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Guest Post: The Curse of Fiat Money
By Thorsten Polleit Of Mises Institute
The Curse of Fiat Money
It may come as a surprise to many, but the relative size of the US
commercial-banking industry has not declined following the so-called
credit-market crisis, which developed in the second half of 2007. On the
contrary, it has increased since then. While nominal GDP rose 4.2% from
the second quarter of 2007 to the second quarter of 2010, banks' total
assets rose 18.4%.

In a recession one would expect an unwinding of credit-financed
investments that have turned sour. Economically unsuccessful firms go
out of business, malinvestment is liquidated, losses reduce investor
equity capital, and the cost of borrowing increases, providing
incentives for reducing overall indebtedness.
However, this is not what happened in the banking industry as a whole.
The Federal Reserve, in an attempt to prevent the bank system from
collapsing, supplied any amount of base money that was deemed necessary
to keep banks afloat. This can be illustrated by the
drastic increase in banks' base money holdings since around the third
quarter of 2008.

The Fed's monetary policy tries to keep the balance sheet of the
commercial banking sector from shrinking. For a shrinking of banks'
assets would be accompanied by a decline in the credit and money supply —
a development that is widely seen as being harmful to production and
employment growth.
However, this is a severe, and actually fatal, misinterpretation of cause and effect. It is bank-credit expansion
that has brought about the trouble in the first place, and a policy of
ever lower interest rates, provoked by ever greater doses of credit and
money injections, is not going to solve the damage done but will
actually make matters even worse.
Fiat-Money Creation through Circulation Credit
Whenever
commercial banks extend loans to nonbanks (private consumers, firms,
and public-sector entities) in today's fiat-money regime, they increase
the money supply uno actu. Ludwig von Mises called this type of credit "bank-circulation credit."
Bank-circulation
credit, which is associated with a rise in the money supply out of thin
air, causes malinvestment and boom-and-bust cycles. It causes all the
evils that are regularly associated with inflation: rising prices (and a
corresponding decline in the purchasing power of the money unit), a
coercive redistribution of income, and malinvestment.
However,
what happens if and when commercial banks are no longer willing to roll
over maturing loans, or borrowers wish to repay their bank debt? Such
developments — which are frequently labeled deleveraging and derisking —
would lead to a decline in the economy's fiat-money stock.
This
is because repaying bank loans basically means that the fiat money that
has originally been injected into the economy is literally leaving the
economic system. And if this happens, the inflation regime turns into a
deflation regime.
Deflation in a fiat-money system is of a
different nature than in a commodity-money regime. To see this, consider
the gold standard. Here, the money supply may decline because people
decide to move gold from monetary to nonmonetary purposes.
Another
reason for a decline in the money supply is a correction of fraudulent
banking. Fraudulent banking means that banks issue money substitutes in
excess of holdings of money proper (gold). If clients demand redemption,
banks default on their payment liabilities. The outstanding money stock
drops, as money substitutes not covered by gold become worthless.
Deflation
in a gold standard comes to a halt once the outstanding claims on money
proper are brought back in line with the stock of money proper people
have deposited with banks. In other words, deflation makes the inflated
money stock return toward its rightful level.
In today's
fiat-money system, however, the inflated money stock cannot be brought
back toward any rightful level, as fiat money is created out of thin air
via circulation credit, not backed by any commodity whatsoever. There
is no equilibrium level the fiat-money supply could shrink toward.
"The Piper Must Be Paid"
Fiat-money
systems collapse once the increase in ever-greater amounts of credit
and money comes to a halt, let alone goes into reverse. Even a slowing
down of credit and fiat-money expansion causes economic trouble — as the
illusion fueling the credit boom breaks down. As Murray N. Rothbard
noted,
Like the repeated doping of a horse,
the boom is kept on its way and ahead of its inevitable comeuppance by
repeated and accelerating doses of the stimulant of bank credit. It is
only when bank credit expansion must finally stop or sharply slow down,
either because the banks are getting shaky or because the public is
getting restive at the continuing inflation, that retribution finally
catches up with the boom. As soon as credit expansion stops, the piper
must be paid, and the inevitable readjustments must liquidate the
unsound over-investments of the boom and redirect the economy more
toward consumer goods production. And, of course, the longer the boom is
kept going, the greater the malinvestments that must be liquidated, and
the more harrowing the readjustments that must be made.[1]
However,
couldn't the central bank just keep the money supply unchanged,
preventing it from falling by, for instance, purchasing assets (bonds,
stocks, etc.)? Such a policy wouldn't do the trick. The ensuing slowdown
of credit and money expansion would, as Rothbard outlined forcefully,
make the economic production structure explode.
The market
interest rate would start moving from its artificially suppressed level
toward its natural level as determined by the societal time-preference
rate. This, in turn, would reveal that the economy — due to increases in
circulation credit and fiat money — has lived beyond its means.
Malinvestment will be revealed.
Credit losses would rise as firms
run up losses due to bad investment and consumers, plagued by
unemployment and declining incomes, default on their debt. Tax revenues
would decline, and governments, which chronically rely on debt
financing, would have to pay ever higher interest rates for rolling over
their maturing debt and financing new deficit-financed outlays.
