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Guest Post: How the Paper Money Experiment Will End

Tyler Durden's picture


Submitted by Philipp Bagus via the Ludwig von Mises Institute,

A paper currency system contains the seeds of its own destruction. The temptation for the monopolist money producer to increase the money supply is almost irresistible. In such a system with a constantly increasing money supply and, as a consequence, constantly increasing prices, it does not make much sense to save in cash to purchase assets later. A better strategy, given this scenario, is to go into debt to purchase assets and pay back the debts later with a devalued currency. Moreover, it makes sense to purchase assets that can later be pledged as collateral to obtain further bank loans. A paper money system leads to excessive debt.

This is especially true of players that can expect that they will be bailed out with newly produced money such as big businesses, banks, and the government.

We are now in a situation that looks like a dead end for the paper money system. After the last cycle, governments have bailed out malinvestments in the private sector and boosted their public welfare spending. Deficits and debts skyrocketed. Central banks printed money to buy public debts (or accept them as collateral in loans to the banking system) in unprecedented amounts. Interest rates were cut close to zero. Deficits remain large. No substantial real growth is in sight. At the same time banking systems and other financial players sit on large piles of public debt. A public default would immediately trigger the bankruptcy of the banking sector. Raising interest rates to more realistic levels or selling the assets purchased by the central bank would put into jeopardy the solvency of the banking sector, highly indebted companies, and the government. It looks like even the slowing down of money printing (now called “QE tapering”) could trigger a bankruptcy spiral. A drastic reduction of government spending and deficits does not seem very likely either, given the incentives for politicians in democracies.

So will money printing be a constant with interest rates close to zero until people lose their confidence in the paper currencies? Can the paper money system be maintained or will we necessarily get a hyperinflation sooner or later?

There are at least seven possibilities:

1. Inflate. Governments and central banks can simply proceed on the path of inflation and print all the money necessary to bail out the banking system, governments, and other over-indebted agents. This will further increase moral hazard. This option ultimately leads into hyperinflation, thereby eradicating debts. Debtors profit, savers lose. The paper wealth that people have saved over their life time will not be able to assure such a high standard of living as envisioned.

2. Default on Entitlements. Governments can improve their financial positions by simply not fulfilling their promises. Governments may, for instance, drastically cut public pensions, social security and unemployment benefits to eliminate deficits and pay down accumulated debts. Many entitlements, that people have planned upon, will prove to be worthless.

3. Repudiate Debt. Governments can also default outright on their debts. This leads to losses for banks and insurance companies that have invested the savings of their clients in government bonds. The people see the value of their mutual funds, investment funds, and insurance plummet thereby revealing the already-occurred losses. The default of the government could lead to the collapse of the banking system. The bankruptcy spiral of overindebted agents would be an economic Armageddon. Therefore, politicians until now have done everything to prevent this option from happening.

4. Financial Repression. Another way to get out of the debt trap is financial repression. Financial repression is a way of channeling more funds to the government thereby facilitating public debt liquidation. Financial repression may consist of legislation making investment alternatives less attractive or more directly in regulation inducing investors to buy government bonds. Together with real growth and spending cuts, financial repression may work to actually reduce government debt loads.

5. Pay Off Debt. The problem of overindebtedness can also be solved through fiscal measures. The idea is to eliminate debts of governments and recapitalize banks through taxation. By reducing overindebtedness, the need for the central bank to keep interest low and to continue printing money is alleviated. The currency could be put on a sounder base again. To achieve this purpose, the government expropriates wealth on a massive scale to pay back government debts. The government simply increases existing tax rates or may employ one-time confiscatory expropriations of wealth. It uses these receipts to pay down its debts and recapitalize banks. Indeed the IMF has recently proposed a one-time 10-percent wealth tax in Europe in order to reduce the high levels of public debts. Large scale cuts in spending could also be employed to pay off debts. After WWII, the US managed to reduce its debt-to-GDP ratio from 130 percent in 1946 to 80 percent in 1952. However, it seems unlikely that such a debt reduction through spending cuts could work again. This time the US does not stand at the end of a successful war. Government spending was cut in half from $118 billion in 1945 to $58 billion in 1947, mostly through cuts in military spending. Similar spending cuts today do not seem likely without leading to massive political resistance and bankruptcies of overindebted agents depending on government spending.

6. Currency Reform. There is the option of a full-fledged currency reform including a (partial) default on government debt. This option is also very attractive if one wants to eliminate overindebtedness without engaging in a strong price inflation. It is like pressing the reset button and continuing with a paper money regime. Such a reform worked in Germany after the WWII (after the last war financial repression was not an option) when the old paper money, the Reichsmark, was substituted by a new paper money, the Deutsche Mark. In this case, savers who hold large amounts of the old currency are heavily expropriated, but debt loads for many people will decline.

7. Bail-in. There could be a bail-in amounting to a half-way currency reform. In a bail-in, such as occurred in Cyprus, bank creditors (savers) are converted into bank shareholders. Bank debts decrease and equity increases. The money supply is reduced. A bail-in recapitalizes the banking system, and eliminates bad debts at the same time. Equity may increase so much, that a partial default on government bonds would not threaten the stability of the banking system. Savers will suffer losses. For instance, people that invested in life insurances that in turn bought bank liabilities or government bonds will assume losses. As a result the overindebtedness of banks and governments is reduced.

