Fiat Currency, Infinite Growth, Finite Resources: A Recipe For Collapse
Yet another in an increasing collection of comments I have posted to the online media site The Tyee. This time it is a commentary on an article that reviews a book arguing in favour of the implementation of Universal Basic Income.
“No stone is left unturned in their thorough and convincing argument…”
I’m not so sure this is true. My personal focus for the past decade+ has been on the unsustainability of our complex society, particularly as it is impacted by our propensity to chase growth — especially population and economic, for these both have a significant connection to our ever-increasing drawdown of finite resources and ecological destruction of our planet. If we are not correcting this tendency to ‘grow’ in any way, shape, or form, then we are just creating more ways to kick-the-can-down-the-road of our wasteful and ruinous path; and place the significant burden of our misinformed ways on future generations.
One of the key arguments of archaeologist Joseph Tainter’s thesis regarding societal collapse as presented in his text The Collapse of Complex Societies is that a society becomes increasingly susceptible to collapse once it encounters diminishing returns on its investments in complexity. It is not a stretch at all to argue that we have been on the path of such decline for decades, particularly once we began creating a purely fiat currency that has allowed an explosion in debt/credit. If one looks at the ‘growth’ of our world since the late 1960s when central banks/governments shifted the world to a monetary system that creates money from thin air with no connection to physical commodities that could constrain our growth somewhat, it is almost all predicated on debt/credit expansion; a conundrum since debt repayment necessitates the growth imperative to continue (yes, basically a gargantuan Ponzi scheme).
Why is this connection to fiat currency important? Primarily because money is basically a claim on future resources and such resources are in terminal decline. So, the more money we ‘print’ (regardless of the reason for its printing), the more claims there are on future resources; resources that not only are disappearing quickly and getting more costly to access (because we always retrieve the easiest and cheapest to get to first), but whose retrieval results in monumental ecological destruction.
And on top of all this is the whole overshoot conundrum we have led ourselves into because of the above. Again, it is not difficult to argue that we have far surpassed the natural carrying capacity of our environment and only been able to ‘sustain’ our population by increasing our drawdown of resources through technology, energy-averaging systems (based on trade/geopolitical conquests), and this explosion of debt.
So, if we want to support our most vulnerable in society in a world that must pursue degrowth (the antithesis of our current pursuits and its expansion of debt/credit), then we need a much more complex discussion of how to do this. I see zero mentions of these complexities in the article. Just creating more money to distribute to a portion of our society is not a solution. In fact, the creation of more and more fiat is likely to have the negative consequence of our ruling class pursuing (more than they already do) increasing and significant price inflation, something that tends to hurt the majority of society more so than the elite at the top of the monetary/financial/economic system.
This article looks at the collateral side of financial transactions and some significant problems that are already emerging.
At a time when there is a veritable tsunami of dollar credit in foreign hands overhanging markets, it is obvious that continually falling bond prices will ensure bear markets in all financial asset values leading to dollar liquidation. This unwinding corrects an accumulation of foreign-owned dollars and dollar-denominated assets since the Second World War both in and outside the US financial system.
Furthermore, collapsing collateral values, which are increasingly required backing for changing values in over $400 trillion nominal in interest rate swaps are a new driver for the crisis, forcing bond liquidation, driving prices down and yields higher: we are in a doom-loop.
What action can the authorities take to ensure that counterparty risk from widespread failures won’t take out inadequately capitalised regulated exchanges?
It seems that they acted some time ago by giving central security depositories (The Depository Trust and Clearing Corporation, Euroclear, and Clearstream) the right to pool securities on their registers and lend them out as collateral. Your investments, which you think you may own can be absorbed into the failing financial system without your knowledge.
This seems particularly relevant, given the appointment of JPMorgan Chase as custodian of the large gold ETF, SPDR Trust (ticker GLD). In a test case in the New York courts concerning Lehman’s failure, JPMC was given legal protection should it seize its customer’s assets.
