Don’t Underestimate the Creativity and Shell Game Trickery of the Central Planners

(Updated below)

From the interview: “MI: What do you expect central banks to do going forward?”

Franklin: “I say, you underestimate the creativity and shell game trickery of the central planners…”

I have come to conclude this is quite correct.  And we may be living in this quagmire for far longer than seemed likely in 2008 / 2009.

Rothbard, from the final chapter of his book “For a New Liberty”:

“Indeed, we can confidently say that the United States has now entered a permanent crisis situation, and we can even pinpoint the years of origin of that crisis: 1973–1975.  Happily for the cause of liberty, not only has a crisis of statism arrived in the United States, but it has fortuitously struck across the board of society, in many different spheres of life at about the same time.”

This was almost forty years ago – and it has been more than forty years since Nixon dumped gold.  Yet, “the creativity and shell game trickery of the central planners” has found no limits.  In the grand sweep of economic history, is 2008 a bigger shock than 1971?  I think not.  In a couple of centuries, when the follies of this time are chronicled, which chapter will get more attention?  Yet the world has continued spinning, for 42 years and counting.

What stops central banks from monetizing more debt?  Only politically unsustainable price inflation (and perhaps someday enough of a destruction in the average standard of living, e.g. a global Greece).  Yet, they have found ways to create virtually unlimited monetary inflation without any politically painful price inflation.  As the global economy now perpetually stands on the precipice of recession / depression, with the impact on prices that the lower demand implies, monetary inflation has more leeway. 

One of the biggest costs of the current path is the lower standard of living driven by resources consumed in bad investments – both government and corporate: an almost continual mal-investment without the necessary intervening correction. Yet, by many measures, we have been living in a stagnant standard-of-living condition for several decades…and it goes on.

The central planners have many options and possibilities to prolong and extend the system.  Ultimately, when all else has run its course, what stops central banks from writing off sovereign debt?  A system re-set, all within the sanitary walls of the system.

I try to think of the negative ramifications of such an act by central banks – I don’t mean theory, I mean real ramifications to how individuals act day in and day out.  If my bank account still functions (why wouldn’t it?) and if the government can still borrow (why not, with less outstanding debt and a central bank to monetize it?), what changes?

I can’t find any negative practical, day-to-day ramifications of a central bank “forgiving” any asset on its balance sheet, but I am open to suggestions.  Eventually, inflation or stagnation will force the issue – but if the write-off happened tomorrow, would it end the world?

In the meantime, I will quote Franklin once again, as I believe his suggestion should be given weight: “I believe it would benefit the libertarian movement, small a group as we are, to focus, rather, on the inequities of cronyism and the evils of oligarchical evolution.”

The issue of inflation is as much a moral and ethical one as it is a pragmatic, economic one.  This was the value of Rothbard over many of his Austrian predecessors – he introduced an ethical component to liberty.

To close on a positive note: this will eventually end, as it must – with a breakdown of the state and centralized control.  It just may not be as fast as many advertise or hope, but it is certain to come.  Again, from Rothbard:

“But such long-run considerations may be very long indeed, and waiting many centuries for truth to prevail may be small consolation for those of us living at any particular moment in history. Fortunately, there is a shorter-run reason for hope….

“The clock cannot be turned back to a preindustrial age….We are stuck with the industrial age, whether we like it or not.

“But if that is true, then the cause of liberty is secured.  For economic science has shown, as we have partially demonstrated in this book, that only freedom and a free market can run an industrial economy.  In short…in an industrial world it is also a vital necessity.  For, as Ludwig von Mises and other economists have shown, in an industrial economy statism simply does not work.”

Sooner or later, this centrally planned economy will not be able to avoid some terrible combination of inflation and stagnation – perhaps age demographics will end up forcing the issue.  But, as Franklin put it so well: don’t underestimate their creativity.

It may be much “later” not “sooner.”

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 “…if the debt is forgiven, there will be consequences - namely, for those who relied on this as income…”

But if it is only the debt held by the Fed, how does this apply? The Fed doesn’t need the income; they have many sources of possible liquidity.

“…and potentially for the ability of governments to continue financing their borrowing in this way…”

This might be true, for a time. Italy and Argentina have never had to wait long to borrow after one of their many defaults. Then again, the Fed can keep buying without concern of the credit history of the borrower – can’t it?

It seems to me that the solution to this possibility of a perpetual motion money machine might only come when there are too many dependent relative to the number of independent – largely, but not solely, driven by demographics.