Forget about the current coronavirus pandemic, at least for the moment.
Also forget about the assorted economic crises that are occurring due both to the pandemic and our governments’ inept responses to COVID-19.
It’s not easy. But to understand the suicidal monetary strategies of the Federal Reserve, we need to put aside the frightening context. It’s a distraction.
Instead, we need to review this folly – and its
inevitable consequences – in purely absolute terms.
The current monetary hyperinflation of the U.S. dollar by the Federal Reserve can only have one possible outcome.
The end of the U.S. dollar.
This isn’t a theory or a hunch. It is carved in stone.
It is based on 1,000 years of unequivocal history and some of the most basic fundamentals of human behavior.
The U.S. dollar (along with other major global currencies) is a “fiat currency”. This is currency that only has value as a medium of exchange based upon government decree (government “fiat”). We are ordered to accept this paper as payment for goods and services.
Why do people have to be legally coerced to accept such paper currency as payment for goods and services? It is because pure fiat currencies have no intrinsic value of any kind.
Worthless paper that is used as a medium of exchange in commercial transactions. Framed in this manner, it is easy to see why the use of fiat currencies is a dubious monetary policy at best.
The history of fiat currencies is the ultimate indictment of the recklessness and futility in using such currencies.
Humanity first began experimenting with fiat currencies roughly 1,000 years ago (in China). Over that time, they have a perfect track record.
All fiat currencies collapse to zero in value (due to hyperinflation), or they are simply removed from circulation before this final death-spiral can occur.
Don’t take my word for it.
The authority on fiat currencies is historian Ralph T. Foster, author of
Fiat Paper Money The History And Evolution Of Our Currency.
Foster’s research and narrative is as insightful as it is thorough. His reporting of fiat currency collapses provides not only the historical details but the context in which these monetary failures occurred.
For example.
Law’s Proposals To Create Money For Scotland
By this time [1700], John Law had become an accomplished gambler, using his mathematical ability to build a fortune. He had gained a widespread reputation in the gambling circles of Europe, carrying heavy bags of coins and chips to and from the gaming sites. But Law was far more than a gambler. The Scotchman found himself frequently discussing economics and banking with his aristocratic friends. In his travels, Law was fascinated by the Continent’s major banking centers. In Amsterdam, he became familiar with the foreign currency exchanges, bank money, and commercial credit. In Genoa, he studied the archives of the Casa di San Giorgio.[4] But the best lessons came from Venice and the lively world of paper and credit at the Rialto.
Law was also arrested, tried and convicted for murder, but (somehow) managed to escape from English prison on the eve of his execution.
Historically, Law has been labeled (rather euphemistically) as "an economist". However, Law was a “gambler” with a fascination for banking, currency exchanges and commercial credit. If he had lived today, Law would have undoubtedly been an investment banker, not an economist.
He would have also risen in the high in the ranks of one or more central banks, as (in fact) he actually did.
After Law’s attempts at “currency reform” in his native Scotland had failed, Law moved on to France.
On May 2, 1716, Law received the charter to form a private bank [in France] – on condition that he become a French citizen. Law complied and then hurried to find a printing press. Shortly thereafter, the Banque Générale opened for business.
In the early years of this scheme, being able to conjure currency into existence seemed to be an economic miracle.
The French were becoming rich overnight, and their national debt was literally going up in smoke. Money was so easy to come by that average citizens were riding in carriages, buying art, and building villas.
All this pseudo-wealth also led to a bubble in the Paris stock exchange. Shares in the government-run
Compagnie des Indes rose from 27.5 livres per share (France’s currency unit at the time) to 20,000 livres per share.
What happened next?
The Bubble Bursts
…The situation was out of hand. On October 10, 1720, a royal decree stripped Law’s bank notes of their status as currency. The Duc D’Orléans ordered all the currency notes at the bank destroyed in a great bonfire.
The price of shares in the Compagnie des Indes collapsed. Louisiana would remain an embarrassing episode in French history.
A fiat currency monetary system. A stock market bubble. An economic crisis followed almost immediately by the collapse of the stock market bubble and the end of the fiat currency itself.
Readers can draw their own parallels here. It took only four years for France’s experiment in fiat currency to implode.
Why? Why did something that seemed to be an economic “miracle” end in utter disaster and an economic catastrophe?
The facile answer is that it was ordained. All fiat currencies succumb to this fate.
More to the point “there is no such thing as a free lunch.”
Money doesn’t grow on trees. And
money (currency that
does have intrinsic value) can’t be conjured from a printing press, only worthless paper currency – temporarily – enforced by government decree.
Real money (i.e. gold, silver, or gold/silver backed currencies) does have intrinsic value. It can never collapse to zero in value. Real money has never been the cause of an economic collapse.
The banker promoters of fiat currencies argue against this common sense and 1,000 years of unequivocal history. They claim that we can have stable, successful fiat currencies.
It ‘merely’ requires all of the following.
- The issuer of the currency exercises permanent discipline in restraining the level of currency creation.
- The government itself exercises permanent discipline in fiscal management (i.e. minimizing debt).
- The citizens using such currencies must be able to resist temptations of excessive greed.
Monetary discipline
The primary dynamic at the root of nearly every fiat currency collapse is an accelerating (and eventually exponential) level of currency creation. This is hyperinflation.
The principal is identical to stock dilution. A company that dilutes its share structure with excessive share creation will destroy the value of its stock.
Over a period of 1,000 years, no issuer of fiat currency has been able to avoid excessive dilution of that currency over any extended period of time. That is the peril of easy ‘money’.
Fiscal discipline
Ultimately, the monetary base for every fiat currency must expand in order to accommodate rising levels of sovereign debt. Unless a nation wants to risk financing its debt denominated in the currency of another nation, it must enlarge the monetary base to finance its own debts.
Some level of hyperinflation is the direct cause of the collapse of almost every fiat currency. However, the desperation that leads to such hyperinflation is almost always a response to some form of sovereign debt crisis.
The debt spikes. The monetary base spikes to accommodate all this new debt. In combination, this creates a crisis of confidence.
It is this
collapse in confidence in the currency and/or government that leads to the death-spiral in the fiat currency itself.
Resisting greed
As noted, the capacity to conjure “money” (currency) out of thin air equates to an environment of permanent easy money.
This is the purpose of such fiat currencies, to grease the wheels of commerce in an economy in order to ‘juice’ economic performance to a higher level than could be achieved with an Honest Money monetary system.
In a capitalist system, easy money is the financial equivalent of ‘crack’ cocaine. It is just as tempting and every bit as addictive.
We only need to look around today at the thousands of corporate entities and millions of individuals who are hopelessly addicted to the Federal Reserve’s monetary crack.
Addiction to easy money means excessive leverage. Excessive leverage combined with excessive liquidity leads to huge and unstable asset bubbles.
This must occur in any/every fiat currency monetary system where individuals cannot restrain their greed impulses.
In 1,000 years of fiat currency history, individuals have never been able to restrain their greed impulses.
This explains why the U.S. dollar is guaranteed to collapse to zero (or be removed from circulation before this can occur). It will happen because it always happens because it must happen.
Fiat currency schemes will always implode as long as human beings continue to behave like human beings.
In the concluding installment, we’ll take a closer look at
how the Federal Reserve is guaranteeing the end of the U.S. dollar.
