Our fake money supply consists of fiat currency (base "money"
created by the fed) and fractional reserve banking. The more dangerous of these
is fractional reserving of the base money, the net result of which is debt.
In any monetary system, the danger comes more from change
per unit time than from change itself. Back in around 1968 my dad gave my
brother and I a buck and told us to go buy some candy. We came back with a bag full, having spent
almost the whole buck. Dad was pissed.
He wanted change from that dollar.
Nowadays a dollar literally does not buy one padded p-clamp for
routing the wiring on my boat. Each 3/8” stainless washer which
is about the diameter of a nickel and the thickness of a dime, costs 17
cents from Ace hardware where my boat is stored in VA. Yes, a small metal disc with a
hole in it costs more than a dime and a nickel, and they don’t even have holes
in them. That is an incredible amount of
change from the buying power of the dollar back in 1968 but it happened fairly slowly over a long period of time.
As it happens, once the federal reserve conjures fake money
into existence, it doesn’t like to eliminate that money from the economy since
doing so would cause economic collapse.
After all, the fed creates new base money for a reason – to manage
crises. How can it be later taken back
without re-introducing the crisis? Before the crash of 2008, the fed had created 800 billion in base "money" since the founding of the republic 200+ years ago. After the crisis the number had to be increased to over $4 trillion; that is in fact how the crisis was ended. At least for the rich. For the poor, the crisis has just gone on and on.
When the fed counterfeits money over a long period of time, salaries have a
chance to keep up for most people, at least the ones important enough to the
economy to have a voice that matters (i.e. not the poor).
The herd will not get upset until enough important people are badly affected and
that’s when the big problems begin.
Bottom line: slow negative change is annoying but can go on
a long time until it becomes actionable by the herd, and base money increases
tend to be slow increases.
With this in mind, fractional reserve lending is essentially
the creation of 10x or more debt based "money" (as opposed to base
"money" controlled by the fed). Thus, in
the economy at any time, 90% of the “money” is debt and 10% is fiat currency
created and controlled by the fed. The
fed cannot really control how much debt money is created except by two means:
- influence (not control) interest rates. Higher interest rates lead to less desire to take on debt and thus less growth (and even possible collapse) of the debt based portion of the money supply.
- change the rules on the fractional reserve ratio. Currently it's supposed to be 10:1 by law but forensic accounting of Bear Stearn showed 36:1 leverage debt to equity. In other words, rich people game the laws and the fed says nothing because the expanding debt increases the overall money supply resulting in inflation which the fed not only wants but needs.
If neither 1 nor 2 is changed then the instantaneous size of
the money supply in the economy is a function of how much debt there is
outstanding. Corporations are taking on
debt in order to buy back their own stock so that the CXOs can cash RSUs and
options out of the Ponzi at high prices sometime between now and the coming
collapse of the Global Debt Ponzi.
Consumers are taking on debt to an even higher degree than the 2007
peak. According to the article linked at the top of this post they are
spending this borrowed money on houses, cars, and extended away-from-home
parties (AKA college).
As long as people want to take on more debt and as long as
banks have the ability to lend it, the Ponzi will continue. When either side of that equation goes south,
the Ponzi will end. Now here’s the most
important part: Ponzis do not collapse slowly.
In a Ponzi collapse the floor drops out.
During the collapse not only is new debt not taken out, the old debt is
either panic paid back or defaulted on.
Regardless the resulting collapse in the debt portion of the money
supply happens quickly. This is what
creates a deflationary crash.
Once the government realizes that the system will not fix
itself, as it found out during 2007-2008, it has to step in and
create more fiat currency in order to try as it might to make up for the loss
of the debt based portion of the money supply.
By that time many people have been wiped out by the collapse of asset
prices but at some point the intervention measures necessarily become so extreme that
government, in order to stay in power, turns on the fiat currency printing
press in such a dramatic way that anyone watching knows that the issuing
authority has lost control of their Ponzi.
What eventually causes hyperinflation is not so much the
printing of money but rather when the markets, the people, the herd loses
confidence in the issuing authority. All of this is going to happen because the pump and dump system is based on the corrupt notion and practices of fiat currency and fractional reserve lending. Nobody knows exactly when it will happen but everyone with a brain knows that it must eventually happen and that we are long in the tooth of the recent pump cycle to believe that it can go on forever.
Use these good time to think about what you will do when the credit dries up. Think about all the businesses which only exists as long as they have access to debt. People who have prepared for the inevitable will not be badly affected by it; those who listen for the alarm warnings of the Global Debt Ponzi tsunami will seek or create economic high ground for themselves.
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