There is a clear link between our system of fiat (paper) money, the supply of money and credit in an economy, and the 30-year boom that came to a dramatic end in 2008. It’s only by understanding this link that investors (and anyone with wealth) can appreciate just how fragile our financial system is, and what to do to protect themselves from its inevitable collapse. [Let me explain.] Words: 961
So says Ben Mountifield (www.247Bull.com) in edited excerpts from his original article* as posted on Seeking Alpha.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Mountifield goes on to say, in part:
The Link Between Fiat Money and the Amount of Money in an Economy
First, we need to establish the link between fiat money and the amount of money in an economy.
Today, for the first time in history, we have a situation where all the world’s currencies are fiat, which means they are money only because of government edict, i.e. because the law says so. None of these currencies have any intrinsic value, nor are they backed by any kind of reserves, such as gold or silver, or any other portable, durable, easily divisible item that is likely to be accepted as payment.
In the words of Federal Reserve Chairman, Ben Bernanke, “US dollars have value, only to the extent that they are strictly limited in supply.” Therefore, as more dollars, euros, or British pounds are created, their value declines.
What this means is that when a government wants to pay for a new welfare program or campaign promise, there is nothing to stop them from creating more dollars, euros, or British pounds to pay for it, and they can do so essentially at the touch of a button.
The Link Between the Amount of Money in the Economy & the Boom-Bust Cycle
Now that we have established the link between fiat money and the supply of money in an economy, we need to examine the link between the amount of money in the economy, and the boom-bust cycle that culminated in the global financial crisis of 2008. This is a process which is best described by the Austrian theory of the business cycle.
The Austrian theory of the business cycle makes the case that interest rates play a vital role in a healthy economy. That’s because interest rates coordinate production over time. For example, when consumers save their money rather than spending it, interest rates have a natural tendency to decline because there is an abundance of available capital.
It’s these low interest rates that encourage businesses to borrow money and begin expanding and developing new products. This is precisely the time when they should be expanding, because it’s the time when consumers are saving, and therefore they will have money to spend on new goods and services at some time in the future.
Conversely, when consumers decide to spend their money today, rather than saving it, the supply of available capital falls, and so interest rates rise. This, in turn, discourages businesses from borrowing money to expand, which is a good thing because consumers won’t have the money to buy their products when their expansion is complete.
So as we can see, by sending signals about the cost of borrowing, interest rates play a vital role in a healthy economy.
The problem arises when central banks intervene in the free market and artificially suppress interest rates, which is what they are doing today, and what they’ve done for the past thirty years.
When central bankers push down rates artificially, they send false signals to businesses encouraging them to borrow money to expand, because it’s cheap to do so. The problem is, consumers aren’t saving so they won’t be able to buy the goods and services these companies produce once their expansion is over.
So by interfering in the free market to stimulate what they call “aggregate demand,” politicians and central bankers actually perpetuate the boom, causing even greater misallocations of capital and malinvestment. Eventually, when the artificial boom finally turns to bust, as the laws of nature say it must, the bust is much bigger than it otherwise would have been had the politicians let the market correct itself.
Unfortunately, it was John Maynard Keynes, rather than the Austrian economists like Friedrich Hayek and Murray Rothbard that won the intellectual debate, and so we continue to follow a broken economic model which has been completely discredited.
The Bottom Line
What all this means is that politicians and central bankers will go to extraordinary lengths to try to resurrect the artificial boom and keep the credit bubble expanding.
- They will continue to punish savers and encourage investors to take risks.
- They will keep the price of money (interest rates) artificially low for as long as they can.
- They will continue to bailout insolvent nations, banks and companies.
Eventually, however, there will be a trigger that bursts the credit bubble. Perhaps it will be another financial crisis, or perhaps the OTC derivatives market will blow up, or maybe the trigger will be a war.
Regardless of the trigger, the important thing to realize is that our current system of fiat money, fractional reserve banking, too-big-to-fail, crony capitalism and Keynesian economic doctrine is not sustainable, and when the bubble finally bursts, we will experience a severe deflationary depression during which we will hopefully redesign our economic system, starting with our broken money. Then, and only then, can we begin a new cycle of true lasting prosperity.
In order to protect themselves from this inevitable collapse, investors need to consider holding a portion of their wealth in physical gold and silver outside the banking system. Once they have accumulated this safety net, they can then begin looking at other assets that are likely to do well during this period.
