Aims and rationale
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig Von Mises
Blog on the absurdities in society, politics, the economy, religion and their bearing on life. The overarching rationale of this blog is to build an argument for my contention that we are living a socio/economic/political juncture that is brought about by the imposition of this particular monetary system and that, historically, has been characterized by credit implosion, deflation, penury, social strife, totalitarianism and, very often, global war.
This is a long introduction. You may want to settle into a comfortable chair with a strong libation at hand. But essentially, all the articles I gather from the main stream press aim to highlight my contention as set out below.
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Everything begins and ends with money.
Everything! There is nothing in this our life that could be brought about or that could be brought to fruition or that could be changed without money. It is not about venality. It is not about being materialistic.
Money is a medium of exchange. It is necessary and it is vital. We cannot make do without money. Barter is fine and can work in a small community. But to expand outside of the community and to engage in intellectual pursuits, we must be able to put a value on things and ideas. Placing a value on things allows us to exchange items and ideas for units of value that can be transported and exchanged for other items and ideas. If you were a pot maker and you wished to undertake a trip to a faraway land, you would have to load up your vehicle with pots and set off hoping to find people along the way that would exchange your pots for food and lodging. Can you imagine the variety and size of pots you would require in order to be able to buy a plate of soup or rent a room for the night and settle your purchase in its entirety and immediately so you can keep moving along? You would need a small pot for a plate of soup and a larger pot for a room and then a larger pot still if a wheel on your vehicle needed replacing and so on and so forth.
Money allows all that in a much more efficient manner. You are a pot maker. You sell your pots to absolutely anyone in exchange for units of value. So now, instead of setting off with a vehicle full of pots, you set off with a bag full of units of value.
There is no practical alternative to the use of units of value that is money.
That being the case, what gives money its value.
Throughout history, man has used things of intrinsic value to exchange for the necessities of life. At some point in human history, salt was deemed valuable enough that it was used as medium of exchange. Still today we use the word “salary” that is derived from the Latin salarium/salarius – of salt – . Things used for exchange vary according to geography and circumstances. Cigarettes can be a valuable unit of exchange in prisons whilst rocks were valuable items of exchange on Yap island. It matters little what is used as unit of exchange provided the unit serves the purpose society deems useful enough to act as medium of exchange for our skills and our endeavors.
So money is a vital necessity.
But money is a tool and as such it can be employed to achieve various outcomes.
You would have thought that in the 21st century, advanced societies that evolved by way of the scientific method and that are steeped in personal freedoms and free markets would be well versed in the origin and nature of money. And you would be spectacularly wrong.
But you have no idea how wrong you would be till you realize that even most “professionals” in the economics/banking/finance industries have no idea what money is, where it comes from and how it works.
Just for kicks, try this. Ask your bank manager or your broker or some economist or economics student what our monetary system is.
Chances are that more often than not you’ll draw blank stares. Some will venture to say that in the USA we are on a Dollar monetary system whilst in Europe we are on a Euro monetary system. Some will opine that we are operating in a free market. Others still will say that we have a capitalist monetary system.
Few if any will know that in the West today we are all on a fiat monetary system. Fewer still will know that we are on a floating exchange rate fiat monetary system. And of those that may know, very few will have ever stopped to think what the ramifications of the use of a particular monetary system are.
Now think about this for a moment.
In the ostensibly Democratic West, why is it that we may have a say in politics (snicker, snicker but that’s a subject for another time) and economics but we have no say in the choice of monetary system? And in societies that are presumably steeped in economic freedom, why is it that we have no say in the setting of interest rates?
So money is the begin all and end all of human life and in the Democratic West, we have no say in how it is managed. Worse still, we have no idea what money is at all. We want it; we want lots of it; we want to accumulate and hoard stacks of money. But we have no idea how it comes about, how it does what it does nor do we fully realize how it can be used to manipulate society. If we did understand all that, I dare say that politics would be transformed and wars would very likely become a thing of the past.
Value based money vs. fiat money
Salt was an example of value based money. That is, salt has intrinsic value. Salt derives its value in two ways: in a first instance the value of salt is calculated in the human and material capital required to locate, extract, convey, refine and distribute it. This is the component that is easy to understand and calculate: i.e. you need so many laborers, tractors, trucks and drills and you need so much gasoline and electricity to find, extract and refine a ton of salt. The second component of value is less tangible and is derived from the utility/desirability society places on salt. Thus, if salt is desirable and rare, its value increases and if it is useless and there is plenty of it around its value decreases.
