Who’s to Blame for the Economic Depression?

Yesterday I mentioned how we’d give you a rundown of the causes of the current depression, how it will evolve, and how it can be prevented from happening again…

But first a quick note on this, “House prices to plateau as buyers flee in droves”, says today’s The Age.

As usual the argument is that house prices won’t fall, they’ll “plateeeeeeaaaauuuuu” until the next house price surge. Er, no they won’t. They’ll “keraaaaaash…”

But we’ll save that for another day because we promised something else for today’s Money Morning.

The problem with most mainstream analysis on the economic collapse is that it’s, well, wrong.

The rest of it that they don’t get wrong, only scratches at the surface of the problem. It usually points the finger at Wall Street or City of London fat cats, blaming them for making lots of money and ruining things for everyone else.

Don’t get me wrong, I’m not sticking up for the pin-striped nincompoops, I’m merely saying that all they did was spot an opportunity to exploit a distortion in the market. And boy did they exploit it.

But here’s the thing, it wasn’t the fat cats that created the distortion. Sure, they may have egged on the bumbling bureaucrats and central bankers, but the fact is they took advantage of a situation that anyone else in the same position would also do.

You see, if the mainstream analysis bothered to join the dots, or follow the trail, they’d realise the causes of the economic depression all lead back to two connected sources – governments and its central banks.

The very same people that the mainstream media believe can get us out of this pickle are the same people that pickled the economy, and are now just making the whole darn thing worse.

I know what you’re thinking, not another rage at central bankers. But I’m afraid we’ll have to keep going on about it for as long as the problem remains.

And the cause of the problem is simple. It’s the involvement of government and central bankers. Their manipulation and creation of money out of thin air is the ultimate cause for everything that’s happened.

And because we know this is the cause, we also know that the same problem will happen again. Because they’re continuing to make the same mistakes.

Most of the time you’ll hear that it was bankers’ greed or de-regulated markets or derivatives or excessive risk taking that caused the meltdown. But if you could represent the problem as a family tree, then you’d find that the central banks and government are great grandpa and grandma, and the bankers, regulated (not de-regulated) markets, derivatives and excessive risk taking are just the descendents.

The fact is, none of those things would either be possible or would have been taken to such extremes if it wasn’t for the interference of grandpa government and grandma central banks.

Quite frankly it’s laughable to see the pollies and bankers blaming the ‘free market’ for what’s happened. Especially when they’re the chumps who should be taking the blame.

As we’ve pointed out before, the free market is an extension of freedom and liberty. That is something to aim for not demonise. What should be demonised is the central planning mindset of those in power. Those that desire to tell you what to do with your money and your life – and boy do we get plenty of emails telling us that we should just pay our taxes and shut up!

But anyway, getting back to the point. Last week in the editorial office up on Fitzroy Street, we ran through exactly how these problems are caused and how it always leads to a boom, a bust, and wealth killing inflation.

At the core of the problem is, you guessed it, the fiat money system. A system where there is nothing backing the value of the dollar in your pocket. A system where new dollars can be created at a flick of a switch without any effort and without any increase in productivity.

As we discussed in our chat with assistant editor Shae Smith and Slipstream Trader Murray Dawes, a paper money system relies purely on confidence. It relies on you being confident that the paper money you receive from your boss will be accepted by a shopkeeper in exchange for goods.

The shopkeeper will only accept your paper money if he or she is confident their supplier will accept it in return for stock, or that the bank will accept it when it’s deposited.

In other words, the money you earn is backed by confidence. Confidence alone, and nothing else.

But in order to maintain that confidence, the government and central bank has to go to extreme measures. After all, when you’re just printing dollars signs on bits of paper or plastic you’ve got to make sure no one else gets in on the game.

Doing that involves legal tender laws and providing the central bank with the monopoly to issue a paper currency. This gives the central bank the power to inflate (and deflate) the money supply at its pleasure, and to ensure that it’s best customers – the government and banks – get first crack at the inflated money supply.

To illustrate how this works and why it’s so damaging to your wealth lets use this example…

Just say there isn’t a central bank. Now, suppose you go to Harvey Norman to buy a plasma television, but instead of paying with the legal tender you convince Harvey Norman to accept paper money that you’ve made yourself.

This paper money is just a sheet of A4 paper on which you’ve handwritten $1,000 dollars.

And just suppose Harvey Norman accepts it! You’ve convinced Harvey Norman that the bank or his suppliers will accept the $1,000 of handwritten notes.

So, what do you think will happen next? You spot a nice lounge suite that costs $5,000 so you write $5,000 on another piece of A4 paper and hand that over. In return you get the lovely lounge suite.

Well, not surprisingly news is going to get around that Harvey Norman is accepting scraps of paper with writing on it as currency. Soon enough everyone’s at it.

The guys at Harvey Norman can’t believe their luck. They used to sell ten plasma televisions each day $1,000 each. Now they’ve sold hundreds in just one day for millions of dollars each. With the price increasing in value just as quickly as people can produce bits of paper with numbers written on them.

Soon Harvey Norman is out of stock.

Armed with thousands of bits of paper, Harvey Norman takes them to deposit at the bank and the bank accepts them. His account is credited with trillions of dollars worth of money.

