Guest Post: Irredeemable Paper Money, Feature #451

Tyler Durden's picture

Submitted and copyright by Keith Weiner

Irredeemable Paper Money, Feature #451

I am writing this, having just returned from the fourth course at the New Austrian School of Economics, in Munich.  The single biggest theme was the rate of interest and its linkage to prices.  Kondratieff, among several others, have observed that rising prices lead to rising interest rates and vice versa.  And the opposite case is also true, falling interest rates go with falling prices (all else being equal).  I plan to write a separate paper on this topic.
One of the most important ideas proposed by Professor Fekete is that a rise in the rate of interest reduces the burden of debt that has been accumulated previously.  And a fall in the rate of interest increases the burden of debt.  This is because the present value of a future payment is:

If the payment is $1000 per year, and the interest rate is 10%, then the payment at the end of the first year is worth 1000 / 1.1 = $909 today.  The payment at the end of the 30th year is worth $57.31 today (1000 / 1.1^30).

But as the rate of interest falls, the present value of all future payments rises.  If the rate of interest fell to zero, then the present value of each future payment would be the nominal value of the payment (1000/1^30 = 1000).  The 30th year payment would be worth $1000 today.

Unlike under a gold standard, in paper money the rate of interest is subject to massive volatility.  Sometimes, the government has its way, fueling rising prices and interest rates.  Other times bond speculators front-run the central bank’s unlimited appetite for purchasing government bonds and the rate of interest falls.  We are now in year 31 (so far) of this latter phase.

As the total accumulated debt increases (feature #450 of irredeemable money is that total debt cannot go down), the effect of a change in the rate of interest becomes larger and larger.  Today, even very small fluctuations have a disproportionate impact on the burden of debt incurred at every level, from consumer to business to corporate to government at every level.  To say that this is destructive is a great understatement.

This, rather than the quantity of money, is what people and especially economists should be focused on.

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CrimsonAvenger's picture

I am clearly not smart enough to be here. All I know is paper=bad, metal=good.

Troll Magnet's picture

obviously, you've never tried Phillies Blunt Wraps.  they are some FINE papers.

Ahmeexnal's picture

ever tried a sterling silver bong?

BKbroiler's picture

scared to turn blue.  smurf chokes sound cool though.

Pladizow's picture

"Paper is poverty, it is the ghost of money and not money itself." - Thomas Jefferson

DoChenRollingBearing's picture

"Gold: Basic Facts for the 99%"

I put up an article with basic information like physical properties, gold holdings, weights & measures pertaining to gold, specifications of popular bullion coins, fake gold and more.

Gold info for us in the 99%!

AldousHuxley's picture

You forgot to add American middle class family right in between the gears....

ATM's picture

Speaking of the British at the time:


"With only twenty millions of coin, and three or four hundred millions of circulating paper, public and private, nothing is necessary but a general panic, produced either by failures, invasion, or any other cause, and the whole visionary fabric vanishes into air, and shows that paper is poverty, that it is only the ghost of money, and not money itself. One hundred years ago, they had twenty odd millions of coin. Since that they have brought in from Holland by borrowing forty millions more, yet they have but twenty millions left, and they talk of being rich, and of having the balance of trade in their favor."  - Jefferson

Cadavre's picture

In times such as these, wise men might be best advised to embrace precepts of the Fabulous Furry Freak Brothers ...

        'Dope will get you thru times of no money better than money will get you thru times of no dope'

CatoTheElder's picture

The maxim you cite is properly attributed to Fat Freddy Freak in particular.

Tijuana Donkey Show's picture

Amen Jesus, Amen! The lord has looked down on this man, and had him preach the gospel truth to the converted, as it is easier for a stoned camel to pass throught the eye of a needle, than a sober man to understand the false profit Bernake. Or in the immortal words of Master P- "Fuck the bitchez, gimme da money and da weed." I found that in my research, the Fed is a bunch of bitchez, proving my postulate. Amen.



