Pure US Fiat Money, Up In Smoke
As of this this week we have managed to survive four decades of US fiat money, and its anyone’s guess how much longer we can continue. Recently we read that the average life expectancy of a fiat currency is 27 years. The world’s oldest fiat currency, the British Pound, has survived nearly 318 years, but during this term it lost 99.5% of its initial value.
Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero.
And as Jeff Clark points out: History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.
Edmund Conway at Daily Mail writes: On 15 August 1971, with the US public finances near broken by the cost of the war in Vietnam, Richard Nixon cut the final link between the US dollar and gold. Until then, the US Treasury was duty bound to exchange an ounce of gold with central banks willing to pay them $35. Suddenly, for the first time in history, the level of the world’s currencies depended not on the value of gold or some other tangible commodity but on the amount of trust investors had in that currency. Central banks were allowed to set monetary policy based on their instincts rather than on the need to keep their currency in line with gold.
It was one of those seminal moments whose significance has only gradually become apparent, obscured as it was at the time by Vietnam and then Watergate. But the more one examines economic history, the more obvious it is that this was one of the most important policy decisions in modern history.
The term fiat money has been defined variously as:
A- Any money declared by a government to be legal tender.
B- State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
C- Money without intrinsic value.
D- All of the above.
According to G. Edward Griffin in his seminal work, The Creature From Jekyll Island -
Fiat money is paper money without precious-metal backing which people are required by law to accept. The first recorded appearance of fiat money was in thirteenth century China, but its use on a major scale did not start until colonial America. The experience was disastrous, leading to massive inflation, unemployment, loss of property, and political unrest. During one period when the Bank of England forced the colonies to abandon their fiat money, general prosperity quickly returned. The Revolutionary War brought fiat money back to the colonies with a vengeance. The economic chaos that resulted led the colonial governments to impose price controls and harsh legal tender laws, neither of which was effective.
Fractional money is defined as paper money with precious-metal backing for part, not all, of its stated value. It was introduced in Europe when goldsmiths began to issue receipts for gold which they did not have, thus only a fraction of their receipts was redeemable. Fractional money always degenerates into pure fiat money.
Let’s start with first principles: for as long as anyone can remember, politicians have sought to spend more than they can afford. Since the invention of money they have discovered ever more ingenious ways to do so. the routine is painfully familiar. The main difference with fiat money is that whereas under the gold standard it was all too obvious when politicians were spending beyond their means (they would simply run out of gold reserves), these days it is slightly more difficult to tell quite how close the system is to breakage.
The Bank of England was formed in 1694 to institutionalize fractional-reserve banking. As the world’s first central bank, it introduced the concept of a partnership between bankers and politicians. The politicians would receive spendable money (created out of nothing by the bankers) without having to raise taxes. in return, the bankers would receive a commission on the transaction–deceptively called interest–which would continue in perpetuity. Since it all seemed to be wrapped up in the mysterious rituals of banking, which the common man was not expected to understand, there was practically no opposition to the scheme. The arrangement proved so profitable to the participants that it soon spread to other countries in Europe and, eventually, the United States.
Nonetheless, as we look back at the chaos of the past few weeks, it is quite clear that our current version of fiat is on its last legs. This, in essence, was the point Sir Mervyn King tried to make again and again in the Inflation Report press conference last week: 2008 was only one stage in a far bigger crisis of confidence in the way we have structured the world economy.
The 2008 crisis represented the first recognition that those increases in asset prices and economic growth were chimerical. The recent relapse represents a recognition that the losses have merely been transferred on to sovereigns’ balance sheets.
Other respected views according to Stephen Lendman at Warisacrime.org –
Economist Michael Hudson is unequivocal explaining a debt deflation caused Depression. The game is over, he says. The global ponzi scheme ran its course. Papering over conditions only works so long before hitting a wall. Tunnel vision assures trouble. Wrecking economies to save banks is lunacy, and forced austerity when stimulus is needed guarantees disaster. It’s not a matter of if, just when, how deep and protracted.
Economist Paul Craig Roberts, trends analyst Gerald Celente, and others worry whether Washington will choose greater war to distract public attention from economic distress. In 2009, in fact, Celente warned about the oldest trick in the book, saying:
“Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war.”
Highly respect analyst Jeremy Grantham began his August letter to investors headlined, “Danger: Children at Play” saying:
“My worst fears about the potential loss of confidence in our leaders, institutions, and ‘capitalism itself’ are being realized. We have been digging this hole for a long time. We really must be serious in our attempts to resuscitate the ‘average (number of) hour(s) worked’ and the fortunes of the average worker.”
“Walking across the Boston Common this morning, I came to realize that the unpalatable (to me) option of some debt forgiveness on mortgages looks increasingly to be necessary as well as tax changes” he discussed in his report.
“To go further, if we mean to prosper long term, I am sure we need to act to make debt less attractive to everybody: it really is a snare and a delusion” to think otherwise.
Calling America’s Congress “dysfunctional,” he said it has to decide between two bad choices:
– austerity to kill demand when the economy is on its knees; or
– do nothing, risk default, compromise the integrity of the dollar and send “a powerful signal to the world that the US, at least for now,” is past its prime.
In fact, growing numbers acknowledge that reality. “Come to think of it,” said Grantham, “the choice was between a technical default and looking like a Banana Republic (or) technical blackmail and looking” like the same thing. “Just different bananas perhaps.”
Overall he sees hard times, “lean years.” Any pretense otherwise “is beyond wishful thinking or weak math skills. It is either childish or gross and cynical politics: that is to say, even worse politics than usual.”
With balanced budgets mathematically impossible without major politically unpalatable policy changes, the alternative is “kicking an enormous can down the road” for even greater predictable disaster.
It’s the equivalent of not dealing with a metastasizing cancer until the patient dies or is too far gone to save.
Adding his own grim assessment, Grantham said if we keep “drift(ing) around rudderless, if we don’t develop some real (nowhere in sight) leadership soon, then seven lean years may be the least of” America’s woes.
Commenting on the August 4 market rout, he added that it “always (has a) disturbing habit of ignoring the obvious and ignoring it some more, until, in the blink of an eye, it doesn’t.”
On August 4, it blinked, making “risk avoidance….a good idea,” Grantham believes that may be his polite way of saying watch out! I warned you! There’s no visible light at the end of this tunnel, getting increasingly darker. Watch out indeed.
In fact, a deepening global Depression just began. It’ll last years before ending, and cause grave harm to billions worldwide, not responsible for their leaders’ malfeasance, especially those domiciled on Wall Street, complicit with political puppets in Washington they own.
Moreover, the greater pain caused, the more they benefit like their Western counterparts, wrecking their economies for personal gain.
No wonder astute analysts like Grantham expressed lack of confidence in America’s leaders, disgust with a “dysfunctional Congress,” and questioned “capitalism itself,” perhaps self-destructing as he wrote.
For billions of global victims, it can’t happen a moment too soon, if it isn’t already too late to help.