STAFF NEWS & ANALYSIS
How Global Fiat Money Dies
By Staff News & Analysis - February 18, 2010

Globally, share prices are down by more than 6%, while some markets, notably those of China, Greece, Portugal and Spain, have lost much more. It's not hard to see why. Renewed uncertainty about the future direction of monetary, fiscal and regulatory policy has once again undermined confidence, reviving risk aversion and volatility. This was always bound to happen once the extraordinary monetary, fiscal and financial system support that helped underpin the stock market rally of last year started to unwind, but with the economic recovery still far from secure, that moment has come rather sooner than markets anticipated or policymakers would have wished. In many emerging markets, the authorities are already in overt, tightening mode. Fearful of rising inflation and asset bubbles, China is clamping down on runaway credit expansion, while in India too, attempts are being made to drain excess liquidity by increasing banks' reserve requirements. The contrast with still stagnant advanced economies could scarcely be greater. While emerging markets take matters into their own hands, here in the west there is a feeling of progressive loss of control. Policy still needs to be kept loose to stimulate moribund private demand, but markets are forcing a tightening which pulls the other way. The sustainability of burgeoning fiscal deficits is being challenged in bond markets, which in turn set the tune for interest rates in the wider economy. Governments are being forced to remove the fiscal stimulus of the last two years rather sooner than they would have wanted. – UK Telegraph

Dominant Social Theme: After rough times, the global economy will bounce back.

Free-Market Analysis: When it occurred to us recently that the current version of Western fiat money was in very deep trouble and perhaps on the way out, we wrote an article on the subject (Depression 2010 – Western Fiat-Money Finished?). Now we return to the subject because the UK Telegraph has published a story (excerpted above) that provides us with corroborating detail on just how grave the economic situation really is. The article's actual title is "Economic policies look impotent in calming the storm" and it is also excerpted below.

As the article implies, (though it doesn't fully come out and say so) the potential crackup of the euro, plus a double dip "recession" and years of potential, grinding joblessness throughout the West are going to put extreme pressure on the current system. So … why couldn't all of the above, plus stagflation – economic stagnation mingling with price inflation – do what a century of profligacy could not: finish the dollar and related fiat currencies once and for all? (And, yes, in the past we have written of how difficult it would be to dethrone King Dollar but that was in the context of another orchestrated fiat currency. And this, it seems to us, is beginning to be another world …)

In our previous article, we tried to point out that the world's major economies were beginning to fail and fail in unison. While those who do not follow world affairs for a living might assume that capitalism is cyclical and that these shake-outs are normal and natural, what we wanted to get across was that most people – with the exception of a handful of hard-money observers and economists – don't fully appreciate the magnitude of what is occurring. They think it is happening in their back yard. It is happening everywhere. This is part of what we wrote:

Depression 2010 – Western Fiat-Money Finished? … We would propose that the West, and the entire globe, is living through a fiat money collapse. Economies all over the world have been inflated to their fullest and people can buy no more useless gadgets and work at no more superfluous jobs. Too many useful endeavors have been marginalized and phony ones have been elevated. An implosion is taking place. The world is reverting to a kind of mathematical practicality. In America, car companies have shrunk because there are too many cars, and houses are not being built because there are too many houses. Banks are not doing deals because too many deals have been done. All that is working overtime are the printing presses. While the greenback is exceptionally at risk we would argue that the same thing is occurring, to a greater or lesser degree, in Europe, in Japan, and even in China – despite all the happy talk about the Chinese miracle.

The point of this Bell article is to put into even better context just what IS occurring – and what the trigger mechanism might be that would lead to fiat money failure. In our previous article, Depression 2010 — Western Fiat-Money Finished, we pointed out that all the major economies are failing together (and from our point of view fiat money was a main culprit). But in that article we did not attempt to fully describe the process that would do the damage. There are many who watch the struggles of Western economies and generally predict doom and gloom, but at this juncture we think we can be more specific than that. We can actually see how the trigger might be pulled. We are helped in our quest by the Telegraph article above. Here is some more:

The IMF has estimated that increased health spending and other costs related to ageing populations will raise the debt to GDP ratios of major advanced economies by a further 50 percentage points over the next two decades.

Pressure for both fiscal and monetary tightening is building fast, whether or not the economy is strong enough to bear it. In the US, Europe and the UK, cheap liquidity support is already being removed. The Bank of England has put quantitative easing on hold, the Federal Reserve is terminating special liquidity facilities right left and centre, and the European Central Bank too is scaling back.