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
Our civilization would not be able to handle such a transition from an expansionary credit based economy where goods and services were readily available into a paradigm of credit contraction, supply shortages and destitution and this is what is coming. There is no way to prevent it – only to defer it until a later date – and that day will soon be upon us. Words: 590
George Soros…is more concerned with surviving than staying rich…He doesn’t just mean it’s time to protect your assets. He means it’s time to stave off disaster. As he sees it, the world faces one of the most dangerous periods of modern history—a period of “evil.” Europe is confronting a descent into chaos and conflict. In America he predicts riots on the streets that will lead to a brutal clampdown that will dramatically curtail civil liberties. The global economic system could even collapse altogether. [Perhaps] we should be, too, [but as] we have often explained, [such comments are nothing more than] the fear-based promotions of the power elite to frighten the middle classes into giving up power and wealth to globalist institutions. Let us explain.
I think the U.S. government and our central bank has a tremendously transparent view of what is coming down the road in terms of financial distress….I believe the evidence [I present below] shows that they are preparing for this eventual crisis in a command and control fashion, without alerting the public to the coming implosion. The most immediate trigger event is the looming peril of a collapsing economy followed by inevitable civil unrest. I believe they will use the despair that flows forth from the fiscal wreckage as an excuse to institute martial law. Call it “crazy”. Call it “conspiracy theory”. Call it “coincidence”. Call it “fear mongering”. Call it whatever you like but I find it far more insane to shrug off the strange behavior of our power structure, and simply hope that it’s all irrelevant to the future. [Once I have put forth my evidence and explained its implications in this article I think you will agree.]
The Federal government is gearing up for unprecedented social unrest (worse than Greece or Spain) when Washington is forced to impose “austerity” plans next year… [which will be deemed absolutely necessary to avoid] runaway inflation [that would otherwise occur] to pay for the country’s costly welfare programs like Social Security, Medicare, Medicaid, Food Stamps and massive unfunded liabilities. [Below are the preparations presently underway.] Words: 500
Get ready…Save some cash, load up with gold and silver, and be patient…Start by buying top-grade dividend-paying stocks and gold on dips or corrections, and hold your gold. This era will see the catastrophic collapse of all fiat money. Gold should skyrocket. Get ready for crime and violence…
You think the problems are bad now? You wait until we don’t have any more credit. You wait until the currency is collapsing. You wait until interest rates are going through the roof and inflation is going through the roof. It’s not going to be a pretty picture. There will be social unrest. [See below for the link to the interview.] Words: 477
The outcome of the election of 2012 will [only] determine the rate of speed at which we approach the [financial] cliff [because] neither political alternative is willing to change course, to steer away from the cliff. The cliff is so high that whether we go over it at 200 mph (Obama) or whether we merely slip over the edge (Romney), the end result is the same — fatal for the economy and perhaps our entire political system. It is the fall that will kill us. [This article explains why that is going to be the case.] Words: 1135
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
With the U.S. election just months off, political pressures will mount to favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
Whether our current economic crisis will end with massive inflation or in a deflationary spiral (ultimately, either one results in a Depression) is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family. [Here is my assessment of what the future outcome will likely be and why.] Words: 1441
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
Interest rates have been manipulated to keep them extremely low in an attempt to stimulate the economy but…unless deficits are dramatically reduced…. interest rates will eventually rise and government interest expense will double or triple from the amounts being paid today. That potentially triggers a debt death spiral, where government has to borrow more than otherwise expected. It also raises the credit risk and could ratchet interest rates up again. It has happened to Greece, Portugal, Spain and other European countries already this year and could well happen in the U.S. too. Words: 595
Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign. The question is: when is sooner or later? The purpose of this article is to examine that question. Words: 2600
LOOK! Everyone needs to see this. United States owes a lot of money. As of 2012, US debt is larger than the size of the economy. The debt ceiling is currently set at $16.394 Trillion, estimated to be hit around Sep 14, 2012. In the infographic below that enormous amount is illustrated in $100 bills. It’s frightening! Words: 605
The U.S. already has more government debt per capita than the PIIGS (Portugal, Italy, Ireland, Greece and Spain) do and it just keeps getting worse and worse thanks to both political parties. We are on the road to national financial oblivion yet most Americans don’t seem to care. They don’t realize that we have enjoyed the greatest prosperity we will ever see…and that when the debt bubble bursts there is going to be an immense amount of pain. That is a very painful truth, but it is better to come to grips with it now than be blindsided by it later. [Let me explain.] Words: 1140
Even as I write these words, the world’s largest economy — the E.U. — is coming unglued at the seams, the world’s second largest — the U.S. — is careening headlong toward a fiscal cliff that promises to gut its GDP, nearly all of Asia — including Japan, China and India — is slowing…and yet most investors still don’t get the message. [Let me go on to explain just what that message is.] Words: 1357