That
said, once increases in fiat money slow down, come to a halt, or become
negative, the credit pyramid and the production structure it has
created would start disintegrating.
Inflation Temptation
Under
a fiat-money regime there is a great temptation for governments and
their supporters (protégés) to advocate a further increase in the
fiat-money supply — by arguing that a further increase in the fiat-money
supply (and a somewhat higher inflation) is the policy of the lesser evil as compared to a breakdown of the economic and monetary order.
Many
renowned economists have argued that, because of political reasons,
(hyper)inflation rather than deflation will be the ultimate consequence
of fiat money. Take, for instance, Irving Fisher, who in his book The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises
(1911) made an unmistakable statement regarding the quality of fiat
money: "Irredeemable paper money has almost invariably proved a curse to
the country employing it."[2]
A
similar view was expressed by Frank A. Fetter, who explicitly referred
to the political-economic dimension of inflation when he wrote in his
book Modern Economic Problems (1926),
Once
the issue of political money begins to be excessive, its further
limitation proves to be most difficult. A result usually unintended is
the derangement of business and of the existing distribution of incomes.
The rapid and unpredictable changes in prices give opportunity for
speculative profits, but injure legitimate business. This incidental
effect on debts and industry offers the main motive to some citizens for
advocating the issue of paper money. It is peculiarly liable to be the
subject of political intrigue and of popular misunderstanding. It is
this danger, more than anything else, that makes political money in
general a poor kind of money.[3]
Mises, in a 1952 addition to his book The Theory of Credit and Money (originally published in 1912), put forward an explanation of why people opt for inflation in times of emergency.
The
emergency that brings about inflation is this: the people or the
majority of the people are not prepared to defray the costs incurred by
their rulers' policies. They support these policies only to the extent
that they believe their conduct does not burden themselves. They vote,
for instance, only for such taxes as are to be paid by other people,
namely, the rich, because they think that these taxes do not impair
their own material well-being. The reaction of the government to this
attitude of the nation is, at least sometimes, directed by the sincere
wish to serve what it believes to be the true interests of the people in
the best possible way. But if the government resorts for this purpose
to inflation, it is employing methods which are contrary to the
principles of representative government, although formally it may have
fully complied with the letter of the constitution. It is taking
advantage of the masses' ignorance, it is cheating the voters instead of
trying to convince them.[4]
In his book Age of Inflation (1979), Hans F. Sennholz noted,
In
the past, the inflations were of relatively short durations, limited to
periods of national emergency when the central government was called
upon to finance extraordinary defense expenditures. After the end of
hostilities monetary stability soon returned as the emergency financing
was abandoned. Today, public demand for governmental services never
abates, in wartime and in peacetime, but seems to accelerate year after
year. In fact, the more government spends on economic and social
objectives the louder the public clamor for more services seems to
become. Thus, the temporary emergencies that in the past gave occasion
for extraordinary defense expenditures and inflationary financing have
given way to a permanent emergency of social service and inflationary
financing. It is true that inflation can never be permanent, for it must
come to an end with the total destruction of the currency.[5]]
The only chance to prevent the exchange value of fiat money from collapsing altogether is a return to sound money
— a way that would start by reanchoring fiat monies to gold, as
outlined most prominently by Mises, Rothbard, and Sennholz. However,
limiting the damage done by the fiat-money curse is not a technical
problem in the first place. It is first of all a matter of overcoming
the political, economic, and sociophilosophical framework of our time.
As Mises noted,
The belief that a sound monetary
system can once again be attained without making substantial changes in
economic policy is a serious error. What is needed first and foremost is
to renounce all inflationist fallacies. This renunciation cannot last,
however, if it is not firmly grounded on a full and complete divorce of
ideology from all imperialist, militarist, protectionist, statist, and
socialist ideas.[6]
Notes
[1] Rothbard, M. N. (2006, 1973), For A New Liberty: A Libertarian Manifesto, 2nd ed., Ludwig von Mises Institute, p. 237.
[2] Fisher, I. (1922, 1911), The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises, New York: Macmillan, p. 78.
[3] Fetter, F.A. (1926), Modern Economic Problems, 2nd ed., New York, The Century Co., p. 53.
[4] von Mises, L. (1981), The Theory of Money and Credit,
Liberty Fund, Indianapolis, p. 468. The quote was taken from part four,
"Monetary Reconstruction," which was written in 1952 and first appeared
in the 1952 American edition by Yale University Press.
[5] Sennholz, H.F. (1979), Age of Inflation, Western Island, Belmont, Massachusetts, p. 62.
[6] Mises, L. (2006, 1923), "Stabilization of the Monetary Unit — From the Viewpoint of Theory," in The Causes of the Economic Crisis, Ludwig von Mises Institute, Auburn, Alabama, p. 44.
h/t Michael
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AngloGold Ashanti closing out its hedges, wants piece of the physical pie!
http://www.bloomberg.com/news/2010-09-14/anglogold-ashanti-plans-share-b...
