Debt Based Money and Interest Rates
Isn't interest the real price of money? As more and more people demand money through credit, this drives up the cost of money, right? This drives up interest rates. Rising demand for easy money causes rising interest rates which cause falling bond valuations.
Does it follow that artificially lowering the price of money will raise demand for easy money? Does it follow that artificially propping up the value of bonds and bills will levitate a plunging real world economy that is built on credit and debt?
Don't bet on it!
As the stock market rises during "normal" times, rising interest rates follow. Likewise, as the stock market falls, so do interest rates. Economic expansion and contraction drive real interest rates in a "healthy" fiat system. This is the check and balance that keeps the system "healthy", keeps it in relative balance.
What we are witnessing today is NOT a healthy fiat system. What we see is NOT a healthy economy. In fact, practically everything we watch today on CNBC is the result of government acts. The government wants desperately to save the stock market, not the economy... because over the past 30 years the stock market has gradually become the US economy!
Wonderland Breaks from Reality
Remember this graphic?
All those fake numbers being put out by Wall Street, the government and CNBC showing magical growth on the Ponzi paper digit (Alice in Wonderland) side of the equation must be juxtaposed against the real world manufacturing economy that has been in decline for 30 years.
This is the 30 year digital/Ponzi-paper inflation crescendo that has finally crested and, like an ocean wave, will curl over and break. This is also the 30 year engineered interest rate decline that has finally reached its nadir, 0%!
So is the price of the dollar actually zero? Perhaps price and value are the same thing in this particular case!
What did I say at the top? "Rising demand for easy money causes rising interest rates..." So what does a zero Fed Funds rate say? Zero demand for worthless money? I don't know. You tell me.
Here is what I see: 30 years of digital/financial Ponzi-paper inflation has gradually decreased the efficiency of all capital investment, everywhere! Mal-investment is so ubiquitous now that it cannot even be distinguished! Confidence in the future is at an ALL TIME LOW! And mass-confusion about inflation, deflation, stagflation, etc... is at an ALL TIME HIGH! We have truly built our own Tower of Babel!
"...achieving 'sound money’ is the easiest thing in the world! Just stop creating more of it! That’s all you need!"
Imagine a hypothetical perfect gold standard. There is nothing but gold used as money, and its supply remains constant. As man labors and builds, the economy will grow, and gradually one piece of gold will equal more and more real goods and services. Over time, in this perfect gold standard, the value of that piece of gold will rise and the cost of goods and services will fall.
Now imagine a lender and borrower. The lender lends 10 ounces of gold to the borrower, who then trades it on the open market for the goods he needs to be productive, say, farm equipment.
Let's say the term is a 5 year loan and there is no interest in this perfect world. After 5 years, the borrower must return the 10 ounces of gold that he borrowed.
During those 5 years, the value of gold will rise and prices of goods will fall, what we currently think of as "deflation". So in 5 years when the farmer must reacquire gold on the open market, he will have to surrender more goods than he received for that same gold 5 years earlier. Likewise, the lender will receive his gold back with greater purchasing power than it had 5 years earlier.
In essence, the lender received "interest" and the borrower paid "interest", even though the money supply remained the same. All that changed was the economy against which the money is measured! The interest was the productivity that the borrower added to the economy. The lender profited from this economic growth and the borrower labored to meet his obligation.
So in this perfect world, the price of borrowing money means keeping up with the average productivity of everyone else in a growing economy.
In other words, money is priced in goods and labor. The price of money is goods or labor. You must either create them or surrender them for money.
Now, in our imperfect world, we can borrow without being productive with the money we borrow. We can borrow for pure consumption! But to do so we must pay the interest out of our own body. We must eat away at our own net capital to pay the vig if we choose not to be productive. Like a stranded starving hiker whose body begins to devour itself. Herein lies the fatal flaw in our system.
Fiat systems work the opposite of gold. While gold increases in value against the real goods that price it, fiat money supply grows commensurate with the goods and services it is priced in; the money supply tracks the economy!
This is supposed to create "price stability" during an economic expansion. You cannot have price stability in an expanding economy on a pure gold standard, you instead get "the evil deflation".
