Guest Post: What Happens When All The Money Vanishes Into Thin Air?

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

What Happens When All the Money Vanishes Into Thin Air?

Issuing debt and printing money do not create wealth. All they can create is a temporary illusion of wealth.

I could have written "if all the money vanishes," but that would be misleading, for all unbacked money will most certainly vanish into thin air. The only question is when, not if. Frequent contributor Harun I. explains why:

Those who fail to understand that the Status Quo is impossible to maintain will be shocked when the disintegration is undeniable. But the whole thing was perverse to begin with. Words like capitalism and meritocracy are thrown around to make people feel good when, in reality, we have never owned anything, not even ourselves.


How can we own ourselves when the very thing we use for subsistence can be cheapened or reduced to nearly nothing, not by market forces, but by central banks acting at the behest of governments? When a person does not control his labor, what is he?


I have been studying the monetary history of the world for the past few weeks. I can tell you that the second oldest profession is currency debasement. Nothing is new.


Of course, this should be no surprise, everything is cyclical. Humankind is like the trader looking for the Holy Grail. There is no perfect monetary system, there is only better and worse. And this one ranks among the worst. 


I wait patiently for people to come to the understanding that the only way for everyone to get their money would be to destroy its value completely, meaning that a loaf of bread would be a million dollars. If a small fraction of what has to be printed to keep the system afloat has caused the price spikes in energy and everything else, imagine what happens as the disintegration picks up speed.


As the exponential debt curve moves closer to the pure vertical, the rate at which debts come due will approach infinity. Of course, while this is the ultimate mathematical outcome, the reality is that the system will collapse before this point is reached. But don't think governments will throw in the towel. If history holds true the rise of a totalitarian government is just over the horizon.


Then there are those who get it right and wrong in the same breath. John Mauldin, in a KWN interview, thanked Europe for keeping the heat off the US. Mr. Mauldin apparently does not understand that our monetary policies are transferring what we do not want to the rest of the world, at least for a time, but not much more.


How many more food items be made smaller and sold at the same price? In effect this is a slow starvation of those at the margin. The 46 million American souls on food stamps will soon find their food stamps to be worthless.


Those who assert that a credit system cannot go hyper-inflationary may not have thought through the exponential effects on the relationship of the debt and productivity curves within the context of all money is debt and the only way to create money is for debt to be created. Eventually the debt curve accelerates away from the productivity curve, then the productivity curve collapses all together. Sovereign debt crises caused by governments stepping in to keep the debt system going is the last stage. Then comes the debt/currency collapse.


Even if the Fed stopped printing money, I fail to see the difference between too much money that is worth nothing, and no money at all. It's not going to matter to a starving man that a loaf of bread is $1 million and he is a dollar short, or if it's $1 and he is a dollar short.

Thank you, Harun. Many observers have addressed the key concept here, which boils down to this: paper money is an abstract representation of the real world.

This can be explained by a simple example. If there is $100 in the money supply, and $100 of goods and services to trade, then $1 will be exchanged for $1 of goods and services. If the money supply suddenly increases by $100, then the value of the existing $100 declines by half, as the money supply is now $200 and the supply of goods and services remains unchanged. Thus it now takes $2 to buy what $1 once bought in goods and services.

Holders of the currency have had half the value of their currency (what we call purchasing power) stolen by the central bank that issued the additional $100 in money supply.

Here is the primary point: issuing debt and printing money do not create wealth. All they can create is a temporary illusion of wealth.

(This is drawn from Chapter One of Resistance, Revolution, Liberation: A Model for Positive Change; you can read Chapter One for free.)

Here is another example. Let's say that a small group is stranded on a desert island that supports a handful of coconut palms. Each palm produces a limited number of coconuts each season. To facilitate trade, the group issues a currency that represents one coconut. (Lacking a printing press, they have to laboriously carve out a pattern on a rock to imprint a difficult-to-counterfeit stamp on the currency.)

This system works well, as the currency issued matches the number of coconuts harvested annually (for simplicity's sake, let's say that's 100). 100 pieces of currency are issued to match the 100 coconuts that exist in the real world. The currency (let's call it the quatloo) is an abstract representation of the goods available, i.e. the coconuts.

But then a wise-guy (i.e. the "central banker" on the island) realizes that if he prints another 100 quatloos, he and his buddies can buy up all the coconuts and fish without having created any real goods in the real world: the abstraction is used to con people out of their real coconuts.

The residents quickly catch on, and the "price" of coconuts rises to 2 quatloos. The wise-guy is addicted to the scam, and so he prints 1,000 quatloos, and then issues quatloos in denominations of 1 million.

