I am not an economist but… (part II)

It is at once fascinating, infuriating, mind boggling and disappointing to read all the mumbo jumbo from the press, the pundits and the authorities. The latest case in point is, once again, Stiglitz Noble laureate that he is.

http://www.guardian.co.uk/commentisfree/2010/may/05/reform-euro-or-bin-it-greece-germany

Look here Nobel matey! Let’s see if I can whittle this down to simple terms for you.

Fiat money is not meant to be repaid ever. It cannot be otherwise.

Each unit of currency that is created by the central bank (the Fed) is automatically devalued the instant it is issued to the Treasury. That’s because by asking for money, the Treasury must pay interest to the Fed. Thus if the Treasury borrows $1 from the Fed, this one Dollar will have to be repaid at some point in the future plus interest.

If you are a keen observer, you will have realized that in this construct, it is mathematically impossible to ever pay back sovereign debt. You ask why?

If one were to collect all the coins and currency notes in circulation and returned the lot to the Fed, this fool would still need to find money to pay the interest… however, the fool has already collected all the currency in circulation so where is he going to find the money to pay the interest???

Thus in a Fiat Monetary system, the debt is never meant to be repaid. Ergo a fiat monetary system is predicated on the infinite expansion of money through the perpetual creation of debt.

But as science and mathematics show us, perpetual motion does not exist. At least, we have not yet identified the circustances under which perpetual motion could be achieved. And so it is with debt. It is mathematically impossible to expand debt ad infinitum. If that were not the case, then we would all be rich beyond our wildest dreams matey.

That is the reality that is biting us in the ass today you Nobel Laureate you.

That is the aberration of our monetary system. A Fiat Monetary system is limited mathematically. The only unknown variable is how long you can keep the gig going.

But let me assure you of one thing. The moment a sovereign creates money to pay itself instead of paying another sovereign (as contemplated by the theory of floating exchange rates), you know we are about to do a lemming. Particularly if the sovereign in question is the owner of the global reserve currency. Bad enough as that may be, logic dictates that as the main sovereign creates money to pay itself, all other sovereigns are going to have to follow suit and create money to pay themselves too.

Following Quantitative Easing in Japan, the USA went at it and now Europe. So, today we are all pretty much just creating money to buy sovereign debt from ourselves. Would you not agree that THIS is the elephant in the room?

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One Response to “I am not an economist but… (part II)”

  1. Jus’ checkn’…. « Guido's temple of the absurd Says:

    […] https://guidoromero.wordpress.com/2010/05/06/i-am-not-an-economist-but-part-ii/ […]

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