Guest Post: Why The Full Faith And Credit Of Governments Is Inferior To Real Assets And How We Can Fix It Once And For All

Tyler Durden's picture

Submitted by Robert Paulson

Title: How the USA got to where it finds itself, why the full faith and credit of governments is inferior to real assets and how we can fix it once and for all

I used to think like a statist, and I used to agree with them. It's appealing to redistribute wealth, especially when it's not fairly achieved.

But what I've realized is that the solution to creating distortions in the market is not to create more distortions by attacking the symptoms. What ends up happening when you do that is that you create a hugely complex set of rules and regulations that hinder the market, make it inefficient and most importantly makes it ripe for abuse via regulation in favor of those who make the right campaign donations to the right politicians. This is the situation we find ourselves in now: A very broken market setup to benefit those who've made the right political moves.

On the other hand, you can simply end the sole cause of the problem to begin with. That sole problem is bad monetary policy. You might say that we should replace everyone in charge of the Federal Reserve with the "right" people. But even if you were able to do that, it's really a temporary fix. The issue isn't just having the wrong people in charge, but having so few people in charge of controlling the levers to begin with. Not only does it create a situation ripe for corruption and collusion, but it puts the value of money in the hands of people who are thereby expected to perform satisfactorily. They execute insane policies at the behest of a government and people who cry "DO SOMETHING!"

It is because of this monetary system that our government and the public at large have been able to amass such humongous debts. Because our system is based upon continual growth, its very lifeblood and continued existence hinges upon consistent expansion of GDP and inflationary monetary policy. The continually bad policy experienced off and on since the Nixon administration has a reason: It was masking declining economic factors.

The stagflation the US experienced in the 70s came about for two reasons: The final end to the gold standard and ensuing monetary policy attempting to stimulate the economy in lieu of actual economic activity. The badly implemented normalization of relations with China by Nixon began the trend of sending manufacturing jobs overseas.

All of this combined with the explosion of consumer credit and the financial industry. People were being squeezed by real declines in jobs and wages. With credit, they could afford to get by "until things got better." This paradigm shift from saving to spending created the consumer culture, yuppies and the decade of greed that was the 80s. As a people, we bought into this idea that we could spend our way into prosperity, and it worked for a while. Actually, up until 2007.

Stagflation was ended in the early 1980s when we finally put someone responsible in charge of the Federal Reserve: Paul Volker. He jacked interest rates up to the high teens until he tamed inflation, but an inevitable and deep recession ensued as a result. In the process, bad businesses (and some good ones) went out of business, many people lost their jobs, but in the end that creative destruction brought us back to reality and put the market in position to spring back forward, especially combined with heavy use of consumer credit as well as deep government deficits and increasing debt.

Throughout the 90s, monetary policy was relatively restrained but ever too loose near the end. It ended up assisting the dot-com bubble by allowing it to blow up far further than it ever could've by itself, ending in an unavoidable recession that was a long time coming. Further, during this time period, China began to become a bigger and bigger factor in supplying inexpensive goods to the market at the cost of American jobs and paid for partially with debt. This time, however, the debt explosion was in the private sector as government spending was restrained and the budget balanced by the end of the decade. In effect, the stagnant income and rising costs of the American people were being masked by continually growing private debt.

So what did the Fed do in the early 00s? In the wake up the dot-com bust and resultant recession, the Fed opened the monetary floodgates wide and never looked back. When the recession ended, it didn't tighten policy as it should've, and did so for two reasons. First, housing was becoming the new hot sector and they didn't want to stop the gravy train in the middle of war time. Second, the government had not only implemented hundreds of billions in war spending and failed to pay for it, but it also cut taxes and held them there. These massive deficits and and increasing debt could only be maintained with low interest rates. Basically, the Fed and the government made a bet that the deficits and debt wouldn't matter because they would be matched by a growing economy and inflation.