IAmNotMark's picture

Oh, that's just some dead white guy talking.  What does he know?

I'm putting my faith in Obama!


Nukular Freedum's picture

Author makes a false distinction between the quantity of money issue and the rate of interest issue. They are really different aspects of the same problem and the debt is a by product of it. Also the author fails to specify which version of the gold standard he is referring to. In my view the problems raised in this article are intrinsically insoluble for the reasons laid out in the following brief but pungent post:

Poor Grogman's picture

The answer is to not have a Standard. Just allow the market to decide what where and when it uses,( without coercion)
the answers the market chooses may vary over time and distance and would likely not be favourable to government or the parasite class.

But isn't that the point?

blu's picture

There is nothing the least wrong with turning blue. It's a nice color.

And if you refer to me as a smurf one more time I will totally set you on fire. Fact.

-- the Archangel Fortran

MayIMommaDogFace2theBananaPatch's picture

I will totally set you on fire. Fact.

Sounding a little bit like Gargamel there...

Tijuana Donkey Show's picture

Didn't Gargamel want the smurfs to turn them into gold? Maybe Gargamel was modeled off of Ron Paul, and the Smurfs work for the Fed?

blu's picture

Gargamel ... oh I get it. Ha. Ha. So what part of setting you on fire did not register with you jokers?

-- Love, Fortran 

easypoints's picture

So when the burden of the debt is still, well, overburdening, with ZIRP-infinity firmly in place, then the emperor's have no clothes? Sounds about right.

twh99's picture

That may be too simplistic.  It should rather be, is the paper redeemable in metal?  If not then watch your wallet!

franzpick's picture

Here's an interesting development in a country where inflation is running 18% and sellers have been accepting payment in gold in place of the local currency, and the story of what the government has done to prevent further acceptance of gold that could destroy the national paper currency: think Vietnam, and the Dong is wrong, and, could this happen here and elsewhere worldwide?:

Bear's picture

Thanks ... good article ... but this line really stood out for me:

"The government’s reasons for preventing the use of gold as a medium of exchange are officially to try and steady the shaky dong"

admirable goals abound

slewie the pi-rat's picture

you guys shoulda been trolling here the just recently while it was being discussed on zH

NotApplicable's picture

Otherwise piss goes everywhere!

Cadavre's picture

Had to holdiback a "nose milk blow out" during an interview RT's Capital Accounts' Lauren Lyster had with John Thomas Financial Chief Economist (and ex FOX Dweeb Head), Mike Norman. Once Norman figured Lyster would not let him sell his "instant Water" (Just Add Water) sham wow unchallenged, old Mikey drifted into into vague doublespeak of tsunami metaphors that lacked the intelligibility to suggest a point of query. Norman did concede something about Glass Steagal, but like every other Florettes the mic picked up, he appear agnostically ignorant (two word Mikey, "Gingko Bilboa"). But boy could Mikey croon Keysnian dogma doody like .. like Chris Mathews pitching the beautiful truth that underlies Bambi's banner catch phrase of the moment, "Real Change You Can Believe In" ("change" is something seen - it don't require faith - well not yet anyway),

Norman dresses more like a broker working the true believers of denialsm grazing sacred pastures on a Sunday afternoon than an economist. Economists see no benefit in a pen stripe suit of amour and regimental tie - but Norman did make one point - he is still a shill!

That interview was almost as hard as the ZH art yesterday where Nanex nerds grilled the SEC on their flash crash analysis that concluded, when translated from the SEC's native non imaginative double speak news speak and trying to use all them fancy smancy business words from school (in reality, and most likely, the SEC's white shoe overlords faxed them the SEC the report the SEC published)l ... concluded not much of anything except that the SEC's rank file are chock full of nothing but the best that only a solid 3rd grade education can provide:

Essentially the SEC concluded: Canceled orders make the market liquid, and boy did the HFT hack shops liquefy the market on flash crash day! Of course, and needless to say, despite the SEC's big mum on the fact all that liquidity was flowing out of the pockets of family and individual portfolios managed by small money management firms working one minute ticks with allocation models. The smart shops, this time, were not the shops relying on models that reset and continued trading after all their stops were breached - some of those guys converted everything and lost their investment clients ass.

