Mucks’ Minute (or maybe two)

The Argument for Fiat Money

 

Now that title got your attention, didn’t it?

Here in the middle of governmental chaos and confusion, political bickering and turmoil, moral decay and dishonesty, debt through the roof with mathematical proof that there is no way to pay it back and that will, at any rate, result in a Depression worse than the last “Great One” and before we’re through, if history is a guide, it will likely be a world wide Depression of a size never before seen or experienced.  The killer drop in oil prices is simply the next bubble in line to pop!  And there are dozens more right there in line to follow.

So,  I am making a case for fiat money…

No, I’m not nuts, just trying making a point.

First, as we all know, all debt must be paid – all over the world.  The debt may be repaid in real goods (gold, silver, productive output, etc)  Most countries of lesser stature – but the group is growing by leaps and bounds-  merely thumb their noses at creditors and default.  Ireland just did that by offering (and getting ) payment of $0.10 on the dollar for the Bank of Irelands debt to the Euro-banks (which never made the Main Street Media in any form or fashion and only Reuters carried the story – to this day!).

Iceland, on the other hand, just told their European creditors to bugger off and defaulted on the whole debt.  After suitable screams and wails from the EU Banks, Iceland is now on the healthy road to recovery, albeit with a greatly reduced (and temporary) access to debt markets.  But they are growing again from a lower base which is better than sinking to a lower base yet through “austerity” and going deeper in debt and juggling fiat money loans while building an even more fragile pile which WILL FALL DOWN in the future.

That’s the honest way out of debt.  Default, bankruptcy, a few mea culpa’s, a few years of suffering from depreciated currency and, followed by the start of honest growth (if that is at all possible in a world of depleting resources), all is well and things get better.  Falling availability of resources is a whole ‘nuther story..

Down Central America and South of the equator they have this default business down pat.  North of the Equator not so much.  Oh sure, Russia did it – but they had so many natural resources nobody noticed much except the banks that got bailed out.  Further more the crash (and that is what it is) of oil prices will shortly see Russia and their captive cronies default again to much greater and world wide devastation  than, say Zimbabwe or Greece (Greece is in a state of continuously defaulting under a “tent” of obfuscation)  who tried a simple default but thanks to the EU who will nail their feet to the floor and torture them for years to come (unless they pull a typical Grecian reaction and burn the place down to stop it).  For some reason they can’t bring themselves to give up the dole and work for a living.

Russia is a different bag.  When they default this time, (after a likely crack-up first), all their dependent annexed countries will find the subsidies gone.  Cuba will go very hungry as they now subsist on Russian handouts. Venezuela, a doomed country with nothing but oil between it and universal poverty will, shortly, go up in a poof of smoke and disintegrating civility and drop into a medieval existence of subsistence farming , small feudal villages and a 500% increase in the numbers of street vendors.

The current not so comedic problems with debt and budget in our own battered, dinged and buried beyond the neck (we’re barely breathing now!) in debt U.S.A. will continue into  yet another “kick the can” attempt which will eventually (if not now) fail.  I’d like for it to fail now and get it over with that’s a personal wish.

That doesn’t address the title of this article, does it?  The Austrians want to return to the gold standard.  The Republicans want to stop (all of a sudden, I might add) excessive Government spending, the Democrats desperately want to “kick that can” (at least past the 2016 Presidential farce) so that things can continue as they were/are – which isn’t going to happen.

Well, what the Republicans and Democrats want to happen will probably both happen – one after the other – and then game over.  Or maybe sooner.  The world will not allow the Democratic no-plan and the American people will throw out of office every Republican in Washington if the Republican’s really cut back spending to where it matters! Neither political party has the guts or statesmanship or leadership to do what’s necessary, so we will, very likely, follow Russia (at a slower and more painful rate) into and maybe under the pit of at least partial hyper-inflation  before the deflationary bullet is not bitten but fired!  Either way, we are well and truly doomed to a Depression of much greater extent than that of the 1930’s and world-wide at that – but no one wants to admit it.