This is why I will not buy miners. Why the Hell are these idiots hedged in such a way that they do not have the money to take the hedges off and also do not have the ability to deliver the gold at the hedged price? A lot of these miners have a vested interest in low gold prices because they use the futures market as casino that they think they can rig with the threat of dumping instead of a way to facilitate their mining operations. It isn't about mining. For a lot of them it is more about trading futures. And that is something mine investors didn't have to deal with in the 70's.
A quick lesson in intuition and a case against fiat: Imagine if people traded goods, not by price, but by weight. And the Federal Reserve provided all the scales and adjusted the weighing mechanism as they saw fit. How can an efficient market exist when the mechanism that is used for effeciency is completely and utterly meaningless?
Not meaningless; corrupt, rigged, fixed by fascist banksters.
excellent
"the curse of fiat money" & THE BLESSINGS OF PRECIOUS METALS !!
It may be admitted that Krugman’s argument has a certain intellectual appeal, much like Keynes’ siren song about pump-priming in 1936 had.
However, the parallel between retiring debt after WW II and his proposed retirement of debt after a $30 trillion spending spree by the government is invalid.
Why? Because in 1945 the U.S. was still on a gold standard with the result that gold could be invoked to act as the ultimate extinguisher of debt.
http://news.goldseek.com/GoldSeek/1284358080.php
Antal E. Fekete
Every time a person reads Krudman, God kills a kitten.
Please everyone, think of the kittens.
+1 HAHAHAHAAAAAAAAA!
Reading the work of Austrian economists is like having the ability to see into the future.
only in your mind.
while there are nuggets of common sense in what they say, there is also a lot of blather that has little relevance to a modern monetary system.
a gold standard money is not a workable monetary system in a modern economy. that you believe otherwise based on faith is irrelevant.
"a gold standard money is not a workable monetary system in a modern economy."
LOOOOOOOLLLLLLLLLLLLLL
Forgive me if I am mistaken, but it appears that the entire fractional reserve fiat monetary system is imploding world wide at the present moment.
It only took 40 years.
Lets see... hmmmm.
Gold has been used as a currency for how many thousands of years now?
OK, I have an open mind and I think it's clear that our current credit money/fiat money system with ever changing reserve requirements and no hard asset backing whatsoever (whether Gold or some other basket of tangible assets) is going to lead pretty soon to the implosion of such system.
So please explain what kind of gold standard monetary system you are thinking of and how credit gets created in such system. And also, what's the transition path from the current system to that "sound money" system.
I insist on this because as always, the devil is in the details, and so far I know there are great disagreements amongst Austrians themselves (eg Feketians-real bills doctrine and Rothbardians-100%Gold) about what type of "Sound money" system would need to be put in place.
See :http://www.safehaven.com/article/3887/monetary-elephants-in-the-living-room
I've eaten the Keynesian pudding and it taste real bad. The recipie looked good but the result is awful, it's actually poisonous. But I can tell you my trust in pudding manufacturers is currently at ZERO, and I'm going to be very careful this time around before I start eating one of the various Austrian puddings just because they claim their's is delicious and is not of the poisonous Keynesian type.
There is a country that has begun a de facto gold standard. Oddly enough, that country is Zimbabwe. To buy staples, you either pan for gold in the streams or you provide a service and get paid by someone who panned for gold. How did they get to a gold-based currency system? The hard way. I see no other path. Thus, to say we are headed for a gold-based system is to sign off on the ultimate doom model. I am currently agnostic on this point, but hope we don't actually get there (despite the fact that I will be rich on the curve.)
If the only way we can get to a "sound money" system (which one???) is by first waiting for the implosion of the current system then a big chunk of the world population is doomed to the Zimbabwean way of life.
That one should dig a hole in the ground and hide there one's savings in Gold and Silver coins or bars doesn't follow from Austrian or "sound money" principles but from man's 5000 year history of experimentation with money.
In other words "genuine common sense".
Damnit, I replied to the wrong person, lol.
A problem going to the gold standard that I can’t reconcile: the USA runs a huge trade deficit. We would ship all our gold to China and the Middle East in just a few years, then we’d be broke. Then major pain we may not recover from! This Fiat stuff sucks, but isn’t the smoke and mirrors campaign we got now working to our advantage as we rig the system to exploit the rest of the world?
The only reason it's not workable is because the fiat money-printers are so far over the cliff edge that they would not be abe to snap back to sound money without the very fabric of civilization unravelling before their eyes.
That it is not workable is not the fault of a sound money system, but rather an indictment of the current fiat circus.
This is my contention. But it is purely intuitive. I think the most important aspect of a monetary system is stability; predictability--some tie to reality.
But regardless of the currency or its backing, if it has any value at all, it could be used to purchase gold. And if gold, which cannot be denied as a stable store of value should easily be able to be converted to any sort of currency one might need.
So why sully gold by diseasing it up in currency games? Let gold be gold and currency currency.
That said, taken for a given that Centralized Banking Is Dead, what is the basis of a new money. What is USD 2.0?
Would you use debt as the primary mechanism of money creation?
