The Funny-Money Game: Alasdair MacLeod

The sense of general unease that I detect among those I meet and discuss economics and financial matters with is increasing —with good reason. Clearly, what everyone calls inflation, rising prices or more accurately currency debasement, will lead to higher interest rates, threatening markets that are unmistakably in bubble territory.

The consequences of rising prices and interest rates are still being badly underestimated.

In this article, I get to the source of the inflation problem, which is the monetary debasement of the dollar and other major currencies. An important part of the problem is that mathematical economists have lost sight of what their beloved statistics represent —none more so than with GDP.

I explain why GDP is simply the total of accumulating currency and credit which is wrongly taken to reflect economic progress – there being no such thing as economic growth. Once that point is grasped, the significance of this basic error becomes clear, and the fiat currency paradigm is revealed for what it is: a funny-money game that will go horribly wrong.

There is only one escape from it, and that is to own the one form of money that is no one’s counterparty risk; the one form of money that always comes to humanity’s rescue when fiat fails.

And that is gold. It is neglected by nearly everyone because it is anti-bubble. The more that people believe in fiat-denominated assets, the less they believe in gold. That is until their funny-money games implode, inevitably triggered by sharply rising interest rates.

Introduction

Those of us with grey hairs gained in financial markets can, or should, recognize that after fifty years the funny-money game is ending. Accelerated money printing has led to what greenhorn commentators call inflation. It is not, as they claim, rising prices: they are the consequence of the monetary expansion which was the original and remains the correct definition of inflation.

Rising prices in the aggregate are nothing other than currency debasement. And currency debasement leads, as surely as night follows day, to higher interest rates. And higher interest rates lead to falling asset values. For the bullish investor, that is all he or she needs to know.

But that doesn’t reckon with crowd psychology, leading investors to prefer to see and hear no evil rather than reason. As individuals, we need to stand back from our own circumstances and prejudices to gain a sense of perspective, to turn our greed for ever-rising stock prices into a fear of losses before the crowd realises that the outlook has changed for the worse and attempts to stampede into safety.

Hence, an understanding of the relationships between politics, economics and catallactics in current times matters more than usual. Even though nearly all investment is handed to so-called expert managers in pension funds, insurance companies, banks, portfolio managers and financial advisors (whose advice is usually taken unquestionably), the delegation of responsibility for our investments is always to those who extrapolate the past into the future. It amounts to a strategy unable and unwilling to consider and evaluate factors of change. The herd instinct has moved on from Charles Mackay’s Madness of Crowds to create and drive a madness of regulated institutions which hang on to a central banker’s every words. In turn, central banks have striven to eliminate the uncertainties of free markets and now control interest rates with a Stalin-like severity. Believing in their own propaganda, central bankers themselves have become fully captured by this funny-money game.

In an article for Goldmoney two weeks ago I pointed out that Jay Powell’s Jackson Hole speech on monetary policy did not mention money once. And most investing institutions willingly embrace the fiction that inflation is of prices and not money. By buying fully into the Fed’s meme, they have blinded themselves to the consequences for interest rates. They comfort themselves that the Fed is in control because it has been in control over markets for nearly all their professional lives. If the Fed says inflation is transient, it will be so.

It is not just America’s Fed. All the major central banks are captured by similar delusions about money, or rather over the management of their currencies which is no longer with the simple objective of controlling their purchasing power. Instead, currency and credit have become the essential tools for funding excess government spending. And even if leaders such as President Biden or Boris Johnson, like St Paul on the road to Damascus, undergo a sudden conversion to the merits of sound money, they would face the task of stemming the tide of rapidly escalating social liabilities such as pensions and healthcare, which have nothing to do with the covid crisis.

No, the establishment is fully committed to currency debasement as a means of funding the state’s increasing need for revenue. It requires concealment of the true situation, which is why Jay Powell and his fellow central bankers are encouraged to ignore any connection between the expansion of circulating currency, credit and prices.

It involves systemic delusion on all aspects of economic policy in favor of the survival of socialistic redistribution. But this article focuses on one aspect central to it: the fallacy of relying upon statistics and where it is likely to lead.

Mises’s evenly rotating economy

The Austrian economist, Ludwig von Mises, pointed out that there is a fundamental difference between an economy and the statistics used to represent it. In the real world, it takes time to do things; to anticipate, to plan, to implement. The desires of tomorrow and thereafter evolve through time, as do the means to supply them. And in economics, time is Man’s most precious commodity. But statistics cannot capture time. They only record what has passed.

You cannot capture human progress or the lack of it through statistics. Statistics are no more than an accounting mechanism for quantifying economic transactions after they have occurred. If everyone tomorrow does exactly what they did yesterday like mechanical robots lacking motivations and desires, statistics for yesterday would be a reasonable representation of what is to pass tomorrow. The same would be true for what happened last year as a precedent for next year. In other words, we would have an economy that conforming with mathematics evenly rotates.

It is of course an impossibility. As von Mises pithily put it,

“Action is change, and change is in the temporal sequence. But in the evenly rotating economy change and succession of events are eliminated. Action is to make choices and to cope with an uncertain future. But in an evenly rotating economy there is no choosing, and the future is not uncertain as it does not differ from the present known state. Such a rigid system is not peopled with living men making choices and liable to error. It is a world of soulless unthinking automatons. It is not human society; it is an anthill.”[i]

With hindsight, statisticians adjust their models from earlier expectations to what has occurred as a basis for future predictions. However, what happened yesterday will condition us for what happens tomorrow because we are all conditioned by experience, but no more than that. The fact that we continually make plans for an improvement in our condition is unequivocal proof that no economy evenly rotates. But it is a useful concept because it allows governments to estimate revenues, and it allows businesses prepared to dig into the details to use estimates of current markets for their investment and production plans. But to take the concept of an evenly rotating economy as the basis of economic prediction is a mistake made today by nearly everyone.