"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens....Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." ~ John Maynard Keynes
Exclusive to STR
December 5, 2008
When someone runs for office under a promise of fiscal reform, the office seeker may try to grab some press by throwing out big budget cut numbers.
Once the numbers make a big splash, the cuts may turn out to be in the category of 'waste, fraud, and abuse,' whereupon everybody rolls their eyes. We've heard this one before.
No doubt there's plenty of waste, fraud and abuse, but is this genius who's just discovered the concept of cutting it from government budgets really going to outdo the hundreds of predecessor geniuses who said the same thing, and then watched it all grow again while nurturing their own pet budget items? It's not that easy.
As a matter of fact, it is that easy. There's a simple, structural way to cut waste, fraud and abuse, not just at every level of government, but in every corporation, big or small, in every industry, politically connected or otherwise, and indeed, in the budget of every individual person, rich or poor.
The magic bullet is bank reform, and the beast to be slain is artificial credit creation (artificial in that it's created wholly from bookkeeping entries of central banks and commercial banks, not from real savings).
Take a look at a couple of modern day financial bubbles--always credit fueled-- Japanese real estate, the Internet bubble, the U.S. housing bubble. We're clearly talking about trillions of dollars of wasted resources (with plentiful enablement of fraud and abuse built in).
If this credit had never been born, we could almost picture the environmental backwards film: Strip mines filling themselves in, forests jumping back to life, smokestacks sucking back pollutants.
Think of the fuel that was used for billions of trips and commutes, the electricity, office supplies, computers, communication equipment, new construction, building customizations, and trash haul aways, the unneeded businesses, to support other businesses that support businesses, and all, in the iconic Internet bubble example of Pets.com, amounting only to the fruitless, temporary support of a sock puppet.
To all the above, staggering as it is, we need to add another layer from decades of excessive consumer credit, and the consequent misjudgment of the level of consumerism that society can currently support--again an illusion that would not have been possible without artificially created credit.
I was struck by this vignette of excess from Satyajit Das's Traders, Guns, and Money: 'A colleague ' Chris, the head of hedge fund sales ' was recently divorced. He began to travel frequently to Paris for business meetings. It turned out he travelled to have his laundry done. He did not know how to use the washing machine and liked the way the H'tel Plaza Ath'n'e in Paris did his shirts.'
Any society with division of labor will have parallel stories of excess, but usually limited to a handful of those directly in the ruling class, or perhaps in the actual owners of large businesses, not in the upper echelons of the 'laborers,' as in this story. (It seems telling that in contemporary America we get stories like this exactly where the credit creation rubber meets the economic road.)
And of course, there really is such a thing as trickle down. If you've taken a recent look (like I have), at your personal budget and purchasing patterns in light of the seemingly unstoppable march of economic uncertainty, you may be wishing (as I do), that you could have back some of the purchasing power you took for granted in past years--money used to replace a cool item with a slightly cooler item, an extra purchase of this or that because the price seemed right, the little luxuries that you deserved, because you work hard.
A healthy society probably has no way to avoid some small percent of conspicuous consumers, and perhaps a little envy and modest emulation from many of those quite humanly wishing to join the fortunate few. If this 'waste' comes from real savings, then any harm will be less than what society would get from a habit of trying to make subjective, top-down judgments to force people away from their personal assessments of what is or is not an acceptable level of profligacy.
However, we've had very significant waste that's risen above the level of any possible subjectivity, and with a clear first cause of artificial credit 'created out of thin air.'
The efforts of policymakers, and particularly of the Federal Reserve, to give businesses and consumers a positive economic outlook and keep them borrowing and spending have, in the past, worked, but only as the confidence game that they always were--ultimately these careless policies had to get to where they were always headed, to the destruction, not the creation, of wealth.
Corporations spent their potential, not on creating real efficiencies and innovations, but on frantically buying each other up and financial engineering-- neglecting core business in favor of debt enabled breadth and mass in preparation for imaginary future growth.
And at least some of us who've been buying a new luxury car every other year, should (in the absence of excessive credit), have been duct taping patches on the tail lights of our ten year old sub-compacts instead.
All of this may sound like just a little too much dismalness from the dismal science, but if we could decide to refrain from ramping the leverage back up again, I think that most of us would handle it with a sense of relief.
Leverage is a giant fog. Who knows what we actually have or can actually do with this kind of borrowing? It makes it impossible for us to talk to each other about anything--certainly not subjects like entitlements or sustainability or taxes.
If we decide to get rid of central banking altogether, and replace it with a simple system of 100% bank reserving, where every loan must come from the use of someone's real savings, then the 'small footprints' that environmentalists have vainly exhorted us toward could get a second channel of support.
And who knows? Maybe if we can clear away the fog of debt to sensibly concentrate on real business and science, we'll find that we can sustainably afford medium size footprints after all.