When Money Dies

Americans experienced a major financial crisis in 2007-8.  Some would argue that it began far earlier, and clearly it is ongoing today.  We may be more aware of this crisis than others because it confronts us daily.  In preparing for what is to come, we would do well to listen to those who saw it coming and who continue to warn of its’ inevitable consequences.

Beyond all the foolishness and greed running rampant in the financial world, one great threat hangs over our future more than any other: The greatest expansion of debt the world has ever seen.  This is in large part due to non-stop deficit spending by governments.  Corporate borrowing has recently exploded similarly.

However, we need to understand that this has been made possible by a credit-based monetary system.  Easy access to credit, which is money created out of thin air, has led to the belief that credit is wealth.  This fantasy has infected society from top to bottom.

When a credit-based monetary system functions the way central bankers wish, the money supply should expand only slightly faster than economic growth.  Enough additional money must be created to cover the growing cost of servicing the expanding debt.

But, since 2008 the central bank (which we call the Federal Reserve) has expanded the monetary base almost four-fold while the economy has grown very little.

They call this “money”, but it is mostly debt.

The arrangement is extremely profitable for banks and the wealthy elite.  It allows for all kinds of mischievousness.  And, it depends on inflation, which is a long-term problem for the rest of us.  If it sounds to you like a Ponzi scheme, you are not alone.

In managing the money supply to avoid the growing threat of another banking crisis, the Federal Reserve has facilitated repetitive cycles of booms and busts, each more severe than the last.  This has perpetuated major social and economic distortions and dislocations.  It has stifled any possibility of restoring normalcy to the lives of ordinary Americans.

The economy has not been permitted to return to a normal and balanced condition.  Nothing has been fixed.  Extremely low interest rates have encouraged rapid growth of corporate and government debt, so the situation has been steadily worsening.

At such extreme levels, there are only two paths forward: default or devaluation.

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. Consequently, they are struggling to gradually devalue the currency in relation to the cost of goods and services.

The government hopes desperately to meet the nominal cost of Social Security, Medicare, and other long-term budgetary obligations without defaulting.  This means the value of the dollar must fall significantly.

By altering the method of measuring price inflation, rising prices have been masked and social security payments held to a minimum.  Only those who live in the real world know the truth.

The devaluation of currencies is taking place around the world as budget deficits grow. Central banks attempt to minimize the interest costs of huge debt loads, while at the same time trying to avoid the failure of banking institutions that depend on interest rates.

Monetary economist and former banker, James Rickards, has written that “financial crises have supplanted kinetic warfare at the center of complex system dynamics. Financial crises in 1998 and 2008… are warnings – tremors ahead of a misfortune beyond imagining.” (“The Road to Ruin”, 2016, p.204)

The consequences of all this are profound and unpredictable.  We face a deepening crisis that will exaggerate all others, severely limiting the capacity of businesses to grow and create jobs, undermining our standard of living, and making it impossible to address pressing needs without worsening monetary instability.

The dependability of a productive, self-sustaining economy has been sacrificed to the tyranny of selfish interests.

Strangely, however, the wealthy elite have behaved like parasites that destroy their host.  They have wrecked the healthy economy upon which their profits depend.  And they have exposed themselves, as well as the rest of us, to the evaporating value of credit-based money.

Tom

Please look for the next post on or about October 6.  We will take a look at the problem of complexity, and the realities of financial markets and other systems that have vastly exceeded the human capacity to fully understand or control.

The Deeper Crisis

We live in extraordinary times. Having entered a period of successive and interacting crises, we are challenged to pull together as a people, to clarify our purposes for safeguarding the integrity of our nation as a democratic republic, and to determine effective means for doing so.

I have commented here that we face a range of diverse crises, all emerging into view at virtually the same time. We have reviewed a number of them very briefly on this blog, and several at greater depth.

Some, like the continuing financial crisis, have impending implications. Others, like the unrecognized instability of complexity in today’s digitized world, remain hidden, but may well provide the trigger that sends things into freefall.

(See blog posts: February 6, “Why the Bankers are Trapped”; February 13, “Insolvency and Devaluation”; February 20, “A New Kind of Crisis”; and March 13, “The Hidden Dangers of Complexity.”)

I have placed emphasis on the coming financial storm because it hangs over us now, waiting for a trigger.

The too-big-to-fail banks are now bigger than they were before they helped bring down the economy in 2008. The federal debt has risen by 83% since that time. We see an increase of low-paying service sector jobs while our economy continues to lose higher-paying jobs.

The stock market has shot upward with no foundation in economic reality, and has now reached irrational valuations not seen since just before the 1929 panic and the dotcom crash of 2000.

The Bank for International Settlements (BIS), which is the central banker to the world’s central banks, announced recently that central bankers will be out of options when the next crisis hits.

Essentially confirming my points in the February blog posts referenced above, the BIS suggests that the major central banks have mismanaged the situation to a large extent because they don’t understand it. Previously “unthinkable risks,” they said, are coming to be “perceived as the new normal.”

The International Monetary Fund (IMF) also released a report recently, stating that “key fault lines” are growing across the US financial landscape, and that “new pockets of vulnerabilities have emerged.” The largest and most interconnected banks, the IMF concludes, “dominate the system even more than before.”

