound money, honest banking, and zero government intervention in markets will avoid driving economy and civilization off a cliff, as we have recently witnessed the monetary school doing, and once in the ditch, Austrian School policy would avoid keeping the economy in the ditch, as Keynesian policy is now doing.
Posted by Daneaglefoot on 03/04/10 03:44 AM
A great article on common sense. What was Einstein's quote? The definition of madness is doing the same thing over and over expecting a different result. It's pointless tinkering with the system when the system itself is completely flawed.
What was it that Greenspan said in an interview? "There is no better system than the one we have now" The West spearheaded by America has been living beyond its means for years and now there is nothing on this earth that can stop what's about to happen. The greatest ponzi scheme in history will come crashing down and if on the assumption you're a believer (I'm not) not even God himself can stop it, irrespective of whether Goldman Sachs does his work).
The greatest deleveraging in the history of mankind. The United States are at the top of that ponzi pyramid, before them it was Great Britain. The Federal Reserve, The Bank of England. Fiat currency has been exposed for what it really is, nothing more than a lie and ingenious lie devised by but a few to enslave the masses.
There is one thing we must not do and that is to underestimate the intelligence these few people have. They understand that this planet is dominated by fear, greed, irrational exuberance a system devised to manipulate the ignorant and weak. Money as principle that never legally existed in the first place thanks to fractional reserve banking. Interest that can never ever be repaid because there is simply not enough principle money.
The music has stopped and America has ultimately run out of chairs. What was it a great Native American Chief once said. "How powerful the language of the whites to make right look like wrong and wrong look like right. Before our white brothers arrived to make us civilized men,we didn't have any kind of prison. Because of this, we had no delinquents.Without a prison, there can be no delinquents.We had no locks nor keys and therefore amongst us there were no thieves.
When someone was so poor that he couldn't afford a horse, a tent or a blanket, he would, in that case, receive it all as a gift.We were too uncivilized to give great importance to private property.
We didn't know any kind of money and consequently, the value of a human being was not determined by his wealth.
We had no written laws laid down, no lawyers, no bankers, no politicians, therefore we were not able to cheat and swindle one another.
You know its funny...We were really in bad shape before the white man arrived and I don't know how to explain how we were able to manage without these fundamental things that (so they tell us) are so necessary for a civilized society."
John (Fire) Lame DeerSioux Lakota - 1903-1976
The day we decided to exterminate a civilization that only took what it could return, that only made decisions ensuring 7 generations were taken into consideration, was the day we accelerated our own destruction. I now openly challenge anyone to disagree with me, I can stay silent no longer.
Posted by Acudoc on 03/03/10 09:51 PM
At first thought, more paper money sounds like a good idea--we can immediately buy more things. But as Bastiat pointed out, good economics looks beyond the immediate consequences and tries to fathom the long-term effects. Unfortunately for us, "long-term" in the lexicon of politicians means the next election cycle.
Posted by Scottleier on 03/03/10 11:50 AM
Another great article by the editors of the Bell, keep up the great work. I couldn't help but think of the decades of malinvestment it takes to get to this stage....
Too bad Keynesian economics doesn't teach students what malinvestment is, how it happens, and why ?
There are two sides to every story, ie. Keynesian economics and Austrian Click to view links no wonder the experts are confused?? They have only been taught to play the game with half a deck of cards.
Posted by Jaxn44 on 03/02/10 10:50 PM
Japan's debt was almost 100 percent domestically financed....foreigners own most of our debt. Japans debt problems started with high interest rates which were dropped....ours were low going into this crash. Conclusion...foreigners will dump debt and cause a dollar crash once they sense that we cannot even pay the interest on our bonds [now]....hyperinflationary depression is MUCH more likely. There hasn't been a real deflation in any currency since the gold was removed as backing....ever.
Posted by Liberty Belle on 03/02/10 06:28 PM
Lance: "...continuously creating additional fiat alchemy..." nice! I love that!
Posted by Bruce on 03/02/10 01:31 PM
Most tsunami waves have an origin far off. Yet, when they reach your shore the ocean recedes first before it rushes in wreaking destruction. So it is with fiat. If we see deflation, look out for the inflation wave.
Reply from The Daily Bell
Posted by Zippy The Pinhead on 03/02/10 01:03 PM
I read AEP the other day and was quite taken back with his call for more (thank you sir may I have another!) QE. Is this not the same AEP who has focused more attention on gold, the sovereign debt of PIIGS, and our (world) debt load.
As you stated neither of us write for the Telegraph and I'm not ready to throw AEP under the bus, this however is quite disheartening.
Guilt is a rope that wears thin.-Ayn Rand
Reply from The Daily Bell
You had the same reaction we did.
Posted by Lance E. Schultz on 03/02/10 11:04 AM
Rosey explaints it best. This is not your fathers oldsmobile. This is not a run-of-the-mill inventory recession but a debt-driven balance sheet depression both in the home at the dinner table [and as long as CUSIP security ID's exist in the public sphere], throughout the sovereign treasuries continuously creating additional fiat alchemy only to purchase it back themselves under the cover of night.
Velocity = 0.001; EU is binding its brotherhood together into its ancient collectivist union; Uncle Samuel is buying his own treasuries (ala Mr. Bernanke's mystery auctions) and the woman goeth about the streets.
Reply from The Daily Bell
Excellent. Though the first sentence is a tad long.
Posted by J. M. Garvey on 03/02/10 10:43 AM
To Peter M. Lutterbeck, who commented that "[n]o politician is around to bite the silver bullet and tell it as it is. If he did he just would not get re-elected":
Friend, please "google" Ron Paul. Or go directly to
Click to view link, Click to view link, Click to view link,
and, not least, the Daily Bell.
Regarding the brief mention of Dr. Paul in the 02/28/10 interview of Jim Rogers, I"like many other liberty-minded Americans"haven't personally detected anything unworthy of admiration in "what [Paul] says," and his having the gumption to say it I daresay a million of us find positively heroic, so I would very much like to know what, specifically, th' Bell thinks Rogers finds wanting there.
Thanks for all the good reading material and complementarily uplifting photo backgrounds.
Reply from The Daily Bell
It is probably not what Paul is wanting so much as what Rogers is willing to say. If you read the interview carefully, you will see he is actually a very cautious man within the ambit of his free-market beliefs. At his level, he may find it easy to make enemies, and powerful ones at that. And Ron Paul is no doubt controversial within such circles.
Posted by Dave Howley on 03/02/10 10:30 AM
"Neat fictions wrapped in impenetrable numerology and other mumbo jumbo".
This is what the average American buys into when the MSM lingo is being tossed around.
Posted by DRUNK AND DISORDERLY on 03/02/10 10:09 AM
Whether one would benefit from inflation or deflation depends on whether or not one is holding dollars or other IOU's. Holding any paper in the coming inflation is a poor option. Our government has shown every intention of continuing the course of monetary inflation. Prices are moving up regardless of the false message of manipulated government figures, and will probably accelerate.
Gloom and Doom? Nope, my personal happiness is derived from understanding and preparing for the inevitable disastrous consequences of a fiat currency.