Any of the seven options, or combinations of two or more options, may lie ahead. In any case they will reveal the losses incurred in and end the wealth illusion. Basically, taxpayers, savers, or currency users are exploited to reduce debts and put the currency on a more stable basis. A one-time wealth tax, a currency reform or a bail-in are not very popular policy options as they make losses brutally apparent at once. The first option of inflation is much more popular with governments as it hides the costs of the bail out of overindebted agents. However, there is the danger that the inflation at some point gets out of control. And the monopolist money producer does not want to spoil his privilege by a monetary meltdown. Before it gets to the point of a runaway inflation, governments will increasingly ponder the other options as these alternatives could enable a reset of the system.


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Fri, 12/13/2013 - 15:12 | 4244147 docmac324
docmac324's picture

Or, just keep kicking the can, forever.

Fri, 12/13/2013 - 15:13 | 4244164 IndicaTive
IndicaTive's picture

There's always Bitcoin.


Fri, 12/13/2013 - 15:16 | 4244169 hedgeless_horseman
hedgeless_horseman's picture



The Twelve Steps

  1. We came to understand that our government is powerless over its spending - that our nation's debt had become unmanageable.
  2. We came to believe that a power greater than our fiat currency could restore us to sanity.
  3. We made a decision to turn our savings and our investments over to
    the care of gold, as we understand gold to be a physical asset - not a
    paper promise.
  4. We made a searching and fearless inventory of our wealth.
  5. We converted to gold, to Krugerrands, and to Maple Leafs, the fiat
    paper assets of our wealth, thus eliminating our counterparties.
  6. We were entirely ready to have gold remove all risk of default.
  7. We humbly asked the coin dealer to reduce our exposure to The Inflation Tax.
  8. We made a list of those politicians that expose us to The Inflation Tax, and became willing to work against them all.
  9. We gave direct support to Libertarians whenever possible, except
    when no Libertarian is on the ballot, and then we voted against the
  10. We continued to create wealth through our own industry, and then we converted it to gold, and promptly buried it.
  11. We sought through silver coins to increase our contact with precious
    metal, as we understand silver to be a physical asset - not a paper
    promise, paying for as many day-to-day transactions with silver as
    possible, using our credit card (not debit) for what was not, and paying
    off the entire balance each month.
  12. We, having had a fiscal awakening as the result of these steps,
    tried to carry this message to others, and to practice these principles
    in all our affairs.

Fri, 12/13/2013 - 15:25 | 4244208 Kirk2NCC1701
Kirk2NCC1701's picture

In your original post of 1/8/12, someone commented that the billionaire Koch Bros co-opted the Libertarian movement.  Is this (still) the case?  If so, "toward what end" is a fair Q. 

My guess is that, aside for their own (financial) benefit of lower taxes and less IRS inquiry, that the official (big-"L") Libertarian movement becomes part of the "Controlled Opposition".  No?

Fri, 12/13/2013 - 15:29 | 4244225 JailBank
JailBank's picture

Yeah I am sure that with the current tyrant in chief running the show the Kochs are not getting any treatment from the IRS. Are you kidding me?

Fri, 12/13/2013 - 17:27 | 4244665 zaphod
zaphod's picture

You forgot:

8 - Tyrannical Leader. The People and organizations who's livelihood depend on the government, comprise a majority who vote for a US leader similar to Chavez, Stalin or Hitler. Government eliminates all remaining opposition who at that point are deemed lawless criminals.

IMHO #8 is more likely than anything else.

Fri, 12/13/2013 - 20:51 | 4245335 layman_please
layman_please's picture

and somehow they always find an excuse to start a war (no 9).

Fri, 12/13/2013 - 15:38 | 4244249 fonestar
fonestar's picture

The problem isn't that these systems are paper (they're digital not paper anyway).  The problem is that they are run by humans.

Fri, 12/13/2013 - 15:43 | 4244258 the grateful un...
the grateful unemployed's picture

if only there were run by humans we could something about it

Sat, 12/14/2013 - 07:34 | 4246177 MisterMousePotato
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I once read a compelling, arguably dispositive, argument about how fractional reserve banking is a good thing. The example used to illustrate the point the author was making was an individual who brings $100,000 to another planet and deposits it in a bank there. (One without any other depositors, FWIW.)

Been a while, but I remain convinced that the problem is not 'the system' per se, but rather that greedy and incompetent sociopaths always fuck it up for their own private profit at the expense of everyone else.

Fri, 12/13/2013 - 17:11 | 4244598 Stuck on Zero
Stuck on Zero's picture

Has anyone ever seen an honest government create inflation?


Fri, 12/13/2013 - 15:52 | 4244278 sixsigma cygnus...
sixsigma cygnusatratus's picture

"We made a list of those politicians that expose us to The Inflation Tax, and became willing to work against them all."

When the red and blue team workers come by during election season, I usually tell them " I don't vote anymore.  It just encourages them."  You should see the looks I get.  Priceless!

Fri, 12/13/2013 - 16:12 | 4244323 Gold Eyed Cat
Gold Eyed Cat's picture

<--  drop 20k on the house and get the balance under 25

<--  wait a few months and buy 20k in PMs when the price is sweet


I know, I know.  Posing hypothetical questions, and asking for opinions on a message board are both signs of stupidity!  I just can't resist.   

