on 18 September 2011
Schlicter's analysis is certainly controversial, and I must admit that I started reading Paper Money Collapse with a degree of scepticism. However, the logic of his argument is compelling and, upon concluding the read and reflecting, the reason behind many recent world economic events becomes evident. A good example is the inability of western economies such as Japan and the US to stimulate growth, despite repeated attempts at monetary expansion.
He begins with a clear explanation of what money is and how it works; how it began as a pure commodity currency, morphed into a paper currency backed by gold, changed again through the process of Fractional-Reserve Banking and has today (as it has in past times before collapsing) become a fiat currency where Central Banks can create money at will and at no cost. Currency created through Fractional-Reserve Banking is somewhat elastic and that created by Central Banks is infinitely so.
It is this elasticity that allows monetary expansion to distort and unbalance the economy, and to induce short term stimulus in certain sectors but zero real growth overall in the long term. It also has the important side effect of generating inflation. As the process continues monetary stimulus is destined to have less and less effect whilst the inflationary consequence is intensified, with the inevitable result of hyperinflation and currency collapse.
Schlicter underpins his analysis with descriptions of historic paper money systems, all of which failed. Our present system of paper money, particularly after 1971 when the US abandoned The International Gold Standard, displays numerous symptoms analogous to the historic examples cited.
What is the solution? Schlicter is uncompromising; only after the effect of previous credit expansions have been unwound and we have returned to a system of inelastic money (albeit possibly including an element of Fractional-Reserve Banking) can the economy begin to grow naturally and spontaneously. We should look to the period of The Classical Gold Standard between 1890 and 1914 which enjoyed economic prosperity notwithstanding a modest rate of deflation throughout.
I confess that one reason for my reading this book was to see what I could do to adapt my personal circumstances to what is, by any measure, potential financial disaster. Schlicter claims that this is not the purpose of his book yet he goes on to suggest that gold acquisition is preferred strategy. However, he also points out that in 1933 Roosevelt confiscated all privately held gold!
I'm not sure what I'm going to do, but I certainly would not want to be dependent upon government bonds or pension obligations for my retirement.
on 15 September 2011
I agree with the bit on the cover of this book where it says that this is not an easy read. For me, it has not been, and not just because the truths Schlichter spells out and explains are so not-easy to take. I am a huge fan of his, and have been ever since I first heard him talk about the analysis in this book in London about a year ago, but he makes me work hard. This book is heavy on logical exposition, much lighter on diverting anecdote. For the latter sort of Schlichter stuff, you must read his blog.
One way to describe Paper Money Collapse might be to say that it is the sort of book that the great Austrian School economist and economic historian Murray Rothbard might have written, had he lived a bit longer. Last year I read Rothbard's Man, Economy and State. While doing this, I kept hoping that I would read a theoretical analysis of our current financial woes, as opposed merely to Rothbard's general take on Austrian Economics as a whole. I realise that this was a lot to ask of a book published several decades ago, and not surprisingly I was, although in general much educated, largely disappointed on that particular count. Well, what I was only hoping to read in that Rothbard book was what I did read in Detlev Schlichter's much shorter book, which I heartily recommend to anyone willing to really get stuck into it. Here is a conceptual analysis, in very much the painstaking Rothbard manner, of how non-commodity-backed currencies behave when they collapse, and why they do collapse, always, inevitably. In other words it is about the times we now live in.
I learned a lot from reading Paper Money Collapse. In particular, Schlichter has convinced me of the wrongness of the argument that since we want economic activity in the world to increase indefinitely, but gold is, barring a few trivial further discoveries, fixed in quantity, gold won't work as the basis of currency. But non-elasticity is exactly why gold is such a good basis for currency. Totally elastic money, on the other hand, inevitably collapses, always and everywhere. Why should our elastic money be any different?
Schlichter is not pointing the finger at individuals. This is not a detective story, where in the final chapter all the suspects are rounded up and Herr Schlichter points the finger at the guilty man. President Nixon's decision to break the final link between the dollar and gold is deplored, and Ben Bernanke's recent pronouncements are likewise disapproved of, but many of the decisions that lead to our current mess were made many, many decades ago, and by their nature they are the kind of decisions which are far easier to make than they are to reverse and clean up after.
Nor does Schlichter believe that hyper-inflation now threatens us all because central bankers are unaware of the badness of hyper-inflation. They know that hyper-inflation is bad. Unfortunately, they also know that if the collapse that Schlichter describes occurs while they are in office, then that, for them, will be even worse than a bit more inflation or even quite a lot more inflation. So, they carry on printing money and postponing the resolution of the problem, which means that when nemesis does finally arrive, it will be all the worse. But, says Schlichter, they know what they are doing; they just don't know how to stop. Schlichter telling them to stop will accomplish nothing.
