The High Price Of Delaying The Default

Tyler Durden's picture

Submitted by Thorsten Polleit via the Ludwig von Mises Institute,

Credit is a wonderful tool that can help advance the division of labor, thereby increasing productivity and prosperity. The granting of credit enables savers to spread their income over time, as they prefer. By taking out loans, investors can implement productive spending plans that they would be unable to afford using their own resources.

The economically beneficial effects of credit can only come about, however, if the underlying credit and monetary system is solidly based on free-market principles. And here is a major problem for today’s economies: the prevailing credit and monetary regime is irreconcilable with the free market system.

At present, all major currencies in the world — be it the US dollar, the euro, the Japanese yen, or the Chinese renminbi — represent government sponsored unbacked paper, or, “fiat” monies. These monies have three characteristic features. First, central banks have a monopoly on money production. Second, money is created by bank lending — or “out of thin air” — without loans being backed by real savings. And third, money that is dematerialized, can be expanded in any quantity politically desired.

A fiat money regime suffers from a number of far-reaching economic and ethical flaws. It is inflationary, it inevitably causes waves of speculation, provokes bad investments and “boom-and-bust” cycles, and generally encourages an excessive built up of debt. And fiat money unjustifiably favors the few at the expense of the many: the early receivers of the new money benefit at the expense of those receiving the new money at a later point in time (“Cantillon Effect”).

One issue deserves particular attention: the burden of debt that accumulates over time in a fiat money regime will become unsustainable. The primary reason for this is that the act of creating credit and money out of thin air, accompanied by artificially suppressed interest rates, encourages poor investments: malinvestments that do not have the earning power to service the resulting rise in debt in full.

Governments are especially guilty of accumulating an excessive debt burden, greatly helped by central banks providing an inexhaustible supply of credit at artificially low costs. Politicians finance election promises with credit, and voters acquiesce because they expect to benefit from government’s “horn of plenty.” The ruling class and the class of the ruled are quite hopeful that they can defer repayment to future generations to sort out.

However, there comes a point in time when private investors are no longer willing to refinance maturing debt, let alone finance a further rise in indebtedness of banks, corporations, and governments. In such a situation, the paper money boom is doomed to collapse: rising concern about credit defaults is a deadly enemy to the fiat money regime. And once the flow of credit dries up, the boom turns into bust. This is exactly what was about to happen in many fiat currency areas around the world in 2008.

A fiat money bust can easily develop into a full-scale depression, meaning failing banks, corporations filing for bankruptcy, and even some governments going belly up. The economy contracts sharply, causing mass unemployment. Such a development will predictably be interpreted as an ordeal — rather than an economic adjustment made inevitable by the ravages of the preceding fiat money boom.

Everyone — those of the ruling class and those of the class of the ruled — will predictably want to escape disaster. Threatened with extreme economic hardship and political desperation, their eyes will turn to the central bank which, alas, can print all the money that is politically desired to keep overstretched borrowers liquid, first and foremost banks and governments.

Running the electronic printing press will be perceived as the policy of the least evil — a reaction that could be observed many times throughout the troubled history of unbacked paper money. Since the end of 2008, many central banks have successfully kept their commercial banks afloat by providing them with new credit at virtually zero interest rates.

This policy is actually meant to make banks churn out even more credit and fiat money. More credit and money, provided at record low interest rates, is seen as a remedy of the problems caused by an expansion of credit and money, provided at low interest rates, in the first place. This is hardly a confidence-inspiring route to take.


It was Ludwig von Mises who understood that a fiat money boom will, and actually must, ultimately end in a collapse of the economic system. The only open question would be whether such an outcome will be preceded by a debasement of the currency or not:

The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances

A monetary policy dedicated to averting credit defaults by all means would speak for a fairly tough scenario going forward: depression preceded by inflation. This is a scenario quite similar to what happened, for instance, in the fiat money inflation in eighteenth-century France.

According to Andrew Dickson White, France issued paper money

seeking a remedy for a comparatively small evil in an evil infinitely more dangerous. To cure a disease temporary in its character, a corrosive poison was administered, which ate out the vitals of French prosperity.


It progressed according to a law in social physics which we may call the "law of accelerating issue and depreciation." It was comparatively easy to refrain from the first issue; it was exceedingly difficult to refrain from the second; to refrain from the third and with those following was practically impossible.


It brought ... commerce and manufactures, the mercantile interest, the agricultural interest, to ruin. It brought on these the same destruction which would come to a Hollander opening the dykes of the sea to irrigate his garden in a dry summer.


It ended in the complete financial, moral and political prostration of France — a prostration from which only a Napoleon could raise it.

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denverdolomte's picture

What about this is a "Free" market? Last I checked you owed x y and z to a number of different divisions. Along with associated fees lol. 