Maybe an unintended consequence of flash crash day was to get small investors to assign their portfolios to their New Delhi call centers.

What's an HFT to do when there are absolutely no retail millet left to chum? They have to migrate to shoals of less populated small, but nonetheless chum responsive  independent mom 'n pop money management shops. Next are the big non HFT brick and mortars. After those shoals have been milked dry, the HFT's become vampires eating each other's bailout cash. Since FED freebies are always in abundance, they can give the zero iodines barking CNBC's midway something to practice using their business school words for quite sometime to cum. Pretty soon the only audience CNBC will be able to claim are the HFT suck bots eating their RMS feeds and the techs looking at monitors in production room.

What was the flash crash? The flash crash was an HFT prototype whose liquidity milking subroutines, that, despite an excellent record during simulation, just lost it's mojo when it was fed a live market stream - and that's all it was. The SEC should have just used the old favorite agency standby, like NIST's "Thermal Expansion". The SEC could have called it "Liquidity Expansion" (or "Thermal Liquidity"), and it would have made just as much or just as little sense as any of the cagatha they shart on some smarty pants paste up pseudo analysis the WHite Shoes instruct them to write. And guess what - if someone blows the whistle the get the national security cattle prod ram rodded where the sun don't shine.

A year ago one HFT soup kitchen shop claimed they only canceled 65% of their orders (... right ... and Oprah's got a tight ass!). The Europeans charge for canceled HFT orders - and word is the same is being considered (meaning it ain't gonna f*cking happen) in The Banana Republic of Merika - land of the free - at least free to breathe another minute (maybe), and home of the brave, well cepting for them box cutters - dey can give give you a real nassitty paper cut - mean - gee willickers, you could get tetanus!

The reason the not quite redy for prime time market flash crash HFT prototype f*cked up be the same reason the SEC is so f*cked. The White Shoes, and dere entourage of prissy dandies pick their next crop of head lice from the guys that been massaging their zipper dragons as regulators. It's the "crappy guy syndrome" all ove again and again and again and again and ... infinity.

"The government’s reasons for preventing the use of gold as a medium of exchange are officially to try and steady the shaky dong"

admirable goals abound

Don't forget about price stability, solid monetary policy, high savings' rates and low unemployment. The reason they don't wan't gold is because printing gold reserve notes is called counterfeiting.

Waiting for someone to tell us how the the gold would be distributed. So many dollars have been printed - and so many dollars are held by so few that should the gold note worth be determined by possession of dollars outstanding, there gonna be a bunch of lotto really pissed off muggles down in the commons.

rwe2late's picture


Me Too.

 How stupid must I be to not have realized that my debt burden would be reduced by paying a higher interest rate?!

One of the most important ideas proposed by Professor Fekete is that a rise in the rate of interest reduces the burden of debt that has been accumulated previously.

I should rush down to the bank now and demand to pay a higher interest rate on my mortgage!!

LowProfile's picture

Pretty sure this makes sense...


Actually in the scenario presented by the article, your debt would be met by either:

A.) Paying it off

B.) Defaulting



If you figure that you're not the only serf in the kingdom, then even though some of your fellow serfs default, the others pay it off, thus preserving the quality of money - fiat or not.

But artificially low (non-market determined) interest rates destroy the quality of money, and the real purchasing power of those repayments over time.

slewie the pi-rat's picture

now you know why i call antF theNuttyProfessor

this guy here was probably ok up into the mid-300s, himself

  1. BiCheZ!
rwe2late's picture

But artificially low (non-market determined) interest rates destroy the quality of money, and the real purchasing power of those repayments over time.

Actually, the article argued the opposite:

supposedly,"all things equal":

HIGHER interest reduces the debt burden.

