Author Detlev Schlicter writes in his new book Paper Money Collapse about his theory that our elastic paper, debt-based monetary system is showing signs of impending collapse. In the video series below, Mr. Schlicter gives a penetrating analysis of how our paper based monetary system works and provides compelling reasons why he believes we are headed for 1) a voluntary and painful self-corrective change in our monetary system or 2) a much more painful and involuntary collapse of the global monetary system.
“In a paper money system privileged money producers exist that can create money out of thin air and inject it into the economy. In our system the banks can do this to some degree and the state central bank without limit. The new money is injected into the economy via the loan market – it is lent to non-banks. These non-banks cannot print money. When the loans get repaid to the banks and the central bank, and the “new” money returns to its creators, so to speak, it does so with interest. That interest represents real resources that the non-banks have produced in the meantime and that they give to the money creators in return for the temporary use of the printed money. The money creators can create money without producing goods and services but they end up obtaining real wealth – that is a privilege that is unique to any money producer. Everybody else in the economy can only obtain more wealth by participating in the production of goods and services. Money producers obtain real wealth simply by printing money. That is not a surprising conclusion if you think of counterfeiting. Our monetary system therefore contains an process of constant redistribution from the producers of goods and services to the printers of money. You may say that this is amoral and anti-capitalist (which it is) but is that enough to conclude that this process is also unsustainable, that this system must collapse? I think to argue that conclusively you also have to show that this process leads to growing imbalances in the economy via the persistent mis-allocation of resources. That is what I do with my book.“
- Detlev Schlicter
“This is the global picture in 2011: After 40 years of complete paper money, public debt around the world has reached such momentous dimensions that the major central banks are now increasingly funding the state directly. This is what is happening in the U.S., the UK and increasingly the eurozone, and it is either accepted with suspicious equanimity or enthusiastically supported by bank economists and the inflationistas in the mainstream media. The trend is the same pretty much everywhere. It is only that within the eurozone it is less clear which government has first call on the printing press. In other paper money economies this can be done more straightforwardly.“
- Detlev Schlicter
“Let’s step back and look at the problem, which in a nutshell is this: The dominant societal model of the second half of the twentieth century – the social democratic nation state with its high levels of taxation, regulation and stifling market intervention, and thus increasingly dependent on a constantly expanding fiat money supply and artificially cheap credit –is rapidly approaching its logical endpoint everywhere, not just in Europe: excessive and unmanageable piles of debt, systemic financial fragility and weak growth.
For many, including quite a few of those demonstrating under the ‘Occupy Wall Street’ banner, this whole mess deserves the label “crisis of capitalism”. That this is nonsense I explained here. What we are witnessing is not the crisis of capitalism but the failure of statism. The present system, certainly the financial system, has very little to do with true capitalism, and if financial markets are now being demonized for their failure to go on funding political Ponzi-Schemes, than this means shooting the messenger rather than addressing, or even understanding, the root causes of the malaise. As I said, this is also a time of great confusion.
The monetary madness of recent decades was only made possible by the transition from apolitical and inflexible commodity money (free-market money) towards limitless, entirely discretionary fiat money (state money). This shift was completed on August 15, 1971, when this system was also made global. What does such a monetary system logically entail?
In a complete paper money system, banks cannot be private capitalist enterprises but must be extensions of the state because the state holds the monopoly of unrestricted money creation. The banking sector is cartelized under the state central bank. To operate a bank, you need a state license that requires that you open an account with the central bank.
In such a system, the central bank can create bank reserves out of thin air and without limit, and has thus full control over the level and the cost of such reserves. The central bank has therefore ultimate control over the funding of the banks and the availability of credit in the economy – which is now supposed to be magically freed from its natural constraint under capitalism: voluntary savings.
In such a system, it is generally assumed that the state cannot go bankrupt as it can always print more money to fund itself. It is equally assumed that the banks cannot fail and do not ever have to shrink, at least collectively, as ever more bank reserves can be made available to them – if need be at no cost, as has become – now that the system arrived at the point of ultimate excess – the global norm.
It can hardly be surprising that those who are in charge of the banks and those who are in charge of state finances have behaved for decades as if the Great Regulator of economic life, the threat of bankruptcy, was of no concern to them. Now that the system has finally overdosed on cheap credit and that the forty-year fiat-money-fed boom is over, reality is sinking in. And it comes as a shock.
There is a lot of talk of return to normality. The market has, of course, a way of returning to normality, which involves liquidating the excesses, clearing out the dislocations, defaulting what will not be repaid, and deflating prices that do not reflect real demand. Liquidation, default and deflation, however, are politically unacceptable, as they cut right to the core of our system of state-managed ‘capitalism’: the notion that the state is above the laws of economics and that it can bestow a similar immunity on its protectorates, most importantly the banks.”
- Detlev Schlicter
Detlev S. Schlichter is an author and Austrian School Economist. His first book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown was published by John Wiley & Sons in September 2011. Mr. Schlichter has appeared as a commentator on television and radio (Sky News, Reuters TV) and his editorials have been published byThe Wall Street Journal, TheStreet.com and mises.org. He is a senior fellow at the Cobden Centre, London, a free-market think tank devoted to issues of money and banking.
Mr. Schlichter had a 19-year career in investment management. He worked at J.P. Morgan & Co. (1990-1998), Merrill Lynch Investment Managers (1998-2001) and Western Asset Management Co. (2001-2009). During his career Mr. Schlichter has overseen billions in assets under management for institutional clients from around the world. He left the industry in 2009 to focus exclusively on his first book, Paper Money Collapse.
Mr. Schlichter holds a degree in economics (Diplom-Ökonom) from Ruhr-Universität Bochum, Germany. He lives with his family in Hampstead, London.
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