Manthong's picture

Maybe Hussein could secretly nationalize all the Saudi funded mosques and have Lew issue assignats against the property…

Then he could ride in on a white horse like a tall, black Napoleon and save us all.

 (..and Polleit has a number of great lectures on the Mises site)

MeMadMax's picture

These charts don't count anymore as we have QE as the bubblegum holding everything together...

End QE and it will all come to a halt. But you will also notice that they are trying to wind down QE slowly.

At some point QE will become unbearably low and they will jack it up again... 

So when does QE end?

QE ends when the economy ends...

GetZeeGold's picture




ATM's picture

QE ends when the dollar ends.

There will still be an economy but it will be far different than the mirage of an economy that we have now. It will be real, it will be small and it will be based not on promises but reality. It is the transition from mirage to reality that is going to tear everything apart, financial, political and moral.

It will be bad.


Offthebeach's picture

Barry would ride a white Unicorn, shooting Skittles out his ass.
Warm stickey Skittles, and no that won't be chocolate they're filled with.

Forward Polar Bears!

Renewable Life's picture

Credit ain't money, paper ain't money, debt ain't money............but guns, food, land, gold and silver IS honey!!!

(Your not the only one drinking on this board, baby)

G-R-U-N-T's picture

"It was Ludwig von Mises who understood that a fiat money boom will, and actually must, ultimately end in a collapse of the economic system. The only open question would be whether such an outcome will be preceded by a debasement of the currency or not:"

Once the people lose confidence in the currency all bets are off!!!

duo's picture

"the political prostration of The US — a prostration from which only an Obama could raise it."

ATM's picture

Obama ain't 'the one'. The One is laying in the weeds planning and waiting.

Obama is a token placeholder. 

Jumbotron's picture

So...what about the "Free"market, denverdolomite ?

There has never been....nor can there ever be a free market anywhere in the world as long as humans are involved in it.  Call it "innate human corruption" or " the sin nature of man" but anytime you involved humanity which from birth is enslaved by the genetic / spiritual inclination to take advantage of other human beings for their own gain....ANY system of ecnomics and / or politics will be slightly corrupted at first and that corruption will only grow in time to the inevitable collapse of that system.

Sadly, enough, you would see just as much if not more corrupting influence under a Libertarian system than you would now.  The Powers That Be throughout time have seen this.  Which is why for all of man's history the normal societal system is dicatatorship / strongman.  The people can NEVER be trusted with freedom.....even though that's what we ALL strive for in our hearts.  But once we get it....we run rampant with it thus corrupting the system with immorality, unethical behaviour, thus leading to calls for tighter controls and more regulation.  And then we are right back to the dictator / strongman once again.

Welcome to the Matrix.....of our own making.  Welcome to Prison Planet.

NoDebt's picture

Yes, yes.  Can we get on with it already?  This is like watching paint dry.

denverdolomte's picture

At least then you get fumes. With this it's well......

Carpenter1's picture

Yet to see anyone lay down a mathematical formula for at least a rough estimate of where the fault lines crack open. Surely someone is able to put something like that together, but then again, haven't seen it.

denverdolomte's picture


1. economy + 1. military = $85 billion a month. ='s We've been fucked since sometime in 1913ish. 


I'm drunk so I don't know if that computes yet or not, but seems legit. 

Slave's picture

Upvote for reading ZH drunk. Good times.

max2205's picture

What if you have no fiat money to be blown up....ah fuck it

Bonapartist's picture

What has been will be again, what has been done will be done again, nothing new under the sun. Mayer from under the big Red Shield sent his 5 sons to the 5 major capitals of 18th century Europe and the rest is well known. Napoleon dared to defy the moneychangers with his refusal to become indebted to them- for that all of Europe's armies were brought to bear against him.

Zwelgje's picture

BS. Nappy was funded by the banksters. And Russia was the secret collateral. That's way he invaded in 1812.

Bonapartist's picture

BS- the Louisiana Purchase was made to FUND his invasion of Russia so he would not go into debt.

erg's picture

We're fine. Everything is fine. *trembles*

Anybody have some smelling salts or...nitrous oxide perhaps? Really, I'll take anything you've got.

booboo's picture

I hear the rage amongst the poor white trash is sniffing their own fermented turds, blacks are down to huffing Pam cooking spray out of a paper bag, the asians still have Marlboros for sale out of the back of a cut down Clelica, italians are boilig their wine bottles to get the last bit of resin off the inside of the bottles and the bankers are snorting top of the line coke off the backs of high dollar escorts. You fit in, you get in, pick a trick.

The Final Straw's picture

FInally, my lucky break. I'm gonna start dealing this. "Yo homey, my shit is the shit." I'm gonna log my meals for different grades of jenkem. The grade A steak all the way down to pizza pockets with questionnable meat products. Listen up ZH folks, ya better make your bulk orders ASAP, before too much fiat is chasing too little product.

