The arithmetical reality of debt based money must necessarily lead to government becoming the largest actor in the economy.
But the logic of debt based money is arithmetically finite. As a sovereign pushes the limits of debt based monetary policy, the social and political constructs are threatened. Argentina, Zimbabwe or, indeed, the former USSR are glaring examples of what happens when monetary debasement is pushed to its limit.
The “useful” life of a debt based monetary system can be extended if, and only if, other sovereign monetary systems and markets can be assimilated. Assimilation can happen willingly or it can be forced.
Argentina and Zimbabwe were unable to assimilate other markets and currencies so their demise was quick, violent and counted in years.
The debt based monetary system prevalent today throughout the West was conceived in the USA in December 1913. Since then, it has been gradually introduced to other countries. In Japan it was forced upon an unwilling political structure at the end of WWII. In Europe, the Bretton Woods accord was showing clear signs of stress by the late 60s necessitating a scorched earth solution for the US Dollar hence the introduction of the US$ as reserve currency followed by the creation of the Euro and the European common market.
The diminishing marginal utility of a debt based currency looks like this:
Here is the problem.
Upon imposing a debt based currency upon society, economic actors are placed at an immediate economic disadvantage versus the creator of the currency.
Imagine an economy of five people of which one has the privilege to create the currency and the remaining four are forced by law to make use of said currency.
The four economic actors must borrow the first sum in order to trade amongst themselves. In this construct whatever profit each of the four economic actors may make is instantly diminished by the interest that must be paid to the creator of the currency. The more trading activity takes place amongst the four individuals, the more interest is paid to the creator of the currency.
Moreover, if the creator of the currency simultaneously injects ever increasing amounts of currency in the economy, the cash holdings of the four economic actors are gradually debased requiring these four individuals to borrow ever greater sums from the creator of the currency in order to compensate the loss of purchasing power of the currency. As they borrow more, they pay more interest to the creator of the currency.
As the political establishment forces this game pervasively, aggressively and incessantly upon society, over time the productive capacity of society is necessarily and inevitably transferred to the financial sector.
For as long as this monetary system can assimilate other markets and currencies, the economy of the sponsor of the system looks solvent and viable.
Clearly however, as debt based money conforms to the law of diminishing marginal utility and since on God’s green earth there are only so many markets and currencies that can be assimilated, a debt based monetary system must eventually but perforce hit its absolute arithmetical limit.
The point at which a debt based monetary system has lost traction, government is per force the largest actor in the economy. Once this happens, not only are individuals by and large dependent on government for their own survival but corruption is revealed in the highest offices of the state.
The above could be interpreted as a judgment on my part of course, but it is first and foremost an observation.
What prompted the above is an article in today’s Guardian newspaper.
You are aware of my assertion that the time for the willing assimilation of markets and currencies has come to an end. Today we are out of any markets the assimilation of which would make any difference to our monetary system. Even the assimilation of China today can no longer reverse the total loss of traction of our currency.
If I am right, two key trends will ensure a global conflict: unemployment and fiscal revenue.
For as long as the expansion of credit could generate a relative expansion of the economy, sovereigns could claim increasing wealth. But as every new Dollar of debt by now only generates negative GDP as highlighted by the graph at the beginning of this rant shows, options are few and very well defined.
As Trillion Dollar arbitrary (and likely illegal) interventions fail to expand GDP even relatively any more, the leverage that allowed the expansion of the credit markets and the relative expansion of GDP can no longer be sustained. As credit markets collapse, so do all those social constructs that make the West stand out versus the rest of the world. Other than road maintenance or refuse collection or mail delivery, pension promises will be reneged upon as will subsidies to sundry special interest groups.
Rising unemployment of course reinforces the drop in fiscal revenue thereby crippling the very dynamic that makes the state the largest actor in the economy and the largest employer. This dynamic feeds upon itself naturally.
Critically, the reality of this monetary system is neither a surprise nor is it unforeseen. It is of course well understood by the sponsors of the system if not by the politicians. There is no shortage of historical references to draw upon in order to plot the inevitable outcome of our predicament. From Chinese use of scrip paper in the 9th Century (about 1800 years before the West ever gave paper money a whirl), to John Law’s French experiment to, indeed, the modern Russian Ruble, we know how this film ends. Or at least we should know.
The article that sparked this rant is:
West Sleepwalking Into Endless War
But of course you don’t need to understand the underpinnings of the monetary system to realize that we are going to precipitate a war. Nor do you need to have done two tours in Afghanistan to see what is going on. To wit, here is a post I wrote in November 2010 regarding a Telegraph article that did not leave much to the imagination:
I don’t know how much more clearly anyone can put it. We are going to war and it is most certainly not because a bunch of troglodytes half way across the world resent our way of life.
A bon entendeur, salut