Interesting read from "Bear Chat"....this is serious sh*t....
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One thing modern economic principal doesn't recognize is the inherent danger of creating credit out of money, whatever medium
of exchange is used. As debt accumulates, it is used as collateral for more debt in some form or another. The problem arises in the
fact that if there is $100 Billion in hard money and it is all put into the banking system at any rate of interest and loaned out,
there is still only $100 billion in hard money. That means all the interest due does not exist and the system can only operate in a
spiraling ponzi scheme and some sort of reasonable bankruptcy. Our entire monetary system was moved from gold, to a
combination of gold and debt to pure debt, the last being the solution provided under the law of necessity by Franklin Roosevelt
under 12USC95b, otherwise codified in rules of war under 50USC5b. Currency that used to be redeemable at any Federal
Reserve bank or the treasury is now Legal Tender for Payment of all debts, public and private. Roosevelt suspended contracts
payable in gold, something the constitution said the government didn't have the power to do under normal terms and replaced this
with a system where the paper was collateralized by debts on property, whether it be real estate or the obligation of the nation
as a whole to pay its debts. The problem arises in the sense that whether the money is collateralized by government debt or
private debt, there is no mathamatical solution in the repayment of debt loaned at interest.
The is a lot of debate among some Americans as to who owns the Fed. If it is the government, then the solution can be somewhat
remedied by the government issuing debt and acquiring the bad assets in the economy as somewhere around fair market value.
The problem with this solution is the moral hazards of which Doug Noland speaks so eloquently. Does Wall Street continue to
walk unscathed, accumulating riches on the backs of the ordinary people who buy the junk they churn out? What about the
foreign investor who is financing this country and the fact that we have become literal non producers of anything that doesn't
come out of a computer, drive down the road (only to a limited degree now) or involves low level service like eating our meals out
instead of at home. My father, who is deceased, told me about his travels into South America in the 1980's. He said he was told
you could tell how poor a country was by the number of shoe shine boys on the streets. What he meant was that there was no
base of production in those countries and the majority had to rely on providing simple services to survive. Not to demean what
people in the United States are doing for a living today, but retail clerks, waitstaff in restaurants, bank tellers, even CPA's that
prepare simple tax forms provide nothing that can be sold outside the general vicinity of where they stand. Clearly, we are $500
billion per year short of goods to sell in this country and the whole problem has no mathamatical solution. Just a continuing
spiral of borrowing on a monetary base that in itself doesn't exist anymore than the means to pay off the entire debt exists. The
value of our currency only holds in the fact that it is legal tender in payment of debts, and the debts we owe are payments on our
homes, land, cars and other items we don't want to lose. You take away the debt and the money has no value, not even in the
bathroom.
If one reads the Congressional Record of March 9, 1933, they will find that Roosevelt placed on deposit at the Federal Reserve a
sum of government debt, I believe in the amount of $20 billion in return for notes. His next act was to gather up the gold in
circulation and force redemption of the gold for these notes that were payable in nothing but debt. Since the interest to pay these
notes was never created, there was always a shortfall, especially seeing as it was sovereign debt (Default on your debt and see
who comes to your aid in war)the only solution was to continually expand the debt in some fashion. Still, the government had to
recognize the money had to bear some relationship to the value of silver that was still in our coinage and so there was great care
to maintain some reasonable balance. Lyndon Johnson, in 1965, probably because he knew his various wars he wanted to carry
out would be limited by the maintenance of a relative value to silver, took the silver out of the US money altogether. I believe
people in the 1930's recognized the value of having silver in their money, but by the 1960's, the total idea of money had changed,
especially with the advent of the ideas of the Chicago School of Economics of which Doug Noland at times. Of course, this act
created an imbalance in a system that was already sure to fail and the result was a closing of the gold window and having anything
of substance behind the American currency. The result was inflation, as there was still plenty of collateral to create money and a
long term climate of economic growth that created more collateral in the idea the collateral already collateralized was worth more.
Johnson's wars gave way to Nixon's wars, Ford's wars and Carters wars. Then Reagan came along and he decided to try to stop
all wars and fight the cold war, one that at least temporarily looks to have been won.
One must look and see what happens financially after a war has been declared at an end. Something tells me that the spiral of
government debt created in wars constitutes a sound collateral to monetize after wars are over. The private sector then takes this
sovereign debt and starts banking in different manners. Some people took their government bonds and borrowed against them to
buy stock, then borrowed against their stock gains to buy more stock or real estate. Others took the same assets and used them
as a basis to issue debt, something that is real common for banks. The point is, a pile of government debt and debt perceived to
be guaranteed by the government represents the next best thing to currency or even better than currency because it is supposed
to earn interest.
Where are we today? There is talk of paying off the government debt over the next few years. That is something that cannot be
done because the very basis of the debt structure, whether it be the currency or other debt instruments, rests upon the soundness
of the debt of the government. Is a FNMA instrument going to suffice for the basis of creating the monetary base? Maybe, until
the nominal value of the collateral collapses. When the value of a currency is centered only on its value in acquiring or paying
debt, there will always be a pitfall. If debt begins to go bad, the currency loses value in the sense that one use of it is diminished,
but on the other hand due to losses of those that bought the bad debt, the other debts owed by those folks becomes
unserviceable. Thus, to make a point, if I borrowed money from my home and put it into junk bonds or stock, in part because I
could write off the interest on my mortgage and I could earn a larger amount of money on junk bonds or stock and the bonds or
stock goes down, then I am financially impared to make payment on my mortgage. My access to funds has been diminished and I
may begin to spend less in order that I recreate my necessary financial cushion and keep a roof over my head. As this process
accellerates, we have what is known as deflation and it may actually be inflation in the sense that prices don't fall as fast as the
availability of liquid assets does. This the material from which depressions are created.
So, in the end, Keynesian economics has created the same economic hole in the ground that it was evolved to solve. In reality, it
was nothing but a scheme to place the intellectuals in charge of our lives, something a man like Ronald Reagan recognized and the
intellectuals knew it. The truth about money and interest is as old as the bible and if one reads the rules in the old testement, they
will find the basis of what I write. I believe every major collapse of society in history was tied to schemes about money,
generally along the same path chosen by Franklin Roosevelt and his successors. The Romans used less and less gold in their
money, till they had none in it. The Egyptians, if one reads Genesis, gathered up all the gold and issued something in its place
that left the residents of Egypt in bondage. Rome devolved into the dark ages, probably because the usuary of the times allowed
the very few to acquire the country and left the masses at the mercy of their protection.
There is a solution to this problem, but I doubt it will be used. First, there is going to have to be massive increases in government
debt to absorb the shock of the debt that is going to implode. Government has the power to borrow up most of the available
money, issue liquidity and hope the bubble can be deflated. Then, maybe they can take their limited amount of gold in stock and
declare bankruptcy and revalue the dollar, much like the Mexicans revalued the peso from 3000 to the dollar to 3 to dollar back in
the early 1990's. Then, we will have to get the government out of banking and let the bankers take their own risks. It would be a
good idea to teach our children about money instead of relying on some fantasy that we are all led to believe, that dollars have
babies. The only dollars that have babies are the images on the printing press plates and interest is a mathamatical impossibility.
There is nothing wrong with financially commiting your money to a commercial enterprise in return for some of the profits, but
do at your own risk and keep the rest of us out of these dealings. Let the buyer beware." |
