Ludwig von Mises and the current economic crisis
We are finally realising today just how accurate Mises was in his predictions on inflation
Next October 10th will mark the 40th anniversary of the death of Ludwig von Mises, one of the prominent figures of the Austrian School of economics and one of the founders of modern libertarianism. Von Mises devoted his entire life as a scholar, first in Vienna in the early 20th century and then in New York, where he taught until 1969, to the rebuttal of the socialist theories and to the development of praxeology as a basic concept of human actions.
The anniversary of his death coincides with the worst financial crisis that the world has been through since the end of World War II – a crisis that has its origin in the excessive indebtedness of private and public sectors and the bubble burst on subprime mortgages. For many economists, it was caused by the easy-money monetary policy followed by the Fed for many years.
If Von Mises were alive today he would see that many of his predictions have become reality. He would see a world in which the national treasuries and the central banks vie for the domain of public policy in a financial environment where the amount of sovereign world debt now amounts to $ 44 trillion (source: BIS) and where central banks are obliged, losing any form of independence, to undertake gigantic operations for the disposal of such debts.
Examples include the Fed’s QE3, the ECB’s OMT programme, and the quantitative easing programmes carried out by the Bank of England and the Bank of Japan. In this continuous run of governments issuing sovereign debt in order to cover always consistent deficits, economists are questioning more and more how long this can be sustained – whether there is a tax limit beyond which governments cannot go, beyond which lies sovereign debt default.
In this context, the debate between those who argue that austerity is unavoidable to bring the debt to more manageable levels and those who argue that creating inflation is the lesser of two evils, is on.
But where would Mises sit on this dispute? The answer is found in one of his many masterpieces, Money and Credit. In the chapter on inflation, he condemns unequivocally artificial printing of money, which he sees as a form of drug administered by governments to citizens. Fiat money creates massive, distorting effect on the system of prices, the redistribution of income, and takes away the ability to control the loss in the purchasing power that the increase in prices generates.
In the end, he concludes, there is no way out for those governments who believe that a bit of inflation, even just a little bit, can contribute to economic recovery, avoiding the citizens’ taxes that would otherwise have to pay: “if you are increasing the quantity of money, and you are not increasing the quantity of things which can be bought with money, you are only increasing the prices which are paid for them. And in time, if the increase in money continues, the whole system becomes a system without any meaning and really without any possible method of dealing with it.”
Increasing inflation creates a false expectation that the consolidation of public finances may be postponed, without taking into account that such action will contribute even more to making the economic system unsustainable. Sooner or later this will collapse through the abandonment of individuals' trust in a currency that has no value.
From this point of view, the vision Mises had about inflation as an illusion imposed is not so far from the Ricardian idea that government bonds are not net wealth, since future generations will have to bear their burden. Inflation and public debt, then, are two sides of the same coin, because they create substantial intergenerational redistributive effects that policy makers cannot evaluate ex-ante.
We are realising today how accurate Mises was in his predictions. Mises had these issues clear in his mind and implicitly warned central bankers of the risk of losing money to its real meaning and of exposing the economy to the risk of currency devaluation. This, then, is nothing but the risk of moving from one crisis of sovereign debt to the current crisis, a prelude to a possible large-scale monetary perfect storm.
Dr. Emanuele Canegrati* is a senior economist in the Italian Parliament. The views expressed are those of the author and do not reflect the official policy or position of the Italian Parliament
*I thank professor Kurt Leube (Hoover Institution, Stanford University) for useful suggestions.
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