Switzerland's largest newspaper posts Austrian critique of paper money

Dangers of the paper money system
Economists fear significantly higher inflation rates in the medium term

Subtitle of the picture: Since has the founding of the Federal Reserve reserve in 1913 the dollar lost approximately 95% of its value.

The use of paper money has contributed from the perspective of some economists to a bloating of the financial sector and rapid boom and bust cycles. The money glut of central banks could lead to higher inflation.

Michael Ferber

«LTRO», «quantitative easing», «Operation Twist» - with such cryptic expressions international central banks have enhanced the vocabulary of finance in recent years. Decisions by the FED and the European Central Bank (ECB) to print money and support ailing banks hide behind these terms. This is to combat the crisis in industrialized countries and has toned down several times already, for example, the worsening of the euro debt crisis. Pumping billions and billions of euros and dollars in the money circuit should not, however, resolve the crisis.

Medicine or poison?

It will try to heal the patient with medicine, which had made him sick in the first place: more and more cheap money, Kuno Kennel said, head of Barclays Capital Switzerland, at a meeting in Zurich. But what will happen when the market will lose confidence in this healing method? In history, there are examples with terrible outcome for this. Already, some market participants expect higher inflation rates in the future.

According to Thorsten Polleit, Chief Economist of Degussa gold trading and Honorary Professor at the Frankfurt School of finance & management, the use of paper money in history often «ended in tears». He fears that currently only the beginning of a politically deliberate monetization of government debt can be observed. ... Above all in the United States the Fed has printed already more money than ever in the past few years. ...
Christof Reichmuth, Chief of the Lucerne Bank Reichmuth, does not believe that any paper money system automatically ends in tears". This shows, for example, the history of the Swiss franc [BS says SA: we had a gold standard until 1997]. However, due to the incentive structure of politicians he also looks a tendency of paper money systems to inflationary developments. The extremely expansionary monetary policy of the Fed after the collapse of the Lehman Brothers Bank in September 2008 is considered justified by Reichmuth. Ultimately mattered was therefore, to prevent a deflation / depression in the United States. The other side of the extremely expansionary monetary policy is, however, that there had therefore been no cleanup in the economy. This will explain why there are hardly any growth impulses to detect.

It is probably because that many already printed money has so far led to any significant increase in consumer prices, that the interest-rate and credit channels are still clogged. Banks hoarding money rather than pass it. Taking into account data but other than consumer prices, already significant effects of the extremely expansive monetary policy are already showing up. So there were already significant increases in asset prices in some countries. For example, the real estate prices in good locations are steadly in the Switzerland and Germany in recent years.

Money printing of the central banks is expected to have significant negative consequences for depositors, the end of old-age provisions for investors. So, losses could be socialized in the past decades costs and debt by reducing the purchasing power of money of citizens. Economists of UBS write in a study, inflation has an influence in principle as a tax - and that it was the one tax that could be collected secretly. Inflation dispossessed citizens which not (to) protect yourself before, just after. This is better system-friendly than other measures, because most people do not understand the connections.

In recent times, the debate especially in Germany has pointed to the consequences of monetary inflation. There, the inflation fears rise as the key interest rates of the ECB for the currently booming German economy are too low. Last week a group of Economics professors has launched a call against a policy of «slightly higher inflation». It said that Bundesbank President Jens Weidmann receives no public support from the Federal Government with his anti-inflationary attitude. The attempt to solve the problems of the debt crisis by more inflation will but fail and increasingly weigh on the economy. The «Spirit of inflation» once out of the bottle, then the currency is quickly threatened. But nothing is gained for the reduction of the real debt burden.

«Chained to the "Titanic"»

That Switzerland can not escape these international developments, showed already in the sharp rise in the value of the Swiss franc, the Swiss National Bank (SNB) has responded in September 2011 with the introduction of lower floor against the euro of CHF 1.20. In addition the SNB printed money also significantly, in order to prevent the CHF from getting even stronger (see chart). From the perspective of Polleit, Switzerland currently resembles a beautiful sailing boat that was chained to the «Titanic» - so to the euro zone with their profound debt crisis. The balance sheet of the SNB faces major challenges when is the crisis in Europe even more top to, because the adherence to the minimum limit could prove to be very expensive. In addition, inflation could rise. Since inflation is heavily correlated globally, it is difficult to decouple from international development from point of view of UBS for individual countries. The Bank economists assume that developing strongly depends on the monetary policy of the United States.