As imposing as this unfolding drama appears, in my view there is a more fundamental crisis. And, it is clearly visible behind all the others.

I have written here, (as recently as June 26), of the stunning loss of personal integrity – honesty, trustworthiness, responsibility – we have witnessed in recent years. A profound collapse of moral standards has taken place on a broad, societal scale.

This is the deeper crisis, and it may ultimately be responsible for the general deterioration that is dragging civilization to its knees. I say this because trust and responsibility are the basis for the sound functioning of human affairs, and lack of them has led to crippling disorientation and disorder.

Why has this happened to such a broad extent? Certainly we have lost the ethical and intellectual foundations that have contributed to stability in the past. But, why? We are intelligent people. What happened to good judgment? Where is common sense?

Have we walked away from responsibility believing that honesty and fairness limit our freedom? Has the daily bludgeoning of mass media warped our minds and stunted our capacity to think for ourselves?

Whatever the reasons, we are now reaping the whirlwind. For a world where many young people have grown up with little effective parenting, and many of their elders have lost any meaningful grounding in values or virtues, there will be no guidance available in the chaotic upheavals that lie ahead.

Analyzing and explaining the prospective dangers we face is beyond the scope of this blog and book. Rather, I seek to gather Americans around a constructive response that is rooted in our local communities, irrespective of unpredictable events.

Tests that require us to pull ourselves together and rise to our full potential might actually be the only antidote to the toxic cocktail of partisan negativity that is poisoning the American soul.

Stability requires and integrity demands a rational and compassionate response to the downward spiral of social and economic deterioration.

Tom

Next week: Responsibility, personal and practical

Unless we love the truth…

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“Truth is so obscure in these times, and falsehood so established, that unless we love the truth we cannot know it.”

–Pascal

“Truth exists; only lies are invented.”

–Georges Braque

The Wisdom of Free Markets

In recent years we have witnessed the ultimate consequences of failure to protect the orderly efficiency of free markets. Instead, we have seen the marketplace subverted and overwhelmed by the forces of greed and self-interest.

Regulation of markets is essential, no less than the enforcement of traffic laws on our roads and highways. But, the primary purpose of regulation in a complex economy must be to protect the integrity of free markets from manipulation.

Never has this necessity been more apparent than in the recent damage caused by major financial institutions.

It appears to many of us that the self-serving excesses of powerful financial interests have been aided and abetted by the very agencies and institutions that should be responsible for the integrity of the marketplace.

There are some who suppose that recent economic problems were actually caused by free markets. This could not be further from the truth. Indeed, the destruction of free markets in the United States in recent years has been nearly complete. A crippled national economy is an inevitable consequence of this damage.

Free markets are essential for very practical reasons. While the concept has significant philosophical implications, the economic reality is simple and entirely non-political.

To maintain a productive economy, markets must have the capacity to perform accurate price discovery across an immense complexity of activity. That is, markets must be permitted to respond without interference in determining prices and value based on the dynamic aggregate of economic activity in the real world.

When this function is upset, critical information becomes distorted and economic reality is misrepresented. Further, distortions take on a life of their own, projecting themselves broadly in ways that are insidious and often impossible to recognize.

Under present circumstances it is not possible for firms, especially small and medium-sized enterprises, to assess risk and make expansionary decisions. Confidence has evaporated.

This is significant in part because small and medium-sized enterprises (SMEs) have historically generated virtually all meaningful job growth. Large corporations have, with very few exceptions, been net destroyers of jobs.

There tend to be two primary motives for interfering with free markets. One is the good intentions of those in government and academia who think they know best. The other, which has emerged more recently, is the virtually unlimited cunning and greed of powerful banking and financial interests that now dominate the marketplace with their high-powered computers and manipulative genius.

Whether motivated by good intentions or by greed, the manipulation of markets will inevitably produce imbalances and, ultimately, the massive distortions and dislocations that we are now witnessing.

While it is true that markets can be afflicted by unintentional pathologies, these need to be studied and understood as such by stewards committed to protection rather than control.

Why are well-intentioned planners unable to influence markets effectively? As we discussed last week, the answer lies in the immense complexity of a dynamic economy. It is impossible for the human mind to fully comprehend the vast realm of interactive forces and their aggregate implications. There is simply no way.

The ultimate consequences of market interference can take time to manifest visibly, especially to those who are emotionally invested in doing it. But, as we have seen, the consequences can be quite spectacular.

Those who get hurt the most are those who are most vulnerable rather than those most responsible.

Let’s not to compromise the values of free enterprise in reaction to poor judgment and bad behavior. If we are to rethink our economic future intelligently, we must do so with a rules-based approach founded upon economic principles rather than one motivated by a discretionary human agenda.

And, make no mistake! Neither economic principles nor social stability will prevail without a firm foundation in the honesty, trustworthiness, and personal responsibility of real people. Economic reconstruction will not be possible until integrity is understood and confidence restored.

Those who fail to comprehend this truth need to wake up to the destruction around them – and get real. At this writing many in the financial world remain in denial.

Tom

Next week: Escape From Insanity

Coin, credit and circulation

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“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
–Mark Twain

“All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation [money].”
–John Adams

“The time to save is now. When a dog gets a bone, he doesn’t go out and make a down payment on a bigger bone. He buries the one he’s got.”
–Will Rogers