The international conference on Financing for Development (FfD), scheduled to take place in Doha, Qatar, from 29 November to 02 December 2008, should examine the causes of the crisis.
These causes are the monetary policies of “our” central banks, that is, for the moment their policies of lowering interest rates. The solution is to call for an end to trade cycles by taking monetary policy out of the hands of governments.
The USA central bank, the Federal Reserve, or Fed, will do whatever it takes to fight against deflation, said the Financial Times, last week. (1)
In normal times, deflation means bankruptcies which make the system healthy again.
At present, bankruptcies would mean total economic collapse.
Our leaders will never allow this.
At present, the sheeple are flying to the USA dollar.
This results in the USA having to emit more worthless digital liquidity.
This cannot but lead to hyper-inflation which will replace the present deflation.
The section “The Causes of Crisis” of this article will provide more reasons to expect hyper-inflation.
“We” are in a credit crunch. What is a credit crunch? In simple terms, a crisis caused by banks being too nervous to lend liquidity to us or each other. Where they will lend, they charge higher rates of interest to cover their risk. (2)
In point 3 of the 15 November 2008 declaration of the group of twenty (G20) Washington summit on financial markets and the world economy, the G20 heads of state were openly admitting that they screwed up the system. (3) (4)
Hence, in point 7 of that declaration, they vowed to continue their vigorous efforts and take whatever further actions are necessary to stabilise, NOT CURE, the financial system. (5)
In response to the financial crisis, the United Nations Secretary-General Ban Ki-moon has convened all United Nations Organisation (UNO) heads of state to an international conference on Financing for Development (FfD) scheduled to take place in Doha, Qatar, from 29 November to 02 December 2008.
Ambassador Nassir Abdelaziz al-Nasser, the Permanent Representative of Qatar to the United Nations, says his government is trying to ensure that conference will be a key summit meeting of world leaders who could help resolve the current crisis. (6)
The art of economics consists in looking
not merely at the immediate
but at the longer effects of any act or policy;
it consists in tracing the consequences of that policy
not merely for one group
but for all groups.
(Henry Hazlitt, “Economics in One Lesson”, 1946) (7)
According to the press reports I am reading, the conference’s investigation will however be limited to examining how the heads of state THINK they can overcome the crisis.
The debate later this week in Doha will be strictly limited to the manner in which the heads of state ASSUME they can overcome the crisis.
They thus want to stabilise, not cure, the fraudulent system.
THE CAUSES OF THE CRISIS
In 2002, then governor, now chairman, Bernanke saw deflation ahead.
Hence, the Fed started cutting rates. The record low of 1 percent was arrived at in July 2003. This started the mother of all liquidity cycles and got us into this bubble. This policy was mostly hailed in public as an appropriate measure to help the economy avoid recession. Austrian economists hold a completely different view.
According to the Austrian Monetary Theory of the Trade Cycle it is the government-run money-supply monopoly that has not only caused the crisis; the theory also diagnoses that rate cuts will not solve the crisis, but will make it even worse.
Central banks, the government agents holding the power over the printing press, pursue a monetary policy of “interest rate steering” or, in other words, pushing the interest rate down as much as possible by relentlessly increasing credit and money supply. It is this inflationary monetary policy that causes trouble.
As Ludwig von Mises pointed out:
today credit expansion is exclusively a government practice. As far as private banks and bankers are instrumental in issuing fiduciary media, their role is merely ancillary and concerns only technicalities. The governments alone direct the course of affairs. They have attained full supremacy in all matters concerning the size of circulation credit. While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion. (8)
Initially, the artificial lowering of the interest rate creates an illusion of richness and affluence. The increase in the money stock via bank credit expansion erroneously suggests that the supply of savings increases. Investment picks up, and the economy expands. The illusion of plentiful resources leads to malinvestment, and sooner or later the boom turns into a bust. While the money-fuelled expansion is a manifestation of the crisis, it is actually the slump — the correction of malinvestment — that people complain about (9)
The expansion in risky mortgages to underqualified borrowers was encouraged by the federal government. The growth of “creative” nonprime lending followed Congress’s strengthening of the Community Reinvestment Act, the Federal Housing Administration’s loosening of down-payment standards, and the Department of Housing and Urban Development’s pressuring lenders to extend mortgages to borrowers who previously would not have qualified. (10)
But our Masters think otherwise.
An editorial in the 22 November 2008 Financial Times argues that banks must continue lending during a global downturn because they are vital utilities – a modern economy cannot function without credit. The editorial further argues that if bankers do not start lending of their own accord, governments will force them to do so. (11)
THE SOLUTION TO THE CRISIS
The crisis is due to liquidity creation.