Fri, 12/13/2013 - 16:29 | 4244349 falak pema
falak pema's picture

Dictatus Papae had 27 steps, Hitchock's film had 39 and Herman G Kahn's diatribe on cold war had are a TRUE economist!  

Its not the number of steps, like Martin Luther and his 95 edits, its a question of mission statement : What is the agenda, is it MEans or an END? 

The libertarian creed is a leopard which wants to change its SPOTS!

Not its true creed. TRy chewing on that. What is libertarianism in the US political tradition?

Is it evangelical? Is it anarchist? Is it small government and modest...If so, how does it prevent a nation becoming a Genoa, small  city state, in times of invading Empires obliged to SELL its soul in great game plays of others? 

The true historical thread, the fight between top down History and bottom up Counter History is a bitch! 

Fri, 12/13/2013 - 15:21 | 4244194 wee-weed up
wee-weed up's picture



Any of the seven options, or combinations of two or more options, may lie ahead.

Are you kidding me... How about ALL of the above!

Fri, 12/13/2013 - 15:45 | 4244266 Honey Badger
Honey Badger's picture

"Pay off the debt"

ha ha, ho, ho, ha ha, LMFAO!!

Sat, 12/14/2013 - 07:38 | 4246179 MisterMousePotato
MisterMousePotato's picture

Good point. I hit him with a happy uptwinkle before giving it the thought you did.

Sat, 12/14/2013 - 02:55 | 4246034 michael_engineer
michael_engineer's picture

No mention of the Executive Order combining with any of them either.

Fri, 12/13/2013 - 15:50 | 4244276 just-my-opinion
just-my-opinion's picture

I love that comment

I gotta big free-way and a big can

Did I tell you...I was a soccer player

Fri, 12/13/2013 - 15:10 | 4244150 JailBank
JailBank's picture

I am very afraid of the default of entitlements. Can you imagine what would happen when the ghettos, barrios, and trailer parks start to empty? The folks are going to go looking for a scapegoat. I only hope they by pass my middle class neighborhood and head straight to for the rich folks.

Fri, 12/13/2013 - 15:17 | 4244183 CrimsonAvenger
CrimsonAvenger's picture

Yeah, we joke a lot here, but there is some serious shit about to come down. I'm afraid as well.

Fri, 12/13/2013 - 15:26 | 4244206 JailBank
JailBank's picture

I tell the wife all the time, when the freebies get cut off people collecting them are not just going to sit back and take it. They are going to get out of the house and go take what they want. The cops won't be there to stop the mob, becuase they will be at home protecting their families.

Fri, 12/13/2013 - 18:41 | 4244946 css1971
css1971's picture

You should think of police as janitors. They exist as a profession to clean up after a mess.

Fri, 12/13/2013 - 15:26 | 4244205 Uber Vandal
Uber Vandal's picture

Ever think you might be "rich folks" to people with less than you have?

Ever think that the layout of some cities is not by accident but design for when such a day comes, and your neighborhood may be a buffer zone?




Fri, 12/13/2013 - 15:28 | 4244214 JailBank
JailBank's picture

I have thought about that, and that is why I have a plan to get the hell out and the supplies to do it. I live less than 2 miles from the end of the city limits on the south side of my city. The rich live in the middle and out west.

Fri, 12/13/2013 - 15:30 | 4244220 JailBank
JailBank's picture

The poorer folks live in up north and and east.

Fri, 12/13/2013 - 17:34 | 4244707 Calmyourself
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I would keep this in mind.  If your bug out includes driving through the spread out neighborhoods on 5-10 acre lots 15-30 miles outside of city limits they may actively funnel you right back to the interstates.  Sometime disasters cause lots of physical mayhem that might block roads.  Bug out plans that include all those back roads like the "experts" advise may not be that convenient when the time comes...  Now you know.

Fri, 12/13/2013 - 18:12 | 4244845 El Vaquero
El Vaquero's picture

I have a jeep and know the rickety little dirt roads very, very well.  If I need to get the fuck outta dodge, I'm not going to take the routes that everybody else does.  I figure 10mph on dirt is better than stopped in a miles long traffic jam. 

Fri, 12/13/2013 - 15:11 | 4244155 Moe Hamhead
Moe Hamhead's picture

It's all going to burn !

Fri, 12/13/2013 - 15:11 | 4244157 howenlink
howenlink's picture

I think more accurately it is the "fiat money" system that has failed.  Don't let them trick you into accepting digital fiat.

Fri, 12/13/2013 - 15:18 | 4244180 oddjob
oddjob's picture

Convenience junkies will lap that shit up.

Fri, 12/13/2013 - 15:25 | 4244184 hedgeless_horseman
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How would youlike to pay for your iPad?  We accept iDebit, iCredit, iCard, and iMoney.  If you wish, we can provide you with an instant iLoan, because we already know your iScore.

Fri, 12/13/2013 - 15:29 | 4244226 oddjob
oddjob's picture

I'm going to hold out getting any icrap until they pay me to use it.

Fri, 12/13/2013 - 22:35 | 4245587 Lost Word
Lost Word's picture

Similar to the Walmart Bank.

