One of the main themes you hear repeated constantly in the MSM by Economistas of all persuasions is that we need to restart Lending in order to get an Economic Recovery. This because in a fiat money system, the ONLY way money gets out in the economy for J6P to earn and spend is through lending. For every dollar lent out, there is a corresponding debt on a balance sheet which is more than that dollar, depending on typical interest anywhere from 0% for a Fed loan to a Big Bank to 30% these days on a Citibank Revolving Credit Card. At 0%, the big banks don't have to worry about compounding problems, just about paying back the principal, but everyone else has to pay back more than they borrowed. Where will this extra money come from? It can only come from still more money being lent out elsewhere, and if this stops happening, liquidity dries up and you begin a cascading series of loan failures.
You can think of this as a series of concentric circles, with the initial Lending taking place out of the BOE in 1692. They loan some money to adventurous folks who migrate to America, who then have to pay them back with Interest. The way they pay them back is of course not with money, but with commodities harvested from the New World. Of course since England is busy prosecuting wars with the French precisely for hegemony over the New World, they start taxing the colonies on everything heavily, sucking wealth out of America faster than the colonists can produce it. So they revolt, and now in theory aren't indebted to the Brits anymore.
Problem is, America still needs a monetary system, and so Hamilton and cronies set up the First Bank of the USA. Where do they get Capital to fund this Bank? From the BOE of course, on loan. So now Americans have some money that works with English Money through the same Banking system, but of course they owe more than they borrowed to start this system. They create more of their own money through loans to colonists, who each pay back their loans by exploiting the land, getting more commodities to sell and in some cases succeeding enough to actually pay back the loans before the next liquidity crises. However, you have periodic crashes in the system where borrowers lose everything, and banksters at the top get their properties for pennies on the dollar (or pence on the pound, same difference).
Anyhow, this period was the second concentric circle of debt creation, the third one came with the exploitation of fossil fuels through machines invented from the steam engine onward. Another big phase of loans here, way bigger than before to well connected folks to start the Railroad Industry and Standard Oil, et al. You know John Rockefeller, JP Morgan, Andrew Carnegie et al.
This was the last set of loan circles that was actually producing enough real wealth from investment to pay back the loans. The following series of loan circles merely shifted wealth from one portion of the earth to another, through wars of conquest. The Civil War in the US and WWI and WWII all were funded through still more loans, and when over were paid back through war reparations that often were pretty intolerable for given areas of the world.
All the following loan circles came from a series of bubbles, first the initial Real Estate Bubble following WWII in the US, when every returning soldier bought his Levittown Ticky-Tacky house on the GI Bill. That was running down by the 70s, and then the Trade Bubble with China began with Nixon's trip to China in the 70s. Then we had the Tech Bubble, and finally the second RE Bubble, which looks to be the last in this concentric series of debt creations, unless somehow a bunch of bankrupt banks can create new debt to fund WWIII. A scenario I doubt at the moment, because after the last real wealth producing bubble (#2), all the succeeding ones have been gradually eating away at the original capital here of resource wealth. It doesn't appear to me there is enough left for expansion anywhere, or even really just to maintain the status quo too long.
So, despite the fact Helicopter Ben prints more money each day with each new Stimulus and drops it by the boatload on the big banks to maintain liquidity (and keep them from sinking under a load of non-performing loans), said banks aren't gonna loan this money out to anybody, because there is no good credit risk out there anymore. Nothing left to really exploit here. This means starting at the outward most circle, debts begin to implode in BK, until it hits the next circle, and the next. All along the way money disappears, first disappearing from the hands of the furthest end user, J6P. The next one to go after J6P is the local banks, the retail distributors of money in the form of loans. These banks drop off the map at the rate of 5-9 each week, increasing now in speed and volume. Its at the critical mass point that enough money goes up in smoke here that the big banks cannot hide their insovency through any accounting trick and begin to fail that the monetary system itself goes into another crises mode. The Fed funneling more funny money to them won't help, because it has no distribution means without the retail loan network. After the failure of the big banks comes the failure of the biggest banks of all, the Nation States. That is when we will see the break up of the one to the many. How long does it take for this series of concentric debt circles to collapse completely? WAG, 5-10 years.
