In A Paper System, All Assets Are Backed by the Treasury Bond

Tyler Durden's picture

Submitted and © by Keith Weiner, president of the Gold Standard Institute

In A Paper System, All Assets Are Backed by the Treasury Bond

In a gold-based monetary system, every asset is ultimately backed by gold.  This does not mean that every debtor (including banks) keeps the full amount of its liability in gold coin just lying around.  Why would one bother to borrow if one did not need the money?

It means that every asset generates a gold income and every asset could be liquidated for gold, if necessary.  If a debtor declares bankruptcy, the creditor may take losses.  But he can rely on the gold income stream for each asset or if need be he can sell the asset for gold.

In a gold-based monetary system, money is gold and gold is money.  Money cannot disappear; it does not go “poof”.  Bad credit can be defaulted and must be written off.  But money merely changes hands.

In a gold system, the promise of the gold coin is the only reason why anyone extends credit in the first place.  Since 1913, there was a step-by-step evolution to our present irredeemable paper system.  Now creditors are forced to accept the government’s scrip as payment in full.  It continues to work (for the moment) partly because of inertia, but mostly because there is (still) good credit behind the dollar.

Let’s look deeper at what backs the money in the present irredeemable paper system.  Start by considering this brief anecdote.  Joe buys some equipment from John, to be paid Net 30.  We say that Joe owes John $10,000.  Next month, Joe comes back and gives the money to John.  Joe is out of debt, but has the debt been extinguished?

No.  The debt has been transferred.  Now the Federal Reserve owes John the money!  Surprised?  Don’t be.

The dollar is the liability of the Fed.

The Fed, like every bank, must balance liabilities and assets.  There is even a technical term for when they have liabilities without matching assets.  “Bankrupt.”  How does the Fed itself balance its liabilities?

The Treasury bond is the asset of the Fed.

Getting back to John, he deposits the money in the bank.  The result is that the bank owes John the money, and the Fed owes the bank the money.  The banks will typically buy Treasury bonds because they are “safe” and they pay a yield.  In this case, the Treasury owes the bank the money.

Notice that whether the bank holds Treasury bonds directly, or whether it holds dollars that are the liability of the Fed backed by Treasury bonds as the asset, the Treasury bond ultimately backs the bank.  And thus the Treasury bond ultimately back’s John’s asset, which is the deposit account.

The same principle holds true for other assets.  A stock (equity) is valued based on the expected flow of dollars it will generate in the future.  In addition, every company is obliged to hold dollars in a bank to cover payroll, pay suppliers, etc.  Few companies could survive one minute past the default of their banks on these deposit accounts.

If this all seems perverse, that is because it is!  The dollar is backed by the Treasury bond, and the Treasury bond is paid in dollars.  It is circular, self-referential, and it is a ponzi scheme.

Under gold, the metal itself is the risk-free asset.   This is not a mere definition, but an observation about reality.  Gold simply is.  It is not a promise and therefore cannot default.  But under paper, the Treasury bond is defined as the risk-free asset.  Obviously, one cannot eliminate risk by defining it out of existence.

It is important to emphasize that if a party’s asset goes bad—especially with the leverage employed today—it will be forced to default on its liability.  By the design of the system, its financial assets are someone else’s liabilities (and its other assets depend on the liabilities of the Treasury).  The ultimate “someone else” is the Treasury in all cases.  When they default, all financial assets will be wiped out.  This means all debtors will default.  This means all creditors will take total losses.  Creditors include not only corporate employers, but savers, pensioners, annuitants, etc.

The next time someone blurts out that the dollar works just as well as gold (or better than gold!), an explanation of this should shut him up.

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Abraxas's picture

In other words they are backed by nothing

Abraxas's picture

Great minds think alike :-)

Dalago's picture

The quickest way to get out this fiasco is to put interest rates to 10%.  Ben Ber-fucking-nancy study the wrong depression.  What a human wasteland.  Depression of 1920 is the correct one:


"What country can preserve its liberties if its rulers are not warned from time to time that their people preserve the spirit of resistance?"  - Thomas Jefferson

redpill's picture

Money backed by debt is not backed by nothing, it's backed by less than nothing, since debt is a negative.  You actually incur liability by holding debt-backed fiat.  On a long enough timeline...

iDealMeat's picture

Sure its somthin..  Your debt is currently $ 139,919.00    You're  good for it right redpill??   So we can consider that debt an asset..

resurger's picture

The bankers disagree with your statment!

