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 labour 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 favoured 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 favour 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 per cent per year,e.g., the money supply,increase exponentially,which does not characterise 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 behavioural 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 per cent 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.
The term rent seeking refers to the extraction of economic value (“rent”) through the manipulation of the social or political environment,as opposed to creating value from genuine economic inputs. Like parasitism,rent seeking involves obtaining wealth without reciprocating any benefit back to society through wealth creation. Debt-based fiat money is an example of economic rent seeking because banks,under the guise of providing necessary financial services,create the vast majority of the principal of any loan ex nihilo (based on reserve ratios set by central banks that typically allow 10:1 or greater leverage),allowing banks to collect interest and principle payments without creating any wealth for society. Unfortunately,the Monopoly money that flows from banks is often imprecisely referred to as “capital” when,in fact,it is debt.
As a currency, gold settles transactions in an absolute sense. When a transaction for goods is settled in gold,there is no residual liability. One party holds goods and the other party also holds finished goods,i.e.,gold bullion. Of course,today,gold transactions can be made electronically,e.g.,via GoldMoney.com. In other words,both parties to a transaction hold physical property with no dependency on a government or central bank. There is no 3rd party liability and the middle man (a government or a bank) is cut out of the deal. Not surprisingly,both bankers and those who favour big government,or who consider government authority to be above the rights of individuals (statists),despise and disparage gold. While nominal gains in asset prices,artificially manufactured by inflation can be taxed,governments have no way to tax gains in the value of money itself and must resort to increasing taxes honestly,which,unlike inflation,requires the consent of voters. As John Maynard Keynes famously said,”By a continuing process of inflation,government can confiscate,secretly and unobserved,an important part of the wealth of their citizens. The process engages all the hidden forces of economic law on the side of destruction,and does it in a manner which not one man in a million is able to diagnose.”
Robbing the Poor through Inflation
Like all other debt-based fiat currencies,the U.S. dollar is dysfunctional as a store of value because it is no longer redeemable,because of the inflationary nature of the monetary system itself,and because both the federal government and the Federal Reserve lack monetary discipline. While the U.S. federal government engages in never ending and ever larger deficit spending,the Federal Reserve engages in debt monetization or “quantitative easing” (commonly referred to as printing money out of thin air),while holding interest rates near 0% to support the banking industry,equities and otherwise unserviceable government borrowing. As a result,the largest U.S. banks,together with Wall Street trading firms of all sizes,engage in rampant financial speculation using excess leverage,thus increasing volatility in stocks and commodity prices while undermining the stability of the financial system. All of the preceding issues increase the money supply independent of genuine economic activity,which is inflationary. The actual result,however,is currently stagflation in the U.S. The real value of wages and savings is falling because currency debasement and related economic and trade disruptions are causing prices to rise,but wages,in nominal terms,have remained flat or have declined due to high unemployment and weak economic growth.
While savvy investors may be able to profit from inflation,the vast majority of people are simply impoverished by stagflation. The income gap between the top 0.01% of Americans and the vast majority is as large today as it was in the 1920’s. Although there can be no objection to wealth derived from hard work,ingenuity and business acumen,the wealthiest 1% of Americans now own more than 33% of all wealth in the United States while the poorest 50% collectively own 2.5%. The growing disparity ultimately stems from the structure of the financial system itself,i.e.,central banking and debt-based fiat money. In other words,debt-based money causes an ever increasing concentration of wealth in the financial institutions to which debt is ultimately owed.
From the standpoint of ordinary workers,currency debasement is like a breach of contract where the agreement to work for a wage is violated by altering the value of the wage retroactively. Inflation transfers wealth to those who first receive newly created money. The Federal Reserve’s quantitative easing and asset purchase programs,for example,literally transfer wealth from Main Street to Wall Street by creating new money to purchase financial assets. Those involved in transactions using newly created money,e.g.,bond traders working for investment banks,bankers,etc.,are rewarded and can immediately leverage their new money to increase their assets or spend their gains at current value on consumption,but the value of previously existing money (in the hands of those who don’t work on Wall Street or for a bank),is diluted when newly created Monopoly money circulates. The result is a growing concentration of wealth in Wall Street trading firms and in banks linked to the Federal Reserve,e.g.,Primary Dealers such as Goldman Sachs and JP Morgan. Conversely,the vast majority of Americans have become systematically poorer. For example,middle income jobs have been replaced with low income jobs and low income jobs now account for 41% of all U.S. jobs.