It won't be until AFTER the complete collapse you could undertake any other real kind of monetary solution, other than local barter as you can achieve that. Chances are there is some reissue of the dollar or perhaps an attempt at One World Currency on the way to total collapse, and that will allow military funding and the Fascist State to run a while longer. However, backed with no real resource base that cannot be exploited without War, this currency fails also fairly rapidly. This scenario falls within the 10 year timeline IMHO. Just have to wait and see how it plays out though.
Anyhow, that is a Reader's Digest version of how the monetary system we use came to be, and how it gradually overran the world through continual expansion in the Capitalist model. I present it here mainly to help people who don't understand the relationships of fiat money, capitalism, banking and nation states in somewhat simplified form, and then be able to use that understanding to make sense of the cascading failures we are witnessing in our banking system and our political organization of the nation-state.
RE
14 Comments
Freebird
"This because in a fiat money system, the ONLY way money gets out in the economy for J6P to earn and spend is through lending."
So, if I've got the capital, build a company and hire people, all paid for with NO lending, money has NOT "gotten out into the economy" for people to earn and spend? If I farm a plot without borrowing, and bring a crop to market, no new capital has been created?
Anonymous
what does j6p mean?
Thanks, someone
ONLY way money gets out in the economy for J6P to earn and spend is through lending. For every
ReverseEngineer
"So, if I've got the capital, build a company and hire people, all paid for with NO lending, money has NOT "gotten out into the economy" for people to earn and spend? If I farm a plot without borrowing, and bring a crop to market, no new capital has been created?"
Generally speaking, when people say they "have capital", what they mean is they saved up a bunch of money working, which they then used (in one example) to buy a farm free & clear. What was that money they saved up? It was a bunch of claims on debt made in an earlier iteration of the cycles. When you go and buy a farm, you pay off somebody else's mortgage with the debt claims you hold as capital, and this money is then extiguished, it disappears off the earth. What your Capital is now is this farm, which you did not create. No new capital has been created You may however begin to extract resource out of this farm, until the soil depletes too much or the water table drops too low for it to produce too much.
The sum total of Capital is all the resources on earth. Further and further iterations of debt cycles have essentially placed more claims on the total capital of the earth than the earth has to give, much like there are 30 claims of paper gold for every gold bar in existence. As a result, the money which represents the debt claims on that capital is essentially worthless, or at best worth pennies on the dollar.
RE
ReverseEngineer
Part II in the Saga of the Fiat Money History: The case for inevitable results
I didn't go further into the relationships between Capitalism and Fiat money in order first off not to make the original post too long to digest, and second in order to see if there were any questions to be answered from the first post before I continued onward. Seeing as nobody has a question on Part I (other than the question about the Origination of Capital which I addressed), I'll go on to Part II. Should be done around Part XX. LOL.
What the ever widening concentric circles of debt should tell you if you are a thinking sort of person is the following: the collapse we are witnessing is NOT the result of fraud in the system, though that is accelerating its downfall now. The collapse was built in from the beginning, and had to occur as soon as the resource base could no longer keep pace with the interest charges placed on all money origination. In each circle as new money was created and disseminated through loans, you created an Interest based obligation on the debt which could only be paid out through expansion into further debt circles. This required always an expanding population base as well as further exploitation of the underlying capital, the resources of the Planet Earth. Remember, for all intents and purposes, that resource base is fixed, with the exception fo daily input of energy from the sun. This will be important later on.
So in the US, where in the last few cycles the primary expansion of the Capitalist system occurred, it was always required to have an ever expanding population base, the quicker the better insofar as any early Capitalist who got in on the system was concerned. You couldn't REALLY get rich without lots of people exploiting the earth's resource, and then exploiting them by taking small piece of each man's labor through interest on the money you dish out. Thus the reason for the Statue of Liberty's invocation,
"With silent lips. "Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tossed to me,
I lift my lamp beside the golden door!"
