Drown in a sea of paper money:
Bad ideas that are destined to fail:
As tax revenues fail to meet projections, deficits grow, deficit spending soars, and debts mount. That’s where paper money comes in. Paper money isn’t only good for financing a war. It’s also perfect for closing the gap between government’s income shortfall from taxes and over-spending.
The central bankers use inflation to wipe away their bad debts. That is their only hope. They believe they’ll be able to control inflation and think or hope it won’t get out of control, destroying the monetary system they’ve built. Eventually they’ll be proven wrong.
Their actions with for example “quantitative easing” have committed them to an inflationary policy to save the banks and continue the monetary system as it exists today. This means the world’s largest banks will keep getting bailed out via continuous manipulation of the money supply. These policies will cause the value of many assets – including gold and silver – to rise substantially. Inflation is the salve that heals all financial wounds.
These central bank policies and the resulting inflation will cause a huge rise in income inequality as real wages decrease and financial profits increase greatly. These policies will ultimately cause a severe breakdown in civil society through the lost confidence in paper money. It has happened in dozens of other countries over the last few decades. It is the inevitable result of paper money systems and government-led central banks.
“The central truth of economics is scarcity. There can never be enough of anything to satisfy everyone.
The central truth of politics is patronage: promising to give everything to everyone. Paper money is the bridge between economics and politics”.
The unpaid debts of an entire generation of people in Western countries are almost due. The so-called “baby boomers” grew up in a world dominated by Marxism and Keynesian economics. These are bad ideas. They are destined to fail.
Fiat money turns the free market function inside out:
Fiat is money with no intrinsic value beyond whatever an issuing government is able to enforce. When it enjoys a monopoly as currency, fiat inevitably turns the free market functions of money inside out. Instead of being a store of value, the currency becomes a point of plunder through monetary policies such as quantitative easing. Instead of greasing society as a medium of exchange, the currency acts as a powerful tool of social control. The second harm is far less frequently discussed than inflation, but it is devastating. The personal freedoms that we know as civil liberties rest upon sound money.
The Fed can’t actually bring forth more resources, more real capital, more skills, more jobs or more output. It can only put out more paper money, to give it to its ‘friends’, thus debasing the money that everyone else holds. This inevitably lowers the real value of wages and the real price of exports.
You work all your life, and you are worth, say, $1 million. Then the Fed prints up $40,000 million or more, just like that. This undermines faith in the entire system. Suddenly, people don’t know what they’re worth. The hard working saver who worked his whole life, to save a million dollars and put it in a savings account at the bank now finds his banker, who speculated on banking shares, is worth twice as much as he is. He wonders what will happen next. As The New York Times put in a heading:
“Bank Executives Cash in, as Market Rises.”
and continues to explain:
“The FEDs bailed out the banks. So the bank execs accumulated stocks then valued at low levels.” According to The New York Times report, “the bankers’ five top execs at each of the 18 largest publicly traded financial institutions, got $142 million worth of stocks.” Even though they’d brought their respective companies to the brink of extinction, they didn’t take a dime less in compensation. They simply switched the cash bonuses they were owed to stock options, valued at the low prices of the crash era. “Today, four years later, those stocks are now worth $457 million. Nice profit. It’s amazing how lucky you get when you have the Fed giving you money!
Or, is it better typified as cheating? This is what happens when the fed fiddles the financial system. Money – created, not earned – is up for grabs. And who grabs most? Those closest to the source: the insiders. The more money the central banks distribute, the more the insiders get. So, the rich get richer.
“Central banks provided cheap money to banks, the cheap money artificially inflated asset prices; made anyone connected to those assets rich. As we became a nation of speculators, those riches were accumulated at everyone else’s expense, and everyone else now realises what has happened and is understandably enraged.”
Honest bankers lead to better banks?
If the bankers had got what they deserved, instead of receiving options and bonuses, they would have gone broke. Then we would have seen what they are really worth. They would possibly have picked up the pieces, creating new and better financial companies. And today, we would have wiser, more honest bankers, and better banks too. We’d also have a more honest financial system.
As a French entrepreneur said:
“The problem is that the ruling class – the President of France – and all his friends have no idea of what really makes a country work. They have never had jobs in the private sector. They’ve never had to balance a budget or pay an employee. It’s all theory and ideology to them. They have spent their lives cushioned from the real world, getting their money from either the government or a political organization. No wonder they have no idea how an economy functions.”
Every government that has used paper money has succumbed to a lethal level of borrowing. Rather than restructuring these debts, paper money systems allow for the rapid expansion of the monetary base to facilitate paying off debts in devalued money.