BUT – big but..  what happens then?  Most likely, the pendulum will swing and inflation will (properly) get blamed for all our problems and we’ll reset the economy by going to some sort of commodity money – based on gold and silver most likely, but it could be carrots, or wheat or something else our “new” Government figures they can control.  (We will never, sadly, punish the real villains, ourselves, for allowing it to happen for the umpteenth time).  Let’s assume it to be old style bi-metalism and an attempt to  restate our medium of exchange (the dollar) to whatever the current world price of gold happens to be with silver priced at some fraction to that of gold.

Ah – says a large part of the audience, heaven is upon us and all will be well.

Which probably will not be a truism for the first few years to a decade or two.

But then we struggle up from our debtor/defaulter dungeon, climb back over the edge  of the pit and wonder of wonders – start to grow economically speaking!  After all, after an inflationary crash and depression, there are a lot of poor people, sadly in this case, probably fewer people as well, and a little bit of growth goes a long way in that situation.  With or without resources.

One problem.  Where does the “real” money come from to allow the growth that is so badly needed?  I know the commodity money fans will say that we don’t need more money – prices will naturally fall as production slowly rises all with the same amount of money (thanks to better technology and higher productivity) – and that is true in the small limited sense.  A fixed money supply does not, however encourage anything. This situation of “encouraging” things is handled by those who run the government at the behest of monied, influential PTB to their own benefit with no thought to the general public or economy at large.

Entrepreneurship is sometimes muzzled for lack of credit (after all, credit is just money that’s advanced on the premise that interest will be paid on it and it will be paid back in a set period of time, right?).  Credit keeps you from spending years and years saving up a stake for a new business you just “know” will (maybe) be successful so monetary growth in a fixed money supply economy is limited to the growth of the commodity that the money is “fixed to”.

Now, from the human view, this is unacceptable because it just to damn slooooooow.   We humans are “speed balls” when it comes to inventiveness and entrepreneurial ability provided we stop paying people not to work and knock off paying welfare moms (and their sperm suppliers)  money for children produced.   I doubt government will exist by then in any significant size other than local, perhaps state and bare bones federal so we may be able to get on with it anyway.

But we’re not talking small stuff here, either.  We’re talking about dragging 150- 200 million people – and much more if you consider the world at large – out of a much poorer place back up the human conditional ladder into some kind of higher location. (Please note the smaller population quoted for the US..  Scary? Bet your bippy it is)

Voila! We need more money!  Fractional banking and more money/credit will do it as it will encourage borrowing for those with good ideas and allow people to buy more things and spend and increase demand for all sorts of good stuff like sofas and cars and houses and flat screens and transport and a replacement for that tent we’ve been living it and perhaps a diet that would include more than potatoes and dandelion greens and new shoes for the kids and – and – maybe with the new money we can restart the school down the road in the next town so we can stop home schooling the brats!  In addition, with just a little more money to go around, Johnny Smith can borrow a little of it and start that wood cutting business he’s been wanting to do out on his property!   What a wonderful idea and all it needs is more money than is allowed by locking in the supply of it to the “Cross of Gold” (and where have I heard that before?).  Let’s print some!

Now we come to the crux of the problem.  Commodity money doesn’t work fast enough because it limits the ability of the economy to grow by other means than technology and productivity improvements reducing the prices of goods and services.  Commodity money is rigid.  It doesn’t encourage anything, good or bad.

Please read that paragraph again.

Fiat money, which one gets when not using a commodity based money works fine for a little while.  A little while.  From the get-go the citizens get screwed because he who pockets and spends fiat currency first (i.e. governmental entities and banks) gets the most use out of it —– unless the issuance of said fiat currency is limited to no more than the HONEST value of the gross production of goods and services of the Country (or the State, or the local community) minus the outstanding debt that needs to be paid off sometime real soon now.

I’ll spell it out,  P-R-O-D-U-C-T-I-O-N.

Not government spending (National, State or local), not welfare, not social programs of any kind, not education, not health and welfare – NOTHING but productive earnings of a country (and I include all three of the above whenever I say “country”).  If the country actually earns more than it consumes, then it is able to tax itself a bit to handle things like national defense, interstate and international commerce negotiations, even local police if you’ve got some problem drunks.  No fair counting anything other than production of goods and services required for those things that are in demand for both domestic and international use.

