With regard to the potential
success or failure of any economic, political or social institution one must
ask two essential questions:
Does Natural Law exist?
If it does, then: Does the
economic, political or social institution violate this law?
Central banking, fiat money
and money and credit creation from thin air must be discussed in light of these
questions.
ABCT is pretty clear about
how and why the creation of money and credit from thin air, a central bank’s
ultimate purpose, is likely to result in malinvestment or a system that
generates failure. This is reason enough to question the existence of central
banking.
But why is it that the tools
of central banking, fiat money and money and credit creation from thin air, are
doomed to create a system that fails?
The reason is simple; they
violate natural law, the nature of man.
Let’s start with a premise: The
creation of money and credit from thin air is theft.
When a central bank creates
money from thin air they are stealing from all of the other holders of that
currency. The existing holders of the currency will now have to compete with
the holders of the newly created currency. Their currency now buys less.
Premise number two: Theft is
a clear violation of natural law.
Premise number three:
Political, social and economic institutions that are built on a foundation that
violates natural law are doomed to failure as man will attempt to minimize the
pain and loss that he experiences from the violation of his nature and the
objective reality of the world.
Conclusion: Current central
banking practices based on fiat currency and the unlimited creation of money
and credit from thin air will, eventually, fail.
That is a pretty simple
argument. Not surprisingly, C.S. Lewis devised a simple thought experiment that
can help us understand why this should be.
This is an experiment where
four objects need to be separated into two boxes. If I give you a baseball, a
basketball, a baseball bat and a basketball net and asked you to put two items
into two separate boxes based on things that those objects have in common, how
would you proceed?
Some would put the baseball
and basketball together in one box and the net and the bat in the other box. The
things that are balls would be together and the things that are not balls would
also be together.
Another approach would be one
based on functionality. The baseball and bat would then go together and the net
and the basketball would be in the other box.
Lewis used this model to
examine the following items: Science, Natural Law, technology and magic.
Most people would place science
and technology together and Natural Law and magic together. Science and technology
are items that can be verified via empirical evidence while Natural Law and magic
have more difficulty on that front.
Lewis offers a different way
to categorize the items: He places science and Natural Law together and
technology and magic together. Both science and Natural Law attempt to conform
our minds to objective truths and
realities of the world. Science teaches us about the physical aspects of
nature that we need to respect and understand while natural law attempts to
teach us about the nature of man, which also must be respected.
On the other hand, technology
and magic have more in common than you might think as they both attempt to get
the world to conform to the will of man. Of course, technology that is grounded
in the physical sciences will work while magic will not.
Everyone understands that the
violation of physical laws can end in disaster, imagine an engineer designing
an airplane while neglecting the law of gravity or the tensile strength of the
materials involved. These errors will be discovered promptly upon a test
flight.
Likewise, political, economic
and social institutions that do not conform to the nature of man will also fail
because they do not conform to the objective realities and truths of the world.
The difference is that it is difficult to estimate how long this will take and
the exact form of the failure. In the physical world of aeronautics, if a wing
does not create enough lift, the craft will never fly. Social dynamics,
unfortunately, are a bit messier and those that violate Natural Law may take some
time to be revealed, but there will be a revelation.
For example, until this
moment in time, all fiat currencies that have ever been attempted have failed.
Somehow, we expect the results to be different this time. They won’t be.
The 20th Century
saw a couple of massive efforts aimed at subsuming Natural Law to the will of a
few men. One was the horrific Nietzchean experiment of Nazi Germany with their
cult of the Superman. A world where might made right. Another saw Stalin and
Mao attempt to build societies based on Marxist theory.
Not only did they all fail,
they all failed despite the horrible violence that they were willing to inflict
on those that did not toe the party line. Rome wasn’t any different.
There just isn’t any way, in
the long run, to get man to go along with a political or economic system that
violates his nature. I am willing to bet that our recent multi-decade
experiment with fiat currencies and central banking will also end in failure as
it violates Natural Law. Timing, of course, is the issue. The outcome is not in
doubt, however.
ABCT tells us that if central
banks artificially drive interest rates too low via the creation of money and
credit from thin air, then the savings rate will fall and malinvestment will be
created.
Empirically, this has all been
happening now for decades.
Given that I have defined
money and credit creation from thin air as theft, we should assume that man
would respond to this theft of his wealth in some rational way. He, of course,
reduces his savings and the amount that may be stolen from him.
Reduced savings and increased
malinvestment should also reduce the real growth rate over time.
It is no surprise then to the
Austrian oriented investor that these are all happening in the economy of our
time as a reaction to central bank orchestrated theft. What is surprising is
that investors have chosen to ignore this, repeatedly, and pay absurdly high
prices to participate in this deteriorating economic scenario.
Just as in 2000 and 2008, I
expect this current foolishness to eventually reverse itself. As I watch stock
and certain bond categories trade at extremely high valuations relative to what
our society is willing to produce and save due to central bank money and credit
creation from thin air, I am forced to constantly ask myself: Does natural law
exist?
My answer is always, yes.
I know then that the outcome
for fiat currency and central banking is not a healthy one.
Disclaimer: Nothing on this site should
be construed as investment advice. It is all merely the opinion of the author.
