“So what do you think should be done?”
I often get this question after I presented my case against our fiat money system, and I sense there is a trace of frustration in it, a bit along the lines of, you are telling us that we are in quite a mess but you offer no policy prescriptions. That is a fair point, I guess. Most writers who lament the economic ills of our time usually have a bag of policy advice on offer. Indeed, whispering new policy ideas into the ears of those in power is what most of these writers aspire to. I reckon what separates them from me is that they believe in government and I don’t.
The mess we are in is the result of policy, of the very idea – the silly idea – that the field of money and finance would work better if it were supervised, managed, guided and controlled by the state; that if we had clever, powerful and astute policymakers, consulted by economist philosopher kings, we could enjoy a smoother, better functioning economy. And if ever things were not running so smoothly, we would change the policy.
“So what is your policy, Mr. Schlichter? Could you not be a bit more…constructive?”
My conclusion is straightforward. There should be no policy. The existence of policy is already the problem. What we need is proper capitalism in money and finance. We do not have that now. What we have is limitless state fiat money, quantitative easing, systematic market manipulation, bailouts, regulations, the IMF, the World Bank, the FSA, FDIC, TARP and LTRO. We need proper markets, not more policy, not more manipulation, and not more bureaucracy. And not more fiat money. We need the state to exit the field of money and banking. Completely.
The main problem with monetary policy is that there is such a thing as monetary policy.
The state is the problem. It will not be part of the solution.
Before I tell you what I think should be done, let me give you another reason why I have been so reluctant to offer policy advice. The aim of my book Paper Money Collapse was to expose widespread fallacies and debunk erroneous common wisdom concerning money. It was not to provide a program for reform. The book is meant to be an eye-opener.
Almost the entire discussion on money and banking today is based on deeply flawed theories. This is true of the financial markets industry where I worked for 19 years. It is equally true of most of the discussion in the media and, as far as I can see, academia. The book was meant to debunk a lot of this misinformation.
My intention was to challenge the present consensus and the established orthodoxy. I think this is what needs to happen before we can even talk about the drastic changes that our system requires. Any policy debate of the type you read in The Economist or The Financial Times occurs within the boundaries of the established consensus. Questions of a more fundamental nature cannot be addressed in the context of policy debates.
But I am not going to evade the question about policy. So let me talk a bit about policy and reform.
The big mistake has already been made. The gold standard was abandoned, in a step-by-step process that began around the time of World War I and that culminated in Nixon’s closing of the gold window in August 1971. For more than 40 years, gold has played no official role in global monetary affairs. State paper money ruled. Everywhere.
This was the era of the central banker, the monetary bureaucrat, of artificially cheap credit, of stimulus, of big equity rallies, of bigger real estate bubbles, of constant debasement, of the quick buck and the big bonus, of growing banks and of ever more sovereign debt. The global financial system got unhinged. After four decades of persistent inflationism we have an overstretched finance industry gravely addicted to the constant drip-feed of cheap money and an out-of-control public sector constantly issuing debt that will never get repaid. Capital misallocations and asset mispricing are gargantuan. The establishment prescribes itself ever more easy money to keep the show on the road.
So the first conclusion is, there is no painless exit. The cleansing crisis is inevitable. Simply being honest about the mess we are in would not be a bad starting point for policymakers.
And to acknowledge that this can’t go on forever. Because it certainly won’t go on forever.
Okay, but what next? If you could design policy, what would it be? What is the number one thing that we need to change to restore financial sanity?
Fiat money critics have floated a whole range of policy proposals. There is the return to some form of gold standard. Also, there is the rather fiercely contested debate about whether fractional-reserve banking should be banned or at least restricted. Recently, colleagues of mine at the Cobden Centre in London have introduced a bill to Parliament that would make board members of banks personally liable for bank losses, which is supposed to reduce or eliminate moral hazard. Thus we are already faced with a range of policy proposals. What is my position on them?
I think we can have it much easier. My proposal is more effective and more easily communicated: Let us separate state and money completely. That is the one thing that needs to change. Capitalism is the only economic system that works in the real world [at least if you want to keep on improving the human condition--Ed.]. But what we have today is monetary socialism, albeit a socialism predominantly to the benefit of the rich and well-connected.