This important erosion of property rights is poorly understood. But as the financial distortions are unwound, leading to unintended consequences such as bank failures and ultimately the collapse of the dollar-based fiat currency regime, the implication is that holders of physical gold ETFs will be left owning an empty shell at a time when they might have expected some protection from the collapse of the value of credit.
The idea that a sovereign nation can never run into trouble financially because it can create its own currency is certainly the dominant narrative amongst government and ‘mainstream’ economists/bankers. After all, who benefits the most from this storyline?
But is it in fact true?
Scratching below the surface of this ‘experiment’ suggests it is not.
If printing one’s own money were a panacea, then nations like Venezuela, Zimbabwe, or the German Weimar Republic (and countless other nations throughout history) would never have experienced the hyperinflation and/or currency debasement that they have. They would be the richest nations ever to have existed.
One could counter that this is because they had to use their debased currency to import goods. True, but if one is debauching one’s currency through exponential ‘printing’, then this may be true for any nation dependent upon imports, which almost every nation is in our globalised, industrial world.
The solution that nations have rested upon given this reality is that the central banks collude to all print at relatively the same rate, so currencies don’t fall/rise too drastically compared to their trading partners.
Fine, but what does endless money/credit creation due to the purchasing power of this fiat currency created from thin air?
Previous trials in this approach indicate that it totally debases/debauches the currency, significantly reducing the ‘wealth’ of the people holding/using it because of the inflation that it creates.
Here’s what John Maynard Keynes had to say about this: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
And while it’s interesting to note ‘official inflation’ is subdued, the manipulation that goes into creating this gauge of price inflation makes the official number meaningless to people’s real-world experience (look up hedonic adjustments to get a sense of how manipulated these numbers are; and then compare your experience in price increases to official numbers — my family’s utilities, food, health, housing, transportation, insurance, education, etc. expenses far, far outpace ‘official’ inflation; by several times).
Then there’s the whole issue of continuing to chase the infinite growth chalice and pulling substantial growth forward through debt/money creation. We live on a finite planet despite hopium narratives to the contrary and all this push for growth does is get us further and further into overshoot by quickening our exploitation of finite resources.
There is no consideration whatsoever of the limits imposed upon us. There is only more growth to try and address our dilemmas that are created by us pursuing growth in the first place.
Despite the story that these policies are being used to solve our problems and help people, the reality is that they are very much probably doing the exact opposite.
In fact, a good argument could be made that the ‘all in’ aspect of this is further evidence that the planet is reaching the endgame of overshooting our natural carrying capacity and the fallout is quickening towards its obvious conclusion: collapse of the complex systems we have come to depend upon.
To paraphrase Canadian economist Jeff Rubin in his book Why Your World is About to Get a Whole Lot Smaller: things are going local and simpler, whether we want them to or not.
Feeding the Growth Monster: Fiat Currency and Technology
My response to an ongoing discussion regarding debt-/credit-based fiat currency and it’s impact on our pursuing the infinite growth chalice.
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Yes, credit-/debt-based fiat is certainly one of the most significant causes of our pursuing the infinite growth chalice. Not the only one, but one of the main ones, certainly. And having ‘sound’ money that was not created and distributed by private interests may help, but there are no guarantees especially if it were in the hands of the political class who, much as they do now, would very likely use such ‘power’ to ‘buy’ votes, ‘pay off’ supporters, and fund boondoggles.
I honestly don’t know if there is any ‘solution’ to this monetary conundrum. In the words of Men Without Hats in their song ‘Unsatisfaction’: I’m never satisfied when the answers could be real. I may not know what’s right but I know this can’t be it.
Regardless of what change occurs with our monetary system, I’ve reached the conclusion that if we don’t begin pursuing degrowth strategies as of, like yesterday, we are destined to experience the collapse that always accompanies overshoot.
We are well into the diminishing returns fiasco that archaeologist Joseph Tainter outlines in his monograph Collapse of Complex Societies, and sets the stage for sociopolitical (and economic) collapse; and it is likely no amount of ‘tinkering’ in our business-as-usual trajectory is going to prevent collapse/decline at this point.
