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Source link: http://archive.mises.org/12755/have-we-crossed-the-point-of-no-return-read-more-ludwig-von-mises-institute-homepage-httpmises-orgixzz0otksufqw/

Have We Crossed the Point of No Return?

May 20, 2010 by

A specter is haunting the world, and especially Europe: sovereign insolvency. Sovereign-debt problems may already have reached a point beyond remedy — short of default or high rates of inflation. FULL ARTICLE by Philipp Bagus

{ 24 comments }

Adam Knott May 20, 2010 at 8:56 am

Good article Philipp

newson May 20, 2010 at 10:02 am

anyone game to guess how many years before the euro dies?

P T Bull May 20, 2010 at 10:56 am

I am thinking it will be measured in months.

ABR May 20, 2010 at 6:26 pm

Suppose the euro dies by agreement among the participating nations. Germany goes back to the DM. How many euros for a DM? Whose euros? Only those held by Germans? I’m getting a brain cramp. Any ideas on how a reversal would actually work?

If someone can provide a rational process by which to effect a reversal, then my guess on the euro’s collapse is 18-36m.

Steve Richardson May 22, 2010 at 8:42 am

As I posted elsewhere, there is considerable 20th century historical precedent in Europe for fragmenting a widely-used currency into the responsibility of various political areas that formerly comprised the currency zone, although most of that occurred in a pre-electronic age where bank deposits were physical.

The and most relevant example was after World War I when the Austro-Hungarian empire was splintered by Britain, France and Woodrow Wilson into several chunks, principally Austria (called temporarily German Austria), Hungary (from which much territory was carved off for Romania), Czechoslovakia (mainly former Bohemia), and the portion of Bohemia that was Polish. The krone had formerly been the currency in all these places. Suddenly each area was required to apply stickers identifying the “new” country where the notes were circulating to each banknote, thus identifying it as belonging to that polity. Then the reserves of the Austro-Hungarian treasury were apportioned to the new political divisions and the stickered banknotes became obligations of each respective area, gradually withdrawn and replaced locally by new national currencies of each country. Bank accounts were redenominated in the new local currencies.

Similar arrangements were made when Czechoslovakia itself split apart in the ’90′s, as I recall, and two separate currencies replaced the prior unified one, gradually drifting apart in value as time passed.

Presumably that could be done in the Euro zone, too.

P T Bull May 20, 2010 at 10:32 am

I am told there is a point when approaching a black hole where it is impossible to avoid getting sucked into it. Is america, or western civilization capable of disciplining itself to avoid currency crisis and hyper-inflation? I wish they did, but realistically I just don’t see it.

This institute and others make some progress with education, but the generations raised on socialism and keynesianism form the bulk of the electorate–not to mention illegals that appear to have a strong voice in our political process and who knows what sort of education regarding national fiscal policy–far outnumber the enlightened.

This reminds me of the fictional hari seldon in the foundation series of science fiction writings. He determined that the collapse of the universe’s Empire governance was inevitable and only sought to reduce the time period of chaos before a new order came about.

Robby May 20, 2010 at 2:29 pm

The “event horizon” of fiat currency….I like it.

Seattle May 20, 2010 at 2:38 pm

Inflation is a policy. It is not an act of God. It is not western civilization that needs “discipline” but the entire political system which must be scrapped forever.

mpolzkill May 20, 2010 at 8:24 pm

Those “illegals” (migrant workers) cleaning my toilets *have* been living high on the hog.

They don’t have a voice, are you kidding? Being a tool is not having a “voice”.

Off topic, just irritates me.

Jim Davidson May 22, 2010 at 6:42 am

Yes, and it was Seldon’s view that the period of chaos would be reduced if the empire fell sooner rather than later. Of course, it worked out that way in Asimov’s books because, well, Asimov wrote it that way. Heh.