Policymakers have also asked banks to prepare for an end to cheap government funding. The effect will be to widen spreads further as banks fall back on alternative, but more expensively priced, market sources for their finance. Meanwhile, there is little sign of securitization returning on the scale necessary to recreate cheap market funding, nor will there be until present regulatory uncertainties are resolved.

As can readily be seen, even if kept low, official interest rates will struggle to maintain traction and may in time become largely irrelevant. Both fiscal and monetary policy are losing their potency. None of this makes a happy backdrop for corporate earnings and therefore the immediate outlook for equity markets.

Major headwinds abound. This doesn't detract from the long term attractions of shares, which certainly seem a smarter bet than government bonds. None the less, a heady cocktail of medium term woes hangs over sentiment. Economic spring still looks a good way off. More worrying still, we can no longer rely on loose monetary and fiscal policy to deliver it.

Why is the above analysis important? Well, dear reader, you have to read between the lines, at least a bit. The author is a mainstream journo, so he is not going to spell it out for you. And in fact, he doesn't come to any real conclusions about the calamity he is cataloguing other than to conclude that "a heady cocktail of medium term woes hangs over sentiment." Oh, really?

No, the implications of this analysis – and it is a good one even though the writer won't face up to the import of his remarks – is that Europe, America, China (and Japan) are facing prolonged bouts of higher interest rates and more expensive money. Now this might be a tolerable scenario within the context of good times but America is flat on its back and Europe is getting there. China's situation, we believe, is far more parlous than the authorities admit, and we've lost track of how many "recessions" Japan has entered into, but it's apparently started another.

This is how fiat currencies fail, in fact. Not with a bang but with a series of increasingly angry whimpers leading up to a crescendo of indignation and pain. We are not so foolish as to prognosticate what happens next – or whether a private gold and silver market standard re-enters the world by default. (Or perhaps as the Brownians hope, in some cases banks and central banks will be nationalized.) But we do know that if current fiat money economies enter the kind of downward spiral this Telegraph article is portraying (and others in the hard-money community have predicted) that the elites who have orchestrated the present disaster will have a hard time retaining enough credibility to exercise control over an ongoing populist unwinding of the current system.

And that is really the issue. We sense rage in the world right now, especially the Western world, which has spread just as fast as the so-called American subprime mortgage contagion. While this rage has not been fully reported, we can see signs of it everywhere. In America it is most obvious in the Tea Party movement, which, unlike other such populist movements, is apparently refusing to be co-opted by the Anglo-American power-elite. The Tea Party movement has been spawned by America's joblessness and the evident mismanagement of the political order that is virtually bankrupting the country with its endless warring and nonsensical social programs.

In Europe, the frustration is starting to mount. It has been simmering of course, for years, but now as the Greece crisis explodes, it will likely climb along with the evidence that the EU is faced with fairly untenable choices and that its participant states and their citizens have been sold unrealizable promises. What began as a common trade zone has morphed into a political union promising prosperity for all. What most of the weaker EU countries are actually facing are years of grinding privation as the EU currency limits begin to bite and the blows are not softened by money printing or devaluation.

In China, we can tell what is going on simply by the frantic pace with which that huge country shifts monetary policy – all the while printing more and more yaun. The old men running China will do anything to keep their so-called boom going. There are plenty of reports of empty malls in China, and one of our feedbackers writes to us of virtually deserted cities(!). In any event, China has decided that internal demand will make up for the now non-existent consumer demand of the West. Yet the Chinese as we understand it, are a thrifty people, barely 50 years from an existence in which some filled their bowls with stones to make the rice last longer. The idea that the corrupt, venal and cowardly leaders of this particular nation state can browbeat their citizens into buying vacation homes and third and fourth cars is doubtful, we think.

And then there is Japan, which has been trying to print its way out "recession" since the early 1990s by our reckoning. That's going on two decades. Every few years we hear that Japan is emerging from its funk and that the economy is taking off. But recently the news has been terrible from the land of the Rising Sun, which depends mostly on exports to keep its economy rolling. Where exactly is it going to export? Greece? America? China? Japan has an aging population and its printing presses have been working overtime for 20 years without success. The only option left now is to cut and cut hard. The Japanese will have to suck it down once more. Will they?