When interset is negative

Interest Margin = Interest Received (Postive) - Interst Paid (Postive)

The Interest Margin will be higher which translates to 30 bedroom houses, yachts and bollingers.

I just love this Clip "It explains the ponzi 100%"

When the interst is all negative, the sheeple will wake up and say

"Give me whats left of my money.."

Now the depositors who have deposits worth Trillions and Billions of dollars, there will be the real problem, will they be happy to place them in Zimbabwe?!

Is it still gonna be a flight to safety for the return of capital and shrugging the return on capital.

Gold is FTMFW

AldousHuxley's picture

asset appreciation is backed by hope

knukles's picture

As in, I hope that collateral is good.
Or he hopes I'll pay him Tuesday for the hamburger today.

That kinda hope?

metastar's picture


Assets are backed by Treasury Bonds
Treasury Bonds are backed by Citizen Slaves
Citizen Slaves are backed by Government guns pointed at their heads.

AldousHuxley's picture in hope that there is a great fool to pay MORE and get LESS

BigJim's picture


Dollars are ultimately backed by oil which can only be paid for in USD, and the coerced extraction of value from citizens (mainly US) who have to work to get paid in them.

If foreign exporters decide they don't want to exchange value for our paper, then all those dollars out there start flooding home and we have a big problem.

iinthesky's picture

To my knowledge, the banks of their own volition do not create the 'credit'' that they loan you. They need your signature on a mort-gage (Death Bond) or some such. Then they proceed to do their accounting tricks and effectively loan you back your own credit. According to the federal reserve's own documents they take the Promissory Notes and deposit them into accounts they create as CASH. They proceed to transfer that cash over to a new account from which a check is drawn and handed right back to you. I believe they like to wordsmith this into 'Origination' and they even charge you to do it. This is overly simplified with the advent of securitization also known as fraud. In any case, now you allegedly owe these fucking clerks (Clerks/Clerics/Priesthood hmmm?) your life's blood and energy. Really?!?

Think about it! Who is the original creditor here in respect to the scumbag banksters? YOU ARE! What a fucking scam! Unreal!

See, the system has gotten wise to us getting wise to them. If you go to a small local or regional bank and ask them about this (I have done this), even if you speak to the CFO of a small commercial bank (I have done this too), they will look at you like you are insane if you ask the wrong questions or explain how this all works. I'm not sure why this is but pondering upon it I suspect that the large globalist money center banks are the only ones who can pull this money conjuring trick. You know, the ones who own the Fed and BOE and BOJ etc. ad nauseum. They then funnel that cash down to their warehouse lending arms or bigger regional systems who in turn make 'loans' to smaller commercial banks at interest who in turn 'loan' you money. This is done to create the illusion of legitimacy because the smaller banks can then claim they actually did make a loan and tendered valueable consideration as their end of the contract. This has the added effect of insulating the treasonous treacherous scumbags traficking in human souls; these are vampires engaging in the seditious overthrow of the United States of America, and their crimes are LEGION!

I don't know if this is actually how it works but like I said, I suspect it is this or some variation of this theme. I would imagine that even the comercial branch offices of the money center banks are seperated and compartmentalized so that those franchisees must pay the LIEbor or the prime rate or whatever rate as well to 'corporate HQ'.

Then, adding insult to injury, granted that the financial system more or less runs government, and that government today believes quite strongly, as did Comrade Lenin, that Government has a monopoly on force, if the system goes off course, YOU and I get to foot the fucking bill. And we are so blind, most of us, that we are selling our own children into slavery, happily and willingly. So many useful idiots react to the idea of a world without income taxes with counter arguments like the roads would disintegrate and there would be spontanious flaming inferno's that would burn cities to the ground and that the wonderful militarized riot gear clad steroided out cops would not provide their merciful protection (a.k.a. shooting you in the head while handcuffed in the back of a squad car for having a bag of weed in your pocket). The mere mention of the possibility sends people into fits of raging frothing sometimes savage outbursts of socialist fervor. It is stunning!

