It’s The Monetary System Stoopid!

This week’s note from John Mauldin “The Economic Singularity” is a good read.

On one hand, I feel rewarded that a luminary such as Mr. Mauldin might be taking up some of the themes and concepts I have been writing about since 2005. I am, after all, but a geezer typing away at an $800 computer in some obscure corner of the world. On the other hand, I have to take issue with Mr. Mauldin whom, like so many, dances around the issue but never touches it.

Mr. Mauldin opines: “There is indeed considerable disagreement throughout the world on what policies to pursue in the face of rising deficits and economies that are barely growing or at stall speed. Both sides look at the same set of realities and yet draw drastically different conclusions. Both sides marshal arguments based on rigorous mathematical models “proving” the correctness of their favorite solution, and both sides can point to counterfactuals that show the other side to be insincere or just plain wrong.”

To which I can only say: “maybe”. But pundits and professionals can model all they want but the reality represented by the following charts is indisputable:


FRED Graph


FRED Graph

In light of the above, what is there to model exactly?

Mauldin continues by quoting some of Minski’s work (emphasis added):

Hyman Minsky, one of the greatest economists of the last century, saw debt in three forms: hedge, speculative, and Ponzi. Roughly speaking, to Minsky, hedge financing occurred when the profits from purchased assets were used to pay back the loan, speculative finance occurred when profits from the asset simply maintained the debt service and the loan had to be rolled over, and Ponzi finance required the selling of the asset at an ever higher price in order to make a profit.

Minsky maintained that if hedge financing dominated, then the economy might well be an equilibrium-seeking, well-contained system. On the other hand, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy would be what he called a deviation-amplifying system. Thus, Minsky’s Financial Instability Hypothesis suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by (stable) hedge finance to a structure that increasingly emphasizes (unstable) speculative and Ponzi finance.”

That’s all I need to quote from Mr. Mauldin’s piece.

Economists and pundits today are bending over backwards to philosophize and debate the finer points of economic theory but nobody is questioning the monetary system. To borrow from a famous quote:

It’s the monetary system stoopid!

Minski’s description of debt is spot on. What Minski omits to point out is that it is the choice of monetary system that dictates the type of debt that will dominate an economy.

In a debt based monetary system, Ponzi finance is inherent and inevitable. Full stop. No other study, research or conceptualzing is required.

When money is borrowed into existence from a privileged third party, every single economic actor is immediately and perpetually placed at an ever increasing economic disadvantage that in turn requires ever greater amounts of credit and money to be borrowed into existence.

As a medium of exchange, money must belong to economic actors because money must reflect the creativity and the productivity of said actors. If one entity is arbitrarily given the exclusive privilege to create the currency at interest and if society is forced by law to make use of this currency, in time, the entire productive capital of society will mathematically and inevitably be appropriated by the creator of the currency and the entities that gravitate around it. This is what precipitates a debt crisis.

A debt crisis arrives when the work and the assets of a person or of a company no longer generate sufficient revenue to service debt.  This moment can be put off in time by declining interest rates or by government subsidies. But the manipulation lower of interest rates also ensures a greater debt burden on all economic actors and, of course, government. In other words, increasing debt means that your work and your assets eventually belong to the financial sector of the economy.

In graphic form, the inevitability of this monetary system is illustrated by the following chart:

FRED Graph

In a debt based monetary system, the expansion of credit markets and of the monetary base can appear to be beneficial. But it is only an appearance. The graphs above prove beyond any reasonable doubt that debt cannot stimulate productivity.

And here’s the reality.

At the point where Trillion Dollar monetary and credit interventions fail to expand the economy thus fail to produce employment, the choices for a sovereign are few and well defined. When the sovereign in question is the nation that harbors the global monetary authority the choices are even fewer and even better defined.

Debt can either be paid down or written off. There is no third way and there most definitely is no middle way.

At the point where debt fails to expand the economy taking on more debt does nothing to resolve unemployment. As unemployment rises, the masses seethe. You let this go on much longer and you have a revolution on your hands.

The choice today for the West is as follows.

Carry on trying to expand credit markets and allow unemployment to rise and eventually allow revolution at home.

