Examples of financial value running away from intrinsic value

As the authorities deliberately prevent a fiat monetary system from purging itself as it would if left alone, inflation must perforce be induced artificially at ever greater rates. Eventually though, force-feeding monetary and credit inflation into the system necessarily results in financial value diverging at ever greater speed from intrinsic value. The reason that happens has to do with the efficiency of money. Fiat money benefits first and most the entities that make use of it first. Thus the financial industry being the next in line after the Fed creates the currency, stands to gain the most from the use of fiat money at all stages of the fiat dynamic. In turn, this is also the reason why towards the logical end of the fiat dynamic, profits are concentrated in the finance industry.

The monetary system is intimately related to the survival of the state. If the monetary system collapses, then so does the state. As inflation gradually becomes the ultimate and only goal to maintain the monetary system alive (hence the state alive), financial gimmickry steps into high gear. Hence all your CDOs, MBS, Swaps, SIVs and whatnots that few really understand including the young turks freshly graduate from college that are tasked with assembling these instruments according to guidelines handed down from above. Clients certainly don’t understand them. However, as the fiat monetary logic progresses, finance and social costs at state or national level increase exponentially so that local and national governments turn towards financial gimmickry in a delusional attempt at mitigating spiraling costs and in a speculative bid to actually make money.

Omitting for the time being that speculation has no place in managing public money, the fact is that due to the fact that administrations follow one another in the seat of power, politicians feel no compunction in squandering public funds during their term in office. That’s because there isn’t really a Mr. Public is there!? The public is an amorphous and vague intellectual concept that few can countenance and, anyway, public money seems to come from an inexhaustible source. So, public money does not foster a sense of responsibility in the governing elites and speculation (gambling) rarely brings about any serious consequences for the perpetrators that fail but great praise for those the would succeed. By not punishing failure but rewarding success, our system encourages speculation and gambling.

So it is that in order to be elected you must promise better and more services to the electorate (ergo you must promise more spending) but that as the fiat monetary dynamic progresses to its logical conclusion funds become scarcer thus politicians have no scruples in dabbling in things they don’t understand but that promise them great windfalls. And the finance industry is only too happy to oblige them because that’s what banks do. It is their job.



European towns desperate for cash jumped into the global derivatives experiment that loaded the financial system with leverage and led to the credit crisis in late 2008. Epitomized by Lehman Brothers Holdings Inc.’s collapse, the fallout cost banks and brokerages alone $1.28 trillion in writedowns and credit losses, according to data compiled by Bloomberg, and required at least $15 trillion in support from central banks and governments in the U.S., the U.K. and the euro zone, based on Bank of England data.

Just a closing note to parse the above excerpt for you. The “Central Bank” and “governments” referenced in the excerpt are euphemisms for you and me; that is the public. Government has no money and neither does the central bank. Both entities are either given money in form of taxes or create money against a guarantee of your taxes. Either way, the money is extracted from society; that is you and me again.

So anyone telling you that large government is a solution to a crisis omits to tell you that large government can only be financed by you and me. The more money we give government the less money we have for productive endeavor.


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5 Responses to “Examples of financial value running away from intrinsic value”

  1. guidoamm Says:

    Hi David,

    By “your conclusions” you mean the currency board and alternative national alliances?

    Of course they’re great ideas. My only beef is the subordination of the monetary system to political logic. Fiat money or currency board both would work fine. Where we have failed repeatedly over the years is to allow politics to dictate monetary policy rather than the economy.

    • David W. Lincoln Says:

      Hi Guido,

      I was referring to the competing narratives. The one I spelled out, versus the song and dance routine from government officials.

      I see that you have dealt with this situation in a newer blog entry.

      I just want to make sure that you know what I am saying, without having to consult something to see what I mean.

      Your last sentence is intriguing. Does the current economic model of consumption have to change, or am I referring to a patch of trees which is part of the forest that has to be in place, rather than the devastated stumps we currently have.