LOWER interest increases the debt burden.

I will grant the correlation, that higher interest would normally be charged by the lender when prices are rising. But to argue that those higher rates favor the borrower seems a stretch.

In the present circumstances, not "all things equal", the suppressed low interest rates hurt "lenders", including those commonfolk who "save". That may be one reason banks are reluctant to lend so long as it is more profitable to "invest" elsewhere the nearly free money handed to them by government .

akak's picture

I have tried to understand this "lower interest rates = higher burden of debt" concept and argument of Antal Fekete's, even going so far as to contact and communicate with him directly, but in the end I can only conclude that either he is supremely poor in conveying the gist of this idea, or else I am exceptionally obtuse, because it still does not make one iota of sense to me, and indeed seems ass-backward.

Does anyone care to try to explain Fekete's cryptic and seemingly nonsensical argument in a manner in which mere mortals can comprehend it?  And HOW can prior debt, maintained at the SAME rate of interest, suddenly somehow INCREASE in burden while interest rates lower?  Or, if the rate of interest on that prior debt actually falls, again, how is its "burden" being increased, and not decreased as common sense would indicate?

Dr. Fekete, you are either amazingly bad in explaining your seemingly contradictory theory, or else your idea makes no sense whatsoever.

rwe2late's picture

Present Value = Payment/ (1 + Interest) ^time

ONLY if and when (so it would seem)

the interest rate = rate of inflation

If interest rate and inflation are different, then the final value (purchasing power) cannot be calculated by using interest alone.

slewie the pi-rat's picture

interest rates low:  ZIRP makes it eZ for fascism to borrow and re-fi;  anybody else who still qualifies, too;  b/c of the "need" to pay the protection rackets, the goobermint union, and for the "social and medical stuff" too;  hence the burden (amount/total weight)  of the debt increases near-exponentially while it's "costs" may even decrease due to centralPlanning and re-fi's

interest rates high:  people take out less debt-money from the future (fiat's source?);  i was here in the early 80's;  the primeRate was 18% and nobody borrowed a fuking thing!  the burden of debt decreased, as did inflation

slewie loves nuts, especially when they are among the few, the bad, and the ugly;  i have no idea if this is what antF means or not, ak

but, when a country can't keep the ponzi greased (greece'd) it is the total burden which they face;  this is why greece isn't borrowing any more than it absolutely 'must':  it can no longer increase the >>burden<<

cBs were s'posed to work this way w/ sovereign finances;  but you know how those print-monkeys love that fuking red button!

  1. this professorF is my favorite economist
  2. BiCheZ!
Banjo's picture

Think of it in terms of the DEBT markets. Aka BONDS. This is why US interest rates will go up as more QE will wash away the debt with printed cash.

Thanks for playing China :)

NotApplicable's picture

I'll admit, it took me a while to get my head around this idea. But it is logically coherent. The thing that you need to realize is that the burden of debt increases relative to all other borrowers who can go out today and get the same loan for less. This might not matter so much if you're buying a house, but what if you're funding a business with it? Rates drop, and suddenly new lower cost competition emerges as they've obtained cheaper financing. Meanwhile, unless you can refi, you're stuck, and can do nothing but watch business evaporate.

Remember the first time you encountered a "early-payoff penalty" on a loan? I was like, WTF, why wouldn't they want their money paid-back earlier? Well, it's because you're paying them LESS in interest as a result, and undoing all the work they did to obtain this rate of return.

And what about the financial system itself? If I go refi my house at the same bank due to lower rates, they will have a reduced interest income stream as a result of it. Now, you might push the duration out longer, which could make up for it, but if you didn't, the bank suffers. Of course, if you refi at a different bank, it just spreads out the loss to the system as a whole (one bank gains, but less than the other loses).

To those who keep the original note in a lowering rate environment, well, then you're taking a loss because you're paying more for the loan than you should be. Instead you should have a lower payment, meaning more money to spend on other things.