The solution is not to give national governments, the United Nations Organisation (UNO), or the International Monetary Fund (IMF) more newly-created liquidity.
With this newly-created liquidity, those organisations who only create more Keynesian chaos.
Let me restate an absolute principle of economics: no one, government or otherwise, can spend more than he or she makes indefinitely. At some point, the compounding interest will consume all the money in the world. We might disagree about when the end will come, but not if. (12)
We expanded credit and the Fed expanded money supply
There is too much liquidity in the system and still we are experiencing a liquidity crunch.
When that liquidity will start coming out of the system, we will experience “some” problems.
The solution is not to call for greater regulation.
The solution is to call for an end to trade cycles.
Once we realise with Ludwig von Mises that today credit expansion is exclusively a government practice, the solution is to take monetary policy out of the hands of governments.
Let us hope that the international conference on Financing for Development (FfD) scheduled to take place in Doha, Qatar, from 29 November to 02 December 2008 will examine the causes of the crisis which are worthless digital liquidity which allows governments to create liquidity out of thin air
and fractional-reserve banking which allows banks to create liquidity out of thin air.
How can there then be a credit crunch?
Good question!
The answer should start with the realisation
that banks used to have the right to issue receipts for the gold they held in reserve,
that this right was taken away from them by the institution of central banks,
and the realisation that banks are, at the point of a gun, forced to collaborate with those central banks.
Hence, the Financial Times-editorial quoted in note 11 wants to force banks to lend.
Let us hope that this international conference on Financing for Development (FfD) will stop maintaining the corrupt dollar-regime at all cost.
Let us hope that the FfD will stop caricaturing everything (oil, gas, gold, euro, etc.) which does not suit the said regime.
Let us hope that the FfD will call for an end to trade cycles by taking monetary policy out of the hands of governments.
I am not sure a conference of heads of “state” is likely to do that.
Hence, we shall forever remain underdeveloped.
Ivo Cerckel
Siquijor, 24 November 2008
NOTES
(1)
Deflation fears send Dow below 8,000
By Alistair Gray in New York
Published: November 19 2008 14:04 | Last updated: November 19 2008 21:53
http://www.ft.com/cms/s/0/41729a96-b63a-11dd-89dd-0000779fd18c.html
(2)
From Times Online
August 14, 2008
The credit crunch explained
http://www.timesonline.co.uk/tol/money/reader_guides/article4530072.ece
(3)
G20 declaration
http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html
3 .During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.”
(4)
Dr Krzysztof Rybiński:
G20 statement – many words, little meat
Saturday, November 15th, 2008 at 13:47
http://www.rybinski.eu/index.php?p=664&language=en
SNIP
It is a rare event indeed, that developed countries policymakers say openly “we screwed up and we are sorry”. So we need to congratulate then on this part. Then come solutions and actions to be taken.
(5)
G20 declaration
http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html
SNIP
7. Against this background of deteriorating economic conditions worldwide, we agreed that […] we will:
Continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system.
(6)
Prime Minister to Lead Sri Lanka Delegation to Doha Summit
Sun, 2008-11-23 08:21
http://www.asiantribune.com/?q=node/14351
(7)
http://jim.com/econ/chap01p1.html
(8)
Ludwig von Mises, “Human Action – A Treatise on Economics”, Chicago, Contemporary Books, 3rd. rev. ed., p. 794
(9)
Credit Crisis: Precursor of Great Inflation
Daily Article by Thorsten Polleit | Posted on 2/7/2008
http://mises.org/story/2863
Diagnosing the Causes of the Crisis
(10).
How Did We Get into This Financial Mess?
by Lawrence H. White
http://www.cato.org/pub_display.php?pub_id=9788
Published on November 18, 2008
(11)
Bankers must start lending – or else
Published: November 21 2008 20:00 | Last updated: November 21 2008 20:00
http://www.ft.com/cms/s/0/d483cb4e-b805-11dd-ac6d-0000779fd18c.html
SNIP
“Neither a borrower nor a lender be” was not intended as advice for bankers. Someone should tell them. The purpose of the recent round of recapitalisations was to strengthen banks so that they could continue lending during a global downturn. But banks are not doing so. They must. They are vital utilities – a modern economy cannot function without credit. If bankers do not start lending of their own accord, governments will force them to.
(12)
No one can spend more than he or she makes indefinitely
Nigel Hannaford, Calgary Herald
Published: Tuesday, October 14, 2008
http://tinyurl.com/vindicating-doomsayers
