Our current economic model is not sustainable. Simply creating money will only lead to ruin, argues Jonathan E Doyle.
I once had arguably the world’s worst economics teacher. I remember sitting in eleventh grade economics feeling much the way I did in ninth grade algebra. In the ninth grade I was genuinely intrigued by quadratic equations. I could stare at them for hours yet sadly had no idea what to do with one. Economics was to follow the same trend.
My economics teacher, who was also my rugby coach, had a great fondness for the sport yet neither a love nor an aptitude for teaching. This was ably demonstrated by his longing stare out the windows of our classroom to the playing fields beyond. While he should have been expounding production possibility curves, he was usually gazing into the middle distance planning passing drills. The result was a sea of confusion into which my hopes of success in global finance thrashed pathetically before sinking to the depths below.
Yet this was not the end. Like an unexpected romance, you always remember where you were when it begins. So it was with my return to the study of economics and global macro finance some 30 years later. I was covered in sweat, riding an exercise bike in my garage.
Government overreach and the prostitution of cabinet decision-making to unelected COVID bureaucrats meant my business had imploded and my international speaking schedule had terminated as quickly as a Joe Biden press conference.
Lockdown saw me riding endless hours in that garage seeking some edification or distraction on Youtube. One particular day I came across a series of videos on the history of the global financial system and the role of gold and silver as a monetary standard by which fiat (paper) currencies could be held to some semblance of accountability. The rest, as they say, is history. Down the Youtube rabbit hole I went.
In the months that followed I read and studied and watched and listened. I began running ultramarathons in the dark at 3am.
My sole companions on these nocturnal journeys of pain, via podcasts and audiobooks, were some of the greatest current thinkers on global macro finance.
Despite the occasional economics podcaster who was probably living in his mother’s basement with a QAnon tattoo, the rest were quite brilliant. Many had multi-decade careers in investment. Most were too rich to care about causing offence. Some had a tangible desire to signal an impending crisis. Something, they knew, was coming like a slow train down the tracks.
In what follows, I will try to explain what it is they saw. To be fair, it’s a difficult topic involving vast tracts of history and complex human behaviour. In essence, it’s this: an impending collapse of the global monetary system caused by economic theories rooted in faulty philosophy, anthropology and ontology (that is, how we understand the human person and being). This has and is being accelerated by collusion between the upper echelons of the mercantile and governing elites.
Only God creates something out of nothing. But try telling that to a central banker and you will notice a shocked intake of breath. Since 1971, when Richard Nixon definitively took the US off the gold standard, the entire planet has been involved in one vast experiment.
Currency printing. Essentially that means creating something out of nothing. Magical unicorn money!
If you or I print currency at home we go to jail. If the central banks do it it’s called monetary policy. If you or I print currency at home we don’t see our family for 20 years. When central bankers and their government enablers print currency they get a private jet to Davos and a new villa on Lake Como.
Before 1971, every US dollar had to be backed by a set amount of physical gold held in reserve. The French were the first to figure out there was no way the US could possibly have enough gold to back the amount of currency they were churning out. De Gaulle called time on the scam and Nixon closed the gold window faster than you can say ‘Watergate.’
The magic of profligate currency printing was embedded in John Maynard Keynes’ demand side theories of monetary and fiscal policy. Keynes won the day at the Bretton Woods Accords in New Hampshire in 1944. Bretton Woods was kind of like the Eurovision Song Contest for economists and bureaucrats. It was a meeting of world leaders and economists whereby a new international monetary system would be hammered out for the post war era.
The US dollar would be pegged to gold and other currencies would be pegged to the US dollar. Countries accumulating US dollars in a trade surplus could then, should they wish, cash in their US dollars for physical gold.
Keynes believed that governments could stimulate the economy by spending into it. In essence, governments could create demand. Most people think this process of spending by the government to create demand is funded by tax dollars. It’s not.
The US, as the most obvious example, is currently running multi-trillion dollar deficits. It spends trillions more than it taxes.