Unfortunately, the housing market couldn't keep growing with just loose monetary policy. That could only do so much. So what did they do? They deregulated the mortgage market and allowed lenders to go hog wild with cheap money and low lending standards. In a free market, this wouldn't have been such a problem. However, through a combination of fraud and ineptness, the banks were able to make terrible loans, package them up into securities and falsely rate them as AAA when they were really junk. This is the key factor that allowed them to continually make horrible loans with cheap money and reap massive profits in the process. They were able to build a ticking time bomb of epic proportions because there was no one able or willing to stop them. No one wanted to be the party pooper.

The ratings agencies failed or were complicit specifically because their continued existence was not dependent upon performance but by the fact that they were deemed by the government as the agencies of choice. They had government endorsements and had zero incentive to rate much of anything properly. As you can plainly see, all 3 of the official ratings agencies are still the official ratings agencies despite their horrendous performance. Why would we expect such a system to work in our favor?

Meanwhile, the American people were high. There were two wars on they didn't want to think about. Their houses were increasingly growing in value. They bought new and bigger houses with cheap loans. The "flipping" phenomenon went into full swing. People took out huge loans against their already paid down or paid off homes to pay for consumer goods. Jobs were growing on trees. Everyone was living the high life on borrowed prosperity. It was doomed to fail and began doing so in 2007, culminating with the credit crisis in the Fall of 2008 in the midst of a terrible recession. All the way along, the government and the people became as indebted as they'd ever been (the government's exception being during WW2, though that debt was largely held by the American people). As things got worse, the debt levels only increased in the face of declining housing values. Even worse, due to bankruptcy reforms made in the mid-00s at the behest of the major banks, many people became essentially trapped in their debt with no way out.

The most important factor that so few people understand is that this approximately 40-year long process of consumerism based on expanding consumer and government debt hid a very big problem: Decline of true wealth production and rising real energy costs.

The overall loose economic policies during those 4 decades fostered the rise of consumerism and the financial industry's increasing share of the market. In a normal economic environment with sound money, the efficient market allocates wealth towards activities which create wealth. This includes manufacturing, mining and energy production. Instead, because the market was distorted by easy credit, we began a 40-year long bubble of consumption and the financial services to make it possible.

For 40 years, our monetary policy enabled our ignorance of a very real and pressing problem: Other countries were catching up to us in technology and we were no longer in the front of the pack by a mile. Instead of doubling down on education and allowing the market to guide the future, we passed the buck. We decided that a continually rising standard of living without interruption was preferable to tightening our belt and delaying gratification.

Now we find ourselves saddled with ginormous debts and no economic infrastructure with which to grow our way out. We are a late-stage kidney failure patient on dialysis, and we are in terrible need of a transplant.

So how do we fix this?

Sound money, debt forgiveness and a truly free market that isn't guided by the hand of the government and is instead determined by what the aggregate investor pool thinks is the right direction. Gordon Gecko was wrong overall, but he was right that greed is good. The profit motive is the key to good decisions and long-term thinking. That doesn't mean we need to be miserly dickheads who only care about ourselves, but self-enrichment and the unfettered ability to be as successful as possible is the only route to a truly higher standard of living.

You might think gold is a barbarous relic, and I would agree that money based upon a single asset is a terrible idea. Putting all the eggs in one basket is too high a risk. However, a currency based on a multitude of assets, especially complimented by commodities that are the lifeblood of wealth creation (oil for instance, and perhaps corn in America's case), is a superior system in comparison to fiat currency backed by full faith and credit of the government. By using multiple assets, we can even out the distortions that will occur from time to time, essentially making our currency as stable as a rock. Those who produce the assets backing the currency will be induced to find the equilibrium which maximizes profit without over-extending. When we have that foundation, we can move forward with a market free of excessive and cronyism-based regulations and maintain a focus on only those regulations which are necessary to prevent harm that we find unacceptable. In other words, instead of using regulation to guide the economy in a specific direction, we can use regulation to make certain things off limits. It's the difference between steering towards something and steering away. It's far preferable to steer a ship away from an iceberg than to presume that you can steer it through the iceberg.

