The Economy in Crisis: When Money Dies

The United States entered a profound financial crisis in 2007, although some will argue that it began far earlier.  At this writing we are perhaps more aware of this crisis than many of the others that loom on the horizon, and a great many of us have been severely impacted.  In preparing for what is coming, we would do well to consider the words of those who saw it coming and who continue to warn of inevitable further consequences to unfold.

I will not elaborate here except to observe that we are experiencing the calamitous collapse of the greatest expansion of debt the world has ever seen.  While this is largely the result of irresponsible spending, it was made possible by a credit-based monetary system.  It is essential that we understand what this means.

We have been brought here by a monetary system in which money is routinely created out of thin air.  In such a system, under normal circumstances, the creation of new money should expand only slightly faster than economic growth.  Enough additional money must be created to cover the growing cost of servicing the expanding debt.

If you are wondering if this is a Ponzi scheme, you are not alone.  However, it is most important to recognize that this has perpetuated social and economic distortions and dislocations.  The economy has not been permitted to maintain itself in a healthy, balance manner.

In the past five years the US Federal Reserve has expanded the monetary base almost four-fold while the economy has grown very little.  On one hand, this exposes the country to a potential future explosion of inflation. When the economy actually starts to “recover” and money begins to circulate in the consumer economy again, it will greatly exceed what is needed for smooth functioning and the Fed will have no realistic way of withdrawing the excess.

However, more immediately, the massive money printing has had the opposite effect than was intended, depressing the economy with disinflation that could lead to outright deflation.

This is a crisis brought on by overwhelming levels of debt.  Since 2008, extremely low interest rates have allowed both corporate and government debt to surge rapidly.  The situation is worsening and cannot be resolved until the markets are permitted to clear the debt, which is weighing on the ability of the economy to mend itself.  And, at this writing the authorities have not allowed the markets to clear.

Debt must default and be liquidated before economic productivity can recover, but the immediate pain of bankruptcy is too great for the bankers and policy-makers to bear. So, they have attempted to gradually devalue the currency in relation to the cost of goods and services.

The government has been masking price inflation, (and limiting the size of social security checks), for a number of years by altering the method of measurement.  This was accomplished by ceasing to include food, energy, healthcare, and other basic essentials in the calculations

The same devaluation of currencies is taking place around the world. Governments must minimize the cost of carrying huge debt loads they will never be able to repay, while at the same time trying to avoid the failure of banking institutions, none of which have adequate reserves to sustain investment losses or defaulting loans.

What is the bottom line for the American citizen?  The United States hopes to meet the nominal cost of Social Security, Medicare, and other long-term budgetary commitments without defaulting.  This means the real value of the dollar must fall significantly, which will cause equivalent price inflation.  In addition, the efforts of monetary authorities to keep an impossible situation from imploding are increasingly destabilizing.  The consequences of all this will be profound and unpredictable.

It is a deepening crisis that exacerbates all other problems, severely limiting the capacity of businesses to create jobs, destroying our standard of living, and undermining our ability to address pressing needs.

Strategic thinking and practical tools for preparing ourselves for an uncertain future will be addressed in Part II of the book, which begins with Chapter 8: Establishing the Foundations for Security.

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