      For, when it comes to forest fires, eventually there is new growth, but a lot of dead trees remain after the last of the flames are put out.

      • guidoamm Says:

        Absolutely. The consumption pattern must change. Consumption is affected through the monetary system. So it is the monetary system that must be managed differently.

        However, we can philosophize and conjecture as to what should or should not be done but the one overarching truth is that the state (any state) has needs and aims. Thus, the monetary system will always inevitably be subordinated to politics. 7000 years of human civilization are testament to the fact that the hegemon of the day must necessarily manipulate the monetary system in order to maintain its position and attain its goals. The same period of history also shows us that the monetary system has some very real mathematical limits and that when pushed to its limits in aggressive and incessant fashion the system will collapse and with it the state.

        My contention is that at least in theory an autocratic political system could avoid the collapse of a monetary system because the autocrat could of his own volition decide that occasionally spending must be reined-in and debt diminished. In practice, we have never seen that happen.

        But in a political system based on democratic principles, there is no way on God’s green earth that a politician may of his own volition decide to manage debt and spending for the good of the long term health of the system because that would spell his/her political death. Any politician campaigning on a platform of austerity or reduced spending will inevitably be upstaged by a rival that will promise “change” without any spending cuts. That is the reason why politicians like Ron Paul for example cannot make it to power.

        But politicians like Ron Paul can make it to power when the system finally breaks down bringing about some sort of event that dislocates society from its comfortable seat.

        I think we are at that juncture. But even if we are, I know that even though today we may get a whole bunch of Ron Pauls into positions of power around the world, 30 or 40 or 50 years from now we’ll be back to square one. And so the wheel turns or, if you prefer, sic transit gloria mundi and all that.

        What it comes down to is whether or not one can make peace with the inevitable repercussions of competitive nation states or competitive politics. After all, the excesses that are brought about by our political system have yielded important advances in science and technology that have, though in varying degrees, benefited large segments of society. Of course, we in the West have benefited disproportionally and have done so to a great extent on the back of other societies and nations. Think of subsidies to agriculture for example. We pay our farmers not to plant a crop or not to produce milk and then we pay them another subsidy to plant another crop instead of buying that crop from Somalia for example. Of course we do that because we can. We can manipulate the monetary system to create the subsidies and we do.

        In this regard, the idea of a world government could be appealing. But a world government is a double edged sword and at least in its beginning stages it might very well be a rather oppressive and intrusive entity. I think that future generations will most likely attain the stage of a world federation but between now and then, there’ll be a number of important wars…. the first one of which, as you already know, I think is around the corner…

        Sorry for the rant…. it’s just that whatever the monetary system, politics will always and everywhere be the priority. And regardless the political system, an environment of competitive nations will always result in the manipulation of the monetary system whatever it may be.

        • David W. Lincoln Says:

          No need to apologize for the rant, Guido. In fact, I would not be at all surprised to see ecclesiastical involvement to tone down the rivalry between nations.

          It is something that would be tried first in the Muslim world, because between now and the Muslims agreeing that they are Muslims, regardless of ethnicity, we will see the blood shed continue.

          However, will the West do so? After all, we are dealing with the aftermath of the Peace of Westphalia, which put an end to the supremacy of the ecclesiastical sphere. Yes, more war is coming because those who follow in the footsteps of those viewed with a jaundiced eye by Orianna Fallaci, they
          will have to be defeated at such a level that they will not want to take on the Western world.

  2. David W. Lincoln Says:

    Guido, between this, http://www.cbsnews.com/video/watch/?id=6298154n and http://network.nationalpost.com/NP/blogs/fullcomment/archive/2010/03/10/75-years-of-funny-money.aspx and http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/02/19/check-the-numbers.aspx and http://www.fraserinstitute.org/commerce.web/product_files/caseforduediligence_cda.pdf we see a scenario which is much more in harmony with Occam’s razor, as compared to the machinations you wrote about in this entry. Not to mention the case against Goldman Sachs brought forth by the SEC.

    How far off the mark are my conclusions?

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