For some reason, fiat money systems seem to work, but lack stability, which presumably gold would fulfill to some degree. But commodities seem as volitile as anything else, and it's not only due to the freakish fluctuations in M3.
And another thing, doesn't gold, or any other sort of durable commodity automatically set the value of a currency? Gold continues performing its magic in spite of what we mere mortals decide to do with more derivative forms of money.
So if we could venture off, for a moment, into using a couple three of those fine minds to dream up a post-Fed USD. Aren't there much better mechanisms that could be devised to regulate its supply? I mean, really. Didn't Freidman want a computer running it? It's about predictability.
Is the pre-occupation with Malthusianism, in spite of all evidence to the contrary, helped terrorize people into accepting an economic life full of the cancer of debt and interest, and reinforced it by putting our governments in that same position, beholden to the same money masters?
I would say, that the current monetary system is working exactly as designed. It was designed as an overarching, high-tech control structure, a rigged pseudo-free market, just enough choices to make to imagine oneself free.
So then I wonder what we might come up with that could be free of the dreary muck of debt cults and the terrorism of suicide bankers.
Let's pretend it really IS created out of thin air, and this magic can spontaneously occur at whatever point in the economy it might be needed.
What would totally decentralized banking look like?
<trying to keep a straight face> (lol) Please tell us, "in your mind" what is the definition of "modern" (lol) in this context, and also please tell us the exact date, hour, minute, and second (lol) on which a gold standard became "not workable" (lol).
the fiat money banks are like huge, inflated Thanksgiving Day parade balloon characters. the fed gives them enough air to stay inflated but they are not sound. instead of real lending to real borrowers they hoard the fake money/air to give the appearance of stability. it cant last.
If Bernanke read this I think his head might explode...
If Bernanke read this I think his head might explode...
Bernanke knows all this Austrian stuff.
Even Keynes knew it.
Someone asked Keynes about the long-run effects of his proposed deficit spending.
His curt response: "in the long-run, we are all dead."
Benny knows the Austrians are right in the long-run. He is just trying to postpone the day of reckoning as long as possible...
There has been debate as to what Keynes actually meant by that quote.
solution
"The only chance to prevent the exchange value of fiat money from collapsing altogether is a return to sound money — a way that would start by reanchoring fiat monies to gold, as outlined most prominently by Mises, Rothbard, and Sennholz."
see my reply to michael.suede above.
What kind of "sound money" system are you thinking of?
Conspiracy theory by banks to control all assets?
All the conspiring these days takes place in the Marriner Eccles building.
Ditto.
Better believe it. Weren't financial sector profits 40% of all corporate profits a little while ago? Maybe worse now.
F@ck the money changers.
The banking system is no longer a banking system. It is a fake clearinghouse thingy for electronic transactions and all of them are in actuality worthless in any sense of the word. So the collapse already happened. The banking system collapsed a long time ago. We all know it. Everyone knows it. Wonder when the bankers are going to admit it. They are the ones that need to swallow the bitter pill..... There is a NWA song about this....Gangster Gangster.....it's not about a salary its all about reality.....
After my own heart! So, banking system is toast. . .now what?
and of course you are absolutely right and of course "you should be right because this is the stated policy of the Federal Government of the United States." In short "we tranferred the risk from the money center banks and other financial institutions to the Fed's balance sheet so as to prevent a massive constriction of lending which would cause a depression" and also "sow the seeds of the recovery." This is the essence of Hank Paulson's book "On the Brink." This of course also happened during a transition to the "Age of Obama" which of course is nothing more than a "racial tensioner" since in reality we're talking "the Age of Pelosi/Reed." And of course This is an interesting bit of history but of course "we've had fiat money for some time." the question is "what do we do with fiat debt"? in my simpleton world i can't really do much about anything but when the government declares debt itself returnless and celebrates this fact "because we're the world's reserve currency" I start looking for some "change i can believe in." that's what happens when you work...for money. God forbid if you're living in debt, right?
B of A will charge fees - guess they dont do real banking, just fed banking
http://www.breitbart.com/article.php?id=CNG.bb54d137200b27d4f18a20472252604a.10b1&show_article=1
And there goes the Dragon, let loose. The BoJ just intervened on the yen.
Now we all know there's not enough gold to go around for intervention. This is going to get weird. Not your ordinary everyday kind of weird. The kind of weird that makes people babble to themselves in the corner.
Gold coins debasement history suggests that gold is just as much a fiat money as paper currency. Remember Rome? It does not matter what is the physical representation of money is. The people in charge of money supply is what determines stable currency, or not. Human ingenuity will find ways to debase even gold.
Why the hell would we want people in charge of our money supply?
why junk Belrev?
it's like junking him for saying the sun is warm....
and here we go, BOJ just interfier with the market
Deflationist Rick Ackerman says gold at $1400 by year's end, with a nice dig at Cramer to boot.
http://news.goldseek.com/RickAckerman/1284530460.php
Yen intervention bitchez
Looks like 83 is the floor, USD/JPY that is, for now.
They won't stop until they get it back to around 90. They're just letting the market carry the heavy lifting for now.
