This article is from Doug Casey's daily
e-mail newsletter. The article focuses on how the monetary system
is creating a monetary crisis for United States and the world.
"Observing the global flow of money, it seems important to consider
the implications of a system built around the notion that debt is
considered money. To wit, governments the world over fund their
operations largely with money created by issuing debt. Even the
payments made on great piles of debt are made using this “debt-money.”
So, more debt begets more debt-money begetting more debt. Over time the
system is unsupportable.
Which brings us to the case of Greece and
other “fringe” countries [ PIIGS ] in the euro-zone. These failing
states – and all the nation-states are failing, just at varying rates –
need to sell a lot of debt in order to generate the debt-money needed
to keep the government’s doors open, but investors, noting just how
much debt has piled up, are wary of owning more.
And that gives rise to what is one of the
thorniest problems resulting from a systematic reliance on debt-money –
the demand for higher interest rates to offset the actual risks of
owning the debt-money of an over-indebted state.
But it’s even worse than that. To
understand why, let’s reduce the situation to more human terms.
Imagine for a moment, being approached by
your deadbeat cousin for a $1,000 loan. In exchange, he offers you an
IOU that says he will pay you back in specie, with interest, at some
point down the road. Now, consider the same situation, but in a world
where debt is treated as money. Now, instead of lending him the $1,000
in exchange for an IOU that promises he’ll pay you back your $1,000
plus interest, he promises to pay you back, but only with another IOU.
This is the net result of using debt as
Investors are now looking at the mountain
of debt looming over Greece and balking, causing that country to raise
rates to attract their money – which, in turn, causes losses to
existing debt holders and, over time, ratchets up the interest expense
on the existing piles of debt. It doesn’t take a genius to see the
potential for yet higher and higher interest rates being demanded, and
that results in the need to gin up yet more debt-money. This all gets quickly circular.
For the moment, the anxious market
believes that the debt-money that trades under the “dollar” brand is of
a superior quality to that of the euro (among others), and so the money
flows back this way.
But the irony is that whatever brand of
the stuff you own, it is still just the same thing: debt-money. Which
is to say, an IOU masquerading as money.
Money should be a reliable store of
wealth. It is hard to use that term when talking about an obligation
that someone else needs to pay up on – especially when that someone
else has proven themselves to be serially unreliable. That makes the
debt-money now sloshing around nothing more, really, than a slip of
paper representing an untrustworthy promise.
To understand how untrustworthy the
issuers are, you need look no further than the steady decline in
purchasing power of all of the world’s many variations of debt-money.
Case in point, in 1939 the average house cost $3,800.
Do you think that a shortage in real
estate and improvements in construction quality explain the one
hundred-fold increase in prices over the past 70 years? Not hardly.
It’s that the Fed and other central bankers, in close cahoots with the
politicians and their cozy buddies in high finance, have used the
ludicrous and dishonest debt-money system to flood the nation with more
and more of the stuff, debasing the existing stocks of same.
As we now know, because we can see it in
the brazen numbers pushed forward by the president and Congress, the
debt-money game is heading for a wall. It was one thing when the size
of the debt rose at a measured pace that left it largely unnoticed as
it grew and grew. But in 2009, the façade fell away, and now the
severity of the problem is there for all to see.
While there have been some whiffs of a
recovery in the economy, it is important to recognize that what
recovery there is, is based on yet more debt-money. A lot more.
In other words, the roots of the
recovery, as tentative as they may be, are exactly the same as the
roots of the crisis.
There are good reasons that gold and
silver have been used as money through the eons. As Doug Casey often
points out, it is because it they are durable, divisible, convenient,
consistent, and valuable.
However, the era of debt-money is going
to pass in the foreseeable future.
It won’t be a simple or easy transition
back to something tangible. When the average man learns that his
debt-money is not worth much more than the paper it is printed on, we
could even see riots in the streets.
For the time being, though, the money
flow is headed back into the U.S., where, unlike the irresponsible
Greeks who ran a budget deficit equal to 12.7% last year, our
government’s 2011 budget shows deficit spending at “just” 10.6% of GDP.
For the record, as recently as 2006, that deficit was only 1.2% of GDP.
Even so, for the moment, our debt-money is considered to be better than
the euro and, it appears by looking at their prices, gold and silver.
It’s all a matter of perspective."
Since this article was posted on the internet, the world economy has
been sputtering like an erupting volcano. The world is in an economic
crisis that is being escaladed into chaos by the food, water and oil