How It Must End

June 9th, 2010

By Brianna Aubin

Last year, I wrote a post about the debt economy.  In it, I explained that all of our currency was based on debt, and that if all of this debt was paid off, then our currency would all disappear from circulation and go back into bank vaults.  One point that I missed however, is that once you have instituted such a system, you are never able to quit it.  In fact, not only are you not able to quit it, but you are inevitably destined for hyperinflation, financial implosion, and economic collapse.

The reason why such systems inevitably lead to catastrophic failure is very simple.  If you go back to my post about the debt economy, I explain that our money is based on debt, and that if debt disappeared from our economy, so would our dollars.  But what is debt?  It is a promissory note on future production.  When I borrow $100 from a bank or a credit card company, I do so with the understanding that I will owe them $110 later, the $10 being interest on that debt or the price of borrowing money.

This means that our dollars are not money in the objective sense, but rather they are promissory notes on future production.  Which means that any dollar which is created in our economy must eventually be paid back.  With interest.  But in an economy when all of the money which you have created must eventually return to the people who lent it (the federal reserve) with interest, where is the money for the interest supposed to come from?  Well, there’s really only one place it can come from:

You must print more money.  Which creates more debt.  Which must be paid back.  With interest.

I trust you see where this is heading.

The other thing I wanted to mention is that for a long time now, the government has allowed private citizens to donate towards paying off the debt.  Apparently contributions have been rising since the economic collapse back in 2008.  Just in case anyone here was getting ideas about patriotic donations, I warn you now: don’t bother.

Yes, the debt is a problem.  Yes, it needs to be paid off.  But remember what I said about our money coming from debt.  Ever since the economic collapse, we’ve been increasing both our debt and our money supply, as indeed we must, since under the current system an increase in one automatically creates an increase in the other.  Now let’s say that every single American decides to go patriotic on us and pay off as much debt as they can possibly spare.  Say they manage to reduce the debt by a half, or a quarter, or a third.

Well, since money is debt, reducing the debt means reducing the money supply.  And reducing the debt by a lot means reducing the money supply by a lot.  And if there’s one thing that government is absolutely unwilling to do right now, it’s reduce the money supply.  Which means that the only thing you will accomplish by paying off the debt on your own time is to reduce your personal wealth, because any debt you pay off will simply be recreated by the federal government as soon as possible in order to keep the money supply at a constant-to-expanding level.

So don’t waste your money when you know Uncle Sam isn’t actually going to value your contribution.  And remember that the implosion of the system is only a matter of time.  The only question left is how many more times the horse can go around the carousel before all hell breaks loose.  This recovery we’re supposedly going through?  Just another circle of the carousel.  Any wealth that could supposedly be generated by cap and trade, a system that allows non-producers to gain money for not producing in the true spirit of Ayn Rand’s “Railroad Unification Plan?”  Just another circuit of the carousel.

My guess?  We’ve got one more circuit left in us, funded by the last stages of the money printing and the government spending.  Many will fall for it.  You should not.  For your own sake, please use this time to prepare for the implosion, because rest assured, it is eventually coming.  Or in the words of the poet Rudyard Kipling:

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

— Rudyard Kipling, “The Gods of the Copybook Headings”

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10 Responses to “How It Must End”

  1. larry ennis |

    Not a really encouraging outlook is it.
    We are headed for one hell of a train wreck.

  2. d |

    Makes sense,but I guess you guys can’t blame Obama for it anymore,right? That also,means we can’t blame Bush,but we have always blamed the other party for all the failures,what are we to do now? “They”,have been saying the world would end all of my life,I was caught up in that frenzy when I was a youth,too. It will never happen,the economy may suffer and sputter,but some brilliant mind or the other,will fix it,not Obama,doomsday will never come,in your lifetime,unless it is nuclear. I’m still waiting for the end of the world,from the 60s. Then the end of the world,in 2000,now waiting on 2012:)

  3. Tom Carter |

    Brianna, I fear that you’re mostly right. We have to get our financial house in order. Reduce spending and increase revenues; there’s no other way. Everyone is going to have to accept that most folks are going to see some of their oxen gored.

  4. Brian Bagent |

    Tom, I think you’ve missed the point of the essay. Spending reductions and increased revenues won’t fix a debt currency any more than leeching peripheral edema will fix congestive heart failure. The symptoms may be ameliorated, but the fatal nature of the disease remains what it is.

    For most of our history, the historical dollar:gold exchange was about $17.50/Troy ounce (by federal law – 275 gr of gold is the definition of a $10 gold coin). Now, that exchange stands at about $1250, give or take. It is likely to be at $1500 by the end of the year.

    There has come to be something of a de facto fractional reserve system with regards to gold contracts on COMEX and at various internet sites where one may purchase what have essentially become gold certificates (well, in fact, they are gold certificates, they just aren’t really considered money – yet).

    If memory serves, in years gone by, the fractional reserve of deposits to gold in the banking industry was something like 5:1, that is banks had $1 of gold in their vault for every $5 on deposit. You should be frightened to learn that the fractional reserve system that has come about has a ratio of about 100:1, meaning that for every 100 currency units of ownership of these gold certificates, there is only 1% of that actual gold in existence anywhere in the world.

    I wonder what might happen to gold prices (to be read as “the value of the dollar”) should the holders of these gold certificates wish to actually take possession of the gold to which their certificates legally entitle them. I’d say that $10,000 an ounce isn’t even a little stretch, though who really knows. It is even possible that the dollar may become so devalued that nobody will accept it in exchange for any gold at all.