Also (and this will bring some boo-blahs), so called free trade where intelligence is hauled overseas and mixed with fiat money to put people to work at 1/20th the cost of domestic labor sucks and I am no fan of this destructive commercial behavior. Tariff the  products when they return to our shores or what you end up with eventually is what we have today:  We produce next to nothing, most all important production has moved off shore and all we have is the mathematically unworkable system of buying products produced in foreign countries by selling them debt that will never be paid back to get money to buy their products –  a Ponzi scheme larger, by far, and enormous proportions never seen before that is now coming home to roost with our unstoppable unemployment, , ever lowering wages (compared to ever rising prices), skill loss, our manufacturing capability mostly dead, a consumer driven society dying from debt that can’t be paid and a future that will be a depression of far Greater Proportion than the last one.

We are and have been exporting our fiat financing to the rest of the world.  So far they take it.  Later, they won’t.

Now to get back on subject, a purely commodity form of money will not work efficiently for an advanced (if smaller) technological society.  It hasn’t worked in the past and it won’t work in the future.  Commodity money will arrest inflationary problems overnight once the general public see and understand that it will arrest inflation of the money supply.  True. Overnight.  The human race has been there and done that a number of times.

Fiat money, unanchored to anything, on the other hand, always destroys a civilization in which it is used as over time, venial rulers, kings, despots, tribal chiefs, emperors, presidents and congressmen find that it’s so much easier to print more fiat money (in the form of cash or credit – which is the same thing in two different siren suits) than it is to explain to the citizens why they should give up their hard earned “productive” money to the government to do things they don’t care about or want.  This way, the government (of any sort or variety) can spend more than the country can produce and tax away to the government in the form of scalping excess production.  These “upper caste rulers” can then buy votes (in a democracy) and fund huge police forces.  Remember the TSA ordering a billion rounds of ammo?  Has your local police force got a tank yet?  My town does and I live in a little calm community on a lake in Central Florida.  And, of course,  in not so democratic countries, it’s easy.  These politicians (and anonymous corporations and contributors who fund them) can stuff the pockets of favored people including those “governing” the country and their cronies and do all manner of mischief with money they have no business having.  Especially now that there is virtually no limit to anonymous fiat cash that can be funneled to political parties with the newly passed “bribery special” funding bill that cleared both houses of Congress last weekend.  Now we look forward to who can purchase the most crooked Congressional, Executive and Judicial people. As if we needed more of that crap anyway.  Turns out that who spends the most wins the elections, determines the judicial appointments and who gets screwed and who doesn’t.

The result of this is slow (don’t be too speedy, now!) depreciation of the fiat money doesn’t kill the golden goose very quickly as an excess of money encourages growth that is not necessarily productive, not necessarily safe (hence a percentage of the growth is false!) i.e serial bubbles; so standards of living usually climb for a while – sometimes a long while – thanks to technological progress and productivity gains that technology brings.  This can go on for a long time – think five generations for the United States – not too shabby an effort even if it has now run off the tracks.

But sooner or later, the ruling scions, bankers, scam artists, politicians, stock sellers and check loan artists get greedy.  Why?  Because every time you add to the debt of the country, you cut down on the productivity of the country.  The more debt you have to roll over and suffer paying the interest for it, the less money is available for productive (REAL production) purposes.  So the gross production (and true products) of the country starts to fall. ROI falls. Savings crunch. The middle class is decimated by such bizarre policies as ZIRP (another name for paying for things by the government and keeping banks from folding up without really having to pay for it (which is a proven failed method that goes back to the Roman Empire with coin shaving et al)

THIS IS A POINT THAT WE HAVE ALREADY PASSED.. Mark that on your calendar.

Things tend to go to pot pretty fast after that happens because every fiat dollar of debt incurred beyond that point actually reduces production capability that much more and it is not linear.  Mathematically,  it turns out to be exponential so the curves of doom rise ever faster until they are unsustainable as they are now.  So crash already and get it over with..

Now what do we do on the other side? What kind of money are we going to use when all the dung has been flung, the depressing future is in the past and we see the light of day and start thinking of eating more than one meal a day?  (I apologize for the doomer slant – but I am not optimistic about the comfort of the coming period of time.)

