The Global Debt Trap: Book Excerpt

Read an excerpt from <I>The Global Debt Trap: How to Escape the Danger and Build a Fortune </I> by Claus Vogt and Roland Leuschel.
By Guest Contributor ,

Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Global Debt Trap: How to Escape the Danger and Build a Fortune by Claus Vogt and Roland Leuschel. Copyright (c) 2011 by Claus Vogt and Roland Leuschel.

By Claus Vogt and Roland Leuschel

Why the Debt Crisis Was Predictable

How was it that we, of all people, were able to successfully predictthe major financial and economic crisis that continues even as wewrite these words today? What differentiates us from the armyof economists, professors, analysts, bankers, fund managers, central bankers,politicians, and journalists who only recognized the impending calamityafter it was well under way?

We are not whiz kids or members of Mensa. Nor do we have any secretaccess to knowledge.

Rather, our only strategic advantage is the willingness to swim againstthe tide, and to remain immune to the siren songs. Most human beings aregregarious animals who can believe â¿" and sometimes, must believe â¿" almostanything, as long as they are part of a group that subscribes to the sameviewpoint. It seems no theory or thought is too absurd to be accepted by vastnumbers of otherwise thoughtful people. Fictions that few could ever believeindividually are trusted implicitly within the shelter of the group. Individualswho otherwise might be totally rational are swept up into irrational groupsthat suppress and inhibit even the most basic of common sense.

The second factor that has helped us distance ourselves from thecrowd is the absence of any conflicts of interest. We view market analysis â¿"which necessarily includes political analysis, social analysis, and even masspsychology â¿" as one of the most worthy pure intellectual challenges that theworld has to offer. We have no professional ties, contracts, or commitmentsthat interfere with or bias that endeavor.

From a technical point of view, the key is our intensive focus on thephenomenon of the speculative bubble. A comprehension of its causes, itsdynamics, its bursting â¿" and the consequences thereof â¿" has enabled us tosee the period since the mid - 1990s, when the largest stock market bubble ofall time began, through different eyes from the majority of our colleagues.Furthermore, the internal logic of the speculative bubble forced us to askfurther critical questions and to connect the dots to what others may haveseen as unthinkable conclusions.

Finally, and most important, our understanding would be woefullyincomplete if we were not familiar with the Austrian School of economics.The brilliance and consistency of its approach, dedicated to the causeof freedom, is both inspiring and persuasive. Its logic will propel youtoward insights that cannot be reconciled with ready - made views of theworld. But therein lies one of its great strengths. Moreover, it does notstop at the gates of institutions that continue to be regarded as sacrosanct.Quite the contrary, the Austrian School debunks the wisdom of the stateâ¿¿smonetary monopoly, reveals the danger of its resulting system of centralbanks and fractional reserve banking, and exposes this monetary complexfor precisely what it is. As we will document here, this monetary complexis the underlying root of the crisis now unfolding. Worse, the globalofficial response to the crisis â¿" unprecedented interventionism â¿" threatensthe continued existence of our free market system and, with it, individualfreedom itself.

Keynes versus Mises and Hayek

Let us start this chapter about the huge differences between classical liberalthinking and Keynesianism with a central quote about money from F.A.von Hayek.

The past instability of the market economy is the consequence ofthe exclusion of the most important regulator of the market mechanism,money, from itself being regulated by the market process.

We refer again and again in our analyses to the insights of the AustrianSchool of economics, whose preeminent thinkers were Carl Menger, Eugenvon Böhm - Bawerk, Ludwig von Mises, Friedrich August von Hayek,Walter Eucken, and Murray N. Rothbard.

At the heart of this school of thought, which extends far beyond the realmof economics, is freedom of the individual. And inextricably tied to freedomis, of course, property â¿" specifically including ownership of the means of production.Freedom of contract and self - responsibility are the most importantadditions to these key concepts, which underpin classical liberalism and fromwhich the political program of a free society emerges.

It goes without saying that the boundaries of the freedom of one individuallie where the freedom of another begins. It is easy to derive the rulesgoverning cooperation from this basic principle.

At the same time, there are also thieves, liars, and fraudsters, seekingto acquire other peopleâ¿¿s property for themselves. It follows that certainmeasures must exist to protect property rights. Furthermore, freedom ofcontract would have little meaning were there no mechanism in place forthe enforcement of contractual agreements.

At discussion of the precise form of such mechanisms â¿" and what concreteproposals classical liberalism offers for their regulation â¿" is beyondthe scope of this book. Suffice it to point out that individual freedomcontinually faces a series of specific threats and that the greater threat toindividual freedom comes not from other individuals but rather frompowerful organizations.

Organized crime, like the Mafia, is a common example that springs tomind, but it is not the one that affects the most people most of the time.Rather, the single greatest threat to individual freedom comes not fromcommon criminals, but from the mightiest organization of all â¿" the state.

The Road to Serfdom

History is littered with examples of horrendous crimes. But the biggest,the worst, and the most devastating have, almost without exception, beenperpetrated in the name of the state. This unmistakable conclusion has ledthe philosophers of freedom to adopt a healthy mistrust of government andits representatives.