The Final Straw's picture

For a limited time, all bulk order include a free pack of Mentos, the best treatment for that septic aftertaste.

Bitcoins accepted.

Skateboarder's picture

Aint no mentos gonna get rid of jenkem evidence...

stacking12321's picture

slang terms include: "butthash"!


The Final Straw's picture

I sense an impending War on Human Excrement.

erg's picture

Don't forget the fresh breath of those Aqua Velva men.

RabbitChow's picture

Amyl nitrite?  great stuff!

besnook's picture

fiat money is the ultimate moral hazard. since the foundation of the monetary scheme is inherently criminal if judged by moral and ethical measures one must possess a criminal mindset to game it, to play it. it makes sense, then, that the successful banker/trader must be a sociopath bordering psychopathy just as psychological studies have revealed. therefore, it makes complete sense that the scheme will self destruct in the effort to save it since the main players are only interested in saving themselves without regard for the consequences of their blind self interest.

Ban KKiller's picture

Petrodollar to the rescue! Backed by high speed printing presses.

BRIC basket to the rescue! Ummm....Amero to the front! 

All script for the company store.


Bonapartist's picture

this "Amero" concept is quietly being introduced into the mainstream

infinity8's picture

and B-I-N-G-O was his name-O!

tony bonn's picture

as well meaning as this article is, it misses the main evil of "fiat" money, which is much a misnomer, in that its creation must be accompanied by debt....the fiat racket is the creation of money with interest paid to a very small elite group of criminal central banksters who grow fabulously wealthy off the backs of the 99%.

thus there can never be enough money to extinguish debt - it is like the failed british consols. the system is a fraud which is enslaving everyone.

22winmag's picture

Credit is a tool alright.


Somewhere between a nail gun and an anal intruder.

Kirk2NCC1701's picture

When you create so much liquidity, it spills over and needs to be mopped up with labor and assets.

Perfect mops: MIC, failed pro-US regimes, EU banks, PM manipulation, Uprisings & Revolutions, bank bailouts...

And when there is so much Fed liquidity that so many are bathing in, they are unlikely to get out of that warm bath any time soon.

starman's picture

its definitely not your grandmas capitalism anymore!

GetZeeGold's picture



She always told me.....keep this up....and you're gonna be learning Common Core.

kellycriterion's picture

You reach a point where credit isn't credit, leverage isn't leverage, it's all just confiscation. Who cares what private investors prefer when you can confiscate indirectly or directly?

The coordinated policies of western CBs and the "business models" of cartel banks are the new mercantilism. The final realization of Imperialism 2.0.

QE and ZIRP are bankrolling western governments and cartel banks and the activities they favor the most. The claims they create on resources are honored globally with a few exceptions.

satoshi123's picture

Crazy Article.

Yes, the USA died in 1913, that's when PTB decided to make the USA the world's 'reserve currency'.

Some 100 years later and 100+ million lives lost the wet-dream is real, the USA can print FIAT to infinity, without credit, ... without permission.

Any NSA fantasy can be fulfilled any toy for COP ShOP can be bought.

Science Fiction 100 years ago could not have predicted todays world where WunderKids create currency on personal computers and the USA congress no longer controls the PURSE,cuz now every law enforcement agency has access to the NSA printing press.

smacker's picture

I don't see why any of what you wrote makes a "Crazy Article".


Hint: central bank printing into oblivion - which is what you're saying - eventually has consequences. The article makes that quite clear.

satoshi123's picture

Crazy ARTICLE, because it pre-suposes that the CREDIT-DEBT illusion is still real, its not.

How many will die in the future to keep the ponzi afloat? Me Thinks Billions, now with the internet where assholes can prove to you that 2+2=10, its all quite simple to keep the PONZI to infinite, and nobody speaks-up, cuz all know they will be droned in a nano-second.

satoshi123's picture

Credit and DEBT are for little people, and little country's.

We of AIPAC and NOW are god's and we make our own currency and pull it out of are ass as needed.

Who the fuck needs DEBT or CREDIT,when you OWN the fucking money tree.


Credit/Debt are just tools to control slaves and slave states but masters,... have access to unlimited FIAT.

Look at virtual currency coming from NSA, its all a brilliant way to 'launder' virtual currency into FRN's.

headhunt's picture

gods hate chainsaws like reality

discopimp's picture

Hate to say it but hence TPTB disdain for bitcoin.  It is birthed out of work performed not debt, so if you don’t hold it, you don’t own it.  How many “bankers” could shift the burden of loss (and lack of underwriting) onto someone else, if they themselves were the only responsible party?  For that matter, who would need a banker, when bitcoin allows adults to be their own bank.