We need to get the state out of the economy completely. To achieve this we must get the state out of ALL monetary affairs. The monetary sphere of society should be a no-go area for politicians and bureaucrats. State involvement in finance is the problem. Let us get the state out. Period. That is the one goal we should have. That is the one policy I recommend.
My enthusiasm for any other policy proposal varies considerably and is dependent on how much state intervention the policy still allows or in some cases even requires.
As an opponent of fiat money I am naturally positively inclined to a return to a gold standard. I believe that Mises was right when he wrote:
“If in the coming years or decades our civilization is not to collapse completely the gold standard will be restored.”
But what type of gold standard should be implemented? Would there still be central banks that would ‘administer’ that gold standard? Under any form of gold standard, the central bank would most certainly be more confined in its monetary operations than central banks are today but there could still be considerable room for manipulation. The US Fed was founded in 1913 under what was officially still the Classical Gold Standard but that didn’t stop it from funding the US government’s military spending in World War I and from initiating credit bubbles and business cycles.
By 1933, the dislocations introduced by cheap money were so big that their dissolution – mandatory and normally automatic under a gold standard and indeed inconceivable under a proper gold standard – had become politically unacceptable. The Fed’s mission was accomplished and the gold standard was abandoned. The rest is history as they say.
An official, government-directed return to a gold standard also raises a lot of questions about implementation that would invite lobbying and horse-trading by various pressure groups.
* How much of the existing money stock – obscenely inflated after decades of money printing and fiat money debasement – should be backed by gold, or to put the same question in a different way, what should the new exchange rate between the money in circulation and gold be?
* How much should the existing money stock be devalued? Should banks be allowed to create deposits that are not backed by gold? Should fractional-reserve banking be permitted?
Questions over questions, and the room for political maneuvering and for political abuse are massive. Do we really want politicians, central bankers, bureaucrats, and their economic advisors make all these decisions? I don’t think so.
I know somebody who is best equipped to make all these decisions.
We may not all agree on the merits or demerits of fractional-reserve banking but as capitalists we should agree on the benefits, indeed the necessity, of free competition.
So how do we get from A to B? How do we get from the present system of finance socialism, of interest rates fixed by the central bank and asset prices manipulated by the central bank, of nominally private banks operating with the protection of a lender-of-last resort, to a system that again deserves the label capitalist?
Step 1: Privatize the central bank.
Do not even introduce a gold standard. Just transfer ownership of the central bank officially to the banks that have an account with the central bank. This is the first step for the state to exit the sphere of money. The central bank is no longer a public institution run by bureaucrats and politicians but an entirely private undertaking. It is owned and operated by the banks.
The central bank administers bank reserves and provides certain clearing functions. The banks need this, for now at least. Shutting the central bank down is not that easy. But its most pernicious aspect is that it is a policy tool. This would end abruptly with its privatization.
Step 2: The state revokes with immediate effect ALL laws and policies that relate specifically to banking and money.
From this moment on, banks are capitalist enterprises just like any other normal business. There is no lender of last resort (at least not one run by the state), there is no inflation target or other official monetary policy for which the banks function as conduits, which under the present system puts them in the strange position of being profit-seeking enterprises and policy-transmission mechanisms simultaneously. But equally, there is no backstop for the banks from the state any longer. No guarantees, no deposit insurance or taxpayer bailouts. If a deposit insurance institution exists, it is handed over to the banks, similar to the central bank. Again, the state has exited the business of regulating, supervising, licensing, subsidizing and backstopping the banking industry.
Entry into the field of banking is now free. You do not need a license. You do not need an account with the now privately owned central bank (although without such an account clearing with other banks might be difficult). There are no legal tender laws anymore, so if anybody has any bright new ideas about money (Liberty Dollars, bitcoin) they are most welcome to try them. The consumer alone will decide over success and failure.
Monetary policy has ended. Bernanke testimonies on TV will be replaced with reruns of old Simpson episodes. Senators and congressmen will have to find new soapboxes from which to propound their personal economic theories.
Step 3: The state’s gold hoard is handed over to the banks.
What? A gift to the bankers? – I do not consider this a gift to the banks but more a return of property to the bank depositors. The bank depositors are the ones that should benefit from this transfer most.