Speaking of fiat money, just look at the Yen fall tonight, beginning at 9:30 EST. Has the BOJ finally fulfilled its threats and intervened aggressively in the Forex market? Sure looks like it! They are back to their "beggar thy neighbor" ways! I wonder if Geithner will call them on it, as he has China. Interesting days, interesting ways!
Can't wait to hear what Timmy thinks about the Yen sitting on a tack. Maybe he'll say it was "bargain hunters" and "profit takers".
Plan to sell gold when Volcker II arrives. Not on the visible horizon . . .
Do you really believe it was the rise in interest rates that stopped gold last time? Or do you think it was the rise in rates plus the wholesale dumping of gold on the markets by Western banks? I think the latter. I also think that after 30 years, that trick is fully expended.
i wander how far will they go
What happens when the "piper" can't be paid? He marches our future into the oblivion! I suspect we're going to be witnesses of the "oblivion"!
You mean we CAN'T print prosperity?
All fiat currencies fail. I've read that the average lifespan of a fiat currency is about 60 years. We are at least 40 years in. But that probably isn't quite right because the 27 years before that was a semi-fiat currency.
Did you catch that bullshit pump of gold on Tuesday?
No shit. Like the dollar is fucked or something.
Market manipulation!
Just like the ramp-down in stocks the last 15 minutes of Tuesday.
Crooked market! What bullshit!!
YES YES YES!!!! GOD BLESS Thorsten Polleit
an elegant, economical, and cogent demolition - without the use of nanothermite - of the economic crock and hubris of our times. thorsten laid waste to monetarism particularly and keynesianism tangentially. he rightfully noted that any modification of the currency (debasement or endearment) is a "coercive redistribution of income" which is why inflationists and deflationists are evil.
he who controls the gold makes the rules....he who controls the currency enslaves the people....this is the goal of banksters - owned by the same people who own the single party totalitarian state in which we live. a state built upon blood thirsty murdering thieves - children of mammon and haters of mankind.
the sociopaths must be destroyed.
It's important to distinguish between TRUE fiat systems and what we have, a credit system.
Our money is NOT fiat, ok? It's not. Those who say that it is or has been are wrong. Our money is backed up by future production, the ability to pay the interest with additional credit backstopped by future growth. It's as simple as that.
Debt-based money is not printed, it's not fiat like tally sticks.
A true fiat system is subject to debasement, sure, but there are means by which people can weather that, via gold or land or cattle or pussies or oil, things which are real and have value independent of the currency denominator.
Tally sticks worked just fine as a PURE fiat money system for a HELL of a lot longer than the FRN has been around. In fact, a fiat system properly managed generates NO inflation and is simple, elegant, and just. The government issues currency then taxes it out of existence. Obviously, this is suboptimal compared to Real Bills, but its longevity hinges upon "properly managed," which true fiat systems HAVE actually been during some times.
Debt money requires growth because the interest owed has not been created at the time of creditmoney creation. If nobody steps up to borrow at least as much as the coupon, the system begins to mathematically implode. That is where we were in 2008.
I told Douchinger years ago that the "answer" to this deflation was for the CBs to forgive the loans, essentially printing money to forgive all the debts owed it. ALL FRNs are by nature ultimately loans from the Federal Reserve. The Fed is effectively as we speak printing the interest owed it on the outstanding monetary base. This is all that is necessary to prevent a catastrophic deflationary spiral, but it will not remove the deflationary pressure in the aggregate money supply as existing loans' principal balances are ultimately repaid. This is why the Mishes out there still "see" deflation. There IS deflation, but the math of preventing a spiral is virtually trivial.
Repayment extinguishes creditmoney. The USG is currently the only entity that is continuing to borrow to prevent mass extinguishment. This is why we should continue to expect national debt to exponentiate. It has to, otherwise as FRNs are repaid and extinguished, there will be less "money" against existing production.
Now, as production in the aggregate declines, if the outstanding credit base does the same, we WILL see "deflation" but NO material effect on prices. This is where I believe we are. The precious FRN crowd has some bad news awaiting them, because as the numbers of things contracts concomitant to contraction in outstanding credit, this is a classic recipe for level prices even as it becomes harder to get money. What this will look like is severe or even hyper realworld "inflation" against *deflationary* monetarist metrics. It's important to think about this a few times to really get it.
Money becomes more "scarce" even as production contracts at the same time. Money vs goods supply/demand law dictates in that case level price but money becomes harder to get. This will have all the feel of severe inflation (because of lack of access to money, i.e., income) but the price tags will indicate no material change. Everything just ends up priced out of your reach. Again, just like all the states around the world that have suffered through collapses, Brazil, Argentina, Mexico. Shit is expensive there in a real world sense.
This is precisely why there is still an argument over outcome. The Fed's printing of the interest plus the government's replacement of lost organic credit demand will create a monetarist inflationary bias. But the REAL trends are of contraction both in production and in credit. Any hyperinflationary tipping point will occur only at collective Point of Recognition that debt has lost its moneyness.
