Recently, I was interviewed by Lex Hoogduin, professor in monetary economics at the University of Groningen and former director of the Dutch central bank (DNB), about the publication of the first Dutch edition of Ludwig von Mises’ magnum opus, Human Action. Despite the fact that this book appeared for the first time in 1949, the lessons of Mises are as relevant as ever. How relevant exactly? Let’s look at five quotes from Mises’ masterpiece to see just how relevant his work still is today.
“Credit expansion and inflationary increase of the quantity of money frustrate the "common man's" attempts to save and to accumulate reserves for less propitious days.” (Chapter 35)
Savers are losers, Robert Kiyosaki would say. Banks are lowering interest rates on savings accounts toward zero. And the only reason interest rates are so low, in contrary to what many economists now argue, is due to central banks’ zero interest rate policies. Because central banks are flooding commercial banks with bank reserves, which they create out of thin air, interest rates are at their lowest level ever. Who stands to lose? The “common man,” as Mises would call the middle class.
“The financial history of the last century shows a steady increase in the amount of public indebtedness. Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.” (Chapter 12)
Never ever were Western societies so heavily indebted as today. Especially since 2008, when governments began bailing out banks on a scale never seen before, total public debt has gone through the roof. The idea, however, that we could “grow” our way out of the debt, is ridiculous. Precisely because the debt is so high, economic growth stagnates.
A final settlement of today’s debt burden is inevitable. There are two ways out: a period of high inflation, which leads to a dilution of pensions and savings, or a (partial) default of governments, in which bond holders would receive mere pennies on the dollar. Whatever the solution, these debts will be settled one day, as Mises argues. However, this will most certainly not happen by full repayment of the outstanding debt by the government.
“Nothing harmed the cause of liberalism more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in the unhampered market economy. People did not conceive that what they lamented was the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion. They stubbornly kept to these policies and tried in vain to fight their undesired consequences by more and more government interference.” (Chapter 17)
Ludwig von Mises already demonstrated in the past century that the phenomenon of economic booms followed by recessions, the economic cycle, has a monetary origin. Because central banks lower interest rates and (try to) stimulate bank credit expansion, a chain of events is set into motion that can only end in one way: in a painful recession.
And what is the solution to a recession according to those very same central banks?
Even lower interest rates and more credit expansion.
Central banks are like pyromanic firefighters, that try to extinguish the fire which they themselves have set, by pouring more oil on it. The idea that central bankers are our lifesavers when a recession strikes, is one of the most harmful ideas that exists in our today’s society.
We are trying to solve a problem that is caused by too much debt and too much credit, with more debt and more credit? That is akin to helping a drug addict by giving him an extra dose of heroin.
“What governments call international monetary cooperation is concerted action for the sake of credit expansion. They have learned that credit expansion, when limited to one country only, results in an external drain. They believe that it is only the external drain that frustrates their plans of lowering the rate of interest and thus of creating an everlasting boom.” (Chapter 17)
Currency wars, they are popularly called. Last week, many world leaders gathered at Sendai, Japan. A G7 meeting was scheduled. Meanwhile, a conflict was surfacing between the United States and Japan, the host of this G7 gathering.
Over the past months, Japan has been suffering the consequences of its appreciating yen. That said, a correction in the USDJPY was a matter of time. The Japanese yen was losing value against the dollar for quite some time. Now the yen is rising, the Japanese Keynesians want to intervene and return to devaluing the yen.
The United States isn’t pleased, to say the least. U.S. policy makers argue that the correction in the yen is “orderly”, and therefore no intervention is needed. The Americans are now trying to force their hand against the Japanese, and convince them they should, for now, not intervene in the forex markets.
Concerted action, in short, for the sake of worldwide credit expansion and currency depreciation. Only, and only if, central banks fully coordinate their loose monetary policies, can they achieve their goal of depreciating their currency without large (direct) consequences for forex and capital markets.
“Interventionism generates economic nationalism, and economic nationalism generates bellicosity. If men and commodities are prevented from crossing the borderlines, why should not the armies try to pave the way for them?” (Chapter 34)
This conclusion of Mises should worry us. When economies stagnate, governments invariably resort to more protectionism. Higher import tariffs, more import restrictions, currency devaluations, and closed borders. But what these protectionist policies result in, is mere conflict.
The sanctions that were imposed on Russia are a good example. The fact that the movement of goods, services and persons is being limited, generates conflict. And when in a certain moment a country cannot obtain some of the goods it wants because it is being made impossible by trade sanctions, the good-old saying applies: desperate needs lead to desperate deeds. One option generally remains: extend your own borders by using armed forces.
Let’s hope that in name of peace the Russian sanctions will be lifted in the nearby future, even though the G7 countries decided to extend the sanctions for now. With closed borders and increasing protectionism, a war in the near future is more probable than with open borders.
And if an armed conflict (that is, a war) erupts after imposing trade sanctions, Ludwig von Mises would be a prophet once again. Probably, if he were still alive, to his own regret.