Saturday, August 18, 2012

The behavioral fallout of junk money

Back in 2006, with the housing debacle and our current recession/depression/whatever only a cloud no bigger than a baby's hand, a financial commentator named Eric Englund wrote a psychologically astute article about the moral and psychological wages of central banks playing games with national currencies. Titled "Central Banking and the Depreciation of Self-Worth," it was recently republished at Financial Sense.
Right behind owning one’s own body, the second most personal asset an individual owns is the fruit of one’s own labor – with such fruit typically taking the form of money; which is exchanged for food, clothing, transportation, shelter, etc. Accordingly, with the common yardstick here being money, a person’s self-worth, in part, can be measured by earnings power, accumulated savings, and personal net worth.
Let's pause to acknowledge that a person's moral standing can't be measured in money, and that saints are indifferent to their prosperity or lack of it as a criterion of self-worth. Just the same, for most people, their image of themselves is dyed by wealth and poverty. It's human nature, even if it would be better overcome or at least subdued.
With central banks, however, continuously perpetrating the immoral and fraudulent act of fiat inflation, money perniciously loses value over time. When such an important and profoundly intimate self-measuring tool (money) loses its stability, people tend to lose their moral bearings and social decay ensues. And, correspondingly, state power increases – for a while at least – as the populace becomes evermore dependent on state bureaucrats for guidance. ...

For a state to gain in power, it must shift its citizens’ chief allegiance from the family to the state. As aided by the Federal Reserve and America’s public schools, Uncle Sam is winning this power struggle for loyalty – for now. When mothers and fathers are economically and financially illiterate – thanks to public schools – then the Federal Reserve’s siren-song of easy credit becomes irresistible. Profligate parents do not serve as economic and moral anchors for the family. Instead, they reach a stage of permanent adolescence in which they are more likely to teach their children to play a video game than to teach children how to read, write, do basic math, and lead a virtuous life. 

As a quick sidebar, you can even detect those "adults" who have reached permanent adolescence by their driving habits – such individuals drive as if they are in a NASCAR race or playing an auto-racing video game. In a household "run" by adolescent-adults, parents redefine their roles as that of a child’s best friend. A house, additionally, is no longer a home but more of a hangout. With family bonds weakening, and state power increasing, it is no wonder that the Homeland Security Act, the Patriot Act, and NSA snooping have only received a collective shrug of the shoulders.
Which came first, the adolescent-adult or the government fiscal manipulation? As with most such questions, neither really; it's a self-reinforcing feedback loop. The more that alleged grownups act like teenagers in the high school hallway, the greater the temptation for the Fed, legislators, and government agencies of all stripes to behave like the school principal. And the more they do, the more chronological adults slough off responsibility for themselves and their families. As long as it's legal -- or in some cases, as long as they can get away with what they want to do -- who cares? If it were wrong the government would stop it. If they mess up, the Great Father in Washington will make them whole.

Englund argues that bad money management at the highest levels of government affects sexual morality, citing Otto Friedrich's study of 1920s Germany. And when central bank fiddling of the economy bears its bad fruit, the results can be catastrophic not merely in some abstract sense but in destroying people's will to live. 

We are far enough away in time, and until recently were far enough away in spirit, from the 1929-1939 Depression that financiers jumping out of skyscrapers seemed like a quaint slice of history, like Cato slicing his wrist at the fall of the Roman republic. But there was nothing funny about it.
Historian William K. Klingaman conveys in his book, 1929: The Year of the Great Crash, that – as related to the stock market crash – asphyxiation by gas was the most common method of committing suicide, yet there was considerable variety. He states:
The wife of a Long Island broker shot herself in the heart; a utilities executive in Rochester, New York, shut himself in his bathroom and opened a wall jet of illuminating gas; a St. Louis broker swallowed poison; a Philadelphia financier shot himself in his athletic club; a divorcee in Allentown, Pennsylvania, closed the doors and windows of her home and turned on a gas oven. In Milwaukee, one gentleman who took his own life left a note that read, "My body should go to science, my soul to Andrew W. Mellon, and sympathy to my creditors."
While visiting New York, at the time of the great crash, Winston Churchill saw the broken body of a man who had jumped from a building and plunged fifteen stories to his death. Later, a notable suicide took place on Friday, November 8, 1929 when J.J. Riordan, president of the County Trust Company, took a pistol from a teller's cage at his bank, went to his home in downtown Manhattan, and shot himself.
So far, we can be thankful that the Whatever It Is we are experiencing hasn't led to many suicides. Perhaps that's only because our culture is less bound to moral codes than that of the '30s. Then again, we haven't yet arrived at the phase of demented "money printing" that is widely expected as the only way for the government to deal with a national debt that can never be paid off in "real" money.
History, clearly, has shown that money, a human construct in and of itself, has a powerful affect on the human mind. Hence, it logically follows that the central-bank–induced depreciation of the dollar – a fiat currency – goes hand in hand with the social decay we see all around us. We must learn from the German experience. To help reverse this decivilization process, we must abolish the Federal Reserve and establish a 100% gold standard – in effect, a counterrevolution. And then perhaps, once again, we will walk amongst a people who live by the Golden Rule.
When a nation runs on paper currency that is worth whatever the government says it's worth -- the definition of "fiat currency" -- it tends to distort all other values, perhaps devalue values themselves. Not just economies but people can only thrive when they are backed by more than the dictates of politicians.


