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Yearning for a Currency Debaser’s Prison

Politics / Fiat Currency Sep 29, 2011 - 11:52 AM GMT

By: Aftab_Singh

Politics

Best Financial Markets Analysis ArticleUntil the mid-19th century, the means of retribution for the stiffed creditor was debtor’s prison. If the creditor could not see the return of his capital, then at least he could temper the pain and humiliation by witnessing the incarceration of the defaulted debtor. In our age of monetary lunacy, it would seem that some of the world’s more dollar-dependent central bankers are quietly (or perhaps not-so-quietly), yearning for a similarly harsh ‘debaser’s prison’. Here I speculate about the peculiar world of the dollar-dependent central banker and consider the consequences of the dearth of entrepreneurial spirit in the money production business.


Even bandits don’t like getting shortchanged:

Nobody likes getting shortchanged — including the people who are usually doing the shortchanging! This is the thing with the international monetary system as it exists today; no matter how profligate the Federal Reserve is, it usually imparts greater profligacy upon the rest of the world courtesy of the stockpiles of dollars and dollar-denominated securities on the asset sides of global central bank balance sheets.

Why? Well, when the Federal Reserve expands its balance sheet in favour of paper financial instruments, the outstanding stock of Federal Reserve notes and Reserve balances morph to become irredeemable claims upon relatively more paper and relatively less gold. The consequence is that greater upward pressures are placed upon the Federal Reserve note price of gold (particularly in the event of a metaphorical evaporation of the paper). However, and this is important, since other central banks own dollar reserves as significant proportions of their (supposedly) hard reserves, they find that the assets that used to back their outstanding stocks of central bank notes disappear. Resultantly, the status quo in the structure of outstanding central bank notes can only be maintained  via vicious contractions in those respective central bank balance sheets.

But in the world of central banking this is a kind-of checkmate scenario; for what are these guys going to do? Un-monetize their respective national debts?! Please… if they do that I’ll eat my 16th century hat…

We must take note of the point that the dollar-dependent central banks that see their reserves debased are also in the game of violating property rights. So they are faced with this unpalatable circumstance where they either contract their central bank balance sheets (to the frustration of their respective governments), or they continue to monetize their respective national debts and deliver a profound boost to their respective fractional-reserve banking systems (hello inflation problem!).

The frustration, the outrage…

Alas, the frustration and the outrage that follows from the inability of Eastern central banks to debase at their own chosen paces is increasing in ferocity. For one, note Putin’s recent exclamations about the ‘monopoly position’ of the US dollar:

 

Fear not Vladimir, this scenario can’t continue indefinitely into the future! Each round of dollar debasement (via expansions in the Federal Reserve System’s balance sheet) implies that the significance of dollar reserves will likely diminish. The resolution of these problems will likely arrive via waning significance of the dollar in international monetary affairs. However, unlike has been often noted by financial commentators of late, this doesn’t have to happen by active abandonment (although it could) – it could easily happen via the dilutive effects of debasement itself.

The most confusing aspect of this whole predicament must be that such dollar-dependent central bankers only did what they were supposed to, right? After all, these people are highly ‘intelligent’ by consensual standards. It does beg the question; if the MSc PhD Noble Laureate (yada yada yada) of the high and mighty institutions of the West don’t know how to produce money, then who does?

Entrepreneurial Spirit:

And here’s where we get to the crux of the matter: What truly ails the monetary system is the dearth of entrepreneurial spirit in the money production business. For what is really wrong with the money producers of the East (and the West but for slightly different reasoms), is that they were unable to anticipate current conditions. Or, perhaps more precisely, that their presence remains significant in spite of their inability to anticipate current conditions. After all, their predicament is a function of their own central bank asset allocation policies!

To be sure, failure as such is not a problem (and perhaps it should be embraced by the experimental and energetic entrepreneur). What is a problem, however, is that such failure lingers on via a lack of market pressure and entrepreneurial competition. Just like every other entrepreneur (and any other man for that matter!), the money producer requires some kind of capacity to correctly prepare for the uncertain conditions of the future. As Ludwig von Mises wrote in Human Action:

Like every acting man, the entrepreneur is always a speculator. He deals with the uncertain conditions of the future. His success or failure depends on the correctness of his anticipation of uncertain events. If he fails in his understanding of things to come, he is doomed. The only source from which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of the consumers. If everybody is correct in anticipating the future state of the market of a certain commodity, its price and the prices of the complementary factors of production concerned would already today be adjusted to this future state. Neither profit nor loss can emerge for those embarking upon this line of business.

Unfortunately for us, if a central banker fails in his understanding of things to come, it is us, not he, that is doomed! In fact, if we really think about the position of the entrepreneur, we find that the money production could not be more confused! Again, quoting von Mises:

… those who are especially eager to profit from adjusting production to the [p. 255] expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement.

Public institutions almost definitionally have slightly slower eyes than the crowd! They are the manifestation of popular musings after all… and ironically it is this framework that is sought as the producer of the most important good of all; money!

[Incidentally, we should mention that much of the above may sound similar to our piece on the sources of profits in the business of financial speculation. Indeed, we believe that the contrarian principle is not to be restricted to the compartment of financial speculation. There is fair evidence to suggest that the contrarian principle (or some altered manifestation of it) has been behind many great businessmen. After all, Henry Ford famously said;

If I had asked people what they wanted, they would have said faster horses.

Moreover, even if you listen to — for example — Jeff Bezos, you'll gauge something in the ball-park of the contrarian principle. He emphasises that entrepreneurship requires a 'capacity to be misunderstood for long periods of time' and so on...]

Aftab Singh is an independent analyst. He writes about markets & political economy at http://greshams-law.com .

© 2011 Copyright Aftab Singh - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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