Fiat money is a brilliant construct. Fiat money is a concept. Fiat money has no intrinsic value. Thus, compared to value based money, fiat money is inherently “inexpensive” to produce. It is THE ultimate medium of exchange. It is highly divisible and very portable. Thus it is exceptionally flexible. Fiat money is absolutely one of the most brilliant concepts man has ever devised.
Think about this. Suppose you want to build a school.
Lets say that in a salt based monetary system building a school requires ten tons of salt. So you need ten tons of salt to pay the architect and the laborers and to buy the material and equipment. But you also need to extract the ten tons of salt first. So you need all the trucks, the laborers and the fuel to extract the salt before you commission your school.
Thus in a value based monetary system, your ability to expand the economy and advance society is constrained by the amount of people, material and time required to create sufficient amounts of money to carry out your projects.
(August 2011 addendum – When I first wrote this essay some four years ago, I perceived the nature of value based money to constrain the development of society. Today, I see that the “constraint” is in fact a function of the discipline value based money imposes on government. In a value based monetary system the ability of politicians to manipulate the monetary system for political gain is severely constrained and, at the very least, would result in an underlying expansion of the economy. That is because in creating more money, politicians would have to employ more human and material capital in order to source and refine the product that underpins the currency. Not so in a Debt Based Fiat Money system [DBFM] where the authorities are free to substitute productive capital with financial capital.)
A fiat monetary system has no such constraints. Building the same school in a fiat monetary system can be done much more quickly because you create the money you need at will. That’s it. Crank the printing machine once and you have the money you need to carry out your project.
You want another school? Crank the machine once again. You need a hospital? Crank it again. You want a bridge and a jet fighter? Keep cranking the printing machine. You want to invade another country? Give the printing machine a good crank and you’re on your way.
For reasons that are obvious, societies organize within and around a set of social parameters deemed desirable. Each society is different and each will organize in different ways. The one inescapable similarity of all social organizations is that there is always an entity that acts and speaks on behalf of the members. In small social organizations that entity could the the mother or father. In larger organizations it can be a club manager or the town mayor. In larger organizations still it is the municipality and in a country it is the government.
At its most basic level, at least in the West, government is nothing but members of a society that have been chosen by their peers in order to act and speak on their behalf.
Thus government is not an entity that is separate and independent from society. Government is supposed to be the embodiment of all the rights and duties as well as the moral and legal obligations of a society. Government is merely the representative of society and nothing else.
But government has no wealth. This is very important to understand. At its most basic level, government has no wealth; it has no possessions and it has no income of its own. Government can only do what it does for as long as society can give it enough money to do it.
But although government has no wealth and no income, government wields the power to coerce society to give it money to do the things it deems necessary and or vital (raison d’etat).
And here is the rub.
Fiat money and Democracy
If you have understood the nature of fiat money, I hope I can now make you see what this entire blog is all about and what my beef really is.
The combination of fiat money and democracy must inevitably and necessarily lead to an inflationary blow off phase followed by a deflationary depression and, very likely, world war.
Like all constructs, fiat money adheres to a logic that in this case is mathematical. That is, for any given set of circumstances, fiat money responds in predetermined ways. Economists and bankers can formulate, extrapolate, calculate, devise and manipulate all they want but the logic of fiat money cannot be altered.
Like everything else in life, when you have too much of something, society places low value on it. Conversely, when something useful or desirable is rare, society places a higher value on it. Fiat money is not different.
Considering that Democracy is the worst political system except for all the others that have been tried before, most of us will agree that we’d rather live in a democratic environment. And therein lie the seeds of our own historically recurring devastation.
One of the characteristics of democracy is personal freedom. That is, the freedom to, for example, decide how best to live your life, what to study, what job you wish to carry out, where to live, where to travel, whom to marry or not marry at all. The other characteristic of democracy, is the freedom to chose those members of society that you feel are best suited to represent your needs and aspirations at the local and national level; these are the politicians.
Here’s the rub. Rather, here are the rubs because there are more than one rub.
Rub #1: Personal freedom is not conducive to long term constructive decisions. Left to their own devices, people will by and large chose instant gratification over short term sacrifice for long term sustainability. 7000 years of human history is a tough record to refute.
Rub #2: Politicians are people that have the desire to lead other people. Therefore politicians are inherently and by necessity manipulators. Politicians must manipulate information and people in order to present a set of goals and ideals that are desirable and appealing to large segments of society in the hope to get elected. That’s what Democracy is all about.
Rub #3: If you put Rub #1 and Rub #2 together, you have the equivalent of the kid in the candy store with no adult supervision.
