In this article I draw attention to the similarities between the current economic situation and that of 1929, and the threat to today’s unbacked currencies. There is the coincidence of trade protectionism with the top of the credit cycle, and there are the inflationary events that preceded it. The principal difference today is in modern macroeconomic delusions, which hold that regulating inflation of money and credit is the solution to all ills. I conclude that economic salvation can only come from ditching today’s macroeconomic theories and by returning to monetary stability through credible gold exchange standards.
There is an assumption in economic circles that when the general level of prices changes, it is always due to changes in supply and demand for goods and services. Prices change all the time, but without a change in the public’s preference for or against holding money and with all else being equal, the general level of prices simply cannot change. Changes in the general level of prices are due to changes in the purchasing power of the money, which stems from the public’s preferences for or against it and do not emanate from goods and services.
This may not at first sight appear to matter, but it calls into question the widespread assumption that price changes are only due to changes in supply and demand for goods and services. It is a basic error behind modern monetary theory (MMT), whose supporters are busy reviving Georg Knapp’s Chartalist theories of money, the theories that permitted Bismarck’s inflationary pre-war armament financing and the subsequent collapse of the German currency in 1923. Believers in a divine right for the state to issue currency will not let themselves be distracted by inconvenient facts. MMT followers are only one group of neo-Keynesian inflationists, who are generally blind to the blunders of their revisionist economics.
Instead, they assume that the purchasing power of a state-issued currency is objectively fixed, only varied by changes in its quantity. Preferences for or against money are not in their economic lexicon. They ignore the evidence of hyperinflations, where the loss of purchasing power is never a straight-line affair. A myopic approach allows them to believe their feared deflation can be offset simply by regulating the increase in the quantity of money to ensure price stability,