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.