The financial journalist Lars Schall talked for Matterhorn Asset Management with seasoned investment banker and renowned economist Prof Thorsten Polleit whether the financial system can adjust by itself, whether central banks are needed or not, and whether the gold market is a free market at all. Moreover, Prof Polleit gives his answer to the question: what is good money?
Thorsten Polleit, born 1967, is Chief Economist of Degussa Goldhandel GmbH (established in Frankfurt, Germany in 1843) and a member of the firm’s advisory board (www.degussa-goldhandel.de). In the period of October 2000 to April 2012, he worked as Chief German Economist for Barclays Capital, focusing on European economic and political developments. Before that, he worked as Chief German Economist for ABN AMRO in London, Amsterdam and Frankfurt.
L.S.: Is the economic and financial crisis the consequence of the failure of capitalism?
T.P.: This is perhaps the most important question that needs to be raised, and hardly anyone is raising it. So I am most pleased with the opportunity to provide a proper answer. Let me give it to you straight: No, it isn’t capitalism that has caused the crisis. The world we are living isn’t capitalism, as many people would like to make you believe. We live in a world of interventionism: that is government interfering in the market, violating peoples’ property rights, thereby providing people with incentives to do bad things. This is what has brought about all the trouble we face today. If we had true capitalism, we wouldn’t have the current problems, to be sure.
L.S.: However, do we see a failure of the science and profession of economics?
T.P.: Under the dominance of state education – from Kindergarten to university –, economics has actually become, first and foremost, a pseudo-science legitimizing government interventionism in virtually all walks of live. So my answer to your question would be yes, I am afraid.
L.S.: Which causes do you see for the crisis?
I know it has become quite fashionable among economists to mention all sorts of causes: such as a lack of regulation, manager greed, insufficient policy coordination and so on. However, I see just one cause: and that is societies having fallen victim to paper, or fiat, money. Of course, you may explain the latter by blaming, say, the welfare-warfare state, majority voting etc. Fair enough. But I would think that if people understand paper money as the root cause of the current problems, we would be a great deal nearer to a solution to these problems.
L.S.: Can the system adjust by itself?
T.P.: Sound economic theory – and that is the Austrian School of Economics – would tell you NO. The fiat money system cannot adjust itself back to equilibrium. For fiat money causes, and necessarily so, economic disequilibria. Central banks slashing interest rates, pumping up the money supply, running deficits etc., wouldn’t unwind any disequilibrium. On the contrary. Any such measures would make them even worse.
L.S.: What do you think about bank bailouts?
T.P.: I guess I very much understand those advocating bank bailouts as a means for avoiding a recession-depression. However, as an economist in the Austrian tradition I must say that bank bailouts will not cure the crisis but will make it even worse. Government interference in the market place may mask the real economic problems, it may postpone the true outbreak of the crisis, but this comes at a high price, namely an even bigger crisis in the future. We won’t escape the damage caused by having used fiat money.
L.S.: Are the rescue measures in the euro crisis more or less just another bailout of banks, in this case predominantly German and French banks?
T.P.: The banking system operates on fractional reserves, and that makes it vulnerable to bank runs. Bailing out one bank is therefore benefitting all other banks, as investors typically assume that central banks will provide a safety net for all banks. That said, having bailed out Greece, Irish, Portuguese and Spanish banks means of course helping Italian, French and German banks.
L.S.: Does the world need central banks?
T.P.: Money has emerged spontaneously out of the free market. It is a free market phenomenon. This is a theory put forward by the economist Carl Menger (1840 – 1921). That said, you wouldn’t need any government, or any central banks for that matter, for getting sound money. In fact, the opposite is true: government replaces unsound money for sound money. Indeed, the world over central banks have been created by governments to destroy free market money and give government full control of society’s monetary affairs. Central banks serve a few at the expense of the great majority of the people. So, no, we do not need central banks.