If you are a science fiction fan you’ll probably remember Dune, the excellent novel (a series of them actually) by Frank Herbert, and the film by David Lynch based on the same book. In it, one of the villains, Baron Vladimir Harkonnen, utters “He who controls the spice controls the universe”, the spice being a rare substance harvested in desert and desolate planet Arrakis and without which the universe would would grind to a halt (if you want to know why and have not read the book or seen the movie…just do it!). Instead of “spice” use “credit” and you’d have an adept metaphor of our universe, our western societies.
This week Spiegel Online interviewed Carmen Reinhart, an american economist known for being the co-author, with Kenneth Rogoff, of the book This Time Is Different: Eight Centuries of Financial Folly, in which they study debt crisis and their aftermaths in the last 800 years.
In this interview Ms. Reinhart gives very clear hints as to what the aftermath of the present debt crisis in western societies might be: inflation and impoverishment of savers and the general population. She also mentions the methods by which such an outcome will be achieved: financial repression and monetization of debt (aka Quantitative Easing aka QE).
Ms. Reinhart holds the thesis that governments have forced Central Banks to relinquish their independence in order to finance government deficits that can no longer be addressed via fiscal policies. What she does not say, be it because she does not believe it or because she does not dare, is that governments are themselves subservient to financial markets, an issue that we addressed in TYR reads “… a de facto coup d’état by Wall Street”. Ms. Reinhart utters some truths and chooses to ignore some other ones. The interview is both illuminating and mystifying, but well worth reading.
At the end of the interview…
…Spiegel asks “That sounds like a perpetual motion…”
…and Ms. Reinhart answers…”Of course it is!”.
It is perpetual motion because credit is the spice of our financial universe, a spice created by Central Banks, where decisions are taken by unelected officials, that channel it, at a very low or no cost, thru the private banking system, that multiplies and redistributes it, at a cost, to the rest of the economy. Ms. Reinhart tries to convince us that it is governments that control money, credit. No, Frank Herbert knew better. It is the Guild, the banking industry and their owners, who control the spice…credit…Central Banks…and in the end governments. How do we know?…ask yourself…Cui Bono? “He who controls the spice controls the universe.”
Some excerpts from the interview:
“So what happens is that money is transferred from savers to borrowers via negative interest rates.”
“If central banks try to accommodate and buy debt, there are risks associated with it. Somewhere down the road you are going to wind up with higher inflation.”
“No doubt, pensions are screwed. Governments have a lot of leverage on what kinds of assets pension funds hold.”
“…after World War II austerity was easier to pursue, because you had a younger population and therefore less entitlements. Furthermore, military expenditure was easier to reduce. So, the build-up in debt we have seen since the crisis is very rare. Usually you get that kind of build-up when there is a war.”