Our monetary system is broken (more evidence)

As stated numerous times in these pages, the Western monetary system and the monetary system of the vast majority of countries the world over, is a US$ based Debt Based Fiat Monetary System. The whole thing is predicated on Floating Exchange Rates.

Don’t let the technical terms scare you. All the above, simply means that all countries that recognize the US$ as reserve currency pledge to prop the system by purchasing the sovereign debt of all the partners to the system (floating exchange rates).

Thus, for as long as the system is working as intended, then all sovereigns purchase sovereign debt from each other. This is what maintains the appearance of sovereign currencies when in fact each currency has been replaced by the US$.

So far so good.

But as the efficiency of the currency wanes, the diminishing marginal utility of debt means that at some point sovereigns may no longer desire or be able to purchase the sovereign debt of other countries. For as long as this situation pertains to one or two countries than the whole scheme can survive. For example, when Japan’s economy began to implode in the 90s, the economies of the rest of the world were by and large still expanding so that Japan engaging in Quantitative Easing didn’t really matter.

Things get interesting when gradually, most but then all parties to the Floating Exchange Rate mechanism are confronted with overwhelming debts. At that point, the rationale of the Floating Exchange Rate system must by necessity be thrown out of the window as each sovereign must desperately try to prop its own sovereign debt … by buying it from themselves…

That is the point the DBFM system is broken.


Banks bought 91pc of the £39.8bn of net issuance of new gilts with purchases totalling £36.1bn, compared to the £11.4bn of UK debt bought in the preceding six months. ”



Basically the auction was a massive success primarily due to the Primary Dealer participation, which took down 51.9% of the entire issue, or $16.6 billion of $32 billion. We predicted, accurately, that “Naturally, none of this due to actual demand, but merely due to Primary Dealer expectations of a prompt and profitable flip back to Brian Sack (the Federal Reserve).”

By the way. The Federal Reserve as of a few months ago is the largest holder of US sovereign debt paper having overtaken China.

Our monetary system is broken. Everything else is a dog and pony show.


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