Fri, 12/13/2013 - 15:17 | 4244158 Kirk2NCC1701
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Philipp Bagus, are you one of the Baguses of the Shire?  You must know Frodo.  ;-)

Fed Gollum:  We hates the Baguses!  We hates them!  Their sword of Truth... it burns us!

Fri, 12/13/2013 - 15:15 | 4244161 Stackers
Stackers's picture

Solution #1 is only choice they have

Solution #2 through #7 are all HUGELY deflationary and collapse the money supply which equals death to a fractional reserve debt/credit/money system

Fri, 12/13/2013 - 15:24 | 4244198 NotApplicable
NotApplicable's picture

While the only challenge is to "manage expectations" in order to stave off the loss of confidence known as hyperinflation.

Fri, 12/13/2013 - 15:15 | 4244165 dbTX
dbTX's picture

We pring so we can buy plastic trinkets for China, so they can lend the paper back to us so we can pay them interest on the paper junk. What a great plan, nuke the fed!

Fri, 12/13/2013 - 15:18 | 4244175 dizzyfingers
dizzyfingers's picture

Behead the bankers, along with the lawyers... Where are those guillotines?

Fri, 12/13/2013 - 15:56 | 4244300 Pseudo Anonym
Pseudo Anonym's picture

the guillotines are behind the 2 billion hollow point bullets the bankers bought recently to keep you away from the guillotines

Fri, 12/13/2013 - 15:21 | 4244177 Grande Tetons
Grande Tetons's picture

It should end something like this,

After that we can all relax and have some nice grilled chicken. 

Fri, 12/13/2013 - 15:18 | 4244186 rosiescenario
rosiescenario's picture

If one looks at the current value of $1 and at its value 40 years ago, it is pretty clear that inflation is the MO.....why would this possibly change?

Fri, 12/13/2013 - 15:20 | 4244187 apberusdisvet
apberusdisvet's picture

And the end of the planet end game that is the uncontrollable radiation from Fukushima fits where in all these scenarios?

Fri, 12/13/2013 - 15:47 | 4244265 TwoCats
TwoCats's picture

That ends with me going long lead futures.

Come to think of it, lead is a good choice either way.

Fri, 12/13/2013 - 22:38 | 4245600 Lost Word
Lost Word's picture

EPA recently shut down the only lead ore smelter in the US.

Soon only the Government will be allowed to own bullets.

Fri, 12/13/2013 - 15:19 | 4244189 docmac324
docmac324's picture

I can start to explain what would happen if my military retirement checks stopped (22 yrs).  A few buddies and myself may start a ruckus.

Fri, 12/13/2013 - 15:31 | 4244234 nobodyimportant
nobodyimportant's picture

Anyone who served in the banker wars for 22 years without wising up does not deserve a pension,

Fri, 12/13/2013 - 15:36 | 4244241 IcarusOnFire
IcarusOnFire's picture

Hey Doc wake up.  It's already started.  The CAmel's nose is in the tent.

As part of the budget deal agreed upon yesterday projected Military Retirement paychecks will be cut by 1% a year.  The deal falls apart without this savings.  Let's see how many start a ruckus?

This one percent cut EVERY YEAR to COLA applies to all retirees under the age of 62.  That's a 20% cut to the average retiree paycheck when you hit social security retirement age.  Next step, to reduce benefits if you are double dipping and receiving social security.

"First they came for the Communists, I did nothing because I wasn't a communist.

They came for the trade unionists, and I did nothing because I wasn't a trade unionist.

They came for the gypsies, and I did nothing because I wasn't a gypsy.

They came for the catholics and I did nothing because I wasn't a Catholic.

Then they came for me, and there was no one left to fight for me."

Martin Niemoller


Fri, 12/13/2013 - 16:48 | 4244477 roadhazard
roadhazard's picture

I will cheer when they come for the double and triple dippers.

Fri, 12/13/2013 - 18:22 | 4244801 Pegasus Muse
Pegasus Muse's picture

House Trims Pay Raises for Troops, Retirees

Dec 13, 2013


Military retirees between the ages of 40 and 62 would receive an annual cost-of-living increase to their retirement benefits at 1 percent less than the rise in inflation. The reduction would be phased in over three years and take full effect in 2016.


"This was a backroom deal that was made by a committee that doesn't have jurisdiction over armed services," he said. "It not only caught us by surprise, I think it caught members of Congress by surprise, especially members of the armed services committees."


Retirees would see a roughly 10 percent decrease in retirement pay by age 61 -- and the cumulative effect of the cost-of-living adjustment would decline even more over time, according to Kevin Brancato, a defense analyst at Bloomberg Government in Washington, D.C. "You're talking about a small decrease in the total package for a retiree's lifetime," he said in a telephone interview. "It's between four and five percent." 


There is significant opposition to House's COLA Cut provision in the Senate.  Wouldn't be surprised to see Military Retiree COLAs reinstated in full before it is all said and done: 


Sat, 12/14/2013 - 03:30 | 4246065 Redhotfill
Redhotfill's picture

@ docmac324  


  Ask the BONUS ARMY how that worked out for them



Fri, 12/13/2013 - 15:27 | 4244210 IridiumRebel
IridiumRebel's picture

I'm sure digital money will save us.