There is a relationship between the distance to a black hole’s event horizon and how much change in velocity you would need to escape the black hole. Once you pass the event horizon, you would have to go faster than the speed of light in order to escape. There is probably such a point of no return in the economics of hyperinflation, and we are very likely near that cusp. When I see things like the Feral Reserveless monetary base going asymptotic, along with excess reserves of banks, I begin to think there is something really uncomfortable happening.

Of course, in our analogy nothing escapes a black hole because nothing goes faster than light. In the universe, black holes appear to be emitting particles. And there are “superluminal” objects that seem to leave galaxies as jets of gas moving faster than the speed of light – if our distance scale of the universe is correct.

Abhinandan Mallick May 24, 2010 at 5:24 am

“There is a relationship between the distance to a black hole’s event horizon and how much change in velocity you would need to escape the black hole. Once you pass the event horizon, you would have to go faster than the speed of light in order to escape.”

What’s interesting about that analogy is that for us “Schwarzchild observers”, it would appear that the particle never actually “falls” into the black hole but slows down asymptotically towards it, since it being inside would be beyond our own event horizon.

Perhaps Ben the nutcase Bernanke sees himself like a Schwarzchild observer of the destruction and inflation he’s creating, which as it increases asymptotically is “slowing down” to him.

Tim Kern May 20, 2010 at 10:36 am

Have we pased the point of no return? Yes. Ellsworth Toohey’s strategy has worked. (Who didn’t see that coming?)

Let’s now talk strategies to use for the coming years.

Steve Richardson (Adamantane) May 20, 2010 at 11:33 am

I agree with the general analysis, but there’s really no need for melodramatics about the conclusion.

There is never really any point of no return so long as humans live and exchange with one another, merely a point at which there is a crossover to “different energetics” one might say, a new mechanism or path replacing much of whatever system/mechanism has failed.

Monetarily these crossovers can be synthetic, e.g., the rentenmark and finally the goldmark in 1923 Germany, or spontaneous, such as the emergence of de facto alternatives, such as commodities in the wake of post war destruction.

This is not to say that deteriorating or spinning into such a crossover point is not an horrific experience or in any way just to those caught up in it. Moreover, outrageously, often those responsible for the failure emerge better off than anyone else.

A great psychological fault line within the freedom movement which I have observed for 40 years or so is our mutually-reinforcing fascination with catastrophe, collapse and annihilation, not unlike the preoccupation of pyromaniacs with blazing fires, or teenage boys with explosions. (I am reminded of my late aunt who never seemed so alive and engaged than when she was attending someone’s funeral!)

We all fall prey to this mindset; it is corrosive and toxic. It tends to paralyze our ability to act. I have no explanation for the phenomenon, but only caution that we all remain on guard against being swept into it unawares.

Adamantane

Joe May 20, 2010 at 11:57 am

I generally agree with everything said. I do have a concern with any collapse that might happen whether it is Europe or the US. One must have confidence that the general populous will choose the correct path. Based on what I have seen in the past 10 years we are going in the wrong direction politically in the US. If people in this country think that big government is the answer than we are in for a lot of pain and suffering. I never found the German people to be stupid but lo and behold they elected a tyrant as the appropriate choice. The US is slowly becoming a socialist country based on some of the results of this years congressional votes. When 50% of the employed don’t pay federal income tax then we are reaching such a welfare condition that majority rule is going to take us down the wrong road. I understand this country is a Constitutional Republic but who follows the constitution anymore.
Hopefully the US citizen has some special DNA that kicks in at the appropriate time. We will see in the 2010 election and 2012 election cycle.
John Galt where are you?

Deus X. Nihilo May 20, 2010 at 12:06 pm

I’ll go Adamante one better and say that I hope and pray that we have damn well passed the point of no return for this highly wasteful, destructive Keynsian globalist fiat money system, because that’s what’s in danger of collapsing right now, not economic progress as such. Human beings will continue to seek cooperative ways of furthering their own interests, the current system be damned for constantly trying to obstruct them and so the sooner it’s done like an overcooked turkey, the better and less painful it will be in the long run. The meltdown of this deeply flawed and inevitably doomed system is a sign that economic laws really are at work, they’re not just abstract parlor games. So if you have gold and silver coins handy, or any other commodities that might serve as money, hold on to them for now because you might need them soon enough for the long task of realigning productive processes to non-parasitic human desires.