As Americans became poorer over the last few decades,they also became more dependent on the government,e.g.,44 million Americans rely on Food Stamps and one out of every 6 Americans is on Medicaid. Indirectly,inflation therefore increases government debt. Like the socialist governments of Europe,the U.S. government has made too many promises,both at home and abroad,that simply cannot be kept even if the government were to cannibalise the remaining wealth of the American people,destroying what’s left of the U.S economy in the process. As a result,more money printing is inevitable. Even Gideon Gono,Governor of the Reserve Bank of Zimbabwe,infamous for his role in Zimbabwe’s hyperinflation,has become an outspoken critic of the United States and now supports a gold standard. Gono was awarded the 2009 Ig Nobel Prize in mathematics for “giving people a simple,everyday way to cope with a wide range of numbers by having his bank print notes with denominations ranging from one cent to one hundred trillion dollars” What is important,however,is that the root cause of inexorable inflation to infinity is exactly the legal structure of money as debt with interest attached to it issued by private banks that profit by creating money ex nihilo.
America: A Banker Snuff Film
With one exception,the banking industry operates in the same way as an organised crime syndicate. The exception is that in 1913 a group of bankers manipulated the Congress of the United States into passing the Federal Reserve Act,which made the scam of debt-based fiat money technically legal. The true purpose of the Federal Reserve Act was of course to entice the U.S. government into borrowing money because the government had the power to tax its citizens. Thus,the Federal Reserve Act gave a cartel of banks access to the wealth of American citizens through interest and principle payments made by the U.S. federal government out of tax revenue. The U.S. federal income tax is essentially a tax on American citizens levied by a banking cartel that rose to power in 1913 and that now dominates the government of the United States at all levels. As a consequence,the U.S. economy is maxed out on debt at every level,the U.S. government is held hostage by the banking cartel and the U.S. monetary system is reeling out of control near its logical “end of life.” One might say that bankers have “had their way” with the United States of America.
When governments pursue ambitions financed by debt,such as foreign wars or bank bailouts,against the will of their peoples,they financially enslave their citizens. If a government’s debt is backed by the wealth,labour and property of its citizens,the rights of government supersede the rights of individuals in a way that is incompatible with individual liberty. Specifically,individuals do not have an absolute right to own property,including their own labour. Thus,the labour and property of citizens is the property of the government and,actually,the property of the private banks that hold the government’s debt. This is the fundamental reason for the invention of central banking,i.e.,it allows banks to access the wealth of the people through the government’s power to tax. The result of this corrupt financial structure is a de facto tyranny where an anti-democratic global banking empire,built upon the debt servitude of all peoples,financially controls world governments,making democracy irrelevant,while nearly all-powerful bankers live better than kings.
Gold vs. Debt-Based Fiat Money
When currency debasement inevitably becomes extreme,governments refuse to accept one another’s currencies but,as noted by Alan Greenspan,”…in extremis gold is always accepted.” The International Monetary Fund (IMF),for example,accepts payments in gold for settlement of debts. Greenspan also wrote that “An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense…that gold and economic freedom are inseparable.” Without gold,banks can turn the financial system into a casino where they are guaranteed to win while ordinary citizens are stripped of their wealth and robbed of their financial futures through inflation. Without gold,governments can pursue endless wars funded by debt and build military empires while private banks that buy government bonds quietly collect the wealth of their citizens. If debt levels rise too high,banks reap huge profits at the expense of the overall economy,leaving behind a hollowed out shell set to collapse. In contrast,gold distributes wealth through the economy (as tangible private property) while fiat money concentrates wealth and financial power in the central bank and its dealers,as well as in the government.