As Carmen Reinhart and Kenneth Rogoff in their book "This time everything is different." «Eight centuries of financial crises» explain, with the spread of paper money at the beginning of the twentieth century inflation was a "widespread and chronic problem» Before the unsecured paper money was introduced, monarchs and rulers used other tricks to avoid debt repayment: they reduced the precious metal content of the circulating coins or introduced smaller coins with the same face value.

In the light of the current situation in Greece, it is ironic that - mentioned in the book by Reinhart and Rogoff - the ruler of Dionysius in Greek Syracuse already in the 4th century BC confiscated the money in circulation and then shaped the value of 2 drachmas on any 1-Drachma coin was under threat of the death penalty. Henry VIII., and his successor Edward VI. in England provided another example of a historical currency depreciation in the years after 1542. During this time, the English pound according to Reinhart and Rogoff lost 83% of his silver.

In Sweden, the currency was devalued in 1572 by 41% according to the authors, and the Russian ruble 1798 was 14% - in the latter case to finance a war. Russia appreciated its currency again in 1810 by 41%, Austria his 1812 by 55%. Both losses were in connection with the pressures that were caused by the Napoleonic wars according to Reinhart and Rogoff.

The citizens were already in earlier centuries taken by means of violence and tricks of the respective rulers away the purchasing power of their money. From the perspective of Reinhart and Rogoff «the modern touch presses only a technically more advanced and more efficient method to achieve the same goal»-evade debt repayment. Their statistics show that inflation is actually very strongly increased in the 20th century. In many industrialized countries, the phenomenon was inflation in recent decades considered defeated, in view of the immense debt of many countries this could change again however.

Murray Rothbard, American economist and thought leader of the libertarian party, identified the root of the evil of paper money in the Federal Reserve system, created in 1913 by the signing of the Federal Reserve Act by U.S. President Woodrow Wilson. The American economy suffers from chronic inflation, which is created by the FED, Rothbard wrote. It is the task of the FED to support private commercial banks with inflation, to give them reserves and it if necessary to bail them out. Through this process, the dollar has lost about 95% of its value since the creation of the fed in 1913 (see chart). In the century before that, the purchasing power of the dollar was, however, largely stabilised.

The use of paper money covered by nothing provides in the view of some economists not only for inflation, but also for inflating of the financial sector, as well as for rapid boom and bust cycles. Historically states especially have made use of inflation when they are dragged into a war. This is demonstrated in the United States by the Vietnam war. In 1971, President Richard Nixon said that the dollar was no longer convertible into gold, and brought to the Bretton Woods system and the gold standard to an end. Because gold was missing as an "Anchor" for the money, the central bankers subsequently had the responsibility to prevent an excessive monetary expansion. According to current trends, this did not work.

When looking at today's situation, it can be argued that because of the already advanced stage of money printing boom and bust cycles currently follow each other in ever shorter time intervals. So there were two very deep financial market crises in the past decade with the stock market crash after the bursting of the Internet bubble in 2000 and 2003 and the outbreak of the financial crisis in 2007 within a few years. The rescue operations of the nations have driven debt levels even more upwards, and central banks have responded with the creation of even more paper money. These developments make an even more fundamental crisis likely.

Inflation at all costs

Polleit expects a collapse of the current system. The paper money system will no longer return to «Normal». A deflationary scenario is unlikely to occur, especially considering the determination of Fed Chairman Ben Bernanke to fight such a development at all costs. In his famous speech "deflation: making sure < it > doesn't happen here» in 2002, Bernanke expressed in a paper money system, a determined Central Bank could provide for higher spending and hence positive inflation.

As a way out of the current debt crisis Polleit holds with a development in the direction of one «Bretton Woods III» system an internationally coordinated policy on inflation conceivable. Gold and silver are likely to play a role. Also from the perspective of Reichmuth, a global currency reform to the problem of debt relief is no longer excluded. But, for more likely, he holds a combination of higher inflation, higher taxes for wealthy people and debt restructuring.

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