All of our debates are probably quite academic and moot at this point. Making one’s local community/neighbourhood/family as self-sufficient/-reliant as possible may be the only way to ensure some of us make it through the other side of the inevitable transition since our society’s collapse will be unlike every other one in pre/history as virtually none of us have the skills/knowledge to survive without modern society’s energy-intensive technology and long-distance supply chains.
This is one of the main motivations for me to transition our yard towards food production rather than monoculture grass and begun helping family and neighbours do the same.
We have painted ourselves into a corner from which there is unlikely any escape route and we are beginning, quite vociferously and violently in some cases, to fight over a shrinking economic pie.
Arguments over how to ‘fix’ things abound (the ruling class has latched onto infinite money printing to ‘paper’ over things, much like the Romans did when they began clipping coins during their decline) but most of these are not ‘fixes’ to our unsustainable trajectory but part and parcel of our attempts to reduce the cognitive dissonance that arises from realising we cannot continue business as usual but the path we need to follow is ‘unthinkable’ for it would mean sacrificing almost everything we hold dear in ‘modern’ society.
Most of us want to believe that technology and human ingenuity will ‘save’ us (thus arguments from academics/educators about focusing more resources into education, not realising that there isn’t the time nor agreement over ‘solutions’ for education to play a role) but it is most likely that our efforts at greater and greater technological ‘solutions’ are just expediting our journey over the cliff since technology speeds the exploitation of finite resources, much as money printing does, and creates a host of negative consequences we conveniently ignore.
If people believe the world is in chaos now, just wait a few years…
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All fiat currencies are no more than floating abstractions of value. Society has put its faith in fiat currency issued by governments. These government-issued currencies are not backed by a physical commodity, such as gold or silver, but rather by the promises from the government that issued it. A difficult question investors today face is determining which assets will appreciate most thus rising in value and which form to hold their wealth.The value of fiat money is derived from supply and demand and the stability of the government that issues it. Over the years many promises have been made that simply cannot or will not be honored. History and many real-life examples exist that indicate that promises are easier to make than keep.
It is very possible in the near future we may see a strong bifurcation of the financial system. The Hard Asset Inflation / Paper Asset Deflation Theory laid out below is based on the idea that as wealthy individuals begin to realize the fragility of the current financial system they will shift their investment preferences to items of substance.
It won’t be long before governments around the world, including the one in Washington, self-destruct.
Strong words, but anything less would be naïve.
As economist Herbert Stein once said, “If something cannot go on forever, it has a tendency to stop.” Case in point: fiat money political regimes. Interventionist economies of the West are in a fatal downward spiral, comparable to that of the Roman Empire in the second century, burdened with unsustainable debt and the antiprosperity policies of governments, especially the Green New Deal.
In the global Ponzi scheme, thin air and deceit substitute for sound money. As hedge-fund manager Mitch Feierstein wrote in Planet Ponzi, “You don’t solve a Ponzi scheme; you end it.” Charles Ponzi and Bernie Madoff
made some of their investors a whole lot poorer, but the world didn’t come crashing down as a result.
For that—for a Ponzi scheme that would threaten to bankrupt capitalism across the entire Western world—you need people much smarter than Ponzi or Madoff. You need time, you need energy, you need motivation. In a word, you need Wall Street.
But Wall Street alone doesn’t have the strength to deliver a truly cataclysmic outcome. If your ambition is to create havoc on the largest possible scale, you need access to a balance sheet running into the tens of trillions. You need power. You need prestige. You need a remarkable willingness to deceive. In a word, you need Washington.
As Gary North wrote in a brief review of Feierstein’s book, “The central banks have colluded with the national governments in order to fund huge increases of national debt, beyond what can ever be paid off. In other words, [Feierstein] has described government promises as part of a gigantic international Ponzi scheme.”
It is slowly coming clear that the fiat dollar’s hegemony is drawing to a close. That’s what the BRICS summit in Johannesburg is all about — rats, if you like, deserting the dollar’s ship. With the dollar’s backing being no more than a precarious faith in it, it is bound to be sold down by foreign holders. Being only fiat, it could even become valueless, threatening to take down the other western alliance fiat currencies as well.
