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David's Macro Blog

Analysis and commentary on business, economics, real estate, financial markets, and other fun topics


Tag: debt-based money

The global financial crisis forces us to ask many questions that we previously didn’t bother to think about.

  • Who issues our currency?
  • What’s the difference between debt-free money and debt-based money?
  • Why must credit grow in order for the economy to grow?
  • Can the U.S. Government debt ever be repaid?

Bill Still warned the world about the dangers of our debt-based monetary system with his classic video The Money Masters.

Now he has created an updated video called The Secret of Oz that directly addresses the financial collapse now that his predictions have come true. Our current system is based upon ever increasing debt that someday will become un-payable and the financial system will collapse when this occurs (like what happened to Iceland).

One of my favorite quotes:

“What can government do? The sad answer is under our current monetary system, nothing. It’s not going to get any better under the current system until the root cause of the problem is understood and addressed.”

The following is from Mike Morgan’s blog (12/09/2008). I agree with many of his points.

If you still believe we are at or near the bottom, please consider a few of my Key Points to support the coming Depression:

1 – Housing prices are still falling.

2 – We are nowhere close to resolving the mortgage crisis, and millions of foreclosures are coming. In turn, this means lower housing prices and, in turn, more foreclosures.

3 – Wall Street and the Banking System has still not accepted the consequences of the toxic assets they built, sold, profited from . . . and now they are stuck with. All they have done is covered them up with a thin layer of Magic Dust (taxpayer bailout money).

4 – The housing ATM is closed. And with the closing of the housing ATM, consumers have less money to spend . . . and less money to pay their mortgages with, so there will be more foreclosures.

5 -If you map out the consequences for 1, 2, 3 and 4 you quickly see that less FFM “free-funny money” means less to spend and this means more job losses throughout the system, and this means much more pain to come.

6 – Worldwide we are seeing government responses with nonsensical bailouts and “spending” programs. The sad thing is, the spending programs are not directed at making us better, but just at how we can buy more toys and treats. In fact, governments are repeating the very same mistakes made in the 1930’s. By the way, these are only the big picture issues. I could give you a hundred reasons we are headed to very dark times, but all of it stems from the housing bubble that created the toxic asset crisis, and until we detox, the pain will get worse. This is no different than a drug addict. All we are doing now is feeding the drug addict and making matters worse . . . just like we did in the 1930’s. And just like a drug addict must go through a horrible physical detox, so must the world.

How bad is the current deflation?

It is so bad that every tool the Fed has to fight deflation, as listed by Ben Bernanke in 2002, has been used and still hasn’t stopped massive deflation.  Essentially the current economic and financial conditions where not even conceivable just a few years ago.

From Mish: Bernanke’s Deflation Preventing Scorecard

Bernanke’s Scorecard

Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work…

2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work…

3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work…

4. Make low-interest-rate loans to banks. Check. That didn’t work…

5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work…

6. Lower rates further out along the Treasury term structure. Check. That didn’t work…

7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work…

8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work…

9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work…

10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work…

11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work…

12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work…

13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work…

Here’s a blog post by Reggie Middleton (one of my favorite bloggers) on BoomBustBlog:

It is a bit dense but contains a clear description of the problem of an economy that is based on debt, fractional reserve banking, and fiat currency.

Here are my observations:

  • The current financial crisis is NOT a liquidity crisis but a solvency crisis.
  • The crisis is built into the system; i.e. it was bound to happen at some point due to escalating debt relative to savings.
  • The current political leaders are NOT solving the root problems but bailing out their Wall Street friends and donors.

In summary, the system will collapse due to debt that cannot be repaid.

My hope is for serious monetary reform in the U.S. starting with an END to:

  • Debt-based money
  • The Federal Reserve
  • The bubble economy
  • “Financial engineering” (as opposed to real productivity) consuming the “best and brightest” minds

Unfortunately, we have just the opposite system. Until the system changes we are slaves to our monetary masters.

President Abraham Lincoln said it best over 200 years ago:

“The Government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the Government and the buying power of consumers.”

“The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity.”

“By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”