Gold Debt-Based Fiat Money 1. Gold is a tangible financial asset with no bank or government liability. Fiat money is a debt instrument or note that is the liability of a government or bank. 2. Transactions in gold are fully settled. Both parties hold finished goods. There is no outstanding liability. Transactions in fiat money are not settled. One party always holds a note owed by a bank or government. 3. Gold certificates or electronic credits in allocated gold accounts are redeemable in a real,physical asset:gold. Fiat money is not redeemable. While it functions as a medium of exchange,it lacks any backing in terms of real assets. 4. Gold is,at all times,in all places and under all circumstances,universally accepted as money. National currencies are accepted according to agreements that,like any contract,can be breached or made legally void. 5. In extremis,gold is always accepted. In extremis,such as in a time of war,a national currency (or any form of paper money) may not be accepted. 6. Gold has intrinsic value. The economic inputs (labour and resources) used to produce a gold bullion coin or bar are still present,preserved as a finished product. Fiat money has no intrinsic value,except perhaps insofar as paper can be used,for example,as kindling to start a fire. 7. Gold is rare,valuable and difficult to produce in large quantities. Fiat money can be printed or instantly created electronically in unlimited quantities and at essentially no cost. 8. The rate of increase in the above-ground gold supply is,and has been throughout history,roughly the same as the rate human population growth. The supply of fiat money, because of its inflationary structure,always increases in excess of population growth or sustainable economic activity,thus it is destabilizing 9. Gold is a consistent measure of value over time and across economies. No fiat paper currency is or can be a consistent measure of value over time or across economies. 10. The value of gold,measured in real terms,is stable over long periods of time. The value of all fiat paper currencies is volatile and always declines in the long run. 11. Gold is durable and virtually all of the gold ever mined still exists today. Neither governments,nor banks,nor paper motes,nor even digital media are as durable as gold. 12. Gold serves as a store of value and a preserver of purchasing power. Its value,in terms of real goods,is about the same today as it was 2000 years ago. Measured in fiat money, prices inexorably rise. Fiat money inevitably loses value because the supply always increases in excess of population growth and sustainable economic activity. 13. Under a gold standard,economies can enjoy stability and sustainable growth. Of course they are not automatically immune to economic disruptions,e.g.,due to exogenous shocks. Money based on debt causes a never ending boom and bust cycle of credit expansion and contraction. Economic disruptions are directly caused by the monetary system itself. 14. Central banks,sovereign nations and investors of all sizes buy gold because its value is more stable than that of fiat money. The value of fiat money inevitably degrades over time,thus the wealth of fiat money holders is eroded (by inflation). 15. Gold has been regarded by virtually all peoples as the highest form of money throughout history (for at least the past 5000 years). Fiat money became the de facto international standard after 1971,only four decades ago. 16. As a currency,gold cannot fail because it is a real,physical commodity. Fiat money systems always, eventually fail. All fiat currency schemes throughout history failed. 17. Over thousands of years, gold has remained a de facto global standard largely outside the control of central banks or governments. Fiat money was created because it can be centrally controlled and manipulated by banks and governments to suit their own particular needs. 18. Gold enables people to shield their wealth from the collapse of governments and financial institutions. If a government collapses, its currency becomes worthless. Governments cannot truly guarantee the wealth of citizens against a banking system collapse. 19. Gold enables people to protect the fruits of their labour from confiscation by governments or banks through inflation and,therefore,to pass their wealth down through generations. Inflation is like a breach of contract where holders of fiat money are robbed of its value over time through inflation. If cash is passed down through generations it becomes less and less valuable over time. 20. Gold safeguards economic freedom and allows people to hold their wealth outside the reach of governments and banks. Fiat money allows governments or banks to arbitrarily decide the value of money and the financial fate of every person dependent on the currency. 21. Gold distributes wealth and financial power to the people. Fiat money concentrates wealth and financial power in banks and in the government,opening the door to limitless abuses. 22. Under a gold standard, governments cannot expand disproportionately relative to the underlying economy. The optimal size of government is perhaps 20% of GDP. Central banking was conceived in part to allow governments to expand,e.g.,to fund foreign wars through debt. Fiat money allows governments to grow to unsustainable levels. In the United States,combined government at all levels is equal to roughly 45% of GDP. 23. Gold prevents the banking industry from expanding disproportionately relative to the underlying economy. Fiat money allows the banking industry to expand to a point where it dominates the economy and government, and is a crushing,economic rent seeking burden on the economy. 24. Gold makes it relatively difficult for countries to pursue military adventures or to fund a large military-industrial complex. Fiat money allows governments to engage in wars and to build military empires as long as their currencies and debts are accepted. 25. Gold is a real commodity and naturally supports the free market. Fiat money entails central planning of the economy,i.e.,”monetary policy,” which opposes free markets.