Soon enough, each coconut costs 1 million quatloos.

Creating debt and paper money does not create real goods and services or real wealth.

As Harun observed, we have been promised trillions of dollars that can supposedly be traded for trillions of dollars in real goods and services, and buyers of bonds have been promised trillions of dollars of the same artificial exchange of paper for real goods.

Just as on the desert island, the growth of actual goods in the real world lags the growth of money, i.e. abstract representations of real goods.

The U.S. Central State (Federal government) has borrowed and squandered $6 trillion over the past four years, and the actual production of goods and services has not risen at all when adjusted for inflation. The central bank (the Federal Reserve) has expanded its balance sheet by $2 trillion, and yet all the assets it have tried to force higher are actually lower when measured in real goods such as gold, oil, wheat, etc.

It's easy to expand the money supply and difficult to expand the actual production of real goods in the real world. Expanding the money supply and issuing debt that lacks collateral is just like printing quatloos on the desert island: you can print a million quatloos but that doesn't create a single additional coconut.

If you print enough quatloos, then people will no longer accept them in exchange for coconuts. You will actually need a real coconut to exchange for fish.

This is why Greek towns are reportedly reverting to barter, the exchange of real goods for other real goods. We can anticipate that silver and gold will soon enter the barter as means of exchange that can't be counterfeited or printed by wise-guys (central bankers).

We can also anticipate the issuance of letters of credit, a practice that stretches back to the trading fairs of Medieval Europe, as described by Fernand Braudel in his three-volume history of early capitalism, The Structures of Everyday Life (Volume 1), The Wheels of Commerce (Volume 2) and The Perspective of the World (Volume 3).

Since gold was in insufficient supply, letters of credit were issued and accepted on a basis of trust. At the end of the great fairs, the letters were exchanged and payment of balances due made in gold or silver. Thus 99 coconuts could be traded for 100 dried fish via letters of credit and the balance due in gold or silver was the value of 1 dried fish--a mere 1% of the total value of goods exchanged.

This is what happens when abstract representations, i.e. "money," vanish into thin air. Alternative systems of exchanging goods and services arise: actual goods are exchanged via barter, tangible concentrations of value that cannot be counterfeited such as gold and silver are used as a means of exchange, letters of credit or equivalent are traded and settled with tangible goods or gold/silver, and eventually, a means of exchange ("money") that is backed by tangible goods in the real world that can be trusted to actually represent the value being traded might enter the market.

That which is phantom will vanish into thin air, while the real goods and services remain to be traded in the real world.

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boogerbently's picture

Isn't that the "WHITE-COLLAR" CRIME WAY OF SAYING "The dog ate my homework"?

Gene Parmesan's picture

You too can be above the law if you're politically connected enough. Have you considered acting as a campaign bundler for Obama?

mayhem_korner's picture



Standard of living cannot be maintained unless one's income (share of the money supply) rises at the same rate as the money supply.  Once one realises this is impossible, the strategy is very clear - convert every available note of fiat into something that can store value longer.

walküre's picture

I bought AAPL at $625. Thought it was a good deal. Can't remember where I read it.

Will it ever see $625 again?


AAPL grinding down is all you need to watch.

mayhem_korner's picture



It was a good deal.  Whether it was a good deal for you, well...

Diogenes's picture

Here is what happens. As long as they keep increasing the money supply people are happy. They feel "richer" because they have more money. Rising prices, inflation, the high cost of living - those are someone else's fault, foreigners or speculators or somebody.

When the inflation gets ridiculous, as when the unit of currency resembles a sub atomic particle and prices double overnight ( yesterday a cup of coffee cost $100,000 today it is $200,000), then it is time to reboot.

Recall all the old green dollars and replace them with new red dollars at $10,000,000 to $1. After a certain date all green dollars become worthless. That will show all those greedy speculators and black market racketeers! Because you will only be allowed to exchange a limited number of dollars and the bad guys will get stuck.

Then the whole game starts all over again.

This basic scenario has played out over and over again around the world. In some countries 2 or 3 times in a lifetime.

SheepDog-One's picture

People DONT have more money! Theyre broke, at best sitting on their #1 asset a home which is plunging in value. WHAT 'more money'?

Diogenes's picture

If  paper dollars are money, and someone gives you more paper dollars you have more money.

The point is, the scam can continue forever unless the majority wises up and refuses to take the fake money. For this to happen the currency has to go to zero 3 times in one lifetime. As in Germany between 1914 and 1945.

In postwar Germany the government did not dare inflate the currency. The people had been burned too many times. They were wise to the scam.The result was a strong, stable Mark, the German "Economic Miracle" whereby they went from ground zero to being more prosperous than ever before in history in 10 years and went on to become the richest most powerful economy in Europe. By the 70s the Mark was far stronger than any other currency including the US dollar.