Fri, 12/13/2013 - 15:26 | 4244211 Sleepless Knight
Sleepless Knight's picture

Now matter what - its a financial circle jerk and your the hub. good luck.

Fri, 12/13/2013 - 15:30 | 4244215 Steve in Greensboro
Steve in Greensboro's picture

For what it's worth, I vote for Option 6: Currency Reform (resulting in a gold-backed currency) combined with Option 3 Debt Repudiation and Option 2 Entitlement Default.  The result is to reduce the power of the U.S. Federal government (taking away its power to print money) along with an impairment of the investing public's faith in the Government's trustworthiness (if that will still be needed after Obamacare). 

Whatever happens, those of us with assets need to hide them from the Government so Option 4 Financial Repression, Option 5 Payoff Debt and Option 7 Bail-in are not feasible (or don't create enough value to prevent a total Government collapse).

Fri, 12/13/2013 - 16:55 | 4244488 withglee
withglee's picture

Where are you going to get enough gold to back the currency. There's only one ounce per person on Earth. An ounce is worth about $1300. So at $1300 per person we're talking  petty cash! And it takes a little less than an ounce to bring a new ounce into existence so you can not make your proposal work by just arbitrarily saying an ounce is worth some several orders of magnitude more.

Fri, 12/13/2013 - 17:36 | 4244717 Calmyourself
Calmyourself's picture

1 oz = $130,000 FIFU YW

Fri, 12/13/2013 - 17:45 | 4244743 withglee
withglee's picture

1oz ~= 1oz new production ... currently valued at $1,300. If you say it's valued at $130,000, then an oz of new production costs $130,000 rather than $1,300. Do you really not get the concept???

Fri, 12/13/2013 - 18:56 | 4244998 akak
akak's picture

Withglee, you may be interested to know that throughout the last four or five centuries (at least) there has been at any given time only roughly one ounce of gold per person as well --- with gold concurrently having been the basis of most monetary systems.

Sat, 12/14/2013 - 12:26 | 4246433 withglee
withglee's picture

That may be ... but it's irrelevant. If you're going to require that money be "backed by gold" and you're going to allow all trade to be conducted with money ... and all savings to be held as money, that means the value of all gold has to equal the value of all trade and savings in money at all times. As we know, that right now gold is valued at about $1,300. And it is $1,300 plus and minus some amount (1/2 to 2 times say) because that is what it costs to bring new gold on line. We know if this number gets much smaller people will quit mining. And we know if it gets much larger, more people will go into mining. Production cost is what sets the value of gold, and that is about 1oz of cost to produce 1oz of new gold. It's not rocket science.

Gold has been used as a basis of comparing value for a very along time ... as have other things. It has never been used as a backing of all trade. There has never been enough of it to do that ... not ever. Further, it has a tendency to fall into the hands of a very small segment of any society. There is, of course, a segment of society that want's that to forever be the case. It gives them power they otherwise wouldn't have.

Fri, 12/13/2013 - 19:02 | 4245017 Richard Head
Richard Head's picture

You're pretty dense.  Did you upvote yourself?

Fri, 12/13/2013 - 19:24 | 4245085 Calmyourself
Calmyourself's picture

Asking you to think expansively is probably cruel, perhaps another few years on Yahoo finance then come back to the hedge..

Fri, 12/13/2013 - 15:34 | 4244217 Kirk2NCC1701
Kirk2NCC1701's picture

My question, and that of many others (I gather), is...

"What role, if any, does Gold and Cyber-Currency (CC) play in this 'Reset'?"

Inquiring minds would like to know.  Would like to... [cough, cough] Front-Run.  It makes the whole thing about betting on the various horses so much 'easier' (i.e. profitable), if we know the order of Win, Place and Show.  ;-)

Fri, 12/13/2013 - 15:35 | 4244242 Grande Tetons
Grande Tetons's picture

Kinda like buying two insurance policies on the same house.  I like the allure of Bitcoin but favor the conventionality and acceptance of PMs. If the shit goes down I doubt i will be too worried about obtaining goods and services much further than a 20 minute walk. 

Walking with PMs! Yeah...kinda fucked there. 


Fri, 12/13/2013 - 15:55 | 4244298 IridiumRebel
IridiumRebel's picture

I'd be totally down with BTC, but I fear Banksters and hackers grubby fucking fingers. PMs seem safe, but confiscation does not seem out of the question. I have one of the two insurance policies. Who the hell knows. The want us all as slaves, barefoot and broken.

Fri, 12/13/2013 - 15:28 | 4244218 dobermangang
dobermangang's picture

#5 Pay Off Debt.     Hahahahahahahaha!  Too funny!

Fri, 12/13/2013 - 15:48 | 4244273 Honey Badger
Honey Badger's picture

Didn't see your post before I posted mine above. 

Fri, 12/13/2013 - 15:55 | 4244297 falak pema
falak pema's picture

71% bail-ins according to the Capitalist Shaman!

You are hearing it from the Horse's mouth!

To save capitalism we need an extreme BAIL IN ! Scraping in the ill earned wealth of Reaganista epileptic capitalist Fit! 

COugh up your ill earned wealth before Tora, TORA, TORA  Armageddon. 