And in a perfect fiat system, where no government or central bank cheats by creating money at will for the "inflation tax" it provides, and all borrowing is for productive purposes, the system could be quite sustainable for a very long time.
Sure, it is still essentially a Ponzi scheme because if everyone paid back their debt all at once the money supply would vanish except for the monetary base. But in our perfect scenario, there is always new volume added to the economy to match the production of new money, and prices remain stable.
But this is not good enough for the bankers and governments who add little real value to the economy. They want something for nothing. So they cheat, which leads to a collapsing real economy set against a mountain of debt money that must grow like a cancer until it kills the host system.
The only conclusion to this systemic flaw is not deflation like we saw in our perfect gold standard. It is not price stability like we saw in our hypothetically perfect fiat system, nor is it even normal inflation like we get in the early stages of a real world fiat system. No, the only conclusion is repudiation which leads to currency collapse, hyperinflation and the end of the system.
So what is the price of money? It is the real economy that it is juxtaposed against. Too much easy money always comes at the cost of the destruction of the real economy!
Hyperinflation is a mass psychological event. It is the revelation that the juxtaposition of paper obligations and the real economy no longer match in any way that can be resolved. It is the epiphany on a mass scale that the proverbial music has stopped and not just one, but millions of musical chairs are missing.
One of the biggest misconceptions about hyperinflation is that it is initially caused by the massive printing we saw in Weimar, Germany and Zimbabwe. But the fact of the matter is that all the inglorious printing, the dropping of zeros, and the million-dollar-notes are simply a subsequent RESULT of the initial condition that caused the currency repudiation.
In dollar terms, the hyperinflation of fantasy digits has already happened! It has been accumulating and accelerating for at least 15 years now. The stage is now set for repudiation on a global scale. What ultimately follows will be up to our wise leaders in Washington, DC. But it is my guess that they will follow the time-tested political path of printing more currency and passing it out. At that point, we will see a familiar sight:
But just know that the wheelbarrow is only a symptom of the disease, not the disease itself. The disease is already present in the dollar, and unfortunately it is terminal.
Protect Your Savings
Currency digits that are not spent on consumption can either be held in their raw form (cash) or stored. Storage of excess digits is available in both paper form and real world elemental form. Over the past 30 years the paper storage of digits has grown many times faster than the real world storage options. And right now, because of "fractional reserve debt" (that it is mathematically impossible for all debts to perform), the paper option is burning in the public square like so many books in 1933 Berlin.
So you can view this as deflation if you would like. But as the entire world watches Ponzi-paper storage burn and runs to safety, you have to wonder, will they stop running once they reach the raw digits of paper created by Ben Bernanke? Or will they keep running to the golden safety of a physical element created in the stars billions of years ago?
This is what it is all about: Capital Flow! You may not have much capital yourself, but if you want to make the right decision for your own savings, you must put yourself in someone's shoes who does. You must follow in the footsteps of giants!
A Little Context from a Friend
It was when the British Empire started to lose its colonial wealth generating tools that the pound sterling lost its dominance and standard value. This is the only story that I intuitively compare with the actual status of the dollar. The sterling didn't go "hyper", but it lost its intrinsic value provided by the enormous amount of goods and services that it represented. The colonies produced these valuable products for practically nothing. So, behind each printed note, there was an enormous amount of tradable tangibles.
As soon as we start to increase the amount of paper to compensate for a contraction in goods and services, we are depreciating that piece of paper. In the case of the pound sterling it was easier to understand how the crumbling colonial wealth eroded the corresponding value of the same existing amount of paper. The same exercise is more difficult to proof for the dollar. But we have some criteria:
- What will happen with global dollar-debt against the increasing amount of dollar-paper?
- Up until now, declining interest rates, put some lid on the expanding debt. When do we reach the confidence-culmination-point? How will we react once we realize thoroughly that nothing is what it seems? My guess is pure HYPERINFLATION.
This extremely strong tendency of more paper for less goods and services is similar to what happened with the sterling and its colonies.
Gold and oil are, IMO, two beacons to signal the above looming dangers. Presently, they don't seem to do their job. The valuations of currencies, relative to each other, is very confusing. Gold and oil are the most universal standards one can come up with.
We are probably making a mistake by considering the dollar-paper against other paper. We are comparing how good we are as Americans or Europeans against the Turkish or South Africans. We lost an important universal standard... 38 years ago (smile).
