Thursday, June 20, 2013

Fighting the Last War


During the Great War (a.k.a., World War I), both sides insisted on running head-on against the other, despite the fact that military technology had advanced far beyond tactics.  Nevertheless, the leaders kept on using tactics that were at least half a century out of date.  Yards of territory were gained or lost at the cost of hundreds of thousands of lives.

The current economic situation bears a strong resemblance to that ultimately pointless conflict.  It is due (in our opinion) to the fact that all the experts today, the Ph.D. economists and politicians, are in substantial agreement.  They all insist on using a financial technology and an economic assumption that was proven fallacious more than three centuries ago.

Frankly, using the Federal Reserve the way Bernanke is using it is analogous to using a machine gun like a bow and arrow.  We doubt very much if Federal Reserve Chairman Benjamin Bernanke — or any of the dime-a-dozen economists on tap — can even define a bank of issue or central bank properly.  The economic and political guildsmen continue to insist, in the face of all evidence to the contrary, that all banks are banks of deposit, and that only government debt (or, for the pseudo reactionary elements, gold and silver) can back the currency.

The result is that government power has increased exponentially throughout the world.  This is precisely as Harold G. Moulton predicted in 1943 when the Keynesian “new philosophy of public debt” began dictating global monetary and fiscal policy:

“It will be necessary to make a choice.  With unlimited debt expansion we cannot prevent inflation without the use of totalitarian methods of control.  No compromise or half-way measures can adjust the difficulties.  The choice is between regimentation and inflation.”  (Harold G. Moulton, The New Philosophy of Public Debt.  Washington, DC: The Brookings Institution, 1943.)

The problem is that you can’t keep the lid on forever.  At some point a currency backed only by government promises starts to collapse when people realize the government can’t keep its promise.  That is what happened in Germany in the early 1920s, when the Reichsmark that in 1914 was 4.2 to the U.S. dollar reached an official exchange rate of 4.2 trillion to the dollar, and the black market rate was anywhere from 12 trillion on up.  It’s what’s happening in Greece right now.  It’s what will be happening here, possibly even before the end of 2013 — unless we get busy and push for the passage of a Capital Homestead Act.

#30#

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