Fri, 12/13/2013 - 15:30 | 4244230 Poundsand
Poundsand's picture

I am going for the final nail in the coffin for the magna carta.  Could this entire process be the undoing of all the freedoms gained since 1215?  Are we once again looking at the divine right of Kings?  Where the choosen few own all the wealth, and simply allow the rest of us to work as their fuedal slaves?

The fed has been purchasing about 45 billion in MBS correct?  That's is the equivelant of buying 225,000 homes valued at $200,000 per month since Sept of 2012.  That is 3,600,000 homes assuming they are all valued at $200,000.00  Go down to $150,000 and that number explodes almost 5 million homes.  With pieces of paper, which they are devaluing every day, they are buying up the wealth of Americans.  And once they have whatever tipping point they need, don't think for a second that our supreme leader won't pull the trigger and take possession "for the good of the country" since he can apparently make law by verbal declaration ala health care.

Fri, 12/13/2013 - 15:39 | 4244244 Kirk2NCC1701
Kirk2NCC1701's picture

In case you missed my earlier post of this (the last 2 times)...

If you do a keyword search with your fave search engine, you'll get tons of results.  e.g.

Look for ZH to wake up to this soon.  I hope.

Fri, 12/13/2013 - 16:03 | 4244322 Poundsand
Poundsand's picture

It's not whether we wake up or not.  The real question is whether we will have to courage to act. 

And while I hope that I have such courage, the day appears to be coming quickly when that will be tested.  Long precious metals of all types.

Fri, 12/13/2013 - 15:31 | 4244231 Drifter
Drifter's picture

Rates won't go up and no checks will stop.  Currency will be "printed" to fund everything till the currency collapses in value from loss of confidence, and they'll keep right on printing and funding everything with dollars now worthless.

No one group will suffer.  Everybody will suffer from loss of currency value, from the tip top .01% down to the bottom of the 99%.  Nobody escapes the pain unless you're completely away from US dollars.

Fri, 12/13/2013 - 15:40 | 4244255 Vooter
Vooter's picture

Whichever option results in bankers and government officials lying motionless in coffins works for me...

Fri, 12/13/2013 - 15:43 | 4244257 ebworthen
ebworthen's picture

#5, "Pay off debt" = ROFLMAO!

The debt is un-payable.

They are already inflating.  Financial repression will come first, then bail-in's, then currency reform, then repudiate debt, then default on entitlements.

Fri, 12/13/2013 - 15:54 | 4244294 TwoCats
TwoCats's picture

Almost agree with you.  I think repression is already in full swing, the remaining order:

Bail-ins (401k's and bank accounts separately), entitlements, debt default, currency reform (at that point too late to be meaningful).

Additionally, I expect some significant tax hikes first, and gold confiscation round 2 at some point after bail-ins.

We will never seriously try #5, even if it were possible any more.

Fri, 12/13/2013 - 15:45 | 4244263 Bryan
Bryan's picture

All they did in March '09 was buy a few years to think over how they're going to extract the wealth they need out of the American public.  We're getting to crunch time now, and the public will soon be figuring out that they were the target, not the recipient, of the government plan all along.

Fri, 12/13/2013 - 15:57 | 4244299 TwoCats
TwoCats's picture

how they're going to extract all private wealth out of the American public

Fixed it for you.

Fri, 12/13/2013 - 19:09 | 4245041 Drifter
Drifter's picture

"how they're going to extract the wealth they need out of the American public."

They've been doing it 5 yrs now.  It's called "QE".

Sat, 12/14/2013 - 00:17 | 4245819 starfcker
starfcker's picture

i'm not so sure about some of these theories. the problem as i see it, is as old as mankind. meglamaniacs want to rule the world, and willing to bet the wealth of the kingdom in their quest. all of the authur's 'solutions' are predicated on keeping the system intact. the problem with globalization is we are just creating inner cities masquerading as countries. keep skimming wealth from us and pumping it in, the illusion of function is acheived. cut the flow, trade deficit, remittences, narco dollars, foreign aid, bailouts, whatever, and the wheels fall off this whole adventure. tom freidman once said this would take a hundred years. i'm already sick of the whole thing.

Fri, 12/13/2013 - 15:49 | 4244277 falak pema
falak pema's picture

Who can believe a guy from Mises?

Its like a guy from the FED!

Two extremes of the same disease! 

Fri, 12/13/2013 - 15:58 | 4244302 SmittyinLA
SmittyinLA's picture

the Romans kept the debasement going for over 900 years 

Fri, 12/13/2013 - 18:27 | 4244894 css1971
css1971's picture

The UK has been at it for 300 with the £.


However, we now have computers and automation so we can do it a lot faster and cheaper.