    As I pointed out some time back, all fiat currency systems fail, and always with disastrous consequences. There are no exceptions. Just because this is the United States of America and we are the most powerful country that has ever existed does not mean that we will be granted immunity to this immutable law of economics.

    Our founders warned, with monotonous regularity, that we should be wary of the danger of allowing a bank to control money.

    A gentleman I’ve known all of my life, a man with a distinguished record of public service and a stellar academic record, a man with whom I’ve had several discussions over the last 12 or 15 years about the nature of money, a man who has had 10s of millions of dollars in his stewardship over the course of his career, confessed to me that he doesn’t believe my generation will even have a retirement to look forward to. He is given to neither rash thought nor action, and has finally recognized the truth of what I’ve been telling him.

    Watching what is happening really reminds me of watching the final hours of my patients. There is frequently lots of thrashing, elevated heart rate, plummeting and/or skyrocketing blood pressures, rapid and shallow breathing and/or deep and labored breathing. I give them lots and lots of morphine, lots and lots of lorazepam (Ativan), lots and lots of Haldol, freqently lots of atropine and scopolamine. That they are going to die is inevitable, but all the narcotics and anxielitics do is ease the passing.

    When the dollar finally implodes, as it inevitably will, the world will be plunged back into darkness. I’d offer the Boy Scout motto of “be prepared,” but how does one prepare for such an eventuality? There is no precedent for this in history.

    When Athens collapsed, when Rome collapsed, it barely registered in most places. While they were powerhouses for their day, they were still just regional powers in a very small region. Not so with the United States and the current state of the world.

    It’s going to be ugly, and the “later” part of the “sooner or later” thing people like me lamented about years and years ago is about to expire. We are left now only with the “sooner” part.

  5. Brianna |

    Brian – I’d worried about hyperinflation being triggered by money printing. I had never before considered it from the perspective of the leveraged precious metal supply, or added into my calculations the fact that gold and silver prices were being artifically deflated through the use of fractional reserve gold and silver certificates. This is a bomb with multiple fuses and a psychological trigger that could go off with a timing which is literally impossible to precisely predict.

    I almost want to say though, better an explosion than a fizzle. An explosion could conceivably lead to a realization of our mistakes and a renewal of freedom. I don’t really see a fizzling of this bomb leading anywhere other than a slow slide into permanent statism.

  6. Brian |

    Brianna, it’s a mess – no error. I think it most probable that the increased supply of our monopoly money is going to trigger an explosion of gold and silver certificate redemption, which will tend to exacerbate the the effects of the inflated supply of cash – a classic conundrum of way too many dollars chasing way too little product.

    As with any geometric progression, growth is slow at first, but soon enough the law of large numbers takes over, which is the ultimate downfall of all fiat systems. We’ve reached the stage where the law of large numbers will start becoming evident to all but the low-normals and the deniers of fact, the Pollyanas who see nothing but sunshine and lollipops.

    Paper can be a useful proxy for money, but it cannot be money itself. There is no substitute for gold and silver, for only gold and silver can truly serve as money.

    A lesson too few have learned: if you are not as moral as your money, you will lose it.

  7. Tom Carter |

    I understand your point, Brian, but I have the same question I’ve had in earlier discussions, and it isn’t frivolous. Can you propose solutions that could be accepted and implemented, all things considered, or are we all just doomed?

  8. d |

    I guess the crazy survivalist will be the only ones that make it,doomdayers,I guess I am that polyanna. It just will not happen,Brian. If you like,you can go live in the woods with those guys who are waiting for the end of civilization,there’s a group in Dayton,but from what I hear,they have to know you are coming,or you will get shot. Folks been waiting for the collapse of our government,since it began,just not convinced that the end is near. Maybe,I will stock up on water,couldn’t hurt,hurricane might make it here,anyway.

  9. Brian Bagent |

    Tom, there is no solution that a large enough percentage of people will willingly bear. As I pointed out, the only ethical money is a supply that cannot be readily inflated, and that limits us to precious metals. There is nothing else that is workable in the long term. Nothing. And there have been attempts for thousands of years to get around the fact that only gold and silver will work.

    The only solution is to never let the cat out of the bag to begin with. Once it’s out, there is no way it’s going to go back in. This cannot be fixed.

    The Athenians devalued their money, the Romans devalued theirs. I don’t know, but I’d bet the Persians and Medes devalued theirs as well.

    I can’t decide if it’s avarice or hubris that drives the push toward fiat money, but I don’t guess it really matters because the end result is going to be tyranny or anarchy.

    Doris, nothing would make me happier than being wrong on this. For me, life couldn’t get much better than it is right now. I want to be wrong. I absolutely positively want to be wrong. But the evidence is pointing in the other direction.

    The difference between us is that I know it can happen anywhere that reality and consequences are ignored. You believe it can’t happen here because…why do you believe that it can’t happen here?

  10. Tom Carter |

    Brian, not to drag this off onto a tagent, but I’m not sure that currency devaluation had a lot to do with the eventual decline of Rome. They hung on for about 1,000 years, in one form or another, and that’s a pretty good run. Whatever currency devaluation had to do with it, I’m sure other little things had a lot more influence — barbarian invasions, internal upheavals, poor leadership especially during the imperial period, corruption, rivalries, sweeping demographic changes, and just the general march of history.

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