How do you protect your paper wealth from this outcome? Some swear by bitcoin and others by gold.
This article looks at what is likely to emerge as a replacement currency system, and concludes that from practical and legal aspects, bitcoin and the entire cryptocurrency industry will fail with fiat, while mankind will return to gold, as it has always done in the past when state control over currency fails
Introduction
It is gradually dawning on market participants that the era of fiat currencies is drawing to a close. Monetarists, who first warned us of the inflationary consequences of the expansion of money and credit were also the first to warn us that the slowdown in monetary expansion would lead to recession, and since then we have seen broad money statistics flatline, with bank lending beginning to contract. This is interpreted by macroeconomists as the end of inflation, and the return to lower interest rates to stave off recession.
Unfortunately, this black-and-white interpretation of either inflation or recession but never both has been challenged by bond yields around the world which are rising to new highs. And the charts tell us that they are likely to go considerably higher. Consequently, conviction that inflation of producer and consumer prices will prove to be a temporary phenomenon is infected with doubt.
Last week in my Goldmoney Insight, I analysed the rationale for a new gold backed trade settlement currency on the agenda of the BRICS summit in Johannesburg on 22—24 August. This article is about the consequences for the dollar-based fiat currency regime.
There is strong evidence that planning for this new trade settlement currency has been in the works for some time and has been properly considered. That being so, we are witnessing the initial step away from fiat to gold backed currencies. Without the burden of expensive welfare commitments, all the attendees in Johannesburg can back or tie their currency values to gold with less difficulty than our welfare-dependent nations. And it is now in their commercial interests to do so.
We have been brainwashed with Keynesian misconceptions and the state theory of money for so long that our statist establishments and market participants fail to see the logic of sound money, and the threat it presents to our own currencies and economies. But there is a precedent for this foolishness from John Law, the proto-Keynesian who bankrupted France in 1720. I explain the similarities. That experience, and why it led to the destruction of Law’s livre currency illustrates our own dilemma and its likely outcome.
It’s not just a comparison between fiat currency and gold. America’s financial position is dire, more so than is generally realised. The euro is additionally threatened with extinction because of flaws in the euro system, and the UK is already in a deeper credit crisis than most commentators understand.
Introduction
On 7 July, news leaked out and was then confirmed by Russian state media that the BRICS meeting in Johannesburg would have a proposal on the agenda for a new gold-backed currency to be used exclusively for trade settlement and commodity pricing…
The importance of Russia’s announcement that a new gold-backed trade currency is on the BRICS meeting agenda for August 22—24 in Johannesburg seems to have gone completely over everyone’s heads, with mainstream media not even reporting it.
This is a mistake. China and Russia know that if they are to succeed in removing the dollar from their sphere of influence, they have to come up with a better alternative. They also know they have to consolidate their trade partners into a formidable bloc, so plans are afoot to consolidate BRICS, the Shanghai Cooperation Organisation, and the Eurasian Economic Union along with those nations who wish to join in. It will be a super-group embracing most of Asia (including the Middle East), Africa, and Latin America.
The groundwork for the new currency has been laid by Sergei Glazyev and is considerably more advanced than generally realised.
This article explains why Russia and China are now prepared to fully back Glazyev’s expanded project. For Russia, it is also now imperative to destabilise the dollar as a deliberate escalation of the financial war against America and NATO. China’s priority is no longer to protect her export trade, but to ensure that her African and Latin American suppliers are not destabilised by higher dollar interest rates.
Introduction
“The BRICS’s introduction of a gold-backed currency, which is supported by 41 countries with large and influential economies, will weaken the dollar and the euro and will benefit countries such as Iran, while Iranians in possession of gold will experience a wealth increase,” Mousavi added [the head of the South Asia Department at Iran’s Foreign Ministry]. The Russian government confirmed a day earlier that Brazil, Russia, India, China, and South Africa would introduce a new trading currency backed by gold.