Most importantly of all, we need to take money out of politics. None of this will matter unless we prevent our politicians from being beholden to campaign contributors. Our current system engenders corruption of even our best, brightest and well-intentioned representatives. They begrudgingly accept the standard which says they must compromise their principles in order to get reelected. My solution is a constitutional amendment which requires all electoral campaigns to be paid for with public funds and prohibits any advocacy of a candidate which extends further than displays of support by private individuals, and a requirement that all such displays be transparent by way of indicating who is responsible for them.

I humbly give you these words and suggestions in the hopes that together we can build an America which is stronger, better and freer. I believe that only through freedom can we accomplish what our hearts desire. Thank you for reading this.

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DonutBoy's picture

Wow - do you actually believe the public campaign financing will take the money out of politics?

blindman's picture

take the money out of banking!
two problems solved.

jeff montanye's picture

i second your sentiment.  however the market requires good regulation to function.  see "reinventing the bazaar".  additionally it prices energy, water, air etc. too cheaply because the costs of pollution et. al. are "paid for" by others.

l1xx3r's picture

I disagree... Do not get me wrong, if politics could work, I would love Ron Paul... I also disagree with the "solutions" in this article. Competing currencies is the only way... not some governmentaly backed one (no matter what it includes). We should all start ignoring the tax man and government... we are 10,000 to one of them, 900 to 1 for cops (which most would join us in ignoring government). Lets just ignore these parasites and create our market... one that will work regardless.

i-dog's picture


Ron Paul has already given up! Listen to this interview ( with Alex Jones @ 13:30 to see that he has already capitulated emotionally to Perry ... and he couldn't change a thing in DC, even if he fought tooth and nail to the end.

Government is the problem, not the solution ... and the worst government of all is a federal government distantly removed from the affected voters facing local issues.

Secede now!!

Dick Fitz's picture

Although I support Dr Paul 100%, I agree that politics cannot be changed from the inside.

Dr P wants to repeal legal tender and introduce competing currency, but I doubt TPTB will allow that to happen without bloodshed. But it will happen, sooner than many think. The "Internet Reformation" has already changed the game, and TPTB can't put the genie back in the bottle.

Dr P has done more to educate the public about the DC one-party mafia than anyone in modern history, and deserves respect for that.

FEDbuster's picture

I support Ron Paul, but he would have to be elected Emperor in order to really change things.  Maybe he can go home to TX, be elected Governor and secede from the US?  They would have to build a fence around TX to keep people out, if that were to happen.  Just for fun enjoy this video of Ron Paul going Full Metal Jacket:

RiotActing's picture

Fuck Ron Pail, Mr. Anti government wants to outlaw abortion. How the fuck does that work Mr. Paul? There going to be a private group that enforces this? How does legislating morality square with your "libertarian" ways? He's a joke like all the rest.

Oh yeah, he also doesn't believe in evolution. He's a fucking idiot. His economic policies are not the work of genius. Get over Ron Paul, he actually IS a kook. Ron Paul, what a joke....

bigkahuna's picture

No-Ron Paul wants to let states determine if it is legal or not.

moregoldplease's picture

I think you mean he doesn't accept evolution as a fact, something you don't seem to accept either. If you have to believe in something then it takes on an aspect of faith not fact.

Ganja Jane's picture

Stop twisting Ron Paul.

He also said his PERSONAL view is that marriage is between a man and a woman. He then stated his personal view shouldn't be forced on the sovereign individual. Let the States and people decide for themselves what constitutes a marriage and get the government out of the licensing personal business.

Seriously. Stop vilifying Dr.Paul.

snowball777's picture

Cop out.

Seriously. Stop deifying Ron Paul.

FEDbuster's picture

Looks like your Mom made the wrong "choice"? 

Ron Paul wants to protect lives from the perspective of someone who has delivered thousands of them.  Like gay marriage or medical marijuana, he would make abortion a state issue.  Abortion is mainly about controlling the minority populations in urban areas, so if NYC, Chicago, Atlanta, LA want to keep killing unborn babies they could get their state legislators to give them the go ahead.  Hell, they may as well open some free spay and neuter clinics there, too.

snowball777's picture

Ah back to the "good ole days" when rich girls could fly somewhere to get an abortion and poor girls had to stay with whatever knuckledragger knocked them up. Oh the times we had.