"My people are destroyed for lack of knowledge: because thou hast rejected knowledge, I will also reject thee, that thou shalt be no priest to me...."


Juan Wild's picture

Amen to that. You oughta see the vapid looks I get when I try to explain this to someone while waiting at the bank. They look at me like I have lobsters growing out of my head or something.

diogeneslaertius's picture

money backed by debt is a congame


all currency that goes into circulation has debt attached, an inherently, mathematically unsustainable vector- but of course that was the point of it all wasnt it?


the point of the ponzi scheme is to rope people in and then implode them


AldousHuxley's picture

but when everyone plays the same con get today's mess...

cranky-old-geezer's picture



Money backed by debt...

Real money doesn't have to be backed by anything.  Its value is intrinsic.

Paper currency isn't money.  It's a claim check for money when it's redeemable for gold, silver, etc.

When it's not redeemable for anything, it's just a derivative.  A naked derivative, meaning there is no underlying asset.  

FRNs aren't backed by treasury bonds. They're not backed by anything.  It doesn't matter what's on the asset side of Fed's balance sheet, you can't exchange a 10 dollar FRN for any of it.

What if the Fed went bankrupt?  Then your FRNs would be worthless.   You wouldn't be entitled to anything on the asset side of Fed's balance sheet.

FRNs are not Fed stock.  You don't have any ownership stake in the Fed when you hold FRNs.

FRNs are bank notes.  But what does "bank note" mean?  It really doesn't mean anything.  There is no promise to pay anything, like a traditional note would have.

Some people say FRNs are "debt money".  That's wrong too.  They're not money, and there's no debt associated with them.  There's no promise to pay anything.

Technically they're worthless pieces of paper.  They have no intrinsic value, and there's nothing associated with them, no promise to pay anything upon demand.

The only half way appropriate thing to call them is a derivative. A naked derivative, since there's nothing underlying them.

They're like Monopoly money.  They have value only in that game.  Nowhere else.

FRNs have value only in the Fed's game.  Whereever that game is being played. 

Right now Fed's game is being played all over the world.  FRN is "world reserve currency".

But some nations are starting to move away from that game.  Because they see the Fed printing boatloads of those FRNs, diluting whatever value they have.

They don't wana play Fed's game anymore, and they're moving away from Fed's "monoply money" used in that game.

BigJim's picture

Sorry, wrong.

FRNs, at the very least, represent subdivisions of (and are thus worth) whatever value can be extracted by the oligarchy that issues them (in this case, the US government - and, yes, I know the Fed isn't part of the US govt, but the US govt is definitely part of the Fed) from the people who are obliged to create and exchange value for them so they can meet their tax obligations.

It's no different from the old tally-stick system. Transferable debt becomes money for the same reason commodities like gold* and silver became mandatory in most civilisations - because if you're unable to cough up the requisite amount of it you'll be thrown into a cage (or worse) by our beloved overlords. Yes, gold and silver are preferred and naturally arise as money in free trade, but so what?

Unlike tallysticks, what FRNs also have going for them, is the fact our satraps in the middle east will accept them for civilization's lifeblood - oil.

Is it good money? No. Is it manipulable and the product of coercive knavery? Yes, but that's beside the point: debt can be money, and it has as much value as its issuer can coerce from its citizens and client states and their citizens. Betting on the collapse of FRNs is betting on the end of the US empire - the two are inextricably linked.

*if you can call something with a 60:1 stock to flow ratio a 'commodity'

cranky-old-geezer's picture



Sorry, wrong.

About what?  I made several points in my comment.


PiratePawpaw's picture

"Betting on the collapse of FRNs is betting on the end of the US empire - the two are inextricably linked."..........exactly

All empires end, and in most cases the citizens dont recognize the collapse untill they are well into it. This one will be no different.

The FRN will end up in curio cabinets along with Talents, ReichMarks, Confederate Dollars etc...