" In fact, a fiat system properly managed generates NO inflation and is simple, elegant, and just. The government issues currency then taxes it out of existence. "
So explain to me how this is just?
Why should government get to print money and then get to forcibly confiscate the property of others?
I'm not seeing the justice in that.
Government has no right to take peoples property by force.
Government has no right to print money and then force its citizens to use it. Legal tender laws require enforcement through violence. Nothing good requires the use of force. If it was good, we wouldn't need legal tender laws.
Government has no right to take the property of its citizens through taxation.
Government has no right to take the property of its citizens through eminent domain.
Not to be the fly in the ointment, but quite a few Americans lived quite well for a long time without complaining about the long-run cost. I just wanted to toss that out there.
Sure, we've been reaping the benefits of a fraudulent fiat empire for quite some time now.
We shall see how the public feels after this whole rigged ponzi collapses in on itself.
The man is trying to justify violent looting.
This is something no one should stand for.
Forcibly confiscate?
LOL...the gov't spends the tally sticks for services, consequently, people "get" something in return. The tax is an accounting measure; it extinguishes only tally sticks. Nobody takes anyone's gold or cattle or daughters.
You mix in a lot of other issues that are impertinent to the point regarding fiat currency.
Honestly, I would prefer Real Bills, but I am just making a variety of points about OUR currency system's not being fiat, along with correcting some misconceptions about the supposed iniquity of true fiat systems.
And, government has whatever right the People give to it.
Great points! Would you care to address how usary contributes to the necessity of prepetual growth?
I don't see any problem with usury in a 100% commodity (ie. gold) backed currency system of lending. In this case, real tangible wealth (resources) are being put into the service of future production with the hope of generating more resources than were expended in the process of lending. (this is how the money for the interest is "created")
However, usury under our current fraud of a monetary sham is another matter entirely.
I would like to get into this further, but it's really more than I can cram into a blog reply.
To see how non-fraudulent usury works, look here:
http://www.youtube.com/watch?v=tDkNPNSgiaY
http://www.youtube.com/watch?v=wWMtQxos5BQ
http://www.youtube.com/watch?v=HegiGuJlzTQ
yes, absolutely.
Debtmoney has an interest component. This is the amount owed but the amount created at any given time is always necessarily less. This is because banks only lend principal. It is up to you to come up with the interest.
The system then requires someone else to borrow *at least* the interest you owe. Then, someone else must borrow their interest. This is because there is only ONE way for money to come into existence, and that is for it to be borrowed.
Think about 3 people and a banker with a goon forcing everyone to use his paper. He lends A $100 for one year at 5%. It's clear $105 is owed but only $100 exists. B or C must themselves borrow at least $5 by EOY1 and transfer it to A or else A is in default. Supposing B borrows under the same terms as A and A repays in full, $200 were created, but $210 were owed. Once A extinguishes his debt, the imbalance is now even worse. B owes $105 at EOY2, but A has taken $105 out of the monetary base, leaving $95 against $105 owed.
There is NO ROOM in a debt money system for repayment or contraction in this manner. Debt MUST be backed by growth because that's the only thing which will prompt C, D, E, F, and so forth, to themselves borrow to feed the pyramid. One must create more than "$100" worth of goods in order to sell backstop the interest, and others must borrow from banker to buy this. Ergo, growth and consumption.
Usury creates, via mathematics, the ingredients for default. If A cannot repay and rolls the loan, the compounding interest eventually consumes him and the money supply. It's really very basic math.
@trav7777
Your brain is very large and powerful. May I ask where you got your education in economics?
money changers ........ hmmm ......... how did it get so bad ? how did it get so out-of-hand ? ........ why isn't someone naming names & going after a great big Pulitzer Prize for excellence in journalism ? ROBERT RUBIN, BILL CLINTON, LARRY SUMMERS, GREENSPAN ........ SCAM OF THE CENTURY .
I told Douchinger years ago that the "answer" to this deflation was for the CBs to forgive the loans, essentially printing money to forgive all the debts owed it. ALL FRNs are by nature ultimately loans from the Federal Reserve. The Fed is effectively as we speak printing the interest owed it on the outstanding monetary base. This is all that is necessary to prevent a catastrophic deflationary spiral, but it will not remove the deflationary pressure in the aggregate money supply as existing loans' principal balances are ultimately repaid. This is why the Mishes out there still "see" deflation. There IS deflation, but the math of preventing a spiral is virtually trivial.
1. Central banks do not have the power to forgive loans. Hell Congress does not have that power (except perhaps debt owed specifically to government). The only way to IMPOSE forgivement of loans is in bankruptcy court.
2. Let's assume the Fed had that power. It would not do it anyway! The Fed's mission is to protect the banks not to bail out consumers at the bank's expense.
Thus your claim the "math is trivial" is wrong for theoretical reasons and for practical ones.
However, Congress could give away enough money for everyone to pay off their debts (effectively achieving what you propose)... but as I stated they wont. It would kill the currency and kill the banks.