Sounds real nice, doesn't it, a refuge for the poor of the world? Really, its just a beckoning call for more folks to buy into the Ponzi. Thus the reason Immigration was ALWAYS a priority of those who began the Ponzi scheme here, without more backs upon which to exploit the great resource wealth of America, those who began the monetary system couldn't derive the most profit from it. So its a bit disingenuous at this point for Capitalists to be AGAINST immigration, these are the very people who most encouraged it and profited from it! The more cheap labor the better, first the Irish and the Chinese to build the Rairoads, later the Mexicans to pick the Lettuce. Just Capitalism at work really, so if you are against this sort of stuff, you are quite anti-Capitalist in nature.
Of course, at a certain point you fill up a location and suck as much as you can from the resource wealth, then its time to Move On. Unfortunately for our originators of the system, no real good place left to move on TO these days. Without another concentric circle upon which to build more debt, the previous layers begin to fail in cascade fashion. This is quite unstoppable, you can't stop it any more than you could stop a house of cards from falling once you pull a few cards from the bottom layer. Only real question is exactly how many cards have to be pulled out before you get the complete collapse.
So, WHY the Fraud, why the deceit we see in the end game here? Primarily because the system has been operating on FUMES pretty much since we hit Peak Oil here in the US back in the 70s. Once we became an Oil Importer rather than exporter, all the capital be had exploited from this country in resource wealth began to drain away toward those countries that still had this resource. Now these countries also can no longer supply further capital either, and nowhere else to get it from, so the entire Global system collapses on itself. It would have happenned with or without the Fraud. It was built into the system from the beginning, as soon as room for Growth in population was exhausted and further exploitation of the Earth's wealth was negative EROEI (which I think is true now if you take into account the necessary energy expenditure of War to control the remaining resource), Capitalism and its Bastard Child Fiat Money was INEVITABLY bound for failure. Without th Fraud perpetuated over the last 30 years, we would have hit this wall back in the Nixon era, or Reagan era at the latest. Our lives for the last 30 years in the US has all been based on extending a failing system through fraud and accounting tricks.
This is not to say that we cannot have civilization without these things, just civilization will be quite different, not to mention a whole lot smaller than it is now. Its the transition period and the shrinkage period that is so difficult to wrap your mind around, but this can be negotiated over time if people let go of the idea of perpetual growth, and let go of the idea that Capitalism has some kind of magical powers to create Something from Nothing. It doesn't. It was just a marvelous tool for exploiting the resources of the earth over the last 300 years. Now this period is done, its time to move on to a better tommorrow. Of course, as Uncle Joe Stalin liked to say, "You can't make an Omellete without Breaking a Few Eggs". LOL.
RE
Anonymous
All of the above seems true to me.... but it is not complete. There's another set of facts that must be pointed out else this argument is as one side (in the other direction) as the MSM. Money - whether it be fiat or real - is lent out by some to be used by others to create something productive. For instance, my father loaned me some money to complete my college education. I was able to pay him back with the money I made in my career. Furthmore, because he loaned me money, I was able to complete my degree at least 1 year sooner and maybe two. So I made a larger salary 1 or two years sooner. So my loan was a good investment. Whether the loan was made in gold or in USD doesn't really matter because I exchanged it for an education. Another exmaple. Instead of flipping burgers for $3.35/hr I started a lawn service by buying a mower and some other equipment with borrowed money. I did well. I made more than 40 grande a year in the mid 1980's mowing hundreds of properties with several crews by the end of my college career. I sold the business (which I regret to this day) and I bought a house with a very large downpayment. I paid all the money back for the equipment. I borrowed more as the business grew until I had the cash flow to go it alone (paid it back too). So... I created a business out of thin air plus my labor and work ethic. I borrowed to do it. Point is this. These 'circles' produce more than the interest paid back to the lender. That is, in the cirlces where the borrowed money is used to produce something of value. When the money is borrowed for lifestyle and other non-productive uses it hurts instead of helps. And so now the system has been corrupted such that not only is debt abused by the masses (they don't understand it) and the real value of borrowing for legitimate reasons is being undermined by policies and taxes. In reality - whether fiat money or real money - when the system is corrupted it doesn't really matter what kind of money you have. It is never enough. If the above conclusions were true, then there would be no such thing as big cities or trains or the internet. As long as the exchange vehicle is properly administered then it will work. It is when the system is stacked when it fails. And again, this is independent of the form of exchange (fiat or gold). I would agree that when the system collapses certain things lose value and other things hold it (e.g. paper vs. gold). I would also say it is true that gold is harder to manipulate as it has inherent value and paper does not (beyond people's confidence in it). The loaning of money allows for the exponential creation of wealth vs. linear creation. But... in most cases, debt is bad. It hurts you. And it is the lack of wisdom of most that causes the most pain. And it is this lack of wisdom that the banks exploit relentlessly.