I suspect that Schlichter may be being rather kind about just how plain stupid some even quite high ranking central bankers now are, but clever or stupid, these people are now thoroughly boxed in by their previous decisions and by the decisions of their predecessors of earlier years and decades.
I have been using the phrase "paper money", as Schlichter himself does in his title. But as we all know, when central bankers now create yet more money, they are mostly putting numbers in electronically managed bank accounts. It is not the printing of bank notes that is the problem; it is the lack of a commodity base to control the process. By the same token, paper bank notes that refer to a currency that is solidly based on something like gold would be fine. But I am sure that Schlichter has thought long and hard about this phrase, and I gladly defer to his decision to call it "paper currency" in his title. I certainly don't know a better way of putting it. "Fiat" money? "Elastic" money? (That's the phrase that Schlichter switches to in the subtitle, also prominently displayed on the front cover.) Both are a bit more accurate than "paper" money, but are also a bit less attention-grabbing for the kind of intelligent and educated everyman whom Schlichter is trying to reach. "Paper" gets over the gist of the problem pretty well, I think. And you start learning what that means as soon as you read the sub-title.
When it comes to Schlichter's pessimism about him personally having any influence on the conduct of public policy, I agree with him, in the short run. But I think he may be proved wrong, in the longer run. I agree with him that there is nothing much he can say to the people now in charge of financial policy that will persuade them to do the right thing now, which basically means getting the collapse over and done with as soon as possible. But when this collapse starts seriously happening anyway, in just the manner and for precisely the reasons that Schlichter says, he could then become a very Big Cheese, as we say in my native England. In fact, if this book does half as well as I suspect it may, Schlichter will probably be accused, by various paper (fiat, elastic) money idiots who know only the title of this book but nothing of what it says, of having precipitated the catastrophe he describes. But other people, including politicians and central bankers, could also then be asking him: So, Schlichter, what the hell do we do now? I urge Schlichter to be ready for this moment. Suggested title for his next book: Now What? (Presumed answer: Let non-state controlled and non-state backed bankers supply currency, which they will back with gold. Get out of their way and let them get on with it.)
Meanwhile, I urge anyone who thinks that he might find this book enlightening, and helpful for personally navigating through the mess, to go ahead and be enlightened. I think this book may become very big. It certainly deserves to.
on 18 May 2012
They often say that "cometh the hour, cometh the man." In our case, the man is Detlev Schlichter, perhaps one of the best Austrian school economists in the UK and whose razor-sharp analysis of fiat currencies could not be more timely. As we approach the end game for "paper" money, controlled by a state monopoly, and the inevitable collapse of the house of cards on which it is built, Detlev provides the conceptual breakdown of why elastic, fiat currencies are such a bad idea.
Detlev's book takes you right from the key question of "What is money?" and leads you step-by-step through how money operates in society, the differences between inelastic, commodity money (e.g. gold) and the prevailing elastic fiat currencies we are being subjected to, and the self-serving manipulation by private and government-controlled central banks that results when free market forces aren't allowed to operate. Most importantly, Detlev demonstrates why a central bank that continually increases the supply of money in circulation or encourages banks to lend more than their reserves will allow causes the cycle of boom and bust that we've suffered under throughout the 20th and 21st centuries.
This is essential reading for anyone who wants to understand why we're in this mess, what it will take to get us out of it and why politicians around the world will refuse to take action until it is too late to stop the breakdown of our monetary order.
on 16 September 2011
When I first met the Austrian School of Economics and the monetary theory of the trade cycle in 2000, in the course of looking for an explanation of the dot-com bust, I believed politicians and economists would surely not let such a theory pass if it contained any truth. By 2007, I realised the mainstream of economics contained a key intellectual error - an inadequate treatment of time.
Given that understanding of time, elastic and inflationary money is a distinct poison. That poison is now destroying our society.
Schlichter's book sets out the arguments in convincing detail. I should love to believe he is completely wrong. That no longer seems likely.
Anyone who cares about prosperity and progress should read this book.
on 28 September 2011
You have to hand it to a man who quits his cushy City job managing money to write a clean, underbrush-hacking book on the fallacy of paper currencies. He's serious, he's fearless, and he learned from experience.
His wakeup call to sound-money economics came in the wake of the LTCM crisis. The lessons from that are the same as the lessons from 2008... or the coming euro explosion... or another round of bank collapse. Detlev gets it; the rest of his ilk in the banking community and the wider parasitic political party of central banks are too busy saving their skins to care!