First, our problem is not with start up money as we can cobble together a commodity based money to dig our way up the side of the pit.  It may very well be that commodity money will be the only way we can do so.  Time will tell.

Sooner or later, we will, once again, need more money than commodity money allows us to have because of the ever limited supply of the base commodity and that is the question.  What can we use?  History is not kind here.  And further (as in Germany today) the memory still lives of worthless “money” (i.e. fiat), hardships unbelievable and a tough row to hoe to get themselves back into a decent level of prosperity (only 75 years of hard work and a large saving rate)..

Our problem is not money, you see, it is human nature.  Human nature is what drives fiat money based systems into disaster, not what is used for the “money” or medium of exchange.   Yes, I know the “real” requirements of money – intrinsic value, small, divisible, retains value over time, readily acceptable in trade, blah, blah, blah.….  Fiat money fills all those requirements if we would just stop printing so damn much of it in paper currency and issue of credit (be it loans or bonds or derivatives or whatever) all based on a nebulous “fractional” banking and credit system.  I have ten bucks so I can loan out $100 because no one will ever want all their money back at one time ; a fairy tale that has sunk many a nation and oh so many individuals.

So, fellow voyagers,  after exploring a good part of the in and outs of fiat money and credit I have come to the conclusion there is no valid reason to create a medium of exchange (paper and credit) that is not rigidly capped by the amount of gold, silver, increasing productivity and technological enhancements of the country involved.

Which kind of blows away the title of this Mucks’ Five Minutes piece (but that was to suck you into reading it in the first place!).  There is truly no case for fiat money at all.  Period.

One exception.  In the event of true National Emergency (invasion or an asteroid) or someone nukes us that requires the Last World War to commence.  Then, sadly, all bets are then off and we are in the soup again.  That has happened time after time after time in history and history will always repeat – usually with different timing, flavors and smells and even outcomes, but repeat it will.

As for today’s debt problems?  Forgetaboutit. The end game is baked in the cake.  We are all going to get poorer by and by and as to investments, he who looses least wins!

But we still need to think about and discuss the other side of it all.  Just in case there is another side.

 

MA

Author: MuckAbout

Retired Engineer and Scientist (electronic, optics, mechanical) lives in a pleasant retirement community in Central Florida. He is interested in almost everything and comments on most of it. A pragmatic libertarian at heart he welcomes comments on all that he writes.

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Fiatman60
Fiatman60

Could not have said it better myself!! One more add on……… And to those wonderful people who get that fiat money at .05% and lend it out to sheeple as a piece of plastic at 20%, who have no visible means of ever paying it back…… is also insane. This will be the first card to fall in this game, followed by mortgage defaults, followed by corporate defaults, leading right up the financial pyramid to the holy grail of them all – government bond defaults.

Fiat quote; “I’ll gladly pay you Tuesday, for a hamburger today!”

card802
card802

150-200 million people eh?
My niece announced at Thanksgiving she will have a girl (3rd) one week before her husband was scheduled for a vasectomy, another niece had a baby boy today (1st), and my daughter in law told us yesterday she is pregnant (2nd). This article kind of shot my good mood right in the head.
Well, off to yoga, then some bourbon and a dark quiet corner.

DC Sunsets

Smart people generally thrive.
Stupid people generally suffer.

Phil Donahue, to Ayn Rand: “But what about the poor?”

Ayn Rand: “Don’t be one of them.”

Golden Oxen
Golden Oxen

“The debt may be repaid in real goods (gold, silver, productive output, etc)”

No it doesn’t. it can be paid back, and is, with the same worthless fiat.

The problem is people accept, or are forced by the government to accept, this make believe money.

Until they wise up inflation and fiat will continue as it has.

Think of it as one big Monopoly Game with make believe money. the smart ones find fools to sell them gold and silver with theirs while the dim sit on it as real, and ridicule those buying the gold and silver.

Utterly amazing, but true.

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Golden Oxen
Golden Oxen
PI Wolf
PI Wolf

There is a solution – Freegold !!!

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