TLaCour
Anonymous, good analysis and examples. I would only part with your statement that "gold has inherent value." It doesn't, it exactly and only the value people are willing to give it, just like every other medium of exchange in history. Food, shelter, clothing v. delicacies, palaces, magnificent robes, just depends on what other people agree that things are worth. In a society of plenty, beans are worth little; in Mexico of 1910, they were as valuable as gold to many, and no peasant would trade their food for shiny bits of metal.
ReverseEngineer
Your lawnmower business didn't create something from nothing. Rather all it did was move some debt money around, and in the process actually destroyed quite a bit of capital, in the form of the gas used to run the lawnmowers. I wrote a longer explanation of this, but it unfortunately got lost and I gotta work right now, so it will have to wait until tonight.
RE
ReverseEngineer
Just to tidy up here insofar as Business Creation under a Fiat Money regime in the Capitalist Model.
Whether its a Lawnmowing bizness or Microsoft, people who don't really grasp the underlying nature of Capital tend to look at such biznesses as creating Wealth out of the Ether, essentially making Something from Nothing. They do nothing of the sort, they simply move around the resources already in place, and if the idea is lively enough and captures the interest of enough consumers of the idea, debt money flows in that direction. People will either use their labor to earn money to buy said product or service, or they will themselves go directly into debt to make such a purchase. That would be the CC model of the last decade or so of American consumerism.
So Bill Gates establishes a Monopoly basically on Op Systems by CRUSHING every last competitor out there and everybody finds these newfangled Computers to be wonderful toys to help them in their daily tasks, so they work at whatever they do to have enough money to buy one. Similarly, Henry Ford came up with a way to produce a newfangled toy at a price cheap enough people could buy it with their labor, and so plenty-o-debt money flowed in his direction. In both cases of course, the Products they popularized (Ford did not invent the Auto, and Gates didn't invent the computer) were both highly energy intensive in their production. Refining steel for cars or creating microprocessors for laptops BOTH are very energy intensive processes, both dependent on very cheap oil to produce in large numbers. So in the end, the Wealth that Henry Ford and Bill Gates both achieved came not as a result of making something from nothing, it wasn't the "great idea" that created wealth, it merely allowed them to exploit wealth already there in the system, cheap energy. As cheap energy disappears, it becomes impossible to sieve up so much wealth in the same way. The fiat money system merely enabled the sieving up of this wealth over time through bubble creation that was for the most part organic early on. People really DID want cars, and they DID want computers, so they worked to get real wealth to buy them, or they borrowed real wealth. As long as there were resources enough for these claims on real wealth, the fiat money meant something. When there were LESS resources than the amount of debt in the system, the system collapsed. That is the phase we are in now.