SheepDog-One's picture

Thats right, but no one knows how to do that. On each check you get, on the endorsement write 'redeemed in US Notes', that is the 'real money' not even gold, and also the IRS cant tax it, only income in FRN's.

cranky-old-geezer's picture



'redeemed in US Notes'

Bullshit.  US notes are no longer in circulation. 

Stop posting bullshit like this you moron.  Somebody tries this nonsense and they'll end up facing tax evasion charges.

francis_sawyer's picture

OK... I'm this far down into the thread & I guess I'll have to do it myself...

Don't give me that do-goody-good bullshit...

Badabing's picture

Had a party the other night. My wife told me to go out and get more chips. All I had to do is break them into more pieces and volea

Diogenes's picture

I didn't say they ARE richer, I said they FEEL "richer".

SheepDog-One's picture

Hell if people are 'feeling richer' although theyre far poorer and paying record higher for gas and food, just because theyre told such by the media, then we're REALLY fucked!

Diogenes's picture

Exactly. That is the point. That is how the scam works.



SheepDog-One's picture

The scam of what....the pea and shell game except there is no pea, ever?  Well they can have fun with that I guess, doesnt really mean anything to me.

Da55id's picture

from the article "If you print enough quatloos, then people will no longer accept them in exchange for coconuts. You will actually need a real coconut to exchange for fish.

This is why Greek towns are reportedly reverting to barter, the exchange of real goods for other real goods."


The real reason barter is arising in Greece is the LACK of Euros in private hands! This is not hyperinflation - those folks doing barter would Love to have some Euros I'd wager.

WmMcK's picture

Green for red? You mean FRN's for US Notes, that's dangerous talk.
I'm waiting for the blue money (SDR's).

tlnzz's picture

What happens?

The greatest Ponzi scheme on Earth comes crashing down.

Dorky's picture

When there is no more money, everything becomes free. Duh!

mayhem_korner's picture



"Free" is the most dangerous price for allocating anything.

Amish Hacker's picture

"If you think health care is expensive now, just wait until it's free."

Paul Atreides's picture

"When a person does not control his labor, what is he?" <--- This is a key statement.

tarsubil's picture

Um... a super awesome free American citizen? No? Wait, what?! Are you with the trrists!?

ronin12's picture

Begins with S, ends with E and rhymes with CAVE.



cranky-old-geezer's picture



"Vanish into thin air" really isn't correct.

It doesn't vanish.  It just becomes worthless.

The only thing vanishing is whatever wealth you have in dollars and dollar-based assets like bank accounts, bank CDs, money market accounts, insurance policies (they pay out in worthless dollars), annuities (they pay worthless dollars), and any kind of check, like social security check, and your payroll check of course.

Yes, you end up working for less and less as the dollar loses more and more value.  Your paycheck might be $5,000 but they won't buy much.  Eventually you end up working for nothing. 

No, you don't get a raise every time bankers print more dollars.  You don't get any of those newly printed dollars.


Pladizow's picture

No, the token remains and becomes worthless, but the value which is no more then a belief, vanishes!

SheepDog-One's picture

Something that never existed in the first place cant vanish.

Pladizow's picture

The belief of value exists and will vanish.

cranky-old-geezer's picture



Saying dollars never had value is nonsense.  They obviously have value if you can buy stuff with them.

But I agree, that value is mere belief.

But belief is all any monetary system has, even gold.  It's worth what people believe it's worth.

centerline's picture

It all boils down to the basics:  food, water, shelter, protection.  We can add on from there.  Energy per se - of one form or another.  Gold is just an token as well, for the most part.  And therefore relies on faith for it's real value outside of industrial use.

Thisson's picture

Gold is more than a mere token.  It has intrinsic value as money.  That is gold's utility.  It intrinsically has all of the properties that make it excellent as money.

kridkrid's picture

Not trying to be overly picky, but it is more than "belief".  Debt money is "belief", but other forms of money have practical value.  Money that is "backed" by some fractional reserve of assets... that too is "belief"... but closer to real value.  But exchanging one asset for another (or an asset for anything really... a good, a service, a whim) that "money" isn't belief.  Any sort of barter that uses a PM as money moves beyond the "belief" category, IMO.

cranky-old-geezer's picture



There's no such thing as "debt money" you moron.   Fed prints dollars and buys treasuries.  The dollars aren't debt.  Treasuries are the debt.

Money that is "backed" by some fractional reserve of assets... that too is "belief"... but closer to real value.

