Suicidal Credit-Based Money System

Bill Bonner wrote a hypothetical college graduation speech which he did not present.  What he would have said included:

“You are heirs to claptrap, nonsense, bogus theories, and trillions of dollars in debt. 

The systems, programs, and institutions your parents set up are mostly worthless scams. Worse, they produce outcomes contrary to their stated goals.

Welfare programs do not help people escape poverty; they keep them mired in it.

Health care programs do not make them healthy; they make them dependent on the drug industry.

Defense industry spending doesn’t make us safer; it funds drones, bumbling interventions, and assassinations… and it creates more foreign enemies.

We end up not only poorer, but also less secure.”

 “You need to stop your parent’s suicidal credit-based money system.”

 “Well, the system is corrupt and self-destructive.  It works only by increasing the amount of debt in the society – including student debt.” 

We add a few more points in the same spirit as Mr. Bonner:

• Central banks were not created to assist the functioning of the financial system. Instead they assist the transfer of wealth to the financial industry.
• Quantitative Easing (QE), “money printing,” liquidity injections and monetary manipulations are rationalized as “stimulus.” In fact QE was little more than a bail-out for the financial industry and the US government at the expense of taxpayers, savers, and pension plans.
• The “War on Poverty” and the “War on Drugs” are like the “War on Terror.” They are expensive, support a massive bureaucracy and promote private agendas.  They have strong support and will continue, regardless of how little they accomplish.

The US national debt exceeds $18 Trillion, NOT including off-balance sheet items, Fannie and Freddie, and unfunded obligations such as future payments for military pensions, Social Security, Medicare, and more.  Depending on who is counting, add another $100 – $200 Trillion in debt.

We all know this debt will never be paid – defaulted maybe – but never paid.  We all know that borrowing ever larger sums forever is not sustainable.  We all know that something is deeply wrong with:

• Total government expenses
• Ever increasing debt that will never be paid
• Defense (and offence) programs
• Central banking, QE, ZIRP, and negative interest rates
• Health care and Medicare
• Taxpayer bailouts and bail-ins
• War on Poverty, Drugs, and Terror
• Welfare spending
• And much more…

WHY?

Because governments and central banks have been able to “extend and pretend” by printing a few $Billion or $Trillion to keep the system working, which maintains the money flow to the political and financial elite.  The elite are purchasing elections, legislation, and votes, and for this they expect to receive benefits from their investments.

What should we conclude regarding the above?

• Sovereign debts will increase and never be paid.
• But debt cannot increase forever. Hence there will be a reset.
• Expect another crisis – even Jamie Dimon of JP Morgan says so. Remember the 1987 stock market crash, the LTCM crisis of 1998, the NASDAQ crash of 2000, real estate and derivative crash of 2006, and the financial crash of 2008.  Crashes happen and intensify as the financial system becomes larger, more complex, and more levered.
• The global financial system is complex, connected and interactive. Safety will be elusive in the paper and digital worlds of fiat currencies and sovereign debt.
• The next crisis is likely to be sudden and catastrophic.
• Gold and silver will be “shelter from the storm” because they have no counter-party risk. They are the ultimate money independent of politicians, taxes, government spending, unpayable excessive debt, and the complex interconnectedness of an increasingly unstable financial system.

As analyst Darryl Robert Schoon says, “Buy gold, buy silver, have faith.” 

Gary Christenson

The Deviant Investor