The present monetary system could only have come about because it was once based on gold. Deposit banking spread at a time when banks still promised to repay deposits or banknotes in specie, and when all banks were thus required to hold (some) gold reserves – reserves that no political entity could create at will. Only slowly and gradually was the gold backing removed and replaced with various implicit or explicit state guarantees, all of which are now practically failing.
Of course, just like investment genius Warren Buffett, the bankers may not know what to do with a pile of gold and may thus be tempted to simply put it on a big heap. I suspect, however, that the bankers will have a very good use for the gold. Their customers – the holders of bank deposits – may be very unsettled by the exit of the state and thus the taxpayer from the business of underwriting the banking industry. Most people only consider their bank deposits safe because they believe the state would not allow Bank XYZ to default, not because they have any confidence that Bank XYZ is run prudently. Now that the state has exited the field of money and banking, the banks are likely to use the gold as additional backing for their balance sheets. They will use the gold as it has been used for thousands of years – to gain trust. And to avoid bank runs.
Will the gold hoard be sufficient?
I don’t know.
Presently, the US government sits on 260 million ounces of gold. At the present gold price of $1,655 per ounce, we are talking $430 billion. The monetary base is presently $2,673 billion; M1 is $2,220 billion and M2 minus money market funds is $9,163 billion. The gold hoard is thus only 16%, 19%, and 5% of these money stocks, respectively. Hardly a proper gold standard but it could be a start. Through proper balance sheet deleveraging and through additional gold purchases the private banks are obviously free to improve these ratios. (Again it is not for bureaucrats or economists to decide what is appropriate. This is the role of the banking entrepreneur.)
But now that the private banks own the central bank, would they not put the printing press into overdrive and create inflation?
I don’t think so. Through quantitative easing the central bank accumulates assets from the banking sector and expands the money supply. The central bank leverages its own balance sheet in the process. The Fed is already levered more than 50 to one, which is more than Lehman and Bear Stearns were when they collapsed. But now the banks own the capital of the Fed. They foot the bill, not the taxpayer. The banks can no longer dump unwanted assets on the central bank. They own the central bank. They cannot transfer risk to it.
Additionally, the public will be very suspicious of an overtly expansionary central bank. They know it is operated by the private banks and entirely for their own benefit. Any inflation concerns will translate into higher interest rates and that is detrimental to the highly leveraged banking sector. I would expect the private banks, now operating without any safety net from the state but under the suspicious gaze of their own customers, to be very cautious about how much money they print.
Easy money is great for the banks for as long as they can lower reserve and capital ratios. That was much easier when they could rely on government backstops or when meeting official regulatory requirements already gave their balance sheet policy an official seal of approval. Now that they are on their own, monetary expansion and thus debt accumulation and leverage are a double-edged sword. It will pay again to run a bank prudently and even advertise your higher capital and reserve ratios.
Furthermore, the relatively sounder banks (if we assume for a moment that those indeed exist) have little interest in running the jointly owned central bank for the benefit of the weakest banks. To the contrary, it is in the interest of the stronger banks to see weaker banks fail and exit the market. At the same time, it is not in the interest of even the strongest banks to see widespread bank runs or a general distrust in banks as that could quickly come to haunt them, too.
I think it is very reasonable to assume that under my plan of complete privatization the key challenge of allowing corporate failure in banking on the one hand but avoiding a complete collapse of the banking system on the other will be managed much better. The reason is that this task is now given to bankers as entrepreneurs who have a keen interest in getting that balance right. As long as banking is under the protection of the state, monetary and banking policy will be conducted for the benefit of the weakest banks, and the strongest banks will simply reap windfall profits.
Does the state get off too lightly?
The state no longer has any responsibility for the banks or money. No more setting of policy, no big hearings in Washington, no bailouts, no IMF, no World Bank. A lot of money will be saved and many explicit and implicit claims on the taxpayer will be eliminated. But also, the state can no longer tell the banks that government bonds are safe and encourage the banks through bank regulation and official capital requirements to invest in them.
There is no longer any bank regulation from the state. Banks will be regulated by the market, which means ultimately by the consumer. The state also loses the central bank and can thus no longer create an artificial demand for its securities. Remember, last year 61% of new Treasuries were placed with the Fed. Why should the banks, which now own the central bank, continue to accept this?