I believe Detlev Schlichter's Paper Money Collapse will prove the handbook for a new generation of economists. He's a bit like the Euclid of sound money. Once the Von Mises crowd gets a hold of this book, it can't fail to go viral in all sorts of excerpts! Your best bet is to read it cover to cover. It starts out from one basic principle: YOU are the driver of the economy. You buy what you need when you need or want it.
Detlev handily rejects, with welcome soundness, the idea that the economy is a super-organism worthy of preservation by the unsound manipulations of the State! All this intervention results in is what Detlev refers to as "dislocations." That is, misallocations of capital galore. I've just turned 29... I consider myself a young woman who's grown up in a world of nothing but false interest rates -- that give false clues to savers and industry -- that deliver only boom-bust cycles in rapid succession. I was born in a recession, I got my first job in a boom, I was baptized a finance editor by the bust, and I expect to enjoy myself even as the greatest depression the world has ever seen creeps stealthily to catastrophic proportions. Detlev is my hero.
We're not victims if we know what's going on. We might not take Washington D.C., London, or Geneva by storm, but we can take Detlev's concise lessons and teach them to those we care for! If the central bankers want to protect their own hides, so do we! Let's buy gold (and silver too) and sleep at night.
Ultimately, Detlev may come across as something of a pessimist. He's earnest, yet, he knows people. He gets power. So instead of painting a utopia backed by gold, his epilogue offers glimpse of chaos and collapse, and plenty more economic defibrillations -- thanks to government's can-kickers who just want to push the consequences down the road a week... a month... a year.
Right now, my dad's retiring, and he's outraged at being punished by his government (for whom he gathered revenues for 35-plus years) for saving in good faith. This is a great book to give him! He'll know he's far from alone for feeling as he does.
In short: Detlev delivers! His facts are simple. No GDP (Gross Deception Presentation) charts here. Just basic reasoning with algebraic clarity applied to man's needs. If you don't have the fortitude for Von Mises or Rothbard just yet, start here.
on 28 November 2011
People will be shocked by this work. It argues against one of the basic principles of our time - fiat money and the whole credit bubble financial system.
So people will tend to reject the work without reading it (denounce it as absurd - and so on). However, if people actually do read it and think about it........
I think you will find that the evidence and arguments the author presents are conclusive - there is no escape from them.
So why "if only it was not true"?
Because if this book is correct (and it is) - then we are heading for a terrible economic crises. A crises that will make our present troubles seem like a storm in a teacup.
on 20 January 2012
Much of that the author says in this book will be familiar to any readers of economists like Ludwig von Mises and Freidrich Hayek and he admits as much - this is a book about the effects of money supply on the economy as a whole, economic ideas which are associated with the Austrian School of academic economics.
What Detlev Schlichter has done is apply these ideas to the current economic malaise which has had a stronglehold on news reporting and political rhetoric ever since the housing market bubble collapse of 2007/8. His conclusions are not pretty and what makes them so terrifying is how convincing his arguments are. It leaves the reader in little doubt that the whole world is headed for a Weimar Germany-style economic black hole.
So who are the villains in this situation? Despite the commonplace assumption that today's economic woes represent a crisis of capitalism in fact this is most certainly not the case. Across Europe the state in its various guises conducts roughly half of all economic activity and its effect is wider than that due to the huge regulatory burden it imposes on the remaining part, the market-sector if you will. That's not what I would call capitalism.
The basic version of Detlev's thesis is this: In order to fund the vast bureaucracies of the modern welfare or social-democratic state modern governments cannot simply rely on taxes - it's impossible for them to raise anything like enough money this way. Governments have historically resorted to building up massive levels of debt by selling bonds. Banks have been willing to invest heavily in government debt because bonds issued by the US, the UK and many European governments are considered risk-free. After all the government has a monopoly on force and can always pay back that debt through tax revenues. But the long-term results of this policy is massive exposure of an inflated banking system to debt which, as Greece, Italy, Spain etc. have shown in recent months is not risk-free. Debt levels have become unmanagable, in the currently fashionable jargon of politics, unsustainable. The confidence that the debt will always be repaid is failing.
This presents a problem. In a rational, market based ecomony a body, whether a state or a commercial company, that cannot service its debts goes bankrupt. It defaults. The banks unwise enough to have lent it money lose out. But were this to happen, if the fiction of risk-free debt were to be so blatantly exposed, then the cost of running up the ever increasing levels of debt which all modern governments rely on would go up. And if governments were unable to raise more moeny through increased indebtedness then the whole welfare state experiment would come crashing down since massive debt is the only way to finance it. And default by a major ecomony would have a major, possibly catastrophic effect on the banks which lent the money and cannot get it back.