In a democracy, a politician needs money. How else is a politician going to get elected if not by spending money? If things are going well, a politician must promise a still more desirable outcome to the electorate. If things are not going well, a politician must promise a better future. Whichever way you turn it the political process in a democracy needs great amounts of money.
Seriously. When was the last time a politician was elected to office campaigning on a platform of austerity and cut backs? That will never happen! If any politician were foolish enough to do something like that, rival politicians would immediately take advantage of the situation promising change without cut backs. Remember Obama?
And here is Rub #4
Since fiat money has no intrinsic value, it is deemed to have no cost.
Thus, in a democracy, politicians have no compunction to promise spending on programs ranging from social to military to scientific nor, indeed, to spend on pork barrel projects aimed at perpetuating their position in politics.
Rub #5: Although not readily visible, fiat money has a cost. The cost of fiat money is a value that is accumulated and shunted forward in time. The cost of fiat money is known as “inflation”.
Rub #6: Inflation is a dynamic that is exponential in nature and limited mathematically.
Fiat money, Democracy, inflation and human nature
And here are the four horsemen of the apocalypse. Although at first they may ride slow, they eventually pick up the pace to a furious gallop as they overrun and lay waste to society.
Politicians make promises and spend money. Banks are only too happy to assist. After all, that’s what a bank does. It lends money at interest. It is their business. It is how they make a living. So politicians need bankers and the relationship is symbiotic.
If you were a politician, what monetary system would you rather operate under?
Fiat money wins hands down. And it wins also because most people have no idea what the difference may be between one monetary system and the other. And, anyway, government has not put the choice of monetary system before the people for ratification.
So, the choice of adopting a fiat monetary system is arbitrary and unilateral. How’s that for Democracy.
The reason a government opts for a fiat monetary system as opposed to a value based monetary system is because government wants the ability to create money as deemed suitable to its aims. If that were not the case, we could quite safely make do with a value based monetary system or, at least, we could make do with a fixed amount of money.
Money is a vehicle for exchange. Money, like socks, chairs or like salt, has a value. And like salt, the value of money is partly tangible and partly non tangible.
If people decide they would rather hold money instead of exchanging it for a pair of shoes, money becomes more desirable than consumer items. If people decide they would rather exchange their money for shoes or holidays, money is less desirable than other items. Thus in an environment where the monetary base is fixed, both the value of things and the value of money would increase and decrease according to people’s preference in holding one or the other.
So, in theory, a fixed amount of money should serve a country as well as a value based monetary system. If the economy expands and the volume of trade accelerates, instead of injecting more money the price of the existing monetary base would be revalued according to people’s preference.
But in an unchecked monetary system, government makes the implicit and deliberate choice of manipulating the money supply – but government manipulation of the money supply is always and everywhere geared towards expansion.
Putting it all together
As government imposes a fiat monetary system AND retains the right to set interest rates, the path is dialed in. The political process will ensure that an ever greater amount of credit and money must be created to satisfy democratic principles. As the credit markets expand, the central bank must follow suit with money supply. Hence inflation progresses. Inflation devalues the currency. Hence prices rise. Hence GDP rises.
And that’s where most people, particularly politicians, get blind sided. People look at a rise in GDP and think it is great. All economic and national metrics are directly or indirectly calculated on the GDP number. A higher GDP makes a whole bunch of metrics look great. Few stop to consider the quality of the rise in value of GDP.
Inflation is not an undesirable dynamic in and of itself. But persistent, pervasive and aggressive inflation pumping over decades will inevitably devastate society and here is why.
The beginning of the inflationary cycle may actually have a legitimate purpose. Inflation may provide seed money that if put to productive use can stimulate productive growth. However, as the political process requires ever greater amounts of money, interest rates are progressively manipulated lower. Lowering interest rates encourages greater credit creation. However, once industrial and commercial capacity reaches the limit of productive investment and as interest rates are manipulated lower still, the new money is gradually invested in more frivolous things.
Somewhere along the inflationary dynamic, countries become “service” based economies.
By now though, credit creation can no longer be slowed down because any let up in inflation would result in the impairment of the GDP number.
Thus along the inflationary dynamic, the continued existence of the monetary system and government become dependent on the continued expansion of inflation thus the continued expansion of credit markets.
But inflation is a dynamic that conforms to the law of diminishing returns.
Thus, as inflation gradually overwhelms the GDP number, government has a vested interest in taking a progressively larger role in the economy with all the attendant aberrations that will entail at the legal, moral and fiduciary level.
This is one of the more relevant posts complete with Federal Reserve charts that gives the tone of what you will find in this blog:
The next world war