Red Pill, Blue Pill

by JAMES DELINGPOLE July 26, 2012

The other day m'learned colleague Ambrose Evans Pritchard wrote a piece in praise of money-printing. What the world needs is more Quantitative Easing, he argued, though this time deployed in "nuclear force."

I have no doubt that this would bring about a full recovery very fast if conducted with enough panache, but is it possible to marshal political consent for such revolutionary action?

The Tea Party Congress, like Europe's bourgeousie, would rather wallow in liquidation, Puritan cleansing, and mass default than tolerate the possibility of a solution.

I couldn't disagree more violently with this analysis. Nor, happily could most of you. The most popular comment response - approved by over 300 readers -  countered:

In reality, economics is not the fiscal rocket-science you make it sound. Capitalism itself is based on good old-fashioned honesty. The money at the heart of it must be both an honest store-of-value and an efficient medium of exchange. It ceases to be so when the inherent deceits of fractional reserve banking allow trillions of false credit to be pumped into the system, thus forcing up prices (booms) which inevitably lead to over-valued commodities (busts).

What happens next is that the banks, having privatized their gains in the good times, simply socialize their losses onto the tax-payer. It's a crime. Simple as that really.

Reading these words - and seeing how many "likes" they got - did my heart good. "So I'm not alone, after all," I thought to myself. "There are others out there who've taken the red pill too."

The red pill - for those who haven't seen The Matrix - is the one which shows you the world as it really is rather than cozy, fantasy confection of the popular imagination. The red pill is not for the fainthearted because it involves confronting painful, ugly reality rather than living the dream.

Let me give you an example of what taking the red pill entails. It's a report from last year by the Boston Consulting Group showing that the amount of household, corporate and government debt which needs to be eliminated stands at $21 trillion. The cost of dealing with this "debt overhang" will entail the loss (i.e., confiscation by the government) of one third of the wealth of the asset-owning classes. Some time in the next few months, weeks or years, we're all going to be taking a 30 per cent hair cut.

Here's another fascinating report, this time about where gold is headed. Conservatively it estimates its target price at $2,300 an ounce.

Whenever I mention such things, I'm always amused by the rage it generates in some quarters from "experts" who passionately believe that gold is overvalued, that it's a bubble that is about to burst. Well fine. If that's what you think, don't go and buy gold bullion. No one's forcing you to - and what I say makes no difference either way to the market price: you can't ramp gold like you can share prices. I just happen to think you're making a big mistake which you could easily avoid were you to acquaint yourself with the most basic principles of Austrian economics.

What you need to understand is that the value of gold is not about to go up. What's going to happen is that paper money is going to become increasingly worthless - meaning you'll need that many more worthless paper notes to buy the same amount of gold. This is what Quantitative Easing does. And the reason you're holding gold is not as some kind of crazy speculative investment which might just make you rich, rich, rich! You're doing it for the much less exciting and more depressing reason that all your savings are about to be inflated away and gold is just a way of stopping you growing any more poor.

I'm holding quite a bit of gold at the moment by way of various investments. But believe me, I'd much rather live in a world where the economy was in the kind of shape where it made more sense to buy shares instead.

Besides your response to Ambrose's piece, the other thing that has given me tremendous hope on Telegraph blogs in the last few weeks has been the arrival of the brilliant Thomas Pascoe - whom I hereby recruit, if he'll let me, as my wingman. (Hannan's probably Guy Gibson; I think I'm more like one of those suicidal Polish fighter aces.) As he showed in his piece the other day on the manipulation of the gold price, Pascoe, too has taken the red pill. He too, recognises, just how potentially dire things might get before this global economic crisis is resolved.

Quite how bad things get in the next few weeks and years really depends on how quickly the red pill faction manages to win the political and economic arguments. At the moment, the blue pill faction holds sway everywhere from Ben Bernanke's Fed to Osborne's Treasury to the entire crumbling mechanism of the EU. Given most people's reluctance to deal with reality, I wouldn't bank on a remotely happy outcome. Especially not in a world so barmy that men like Joseph Stiglitz are actually given the Nobel prize for economics...

Oh, and you can hear me talk more about this over on my podcast for Bogpaper.com. Take the red pill. T-a-a-k-e the RED PILL. It's the only way any of us are going to get out of this one alive.