Thats a greatly truncated version, of course. And what makes it scarier is the blind refusal of mainstream commentators and politicans to face the facts. Obsession with indicators of short-term growth and paralysing fear of having to try and convince the public of the impossibility of maintaining the status quo has led the political elite to resort to the same doomed attempt to keep things going as Weimar Germany - the printing press. Under the Orwellian term "quantitative easing" this is exactly what the Fed, the Bank of England and the ECB are now doing on a massive scale - printing money out of nothing to prop up the bond market. Essentially governments are running up ever bigger debts and buying it themselves with monopoly money.
The endgame, as this vital and awesome book so clearly and logically demonstrates, will be (yes, that's will be - there is no other outcome short of alien invasion) a collapse of all the world's major currencies. And, as governments the world over try desperately to avoid the unavoidable logic of basic arithmentic, in the leadup we will see (and are seeing) ever increasing calls for market controls and intervention at the expense of the only part of the ecomony that actually produces the wealth governments are addicted to spending - the men and women who work in the private, market, sector.
If you buy this book, and I cannot recommend it highly enough, you should also check out the author's blog for up to date analysis of this real-time economic crisis. It is encouraging that his message seems to be filtering through to the mainstream if his recent appearences on the BBC and Sky News are anything to go by. Here's hoping against hope that the political class will start to pay attention.
on 7 October 2011
This book is not comforting reading, nor is it always easy to read. You have to concentrate. But it is a "must-read". For me, one of the most valuable insights of this book is how it explains how the general price level in an economy can appear to be stable but that injections of fiat money into the system can derange relative prices for consumption, intermediate and production goods. This point is vital. It explains why those central banks, such as the Bank of England, got dangerously complacent in the 90s and noughties when the inflation targets they had been set appeared to behave. But all the while, the surges in money supply growth created a bloated financial sector and property market bubble.
He also rebuts the argument, sometimes used by opponents of commodity, or "inelastic" money, that a growing economy needs a growing supply of money to ensure stability. Untrue. At most, an expanding economy, with growing innovation, division of labour and productivity growth, should see a mild deflation over time (which is good for people who want to save by holding cash). But as Schlichter explains, there is no reason in logic or evidence why a mild price deflation should hamper economic progress once people get used to the idea that their money will buy a rising stock of goods and services through time. He uses the analogy of computers. In recent times, the hourly wages needed to buy, say, a mobile phone have slumped. Has that stopped people from going out and buying these devices? Of course not.
Schlichter's explanation of how fractional supply banking works is crystal clear and, in my view, he explains it slightly better than say, Murray Rothbard did in his The Mystery of Banking, although the latter book is still well worth reading. And Schlichter's style is more sober and less brash in its tone than the approach adopted by Thomas E Woods in his book about the crash, although Woods' explanation of Austrian business cycle theory is pretty good.
All these books are useful for driving home key points about how we have arrived in our current pass. Schlichter, precisely because he used to work in the investment management business for so long, speaks not as an ivory tower academic, but as someone who has been on the practical side of finance. He knows that much of what appears to be "free market banking" is anything but; in fact, as he describes it, much of what now goes on in Wall Street, the City or wherever is a hybrid of market and state planning. In its way, it is profoundly corrupt. Schlichter also mentions how such a large chunk of the economics profession is locked into the philosophy that drives the current system - without it, many of these people would have to do something else for a living.
Perhaps the scariest part of his book is when Schlichter points out that the derangement of the capital system in the West is worse than in the late 1970s, when the-then Fed chairman, Paul Volcker, pushed up interest rates to record highs to purge some of the malinvestment and rottenness from the system. The cigar-chomping Volcker was a brave man, and he had the support of the-then presidents Carter and Reagan (Carter sometimes needs more credit than he gets). I cannot see any such central banker now receiving such support for this sort of thing. Instead, we've got ourselves "Helicopter Ben".
Paper Money Collapse is one of the best books to come out of the financial crisis, maybe the best so far.
on 25 September 2012
The sky is falling, and so are the dollar, the pound and every other currency not linked to an independent, immutable source of value, like gold. So says economist Detlev S. Schlichter, who steps articulately into the middle of the Keynesian-Monetarist divide by inserting Austrian-school economics into the mix. He argues that paper currencies are just devices governments use to rule economies and that money is literally not worth the paper on which it's printed. It's a controversial and grim opinion, grimly and artfully delivered. Schlichter is a strong writer who isn't shy about advocating a radical perspective. Though he's somewhat given to self-reference and emphatic repetition and - in his passion - even harps a bit on his concerns, getAbstract considers Schlichter's contrarian take on currency and fiscal policy a highly thought-provoking read for goldbugs or for those who seek alternative views of contentious economic times.
on 8 January 2012
Essential reading for those wanting to understand what is currently taking place in the world economy and just how it is all going to play out/end. Suffice to say - paper money (or more accurately, elastic money) is on borrowed time. A must buy book.