It’s sad that the breakdown of this horrible system will ruin many lives in the process, but reality has a nasty habit of slapping upside the head those who refuse to heed it. She is a jealous mistress who does not suffer foolish fantasies for long.

Walt D. May 20, 2010 at 1:35 pm

I think we passed it a long time ago. See this article from 2005.
http://www.lewrockwell.com/englund/englund18.html
This was before the $1.4 trillion deficits.

Gurrie Rhoads May 20, 2010 at 4:41 pm

I really did not like the article, and I am concerned at how much some libertarians are beginning to sound more like Karl Marx than like Ludwig Von Mises. An example:

“The liquidation of malinvestments is beneficial in the sense that it purges inefficient projects and realigns the structure of production to consumer preferences. Factors of production that were misused in malinvestments are liberated and transferred to projects that consumers want more urgently to be realized.”

Sounds pretty much like Das Kapital to me.

Gang, the answer to the government’s having put the monetary pedal to the metal for too long is not, repeat not, to jam on the brakes and cheer as everyone’s head goes through the windshield. The answer is to take the foot off the accelerator and let the market coast to find its own speed. The situation now, with trillions of new dollars being created, but a regulatory environment where the banks are “deleveraging” and building up their cash (so they can buy more treasuries when the arm is put on them), is definitely not a “liquidation of malinvestments”, whatever that is supposed to mean, or a “liberation of the factors of production”, whatever that is supposed to mean.

Money can be gold, or fiat, or dollars, or francs, or whatever a large number of individuals decide to use in denominating their purchases, their contracts and their savings vehicles. The simple truth is that they will gravitate toward whatever seems to be the most stable and/or predictable. When the Fed chooses to alternate between accelerator and brake on an unpredictable basis, only those that are “in the know” will benefit (and I’m not talking about economists).

Gurrie

Greg May 20, 2010 at 5:31 pm

Liquidation of malinvestments is beneficial in the same sense as putting out a housefire is beneficial. It’s not a good situation, but you’re making the best of it. Ignoring the fire or letting the fire slowly burn out or “find its own speed” is not the answer. There is nothing Marxist about the paragraph you quoted.

If you’re driving a van off a cliff, better to jam on the brakes and hit your head on the windshield, perhaps losing a passenger or two, than to lose everyone.

Gurrie Rhoads May 21, 2010 at 2:25 am

My goodness, what with fires blazing and cars going off cliffs we are getting a little wild with metaphors, aren’t we! I didn’t mean to start down that slippery slope (another one that’s overused, I’m afraid).The economy was not “on fire” and the van was not “headed off a cliff”. Congress, in its zeal to make housing affordable for everyone (which the market was already doing in an adequate fashion), and the Fed, in its zeal to let W have his war and domestic prosperity too, created conditions where housing prices were going up faster than normal. When the Fed went to 1% (the first time), it was clearly saying to the banks and others in the financial markets “get the money out the door as fast as you can”.It should not be a surprise that some bad decisions were made.With Sarbanes Oxley and mark-to-market firmly in place, a few poorly performing funds suddenly created a little panic, which then spread (like wildfire? oops). Most banks were not actually losing money from an operational standpoint, but their investments were plummeting in value and the FDIC became a “capital ratio gestapo”, helping some banks and seizing others.This whole deleveraging episode has been very similar to, but worse than, the deliberate destruction of the savings and loan industry in the 1980′s. It is not a good thing.

htran May 20, 2010 at 7:44 pm

P T Bull:

“This institute and others make some progress with education, but the generations raised on socialism and keynesianism form the bulk of the electorate… far outnumber the enlightened.”

