Huerta: ‘El empresario está acostumbrado a una economía maniaco-depresiva’
Interview with Jesús Huerta de Soto, Professor of Political Economy
‘We must allow the market to detect and rectify its own errors.’ Professor Huerta de Soto holds that ‘governments attack the symptoms, and not the causes, of recessions.’
D. Gracia / C. Cuesta (Madrid) Expansión
If we are to emerge from the crisis, ‘politicians must resist implementing grandiloquent rescue plans,’ warns Jesús Huerta de Soto (Madrid 1956). Professor of Economics and one of the foremost current representatives of the Austrian School, Huerta de Soto, who recently delivered a lecture at the Madrid Association of Family Businesses (AMEF), is certain that ‘the great social crisis of our time is statolatry.’ In other words, it is the tendency to expect the state to resolve any problem that arises. In an interview with Expansión, he confidently stated that once the economy is back on its feet, ‘we will again enter into a phase of credit expansion which will give rise to widespread malinvestment.’ Thus, the seeds of a new recession will be sown.
Do you feel the crisis is being properly dealt with?
The authorities invariably react to recessions by increasing regulation. They attack merely the symptoms, not the causes. If credit expansion continues, companies cannot be prevented from investing in rasher projects. Central banks are responsible for the bubble of the last decade: they inject credit into the economy at extremely low interest rates, and entrepreneurs rush to invest in nonviable projects.
How must the economy be adjusted if we are to move ahead?
The market is highly efficient at correcting errors. In fact, in Spain 150,000 companies have already folded, and another 150,000 may yet disappear. To expedite this process, the economy must be flexible, particularly the labor market. Millions of workers who were involved in nonviable investment projects must be moved to other, sustainable areas. When unemployment peaks, at around five million unemployed, the economy will have recovered. The companies that have survived will be the healthy ones. The problem is that hiring a worker is almost like marrying him — or worse, since express divorce makes it easier to separate from your spouse than to fire an employee. This situation makes re-entry into the labor market much slower.
The government has just introduced a tax increase. What will be the consequences?
Companies and households get their finances into shape by repaying loans and reducing costs. This is easier when one has more income available, so it is important that taxes not rise or, better yet, that they fall. Just as individuals must practice austerity, so must those in charge of the public sector. During the Great Depression, however, President Roosevelt did the opposite. He made the labor market more rigid, increased wages by decree, raised taxes, and boosted the role of the state in all sectors. That is what made the depression of the 1930s so severe.
Often it is the private sector that demands state intervention.
Entrepreneurs in Spain are accustomed to a manic-depressive economy, which swings from bubble to crisis. To be sustainable, the economic recovery must be cold, with no rushed growth. For the first time in history, Spain cannot react to a recession by deceiving citizens with currency devaluation. This crisis has revealed that the problems are real and must be faced. We need a legion of entrepreneurs to detect the errors. Then, we must cut costs, restructure companies, and bend over backwards to improve product quality.
‘Central Banks are the Last Vestige of Planned Economies’
D.G./C.C. Madrid (Expansión)
Huerta de Soto advocates ‘bringing the fall of the Berlin Wall to its culmination in the financial sector.’ As long as central banks continue to exist as ‘central planning agencies in western countries,’ this follower of the Austrian School believes cycles of artificial credit expansion will repeat themselves again and again.
‘Central banks insist on dictating manu militari what should be the freest of market prices (the interest rate), and on managing the money supply. Austrian theorists showed that a central planning agency could not possibly gather all the information necessary to make its commands meaningful. This is the principle of the impossibility of socialism. Monetary authorities trigger and reinforce economic cycles instead of stopping them.’
Huerta de Soto’s solutions would be ‘first, to eliminate planning agencies’ and second, ‘to establish a system in which bankers are subject to general legal principles. In other words, there should be a 100% reserve requirement on all demand deposits and equivalents. This way, bankers could act solely as pure financial intermediaries: they could lend only what had been lent to them. This would separate the business of financial intermediation from the business of money creation.’
Without central banks, who would generate the money supply? The professor advocates ‘a return to the gold standard, since growth in the stock of gold is independent of human will. The world’s stock of gold grows between one and two percent per year, and hence we would eliminate the possibility of manipulating the financial system. All loans would be granted against prior saving, and there would be a balance between saving and investment. Recessions would then be history.’
