Debt-based fiat money, which implies never ending debt and constant inflation, is not a sound, stable or sustainable monetary system. Major economic problems today, such as rising global commodity prices and the sovereign debt crisis, are not aberrations or inherent problems of capitalism, but are the inevitable consequences of a centrally planned system that, by design, produces never ending inflation, ever increasing centralization of financial power and increasingly extreme concentration of wealth.
Monetary systems that rely on debt-based fiat money can be accurately described as confidence games and the global cartel of central banks that exists today is similar to a criminal cartel, such as the drug cartel, except that the banking cartel has been legalized,can extort hundreds of billions from governments with impunity,and can conjure unlimited trillions out of thin air for its own benefit with no accountability. In stark contrast,hapless billions of people labor worldwide for single-digit hourly wages on an ever faster moving hamster wheel of inflation and debt.
Like a commodity, supply and demand is the putative basis for the value of money in the field of economics,but many economists and most investors know very little about the underlying structure of the monetary system. The legal and,in a systemic sense,mathematical structure of money is debt,i.e.,a note or debt instrument, thus money is the liability of its issuer (a government or central bank),rather than a tangible asset. Money,which is a purely legal construct (rather than a direct representation of a physical asset or an actual commodity),is created ex nihilo through legal agreements,such as mortgage loans,car loans,student loans,credit card charges,business loans,etc.,hence the term “fiat” money. Governments help banks to create money by borrowing for deficit spending (and by paying interest on the debt),but central banks create money directly through loans to banks or favored parties,debt monetization and asset purchases.
The reality of debt-based fiat money has many implications and consequences. The most important fact is probably that such a monetary system must constantly expand because,when money is debt,interest payments require the money supply (and debt levels) to constantly grow regardless of population growth or sustainable economic activity. In other words,debt-based fiat money systems are inherently inflationary and banks are in the inflation business. Monetary policy must favor inflation so that,overall,interest payments can be met,preventing the system from collapsing in a deflationary spiral of debt defaults. For this reason,the value of the U.S dollar has declined to the equivalent of roughly $0.03 since the founding of the Federal Reserve in 1913. The Federal Reserve’s supposed mandate of price stability is as absurd as it is impossible. In fact,the Federal Reserve itself,through its monetary policies,is the ultimate source of monetary inflation and the most general cause of rising prices.
A debt-based fiat money system,together with the monetary policies necessary to support it,eventually causes debt levels to grow to unsustainable levels, resulting in unsustainable economic aberrations,such as the dot-com and housing bubbles, and producing the boom and bust cycle of credit expansion and contraction, euphemistically called the “business cycle”. Obviously,infinite growth is impossible in a finite world and phenomena that increase by a significant percent per year,e.g., the money supply,increase exponentially,which does not characterize sustainable systems. Without debt-based fiat money,a massive U.S. federal government equal to roughly 35% of GDP,a gargantuan banking industry equal to 20% of the S&P 500,a vast military industrial complex costing hundreds of billions per year,and perpetual foreign wars costing trillions of dollars would be unlikely,if not impossible. Of course,a perfect monetary system has yet to be invented,but debt-based fiat money has more disadvantages than advantages,and the advantages accrue only to a select few.
A Broken Promise
When a transaction for goods takes place using debt-based fiat money one party holds goods and the other holds a note,which is a financial system asset of the holder but a liability of the issuing government or central bank,i.e.,money is a liability,not an asset,of the issuer. The most obvious question is whether the government or the central bank in question is good for the debt. Since fiat currencies are not redeemable,the only way the issuer can be good for debt is in terms of other fiat currencies,all of which decay in value over time. Fiat currencies are backed essentially by the words “full faith and credit” which,in a practical sense,refer to the government’s ability to tax its citizens. In reality,however,the words “full faith and credit” mean that fiat money is backed by hollow promises that history shows will eventually evaporate.
Fiat currencies,which have absolutely no tangible,physical backing or real,lasting value,depend solely and totally on the confidence of their users,exactly like a criminal confidence game. Of course,economics is a social science rather than a hard science but,since there are no mathematical models or equations that can accurately describe or predict all possible human action,confidence cannot be reliably manufactured or maintained through behavioral techniques independent of objective reality. Although fiat currencies can function as a unit of account and as a transaction medium,they fail with one hundred percent certainty as a store of value.
The U.S. dollar became a purely fiat currency in 1971 when the Nixon Administration ended the dollar’s convertibility to gold. In effect,the U.S. defaulted on its international gold debts in 1971,thus the current version of the U.S. dollar was born with a unilateral violation of the Bretton Woods Agreement. From that point,the world financial system quickly devolved into an abstract,mathematical representation of economic activity from which paper profits could be extracted through economic rent seeking,i.e.,manipulation of the financial system,rather than real economic activity. The replacement of redeemable U.S. Treasury certificates with Federal Reserve Notes substituted a promise to pay in gold or silver with a promise to pay nothing. The transaction medium (paper notes) was substituted for the value that it was originally intended to convey (physical gold and silver). Once the gold and silver of the American People was confiscated and the gold window was closed (ending the Bretton Woods Agreement),the global financial system became a closed symbolic system dominated by computer models but decoupled from the real world,with no direct linkage to real goods,tangible assets,or sustainable economic activity. The U.S. dollar continued as the world’s reserve currency simply because it remained useful,not because it was,in any real sense,valuable. Today,the perceived economic strength and political stability of the United States has all but disappeared.
Read more: http://www.businessinsider.com/25-reasons-to-buy-gold-and-dump-dollars-2011-7?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheMoneyGame+%28The+Money+Game%29&utm_content=Google+Reader#ixzz1Rnu2LKcb
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