This is the essence of Prof Fekete's argument. Between this idea, and his idea of observing the gold basis as a sort of monetary barometer, I consider him one of the most tuned-in monetary theorists alive. It's too bad lots of people call him a quack because they mischaracterize his writings on Real Bills. (especially one named Corrigan, whose writing I otherwise love to read)

akak's picture

The thing that you need to realize is that the burden of debt increases relative to all other borrowers who can go out today and get the same loan for less. This might not matter so much if you're buying a house, but what if you're funding a business with it? Rates drop, and suddenly new lower cost competition emerges as they've obtained cheaper financing. Meanwhile, unless you can refi, you're stuck, and can do nothing but watch business evaporate.

Thank you, NotApplicable --- this does help clarify the argument for me.

You hit on what I found to be the essence of the argument, one that confused me to no end: that Fekete's buden of debt in a falling interest rate environment would be relative, NOT absolute.  Thinking in terms of say a homeowner wtih a mortgage, or a person with a running credit card balance, I failed to see how falling interest rates presented a burden to THEM, not thinking about the competitve, and relative, position of a business in debt as well.  I think Fekete should refine his presentation of his argument to take those specific, and very different, debt positions into account.

DoChenRollingBearing's picture

Let me take a crack at this one.

Say you had gone out and borrowed $100,000 for your business (say) 5 years ago and had to pay 6% interest.

Let's say your competitor today can borrow the same at 3%.  YOUR debt burden is now much higher than his.  It is harder for you to pay off your debt.

slewie the pi-rat's picture

hey, D_C_roll.ing_bear!

imo the "burden of debt" is not a micro-economic idea;  it is the burden of debt of the macro economy, the debt that must be "carried" in macro terms

going w/ his present value idea, when the rate is lo, the present value is hi (long bond  = 141+)

a higher discount rate lowers the PV of the debt

p.s.:  i "think" L0L! (theProfessor strikes again!)

PivotalTrades's picture

One of the most important ideas proposed by Professor Fekete is that a rise in the rate of interest reduces the burden of debt that has been accumulated previously. 

You barrow $100k today at 3%

5 years hence you lend that $100K at 6%.

Pay off the remaining loan and collect the difference.

Cadavre's picture

Maybe it meaning to be saying that higher (market?) rates reduce the rate of debt accumulation  - unless he be saying we don't need to pay no stinking interest cause it's not debt, therefore not owed no more (all for that - better than investing in wet index paper!)


The only way, thinking it was anway, to reduce debt burden is pay it down - unless embedded in this article is some magical way to rehypotocate cash out for payables.

taniquetil's picture

Paper money is like the government putting a gun to your head and telling you how much your stuff is worth.

twh99's picture

They have it easier than that.  At least when someone is putting a gun to your head you know you are being robbed.  

In this case most people don't even understand the amount or level of theft that is being perpetrated by the government.

CURWAR2012's picture

Very true, stealth theft we do have.

Max Fischer's picture



The gold standard is like having something utterly arbitrary (in this case, the supply of gold) dictate to a country how fast it can grow and whether or not it will have the funds necessary to defend itself in war.  If the gold standard worked, why did this country go off it so many times?

Max Fischer, Civis Mundi

mayhem_korner's picture

The gold standard is like having something utterly arbitrary


That gold is of finite physical supply is exactly what makes it NOT arbitrary as a currency anchor. 

And instead of asking the "if the gold standard worked" question, why don't you ask how well things have been working since 1971? 

Uber-moronic today, Max.

Max Fischer's picture



The reason this country has gone to shit is because we have a very dumb population that continues to elect politicians who serve the owners instead of the laborers. It is not accidental that over the last 40 years the rich have gotten richer and the workers have been gutted.  What's truly amazing though, is that many of those gutted continue to be brainwashed into electing politicians who craft legislation that's directly against their interests. Just think about this for a moment:  Sarah Palin nearly became the second most powerful person in this country.  