FreedomGuy's picture

I used to think that. However, when debt is properly done the debt is backed by an asset. When someone builds a house or car there is new product on the market that was not there before. When a bank creates money (fractional reserve banking) then there should be an approximate one to one correlation in money and assets. To hedge the loan the banks used to require something down. Let's say you have a no money down VA loan and you borrow $300k to buy a new home. There is new debt of 300k versus an asset of 300k. New products and money have come into the world.

What is true is that we are issuing money with no assets and issuing more money with depreciating assets. This leads to an economic abyss and destruction of value. Price discover gets ever more painful.

BigJim's picture

You raise an interesting point re: creation of new money to buy 'new' assets.

Let's think this through. The house (say) is created via land (ie, materials) and labour (and management etc). If these are paid for on credit, the money is created via fractional reserve lending. Then, when the house is purchased, that money is destroyed but new money is created for the purchaser, who will pay the money back (say, over thirty years). So... we have a 'new' thirty year old house, and the new money that was created to pay for it has been destroyed.

Versus.. paying it all from existing savings; then that new money would never have been created.

So, what happens, is that the money supply increases to match the purchase of the new asset (which is inflationary), and then shrinks when the debt is paid off (deflationary), versus a slight deflationary effect when new stuff is created, and new money to pay for it, isn't.

If the money supply were only expanded to pay for literally new assets, and then contracted when the new asset is no longer of any use, then the overall monetary effect would be neutral (of course, in the case of houses... they tend to last much longer than the period of credit)

What you're overlooking, however, is that a lot of the value of the 'land' (ie, materials) for the product may have already been reflected in the money supply. So, for instance, when I take out a loan for $300,000 to buy that new house, the increase in the money supply isn't just reflecting the increase in value of assembling all the building materials on an existing plot of land, which may only be something like 20% of the final price; the money created is for the total outright price, despite the fact that only 20% of its economic value is 'new'.

WTF_247's picture

Impossible to do that.

The govt has run up so much debt they cannot afford to pay 5x the interest.  16T x 10% = 1.6T in interest.  We only collect 2.5T in taxes.  Now some of it would be delayed because existing bonds will last 5-7 years before needing to be refunded.  But a significant portion of the debt is rolled over weekly.  This would cause an immediate cash problem at the govt which could only be solved by even more aggressive deficit spending.

redpill's picture

We can fix that, just end the Fed and "vanish" their treasury holdings.

diogeneslaertius's picture

it really is that simple, we just need the political will to do it

JLee2027's picture

John "Vaporizer" Corzine is the man for the job.

cranky-old-geezer's picture



We can fix that, just end the Fed and "vanish" their treasury holdings.

You're dreaming of course.  It won't happen in the real world.

Yea there's a lot of "should'a - would'a - could'a" out there, things that should happen.  But they won't.  You know it.  I know it.  Everybody knows it.

I prefer to live in the real world where the Fed will go right on doing what they're doing.

The real world outcome is massive currency printing, hyperinflation, then currency collapse.  It's gone that way for every fiat currency, we're on that path now, this one will go the same way.

That $16 trillion government debt?  It won't be defaulted on.  It will be debased away.  When the dollar collapses, becomes worthless, that $16 trillion debt becomes worthless too, because it's payable in dollars ...worthless dollars by then.

Whiner's picture

Look here, Geezer. I am The Bearnanke. I am the worlds reserve currency. You hear me? You can't buy oil without me! Get your head on straight, you frigging sheeple spit. I own the world's biggest damn printing press and frigging helicopters out my ass! I wrote the f**king book on the depression. I will print, damn you, print, print, print! The world will bow down to me. Barry's got the only military to back my Empire of Money. Can you say "House of Saudi" blockhead? They will pump, pump, pump like a horny camel. You ever seen that? Get that smile off your face, and get religion today, debtslave! I will naked short, crush your frigging GOLD, MF, until you bleed tungsten! My Open Markets Committee will, buy, buy, buy and my PDs will hand you your golden egg head so bad you will crap your pants and beg for your own FRNs. Repeat after me, fool, " The real world has no-NO f--cking choice. They gotta print when I print." China can go pound sand.I own them. Can you Say "OWN THEM"? Say it or I'll short your miners to hell. I own you too, so grovel, MF. You got nowhere to hide. (Telephone ringtone-"I Did It My way") Hold on a minute. "Jamie, buy'em at the open, low-lower, lower... Yeah there, F--ck the indirects, I gottem' drilled.) where was I geezer? Oh yeah I am The Bearnanke. S&P 15 K by election. Bots. I said, "Bots!" sniffin your ass! Why don't you short it?