More bullshit.  "Backing" is a myth.  A "gold-backed" currency is just as worthless as a totally fiat currency.

Redeemable is the only thing that counts.

But exchanging one asset for another (or an asset for anything really... a good, a service, a whim) that "money" isn't belief. 

Yes it is belief you dumbass. PMs are worth what people believe they're worth, just like any paper currency, no difference at all.

But PMs can't be printed on a printing press like paper currency can.  Bankers can't dilute the value of PMs like they can dollars.  That's why PM's are a superior store of value.  But it's all still belief.



kridkrid's picture

Awesome... I haven't been called a name here is quite some time.  I won't exchange it in kind, if you don't mind. Not that I'm always above name calling... but, I do it less frequently as I've matured.  Perhaps there is some sort of bell curve on this behavior? 

The fed doesn't need to "print" anything to buy treasuries.  The fed doesn't even need to buy treasuries itself, it can simply "loan" into existence the "money" via an electronic entry to the account of said buyer.  That buyer can then "purchase" said treasury in order to run the government.  

Again... I don't know if our differences are based on semantics, but virtually all money is loaned into existence... that loan has interest associated with it.  The "money" that needs to be created to cover the interest doesn't exist... so more "money" must be loaned into existence.  This is why fiat money and fractional reserve banking is destined to fail the moment it is introduced.  It is, quite literally insolvent from inception.  But it isn't until the cost of maintaining the debt begins to choke the productive economy that we really begin to feel the effect.  Along the way, the wealth effect provides us with a bit of an illusion.

But I think there is more we agree on than we disagree.  I agree, for example... that gold backed is ALMOST as worthless as fiat.  The value in gold backed... at least you have some recourse... as long as, as you say, it's redeemable.  This is, after all, what happened in the 70's.  The world called our bluff and demanded gold.  Our system was broke.  The dollar should have ended right there... but the world was duped into something different.  And we are getting ready to pay the price for the evil.


Yes it is belief you dumbass. PMs are worth what people believe they're worth, just like any paper currency, no difference at all.

Again... such name calling.  usually a sign that you're sunk.  Kind of silly position to take, suggesting that there is no difference between paper money and a precious metal.  The simple fact that there is utility to a PM makes the two vastly different.  Of course you know that.

cranky-old-geezer's picture



Again... I don't know if our differences are based on semantics, but virtually all money is loaned into existence...

No it's NOT loaned into existence you delusional idiot.  it's (a) created, then (b) loaned out. 

And it doesn't have to be loaned out.  In '08 Fed (a) created billions of dollars and (b) bought worthless securities from Wall Street banks with them.   See, no lending, just buying.

"a" and "b" occurring more or less at the same time, or "a" happening because of "b", doesn't make dollars debt.  The promise to repay is the debt.

And yes, with a few keystrokes Bernanke could create a billion dollars in someone's bank account, or 10 billion, 100 billion, whatever. 

But Fed isn't in the business of giving currency away.  Benny boy want's something in exchange for that (digital) currency he just created with a few keystrokes. 

And yes he'll gladly take worthless securities in exchange. He doesn't care, it didn't cost him anything to create that 100 billion in someone's bank account, plus he can put those worthless securities on his books and assign any value to them he chooses.  He could say they're worth 200 billion, 300 billion, whatever, it doesn't matter, nobody is gonna question it, at least nobody who can do anything about it.  Who's gonna charge Benny boy with accounting fraud?  Nobody.

The simple fact that there is utility to a PM makes the two vastly different. 

Utility to PMs?  When's the last time you went to the grocery store and paid for groceries with PMs? But you can pay for those groceries with dollars no problem.  So which has more "utility"?

The ONLY problem with dollars is Benny boy can print 'em on a freikin printing press, and yes, create 'em in someone's bank account with a few keystrokes, and when he does, all dollars in existence lose a little value ...and merchants raise prices a little to compensate.

He can't do that with PM's.  He can't debase PM's like he can dollars.

Actually this IS another problem with dollars.  Benny boy is printing (or digitally creating) so many of 'em, and they're losing value so fast now, the rest of the world might just decide to stop accepting them ...and yes that's exactly what's gonna happen, the dollar collapse I keep talking about won't happen in America, it'll happen outside America where Benny boy can't do a damn thing about it.