Government bonds everywhere benefit from the idea that states can’t go bankrupt because they can always print the money. This idea is fundamentally wrong as I have argued repeatedly. Once the debt load reaches a certain level, it can no longer be inflated away. If this is still tried, currency disaster will ensue. Be that as it may, with the state officially separated from the field of money and banking, it would have to manage its finances like any other entity, like a private corporation or a household (or almost like any other entity as it still benefits from the privilege of taxation). We would certainly see higher state borrowing costs, lower levels of spending and smaller deficits. This would be an important step to what Doug Casey calls “starving the beast”.
Of course, in such an environment we would not have to worry at all about how the banks arrange their executive pay, how their bonus schemes work, or if bank shareholders hold their board members at all responsible for their mistakes and failures. These are internal affairs of entirely private and capitalist enterprises. If bank shareholders get this wrong and set the wrong incentives, only they will bear the consequences. The idea that banking is a public service for which a specific set of rules and regulations must be designed and administered by the state does no longer apply.
Come to think of it, this proposal looks much better in terms of consistency and clarity than any other, in my humble opinion. Those who argue for an official gold standard are asking the state to design and implement a new monetary order. Those who ask for a ban on fractional-reserve banking ask the state to define what constitutes legitimate banking business and then enforce it. Those who want to introduce new legislation in response to executive pay and bonus schemes, ask the state to interfere in the relationship between shareholder (principal) and manager (agent).
I ask the state to do just one thing: Get the hell out of money and banking! Now!
Detlev SchlichterPaper Money Collapse
Pingback: The Separation of Money and State « Financial Survival Network
Pingback: The Separation of Money and State « Evil of indifference
Excellent article, but I have a couple of problems. First, do you really expect that the politicians who make up the “state,” and have been bought and paid for by the bankers, are going to turn all of that gold over to the banks? My guess is that the banksters have the majority of the gold these days, so if you went back to a pure gold standard they would probably be able to screw things up as well as control them to a great degree.
Second, Step #2 I just don’t see happening. What “state” is going to do that?
The banks ALREADY own the Fed. Read Title 12 USC. Every bank must purchase shares in the Fed. Also every state commercial law code (Uniform Commercial Code) would have to be changed. Currently, one is allowed to discharge (not PAY) the obligation of a note with another note. That’s why when you go to a Federal Reserve Bank or the US Treasury with an old FRN that says “This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury or any Federal Reserve Bank” (I forget the year they changed) with a $20 and ask for your ounce of Au, they’ll give you a ten and two fives.
I don’t think you need to tell the state to “get the hell out of money and banking”…that for some reason doesn’t make sense…you are free to create your own system of payments and clearing in specie or fiat…why ask the state for permission? If you went up to a bully and asked him to stop bullying you he would surely slap you in the face…the only way to defeat said bully is to meet him with a greater force…in this case “the market”…you are free to create…no man made law can stop that…its natural law to evolve…so we must…we don’t need permission from the state…
Pingback: gkV7M7tOFy gkV7M7tOFy
Pingback: escort bayan izmir
Pingback: Uctun Orospu Çocugu