Too bad there was no spay and neuter clinic in your mom's state.

Ganja Jane's picture

Once again the language has been corrupted.

There's a clear difference between 'pro-choice' and 'pro-abortion.'

Dr. Paul is an OB/GYN; He might be 'pro-choice'  but NOT 'pro-abortion.'

Pro-choice means the right of the sovereign individual to choose for themselves; Pro-abortion would imply encouraging abortion as a birth control method. Abortions are dangerous to a woman's overall all well-being -physically, mentally and emotionally-if used repeatedly to end unwanted pregnancies instead of using preventative measures. Fuck, just having to make the choice is emotionally and mentally taxing beyond what anyone who hasn't been in a position to make that choice to even begin to understand or even relate to. It's a very personal decision.

Would you like graphic details of the abortion procedure and the physical aftermath lasts weeks, perhaps maybe months? How about the emotional and mental turmoil that lasts for years?

Once again we have a failure to communicate.

I'll check back. I am willing to share my experience if you're willing to LISTEN.

Ganja Jane's picture

Ron Paul is pro-life but Not anti-choice; he wants to return it to the states to decided for themselves.

MarketTruth's picture

WAKE UP! The 'full faith and credit' is based on the slave labor of the USA's citizens via the ability of taxation.

If you starve the beast, and also begin to barter every now and then to as often as you can, there is no 'full faith' both for the country's ability to generate tax income and in the debt-based privately owned central bank's FIAT currency.


Sean7k's picture

Black market revolution.

FEDbuster's picture

Craigslist, swap meets and farmers markets are a good start. 

Kayman's picture

"the efficient market allocates wealth towards activities which create wealth. This includes manufacturing, mining and energy production. Instead, because the market was distorted by easy credit, we began a 40-year long bubble of consumption and the financial services to make it possible."

This article is a succinct summary of scarcity of free markets. The price being paid by the unemployed.

"the country's ability to generate tax income" will price the purchasing power of the USD in the long run.

If we had a choice, and we don't without blood in the streets, I would let slimy politicians run the Federal Reserve.  Private banking criminals do not have the country's interest. Period.

I think I will go outside and throw up now.


sun tzu's picture

A million laws and regulations won't help when law enforcement is corrupt and selectively prosecutes.

AldousHuxley's picture

that doesn't mean we should make bankster's legit.


to fix corruption you need regulation that forces those in power to have some skin in the game. Align the interest with those of the public.

Ganja Jane's picture

The problem with pollution is that those responsible aren't held responsible for the costs of cleaning up the mess; itrs often left to the the tax payer to pay for  out of pocket or by means of the legal fees in pursuing the case.

Dubya made sure that superfunds are the problem of the taxpayer and NOT the company doing the pollution.

Why can't we productively shift this discussion to alternative energy like geothermal, harmonics, solar, hydro and wind power?

Summary: Government statistics show that about 70 percent of all federal energy subsidies goes toward oil, natural gas, and coal. Fifteen percent goes to ethanol, the only 'renewable' source of energy that consistently gets bipartisan support in Congress (think farm lobby and Iowa, thanks Monanto!). Large hydropower companies — TVA, Bonneville Power, and others — soak up another 10 percent. That leaves the 'greenest' renewables—wind, solar, and geothermal—to subsist on the crumbs that are left. Harmonics hasn't even entered the conversation let alone Tesla technology.

We can have 'cheap' energy with little to no pollution. The problem is the real people in charge couldn't profit and control the sheeple with it.

Sean7k's picture

With free markets, profits will drive innovation and determine energy sources. Government is NEVER a part of the solution- it is ALWAYS the source of the problem.

Ganja Jane's picture

I am all for Laissez Faire but when it comes to the environment, we need to be more careful. I am as 'Green' as they come but I don't believe the populous is creating global warming, I don't believe in 'Saving the Planet.' I'd rather address the global poisoning, weather modification using Tesla Technology along with 'Chemtrailing,' GMO's and depleted uranium. The planet will still be here if we die off. We're poisoning ourselves thru the environment we need to survive as a species.

Much love to you, my brother.

