Caution versus Confidence

Sometimes caution is a virtue. When things are going from bad to worse, one does not want to embark on boondoggles. Resources need to be conserved for redeployment in better times.

One of the functions of money historically is its use as a store of value. When prices are low enough that the desire for a good deal overcomes the fear of loss, money is pulled out of hoarding. In 1933, US President Roosevelt signed an Executive Order "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates." Evidently, Mr. Roosevelt decided that by forcing money out of hoarding, the same happy result would occur as if the money had come out of hoarding voluntarily.

We believe this was a critical error of judgment, and a factor which prevented the cure of some critical failings in the US (and indeed world) economic systems which caused the 1929-1939 Depression. We agree with the Austrian school of economics theory that excessive credit expansions are the primary cause of depressions. The excesses of these expansions are worked out primarily by a dissolving of the banking system and a subsequent reboot, so to speak. The policies of the Hoover, Roosevelt, Bush II, and now Obama administrations (and their international counterparts) did not allow the liquidation of the banking system. On the contrary, the popular solution to the depressionary stress is rescue of the failed banking system and further expansion of credit.

Classically, metallic money has acted as a brake upon credit expansion. In the Great Depression of 1929-1939 this brake became an inconvenience and was discarded. Since then, the world economy has been riding a runaway train of credit expansion. Sooner or later (and we vote for sooner), it will come off the tracks when spurious 'investments' do not produce intended yields.

Is the 2007 Depression then 'the big one'? It will be if world leaders decide to void the world's paper money supply of what little store-of-value-ness it has left. Zero percent interest rates and debt monetisation (both in progress) are a good start in that direction. Seeing their money become nothing other than something to spend, the world's citizens will dutifully spend away and the greatest crack-up boom ever will ensue, followed by the inevitable hyperinflationary catastrophe.

We would like to hope some other scenario is possible, but it seems less likely by the day.