Junk-bond spreads near record lows:
Of course, central-bank manipulation hasn’t been limited to stocks, gold and silver alone. It has also warped the global bond markets like never before. They have purchased trillions of dollars’ worth of sovereign and corporate debt. This has pushed global interest rates to unheard-of lows – even below zero in many cases – and has allowed for companies and consumers alike to binge on record amounts of debt.
Nowhere has this manipulation been more apparent than in the high-yield junk bond market. Junk-bond spreads – the premiums investors earn by holding risky debt versus risk-free sovereign debt, like U.S. Treasury bonds – these spreads have been sitting near record lows for a long period of time. But the new records that are being reached are resulting from the European Central Bank’s ongoing bond-buying program, resulting in the continuous decline of junk-bond yields. And recently – for the first time ever – a huge swath of European high-yield debt, is yielding as little as U.S. Treasuries.
Yes, you read that correctly; Right now, investors are getting paid no more to hold risky European corporate debt than they would to own the safest government bonds in the world. As shocking as this may seem, the reality of the greater picture is even worse. More than half of this debt – 60% in fact – yields less than U.S. Treasuries today. This will not end well.
All this is no different than stealing your hard earned money. And yet that is what happens every time, resulting in a massive crisis and ultimately, a breakdown of social norms.
A sea of paper money:
The global economy now floats on a sea of paper money. The financial fate of Europe’s banks and its governments is impossible to disentangle: because the banks are the primary source of funding for government deficits. Government debt represents a large proportion of the asset base of most euro zone banks. Insolvency of one bank therefore threatens the insolvency of another bank. Euro zone leaders have turned a €50bn Greek solvency problem into a manifold €1,000bn real debt crisis for the European Union.
The central aspect is that this interaction has made the largest European banks the ‘too big to fail’ TBTF unrecoverable. Euro zone governments cannot provide the massive capital infusions and guarantees to banks to solve this financial crisis. The truth however is, that given the level of euro zone government indebtedness and the relative size of Europe’s banks, Europe’s largest banks are now too big to be saved.
However, EU-leaders think they can solve the crisis by adding more paper money to the economy, by allowing the ECB to buy Greek, Italian, Spanish, etc. bonds, which is the popular remedy. Moreover, under the control of a central bank, paper money provides modern economies with the illusion of great flexibility and resilience. Without the rigidity of the gold standard, bad bank loans are easily swept under the rug to fester.
When the government prints more money, it provides a people obsessed with asset prices, obsessed by the illusion that they are growing wealthier when in fact, they are growing poorer. As paper money becomes more and more plentiful, the purchasing power per unit goes down, causing producers of valuable products to eventually demand more units of paper money in exchange for their products or services.
So what are the long-term costs of paper monetary systems? How can an economy develop in a healthy, sustainable manner when wealth’s scale constantly changes?
Contrary to popular opinion, paper money is not wealth. Paper money is a claim on wealth. It only has value to the extent that it can be exchanged for things; bread, corn, gasoline, services, cars, etc.
Investors should expect the current momentum behind populist political movements in the world to grow stronger. This will be bad for the dollar/euro/yen, etc., bad for longer-maturity bonds and bad for the stock market, but good for gold and silver.
Meanwhile, it should be clear how this monetary experiment will end; just look what happened during the Weimar Republic in Germany, Argentina, Venezuela, and Zimbabwe. We are facing an inevitable HYPERINFLATION.
Will the price of gold ultimately increase from its current $1300 to $10,000 per ounce? It’s almost certain it will and even higher when hyperinflation sets in.
Gold will serve as a solid bridge on the journey from this paper monetary system to the next one. The faith-based monetary system is breaking down. Gold won’t break down with it.
Required is a serious cost/benefit analysis:
Their final decision should be based on this analysis to choose the best options for their ultimate decisions. More importance should be allocated to longer-term implications than to the short-term effects. Already too many decisions have been made to relieve short-term pain, resulting each time in greater problems to be solved to prevent the financial crisis.
Greece and the EU would have been better off if Greece went bankrupt over 6 years ago.
Printing money will actually result in far worse consequences than what would have been the case, should they have gone bankrupt. Why not simply accept bankruptcy, separation of banking activities, restructuring or a write-down of debt? This would have been the best long-term solution, despite the short-term pain.
The EU Is 1 Big Scam & The Ukraine Is its Next Victim…
Dr. Richard Wolff, joins Thom Hartmann. Joining the European Union has been a disaster for countries like Greece – Spain – and Ireland. Austerity cuts have decimated their already struggling economies. So why is Ukraine even THINKING of moving closer to joining the EU?