Sean7k's picture

When private property is enshrined in law, people retain the ability to make polluters responsible for their actions. It is government that protects polluters through regulation.

snowball777's picture

It's difficult to bring about a tort suit when the chromium 6 in your tapwater has given you a fatal case of cancer, don't you think?


Gohn Galt's picture

Exactly.  The corruption of our government is in every stage.  If anyone is licensed or certified, like a doctor, corporate food producer, teacher or city services.  I can guarantee that not one thing that they can produce or deliver is in your best interest.  Whatever happens to the world or the government, the days of blindly trusting others for food or medical solutions are gone and it might have only been an illusion at best.

I have take of all of my own needs, filter all air, distill all water, grow in environmentally controlled conditions.  I track the air quality inside and out.  Including alpha, beta, gamma radiation.

If a man is a beggar, he can not approach life on his terms.  So I say, empower and educate the beggars so they may become men.


Sean7k's picture

Regulation kills free markets. It is an intervention for the benefit of the few that create it. Markets need nothing except an atmosphere of sound money through the elimination of legal tender laws. As John Adams said, "you don't have to force a man to accept good money".

Captain Benny's picture

His name is Robert Paulson.

I think he's advocating the right thing regarding election reform, but success cannot be achieved in reforming this beast of a western world without some serious pain and that means a depression that will be far worse than the "Great Depression" ...

buzzsaw99's picture

No-one can be trusted to administer the money. Everyone steals. It is a fatal flaw in any proposed system. This is just more of the same. Some bankers get rich while the people who actually produce are exploited.


Here is my suggestion:


1) massive dieoff.

2) self sufficiency.

3) barter.


It's the only way forward.



flacon's picture



1) massive dieoff.

2) self sufficiency.

3) barter.


That's why humans invented MONEY and TRADE because those three things are too unappealing for an extended period of time... but I hear you man! I hear you! 


buzzsaw99's picture

yeah, unappealing, unappealing to those who wish to exploit the labor of others.

RockyRacoon's picture

Yep.   And this part lacked sufficient explanation: based upon a single asset is a terrible idea.

The argument given, about all the eggs in one basket, is a bit limp.   Having too many baskets allows for gaming of the system.   A gold standard is a focused and direct asset that has historical significance.   Of course, the Federal Reserve will have to be dissolved to accomplish that.   Therein may lie the fly in this ointment.

And, please, don't anyone post about economies with gold standards have failed or had other problems.   They were not true gold standards in the classic sense.   Yes, a gold standard can be gamed as well, but it will have to be twisted into something only called a gold standard -- not the real thing.   Does anyone really think that the U. S. has a "Democracy" or "Free Markets"?   Same concept.

(Yeah, I know it's a Constitutional Republic.   A person's gotta cover his ass in all ways possible around here to keep from getting slammed.)

blunderdog's picture

I love ya, Rocky, but the idea that *any* fixed resouce commodity is going to somehow solve the problem of human corruption is just WRONG.

Let's say, just for sake of discussion, we had a PERFECT gold standard in place tomorrow.

What is supposed to happen to all the people who own no gold?  They trade in their "savings" or "wealth" for some amount of gold, right?  So the amount of gold available defines the current gold "conversion rate" according to whatever everyone considers their "wealth" today.

Now tomorrow, when I lent my friend a few bucks and told him to give me an extra buck back, is the "conversion rate" of gold supposed to change?  Because of the PRIVATE CONTRACT that existed between me and my friend?

Problem: any fixed exchange-rate for a physical commodity is incompatible with EITHER: a free market of floating exchange rate, OR a functional credit market.

Which of those common assumptions do you want to sacrifice?  Floating exchange, or a credit market?

Alpha Monkey's picture

I love ya, Rocky, but the idea that *any* fixed resouce commodity is going to somehow solve the problem of human corruption is just WRONG.

The solution is to let it be free floating, not fixed, with price discovery by the free market.  Once the price reaches the true value, it will be incredibly difficult to manipulate.  If you're wondering how valuable gold might get, imagine if everyone realized there dollar denominated "wealth" assets were just paper and poured into gold.  What might that price be, and when would it go down if everyone that was holding it as a wealth asset saved it to pass it onto their children.