Why do I have to keep explaining basic monetary principles like this?  C'mon folks, this is ZeroHedge for christ's sake.  Don't bring your "debt money" bullshit here, take it (and your dumbass) back to FOFOA or whatever other bullshit site you came from.

valkyrie99's picture

Gold coinage derives only part of its’ value from intrinsic means, ie its' value by weight.  However if you look at the monetary history, gold has derived more of its' value from governments stamping coinage at values much higher then gold by weight, restricting the ability for others to create coinage with military might when needed, monetizing the coinage by demanding payment using them for needed services and taxes, mandating merchants accept payments in gold coinage that otherwise weren't inclined to, religious rites declaring the overvalued coins money, restriction trade with civilizations that valued gold much lower to only be made by the states coining money, and ensuring only small amounts of stored gold is released to circulation to maintain scarcity so the value of gold didn’t decrease back to costs reflective of its’ costs to produce and its’ value based on its’ usefulness. Therefore, much of the value of gold is fiat, granted to it by historic government mandate and might, and maintained by large holders of gold that ensure supply remains limited. It’s just that the ability for the powerful to create the means of exchange, money, was many centuries before paper was invented (in the west at least).


kridkrid's picture

Yes... all well said.  Getting government out of money altogether would be the best thing... or at least ending the government’s ability to create a monopoly on money.  We should have lots of different forms of money competing for use and able to be exchanged for each other.  It wouldn't limit commerce, it would enhance it.  The destruction of one currency wouldn't take the whole system down with it. 

valkyrie99's picture

Yes, I generally agree with you. In my research the most stable monetary system (aside from effects of particular goods due to weather affects and natural disasters temporarily causing deviation in price, ancient drawings and especially cuneiform indicate over 3000 years of stability) was mixed commodity monies – the only way governments (Egypt, Assyria, etc.) affected this method of exchange was publishing tables of exchange rates the state would accept (1 calf or 130 sacks of 130 grains of wheat might be accepted as payment for the same debt) that established a minimum that these predominant goods as well as their liquidity (one could be relatively sure that if they traded they uncommon good they had for a widely and government accepted cow, they would in turn be able to trade that cow for the less common good they ultimately desired so trade and store of value functions were achieved). In this time finance did offer deposit services (at a cost without lending deposits), check clearing functions where goods would be paid to a third party, and loans with interest were restricted only to organic goods that reproduced (first solution offered to the interest problem – if you loan cows society can pay back interest in calves, but if you loan silver with interest due, there is more principle + interest due from society then silver available to repay). I would see a modern version of this, many currencies backed by locally abundant natural resources as one of the best options available.  


The only part I’ll disagree with you on is that aside from the possibility of backroom deals to monetize debt, most government don’t have a monopoly or even ability to create money themselves, just to issue bonds – promises to pay that logically wouldn’t be necessary if the government was just creating money when it wanted to spend it. Currently the private and central banking system has the monopoly on money creation – a situation that is often called ‘government printing’, but I see as much worse, and is certainly so far showing signs of less longevity, then a government monopolizing money creation (say how ancient Rome declared it the right of sovereignty for it to monopolize the money supply or King Edwards’ tally sticks – not perfect, lasted relatively long but not forever - even the despotic empires had a better track record issuing the money supply then banks).   So although I do like the idea of competing currency, I don’t think banks should have the issuing power - when they do, the longevity of the currencies they offer is terrible, frequntly causing inflation and panics within a couple years - perhapse not distroying the entire system but redistributing resources from productive uses to destructive bubbles in the process - that did not seem to be part of the business cycle prior to fractional reserve banking.


kridkrid's picture

thanks for the thoughtful response.  There is a great book out there right now talking about the history of money and debt.... Debt, the first 5,000 years.  Worth checking out.  The author should be a regular guest here... not sure how I can help to make that happen.

Mysteerious Rooshian Vooman's picture

HA! sez YOU! I do it all the time!

KandiRaverHipster's picture

but it creates Series A through IPO investment in wothless software that lets you manipulate pictures and instantly share them without doing any work!

Jason T's picture

i think larouche's triple curve is also a valid interpretation of what happens when you expand the financial aggregates and monetary aggregates and the physical economy breaks down.. you get a hyperinflationary blowout.

I'm watching productivity output per hour as I think that is what is indicate the real collapse.  

CEOoftheSOFA's picture

As a kid, while playing Monopoly, we dished out double the amount of cash to each player at the start of the game.  The result was that everyone would buy as much property as possible at the "Controlled" price, and then flip them to other players for double the book value.  In the end, we all ended up with the same amount of properties.  You would think the adults would have figured this out by now. 

DoChenRollingBearing's picture

What an interesting take!  + 1

Tinkering with the rules on Monopoly (and Risk) was always great entertainment when I was young.

Badabing's picture

The new rules for monopoly is whoever plays the banker can change the rules on the fly!

Almost Solvent's picture

Monopoly will soon be banned because it teaches one to turn PAPER $ into PHYSICAL - land & hotels (& PMs, although not used in the game).