In the first part of this little series I discuss the sheer madness of having a fiat currency system which allows governments and banks to conjure trillions of dollars out of thin air. The short of this little story is simply this: the total godlike power granted by the ability to print money in our totally money-obsessed society is simply incompatible with human nature because, as we all know, absolute power corrupts absolutely.
This second part in the series will talk about something equally insane that grew out of the madness of a totally unbacked fiat currency system: the ability of rich nations to borrow huge sums of money from poor nations in order to provide truly ridiculous welfare benefits to their spoilt citizens and pay for their massive trade deficits with these poorer nations. And yes, the real kicker is that, when all the red tape has finally settled, the rich nations will repay this debt with money that they conjured out of thin air.
The relationship between the USA and China is the classic example of this crazy state of affairs. The US government owes China almost $1.2 trillion – enough money to buy half the world’s population an iPad. In addition, the 2011 US/China trade deficit was about $300 billion which equates to an iPad and an iPhone for each and every American every single year.
But we have not yet arrived at the truly ridiculous part. Here it is: The 2011 GDP per capita of the USA was $48387, while that of China was $5414 – almost 10 times lower. How is it possible that the US is actually borrowing from China and not vice versa? Well, this is simply because the Chinese save 30-40% of their tiny little incomes, while Americans blow every cent of their massively inflated wages. This is equivalent to a CEO borrowing money from his frugal factory workers for the sole purpose of living even further beyond his means. I mean, in which universe would this insanity become the norm for entire nations?
In a world with even this slightest hint of logic, this relationship should be the complete opposite way round. Poor countries should be able to borrow large amounts from rich countries in order to purchase infrastructure, develop their people and greatly increase their productivity. In this way, they would be able to easily repay their loans through honest earnings derived from their increased productive capacity. This is what loans are meant for.
What we see today, however, are rich nations borrowing huge sums from poor nations, not to improve their productive capacity, but rather to fund their completely unsustainable welfare states and to fight completely unnecessary wars. As a result, these rich nations are actually losing productive capacity, thereby reducing their ability to pay back their huge debts through earnings from honest production – hence the need for repaying debts with printed money.
Skip to 7:20 in the video below to get a nice analogy of just how ridiculous this actually is. Actually, do yourself a favor and watch the entire video all the way through. It’s actually pretty entertaining in a very sad kind of way.
Click here for part III.