A Broken & Crumbling World :: by Wilfred Hahn

World money systems are becoming increasingly dysfunctional and broken. Most concerning of all is the continuing slide into monetary immorality. This term, of course, has no traction amongst most policymakers and in spheres of monetary economics. No matter…regular readers of this newsletter will still adhere to the ideas of absolute truth and a difference between right and wrong, not the “end justifies the means” nor the supremacy of expediency.

Readers may ask, if things are so broken, then why have stock markets been soaring to new highs in past months? To that we would answer that financial market trends have very little relationship to true prosperity. Financial markets have utterly no role in determining what is right and true. That would be entirely dependent on the morality of its human participants and those that control or influence financial markets and economies.

The fact that financial markets have been soaring is due to massive monetary manipulation, economic imbalances and the willing gamesmanship of those that influence and/or control capital movements. While financial markets (and lately, even real estate markets) are again dangerously inflating — largely flamed by the all-time unprecedented and global money manipulations of central banks and other financial institutions — household income growth is stagnant (even as corporate earnings in the U.S. are almost 2.5 times the norm relative to the size of the economy), youth unemployment is at peak levels, labor force participation is sinking, and wealth distribution is becoming ever more concentrated. This is a foundation that will eventually lead to social breakdown.

Just how much further can central banks push such arbitrary and inflated conditions? While there can be no doubt that current policies will lead to ultimate collapse, further and increased manipulation is still very possible. In fact, we would even say this is likely. How so? Because trends in human values toward relativism and materialism continue to accelerate. Indeed, more monetary manipulation will continue to deceive and furthermore, requires experts in greed without conscience.

No doubt there do exist some sensible central bankers. However, they are in the small minority and are considered to be unimaginative. One of these is Jens Weidman, President of the German Bundesbank, who recently commented: “A point that I think is important to make—perhaps less for my central bank colleagues than for finance ministers—is that the medication monetary policy makers administer only cures the symptoms and that it comes with side-effects and risk.” He is correct. That said, we doubt that he will survive much longer in his current position. With Japan on a “kamikaze” warpath of reducing the value of its currency (down some 40% against the euro in a matter of months) it will not take long for Germany’s export economy to be lamed. Then, very few will have any appetite for austerity policies. The rampant recklessness of unorthodox monetary policies will be seen to be wise and brilliant.

One illustration of such so-called brilliance was on display recently at the INET conference in Hong Kong.

There, celebrated policymaker and claimed scholar, Lord Adair Turner gave a keynote presentation on a monetary policy prescription that he called Overt Permanent Money Finance or OPMF. It sounded impressive and learned but in reality it was something very simple…a new and massive form of theft. In short, he validated a new policy frontier for central bank chicanery and sleight-of-hand. We would consider Mr. Adair’s recent speech as the “coming out” of OPMF.

INET stands for Institute for New Economic Thinking. It was founded and funded in large part by George Soros in 2009. Its stated objective, according to the INET website, is to “accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century.” While still relatively new, it is gaining much influence and is attracting high-profile economists such as Lord Adair Turner and others to its ranks.

George Soros, in an interview at this recent INET conference, expressed enthusiasm for OPMF. In fact, much more than that. He said something to the effect that, in his consideration, he believed Lord Adair Turner (advocate of OPMF) to be one of the most brilliant economists alive today.

Just what is OPMF? It is this: To have central banks directly finance the budget deficits of governments. In other words, central banks would buy new issue bonds directly from a government’s treasury in exchange for newly issued money. The central banks get the bonds; the government gets the money in its bank account to spend.

In short, brilliant. If government debt is never contemplated to be paid back to the central bank, wouldn’t it be more correct to say that the central bank gave a free gift of money to the Treasury Department? We would say yes. This opens the door to great abuse…and much more malinvestment and economic distortions.

Real wealth cannot be created out of thin air. What these new OPMF policies must therefore produce is large shifts in relative wealth between different economic agents and households. Wealth distribution skews will continue to widen, with the 1% amassing even more relative wealth. (Wealth distribution is already at its most imbalanced in at least 8 decades in the U.S. not to mention similar trends in other countries.) This is just one of the structural problems.

While Mr. Adair and other erstwhile and mutually-congratulatory money alchemists will no doubt continue to reinforce the notion that their ideas are new and brilliant, they are in fact not. The underlying premise — buried under mile-high layers of academic-speak, theoretical obfuscation, references to other revered economists and so on — is a fascist wealth transfer. That’s harsh language. Even harsher (and more accurate still), is the word theft. When massive amounts of wealth are being transferred by effect of the policies of unelected central bank officials (not by way of labour or savings nor a properly-empowered congress) that is what it is…theft.

If you’ve been puzzled by the inexplicable strength of stock markets in recent months, despite a clearly decelerating economic ebb and wilting earnings, then the growing expectation of OPMF could be the missing link.

As OPMF gains further influence in policy circles, we speculate that financial markets (both bonds and stocks…the latter certainly so) will initially be (perhaps already are) in a celebratory mode. In fact, it may yet be a full-blown punch bowl party. Intoxicants such as free money and free government funding will do that. But only for a time. The flaws that we have cited will, in time, come to the fore.

Finally, while we see such smug, morality-free prescriptions being proposed to wide and celebrated approval, on the other hand we also see confusion and trepidation. Said Lorenzo Bini Smaghi recently, former member of the executive board of the European Central Bank: “We don’t fully understand what is happening in advanced economies.” Furthermore, José Viñals, IMF Financial Stability head, forebodingly commented that “Put simply, we are in uncharted territory.” Indeed we are.