The Federal Reserve prints the rest and buys US Treasuries from a group of Primary Dealer Banks who take that money and park most of it in their accounts with the Federal Reserve for which they are paid interest.
Note well, that nothing of value was created. No new products or services. It’s just a vast shell game of multi-billion dollar transfers between government and the banking sector.
Since COVID began almost 30 trillion dollars of excess liquidity has entered the global banking system. That’s 30 trillion dollars that did not come from anything of value being produced by anyone. And always remember this truth, every dollar finds a home. There is a reason asset prices, such as stocks and real estate, are somewhere north of Pluto.
In essence the currency printing exists at this scale because no government or central bank wants the collapse of markets to happen on their watch. They will do everything within their rapidly diminishing power to prop the system up for one more week or month or year.
To me, right now, a lot of central bankers are starting to look like the Wizard of Oz when the curtain gets pulled back. They are rapidly pulling every lever in the hope the illusion can continue and that no one will notice. The belief appears to be that the laws of reason, science and reality itself do not apply to the global banking system.
This prodigious rate of currency printing has no historical precedent.
At least not at this scale. It’s also interesting to note that almost no physical paper money is actually printed. It’s just a euphemism. I am not making this up.
There is a man or woman sitting in an office at the New York Federal Reserve or the Bank of England or the European Central Bank who sits at a keyboard and types in ‘100 billion euros’ or ’50 billion dollars’ on a computer screen and then presses the enter key. That is literally what happens.
That money is then used to purchase government securities from primary dealer banks. It then works its way into the real economy chasing real goods and services. And what do you think happens when a vastly increased money supply chases a smaller pool of goods and services? Inflation? Deflation? Hyperinflation? No one is actually sure how it plays out. All we know is that it cannot continue.
Not convinced? Ask yourself how, despite a global pandemic, despite vast unemployment, despite disrupted global supply chains, despite millions of business failures, somehow virtually every asset class on the planet from equities to real estate to second hand cars to crypto-currencies are trading at record highs. That, my friend, is an everything bubble. That is the suspension of the laws of reality itself.
In contrast to Keynes’ demand side theories, classical economics focuses on a supply side model. Men and women producing worthwhile goods and services that people actually want is the basis of a productive and stable political economy. The way you build a supply side stable economy is with two things and pretty much two things only. Low taxes and stable money.
Low taxes encourage entrepreneurship, effort and industry. People work harder, start businesses and take more risks when they know they get to keep the bulk of what they produce. Stable money means that people can make reasonable economic and investment decisions in the belief that, at least economically speaking, tomorrow should look pretty similar to today.
Supply side theory also seems to better capture the best of western cosmology, or, as the great supply-sider Jude Wanniski used to say, ‘the way the world (actually) works’. If the inherent flaw in demand side is that we don’t get to create something out of nothing because that is God’s role, then supply side takes the inverse position.
In a supply side world we are particeps creatoris. We participate with God, the cosmos and reality itself in the very act of creation. We cooperate by bringing utility, value and beauty into the world. We cooperate with the generative divine nature in tending the metaphorical Eden of the global financial system, however imperfectly.
And, it’s worth remembering, we either cooperate with reality or are eventually broken by it.
Supply side also captures certain inherent truths about the human person and the dignity of work. Note the sinister push for Universal Basic Income (UBI) from the new global money high priesthood.
Paying people to stay home or to do meaningless work misconstrues the truth about the value and dignity of the human person. We are created for work. Not for work alone, mind you, but it is a central aspect of what it means to be human. Adam and Eve did not sit around Eden spending government handouts at a celestial Walmart or Tesco. They tended the ground. They produced. It’s at least an anagogic proof that supply precedes demand. Adam and Eve produced even though there was, initially, no one to demand.
The post Bretton Woods experiment is coming to an end. The structure of reality is only warped for so long before it snaps back, however painfully. We cannot create out of nothing. We cannot print and spend our way to prosperity.
The sad truth is that as this slow train comes down the tracks, it is the middle class and the poor who suffer. They cannot get out of the way. But at that Lake Como villa the train rumbles safely past as you pour your next martini.
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