David Foster said...

Sebastian Haffner, who grew up in Germany between the wars, described the psychological impact of the great inflation:

"But the mark now went on the rampage…the dollar shot to 20,000 marks, rested there for a short time, jumped to 40,000, paused again, and then, with small periodic fluctuations, coursed through the ten thousands and then the hundred thousands…Then suddenly, looking around we discovered that this phenomenon had devastated the fabric of our daily lives.

Anyone who had savings in a bank, bonds, or gilts, saw their value disappear overnight. Soon it did not matter whether it ws a penny put away for a rainy day or a vast fortune. everything was obliterated…the cost of living had begun to spiral out of control. ..A pound of potatoes which yesterday had cost fifty thousand marks now cost a hundred thousand. The salary of sixty-five thousand marks brought home the previous Friday was no longer sufficient to buy a packet of cigarettes on Tuesday."

The only people who were able to survive financially were those that bought stocks. (And, of course, were shrewd or lucky enough to buy the right stocks and to sell them at the right times.)

"Every minor official, every employee, every shift-worker became a shareholder. Day-to-day purchases were paid for by selling shares. On wage days there was a general stampede to the banks, and share prices shot up like rockets…Sometimes some shares collapsed and thousands of people hurtled towards the abyss. In every shop, every factory, every school, share tips were whispered in one’s ear.

The old and unworldy had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience was punished by starvation and death, but rapid appraisal of new situations and speed of reaction was rewarded with sudden, vast riches. The twenty-one-year-old bank director appeared on the scene, and also the sixth-former who earned his living from the stock-market tips of his slighty older friends. He wore Oscar Wilde ties, organized champagne parties, and supported his embarrassed father."

Haffner believes that the great inflation–particularly by the way it destroyed the balance between generations and empowered the inexperienced young–helped pave the way for Naziism.

"In August 1923 the dollar-to-mark ratio reached a million, and soon thereafter the number was much higher. Trade was shutting down, and complete social chaos threatened. Various self-appointed saviors appeared: Hausser, in Berlin…Hitler, in Munich, who at the time was just one among many rabble-rousers…Lamberty, in Thuringia, who emphasized folk-dancing, singing, and frolicking."


Rick Darby said...


Although the German Great Inflation was brought under control fairly quickly and the country returned to "normal" on the surface, it's easy to imagine how everyone who lived through it carried psychological scars from then on. Those memories plus the worldwide Depression left many Germans willing to trade political freedom for the promise of national power and full employment.

What are millions of Americans who've been out of work for years or are working at jobs far below their capacity feeling today? What might they tolerate in the name of government intervention and national security if they believed it would restore them?

David Foster said...

In the case of German, there was a one-two punch: the Great Inflation was followed about 7 years later by the Great Depression. A good fictional portrait of the psychological impact was offered by Hans Fallada in his novel Little Man, What Now?, which I reviewed here:

I don't think the USA is in danger of Weimar-level inflation...Bernanke may not be brilliant but is not as clueless as was the guy running German monetary policy back in the days...but I think even Carter-level inflation, coupled with protracted structural unemployment, would have very corrosive cultural impacts on the US.

Anonymous said...

DP111 wrote..

Interest rates are now at virtually zero. With inflation at 3% or above, this means people who have saved all their lives, are having their capital effectively pillaged and looted by the banks and governments.