The problem is systemic. The system was supposed to be vigilant citizens safeguarding liberty. When that task was marginalized and demonized, the people will end up having to go as well.

Steve Richardson May 22, 2010 at 8:53 am

As I dimly recall, while Marx swerved off the path and his wheels came off, his economic education was originally rooted in what was the classical economics of the day, English and Scottish thought, notably Smith and Ricardo. He hung around with the likes of individualist anti-authoritarians like Max Stirner.

Steve Richardson May 22, 2010 at 9:30 am

Let’s not get trapped by our metaphors or the sidetracked into the ethics of emergencies.

The devil is always in transitions from one public policy to another, whether in the direction of more intervention or less. I am glad you point this up.

Therein lies one of the hot ongoing debates in the freedom movement when we seek to remove the barnacles encrusting our institutions.Individuals plan their actions based on whatever arrangements exist and presumably will continue to exist, whether those arrangements are just or inequitable.

A classic example is withdrawal from a war where the withdrawing force is totally dominant in the situation, or even if not where, outright surrender isn’t contemplated. The simplest notion is to simply stop fighting and attempt to go home, but a staged withdrawal over weeks is much less likely to result in unintended chaos.

If the war is viewed as an immoral aggressive war, one could argue that each day the withdrawal is prolonged in the interest of avoiding subsequent chaos, is another day of immoral aggression and another day where innocent people are being violated. I understand that argument and sympathize with the desire to withdraw as quickly as possible, but simply dropping weapons on the ground and leaving the field has overall consequences for the combatants and the civilians even more dire than winding down the hostilities in the theater over a few weeks or months. (Scant consolation to soldiers killed or wounded after a cessation to hostilities has been decided but not yet fully implemented.)

So, too, would be the transition from extreme social welfare forced pension plans to a less coercive arrangement. It would be both impractical and unnecessarily damaging simply to stop collecting pension taxes and cut off the monthly checks.

Necessarily this means that after the decision has been made to change the system to something less aggressive, people of nececessity will still be coerced for a time.

But a smoothly crafted transition entailing some extended winding-down of the coercive arrangements can be woven into individual future planning without discontinuities that create dire individual circumstances.

To me a staged transition is a vastly better alternative than precipitating riots in the name of doing no harm.

Ralph Fucetola JD May 20, 2010 at 8:05 pm

Gurrie,

I tend to agree “The answer is to take the foot off the accelerator and let the market coast to find its own speed.” Ron Paul has a bill pending to do just that… allow competition with the FRB fiat legal tender.

Quoting CoinNews.net:

“H.R. 4248, or the Free Competition in Currency Act of 2009, includes several measures to end government controlled currency. One is to repeal Section 5103 of Title 31 of the United States Code which includes legal tender language that, according to Ron Paul, should not exist. ‘There is nothing in the Constitution that grants the Congress the power to enact legal tender laws. We, the Congress, have the power to coin money, regulate the value thereof, and of foreign coin, but not to declare a legal tender. Yet, there is a section of US Code, 31 USC 5103, that purports to establish US coins and currency, including Federal Reserve notes, as legal tender.’

Federal law currently mandates short-term capital gains rates of up to 35 percent for coins and long-term capital gains taxes of 28 percent, which Ron Paul argues is a hindrance to competitive currencies. H.R. 4248 would eliminate taxes on 1any coin, medal, token, or gold, silver, platinum, palladium, or rhodium bullion’ as well as restrict states from assessing taxes and fees ‘on any currency.’”

George May 22, 2010 at 1:02 am

Socialism? A system where hundreds of bankers get hundreds of millions of dollars of bonuses is what you call socialism? Call a spade a spade.

Inflation probably later, but not just yet. The new money actually has to be spent and used to bid up resources; hard for that to happen when asset prices are stagnant and 20%+ are unemployed… Not to say that it doesn’t cause redistribution even without general inflation (see comment about scam artists above)

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