Everyone has this notion the Fed's mission is to raise prices. It is not. Bernanke's mission is to get banks to lend and consumers to borrow. Forgiving loans or handing out trillions would do shrink credit. Remember this is a credit based system! Moreover, as I have pointed out many times the Fed would object to Congress giving away money for the explicit purpose of everyone paying off debt because it would destroy the banks and the currency.
It is decidely a non-trivial thing to defeat deflation without causing far bigger problems.
Mish
1. Central banks do not have the power to forgive loans. Hell Congress does not have that power (except perhaps debt owed specifically to government). The only way to IMPOSE forgivement of loans is in bankruptcy court.
Yet inflation resulting in a devalued currency can be a pretty 'forgiving' tool when it comes to CB's needing to impose a way of dealing with onerous debt. So bankruptcy is not the only way to forgive debt after all; not with fiat currencies anyway. Depends who your friends/creditors are, I suppose.
2. Let's assume the Fed had that power. It would not do it anyway! The Fed's mission is to protect the banks not to bail out consumers at the bank's expense.
See above.
It is decidely a non-trivial thing to defeat deflation without causing far bigger problems.
Now that makes sense.
Regards
You're factually wrong.
What do you suppose Quantitative Easing represents? The Fed is printing the coupon on the money supply. Otherwise, the compound interest function will consume it. This is your deflation spiral.
Saying that the Fed does not have the "power" to forgive loans is foolish; they've been using that power since March 09.
Second point: your statement about the Fed's role being to protect banks is superficial. The Fed is in actuality a superbank; its concern is not necessarily its member banks but the "system." Printing the coupon does not hurt its members; it helps them. The banks still "see" real money coming in. The Fed is "buying" their shitty assets. The banks were the most highly levered and the ones most susceptible to deflation.
I know what I am saying bends ears because most people IMPROPERLY conceive of banks as lenders holding paper. In reality, they simply do not do that anymore. Banks don't suffer from inflation, they profit by it. GROWTH is what makes them money, ok? The notion that deflation helps banks is very clearly empirically wrong, given how many of them went under in 2008.
I never claimed Congress would "give away" money to repay ALL loans. What the Fed is doing is paying the INTEREST owed, which without creation would serve as an exponentiating parasitic deflationary drag on the money supply. They realized in 2009 what I realized ab initio.
At the same time, the USG has taken over the mantle of attempting to ensure that the aggregate monetary base does not contract; yields are so low that future compound interest represents less scalar quantity.
Defeating deflation may cause other consequences, sure...but what are the consequences of "allowing" deflation? The major deflationists bleat nonstop about the effects of deflationary collapse...including precious FRNs, massive liquidations, starvation, war, pestilence, famine, death. Don't be so married to your thesis that you start claiming these are a superior outcome.
My point is only to discuss the mathematics and why the Fed is doing what it is doing, not to attempt to dismiss the negative side effects. There is no consequence-free outcome to a global net energy peak within an entrenched growth paradigm.
If repaid debt is currency destroyed, then how would that kill the currency? That money did not exist until it was borrowed, and after being repaid, removes that previously created dollar.
I don't say that let's pay off everyone's debts. Buy why not create money at the grassroots, and see what happens with a percolating economy. Probably a lot of debt would be retired. I guess I don't care what that does to the banks. I thought they got their bloodmeal, and further interventions should cease as quickly as possible, because the whole business is out of control, and has engorged itself at every trough of blood they could find.
Why not innovate around those bastards, rather than prattle about "have no power to this, and no power for that, but that would destroy the banks, blah, blah." Like you're shilling for the system, on a mission to stave off any larger spiritual issue like whether or not the people must put up with the powers that be sucking the lifeblood of the other 99% and let's not forget the childrens.
40% of the people are practically destitute, while now 40% of the GDP is bankstery.
Pretty easy math there. The future is underwater. Now my question is what the hell did my child do to be born with debt to pay? Is that some sort of evil twist on original sin or something? It reeks of the fleshpots of the old testament, and gold idols and shit.
How about everyone is banker. Everybody is earning a return on money, that a sovereign government and people ought to expect. FRBanks get a guaranteed 6% or something.
I'm thrashing around hoping somebody set me straight on some things.
I miss ChumbaWumba.
"Just when ya think the War is over: they start one up or they start one over; just when ya think..."
Interesting how in Sennholz' excerpt he is so quick to discount financing extraordinary defense expenditures in times of emergency as 'temporary', and intently focus his full blame on the odious revenue-sapping nature of programs intended to provide emergency/social financing for main street. Yah, 'temporary', riiiight.
I suppose I should make allowances for it being 1979 and Mikkey Mause's fear focus was still:
http://www.youtube.com/watch?v=83tnWFojtcY
(In '79 we were still on Osama's side, or so I've been told.)
Curious: how many bandaids could you buy for each American with a trillion USD/annum? I mean, assuming the improbable and the hocus pocus of fiat currency somehow manages to maintain its illusion of value awhile longer, natch.
Regards
Everybody and their dog is cursing the fiat monetary system and rightfully so. What I don't get is how the gold-standard would work as an alternative.
The increase in wealth and/or production of actual goods in the end is driven by a couple of key factors: innovation and demographics.
