How Germany Can Save Civilization

 

The unholy alliance between accommodating central banks and spendthrift governments, born of Keynesian economics, will cause the collapse of the Western world's fiat currencies while wreaking devastation on civilization itself. Keynesian economists dominate all levels of government, government bureaucracy, the mainstream press, and universities. Keynesian economic thought puts centuries' of sound economic science on its head. Prior to Keynes, those in government were forced to, well, economize, due to the scarcity of resources, as represented by a universally acceptable medium of exchange--i. e, sound money in the form of a commodity, usually gold and/or silver. By substituting "aggregate demand" for Say's Law, Keynesian economics gave government not only a green light to spend, spend, and spend some more, but actually an obligation to do so. Furthermore, government did not have to concern itself over prioritizing its spending. Keynes actually told government to pay people to dig holes in the ground and then pay others to fill them back up.

 

Keynesian economics allows government to confiscate resources that it dare not tax or borrow in an honest monetary system. Think of a situation where most people must work to provide goods or services that they exchange in the marketplace for money with which to buy the necessities and luxuries of life. But your neighbor has a money printing press in his basement and need only print as much money as he needs to live a life of ease. That is what Keynesian economics fosters; i.e., many work and a few politically connected elites and their sycophants live luxuriously at leisure.

 

Sound Money Was the Barrier to Government Confiscation

 

The barrier to implementation of the Keynesian revolution was sound money. Government could not manufacture gold and/or silver out of thin air. It had to tax the people or borrow honestly in the bond market. The public dislikes taxes, and excessive borrowing causes interest rates to rise, followed by an inevitable recession.

 

The seeds of sound money destruction were sown at the 1944 Bretton Woods Conference, whereby US dollars could be held as central bank reserves and redeemable into gold by the US Treasury at thirty-five dollars an ounce. This was the so-called Gold Exchange Standard, but only foreign central banks and some multinational organizations, such as the IMF, enjoyed this right of redemption. The system depended upon the solemn promise by the US that it would refrain from issuing unbacked dollars. The watershed event that ushered in this new, malignant, completely fiat money era occured on August 15, 1971, when the US abandoned the Gold Exchange Standard in order to stop the drain on the US gold stock.

 

 American money printing had begun in earnest in the previous decade in order to finance Lyndon Johnson's "Guns and Butter" policy. The Fed monetized government debt to fund LBJ's Great Society welfare programs while fighting a war in Southeast Asia at the same time. Dollar claims in the form of government bills and bonds built up at central banks around the world. At the recommendation of French economic advisor Jacque Rueff, a free market economist and gold standard proponent, French President Charles De Gaulle ordered the Bank of France to redeem eighty percent of its US dollar holdings for gold, per the solemn promise made at Bretton Woods. Thus began a run on the US Treasury's gold reserves that culminated in President Nixon taking the dishonorable action of abandoning the Gold Exchange Standard. This set the course of unfettered fiat money expansion that has led the world to the precipice of monetary destruction.

 

 (President Nixon did have another option. He could have devalued the dollar to gold in order to stop the run on the US gold supply and promise that the US would stop issuing unbacked dollars. In fact, at the Bretton Woods Conference, the IMF had been given the duty to audit the US money and gold stock to ensure that it lived up to the agreement. But the IMF failed to do so.)

 

The Scenario for a Worldwide Currency Collapse

 

GoldMoney.com's Alasdair Macleod has written exhaustively of the inevitable destructive result of money printing that now has entered hyperinflation in America. Macleod defines hyperinflation not as prices out of control (yet) but as the scenario whereby government spending can be financed only through ever increasing issues of fiat money. Skyrocketing price inflation, the traditional definition of hyperinflation, follows inevitably from previous acts of excessive and increasing money printing that first reveal their destructive nature in stock market, real estate, and commodity bubbles before filtering down to out-of-control consumer price inflation that devastates society, as seen in Weimar Germany in 1923, and more recently in Argentina, Venezuela, Zimbabwe, and elsewhere. The horror stops only when society abandons the hyper inflated money and adopts a new or different currency. Weimar Germany tied its new currency to the dollar, which was still on the gold standard. But the damage had been done. German civil society had been destroyed and its citizens traumatized to the extent that within ten years full blown totalitarian dictatorship was seen as the only viable option to internal civil disorder.

 

Today there is no gold standard currency in the world to which the US and the West could link their hyper inflated currencies. The most likely outcome will be a return to a gold backed dollar, but only after American civil society has been forever altered for the worse and the American people traumatized as were the Germans in 1923.

 

Germany to the Rescue

 

But, there is an option still available to the West--a voluntary abandonment of Keynesian economics and the linking of the US dollar to its still substantial gold reserves. But what development could move the US toward strengthening its currency voluntarily? Germany!

 

Germany is the fourth largest economy in the world and probably the soundest financially. Germany's federal government regularly runs budget surpluses, a phenomenon last seen briefly in the US in the 1990's and before that in the Eisenhower presidency of the 1950's. Germany does not rely upon borrowing, much less money printing (called monetization),to balance its books. Prior to joining the euro zone, the Deutsche Mark was the strongest currency in Europe. For decades it appreciated gradually against all currencies, including  the US dollar. As such, it served as a rebuke to the inflationary monetary proclivities of its trading partners. But the DM was more than a rebuke; it was a real market force that prevented its trading partners from debasing their own currencies too rapidly. Prices of highly desirable German goods rose in foreign currency cost even when their prices as denominated in DM remained stable or even fell somewhat.  This was especially troubling to France, which feared a resurgence of German economic power in the heart of Europe.

