The real question one needs to ask is whether someone who is drug dependent can withdraw from the drug without pain. Yes, giving the patient more drugs temporarily delay the withdrawal pains, but you are curing the symptoms, not the root causes.

This is probably what Hayek meant that there is no way you can avoid the business cycle downturn, even if you apply strong Keynesian measures. Unsustainable debts are exactly that — they are unsustainable, even though the period can be extended temporarily with zero interest rates. But you cannot do this forever without huge damage to the economy.

When you replace private sector debt with public sector debt (or central bank debt) all you do is to shift the pain and postpone losses to the future. Unfortunately there is a political economy problem here. You are postponing the costs to be borne by people who have no say on whether they want to bear these losses (the unborn generation) and captive savers (such as depositors), because they have nowhere to run.

But in an open economy and with no controls, savers can either flee abroad or buy real commodities such as gold.

Hence, this current crisis is really a crisis of fiat money versus commodity money. From the long lens of history, either you trust gold to protect the real value of your money or you trust powerful governments that honor their liabilities. Governments may honor the nominal face value of their liabilities, but not necessarily the real value.

Andrew Sheng is author of the book From Asian to Global Financial Crisis. He is Adjunct Professor at Tsinghua University, Beijing, and University of Malaya. He was formerly the Chairman of the Securities and Futures Commission, Hong Kong.

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