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"The financial
policy of the welfare
state requires that there be no way
for the owners of wealth
to protect themselves."
- Alan Greenspan, 1966
An NBER working paper by
Carmen Reinhart and Belen
Sbrancia describes how
Western governments in the post-world war economies unloaded their debts on credulous citizens through a policy of financial
repression. Because
it is politically
palatable (as opposed to outright
default, hyperinflation, or overt tax increases) some analysts expect governments to try it again.
One part of it - inflation - is
already well-underway.
Financial repression means
savers (investors) will be forced
to pay leviathan's debts, whether they like it
or not.
The particulars of financial
repression vary, but the general scheme is this: Using
its power to violate private property rights, the government makes the domestic investment community a
"captive audience." With central bank cooperation it mandates low nominal interest rates along with a higher inflation rate, resulting in negative real interest rates. The latter transfers
wealth from, say, pension funds to the government, thus liquidating a portion of its debt. Since the bond holders are "captive," there
is no ready remedy for investors wishing to preserve or grow their wealth.
If investors attempt an
alternative such as purchasing
physical precious metals, the government will either restrict
those activities or abolish them. One way or another it will see
that it has the
"captives" needed to pay
its bills.
The working paper contains language suggesting the authors have accepted several monetary fallacies. For example, we read:
It is
important to stress that during
the period after WWI the
gold standard was still
in place in many countries, which
meant that monetary policy was subordinated to keep a given gold parity. In those cases,
inflation was not a policy
variable available to policymakers
in the same way that it was
after the adoption of fiat currencies.
The post-WWI gold standard was a straw version of the classical gold standard, which itself was under
government control. Yet
it's true, holders of Federal Reserve
Notes could, in theory,
swap them for gold coins prior
to Roosevelt's heist in 1933. "Monetary policy" (inflation) was indeed subordinated to gold, which is why
government got rid of it, and the government-spawned gold-exchange standard of the 1920s served to set up gold, intentionally
or not, to take the fall when the roof collapsed.
As economist Joesph
Salerno writes,
The end of the classical
liberal era in 1914 caused the removal from government central banks of the
"golden handcuffs" of the genuine gold standard. Were these "golden handcuffs"
still in place in the 1920’s, central banks would have been rigidly constrained from inflating their money supplies in the first place and the business
cycle that culminated in
the Great Depression would
not have taken place.
The fractional-reserve
scheme began to cave, as it always had,
when too many people attempted to claim their property at the same time. It exposed the essential fraud of
the banking system, though
few economists see it that way.
Which is not surprising, given that most of them, directly or indirectly, feed at the Fed's trough.
In another section of the NBER paper,
Reinhart and Sbrancia
tell us,
World War I
and the suspension of convertibility and
international gold shipments it
brought, and, more generally,
a variety of restrictions on cross border
transactions were the first blows
to the globalization of capital. Global capital markets recovered partially
during the roaring twenties, but the Great Depression,
followed by World War II,
put the final nails in the coffin of laissez faire banking.
This is truly shameful scholarship. Banking was in no sense
"laissez-faire." The Federal
Reserve Act of 1913, establishing
a government-enforced banking
cartel, erased the last traces of freedom in banking. As we read in Wikipedia,
[Laissez faire] describes
an environment in which
transactions between private
parties are free from state intervention, including restrictive regulations,
taxes, tariffs and enforced
monopolies.
The Fed is a monopoly money producer established by the state. As such
it is in violation of capitalism's private property foundation, and its very presence
creates distortions in market activities. (See The Ethics of Money
Production, p. 170) It seems that the further we move away from laissez-faire the more it is blamed for the catastrophes that follow in interventionism's wake.
Still, the NBER paper has
great value. The authors
(rather tediously)
document how Western governments from 1945-1980 used repressive financial schemes to pay down their debt relative to
GDP. The great appeal
of such schemes is their transparency
to the general public, making
them virtually irresistible to today's debt-choked governments.
Reinhart and Rogoff's This Time is Different: Eight Centuries of
Financial Folly spells
it out this way:
Under financial
repression, banks are vehicles that allow governments to squeeze
more indirect tax revenue from
citizens by monopolizing
the entire savings and payment system. Governments
force local residents to save
in banks by giving them few, if any, other options. They then stuff debt
into the banks via reserve requirements and other devices. This allows the government to
finance a part of its debt
at a very
low interest rate; financial repression
thus constitutes a form of taxation. Citizens
put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and
restrictions to force the banks to relend the money to fund public
debt. (from Prudent Investor
Newsletters) (emphasis mine)
It's an effective racket, almost as effective as the central banking
- debt monetization schemes that brought us to disaster's door in the first place.
George F. Smith
Read his book : The
Flight of the Barbarous Relic
Visit his website
Read his blog
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