Pingback: SYNC ATACK
Pingback: izmir escort
Pingback: Email Processing 4 Cash Jobs
Pingback: Payday Loans
Pingback: ipad accessories gifts
Pingback: waist cincher
Pingback: remy hair extensions
Pingback: Alhambra video optimization for seo
Pingback: escort las vegas
Pingback: ham radio3k
Pingback: Burbank seo marketing services
Pingback: free online web directories
Pingback: iphone parts
Pingback: smokeless cigarette
Pingback: Nazilli Belediye Baskan Adayları
Pingback: rise of venice cheats
Pingback: paul drago md
Pingback: empire medical training reviews
Pingback: david lutes gestalt
Pingback: little yorkies
Pingback: izmir bayan escort
Pingback: visit page
Pingback: browse this site
Pingback: jason plenderleith
Pingback: seminovos BH
Pingback: paul streeter homes
Pingback: canon rebel xs
Pingback: web designers directory
Pingback: hosting domain
Pingback: tucson internet marketing
Pingback: page rank check
Pingback: asus laptop
Pingback: รับทำ SEO ราคาถูก
Pingback: Dating Tester
Pingback: seo services ireland
Pingback: Nazilli Akp Belediye Başkan Adayları
Pingback: Nazilli MHP Belediye Başkan Adayları
Pingback: Nazilli Chp Belediye Başkan Adayı
Pingback: tjene penger hjemmefra
Pingback: dog poop
Pingback: sell my car
Pingback: baran promosi souvenir perusahaan
Pingback: musical theater rights
Pingback: mark adams sozo
Pingback: most beautiful book covers
Pingback: izmir escort eda
Pingback: FIFA 14 RMT
Pingback: TESO Gold
Pingback: Free Sugar Daddy Dating Site
Pingback: FFXIV è‚²æˆä»£è¡Œ
Pingback: FF11 è‚²æˆä»£è¡Œ
Pingback: The Elder Scrolls Online Power Leveling
Pingback: how to transfer NHS pension India
Pingback: rs 3 gold
Pingback: accident attorney austin
Pingback: POE Items
Pingback: Timbangan Murah
Pingback: Nail Salons Markham
Pingback: ESO Gold
Pingback: RuneScape FireCape
Pingback: hacker un compte facebook
Pingback: ESO Power Leveling
Pingback: Sublimation mugs
Pingback: payday loans
Pingback: izmir anaokulları
Pingback: daily deals
Pingback: this article
Pingback: Jerk off
Pingback: breaking bad game
Pingback: Houston SEO
Pingback: nepal peak climbing
Pingback: Portrait Photography Workshops
Pingback: FIFA 14 coins PS4
Pingback: Wall Plates
Pingback: Ontario basement repair
Pingback: æˆ¦å›½ixa RMT
Pingback: FFXI è‚²æˆä»£è¡Œ
Pingback: Path Of Exile Currency Items
Pingback: buffalo web design
Pingback: The Elder Scrolls Online Gold
Pingback: çœŸãƒ»ä¸‰åœ‹ç„¡åŒ RMT
Pingback: Wizardry RMT
Pingback: online casino
Pingback: reiki healer
Pingback: Nazilli Belediye Seçim Anketi
Pingback: izmir anaokulları rehberi
Pingback: lunatik promo code
Pingback: david sills qb
Pingback: free background checks
Pingback: buy VigRX Plus
Pingback: professional cleaners
Pingback: World of Tanks Power Leveling
Pingback: FF11 ã‚®ãƒ«
Pingback: RuneScape Fire Cape
Pingback: günlük burç yorumlari
Pingback: Nanette Laforce
Pingback: FIFA 14 coins XBOX 360
Pingback: navigate here
Pingback: carpet cleaning charlotte nc
Pingback: wholesale warranty
Pingback: Old school new body
Pingback: nutrition guide
Pingback: iherb coupon
Pingback: Toronto Locksmith Services
Pingback: morkie puppies for sale in ohio
Pingback: wedding dresses
Pingback: gratis sesso
Pingback: iherb coupons
Pingback: ffxiv power leveling
Pingback: en hizli seo
Pingback: izmir web seo
Pingback: consumer business centre
Pingback: INFO TIMBANGAN DIGITAL
Pingback: funny Pictures
Pingback: weight Loss
Pingback: ãƒ©ã‚°ãƒŠãƒã‚¯ã‚ªãƒ³ãƒ©ã‚¤ãƒ³ RMT
Pingback: cheapest payday loans
Pingback: wisata pulau tidung
Pingback: expedia travel
Pingback: FF14 ã‚®ãƒ«
Pingback: truck hybrid certified
Pingback: SEO Tools
Pingback: sunshine toyota
Pingback: new fords
Pingback: Advice by The 247 Newsroom
Pingback: sell your cats direct
Pingback: Look for Fisgki
Pingback: Nashville, TN For Sale By Owner
Pingback: For Sale By Owner Orlando, FL
Pingback: Unlock iPhone
Pingback: baptistika rouxa
Pingback: silicone spatula
Pingback: Diablo 3 è‚²æˆä»£è¡Œ
Pingback: TERA RMT
