Fiat Money Blues

The Latest From Peter Hartcher

Here's something interesting.

The economies that account for 96 per cent of the world economy are today running loose money policies. Most are happily handing out free money. Some are supplying money at rates so low that it's actually cheaper than free.

It's done for good cause. When money is cheap, people are more inclined to invest or spend. So it aids economic recovery. The former chief of the US Federal Reserve, Alan Greenspan, was named as Time magazine's person of the year in 1999 for his ready resort to loose money.

But if there is too much for too long, it ends badly. Exactly a decade later, Time named Greenspan as No. 3 on its list of "25 People to Blame for the Financial Crisis". And I think they let him off lightly.

The evidence of the past three decades should be enough, but you can go back further. In fact, every major financial crisis in the four centuries of capitalism has had its origins in loose money.

How does it work? It's simple commonsense. The basis for value is scarcity. If scarcity is destroyed, so is value. And when money loses its value, it is abused.

The problem is deleveraging out of extreme debt positions that stem from easy money, when the bubbles pop. So far what we have learned from Japan post 1989 and the US in the 2000s is that nobody who is stretched out wants to take their medicine when the debts are called in. Consequently, the assets that should be written down don't get written down. In a sense, all the asset bubbles that form are deemed to be too large to fail.

It's not as if Australia has more moral fibre in the moral hazard stakes. It's just that it is in a lucky position where the debt collector hasn't come knocking, thanks to Peter Costello's balancing the books.

What history is showing is that the only two ways of paying your way out of debt is to tighten belts or inflate away the money. In a democracy, no administration or government seems able to survive the tightening of belts unless they rise to power with that specific mandate - and even then it remains to be seen if the Tories in the UK can keep it up and retain government. So that leaves the Weimar Republic option of inflating away the debt, which hurts everybody's savings (and explains why everybody rants about gold and decries fiat money).

There is another way of course  and this is simply not to pay what you owe. The fancy version of this is Chapter 11 in the USA, but in Australia we're seeing companies like the Swish Group get away without paying creditors and re-forming themselves as essentially the same outfit that racked up the debts. Not paying your creditors is an option - which Iceland is embracing.

If we had still had the Gold Standard and the value of money was locked into Gold, then we would not have had the option to print the money, which means the fallout from the 2008 GFC would have crippled whole economies instead and the majority of us would be wandering the streets jobless wondering what the hell happened.

You can see why we keep repeating the soft option of inflating away our debts and hurting the entire population over all rather than sheet home the blame to the rich. I just don't see Lloyd Blankfein or Donald Trump hurting too much.