A Catch 22

A case of deflationary collapse or hyperinflation

Joseph Heller published his famous book “Catch-22” in 1961, describing American pilots during World War II. In this day and age of financial misery and economic havoc one could use Heller’s beautiful description of a catch-22 as an analogy. Central bankers everywhere face a classic catch-22. Bankers who are piloting our economies so to speak.

To me it is not so much of a question if they are facing a catch-22. It is one of how much Ben Bernanke, Jean-Claude Trichet, Mervyn King and all other central bankers are aware of it.

The pilot in Heller’s Catch-22 “..Orr, was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane he had to fly them. If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to”1.

Today, central bankers could argue they are crazy and ask to be grounded. Or they could argue they are sane and ask for more missions. Either way they are flying into enemy airspace and will be at risk to be shot down.

Now, Jean-Claude Trichet clearly has asked to be grounded. He is well aware he would be crazy to pilot the economy into enemy airspace. Ben Bernanke and Mervyn King & Co. on the other hand chose the other option. As brave men they asked to fly in an attempt they don’t have to, or at least, in some idle hope, become the heroes who won the war. But deep down they must be very well aware they are probably ending up as kamikaze pilots.

The current economic mess is a deflationary economic environment due to a collapse of credit. The combination of high and unsustainable levels of indebtedness of businesses and households in the private sector everywhere, along with an accumulated debt overhang in public domains, ignited by banker’s greed to profit while shifting off all risks, and national desires to export as much debt as possible, have caused the house of credit to collapse. It is a repeat of what any fiat-money regime encountered. After all, it is a result of a build-in flaw. Or should I consider it a build-in opportunity? So much is proved by all previous fiat-money experiments; they all failed. Either through a cancellation of debts, or through hyperinflation. It’s one of the rare statistical certainties out there.

So, monetary deflation it is. It is an economist’s horror scenario since the only solutions seem to fight and risk your life, or to flight and risk your life. Central bankers have a choice between asking to be grounded and not monetizing excessive debts, letting monetary deflation wreck the economy and eventually loose the war, or ask for more missions and bail out everybody, debasing its currency along the way, risking hyperinflation and consequently going for the option of total economic destruction in some twisted version of a protectionist effort to win the war.

But as Yossarian found out in Joseph Heller’s book, a catch-22 does not actually exist. Only when the powers claim it to exist, and it is generally believed it exists, only then it has consequences.

If we were to stop the ongoing economic warfare and reform the international monetary framework (and domestic ones as well), there would be no catch-22. A new gold-standard (to settle international debts), a massive debt-for-equity program (to restructure business and household debts), and a cancellation of all $600-$1,000 trillion worth of outstanding credit derivative contracts (to prevent complete economic annihilation), would do the trick and end the war. Only then a capitalist economy can be rebuild. One based on sound money. Pure and simple.

But it remains a question if central bankers really understand the meaning of their catch-22. As in Orr’s case, they probably can’t see straight.. Let us hope there are many politicians as smart as Yossarian, well aware of the full meaning of a catch-22, and fighting as real brave men and women in a victorious battle to dissolve its existence.

1 From “Catch-22”, by Joseph Heller (1961), pp. 62-63.

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