1. How will a fixed gold standart take into account those fickly unpredictables?
2. Will the supply of gold have to be increased in line with that growth? Is that realistic?
3. Should the old products be depreciated by the market that much faster to make way for additional (demo) or brand new (innov) products?
I'm not smart, so I'm just asking the basics. And the basics tell me that you can't have a fixed measure (gold) for a volatile system (consumers - both individual and corporate). Doesn't that spell greater problems down the road - not enough gold base to account for new population and/or products? OTOH if the standard was made flexible wouldn't it increase the overall volatility - it would be a dog eat dog world where every business and individual would be fighting for his share of the gold pie?
Sorry, for the ramblings. I'm not trolling, just trying to clear up a few things for myself. Would be grateful for any insight into the above.
I believe society is beginning to dig through the dusty archives and read materials that were considered antiquated. Ten years ago, not one in one thousand people knew what a reference to the Austrians meant. (A few years ago I had dinner with the CEO of Morgan Stanley Bank--the subsidiary--and he drew a total blank to such a reference.) I am finding that less true now.
bubble ...bubble...bubble....the whole economy is a bubble......everything the people have experienced in the last forty years has been a bubble...their whole lifestyle....i think India just caught up with this bubble that the western world has been seeing for the last forty years.....since 1991...when economic gates were opened for foreign multinationals......an d we will in igger trouble..because of the population we got........and muslims are to blame a lot for that ...they dont care about anything else other than their religion....its because of their own stupidity and Anger they are being taken for a ride.....others living around them will also suffer....i m not telling Hindus are blameless...but muslims care for is their Islamic UMMAH...stretched from Indonesia ...joining northern india...Kashmir...Pakistan to the middle east.......Nouriel Roubini sees huge growth in INDIA....better than china......this writer has put exactly what was in my mind:( comments by DON)
http://americansjourney.blogspot.com/2010/09/don-robertson-commentary-on...
Banks would only advance loans if the producers hedged their production...obviously the banks made them hedge through their derivatives desks and encouraged them to overhedge. Then when the gold price started to run the producers couldn't afford to close their hedges and the banks wouldn't extend them any more credit so the banks ended up with the assets...nice work if you can get it!
FullMetalJacket - I assume you are primarily referring to Barrick and past events
according to Jim Sinclair what you have described is how a lot of the current mining companies are financed today
Jim calls it 'short of gold derivatives' and says it is especially prevalent among the junior miners
whether you call it 'hedging' or 'being short' is just semantics - the miners have taken on debt and have guaranteed that debt with the gold that they might be able to produce from the mine
if I understand Jim Sinclair and Stewart Thomas, this is how the banksters will profit from the short of gold derivatives:
> suppression of the gold price ends (whether through failure of the suppression scheme or according to plan)
> price of gold rockets higher
> banksters make a margin call on the short of gold derivatives
> miners lack the gold (or cash) to cover the margin call
> banksters refuse to extend further credit to miners
> banksters take possession of the mines in lieu of payment on the derivatives
according to Jim and Stewart this is how the banksters will win even when the price of gold shoots higher
I like a point that Stewart makes: the banksters are the best money makers on this planet - to think that they won't make money when gold shoots higher is just silly
according to Stewart, the banksters are long $400 billion via these derivatives - their short position on the COMEX is 'only' $20 billion - they aren't concerned about losing money on their shorts since $20B is chump change relative to $400B
... but still enough to have a handle on the whole thing.
Nice.
The FN "Maestro" is in front of the CFR ("One World Govt" Clan) saying best stimulus would be for stock prices to rise and that he's concerned about the rise of GOLD! More ammo for a pump (of markets) and dump (of gold) for TPTB. Let's see if they have any ammo to levitate the DOW, S&P, and DOG today...
It's the DEBT based Credit expansion via fractional reserverve banking, STUPID! The only way to "Keep it going" in a debt issued fractional reserve banking system is to exponetially increase the debt while simutaneously decreasing the interest rate (see Fractional Reserve banking as an economic paritism - "http://econpapers.repec.org/scripts/redir.plex?u=http%3A%2F%2F129.3.20.4... ). This will only delay debt saturation and the ineviatable credit contraction when debt paydowns default > new debt issues we have deflation.
When Lincoln issued his "Fiat" money, it was DEBT free issues of Treasury notes ($450 million Greenbacks), and of course there was inflation, but no deflation until the removal of greenbacks by the redemtion act (bankster alert).
When Jefferson's Treasury issued treasury notes to pay US troops for the war of 1812, it was debt free issues.
"The paper money carried the United States through the most ardous and perilous stages of the war, and through operating as a most unequal tax, it cannot be denied that it saved the country" - Albert Gallatin Secretary of the Treasury under Jefferson
I always ask this question - Over the last 50 years the total $US demoniated debt has risen by trillions and trillions (some say 54 trillion total, but the exact number is not important). This implies that some entitie was able to "loan" this money. how did the trillions of United States dollars come into existence? Who had all this United States money sitting around to loan out?
Until we stop banks creating $US currency to loan to us at interest, we all Fk'd except the ruling class.
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