The Daily Bell is pleased to present this exclusive interview with Detlev Schlichter

Daily Bell: You worked for J.P. Morgan & Co. (1990-98), Merrill Lynch Investment Managers (1998-2001) and Western Asset Management Co. (2001-09).  Does Wall Street get a bad rap?

Detlev Schlichter: The public debate is entirely confused. Most people I worked with were hard-working and committed. Sure, they wanted to make money for themselves and their families (so did I) but most of them also wanted to do what's best for their clients. People don't question the system they work in. They take it for what it is and they operate according to the incentives that the system gives them.

Over the past decades the financial industry has been hugely advantaged by the massive expansion in fiat money and the resulting inflation in financial assets. It is what it is: All of us in the industry benefitted from it. But I fear that among many who work in the industry this has created a somewhat inflated view of their own importance and some unrealistic expectations as to compensation.

Even more importantly, our system of lender-of-last-resort central banks, essentially unlimited bank reserves and artificially cheapened credit, systematically encourages aggressive bank lending, the leveraging of balance sheets, the accumulation of debt and excessive risk-taking. This system tends to punish prudence and good business practices, and reward recklessness.

After years and decades, business ethics have deteriorated, not surprisingly. Some of the bad rap is now justified but one should not confuse cause and effect. A truly capitalistic system is one in which people have to live with the consequences of what they do, and that would be a system with much better checks and balances – imposed by the market, not by regulators.

Daily Bell: Why did you leave the industry in 2009 to focus exclusively on your first book, Paper Money Collapse? What inspired you to write it?

Detlev Schlichter: The realization that this system is truly unsustainable and that it is fast approaching its endgame. The explanation for why that is so can be found in the work of the great monetary economists, the Classical British economists of the 19th century and in particular the Austrian School of economics, first and foremost the great Ludwig von Mises. Mises explained, better than anyone before and after him, why 'elastic' money is destabilizing, why the lowering of interest rates through monetary expansion and extra bank lending causes not sustainable growth but boom bust cycles.

I have read the Austrian School economists extensively over the past 20 years, and over the last 10 years of my work in financial markets I realized just how powerful their monetary theories were in explaining the phenomena I observed in my work life. However, their insights were completely ignored in the debate in financial markets. Here, Keynesianism, Monetarism and Neoclassical economics dominated, and in an almost bizarre way, Keynesianism even still ruled – probably another bad habit that we can blame on 40 years of fiat money and central bank 'stimulus.' That a government agency, or government-sponsored agency, the central bank, administratively sets interest rates, determines the quantity of bank reserves, backstops the banks, which necessarily cease to be truly capitalist businesses in the process, and encourages and guides bank lending is now deemed by many to be almost equivalent of the natural order. To call such a system capitalism is simply absurd. But financial markets operate in an intellectual bubble. I wanted to help prick that bubble.

In 2009, I felt that the crisis we had entered could be The Big One, the one crisis that was too big to paper over (no pun intended!) with yet more money printing and debt accumulation. The system was approaching its inevitable endgame. This is the sort of crisis that is completely inconceivable outside a system of fully elastic fiat money. Only a system of elastic money can over time accumulate imbalances on this scale. It is a fiat money crisis. I felt that what was needed was a fundamental analysis of paper money systems that goes back to first principles: What is money? Why do we use it? What is money demand and how can it be met in a free market? What makes good money? I wanted to argue as logically rigorously as I could and make the conclusions as inescapable as possible so that the reader would either have to spot any logical flaws in the argument – I believe there are none – or accept the conclusion, which is that our paper money system is unnecessary, suboptimal, unstable and unsustainable.

The argument is Misesian but was not targeted predominantly at those already familiar with the Austrian School but at the people who I used to work with: financial market professionals and mainstream economists, who in general believe in the sustainability and even superiority of the present system. I apply Mises's work to the current unconstrained fiat money system and use it to challenge common misperceptions on money and central banking. But with all due modesty, I do believe that Paper Money Collapse is more than just a restatement of Austrian monetary theory. There are new insights in it.

Read in its entirety: http://thedailybell.com/28208/Anthony-Wile-Detlev-Schlichter-on-the...