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Debauching the Currency

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Often people who make gloomy predictions about the economy have an ulterior motive. They want to sell a newsletter, a book, precious metals, or even storage food. In some cases they have no basis for their views other than an opinion. I like to think that what I write originates with the economic thinkers of the Austrian School of economics. They issued many warnings and gloomy predictions. I believe they are right and at some point our economy and monetary system will falter. In fact, a sudden crisis can appear at any time. Panic and fear can paralyze the nation and high and mighty assets can quickly turn to dust. A great leveling lurks off shore. When it crashes down upon us, as it inevitably will, we are likely to suffer through the worst financial collapse in history.

The greatest of the Austrian School economists was Ludwig von Mises (1881–1973). He is the antithesis of the Keynesians who run the Federal Reserve and the U.S. Treasury. He issued this powerful warning: “Endeavors to keep the rate of interest below the height it would attain on a market not sabotaged by credit expansion are doomed to failure in the long run. In the short run they result in an artificial boom which inevitably ends in a crash and slump. If one wants to avert depressions, one must abstain from any tampering with the rate of interest.”

Mises predicted, “The monetary and credit policies of all nations are headed for a new catastrophe, probably more disastrous than any of the older slumps.” He also warned, “There is no hope left for a civilization when the masses favor harmful policies.” Mises deplored money creation, monetary easing, and the inflationary policies of today. He wrote, “Inflationism … is an expedient of people who do not care a whit for the future of their nation and its civilization.” He warned, “Inflationism cannot last; if not radically stopped in time, it must lead inexorably to a complete breakdown.” He knew whom to blame. “It is government interference that has destroyed money in the past and it is government interference that is destroying money again.” And he knew why it does it: “Progressives need inflation in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voter.” Mises insisted the outcome was dire: “Continuous inflation must finally end in the crack-up boom and the complete breakdown of the currency system.”

Two distinguishing economic professors who were followers of Ludwig von Mises issued their own warnings. Murray Rothbard (1926–1995) wrote, “The natural tendency of government, once in charge of money, is to inflate and to destroy the value of the currency.” He also pointed out what happens when inflationary policies are practiced worldwide, “At the end of the road will be a horrendous worldwide hyperinflation, with no way of escaping into sounder or less inflated currencies.”

Han Sennholz (1922–2007) had this to say: “The ultimate destination of the present road of political fiat is hyperinflation with all its ominous economic, social, and political consequences. On this road, no federal plan, program, income policy, control, nationalization, threat, fine, or prison can prevent the continuous erosion and ultimate destruction of the dollar.”

My friend the late economist Kurt Richebächer (1918–2007) warned, “The U.S. credit and debt excesses of the past years are beyond past experience in history.” Along the same line, the economist Jörg Hülsmann writes, “The government’s fiat makes inflation perennial, and as a result we observe the formation of inflation-specific institutions and habits. Thus fiat inflation leaves a characteristic cultural and spiritual stain on human society.” The late editor of the London Times and economic thinker William Rees-Mogg (1928–2012) wrote, “Inflation gradually pushes the whole community towards speculation, since ordinary life begins to require speculators’ skills.”

Diluting milk

The author and economist Henry Hazlitt (1894–1993) explained, “It is not merely that inflation breeds dishonesty in a nation. Inflation is itself a dishonest act on the part of the government, and sets the example for private citizens. When modern governments inflate by increasing the paper money supply, directly or indirectly, they do in principle what kings once did when they clipped coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water.”

The philosopher and economist Leonard Read (1898–1983) knew why governments inflate: “Inflation makes the extension of socialism possible by providing the financial chaos in which it flourishes. The fact is that socialism and inflation are simultaneously cause and effect; they feed on each other.”

What then will be the outcome? The noted banker and economist John Exter (1910–2001) warned, “The market place is a crime and punishment world, and this Federal Reserve credit expansion is the greatest monetary crime of all time. Accordingly the punishment will be far and away the greatest punishment of all time.” Another answer came from economist Virgil Jordan (1892–1965): “Ultimately with God’s aid, Truth always emerges and finally prevails supreme in its power over the destiny of mankind, and terrible the retribution for those who deny, defy, or betray it.”

This is a time when investors are feeling great optimism. The possibility of a financial crisis seems remote. However, economic disasters do not announce their coming. A panic unfolds unexpectedly; otherwise it wouldn’t be a panic. One should not rest easy given the debt, deficits, and money creation promoted by liberal central bankers and socialist economists. A collapse can come at any time, as we saw in 2008. No one should forsake the protection of precious metals or decide not to have a hedge against a hyperinflationary disaster and depression.

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    James Cook is the founder of Investment Rarities Incorporated.