Always strive for the virtue of Rationality which, as Ayn Rand wrote, means to accept the responsibility of forming one's own judgments and living by the work of one's own mind (which is the virtue of independence); to never sacrifice one's convictions to the opinions or wishes of others (which is the virtue of integrity); to never attempt to fake reality in any manner (which is the virtue of honesty); to never seek or grant the unearned and undeserved, neither in matter or in spirit (which is the virtue of justice).
The corner comes closer and closer, every day it becomes clearer and clearer. At the end, at the corner, there are only two choices:
Inflation or Deflation.The efforts to stabilize the global financial system are going to fail.
On June 16th Ottmar Issing, Vice President of the German Bundesbank, gave the signal by saying: "Monetary policy can only be effective if asset prices, goods prices, and wages are in balance." This was his contribution to the discussion over the ongoing Japanese problem.
The monetary policy of Japan and connected to the US is going to fail if continued. In Japan asset values dropped between 50% and 70 % since 1990. Goods prices and wages remained more or less unchanged. As long as these three prices are not balanced, the applied monetary policy will not lead to economic recovery. Low interest rates and more liquidity will not work. The global liquidity is creating bubble after bubble. Without the Japanese liquidity, the extreme bubbles in Asia wouldn't have developed. Crisis after crisis is repeating itself in shorter and shorter intervals. This can continue theoretically until the global level of interest rates equals the Japanese level, leading to an inflationary blow-off.
If Japan allowed consumer prices and wages to fall, to reach the level of asset prices, a deflation would develop, causing global deflation. After the adjustment a new up trend would develop.
The other possibility is to lift asset prices to catch up with consumer products and wages. This requires a concerted global action to supply liquidity. The central banks, the IMF and the Worldbank have to supply more and more credit (This in itself will not work because the marginal benefit, as measured in Gross National Income, of each additional credit monetary-unit is approaching zero). The problem is the following. During the process, the global dynamic financial system is getting more and more out of balance. The change of one parameter is causing a negative outcome on the other side. That's where we are right now!
If continued, the increased Japanese liquidity would cause a collapse of the Japanese Yen and a snowballing inflationary spiral in Japan. The inflationary force would finally balance asset prices, goods prices and wages at a much higher price level. A new currency would lead to a new economic up trend.
Global interventions for the yen would increase monetary supply of the intervening central banks - and would lead to more financial crises, more bail outs, and a slowly but snowballing global inflation level. This is consistent with Alan Greenspan's remark that central banks can create unlimited amounts of paper money. This would mean global inflation! All three price levels on a global basis would be balanced again.
Now comes the rational decision to make, of which way to go: Inflation or Deflation? Both ways are painful and will lead to social, political, and economic tragedies. But only the deflationary way is compatible with the principals of rationality. The broad masses, especially the honest and humble ones will keep some of their savings and buying power. The greedy and scrupulous ones will loose their game and buying power (credit). This is a decision between good and evil. Central banks should choose the good. That means they must cease supplying excess credit, and quit throwing good money after bad.
The solution for a new beginning is a monetary unit, totally independent of government manipulation. Money supply should increase at a level of sustainable economic growth. This is probably between 2-3%. Interestingly, annual precious metals supply grows at this rate are. The road to economic growth in a balanced system is control of money supply.
Depending on technological development, metal based monetary systems move from less precious to more precious metals. And since platinum is more precious than gold, a monetary system backed by the white metal would afford better control over the money supply. Value should depend on rarity (Platinum is 15 times rarer than gold, and 125 times more rare than silver). However, an increase in supply of one of the metals would necessarily change the ratio. Any money supply increase would depend on the output of the most precious metal.
By making certain the institution in control of the money supply is independent of government control, but that money supply is ONLY a function of changes in the levels of platinum, then monetary manipulation by politicians would be much more difficult - and dire financial situations like today almost impossible. Consequently, economic evolution of mankind would be more honest and less greedy - simply better.
Stefan Albrecht
June 20, 1998
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