Our current economic system truly brings out the worst in human nature. This is a fact. And you just need one quick look at the state of the world today to confirm this for yourself.
The root of the problem lies with our fiat currency system (the pieces of paper and the plastic cards we use to buy stuff with) which can be created out of thin air by certain members of society. Now you can probably imagine that the power to create money out of thin air would make you a god in today’s money-obsessed world. Indeed, this money creation truly is the ultimate power and, as you have probably heard many times before; absolute power corrupts absolutely.
Society today is ruled by these all powerful deities called central banks. It would not be too far-fetched to say that the people in charge of these institutions (e.g. Ben Bernanke and Mario Draghi) are the most powerful people in the world. A single statement from these people can cause significant market fluctuations, instantly causing massive wealth transfers within society.
Central banks wield their awesome money-creation power by making it easier for individuals and governments to go into debt. They can do this in various ways, but the important thing to understand here is that fiat money is created through debt. Take a look at the video below to see how this is done (do yourself a favor and watch the entire 5 part series).
Under certain circumstances, we mortals go on an absolutely crazy debt binge and thereby grant our banks the power to create massive amounts of fiat money out of thin air through the mechanism of debt. And yes, if such out of control money creation carries on for too long, you end up with very uncomfortable things like the 2008 housing bubble.
Such bad things can happen when many of us mortals forget that all of this debt that we are taking out is actually future consumption taken today. And no, it is not an equivalent amount of future consumption; it is future consumption with interest. Since all of us mortals are up to our ears in debt, we all have to labor more tomorrow than we consumed today. But we have to have something to labor on tomorrow and unless someone is willing to consume what we produce tomorrow, we will not have a job. Therefore, to keep everyone employed in this system, the human race must consume more and more every single day.
If some of us actually start consuming less, some of us will be out of a job. And if some of us are jobless, some of us will not be able to repay our loans. Our loan repayments are our offerings to our money-making gods and without these offerings our money-making gods are powerless to add to their growing collections of sports cars. The gods cannot tolerate this and therefore do everything in their power to keep the system going.
Their solution is simple: artificially increase consumption. They do this in three ways: increased government spending (including bailouts and stimulus packages), decreased taxes (allowing us to spend more) and even lower interest rates (getting us to borrow more). We mortals think this is awesome because we get to consume a lot more without having to work any harder. Our faith in our money-making gods grows and we happily continue to live in this magical consumption-filled world they have created for us.
There is one problem though. As our gods continue to increase spending and reduce taxes, they encounter a little snag known as a budget deficit. No worries though; they simply borrow this money from other gods and, just like we promise our future labor when we take out a loan, our gods promise the future labor of their minions (us) when they take out a loan. In this way, our money-making gods promise the labor of our children for the consumption they trick us into taking today so that we can pay back our loans and they can use it to add to their collection of sports cars.
Now the problem comes in when these loans get so massive that even the gods start to wonder whether each other’s minions will ever be able to pay up. When this happens, the gods will not lend to each other any longer and there will be no way in which they can maintain our ever-increasing consumption. When this happens, the one and only option left to our gods is to engage in the ancient ritual of massive money-printing to keep us spending more dollars every day.
Unfortunately, this is also the ritual for the awakening of the fabled god-killer by the name of hyperinflation. And when hyperinflation is unleashed, the whole system goes kaboom…
Part II continues here.
Filed under: Crisis analysis