Sunday, November 3, 2013
This Is Not a Peter Schiff Fan Blog
I want to bring this subject out of the shadows of the comments section on my previous post and open up my thinking on money and credit.
This is not a Peter Schiff fan blog. But this will neither be a fan blog for "serious, academic economists", who in my opinion have been dangerously out of touch when it comes to the implications of the massive credit expansion of the last 30 years, credit which has been used increasingly for purposes of pure consumption or, at best, low/negative return investments. My limited understanding is that we have been bringing forward a lot of future growth through this credit expansion. Excess "borrowing from the future" is made possible by the fact that no one knows how much growth lies in the future. What we can be sure of is that a) it's less of it there now that we have brought it forward, and b) it only takes some greed and optimism - basic human characteristics - to borrow too much of it. This is my "big picture", which makes me quite pessimistic about future growth (if we first don't see creative destruction à la Joseph Schumpeter), and it makes me see more "bubbles" around the world than the average person.
I recently read a speech by Adair Turner ("Credit, Money and Leverage: What Wicksell, Hayek and Fisher knew and modern macroeconomics forgot") and it was an important confirmation to me that I've been onto something in my thinking the last couple of years - and it made my thoughts more structured. (I found it thanks to Buttonwood/Philip Coggan of The Economist who linked to this speech in his blog post.)
If there is one writer I seem to agree with surprisingly often, it is above-mentioned Philip Coggan. His book, Paper Promises, reflects quite well my thoughts on the subject. I can highly recommend it.
I also appreciate hedge fund legend Ray Dalio and his thinking on the subject of money and credit. You can find his original text "How the Economic Machine Works: A Template for Understanding What is Happening Now" here, and a simplified Youtube version here.
These are just random examples of people who have influenced me greatly through their writing, and I should definitely mention Bill Gross (of PIMCO), Howard Marks (of Oaktree Capital) and Nassim Nicholas Taleb as well.
So, overall I think we have too much debt in the world. The moral hazard related to no one possibly knowing how much growth lies in the future and so no one being able to set a limit to how much of it we can bring forward through credit-driven consumption and commitments related to pensions and health care has enabled us to live way beyond our means. (I'm not exactly repeating anyone I know, so I don't know if I've got it all wrong)
I just think that there has been a deficit in "sound money" thinking in the world during the last thirteen, if not thirty, years. There will no doubt come a time when we will have a deficit in "loose money" thinking. But because of the experimental, exceptionally massive fiscal and monetary stimulus we saw in 2008-2009 (and one might argue we've seen since 2000), we never really saw that deficit in loose money thinking take place (at least not for more than a couple of months). We have opted for fighting problems related to excessively loose money with even looser money. People wiser than me argue that it's the right thing to do, while other people wiser than me say it's wrong. I'm just very suspicious of this strategy because it is 100 % compatible with avoiding short-term pain, which is something that is very much hardcoded in our brain but often leads to inferior long-term gain.
Does this make me an "Austrian"? You decide. But I don't want to hold on to any school of thought, at least not indefinitely. To me the answer, like usually, lies somewhere in between.
Posted by Antti Jokinen at 14:06