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Dishonest Money

February 20, 2002

Gerardo Leone, commercial director at Argentine cold meat supplier Paladini SA, knows he has to revise his price list that assumes an exchange rate of 1.4 pesos per dollar. He just doesn't know when to do that.

"It's impossible to set our prices," said Leone. "The country is such a mess." Without a believable peso rate, some companies are either delaying production forecasts for the year or stalling a revision in prices to match higher costs already charged by suppliers.

Although the unfortunate Argentines have allowed themselves to be put in the position of being a reductio ad absurdum for the rest of us, Senor Leone and his peers have encapsulated the Austrian theory of the business cycle in a few brief words.

Though we labor to exchange those goods and services which are our chosen specialty for those arising from another's métier, we have to do this by first exchanging them for money.

The swirling currents of supply and demand for the goods themselves are naturally difficult enough to navigate, without us having to do this in a craft of changing dimensions, using a paddle of indeterminate size, subject to governmental "water management" schemes of artificial drought and flood to affect the channel.

In less metaphorical terms, the inability to rely on a monetary yardstick as a reckoning for honest exchange, for any length of time, can only frustrate the business of wealth creation, as the Argentines are finding to their cost.

If every time we bring the results of the sweat of our brow to market, we are subject to an arbitrary assessment of their worth, either we are suffering from deliberate imposts on the part of the authorities, or we are partaking not in an entrepreneurial risk, but in a capricious lottery in which we have no knowledge of the odds involved.

If we are to take one lesson from the current state of the world economy--and the geopolitical stresses and ideological divides which reflect this--we should alter the (oft-misquoted) phrase from the second book of Timothy.

Rather than holding that "the love of money is the root of all evil," we should all fervently avow that "the existence of dishonest money is the root of all evil."

Consider the Telecom bubble's latest revelation, after the sound of hollow laughter rang around the transcontinental skeins of "dark fibre," as the SEC investigation of Global Crossing's finances focussed on "Indefeasable Rights of Use" agreements, or, more colloquially, "capacity swaps."

This scam seems to work as follows:

I run a small hotel in a mountain resort, as do you, my neighbor. Business has been bad this year since the recession hit our overseas clients, what with their accounting worries and all, so we both have lots of unbooked rooms and little prospect of a passing tour party to occupy them.

Then I have a bright idea: I will rent the ten spare rooms you have, for the next ten years, if you will return the favor to me. Moreover, I will recognize nine-tenths of the value of my multiyear "sale" to you now, but offset it with only one year's worth of costs. You will do likewise.

No cash will change hands, but you and I will have substantially increased both sales and profits, using these so-called "hollow" swaps

What's more, when next we meet in the local chamber of commerce, we will both be able to boast to our local bank manager how life in the hotel business has never been so good!

Recognizing that this is a widespread practice in that latter-day Canal Boom, the Telecoms industry has been late arriving, but, as Jim Crowe, chief executive of carrier Level 3 Communications, told the FT, "We're going to find instances of companies that kidded themselves, and kidded investors, with hollow swaps."

When you consider that some estimates reckon that $1 trillion has been spent by this industry in the past five years, funded by $750 billion of debt and equity issuance, and that anything up to half of the value has already disappeared, you can just begin to glimpse the tip of this very nasty iceberg, looming out of the moonlight under the White Star liner's bows. 

You also get to understand what we Austrian School people mean when we say dishonest money always leads to monstrous amounts of wasted, or "malinvested," capital.

Moreover, look at the international situation, where after five years of whitening the graves--or papering over the cracks, if you prefer--the dysfunctional nature of the system has been brought home, even to the gates of Rome itself, amid rising unemployment, record bankruptcies, surging defaults and delinquencies, and falling output.

Testimony to this breakdown is the fact that the IMF, at a rough reckoning, is currently involved in the extra-constitutional direction of around one-third of the world's polities and is imposing its failed and destructive mix of "Black Ship" interventionism on them all.

It is thus employing dishonest money to impoverish the nascent middle classes and subsume national sovereignty around the globe, with a twofold aim.

The first aim is to bail out failed (dishonest money) credit expansions, to the ultimate benefit of the predatory lenders who instigate them and who are then rewarded by achieving higher returns on IMF-restructured, "socialized" debt, while having the debt service itself underwritten by taxpayers both at home and abroad.

The second aim is to impose economic colonization by carpetbagging industrial capital in the form of phony privatizations, held in devalued currencies. Further, it enforces what is laughingly called a market "liberalization," but which, in essence, means an osmosis under duress whereby Western goods and credit cannot be barred admission due to IMF loan "conditionalities," but where the return flow of goods has to surmount hefty tariff barriers, which in turn make the debt service less supportable and so promote a spiral into poverty.

The sheer Kafkaesque absurdities to which this gives rise were highlighted only lately when George W. Bush, keen to shore up his key Eurasian client, Pakistan's Musharraf, felt free to intimate that up to $600 million in purchasing power would be transferred from U.S. citizens in the form of aid, but that the U.S.--ostensible and vociferous champion of free trade--regrettably would not be able to lower tariffs or to increase the quotas currently limiting textile imports from the factories of Lahore and Islamabad.

The fact that the resultant influx of cheaper goods would have provided some offset to the poor U.S. taxpayer-as-consumer, as well as boosting the free-market portion of the Pakistan economy, was naturally nothing beside the howls of protest from Neanderthal Southern politicos, zealous advocates of their local textile-manufacturing, campaign contributors, who shelter behind such prosperity-sapping protectionism.

None of this IMF-supervised harm would ever take place if money were not dishonest--if it were not able to be conjured into existence by the central bank's willingness to foster the creation of what passes for "money" in this world by the mere granting of an electronic book entry at a fractional-reserve, fiat-currency, lending bank.

If tomorrow we foreswore this dishonest money, and we irrevocably fixed its quantity and form, we would make sure that the title to it had to be earned by fruitfully contributing labor, and thus we would forestall much prejudicial misalignment of ends and productive means. 

We would we be able to separate the cornucopia that flows from free enterprise and private endeavor from the subtle toxins of the financial freebooters who use these honorable activities as a vector for the transmission of their pathogens.

We would be able to differentiate clearly between classical Manchester liberalism--of hard money and individual sovereignty--and modern IMF-imposed "neo-liberalism," which brings the corruption of value and, eventually, of morality, and which leads on from the inflationary exploitation to excess, waste, despair, and disaffection.

If capital were once more not an ephemeral demand liability from the banks, but a true, preservable token of that productive labor which was spared prior consumptive recompense, it would be the more closely guarded and better applied for the fact that it was scarcer and more hard-won. Economic growth--especially that measured by mere spending--might be slower, but it would be more steady, more equitable, and more sustainable as a result.

Moreover, the inarticulate rage of the dispossessed masses and the pot-banging cacerolazo of the Argentine middle classes, together with the metaphorical equivalent among many of the rest of us, would have no further cause to inflame it.

Thus, violent fundamentalism--whether from the Middle East or the Upper East Side, whether from collectivist Maoist guerillas or collectivist Monroe doctrine globalizers, whether from rogue states or a rogue State Department, whether from Medellin drug traffickers of meddling energy traders--would not be able to seed itself where its vicious thorns and fast-growing shoots could choke our liberties.

Now do you see why the elite hates Gold with such a passion?


Sean Corrigan is a principal of www.capital-insight.com, a London-based economic consultancy. See his Mises.org Articles Archive, or send him MAIL.


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