“Drastic inflation is ahead. When the amount of goods and services in the economy does not change too much, but the amount of money doubles, it reflects in higher prices,” says HANS-HERMANN HOPPE, Professor Emeritus of Economics at the University of Nevada, Las Vegas.
Several years ago you said in an interview that “governments love crises – in fact, they often cause them or at least contribute to them, in order to strengthen their power”. Does that apply to this economic crisis, as well?
Certainly. This is not a crisis of capitalism, but of states and their central banks. The cause is – and everyone will agree on this – primarily the easy access to loans. How could this have happened? When I have my own savings and I lend them to someone, I evaluate very carefully whether that person is able to pay his loan back. But if I can create the loan “out of nothing”, because I simply print up money, and furthermore, I know that in the event of a mass insolvency, the central bank will rescue me in any event, I will lend to just about anybody. Now, states are using the crisis as an excuse for increasing financial market regulation. It is a good illustration of the fact that governments cause crises, people then request more intervention from them to mitigate the crisis, and they make further and further interventions…
Do certain private companies enjoy the crisis? What I mean is mainly large banks, such as Goldman Sachs; there is even talk about a “Goldman conspiracy”.
Yes. No other field is so closely connected with the state as banking, especially institutions such as Goldman Sachs. The existence of central banks ensures that key commercial banks can engage in credit expansion. Commercial banks were, in fact, among the most significant interest groups that lobbied for the establishment of a central bank.
Interesting – in this regard, you would agree even with Joseph Stiglitz. He, too, criticises the link between Wall Street and the government.
But Stiglitz is not against the institution of the central bank. He is not against the institution of paper money that is not covered by anything. And that money is, naturally, also responsible for the crisis. As long as money is tied to a commodity, for example gold, the amount of money and the number of loans cannot be arbitrarily increased, because it is impossible to increase the physical amount of gold that exists. On the other hand, the physical amount of money that is not covered by anything can be increased at any time. Stiglitz does not protest the least against the fact that the government is the monopolistic issuer of money, which is a fundamental mistake.
You say that modern mainstream economics, whose leading representative is Stiglitz, is in a state of total confusion. Is bad economics one of the culprits of the crisis?
In the economic profession, there is practically not a single person who would question the thesis about the necessity of the existence of central banks. Everyone agrees that market competition is useful in the dairy business, in the automobile industry, and in other sectors, because the failure of socialism has shown that without a market and competition, the economy simply does not work as it should. On the other hand, they hold that one of the most important goods in the economy – money – should be produced by a monopoly, by a central bank, without there being competing suppliers of the commodity. Faith in this monetary socialism is nearly omnipresent. Also omnipresent is the inability of these economists to see that an interest rate is something that is created on the market, rather than something that should be determined by central banks or governments. The interest rate is the product of the mutual effects of the overall supply of saved-up funds and the demand for those funds. That is a market phenomenon. But most economists think that some institution can determine that the rate would be such and such. In all other areas, however, they would say that that is strange and not beneficial.
But in banking, they still prefer central planning.
Yes, exactly. That is why this whole idea that this crisis is a crisis of capitalism is absolutely ridiculous. How can the market be attacked when money and loans – the cause of the crisis – are not produced on the market? It is the result of an unsuccessfully managed central planning of monetary matters.
But for the time being, it seems that the crisis will lead more to the stiffening of regulation rather than to the loosening of markets. Do you fear such developments?
Yes. The same people who are now asking for tougher regulation wanted regulation before the crisis. The best regulation is that the companies that have failed go bankrupt. If the banks practiced that catastrophic policy with risky loans, they must go bankrupt. Only then can they learn from their mistakes. Now, the situation prevails that banks have made enormous mistakes, but they are rewarded for them. Rescued banks therefore cannot learn from mistakes, and that is why they will commit further excesses in the future, on a yet larger scale. On the other hand, those who behaved wisely will be punished by the higher taxes that are required for the rescues.
Do you therefore expect a yet greater crisis in the future, even when we manage to get over this one?
If we get out of this crisis through the present measures, the next one – even more massive and worse – will be automatically programmed.
Why are banks and politicians so scared of deflation? Do you share their worries?
No. A deflationary period, if it occurs at all, will be only very short. The reason for it is that during a crisis, people want to hold more cash. When the demand for cash increases, the monetary supply drops as a multiple of the money withdrawn from the system. The present pouring of money into the system is merely an attempt to “compensate” for what has been drawn out by people in cash. As soon as that stage is over, the converse effect will occur: with the return of faith in the banking system, banking reserves will increase and monetary supply will increase at a multiple ratio to the reserves, which will lead to truly massive inflation. What we are seeing today is not deflation, only low inflation – the result of the fact that people are scared and they want to be enormously liquid.
Is massive inflation inevitable?
Unless central banks do something that they have never done before, that is, unless they pull money back from the market, it is. But I do not know why they would do something like that. I am expecting drastic inflation. This is simply the basic alphabet of economics: when the amount of goods and services in the economy does not change too much, but the amount of money doubles, it is reflected in higher prices.