I fully acknowledge that this country seems to go further and further into the ditch as each decade goes by. But that's not a comment about the gold-standard, that's a comment about the idiocy of our population and the leaders they elect.  Going back to the gold standard is NOT the answer, just like it wasn't throughout our history. 

Max Fischer, Civis Mundi 

Zero Debt's picture

Word of advice, speak for yourself only about who is dumb or not. Besides, if your idea of fractional government paper is so great, why would you not like to prove it by allowing competing currencies? Instead of lecturing others on which standard ought to be used, let's have the market decide, and not impose legal tender laws, taxation or other mandated disadvantages on commodity money. Surely the paper system must become the winners, right? That is what history tells us, right?


Max Fischer's picture



We have competing currencies... it's called the fx market.  If you think the US dollar is worthless, just keep a small amount of US dollars in your wallet for everyday transactions, and keep the remainder of your wealth in gold, silver, corporate equity or other currencies.  Pretty simple, actually. 

Secondly, we had an era of competing currencies which gained momentum around 1836. It was known as the "free banking era" and it was a DISASTER. It began when the charter of the Second Bank of the United States (a primitive attempt at a central bank) expired which then led to the creation of thousands of unregulated local and regional banks.  In this wild, wild West of competing financial Darwinism, the banks began issuing their own unique currencies (which led to rampant counterfeiting) and practiced very risky and unsound speculation and lending - all of it devoid of any federal regulation. Bank panics (often for no reason) were the norm and the life savings of farmers and workers would vanish overnight. It was an unorganized, unregulated NIGHTMARE. Do you actually think that if banking was relegated to regional and local entrepreneurs, the Lloyds and Jaimes would disappear and there wouldn't be manipulation, fraud and corruption?  

By the time the Federal Reserve was created in 1913, it was estimated that there had been 10,000 different currencies issued by thousands of different state-chartered banks and only redeemable at those particular banks. This was a nightmare scenario for trying to conduct interstate commerce, and/or trying to figure out exchange rates, let alone if the bills were fake or not.  While the National Banking Act of 1863 was created to make an attempt at unifying a national currency. the regional banks still created their own currencies and it only created more chaos in the system.  

You need uniformity, and you need uncorrupt, true representatives of the People to govern it.  Competing currencies within a country is no different than "End the Fed"....  just more empty Libertarian rhetoric that sounds great if you don't understand history or don't really think it through.  

Max Fischer, Civis Mundi 

Zero Debt's picture

The FX market is an quasi-government institution where different monopoly tokens can be bartered, but not a genuine market of producer and consumers of those tokens. Their value in barter emanates from the lack of alternatives. Competing currencies means to allow competing issuers. In addition to FX you would then have domestic exchanges. There are thousands of stocks listed, obviously you believe in having a stock market and you are not having endless nightmares about all those thousands of complicated stocks inhibiting all interstate commerce, stifling your prosperity and eating your proverbial lunch. And so it just appears odd to have only one currency. We have thousands of bond issuers, no nightmares so far. Every freaking municipality seems to be issuing one. If they can issue a zero coupon bond, then they can issue a currency. The complexity of valuating currencies is not just a national one but a regional one too. Economies have both local and international flows.

The point about bank runs is unrelated, if a bank is unsound it has to fail. Why give a depositor more protection? If there is a need to insure deposits, let private insurers do it and charge a fee competitively. Depositors are looking for interest returns, and should be treated as risk takers. A true saving of physical metal in a warehouse does not just "fail", hence prudent depositors do not need to bail out ignorant ones. "Risk free rates" is an oxymoron on par with "flying saucer". The risk free rate is fixed at 0% in a free money market. All >0% rates are risky. Besides, monopoly currencies did not help farmers and commodity producers from losing segregated monies in MF Global.

Your perception of chaos is your own. Do you perceive different styles of clothing, software and cars as equally chaotic? The desire to unify and control is not in the best interest of the many.