Cut debt and allow revolution at home.

So, what are you going to do.

Debt can only be paid down or written off.

BRICS are the West’s largest creditors. Incidentally, BRICS also happen to own most of the global productive capacity.

The West cannot pay the debt.

The West cannot default on its debt because defaulting is something that Thailand or Argentina can do but not a Western country.

BRICS are most certainly not going to write our debt off.


This is what the monetary authority is weighing: revolution at home or induce a debt write off.

If you were in the shoes of the monetary authority, what would you do?

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4 Responses to “It’s The Monetary System Stoopid!”

  1. Patrick Donnelly Says:

    Incidentally, Project Seal, completed in 1946, showed how to use tons of TNT to create tsunami. Japan has already been devastated, as has the fission industry! Better still, not acknowledged as an act of war by any! Unlike Aceh which caused China to issue a nuclear ultimatum. Note also, Weather modification is admitted by Treaty to exist.

    The Monroe Doctrine has ensured that USA causes the South/Central Americas to develop with a mad Gini number. That is clearly the future for the USA and Canada also?

    Revolt? Decades away provided the JIT supermarket food system remains …… wonder what will disrupt that?

    I foresee a coup, from the oath takers and armed forces in USA. Either to forestall revolt or to prevent TPTB getting their way, a reversal of the Smedley Butler plot.

  2. Patrick Donnelly Says:

    Sounds like a plan!

    There is a massive bias against destroying productive capacity despite the broken window theory, because we all know that it is a waste.

    The current extend and pretend, apart from enabling the usual suspects to make money from nothing, with state assistance, is also designed to create inflation. This is merely engineered price rises based on too much credit chasing commodities of all kinds. This is destined to fail massively, at some stage, but will cause massive pain and deaths in the millions, given that many commodities that are sure fire, in a Depression are foods! The hope is to inflate away debt. Not going to work!

    SPOT ON!

  3. josephbc69 Says:

    Another superbly concise and witty article, informing us even as it spills the entrails of the freshly slaughtered Fed Res Bunco Temple sheep open for the world to see: there’s nothing there!! Gadzooks, not only is the Emperor naked, but so are all his advisors’ brains!!! What to do, what to do?

    Well, do nothing at all, actually. Just let the fershlugginer mess fall apart, as it well and truly deserves. When year 1000 came rolling into view in 999 AD Europe, the sheeple and the nobles believed the Church when it said “The End is at hand!! Repent and give us all your land and wealth if you wish entry into Heaven!!!”

    Which all-too-many people did, VERY much to their regret when they awoke on January 01,1000, because everyone was still here, warts, debts, and oops!! No more lands or gelt, gold or silver, etc. Many were furious and went to tear down their priest’s house and even higher-up servants of Il Papa, but alas: no refunds were forthcoming. So it goes. And goes and goes….

    So what’s changed in the more than 1000 years since then?

    Nothing, really, except the names and roles: there is still a small elite ruling class and its compradores who live for the most part as parasites upon the body politic. They got theirs and much of yours and are nowhere to be seen. What have you got to show for expending your life in support of The System? Or, as R Crumb remarked in a mid-Sixties comic panel, “Is dis a System?”

    • guidoamm Says:

      You are much too kind Joseph. Thing is the system is imploding and we are well past the point of no return financially speaking. At the same time, we cannot allow revolution at home. If they do nothing and let things develop the way they are, revolution will obviously tear society apart but the monetary authority will also lose their power and their assets.

      So, in my opinion, they will not just do nothing. The machine is already at work. It has been at work for some years now and the West will precipitate a conflict of global proportions.

      The West cannot pay the debt down and the BRICS will not write it off. Increasing the debt is now of no use and, at any rate, BRICS are no longer lending.

      We will start a war somewhere and gradually bring it to a band of land that stretches from India to South Korea via China. Ideally we also need to devastate Japan. Once the entire infrastructure and productive capacity of these countries has been obliterated, we will tell them that we no longer owe them anything. Better still, at the close of hostilities we’ll turn around and offer them loans to “rebuild” their countries and their societies.

      And Bob will be your proverbial uncle.

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