Now tomorrow, when I lent my friend a few bucks and told him to give me an extra buck back, is the "conversion rate" of gold supposed to change?  Because of the PRIVATE CONTRACT that existed between me and my friend?

Small amounts of debt and interest would never destroy an economy, why do you think they should influence the price of the worlds prefered wealth asset.  Now, when governments endorse programs of over-spending on debt, (which would be much more significant amounts of money) then the world would be aware of this, and the value of gold in that country's currency would increase.  In this scenario, it is the savers who benefit when their governments decide to turn on the printing presses.  Savers who have their wealth in gold that is, not in local currency denominated assets.

Problem: any fixed exchange-rate for a physical commodity is incompatible with EITHER: a free market of floating exchange rate, OR a functional credit market.

There is no problem, we will eventually see gold take it's rightful place as the premier wealth asset, AND have functioning credit markets that are kept in check by gold.

blunderdog's picture


I think you misunderstand the point of the criticism.  It's not that my friend's and my private contract for a few grams of gold is going to ruin the system--it's that ANY private debt-contract requires quantities of gold to be "promised" which may not ever come into existence.

Something "breaks" in a fixed-commodity resource currency.  The problem is structural, logical, and foundational.  There are reasons why countries went off the gold standard, and they're not just that politicians wanted to steal more.

THIS SAID: A gold standard right now would be a good idea, as it would be somewhat corrective to the current over-creation of debt-based money.  It just won't be any kind of permanent solution, and even the simplest gaming-through of the options demonstrates why.  The economy is NOT a steady-state system.

eaglefalcon's picture

You might as well agree with your friend on how any ounces of gold he needs to pay you back instead of how many bucks, that way you don't get into a dispute later and lose the friendship.  


Why bother with a "gold standard" i.e. a paper currency backed by gold?  Why not just one world currency -- gold so that nobody would ever bother with  "exchange rates" again.  If anyone is complaining about the weight of gold, they can make payments with gold denominated check or debit card.  


In fact that is my dream world, gold as sole currency (maybe silver as spare changes), non-fractional reserve banking, no consumer credit, no mortgage, everything needs to be bought by cash gold.  If anyone wants to make risky investment, thats their choice, but no bail out from government, so they need to either eat their loss or pay big insurance money, that'll wipe out 95% of the credit, drive down the price of everything, and make a huge segment of the society responsible, productive and prudent citizens.


In fact, if gold becomes the only currency, we dont need central banks any more.  I'd rather subject myself to the force of the market than to the tyranny of bernanke

Koffieshop's picture

If the world would ever settle into a steady-state economy with no population or economic growth and have sustainable production it would be in the way you described. Also, products would cost a fortune and last a life-time. None of that cheap throw-away crap. Houses would be build to last a couple of hundred years.

It sounds wonderful, but I think we will never have this. People are ambitious assholes and need strife, discord and illusions of grandeur because that is how evolution is pushing us forward.
Lessons of the past are forgotten and if there is no problem you can be sure someone will create one.

RockyRacoon's picture

I love ya, Rocky, but the idea that *any* fixed resouce commodity is going to somehow solve the problem of human corruption is just WRONG.

Absolutely nowhere did I say that.  Human corruption is a constant, not a variable.   As for people needing gold to make transactions in a gold standard economy... how's that?   The folks with cash in their banks don't need gold, but the bank does.  It is the holder of gold in proxy for the depositor.   Farmers don't need anything but hard assets, land, and seed.

SloSquez's picture

The cure has become the disease...odd that.

Kayman's picture

Or more precisely - The Federal Reserve; the disease purporting to be the cure.

mendolover's picture

IMAO I believe we are headed for all three.

disabledvet's picture

My solution is far simpler: appoint me to all that important stuff and everything will be just fine.

Besides look at my floppy ears. How could you go wrong with floppy ears like that?

buzzsaw99's picture

polly purebred needs a new pair of shoes? ;)

delacroix's picture

wasn't underdog a drug addict?

WmMcK's picture

I thought that was Shoeshine Boy ...