My intuition tells me that ALL paper is depreciating. Or is it that services are more and more over-valued? Isn't it strange that most produced goods decline rapidly in price while services are constantly rising in price? Aren't we doing something similar to the British empire? Surfing the world in a quest for the lowest price for manufactured goods, undervaluing Chinese/Indian etc... services and overvaluing the services we provide to ourselves? This global imbalance cannot exist forever. The outcome is most probably an inflationary solution.
Words of Wisdom
And since I, myself, am a mere shrimp following giants, I will close with a few selected quotes from FOA on The Gold Trail:
The dollar is toast because most of the world doesn't like the management policy. They didn't like it in 71, but tolerated it because gold was suppose to keep flowing in repatriation payments. And if they didn't like it back then, they god awful hate it now!
We like to think that the dollar is what it is because we are so good. (smile) But, the truth is that for over a two decade period +, none of our economic policy, our trade financing policy, our defense policy or our internal lifestyle policy has pleased anyone outside these borders. We managed the dollar for us (U.S.) and the rest could just follow along.
Our fiat currency has survived all these years because others have supported our dollar flow in a way that kept it from crashing its exchange rate. We talk and think like we are winning the tug-of-war when, in fact, they just aren't pulling very hard.
My friends, a national fiat in our modern world only functions if the whole world uses and supports its flow and most importantly likes its management (political styling is the catch word). This support and use of our dollar can and will change faster than many think possible. Our dollar is not going to become a "banana" or "nada" in the future, as auspec notes. It already is and has carried this trait for some time now as does every fiat today. The only thing that keeps them from cascading away is world support and use.
That dollar value is there now, you just don't see it yet. The price inflation that many don't or can't see happening, will be the result of our currency management changing to confront the nature of all the above. As this happens the US will have to raise rates even as it massively prints more currency to support our internal economy [obligations!]. Our entire economy will slow and fail as this price inflating process moves on. Some will call it stag/flation, but will change that description as it becomes more of a crash/hyperinflation.
We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nations identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Make no mistake, the entire internal US sector can and will function as its currency runs a price inflation just like these third world countries. We will adapt as they have by dropping our living standard accordingly.
The prestige that we have the largest military force in the world does not help our money problem. We talk as if we will let any country die that does not use our money or support our currency. I point out that the British also made such comments and it didn't stop their downfall. Nor the Russians.
I point out that many, many other countries also have the same "enormous resources; physical, financial, and spiritual" that we have. But the degrading of our economic trading unit, the dollar, places the good use of these resources in peril. We buy far more than we sell; a trade deficit. Collectively, net / net, using our own resources and requiring the use of other nation's as well. Not unlike Black Blade's Kalifornians sucking up their neighbors energy supplies (smile). We cannot place our resources up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert.
No, this country will not turn over and simply give in. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not its currency system. Around the world and over decades other fine people-states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over valued dollar that we spent without the pain of work.
And lastly, a Q&A w/ FOA:
Q: [Will we see] Brazilian or Weimar style hyperinflation of the USD? The Big Banana, or the 'little banana'?
FOA: Full on, wide open, in your seat, flat out! It's in the pipeline!
[Note: Zimbabwe's hyperinflation hadn't happened yet when this was written]
Q: Debt is designed for default as fiats are for debasement. [Right?]
FOA: My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationist get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)
Q: At $30,000 POG [115 times the current price at the time this was written] the US[$] as we know it will be no more, agreed?
FOA: Agreed, but still in use. Just like all those Pesos around the world! But remember, at the very least, the first $10,000 [38 times the POG at that time] of that figure would represent the current purchasing power of the dollar today. We will most likely get there long before price inflation jumps way up, once the current dollar gold market fails and gives way to a free physical price[...]
Q: What advantage would it be to the Power Elite to destroy the dollar?
FOA: Wrong context. What advantage does the Power Elite gain by expending assets to save an already failed currency. Better to do what major players have done for centuries and are doing now, buy gold and evolve your power base to use the next reserve.
Q: The end of a currency's lifetime always ends in gold debasement?
FOA: In almost every case. Sometimes in the open, sometimes hidden.