The Soviet empire started to crumble around 1989. The time period between the forming of the North Atlantic Treaty Organization (NATO) in the late 1940s and the retreat of Russia from Eastern Europe with the eventual collapse of communism in Russia is known as the Cold War. There was a great power confrontation in Europe that did not result in war.
Essentially, US-led NATO stood its ground to prevent further Soviet expansion from the territory it occupied at the end of World War II and waited for the inevitable collapse. Now, perhaps not everyone saw the collapse of the Soviet empire as inevitable. But all one had to do was view the Soviet empire for oneself, up close and personal, which is what I did in the early 1970s as a young Air Force officer.
The State of the Communist Economy
The Russian economy at that time is painful to describe. Moscow and Leningrad (Saint Petersburg), the so-called jewels of the Soviet Union, were depressing. Everything was shoddily built. There were very few cars on the streets. There were no retail shops deserving of the name. Lines formed in the middle of the night awaiting the opening of the few bakeries. I saw this for myself from my hotel window on the Nevsky Prospekt in Leningrad. GUM, the “world’s largest department store” near Moscow’s Red Square, sold nothing that was equal to what could be found in any garage sale in the West.
Actually, that should not be a surprise since at one time all those garage-sale goods were marketable. I did not visit Berlin, but those who did say that crossing the Brandenburg Gate from West Berlin to East Berlin was shocking…
The unencumbered realist concludes that there are no solutions within a status quo structure that is itself the problem.
Realists who question received wisdom and conclude the status quo is untenable are quickly labeled pessimists because the zeitgeist expects a solution is always at hand–preferably a technocratic one that requires zero sacrifice and doesn’t upset the status quo apple cart.
Realists ask “what if” without selecting the “solution” first. The conventional approach is to select the “answer/solution” first and then design the question and cherry-pick the evidence to support the pre-selected “solution.”
What if all the status quo “solutions” don’t actually address the real problems? This line of inquiry is strictly verboten, for there must be a solution that solves everything in one fell swoop.
Examples of this approach abound: a one-size fits all solution that resolves all the systemic problems by itself. All we have to do is implement it.
Replacing fiat currencies is one example that I have explored:
I’ve also explored how real change works: it takes many years (or even decades) of sacrifices and high costs with none of the immediate payoff we now expect as a birthright. Real change pits those benefiting from the status quo against those finally grasp that the status quo is the problem, not the solution, and these political/social battles are endless and brutal because any gains come at somebody else’s expense.
In the war between the western alliance and the Asian axis, the media focus is on the Ukrainian battlefield. The real war is in currencies, with Russia capable of destroying the dollar.
So far, Putin’s actions have been relatively passive. But already, both Russia and China have accumulated enough gold to implement gold standards. It is now overwhelmingly in their interests to do so.
From Sergey Glazyev’s recent article in a Russian business newspaper, it is clear that settlement of trade balances between members, dialog partners, and associate members of the Shanghai Cooperation Organisation (SCO) optionally will be in gold. Furthermore, the Russian economy would benefit enormously from a decline in borrowing rates from current levels of over 13% to a level more consistent with sound money.
To understand the consequences, in this article the comparison is made between the western alliance’s fiat currency and deficit spending regime and the Russian-Chinese axis’s planned industrial revolution for some 3.8 billion people in the SCO family. China has a remarkable savings rate, which will underscore the investment capital for a rapid increase in Asian industrialisation, without inflationary consequences.
With a new round of military action in Ukraine shortly to kick off, it will be in Putin’s interest to move from passivity to financial aggression. It will not take much for him to undermine the entire western fiat currency system — a danger barely recognised by a gung-ho NATO military complex.