Now that the bank has accepted these dollars Harvey Norman can spend the money elsewhere in the economy. And it can also buy a bunch of plasma’s from its suppliers. But everyone’s in on the game now, people everywhere are writing out their own dollars and using them in exchange right across the economy.

Only A4 paper isn’t big enough to get all the zeros on!

The increased money supply has filtered right through the economy. The money supply has soared and so have prices.

Eventually the whole thing collapses because the economy collapses. People stop working because why work when you can write out your own money.

Monetary inflation has caused the economy to come to a standstill. At some point people have realised that the paper dollars aren’t actually worth anything. No one will accept them because to accept them means to exchange something for the paper dollars.

Harvey Norman no longer believes that giving away a plasma television in exchange for a bit of paper is a good deal.

Do you see how a paper money system works? If everyone could create their own paper money backed by nothing, inflation would become infinite.

Hang on, doesn’t that mean it’s good to have a monopoly on the printing of money? Doesn’t that mean it’s sensible that only the central bank can create money? After all, this surely prevents infinite inflation.

No.

But that’s the argument mainstream economists make. The reality is that like any other monopoly, putting the power of paper money creation in the hands of one institution merely gives that institution an advantage over everyone else.

Let’s go back to our example. Let’s say that only you had the power to create a paper money. That your paper money was the only one accepted as money.

Obviously that would put you at a great advantage compared to those that actually had to do something to earn money. You could buy anything you want. You could pay as much as you want for things knowing that all you have to do is write out more dollar notes.

Your actions would be inflationary, because you would have the power to determine who gets that money. And there would be no limit to the amount of money you would create.

If you decide to spend the money with Harvey Norman that is to the benefit of Harvey Norman but it’s to the detriment of Clive Peeter, because Harvey Norman can now potentially pay more for wholesale supplies which will also increase the costs for Clive Peeter.

Central banks have the same power to create money for their and their friends benefit. The difference is, their influence is wider ranging and far more damaging.

The central bank creates money for the government to spend. And governments aren’t just buying the odd plasma television or weekly shopping with its created money. In fact, governments are responsible for around 40% of all the money that’s spent in the economy. Not just from created money but from stolen money (taxes) too.

And because the government gets the new money first it is able to benefit from lower prices before the impact of the increased money supply has filtered through the economy.

As the new money filters through the system it impacts your purchasing power. The $900 handouts is a perfect example.

Those that received the $900 benefited not only because they received $900 but because they were insulated to some degree from rising consumer prices. Because the economy was propped up by bailouts and the $900 handouts, prices didn’t have the opportunity to fall as much as they otherwise would have.

But for those that didn’t receive the $900, well, it was tough luck. Not only did they not get some cash, but because the bailouts and cash handouts prevented prices from falling, these people lost out as they had to pay the same higher prices as those that did get the handout.

As you can probably see by now, it’s the creation of money from nothing and backed by nothing that starts the boom-and-bust ball rolling.

The closer you are to the initial creation of the dollars, the more eager you are to take advantage of it before it filters through the economy. Why do you think governments have been so keen to roll out their stimulus spending as quickly as possible? Although if they take too long, guess what, they just arrange for more money to be created or taken from taxpayers!

Why do you think the banks are so keen to lend money out as quickly as possible? And why do you think the stock market has rallied so strong so quickly? It’s the need to get those newly created dollars working to get as big a return in as short a time possible.

You only have to look at the latest Goldman Sachs annual report to see this in action.

At the end of November 2007 Goldman Sachs recorded net revenues of USD$45.9 billion. At the height of the meltdown by November 2008, its revenues had dropped to just USD$22.2 billion.

By December 2009 Goldman Sachs’ revenues were back to ‘normal’ at USD$45.1 billion.

The key is in where the money was made, trading and principal investments.

It tells you quite clearly that nothing has changed. The rules are still the same. Goldman Sachs and other banks are one of the first recipients of the newly created dollars. And being first in line the banks know they’ve got to do something with the money. What better way than to quickly trade it on the markets.

When you can borrow money at close to zero percentage interest rates why wouldn’t you? It’s the equivalent of writing $$$ on pieces of paper and spending it quickly before everyone else gets in on the game.

That’s what the banks did leading up to the 2008 meltdown, and that’s what they’re doing again. They all know it’s a Ponzi scheme. But they also know that there’s plenty of money to be made while it lasts.

The biggest bet they’re making is that they can get out before the whole thing falls down again. Of course they failed to do that last time, hence the trillions of dollars in bailouts.

So this time it could be worse, knowing for a fact the government will backstop their entire risk taking. Risk taking that has been created by the government and its central bankers.

That reader, is the single cause of the economic meltdown or depression or whatever else you want to call it.

Yes, the bankers and pin-striped chumps are deeply involved, but they’re doing exactly the same as what you would do if you were given the power to create your own money.

But just remember, that isn’t the free market in action. Instead it’s counterfeiting or fraud in action. Central banks and banks have the power to do things which no one else has the power to do – create money.

That is a power which is directly opposite to the notion of a free market.

I said I’d give you a simple rundown of the causes of the current depression. That’s what you’ve got today. Unfortunately we’ve run out of space so we’ll have to go through the next stage of the depression and the only true solution to it tomorrow.

Cheers,
Kris.

Who's to Blame for the Economic Depression?, 8.6 out of 10 based on 14 ratings

Tagged as: central banks, depression, economic depression, house prices, mainstream analysis