Yours truly is happy to announce a new book publication : Krise der Inflationskultur (Munich: Finanzbuch-Verlag, 2013), 320 pp.
The strongest criticisms of fiat money and central banking have been based on monetary considerations and on the theory of capital. By contrast, the repercussions of an inflationary monetary system on financial markets and on the use of wealth has been somewhat neglected. The present essay on the political economy of finance fills this gap. The central thesis is that, in a fiat money system, financial markets tend to turn into engines of destruction; they absorb excessive amounts of savings, facilitate the consumption of savings, and reinforce a culture of inflation that saps and undermines the economic foundations of civilisation.
The publisher wished to announce the title early for marketing purposes, thus we had to make up a title (Crisis of the inflation culture) that approximately covered the essence of the book. But writing it was very much a work in progress, and it turned into something much more fundamental than I had planned. Initially the project was to publish a collection of some of my German-language articles and op-eds that had been published in the previous five years, in which I had commented on the never-ending financial crisis and highlighted various implications of capital theory. But once I sat down to put this material into a meaningful order I realised that the result would be very unsatisfactory both for the readers and myself. Thus I started to invest much more into the project, first filling gaps, then adding ever more new material, and taking out more and more of the material that was initially supposed to be in the book. When the manuscript was completed it had turned into an entirely new book, definitely a result of my studies and teaching as from about 2006, but nothing that I had imagined or planned quite in that way. The invisible hand, once again.
The only negative externality was that the title no more quite reflected the essence of the book. If I had to give it a new title now it would be Fiat Money and the Wealth of Nations or Political Economy of Finance or maybe The Finance of Nations. One of these shall be the title of the American edition, forthcoming from the Mises Institute in 2014.
Table of contents
Intro
PART ONE: On Growth
I Savings and growth
II The role of financial markets
III Scarecrow deflation
IV Money illusions
V On the appropriate use of statistics
PART TWO: On Inflation
VI Inflation and price inflation
VII The Misesian critique of inflation
VIII The bubble economy
IX The nationalisation of wealth
X Inflation culture
PART THREE: Dealing with the crisis
XI Billy-goat the gardener
XII Fewer crises through smaller government
Arguments developed in the first part (more in the other two parts)
(1) The uses of savings in a free society. Virtually any proportion of income can be saved (short of 100%). As the savings rate increases, investment increases as well, but less than savings, because the return on investment diminishes. This means that in a flourishing and free economy more and more savings tend to fund non-commercial projects: arts, science, philanthropy, environment, and the embellishment of public space.
(2) Financial markets are not necessary for the “financial division of labour” between savers and the final users of savings. The same function is fulfilled by the traditional form of savings through money hoarding. This point is completely neglected in today’s academic literature on financial markets. Due to Fritz Machlup’s very negative influence, Austrian economists too did not sufficiently stress this point. The implication is that all forms of savings are conducive to economic growth, and ultimately for the same reasons.
(3) The political dimension of the transition from money hoarding to financial saving-investment is a greater dependence on financial intermediaries and, especially, much lower costs for governments bent on expropriating the wealth of the citizens.
(4) The true reason why financial markets can be instrumental in fostering growth is that, as a tendency, they stimulate savings (that is, they provide incentives to reduce spending on consumers’ goods). This point too is completely brushed under the carpet in the conventional financial literature. According to the prevailing opinion, financial markets help collecting money that would otherwise lay dormant in money hoards without diminishing consumer spending whatsoever. Thus they stimulate aggregate spending respectively aggregate demand. Therefore (and not because they encourage savings) they allegedly tend to promote growth.
(5) Financial markets tend to promote growth only in a competitive environment. If they are hampered by government regulations (“financial repression”) they become prone to inefficiency and corruption. If they are subsidised, they suffer from moral hazard, absorb excessive amounts of savings; this entails wasteful uses of capital and it also facilitates political abuses. Today financial markets are massively regulated and they are also massively subsidised through the printing press. This two-fold damage is usually overlooked. In particular, the conventional theory has no place for the notion that financial markets absorb excessive amounts of savings. Its motto is: the more, the better. We present data to show that, today, in all major countries, a large part of financial savings (40-60%) are used to finance public and private consumption, rather than non-financial firms.
(6) Price-deflation and the deflation of the money supply, respectively the risk thereof, are essential features of a free economy. They impose limits on the development of the credit market and preserve the practice of equity finance and of high liquidity.
(7) National accounting fully confirms the Austrian analysis. Savings-investments are the main source of revenue in developed countries. I demonstrate this with data from the US (BEA) and from Germany. I also have corresponding data for France, Japan, and the UK.
(8) Austrian economists draw attention on the fact that capital consumption embellishes nominal and real GDP figures in the short run. I analyse the case of fixed capital of German non-financial firms to illustrate this point, highlighting the significance of GDP and inflation-rate figures, and how they are calculated.
