The Dying of Money: Lessons of the Great German and American Inflations, a sought-after book written in 1972 by Jens O. Parsson, was leaked onto the internet yesterday and spread widely.
As an aficionado of both economics, German history, and American history of the 20th century, I took most of my evening off to read the whole thing.
There wasn’t much new to learn there for a devoted student of Austrian economics, but I still found it valuable for the cultural perspective that it provides along with some color commentary on the differences in the American banking system relative to the German one under the Weimar republic.
To review the book briefly, the large part of the book is a highly accurate analysis of both the mechanics of inflation and the political and financial forces that brought it about. The author’s prescriptions for economic stability, however, are thoroughly statist and in part derived from the addled and over-idealized vision of Milton Friedman, who dreamed of a responsible central banking system in which the money supply would be expended by a fixed percentage every year.
That’s actually the stated goal of the Federal Reserve, but to actually accomplish it, the central bankers would need to be able to exercise total control over all banking activity and much of economic activity besides. My view of Milton Friedman and his ideas coincides with that of Murray Rothbard. Friedman is like the silly putty of free market economists. Even a hardcore socialist can find much to love about Friedman and his “public goods” arguments, which can be extended to fit anything.
The fact is that we live in Milton Friedman’s world today. Although Keynes gets much of the credit, it’s Friedman’s ideas that are promulgated throughout the upper strata of academia as a matter of dogma. It’s mistaken to call Friedman libertarian. He may have had pro-market sentiments, but the wishy-washy non-principles he used to underpin his arguments are statist in their application.
I spat out many of the choice quotes from the book on my Twitter feed throughout the day. Some of them stand out:
And the empire builders who contributed nothing of their own literally bought and sold the creators and managers of real-life businesses.
This sentence describes the late stages of the Weimar crack-up boom, but it could also apply to our current era, in which the Venture Capitalist is a celebrity – constantly surrounded by supplicants and fanboys. Just from anecdotal experience, I know that money comes much more easily from a venture-backed business than when the business must derive its cash flow from servicing real customers.
The modern VC is the social and fiscal conduit between the entrepreneur and inflationary Valhalla.
The successful venture capitalist of today derives income from the public equity markets, directly through IPO or indirectly through acquisition from another public company.
As per Parsson, ”Stock market speculation is a principal relief valve concealing latent inflation pressure.” And that has always been especially true in the United States. The US has the most sophisticated securities markets ever devised. One of the major functions that these markets perform is to quarantine inflation.
When the banking system creates new money by extending credit, much of this money flows into the securities markets – it’s paper chasing paper, rather than paper chasing real goods. This is convenient for the bureaucratic class, which measures inflation through a hedonically-adjusted basket of real goods – food, housing, and other physical stuff.
The securities markets are also ridiculously tax-advantaged relative to the real economy. Long term capital gains are taxed at a flat rate. The real economy is taxed at every level of transaction and highly regulated. When all you do is push paper, the government takes relatively little. It also endorses companies and individuals to toss money into the markets through IRA and 401(k) programs.
What I Liked
What I enjoyed the most about this book was how it explained that inflation is an asymetrical process that creates a stark divide between haves and have-nots. Those individuals that benefit from the inflation – bureaucrats, middle-men, members of large companies, successful speculators, and bankers – live like royalty. The marginal members of society fall into a hell-trap of deprivation, cut off from live-giving liquidity.
For example, the immigrant neighborhood where I live in Brooklyn might as well be in a different universe relative to TriBeCa.
Another major difference that the US has relative to Weimar Germany is that the dollar is widely traded internationally. Parsson notes
Vicious rates of price inflation, soaring profits, and rich incomes correlated with industries in which foreign competition was impossible – building construction, medical care, property ownership and rental, and all forms of services.
This doesn’t include education in that analysis, which was less reliant on credit expansion than it is today – although he does address the issue elsewhere in the book. Most of these sectors are highly inflated by the government or the banking system.
The US system extends internationally. It takes much longer for a dollar to circulate the world than it took a mark to go around the German economy.
Parsson describes how those Germans connected to credit-boosted sectors lived well throughout most of the inflation, while those on the outside suffered mightily.
I get the impression from the book that the author believed that he was in the end stages of the system, when in fact he wrote before its ultimate denouement, hey-day, and crack-up. Intellectuals of every persuasion are now acknowledging that the current course is unsustainable.