Hans-Hermann Hoppe (59)
A professor of economics of German origin and a so-called anarcho-capitalist who worked at the University of Nevada, Las Vegas until last year. Now he lives with his wife in her homeland, Turkey. Aside from economics, he studies history, philosophy and sociology – his thesis advisor was Jürgen Habermas, a major German philosopher and sociologist. In the US, he closely cooperated with Murray Rothbard, a cult libertarian thinker. Hoppe is an opponent of large state units (“Better 200 Duchies of Luxembourg than one European Union”) and he drives a Mercedes.
Do you think that politicians and bankers do not know that?
They do have a bit of an idea about it. They know that the crisis is due to easily accessible loans, but do not clue in to what in fact made it such that they could be provided. In the United States they found out some years ago that certain groups of inhabitants own fewer houses, find themselves unable to pay back loans in more cases, etc. They said that it was discrimination that should not occur. Everyone should get a loan, under identical conditions. But loans cannot be granted under identical conditions, because you have to look at creditworthiness, at the likelihood of each applicant that he will repay the loan.
For example, blacks are usually not eligible for as large a loan as are whites; there is a greater likelihood of insolvency with them. Asians can get a higher loan than blacks. If you lend to everyone under the same conditions, people who are not creditworthy and who can, in fact, not afford it, will get a loan in a much higher number of cases.
Is inflation advantageous for certain groups of people – for example for politicians or bankers? These groups are the first to be able to buy with new money for old prices.
That is always the case. That is the reason why banks are so close to governments. The central bank creates money and the first ones to get it are the large commercial banks. Next in line are the largest clients of those large banks, and so on. Of course, everyone who is not a large player with a fixated income becomes poorer, in effect. And those who are the first to get to the money enrich themselves at their expense.
Perhaps that is also the reason they are so afraid of deflation. In that case, a similar redistribution is not possible.
More precisely speaking, it is much more difficult. Deflation is not a danger from the theoretical perspective. When all prices drop, not only the sum which the manufacturer gets for the goods drops, but also the price of raw materials or the intermediate products required for its production. Furthermore, there are industries, such as consumer electronics, in which prices have been going down on a sustained basis for decades. Although everyone knows that the notebook they are now buying will be significantly cheaper in a year, the industry as such keeps developing, it is not collapsing. A sustained decline in prices therefore does not necessarily mean that an industry is in poor economic condition. In a certain sense, it is even necessary to have deflation…
We can see it now: by an artificial increase of the monetary supply, governments are preventing a decline in prices, they are preventing deflation. They are postponing the point when people will say to themselves that they already hold enough cash, and the economy will thus revive.
Deflation is also not advantageous for debtors, which governments usually are. On the other hand, inflation is: it reduces the real debt.
Yes, but only as long as it is unexpected inflation. If it is expected, it will reflect in higher interest rates and the outcome will not be a redistribution of pensions. Furthermore, inflation is in fact a form of taxation.
Do you mean an inflation tax?
Inflation, the reduction of the purchasing power of money, results in a reduction of real income. If I have a fixed income and the inflation level is for example ten percent, it is the same as if my income were taxed by another ten percent. The difference is that you usually do not find out as quickly and you don’t even really find out how it happened: when they tell you that you will be paying higher taxes next year, you know who is responsible for it. When you lose money through inflation, many people do not even notice. That is why politicians prefer inflation to tax increases. Inflation can be blamed on foreign speculators, greedy stock brokers – but not so higher taxes.
You say that the present anti-crisis government interventions will lead to a drastic crisis. Do you think that inflation may be preferred by countries because it is, under certain circumstances, advantageous for debtors? And, as we know, governments tend to be debtors?
If you encounter a problem, you normally resolve by saving up more, to have money for resolving it. When you simply print money, you know that you will have to pay out government bonds. You know that in the end, they will have to be paid out. By future generations of taxpayers. So you are not one of those, but you can spend it now. Democracy is simply fertile ground for short-sightedness. It changes a man such that he behaves like a small child. A problem? We can solve it immediately – we will sell government bonds! Who would worry about who pays them back in the end – it can be spent now. There will be other generations and in fact, I may be dead long before it will have to be paid.
A private entrepreneur behaves differently?
Yes. He knows that if he gets into debt, only he will have to pay it back. But nobody makes governments accountable for the debt they make – just take Bush. There is no personal liability for debt. A private individual can lose everything by getting into debt, a politician not. And when a politician can behave this way, if this is how the structure of the stimuli is set, it is in fact nearly in his nature to behave that way.
So that is another reason why you prefer monarchy as a form of state arrangement?
I think that monarchs usually view matters with a longer-term perspective. They care for the welfare of the country more. They want to leave the country to their successors in good shape.