Vincent Vega's picture

Pay interest? They can't even afford to repay the principal. Not no way, not no how, not never ever gonna happen.

cranky-old-geezer's picture



Who cares about the principal?   They don't.  They created the shit out of thin air anyway.

No, they just want that interest.  It's where they make money.  Interest income.  Profit. 

Don't you know anything about bank accounting?  Income and profit comes from INTEREST, not principal.

No, they don't give a fuck about the principal.  They created it out of thin freikin air anyway.

They'd rather keep that principal out there earning interest forever ...and keep loaning out more principal ...also created out of thin air ...and earn more interest.


Arnold Ziffel's picture
When money dies: The nightmare of the Weimar collapse   Adam Fergusson  (Author)below in pdf forn those quiet nights to rea dby the fireplace):

resurger's picture

In other words they are backed by nothing

Kyron95131's picture

its backed by unicorn smiles, sun shine dreams, and a military that dwarf's the next 26 nations cumulative military combine.

redpill's picture

Speaking of which, my 3 year old won't stop playing Robot Unicorn Attack.  She isn't very good, so the Erasure song they use for a soundtrack starts over from the begining every. 10. seconds.  I'm thinking some of these central bankers deserve the same treatment, waterboarding ain't got shit on the first 20 bars of "Always" looped perpetually.


Solon the Destroyer's picture

Well I wouldn't call coerced labour from government dominated tax slaves "nothing" exactly. 

But that don't make it right and proper neither.

NotApplicable's picture

Yep, the barrel of a gun is hardly "nothing."

cynicalskeptic's picture

And Predator drones that can blow you into a million pieces - wherever you are in the world - are even better!!!!     

We've entered a Bizzaroworld where it's the DEBTOR threatening to break legs if other won't continue to lend him more money to squander (or sell him oil and other good things at dirt cheap prices).

WhiteNight123129's picture

No true, they are backed by you the taxpayer. I think it is a pretty good backing, the population is paying taxes so they can have a currency isn t that nice? The ruler lives off of the population in this paper system. If people revolt, the ruler and the currency fall together. In a non-paper system, with no central bank, there is a lot less that the population have to pay to use a currency (bank bills). Hong-Kong is close to that system.

Solarman's picture

Not quite true, they are backed by the IRS and the US Military, and their ability to extract assets or labor, here or abroad.

Kreditanstalt's picture

Not backed by "nothing"...dollars are backed, ultimately, by the government gun.  Tax (forced labor) WILL be extracted from you and me.

The shoddy truth of our system is that the promises are backed by BRUTE FORCE,

RafterManFMJ's picture

I'm just going to buy treasuries and cut out the middleman.

Newsboy's picture

No, it's GOLD that is "backed by nothing", if you will but recall the Canadian newsgirl quote from last winter...

Abraxas's picture

What do Canadian girls know. Gold is backed by God.

Solon the Destroyer's picture

But God disappears in a *puff* of logic.

Paul Atreides's picture

Now there's a man who really knows where his towel is!

Abraxas's picture

Not this God, he doesn't. Not the Mammon.

Turin Turambar's picture

Uh, sure.  Get back to me AFTER you've done a transcendental critique on the pretended autonomy of theoretical thought.

Some people think they are so clever; yet, they remain completely clueless as to the anti-intellectual nature of their beliefs, and to top it all off many of their "philosophies" are actually "anti-philosophies."

and to think I was taught that Dodo birds were extinct!  Well, that's public education for you!  lol

smiler03's picture

It's not hard to understand that you talk shite about shite.

edit: I forgot the /s and the applause