Centralization and Systemic Instability
Central banking and debt-based fiat money require central planning of the economy,which is not only ineffective but diametrically opposed to free markets,individual economic freedom,and democracy. Central planning of the economy leads to systemic instability because human beings,who make monetary policy decisions,are invariably fallible. Further,it is simply not the case that a single policy is appropriate for all industries and regions,thus there is not and can never be a correct monetary policy for all economic activity. In other words,the fundamental concept of central banking is flawed independent of the debt-based fiat money scam (except from the standpoint of bankers because debt-based fiat money causes wealth and property to accrue to those who enjoy the extraordinary privilege of creating money).
Thanks to the Federal Reserve,extreme centralization of wealth and financial power is now a reality in the United States. Not coincidentally,the U.S. economy is an increasingly all-or-nothing system that leaves tens of millions behind. Only 66.8% of American men were employed in 2010,the lowest level ever recorded,because permanently unemployed individuals are no longer counted as part of the workforce. Individuals who are willing and able to work have been pushed out of the financial system and forced to depend on charity or on the government. Since unemployment in the United States is a deep,structural problem,permanently unemployed individuals are disenfranchised former members of society,i.e.,part of a permanent and fast growing underclass. To make matters worse,the majority of American households are now net recipients of government transfer payments. Tens of millions of Americans have,in effect,become wards of the state causing the federal government’s deficits and debt level to climb ever higher from record levels. Nonetheless,the more debt the government has,the more wealth and power the banking cartel commands. Interest on the U.S. federal government’s debt cost $413 billion in fiscal 2010 and that number is expected to roughly double over the next decade.
As a point of comparison,the services of bankers cannot actually be worth more to society,in terms of real wealth creation,than the services of those who build businesses,produce real goods and create jobs,but the concept of value is distorted by the nature of the financial system. As a result,bankers may enjoy multi-million dollar bonuses without having added a single new business,product or job to the economy. Arguably,such a financial system is a contrived fantasy world,where bankers,perhaps not unlike Lloyd Blankfein,Ben Bernanke,Jamie Dimon and Timothy Geithner,financially rule the world as its “financial royalty.” Why the public or government officials (ignoring political campaign contributions) place any confidence in these or similarly self interested “financial leaders” and the institutions they represent defies reason. What is important,however,is that the structure of the financial system (i.e.,central banking and debt-based fiat money) ultimately produces financial,economic,social and political instability as a consequence of never ending debt,constant inflation,central planning of the economy,centralization of financial power and extreme concentration of wealth.
Physical gold provides a way to preserve wealth outside of the inflationary currencies of the debt swamped U.S.,European countries and Japan,to name a few. Buying gold is an “opt out” decision,not only rejecting the supposed “full faith and credit” of corrupt governments,but also rejecting the inflation / debt-servitude paradigm of the global central banking cartel that currently has every developed nation in a financial stranglehold. The ancien régime of the U.S. federal government,the Federal Reserve and the U.S. dollar as the world’s reserve currency will clearly fail as a result of its inherent structural flaws. The U.S. monetary system has already begun to break down and is currently being supported by money printing,government deficit spending and by what are,in effect,financial attacks on sovereign nations,thus on their currencies,that make the U.S. dollar appear stronger. Schemes undreamed of may yet prolong the death rattle of the U.S. dollar but the outcome cannot be changed. Like all fiat currencies before it,the failure of the U.S. dollar will leave holders of U.S. currency and of U.S. debt with nothing but ridiculous coupons,like Zimbabwe’s defunct 100 trillion dollar notes. One can only hope that the opportunity will be taken to abolish the Federal Reserve,shut down the global debt-based fiat money scam,and break up the criminal central banking cartel.