Having established that the largest economies in the world may be deeply in trouble, we have now pointed out that the trigger mechanism for a brand new economic order is the misery that the world's largest economies are facing over the next decade. The prospect of this misery has caused intense anger in America, will likely fuel tremendous disruptions in Europe and perhaps even in Japan (well, something may happen in Japan, anyway). China is a wild card. In fact, our view is that China is cauldron of catastrophe ready to bubble over. If and when the bubble bursts in China, there will be trouble a-plenty.

And yet … we have saved the most important analysis for last. Why? Because the objection to all of the above would be that such cycles have occurred before. The nefarious system of private/public central banking (mercantilism) that has been in place for a century now has been through plenty of ups and downs and has weathered them all. Those at the very top have tremendous resources. Having built the system, they are in a position to do what is necessary to control it, re-jigger it and buy off the (mostly controlled) opposition.

But this time, dear reader, it is different! This time, every action that the power elite takes, every move it makes, is subject to the most excruciating analysis on the Internet. There are now, truly, no places to hide. The lies that would palliate only irritate. The machinations that should soothe only exacerbate the already raw wound. There is NOTHING the power elite can do at this point that is not transparent to millions of ordinary people who read the Internet and have come to understand the evil of the system it has put in place.

Years ago, we used to write this as a theoretical paradigm. But listen to average people in the American Tea Party movement. Many of them are very informed about economics. Many of them understand the evils of the current mercantilist banking system and how it has hijacked their livelihoods and made it impossible for them to find employment, care for their families or build a future for their children.

This is not an "emergency" that the power-elite can overcome through the kind of crisis-management at which they are adept. They cannot bring their think tanks to bear or defuse the growing rage through orchestrated mainstream media campaigns. It is truly a mass movement partaking of Hayek's spontaneous order. There are no leaders to arrest, no agitators to shoot, no ideological arguments to debunk. The reason for this state of affairs is because the Internet – which is fueling all the above – is a PROCESS not an event. And the process is ongoing. From the power elite point of view, it will only GET WORSE. Free-market thinking will only become more acute, and at the same time more generalized. And this is a terrible nightmare for them.

We have certainly written some of the above before, but we are sure our regular readers will indulge our repetition. We – and you – have a ringside seat to the biggest show on earth. This is the biggest story that will ever be written in our lifetimes. We are seeing what may be the end of a hundred-year-old attempt to subvert the freedoms of the entire Western world. Oh, certainly things will not go smoothly! The power elite in our estimation controls most of what can be controlled, and can start wars to boot. But it is already too late to control the dissemination of the Internet's free-market information. It is already too late to erase a generalized understanding of how the elite's fear-based promotions work, or how they take advantage of such promotions to rob the average person of wealth and hope.

Will we see a gold and silver standard in our lifetime? Or free banking? Don't know. Will we see a reduction of war, a pull-back on domestic spying and repression? Perhaps. We tend to think so. We base our assumptions on what happened after the Gutenberg press made books generally available, a state of affairs that eventually swept away the entire old order and remade Western civilization – for the better in many ways. Ideas are far more powerful than swords, or even tanks. Even tactical nuclear weapons. When a people in aggregate find out they have been lied to, watch out.

It is for this reason, then, that we write of the death of fiat money. If the great fiat-money economies of the world stagger under the twin weights of price-inflation and failing, jobless economies, there will be massive socio-political difficulties in our opinion. But this time, the manipulations available to a power elite that wishes to keep the current damnable system in place will not be available because of the Internet. People will understand, in our opinion, and will not tolerate the machinations. The same thing that is happening to global warming will eventually happen to the entire central-banking scheme. It will begin to fall apart. People, tortured by their sudden poverty and the rapine of hopelessness, will read the truth and act. It will not be pleasant for the power elite that has invested so much time and money in the current intergenerational scheme, but it is simply human nature. It is life.

After Thoughts

Smell that? There is a sudden but discernable whiff of panic in the air. We think the elite has miscalculated. Instead of global regulatory regime and controllable global populism, they are increasingly faced with the informed rage of millions and eventually, perhaps, tens or hundreds of millions. Add in China and Japan and you're talking billions. We know there are plenty of savvy readers who will disagree with us. It is all in the plan, they will write, as they have before. The elite is in control every step of the way, they will inform us with understandable cynicism or barely disguised despair. But, please consider … what if they are not?

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