Friday, December 13, 2013

Philipp Bagus and the End of the Experiment

Dr. Bagus has written a very good overview of the current central banking induced mess and the possible methods of resolution.  None of the options are pleasant; of course, there are no pleasant options at this point.

This is a very good and thorough post by Dr. Bagus.  I offer a few thoughts (and forgive all of the links, but this comment is already too long):

A paper currency system contains the seeds of its own destruction. The temptation for the monopolist money producer to increase the money supply is almost irresistible.”

Combining these two statements into one would improve the accuracy (or perhaps just the clarity) of the statement, in my opinion:

A [government enforced monopoly] paper currency system contains the seeds of its own destruction.

The problem is the monopoly, not the paper.  Both Mises and Rothbard offered that a competitive banking environment would be an effective and sufficient means by which to check excess credit creation. 

In any case, a modern economy will demand paper currency – more specifically its digital equivalent.  The only question is how to keep such a system in check.  It seems to me the two options are regulation by market or regulation by government.

It looks like even the slowing down of money printing (now called “QE tapering”) could trigger a bankruptcy spiral.”

This would likely trigger a reduction in asset prices, but it isn’t clear to me – in the US at least – that this could trigger bankruptcies – at least not in the banking sector (bankruptcies in other sectors have often been managed in the normal course). 

In the US, with the two trillion dollars of excess reserves in the banking system, it isn’t clear to me what would happen specifically regarding bankruptcies if tapering was to begin – or even more drastic, a reduction in the Fed’s balance sheet (which I don’t believe will ever happen, but only am curious from an intellectual standpoint).

I will be grateful to anyone who can point to a well thought-out post on this specific issue – tapering / central bank balance sheet reduction in an environment of excess reserves.

From Bagus’ list of seven possible options:

3. Repudiate Debt. Governments can also default outright on their debts. This leads to losses for banks and insurance companies that have invested the savings of their clients in government bonds.

What happens if it is only the debts owed to the central bank which are repudiated?  Or, more palatable, if the central bank always rolls over the maturing securities?  No banks or insurance companies would be directly affected.  It strikes me that this game can go on for quite some time – at least until the resultant reduction of productivity (due to resources being increasingly absorbed by the government) causes sufficient anger in the general population.

Any of the seven options, or combinations of two or more options, may lie ahead.

Dr. Bagus has laid out the possible options quite well.  Magic, is not an option – despite the hopes on this topic of some of the more popular pundits, including Ambrose.

Before it gets to the point of a runaway inflation, governments will increasingly ponder the other options as these alternatives could enable a reset of the system.

They will certainly do everything in their power to maintain faith in regulatory democracy, as this system has proven very effective in maintaining control over (and therefore extracting the wealth of) the middle class.

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