Fri, 12/13/2013 - 16:04 | 4244326 the grateful un...
the grateful unemployed's picture

the over production of electronic currency does not create inflation it causes phantom collateral, savings and wealth which is not redeemable. phantom collateral doesn't so much steal from real collateral as it crowds it out, much as government spending crowds out private spending. since corporations grew in size and efficiency to compete with government there is barely any difference between the two. since government owns no collateral, its a logical choice for them to manufacture wealth in order to compete. assuming its a desirable situation, holding government and corporations in a separate but equal alliance, government should stop giving phantom collateral to the banks, or nationalize the banking system and run it themselves. this would result in running government like a business with services rendered and fees or taxes collected for those services, and a balance sheet, and the ability to manufacture collateral (sell bonds) in order to finance new spending. if the government were a business printing collateral for their own financial needs, (and not trying to juice the business economy) there would be no phantom collateral. the problem then is really the parasites in business who live off the welfare the government hands out to them, when the real business is creating services for the rest of us, and collecting fees. paper currency is nearly as useful as gold in almost every situation, either one function as real collateral. which is why the money velocity is going negative soon, and the money will begin to disappear just as it did in the 30s. we are right back to square one, government is a corporate enterprise, and should be run like one. and we the people are the users, should demand this. quit giving our profits to banksters

Fri, 12/13/2013 - 16:16 | 4244354 Kirk2NCC1701
Kirk2NCC1701's picture

The Elite Robber Barons (0.01-1%) in thinking about the Rest: "How do I hate thee?  How do I rob thee? Let me count the ways."

A:  At least 7 ways.  See 1-7 above.  If we don't include things like: Taxes, Licenses, Permits, Fees, Fines... Peasant/Slave Wages, vanishing health care...

Fri, 12/13/2013 - 16:22 | 4244369 lasvegaspersona
lasvegaspersona's picture

and the winner is #8 freegold

Fri, 12/13/2013 - 16:23 | 4244375 agent default
agent default's picture

None of the options in the article take the side effects into account, which will inevitably lead to collapse of the private sector and ultimately revolution. 

When talking about defaulting on debt, the OTC derivative market should be taken into account.  The implosion will be multiples of the sovereign debt. 

As far as wealth one off(yeah right) expropriation or excessive taxation is concerned.  This is guaranteed to instill a Soviet citizen mentality to the most active sectors of the economy.  If you can't keep it, if it is not really yours, why bother to earn in in the first place?  Businesses will close or contract, investment will drop and unemployment will skyrocket within months if this is even attempted.

Fri, 12/13/2013 - 16:59 | 4244389 RaceToTheBottom
RaceToTheBottom's picture

I think that there is another option.  It might have been hinted at but wasn't explicitly mentioned.  Selling US assets.  We may not want to sell nuclear submarines as they will be used against us in the future by the likely buyers of China or Russia.

Therefore I think that the likely sales will be land.  I think that we will sell parts of Alaska and the US to Canada and possibly Russia, but the Russia sales will be small, basically the Aleutian Islands...  The US Sales will be parts of Wyoming, Montana, the tip of Idaho and possibly some bits of Dakodas. 

Now even sales like this are not enough to handle the sums of debt we are talking here.  But it could be a part of the solution.  When faced with revolution, it might look fairly palatable to a conman politician and his WS master.


If you are ever going to do so, now would be the time to visit Yellowstone and Glacier National Parks.  Do it now while you don't need a passport.

Fri, 12/13/2013 - 16:31 | 4244411 thewayitis
thewayitis's picture



  And the winner is:   #8  Keep kickin the friggin can down the road. Forgot that one .......



Fri, 12/13/2013 - 16:46 | 4244455 withglee
withglee's picture

Read this line and you need read no further:

"The temptation for the monopolist money producer to increase the money supply is almost irresistible."

The writer is clueless about what money is. Monopolists don't "produce" money increasing the supply. Traders making trading promises produce money. And by definition of trade: supply is exactly equal to demand for the trading promise created.

The cause of failure of money (all of which is fiat) is in the management. You can't inject money into an economy. Traders create the money that goes into the economy. And when they deliver on their trading promises, the money they created is extinguished. And should they default, the default is recovered through interest collections. The governing relation is INFLATION = DEFAULT - INTEREST. The job is to manage so that INFLATION is zero at all times everywhere.

So where is the problem (i.e. why isn't inflation zero and why do we have the so-called business cycle)? Because we have deadbeat traders(defaulters) and we don't recover their defaults through interest collections. And you don't need to look far for the culprits. They are governments. They never deliver on their trading promises (they just roll them over and that is default) and they pay the lowest interest of all traders. That's actuarialy unsound. It's like an insurance company treating repeat crashers better than safe drivers.

Discipline governments and the marketplace's grief goes away.

Fri, 12/13/2013 - 17:27 | 4244654 BigJim
BigJim's picture

All the 'money' in our economy stems from commercial bank lending, or the issuance of financial instruments that trade as money through the collateralisation of (real or imagined) assets.

And when they deliver on their trading promises, the money they created is extinguished.

I see. So there's no such thing as capital, then? In a debt-based system, paying off the debt extinguishes money... the amount of money in the system has nothing to do with traders completing trades.

And should they default, the default is recovered through interest collections.

What? By whom? No, the 'interest' charged partly reflects the risk debtor will default. How are you going to collect interest after the debtor defaults?

Please peddle your gibberish elsewhere.

Sat, 12/14/2013 - 13:02 | 4246412 withglee
withglee's picture

Capital is "not" money. That's the fallacy. We live in a society that requires someone with capital to back trading promises. This gives people with capital power they otherwise would not have. Why, when I buy a house by promising 360 monthly payments in the future in exchange for a house today ... why must I find a capitalist to "back" that trading promise? As we all know, the result of this policy is that we buy our house twice. We pay the builder once. And we pay the capitalist once. And we do this while the capitalist only puts up 1/10th of what he claims to be putting up to "back our loan".

