Book Review: The Age of Debt Bubbles

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Patrick Barron
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The Age of Debt Bubbles: An Analysis of Debt Crises, Asset Bubbles and Monetary Policy (2024). (ed. Max Rangeley).

In this series of Professional Practice in Governance and Professional Organizations by Springer—the most prestigious academic publisher in Europe, if not the world—editor Max Rangeley has enlisted actual practitioners to explain how the “Mother of All Debt Bubbles” has been created, its danger to our financial and monetary system, and what can be done about it.

This is more than a book about theory, which, no matter how logically presented, never seems to satisfy advocates of competing theories. “It’s just your theory among many.” The real novel addition is found in later chapters that provide explanations and links to sophisticated studies that show how the wealth-generating free market has been crippled by excessive money growth and burdensome regulation. Since at least 1980, monetary authorities have sought to forestall recessions via monetary pumping that has led to larger and larger financial bubbles. These may be difficult to deflate, despite their assumption that a complete collapse can be avoided by timely reforms. But, as the authors point out, reforms may fail if the damage is too great. The collapse of the Soviet Union could not be avoided by Gorbachev’s late attempt at perestroika and glasnost. It is the hubris of the West’s monetary and regulatory class that such an event is impossible on our side of the old Iron Curtain. But is it?

The errors stem from misunderstanding by authors of textbooks, some central bankers themselves, and even Nobel laureates of what money actually is and how it is created. Most textbooks get money creation wrong, believing that banks lend out customer deposits; whereas, the vast majority of money is created by the lending process itself and does not require prior customer deposits at all. Gone is fractional reserve banking, whereby banks had to maintain a fraction of their deposit liabilities in base money either in their vaults or an account at the central bank. As the authors point out in the early chapters, by and large central banks provide all the reserves (base money) that the banks demand in order to satisfy their customers’ lending demands. In other words, there is no real mechanism to instill discipline in banks and their borrowing customers.

In his section titled “Monetary Policy Framework Needs Reform,” William White—who has vast experience in central bank administration—explains how governments have found themselves in debt traps (interest on current debt cannot be paid except with even more debt) and some central banks have negative net worth themselves. Bad policy has led to other unintended, adverse consequences, such as inequality, market instability, and lower economic growth. Fundamental reform is essential before this house of cards collapses.

In the section titled “Money, the State and the Market,” Miguel Fernandez Ordonez sees this power of the banks to create money ex nihilo (out of nothing) via the lending process as the main culprit that leads to larger and larger financial bubbles. He views bank-created money as not real money at all. His view is similar to that of the great Austrian School economist Murray N. Rothbard. I believe that Ordonez would agree with much that Rothbard recommends in The Mystery of Banking.

The main difference in their views is that Rothbard would require that all notes and bank demand deposits be backed by gold, whereas Ordonez would eliminate bank notes altogether and give the central bank total control of the money stock via central bank digital currencies (CBDC’s). Most Austrian School economists are opposed to this total control of money by the central bank, but Ordonez makes a good point that bank manipulation of the interest rate would end along with the need for onerous and costly bank regulations. The central bank would have sole control over the money supply. The banks would concern themselves exclusively with funding the productive side of the economy. As Ordonez says, “The market delivers goods and services. The state delivers sound money.” It is an interesting idea, even if not embraced by Austrian School economists.

The consequences of money creation most concern editor Max Rangeley and his coauthors—Professor Roger Koppl of Syracuse University and UK political advisor Harry Richer. Although there are competing explanations as to what triggers the bust phase of the boom-bust cycle, all authors point to excessive money creation as its primary cause. The incestual relationship between the central bank and the banks themselves makes it possible for the banking system to cover over losses with more and more money. Politicized central banks do not protect the integrity of money and banking. These interventions lead to larger and larger banking crises, papered over by larger and larger central bank interventions.

It is a loop that prevents the market from fulfilling its primary function of allocating finite resources from failed businesses to profitable ones. Joseph Schumpeter emphasized that the market economy is one of profit and loss. If underperforming companies are bailed out, new more profitable ones cannot arise. His “creative destruction” never happens. The authors point to much scholarly research that proves that Western economies are on a downward economic slope. These studies would be well worth the time and effort for skeptics to digest.

The traditional method whereby central banks “stimulate” the demand side of the economy is through interest rate manipulation. Setting rates too low discourages saving, while encouraging demand. Once initiated, the boom must end in a bust. Ludwig von Mises—undoubtedly the greatest of the Austrian economists—used the example of a new house to be built by bricks. Lowering the interest rate artificially by inflation is similar to fooling the architects to design too big a house by telling them that more bricks exist than are actually available. The builders run out of bricks before the house is completed, forcing the owners to abandon the project and salvage what they can. Barbara Kolm—vice president at the Austrian central bank and the most prominent Austrian School central banker in the world today—explains how the ECB’s misguided policy led to the debt crisis in Greece and anemic economic progress in Europe over all. Lord Syed Kamall—former member of the European Parliament—explains how the 2008 debt crisis gave cover to the ECB to target hedge funds and private equity companies, although they had little to do with the cause of the crisis.

The real solution to ending debt bubbles is a return to commodity money—gold, silver, and perhaps, copper. It is foolish to demand that those who are able to manufacture money out of thin air should cease to do so, either completely or to moderate their money expansion. My maxim is, “Any entity that can print money will print money.” Commodities cannot be manufactured out of thin air. Their growth is dependent upon actual production at mines and mints, part of the market economy itself.

As the authors point out, the world’s economy progressed very nicely from the time period after the American Civil War (1861-1865) until World War I (1914-1918). The world was on a gold and silver standard, plus the United States did not even have a central bank! The relatively modest boom-bust cycles of this time period were caused primarily by excessive fiat money creation by the banks—enabled by government policies—a practice that was not illegal at the time, but should be made so and not legally encouraged. Extending ordinary commercial law to the business of banking would prohibit the practice and hold bank owners and managers personally liable. I think that Ordonez would agree.

There is much, much more for the interested layman to learn. Only when the people themselves become knowledgeable about how the free market system works, will they realize that the goose that lays the golden egg has been hijacked by Keynesians, and then will they be ready to accept the pain that will accompany reform. But leave no doubt—the pain will occur! Either we accept reform sooner or be victims of the inevitable collapse later.

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