You claim that governments not only love crises, but even fabricate them; that Roosevelt knew about the attack on Pearl Harbour in advance, and that Bush may have known about the planned attacks on the World Trade Centre…
Let us take it in order: as for Roosevelt, we know he knew. In the case of Bush, I suspect that he knew. But that has not been proven – it always takes some time for such documents to get to the public. But it would have suited both of them: Roosevelt was enabled to enter the Second World War by the attack, which he wanted to do in any event, but he did not have sufficient support from the public and the media. An attack, such as was the bombing of Pearl Harbour, can immediately change public opinion. After the 9/11 attacks, the public was also immediately on Bush’s side.
Do you think that governments are lured by the idea of creating a feeling among the public of being threatened, in order to get better control over the inhabitants, in order to be better able to intervene?
I think that that is the case in nearly all countries. Governments also often establish so-called non-governmental organisations (NGOs), and these seemingly independent entities then lobby for governments to intervene even more in certain situations. But the only source of finance for many of them is government money. Governments therefore support these organisations and they “in return” lobby for greater powers for the government, for example in fighting so-called global warming: they are asking governments to protect poor polar bears, to prevent the melting of icebergs, and so on.
Do you think that governments can manipulate scientific research in a direction that suits them, and one of the results of that is, for example, the so-called global warming?
Yes, global warming is only another in the line of crises that governments, as I have already said, love. But now, global warming has been moved to the back burner a bit – because of the financial crisis. It is no longer the most important topic, but as soon as the crisis is over, it will return to the scene. It does not matter too much whether it is a bit warmer or cooler. The thing is that the resolution of such developments should not be a matter of government intervention. People can adapt to these things on their own. Several hundred years ago, the average temperatures were far higher than today. People in England grew grapes, in North Carolina oranges: that is not possible today. So in fact, cool periods are to a large extent worse for mankind that the warm ones. And when the ocean level rises? Some regions will be worse off, prices will go down, and others will be better off. There are millions upon millions of individuals and adaptations that will be made. So, hence, there is, in fact, no problem with global warming.
Do you agree that governments are trying to get science, universities, and the academia in general under control? I was told that by William Butos, who studies the economics of science in the Austrian version. Another economist from the same school, Thomas DiLorenzo, said that only one institution of higher education has been left in the US that has thus far not taken a single cent of government money – the Grove City College in Pennsylvania.
That is true – both in the case of state educational institutions, and the private ones. Even private schools need accreditation, and if they do not teach what governments want, they may not get it. Also, some of the money for research comes from state sources.
One thing is that governments take advantage of problems such as global warming to reinforce their power, as you say. Another thing is, however, that the vast majority of the public, i.e., voters, believe it – or at least do not have such a critical view of it. How come?
That gets us back to education. Curricula and the form of education, from kindergarten to university, are determined by governments. They therefore have a certain advantage in convincing people about their point of view. And many educational workers are also paid from taxes. That is why the basic points of government propaganda are accepted by the general public.
An increasing number of people are paid by the state; so of course it is not in their interest to lobby against the government in any way.
That is why governments love the present form of the pension system. The normal way of securing oneself for old age is to save and to buy one or two houses for your savings. In old age, you can then sell the real properties and live off the money you get. The present form, the generational contract, means that the people who are working are paying for pensioners, and it carries with itself a further need to tax. If the state did not continue in its high taxation of the people who work, all pensioners would get much poorer. The vast majority of the population is therefore dependent on government taxation. I am afraid that this cannot be easily changed because it would threaten the lives of the people who depend on the state. And there are only very few who are totally independent of the state.
And that is why an increasing number of people are lacking critical thinking? They act like a herd?
As I have said, democracy turns many people into small children. It makes them believe that all problems can be solved quickly and easily if the right people are elected, if money is printed, or if wealth is redistributed from one group of inhabitants to another. It supports a childish mentality in them.
Interesting, your opinions are in certain cases similar to those that are proclaimed by the left – or even the ultra-left.
The lefties are not always wrong. The left, too, knows that the state does evil. Sometimes, the left is more realistic than the mainstream. And it also seems that there is close cooperation between governments and big business.
Are you, therefore, more against mainstream, conformist ideas than against some of the leftist theses?
The left can describe certain problems very well, but the solutions it proposes are usually ridiculous. For example, it rightfully attacks conspiracies, situations when certain people are put at an advantage to the detriment of others, when there are coalitions between state and banks. In this regard, the description of the situation is often correct. But the solutions the left suggests are almost always wrong.
So you believe in conspiracy theories? That, too, is a typical aspect of leftist thinking…
Yes, but you do not have to necessarily believe in one big conspiracy. The reality is such that many people conspire in some way – so that someone else would do this or that. Even people who are not influential, for example you or me, sometimes try to achieve a certain goal by influencing someone else, by taking advantage of connections, and so on. Why should we think that powerful and influential people are not doing that? Of course they are. But there are also conspiracies that go against each other and cancel each other out to a certain extent. Most things in the world happen because someone wanted them to happen. History is not a sequence of accidents.
An abbreviated version of this interview, obtained in Prague, was published in the Týden No. 19 on 11 May 2009.