If,in fact, capital is backing trading promises, why is there such a thing as leverage. Why can some capitalists multiply the effectiveness of their capital by some arbitrary factor (typically 10 to 20 times) as they do this so-called backing of new trading promises (which you like to call collateral). Where is the collateral for the money the government borrows that exceeds the taxes and fees they collect? Answer ... there is none. They call it "full faith and credit".

The problem is not with a "debt based system". The problem is with proper and fair management of the Medium of Exchange (MOE). The MOE stands for "a promise to complete a trade" and always has. This is obvious in examining the 3 steps of trade: (1) Negotiation; (2) Promise to trade; (3) Delivery on promise. Money allows (2) and (3) to happen over time. But the money itself is an item of barter at this point. People exchange it because its value is "guaranteed" and that makes it work. When the guarantee becomes an obvious hoax, money ceases to work. That's where we are now. At that point, money no longer works as an item of barter.

Thinking of any "money" now flowing in the system: It got there by someone asking for it and promising to return it when they're done with it. It's called a loan. The system (the marketplace) breaks down when some traders don't have to return the money they borrow and that money is not reclaimed. It results in inflation. And governments "never" return the money they borrow.

And regarding "how is interest collected after the debtor defaults?" In a properly managed MOE it is done actuarially, just as in a properly managed insurance risk, premiums are set by actuarially studying risk. As with insurance, if you underestimate defaults (claims) and don't compensate with enough interest collections (premium charged), you "bump" the interest collections (premiums) on later trading promises (new risk backed) to bring things back into balance (defaults = interest; claims = premiums). On a continuous basis, this feedback control systems can deliver a perfectly flat response.

This isn't gibberish. It's plain common sense.

Fri, 12/13/2013 - 16:54 | 4244495 DOGGONE
DOGGONE's picture

Outstanding article! Included are notations of some choices being less visible, less apparent, etc. I favor plain, crystal clear truth! We got to the present situation (in the USA, at least) by keeping our track records seldom seen, see here:
Nonsense kept unseen allowed continuing nonsense! Let's STOP hiding our track records, let's stand on the truth and plan for the future.

Fri, 12/13/2013 - 16:55 | 4244514 Fix It Again Timmy
Fix It Again Timmy's picture

Paper money works until it stops, gold - working for 5,000 years and it's still not tired.....

Fri, 12/13/2013 - 17:08 | 4244580 Stuck on Zero
Stuck on Zero's picture

For this statement: "A better strategy, given this scenario, is to go into debt to purchase assets and pay back the debts later with a devalued currency..."

I'd like to add: "... or default because you lost your job."



Fri, 12/13/2013 - 17:40 | 4244715 Hongcha
Hongcha's picture

Re BTC; I have no beef against BTC but has anyone been to a country where the Govt. simply shut down the www?

Burma (Myanmar) 2005; the Tatmadaw threw the master switch to OFF, permitting only a few govt-owned sites through.

You could not get any of the Yanqui sites, and that includes GOOG, YHOO, MSN, etc.  Nothing.

They can throw the breaker and keep an internal 'net for Govt. use ... then turn it back on when it suits them.

They can also tag the BTC and like sites for a roach motel-style mop-up of users of the Verboten sites.

They can also clean your clock because they have complete access to all your accounts.

It would probably take a War to make a good enough excuse to do all this. 

Monstrously, the logic of ginning up a war to accomplish all this makes sense, in an infernal way I do not even wish to contemplate ...

Fri, 12/13/2013 - 17:59 | 4244786 Peter Pan
Peter Pan's picture

Another option is to tax government.
The way to do this is to let the number of government employees grow by say 10% and at the same time drop the wage kevels of all overpaid government employees by 10%.

Service and productivity levels should increase because the government workers are not only more in number but also would not want a further increase of workers with another drop in wages.

This will remove quite a few people from the unemployment scrap heap and reduce unemployment benefits and food stamp usage. It would also stop the clamour to become a public servant.

They might also bring back all those soldiers who have been used as killing machines and who end up being cripples on benefits or who create widows and get them working on infrastructure projects.

Fri, 12/13/2013 - 18:07 | 4244828 Peter Pan
Peter Pan's picture

I am surprised that one of the options did not include the massive revaluation of gold as a means of removing some bad debts, recapitalizing banks etc without sticking it into depositors and shareholders.

Fri, 12/13/2013 - 21:30 | 4245432 are we there yet
are we there yet's picture

There is also the Stallin-hitler-ghengas kahn approach. Anyone who has been a freeloader more than one generation, or a criminal family more than one generation, or an IQ below that of a turtle, is turned into soylent green. Optional, any one who has been a politicain for more than 12 years, or a lawyer-lobbiest more than 12 years also becomes cat food. This idea will sound better over time.

Sat, 12/14/2013 - 22:15 | 4247432 matrix2012
matrix2012's picture

Just info ZHers, there are many astute comments on this article at the Mises link above! Should take a look there ;)


Thank you Tyler for carrying quality reading like this to ZH!

Do NOT follow this link or you will be banned from the site!