Introduction
In the geopolitical tussle between the old and new hegemons, we see the best of strategies and the worst of strategies, where belief is pitted against credulity. It is the season of light and the season of darkness, the spring of hope and the winter of despair…
“[B]anks have been managing their paper gold books with one assumption, which is that [Nation] states would ensure gold wouldn’t come back as a settlement medium.” -Zoltan Pozsar
Before we go any further, we read ZeroHedge’s report on this letter Dec 7th entitled: Zoltan Pozsar: Gold To Soar…When Putin Unveils Petrogold(ZH Prem) and have been thinking on it since. Here is one of those thoughts pertaining to Gold’s evolving market structure
The statement at top is arguably the most important sentence in Zoltan’s recent post entitled: Oil, Gold ,and LCL(SP)R. It is how he closes that note.
If you have read his letter (excerpt below) you may prefer quotes pertaining to Gold’s price jump from $1800 to $3600 or Pozsar’s follow up statement to the price of Gold potentially doubling where he wrote: Crazy? Yes. Improbable? No.
Those statements certainly are nice to read for real-money advocates; especially coming from one of the most respected economists on the street these days. We cannot lie it makes us smile as well.
However, for anyone with precious metals exposure, like a bank or presumably you reading this piece (thank you for that), the quote at top should rule them all. Here’s why…
Why Banks Short Gold
Zoltan, possibly inadvertently, gives readers the rationale by which banks have been profitably shorting Gold since the 1990s. Here is our translation of that same sentence at top.
Translated from the original Zoltanese:
Banks have been using rehypothecation for decades fearlessly with approval of global governments who promised them Gold would never be used as a settlement medium—i.e. have a practical use — again.
A staggering number of Nigerians love Bitcoin, but hate government cryptocurrency (CBDCs).
In April, leading cryptocurrency exchange KuCoin noted that 35% of the adult population in Nigeria – roughly 34 million adults aged 18-60, own bitcoin or other cryptocurrencies. But when it came to the country’s Central Bank Digital Currency (CBDC), the eNaira, it was a massive failure.
According to Bloomberg, only 1 in 200 Nigerians use the eNaira – despite government implemented discounts and other incentives, implemented as desperate measures to increase adoption.
Now, the government is looking to boost digital payments by limiting ATM withdrawals to just 20,000 naira, or roughly US$45 per day, Bloomberg reports, citing a circular sent to lenders on Tuesday. The previous withdrawal limit was 150,000 naira (US$350).
Weekly cash withdrawals from banks are now limited (without fee) to 100,000 naira (US$225) for individuals, and 500,000 naira (US$1,125) for corporations. Any amount above this will incur a fee of 5% and 10% respectively.
The action is the latest in a string of central bank orders aimed at limiting the use of cash and expand digital currencies to help improve access to banking. In Nigeria’s largely informal economy, cash outside banks represents 85% of currency in circulation and almost 40 million adults are without a bank account.
The central bank last month announced plans to issue redesigned high value notes from mid-December to mop up excess cash and it’s given residents until the end of January to turn in their old notes. The bank also plans to mint more of the eNaira digital currency, which was launched last year but has faced slow adoption. -Bloomberg
What’s more,new rules which will take effect Jan. 9 will ban the cashing of checks above 50,000 naira (US$112) over-the-counter, and 10 million naira (US$22,480) through the banking systems. Point-of-sale cash withdrawals have been capped at 20,000 naira ($45).
My friend Dr. Sabri Oncu has established an innovative seminar program at Kadir Has University in Turkey. Called the “Kadir Has Lectures on Global Political Economy”, it has had lectures from a number of non-mainstream economists, including Ann Pettifor, Frances Coppola, Yanis Varoufakis, and Jan Kregel.
In my lecture, I explain how bank credit adds to aggregate demand and income, and therefore how capitalism’s great crises–the Great Depression, the Great Recession, the Panic of 1837, and so on–were caused by credit turning negative.
I also explain how we could remedy the economy via a “Modern Debt Jubilee”. Of course, since Neoclassical economists dominate economic policy, I know that this policy has no better than a snowflake’s chance in Hell of being implemented.
I’ve attached the PDF of my slides here as well (unfortunately Substack doesn’t support Powerpoint files: if you want to download them, please go to the Patreon page https://www.patreon.com/posts/75639086.
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