This is not to say its impossible to be relatively rich even in a world of declining resources, just its a lot harder and becomes way more dependent on the control of Labor, which is much harder to control than Oil sitting under the ground on your property. You can use laws to enforce Property rights of a commodity like Oil, but at least at the moment in most of the world you can't make people your direct Property, though of course that may come again here as things spin down further. Even if you do make outright Slaves of people, its a much tougher biz model than owning a lot of Oil, because Oil doesn't COMPLAIN or get annoyed at being exploited. Slaves have a lower tolerance for this than Oil does. LOL. So the Profit margin isn't there in direct Slavery as it was for the exploitation of Oil, which of course is WHY the Slave based economy of the Old South in the US fell to the indirect economic slavery of the Industrialized North in the time of the first Civil War here in the US. Anyhow, while we may again see slave owners, they'll never be as rich as the wealth of energy inherent in fossil fuels made the Industrial and Technological tycoons of the last couple of centuries.
When you model the development of Capitalism over the last 3 centuries as a series of Concentric Circles of Debt, you begin to see how exactly it was possible to keep going into ever larger circles which represented more real wealth in the world, and why our Keynesian Economistas THINK its possible to work their way out of Debt problems merely by issuing MORE debt. To you and me more grounded Thinkers, it seems LUDICROUS that the US will work its way out of its debt problem by issuing still MORE debt, but see, for Keynesians this model ALWAYS worked before. The REASON it always worked before was because there was more resource wealth available in the world to be exploited, and so you could always get a return on your investment assuming you could KEEP EXPANDING.
In reality today, the resource problem is far greater than just the transition over the Hump in the Curve of Peak Oil to the downslope, resources from Water to good nutrient filled arable land have ALL been depleted by the ever expanding mass of humanity on the planet. When the oil gets too expensive, the Green Revolution and the means by which we pump up water from deep aquifers and create high energy fertilizer out of phosphates and NG to keep this land productive will all disappear quite rapidly. So we will get a population crash of outrageous proportions as a result. How soon this happens is an open question, and how well we can manage it is another one also that I really cannot answer. What I CAN tell you for SURE is that the Capitalist model is quite dead, and will not EVER be coming back. It was totally dependent on being able to exploit an ever growing portion of the planetary resource base (the Capital), from the time of the discovery of the New World to the discoveries of the scientific enlightenment which created the machines dependent on the thermodynamic energy of Oil. This time is now OVER, and now we move on to a Better Tommorrow. Of course, as Uncle Joe Stalin made clear, you Don't Make an Omelette without Breaking a Few Eggs. ;-)
RE
Goldorack
people will soon learn what is the only valuable thing on this planet :
(drinkable)water.
it's already understood in some countries like Turkey, Syria and Israel. you will say "of course, they need it". It's just a question of time before we all REALLY need it. this will determine the wealthiest countries, the maximum number of humans, and the wars of the future.
you can live without gold coins and with scarce foods, but without water...
ReverseEngineer
Water isn't the ONLY valuable thing on the planet, though its one of the most necessary things. Its not even the most valuable thing in terms of necessity, Air gets the nod there. You can only live a couple of minutes without Air, you can make it a couple of days without Water.
Water does differ from Oil in that it does rain down in some quantity somewhere every day. To this extent, unlike Oil susrface water is to some extent a renewable resource. Subsurface water in deep aquifers is not renewable resource, except on a geological timescale, and like Oil that is being rapidly drained, so agricultural areas which depend on irrigation from such aquifers will certainly have increasing difficulties over time here.
Oil is the first of the Resource Wars we are entering into, not the last, and Water is certainly coming as well. India and Pakistan are set up for a nice resource war for water rights, and China has real problems domestically. We aren't immune from the problem here, the southern and western US have many problems, from diminished flow rates in the Colorado River to depletion of the Ogallala Aquifer. If you live in an area that is flush with water, eventually you will have problems with migrations of people from areas which have dried up, which puts further stress on the water supply in that area.
If we manage to get through the Oil Wars without annihiliating ourselves, the fight over water rights is likely to be fought quite differently, without the Tanks and high energy explosives of modern warfare. Its a battle more likely to be fought with Trebuchets and Atlatls.
RE