Pingback: MHF RMT
Pingback: neverwinter power leveling
Pingback: Neverwinter Astraldiamant(Neverwinter Astral Diamonds)
Pingback: Elder Scrolls Online Gold
Pingback: AION ã‚®ãƒ¼ãƒŠ
Pingback: options binaires avis
Pingback: anthony angiuli
Pingback: Play Dress Up Games Online
Pingback: Free Dress Up Games Online
Pingback: code promo Xflirt
Pingback: code promo parapharmacie
Pingback: wholesale cigar
Pingback: laser spine surgery
Pingback: Urban Adventures
Pingback: Cheap Cozumel Tours
Pingback: recette crepe
Pingback: status sarl
Pingback: èˆžç¿”ä¼ RMT
Pingback: ãƒ‰ãƒ©ã‚¯ã‚¨10 RMT
Pingback: lawn mowing services
Pingback: one more blogpost
Pingback: urlman cow
Pingback: check source
Pingback: should i buy gold or silver
Pingback: life quotes
Pingback: university essay writer
Pingback: everquest next power leveling
Pingback: TESO Gold EU
Pingback: ã‚¨ãƒãƒ¼ãƒ—ãƒ©ãƒãƒƒãƒˆ RMT
Pingback: Homeshop 18 Coupon
Pingback: blade and soul power leveling
Pingback: Guild Wars 2 Power Leveling
Pingback: GOLIATH LABS
Pingback: buy facebook application votes
Pingback: payday loans for bad credit
Pingback: nail salon scottsdale
Pingback: waxing scottsdale
Pingback: breast actives buy
Pingback: Sosyal iliskiler
Pingback: Hop Hoang Fremont
Pingback: Shaahin Cheyene
Pingback: MHF Zeny
Pingback: Unlock iPhone EMEA
Pingback: s3ks on the beach
Pingback: İzmir s3ks
Pingback: Ð¾Ð½Ð»Ð°Ð¹Ð½ ÐºÐ°Ð·Ð¸Ð½Ð¾
Pingback: girls in yoga pants
Pingback: see here
Pingback: wedding videograhpy charlotte nc
Pingback: click here
Pingback: embroidery design
Pingback: FFXIV Gil
Pingback: prada handbags
Pingback: best value laptop
Pingback: Generic Levitra
Pingback: pirater compte facebook
Pingback: finish line coupons
Pingback: search engine optimization companies
Pingback: PMP Certification)
Pingback: iphone repair leeds
Pingback: Mclaren Auto Body
Pingback: iphone repair london
Pingback: Try This Site
Pingback: mark williams
Pingback: japan shopping
Pingback: You Can Check Here
Pingback: Play Parking Games Free
Pingback: magic suitcase
Pingback: ãƒ¬ã‚¸ã‚§ãƒ³ãƒ‰ ã‚ªãƒ– ã‚½ã‚¦ãƒ«ã‚º RMT
Since the invention of the "shareholder rights plan" (i.e. the "poison pill"), most companies are relatively immune to hostile takeovers. But according to Dave Gonigam that could all change thanks to one activist investor. And if you're savvy enough, you may just be able to follow his lead for big gains. Read on...
As the markets have continued to rally over the last several years, more and more people have touted the problem of "income inequality" in the US. But as Jim Mosquera explains, this perceived problem will likely sort itself out with the arrival of one specific market event. Read on...
Almost one year ago, substation telephone cables were maliciously cut in San Jose, CA. In 20 minutes, 17 transformers were knocked out. A year on, similar threats have cropped up. Today, Addison Wiggin explains why these threats are so serious for the safety of the global economy... and shows you one way to play it...
The big problem with declaring bubbles is that it really does you no good. Unless you're attempting to measure and time market moves, you're also blowing hot air. But if you keep watch for negative divergences, you have a much better shot at figuring out big market moves than the latest bubble-busters. Greg Guenthner explains...
Too often investments are made in a vacuum. But as Byron King demonstrates, the global economic crash... easy money... and technological advancements are all interdependent. In particular, that connection has changed the investment calculus in the resource market. Read on to learn how...
Oil isn't the only resource to experience "peaks." Due to a major contraction in gold exploration over the past few years, the mining sector is no longer mining gold at its replacement rate. In other words, the amount of gold above ground is running out. And according to Henry Bonner, it will get worse before it gets better...