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As much as I agree with Professor Huerta de Soto I am still very pessimistic about the European situation, perhaps even more than six months ago. In short I do not believe we’ll get to see “another phase of credit expansion” which I take to be as another large boom like the one we experienced between 2000 and 2007.
What we’ll see for sure is a stock rally which is bound up for short term correction, raising unemployment and, what’s more important, growing concerns for governments all over the continent.
As Huerta de Soto pointed out European expect governments to address all of their problems. And governments have been happy to oblige.
Problem is the drug isn’t working anymore: GDPs all over the Continent are growing at a record pace but unemployment continues to raise. Interest rates are at an all time low but banks are becoming increasingly cautious when borrowing.
So instead of questioning the sanity of asking a quack to cure the patient people are actually asking for more intervention…
The Market Is Not Unfathomable.
“We must allow the market to detect and rectify its own errors.”
How revolutionary is this simple statement! To the ill-educated who cannot fathom the market as the means of communication but who comes to partially understand the role of entrepreneurs, the solution will be to try to create pseudo-entrepreneurs. In fact that is very similar to what exists already with the empiricists and ego-driven interventionists trying to perceive what is going on in the economy and then imposing some contrived scheme.
The essence then is that the ill-educated cannot fathom the market. The fact of the matter is that no one can; but that the Austrian economists understand that the market is a process in disequilibrium that reflects human action, making it a wellspring of information.
“politicians must resist implementing grandiloquent rescue plans,”
This is like saying, “Leopards must change their spots.” Human beings are genetically programmed to do whatever is good for themselves, in any given situation. For politicians, wrecking the economy is good for them. More financial chaos means more power for them and more power will mean more money and more privileges. And for their inner core of supporters, the major political donors, organizers, money men and family members. Appealing to politicians’ better side is ridiculous because bad policies are how they expand their business and increase their incomes.
The real prescription for this crisis is:
The people must reject political control of their money and their lives.
Just one technical question. If the banks must maintain “100% reserve requirements on all demand deposits and equivalents”, how do the banks get to “lend what has been lent to them”?
I am assuming the business of financial intermediation will continue along the lines of providing longer term loans (particularly for business) against the availability of shorter term deposits, but with 100% reserves this becomes impossible, surely?
If on the other hand, we assume that loan terms should equal deposit terms, then surely only a very small part of the available savings will be available for lending/investment and then only on shorter term production regardless of the rate of interest which could have asked for a longer term production structure? Or we end up with a very steep yield curve (to encourage longer term deposits), which discourages longer term production, despite the level of aggregate savings. This still does not, however, solve the problem that savings that people prefer to hold on demand (even over long periods of time) is never available for investment under a 100% reserve standard.
Is there really a fullproof practical solution, or do we not need to understand all the implications, then make a decision and then live with that decision being aware of the potential ramifications?
It s quite correct that there is no need for a central bank as a credit intermediary – Hong Kong has demonstrated that fact for a great many years by dispensing with one, albeit maintaining a Monetary Authority. Some observers consider that the absence of a lender of last resort accounts for the relative resilience of HK banks’ balance sheets.
Professor De Soto does not appear to refer to the important, but ill-documented, role of trade credit in economies. The eminently pragmatic Swiss have been demonstrating since 1934 that it is quite possible for trade credit to be provided and cleared within a credit clearing union – the Swiss WIR.
In the WIR model – for those unfamiliar with it – goods and services change hands on credit terms not IN EXCHANGE FOR Swiss Francs as a fiat unit of currency, but BY REFERENCE TO Swiss Francs as a unit of measure or value standard. Discipline in relation to WIR debit balances derives from the requirement for participants to give security over their property, and this use of property backing as a framework of trust probably accounts for the sustainability of the WIR.
It would be quite possible for a unit of gold to be used as such a reference point or ‘gold standard’, but it will be seen that there is not in fact on the face of it in the WIR architecture any need for physical gold at all. Equally, a unit of energy could be used as an ‘energy standard’, which some users might find more relevant to their everyday experience than gold as a pricing reference.
Such a credit clearing system is therefore demonstrably capable of providing the credit necessary for the circulation of goods and services and the creation of productive assets, but in order to extend it from businesses to individuals, then some form of currency unit (s) would be necessary which would be acceptable by businesses in settlement of credit extended to individuals.
As Robert points out, we would need to look elsewhere for the medium and long term financing of productive assets, and I believe that this may be achieved through a new approach to equity, rather than the creation by credit intermediaries of credit ex nihilo.
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