International bartering.

The global money supply will at some point collapse.  Of that I am sure.  You want the reason?  Just scroll to the bottom of Mish's post.  Just above the comment section he posted a chart that he got from the federal reserve website (FRED) which I have pasted to left.  The global outstanding debt is now about 65 trillion dollars. When did the curve begin its exponential run up? Yeah, right after Nixon defaulted on dollar convertibility into gold.  Whether or not you realize it, this chart is really an inverted chart of the quality of the currency.  Why?  Because it just gets easier and easier to take on more debt and that is the sign of a weak currency, not a strong one.  Needless to say, 4+ trillion of monetary base is all that is authorized by the fed (all the issued shares in the USA if you will).  The other 61 trillion of outstanding debt can never be paid off because there simply isn't anywhere near enough of the currency in our system to do so. 

Those who lent all this cash out count on the hope that not everyone will demand repayment at once but if even 7% of the debt were to be recalled/demanded to be repaid at any time, there simply wouldn't be enough cash to cover it.  This is the so called liquidity crisis.  It's the scramble by debtors to find dollars needed to repay loans that got called.  And its the scramble by creditors to get their money back out of the system before the system collapses.  You can also think of it as a short squeeze on the naked short which is what is technically happening in a fractional reserve money supply each time credit is instantiated from thin air.  I'll say it again: fractional reserve credit is a naked short on the underlying currency. 

It amazes me that more people don't understand this.  Sure, the fed can go ahead and print up more cash, but it cannot simply hand that cash out.  Anyone who takes that cash from the fed in order to satisfy a claim on cash by some other party will have generated a debt to the fed in the same amount that they received.  It's the old borrow from Peter to pay Paul deal.  So the fed can and has acted as a shock absorber for short term liquidity problems (i.e. 2008) in the past, but it cannot absorb unlimited shock just as the shocks on a car have their performance limits.

I hope you can see how this can never end well.  It cannot be unwound gracefully by anyone.  It is a debt Ponzi and like every other Ponzi that ever existed, everyone involved believes that their money is safe and that they will be repaid.  But I'm telling you for a fact that 93% of the people will get stiffed because there is only enough cash to pay 7% of outstanding debt.  It almost happened in 2008 in what this senator called an electronic run on the dollar.  His description was very accurate.  Institutions were pulling their money out of money market funds.  In essence, these funds were loaned to the money markets.  The fund managers promised to manage the money to make a profit on the loans but the market got scared that the Ponzi was about to collapse and so it began to pull money out of the casino while there was still money there to pull.  The fed had to step in and calm everyone down and so the Ponzi lived another day but do not forget that even Charles Ponzi successfully stopped a major run on his Ponzi scheme one time before the eventual collapse arrived.

The big players know very well that this is musical chairs economics.  At some point the music will stop, the liquidity will dry up for good cash will become very scarce.  That is the deflationary crash.  Then the government will step in wind up the printing presses to full power in order to counteract it.  That's when everyone will know that the green paper Ponzi is in the collapse stage that ends with hyperinflation.  So repeat after me: first deflation and then massive inflation and then hyperinflation.  Same thing I have been saying since I began this blog in 2010.  I never changed my tune once about this.



In all of these things, the marginal players will be affected first.  That's just the way it is.  And so now we see Cuba looking to pay their long standing debts off to the Czech Republic not using currency which is a marker for labor, but rather using the productive output of the labor - Cuban rum.  This is just the kind of thing we will see more of as the dollar loses reserve currency status as the people of the world begin to vote no confidence on the it.