It never was. But it’s a testament to the much-maligned “financial innovation” that this society has managed to muddle through for such a long time. When reading this book, I feel awestruck by the evil ingenuity of modern statism, and how much more sophisticated it’s been in balancing and managing an inherently unstable and destructive method of organizing humanity than anyone could’ve conceived of earlier in the 20th century.
This has really been an impressive trick of public management and coordination, especially since the stock market super-inflation since the 1980s.
The Arrogance of Deflationistas
After reading this book, I felt a firmer conviction that economists and writers who argue that the global economy is going through “deflation” now are misguided and lack historical perspective. Merely because credit is contracting in a certain area due to government intervention doesn’t negate the overt and surreptitious expansions of credit in other areas. Following the 2008 crisis, the government essentially rolled up credit to real estate developers while simultaneously extending an infinite line of credit to investment banks through the discount window.
The way that inflation works, the Fed is essentially redistributing wealth from cash holders to major public companies and to the Federal government. Municipalities are weakened due to declining tax revenues, but government employees and contractors remain in bubble-land.
It’s only marginally important that the proles are no longer capable of contracting new debt or servicing their existing debt to the inflationary machine. The cash-funnel still pumps into securities of all varieties. The new currency chases paper while remaining largely dammed off from the world of people, places, and things.
Drowning in Liquidity
Few understand that the flow of money determines the shape of society. The fact of inflation is so poorly understood that many PhDs and finance professionals have no understanding of its mechanics. Political intellectuals and the politicians themselves also often fail to understand how inflation functions. It’s as if inflation were the water in the fishbowl, and the majority of people were the fish.
Also, inflation has the effect of keeping people reliant on supporting its continuance. So many people – professors, bankers, corporate employees, government workers, real estate people, construction workers, auto workers – very nearly the entire economy – is reliant on continuing inflation to sate the monetarist addiction.
It ends in horror. Always.
There ain’t no such thing as a free lunch. Inflation creates the illusion of prosperity by generating short-term economic activity. It’s like taking amphetamines and re-organizing your underwear for sixteen hours. You could say that you were tremendously “productive” during that time, but in reality, it was just purposeless activity.
In the absence of accurate price signals and due to heavy regulation, it’s impossible for entrepreneurs, employees, and incumbent capitalists to know with any precision where to invest their efforts. The market runs on price signals. When inflation distorts price signals, economic calculation becomes impossible.
Due to the multi-decade inflation-driven run-up in land prices, there’s an entire class of unemployed workers that are mal-trained. That’s perhaps the most tragic aspect of malinvestment: the wasted lives. The people who become derivatives traders instead of doctors. Bureaucrats rather than entrepreneurs. Web app developers instead of railroad engineers.
No one knows what to do because price signals are so badly distorted by the manipulation of the flow of money.
Virtual Worlds are Anarchic
Businesses are now fascinated with online games. It only took a couple decades, but as the big money begins to flow to the sector, it’s beginning to spark serious study.
Most are impressed with the ability of game designers to induce players to participate so passionately in imaginary worlds. World of Warcraft players devote months of time to solving complex tasks. Players organize, trade, and compete in stunning numbers throughout the developed world.
But I think many misunderstand why so many people devote such unusual amounts of time to mastering game worlds rather than bringing that kind of behavior into the real world.
Online games are effectively anarchist societies. There is relatively little regulation in an online world. While in the United States, you must file for incorporation if you want to start the simplest business, in a game world, there’s no such barrier to entry. At most, you may have to fill out a one-line form in the game world to incorporate or form a “guild.” If you want to trade with someone, there’s no tax form that you need to fill out.
Virtual worlds are societies with minimal friction and few of the onerous laws that regulate human behavior. If virtual worlds were to be subjected to regulations, they would go extinct almost immediately. For example, a miner in EVE will often extract ore from space rocks for far below the minimum wage when considering the value of in-game currency relative to the US Dollar. But they do it anyway, because they enjoy it, and it creates value for others.
These virtual worlds have become grey market havens for human societies. The “virtual” adjective only exists in the mind. Merely because the worlds exist only as markings on a server hard drive and electrons transmitted over the internet doesn’t mean that these societies aren’t real.
It would be simpler for businesses to apply the lessons of virtual worlds on how to motivate people, but the real world is kept under tight control. It’ll take a long time for that to change, if ever.