 

The opportunity for France to eliminate the DM and gain some control over the German economy arose after the fall of the Soviet Union and the government of its puppet state East Germany in the early 1990's. Germans on both sides of the now torn down Berlin Wall desired to reunite their country politically. Eschewing force majeure, Germany sought the approval of the US, France, and the UK to reunite. In a still controversial and not universally accepted scenario--see this report from Spiegel International--France let it be known that it would give approval to a reunited Germany only if West Germany scrapped the DM and used the euro. German central bankers may actually have thought that they could prevail to make the euro a super-DM. They soon learned otherwise as they were outvoted at key policy debates and watched helplessly as the European Central Bank violate the terms of its charter not to inflate the euro or to support the debt obligations of its members.

 

Reinstating the Deutsche Mark Would Be Good for both Germany and the World

 

The decision to leave the inflationist euro zone is a political decision only. There is nothing in economic science that would prevent Germany from doing so and even adopting a gold standard. As explained by Ludwig von Mises in Chapter eleven of Omnipotent Government:

 

No international agreements or international planning is needed if a government wants to return to the gold standard. Every nation, whether rich or poor, powerful or feeble, can at any hour once again adopt the gold standard. The only condition required is the abandonment of an easy money policy and of the endeavors to com­bat imports by devaluation.

The question involved here is not whether a nation should return to the particular gold parity that it had once established and has long since abandoned. Such a policy would of course now mean deflation. But every government is free to stabilize the existing ex­change ratio between its national currency unit and gold, and to keep this ratio stable. If there is no further credit expansion and no further inflation, the mechanism of the gold standard or of the gold exchange standard will work again.

 

Germany is being plundered economically and financially by mostly southern European countries, as shown in this TARGET2 chart. In essence, Germany is building high quality goods that are being purchased by other euro zone countries with money printed out of thin air by the European Central Bank. Currently Germany's TARGET2 balance at the European Central Bank is in excess of one trillion euro. The quality of Germany's TARGET2 credit is suspect, to say the least, as explained here by Alasdair Macleod of Goldmoney.com. National central banks in highly TARGET2 deficit countries have been declaring non-performing loans as suitable collateral to obtain loans from the European Central Bank. This dumping of problem loans into TARGET2 will reduce the Bundesbank's assets in an inevitable banking crisis. The process of capital confiscation is increasing as the European Central Bank expands its so-called Quantitative Easing Program. The simple answer is for Germany to leave the euro zone and reinstate the DM. Doing so would be a benign act of rational self-interest by a sovereign nation.  Most probably many current euro zone countries would leave the euro zone, too. Without Germany to fund the budget deficits of the mostly southern members of the euro zone, the European Central Bank would shift its mechanism of plunder--the TARGET2 system--to the few remaining semi-responsible but  much smaller nations. To avoid this fate, these more responsible nations  would either adopt the DM themselves or reinstate their former local currencies and link them to the DM. This would leave the profligate nations of the former euro zone with no host to plunder. Reinstating their own currencies would probably be short lived, as no one would buy their bonds. The euro zone will have collapsed, leaving the only option, eventually, for all of Europe to become a DM zone, either adopting the DM themselves, as they had adopted the euro decades ago, or through direct linkage of local currencies to the DM. A sound DM would force these former euro zone nations to adopt more responsible spending and regulatory regimes.

 

A Cascade of Benevolent Reform Around the World

 

Reinstating the DM, a peaceful act by a sovereign country, would create a cascade of monetary reform throughout the world. Europe's trading partners would find the cost of necessary imports rising in terms of their local currencies, forcing them to adopt fiscal and monetary responsibility. Gresham's Law--that overvalued money drives out undervalued money--would work in reverse in international finance, because there is nothing to force foreigners to settle trade accounts with the dollar. Governments certainly can use legal tender laws to force their citizens to use "bad" money within their borders, but they cannot force sovereign nations to do so for very long. Just as superior automobiles from Japan and South Korea forced US automakers to up their game, a strong DM will force the US to strengthen the dollar. If it does not, the world will abandon the dollar for international trade, as explained by Alasdair Macleod. All that is required for this process to begin is that Germany, a sovereign nation, leave the euro zone and reinstate the Deutsche Mark. No treaties are required. Germany needs no one's permission to leave the euro zone. The sooner it does so, the better for itself and for the world.

 

Patrick Barron has been a consultant to the banking industry for forty years. He taught an introductory class in Austrian economics at the University of Iowa plus a directed readings class of Ludwig von Mises' magnum Opus "Human Action". He taught at the Graduate School of Banking at the University of Wisconsin for thirty years, running the school's capstone "Bank Management Simulation" course.

 

Presented with the grateful collaboration of:

 

Godfrey Bloom, spent thirty-five years and won prizes for fund management. For five years her was on the EU Monetary & Economics Affairs Committee. His articles and speeches can be found on Godfreybloom.uk.

 

Emile Woolf, a chartered public account for over fifty years, bestselling and award winning author of professional texts and economics essays. His regular "Economic Perspectives" may be found on his website: http.//www.emilewoolfwrites.co.uk.

 

Alasdair Macleod, a veteran of over fifty years in stock markets, investment management and banking. He writes a weekly column on the economics of sound money for Goldmoney, Inc. in a personal capacity.

 

Thorsten Polleit, chief economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

 

Claudio Grass, precious metals advisor in Switzerland, advises HNWIs on the best strategies for preserving wealth.

 

Philipp Bagus, professor at Universidad Rey Juan Carlos and author of The Tragedy of the Euro.