Based on the most thorough analytical and empirical arguments, theysee the government as the greatest threat to freedom, against which a societymust protect itself at all costs, lest it degenerate into dictatorship. Theseparation of powers is one such protective mechanism. But equally importantis strict adherence to a currency that cannot be multiplied at will, thusforcing the government to treat the nationâ¿¿s finances in a responsiblemanner, while protecting the people from the greed of the politicians.

In principle, there are two ways freedom can be abolished and slaveryintroduced: through revolution or evolution. The reader will certainlybe familiar with revolutions that have led to the rise of dictatorships. Thecommunist revolutions, causing untold suffering and poverty across greatswaths of the globe have, after all, only recently been consigned to history.

A repeat of this ghastly period in history hardly appears to be an imminentthreat today, while the threat of Islamist revolutions seem more current,threatening the introduction of new tyrannies in several parts of the world.

In Europe, most of the Americas, and other regions, freedom is notcurrently threatened by domestic groups demanding revolution. Instead,the greater threat stems from an evolutionary process initiated long ago â¿" anot - so - subtle, insidious progression in which the government spreads graduallylike a cancerous tumor, increasingly limiting or abolishing individualfreedoms.

To describe this process, Hayek coined the phrase â¿¿the road to serfdom.⿝ In this book we refer primarily to Keynesianism â¿" to embody not onlyJohn Maynard Keynesâ¿¿s economic program, but also, to some degree, allschools of economic thought that seek to accord the government a sphereof influence extending far beyond the essential sovereign tasks of ensuringsecurity at home and abroad.

For the sake of simplicity, we draw no distinction among multipleschools of economic thought, all of which have one major commonality:namely that they all demand an overly robust role for the government inthe economy and society.

In this broader sense, we also characterize monetarists as Keynesiansinasmuch as they advocate the government monopoly over money and thesystem of central banks, which that monopoly necessarily entails. Granted,in other realms, monetarists espouse thoroughly non - Keynesian positionsthat may seem to favor freedom. But for the purposes of this book, theycontinue to fall under the broader rubric of Keynesians.

The administration of former president George W. Bush and the neoconservatives,despite all their rhetoric to the contrary, were, in fact, out - and - outKeynesians. This is so obvious it should not even be worth mentioning.However, in the wake of the debt crisis, since the blame game and searchfor scapegoats is so ubiquitous, and since neoliberalism is first in the firingline, this observation is nonetheless necessary. It â¿¿ s ironic that liberalism andfree market philosophies are getting lynched, when the real culprit thatdeserves to stand trial is Keynesianism.

The key point here is not whether government intervention in theeconomy â¿" including massive economic stimulus programs â¿" are financed bydefi cits or not. We know that Keynes proposed that the government shouldaccumulate reserves in good times so that it could afford to finance stimulusprograms in bad times. But because Keynes himself was, in large measure, apolitician, it is inconceivable that even he considered the implementation ofthis proposal to be possible â¿" let alone probable. The interests of politicianswho depend on votes are diametrically opposed to Keynesâ¿¿s proposition ofaccumulating reserves in times of plenty. Voters almost invariably demandthat surpluses be spent today â¿" not in some elusive future.

To reveal a governmentâ¿¿s hidden agenda â¿" even behind its smokescreenof public relations and propaganda â¿" all that is typically required is to considera few key variables: you can look at the trend in the governmentâ¿¿sshare of total economic activity, the amount of legislation passed or, morecommonly, the level of national debt. If each of these is expanding, you canbe almost certain that the government is not pursuing a liberal agenda. It isimmaterial what kind of rhetoric or propaganda the government is deploying.

Do not let them fool you. And donâ¿¿t be hoodwinked by false critics,either. Judge both sides not by their words, but by their deeds.

Classical liberalism and the Austrian School of economics stand, as wedo, for freedom of the individual â¿" with no ifs or buts. Classical liberalismand the Austrian School are the offspring of unwavering philosophers offreedom. And these are philosophers who think ideas through to their logicalconclusion with inexorable consistency, even in circumstances in whichothers would prefer to take a more relaxed view â¿" to further their career orto avoid established taboos. It should therefore come as no surprise thatthinkers of this provenance have no powerful friends. They are a thorn inthe side of the powerful.

In

The Denationalisation of Money

, F.A. von Hayek sums it up asfollows: â¿¿I fear that since â¿¿Keynesianâ¿¿ propaganda has filtered through tothe masses, has made inflation respectable and provided agitators witharguments which professional politicians are unable to refute, the onlyway to avoid being driven by continuing inflation into a controlled anddirected economy, and

the only way to ultimately save civilization, willbe to deprive governments of their power over the supply of money.⿝ We agree. But some of the most powerful men â¿" controlling trillions ofa nationâ¿¿s money supply â¿" do not.

This book is available at all bookstores, online booksellers and from the Wiley web site , or call 1-800-225-5945.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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